Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the Phunware Third Quarter 2024 Earnings Conference Call. Participants on this call are advised that the audio of this conference call will be broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately 1 hour after the end of the call through November 7, 2025. I would now like to turn the call over to Brooks Hamilton of MZ Group, the company's Investor Relations firm. Please go ahead, sir.

Thank you, operator. Good afternoon, and thank you for participating in today's conference call. Earlier this afternoon, the company released its financial results for the quarter ended September 30, 2024. A copy of that press release can be found on the company's website at www.phunware.com by selecting Investors under the About tab from the corporate home page. I further encourage you to visit investors.phunware.com to access not only the earnings press release but also the current investor presentation, SEC filings, Phunware's recently released letter to shareholders and additional information on Phunware. Joining me on today's earnings call from Phunware's management team are Stephen Chen, Interim Chief Executive Officer; and Troy Reisner, Chief Financial Officer. During this call, management will be making forward-looking statements, including statements that address Phunware's expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in Phunware's most recently filed annual report on Form 10-K and subsequent periodic reports filed by Phunware with the SEC and Phunware's press release that accompanies this call, particularly the cautionary statements in it. Additionally, the matters being discussed today may include non-GAAP financial measures. Reconciliation of GAAP to non-GAAP financial information is set forth in the earnings press release. The content of this call contains time-sensitive information that is accurate only as of today, November 7, 2024. Except as required by law, Phunware disclaims any obligation to publicly update or revise any information provided on this call to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to Phunware's Interim CEO, Stephen Chen.

Thank you, everyone, for joining today's earnings call. I'm Stephen Chen, and I am excited to update you on Phunware's progress. We're rooted in our legacy as a pioneer in mobile technology and our commitment to becoming a leader in the mobile plus AI solutions space. As we communicated in our recent shareholder letter, Phunware's mission is to leverage mobile devices as a foundation for AI-driven personalized engagement that allows businesses to connect more effectively with their customers, partners and employees. Phunware's history in mobile engagement uniquely positions us for an era where mobile technology and AI converge. From the beginning, Phunware was among the first to recognize the transformative power of mobile devices as a primary way people interact with technology and with one another. This foundation allows us to now deliver generative AI directly into users' hands, creating experiences that are highly personalized, relevant and impactful. This legacy is more than history. It's also the springboard for our next chapter. As we step into the era of AI, we see mobile plus AI as the future standard for all enterprise engagements. By merging our strength in mobile with generative AI, we are committed to turning mobile devices into dynamic, context-aware tools that offer unique insights and highly customized experiences tailored to each user's needs. Mobile devices remain one of the most accessible universal technologies globally, making them the ideal platform for our AI solutions. By combining mobile and AI, we're enabling businesses to create entirely new opportunities for meaningful engagement, transforming devices into highly adaptable, real-time tools for connecting with customers and employees. Our vision spans both consumer-facing applications and internal employee productivity tools. For consumers, we're building personalized, context-aware experiences that elevate engagement, service and satisfaction. For internal use, we're designing AI-enhanced productivity tools that streamline workflows, improve decision-making and boost operational efficiency. This dual approach empowers enterprises to harness AI to enhance customer engagement while optimizing internal productivity. Our next-generation AI-driven SaaS platform anticipated to launch in mid-2025 is designed to democratize mobile app creation by allowing companies of all sizes to create, build and deploy custom mobile apps quickly and affordably. This platform is rooted in our understanding that modern businesses need fast, scalable AI solutions that reduce both the cost and complexity of mobile app development, giving them the flexibility to design high-quality apps that respond directly to user preferences. Phunware's extensive experiences working with Fortune 500 companies has given us a robust understanding of what it takes to deploy technology at scale. This expertise allows us to create modular rapidly deployable AI solutions that can adapt to a wide range of industry needs. From retail and healthcare to advocacy and large-scale enterprise applications, we are where our customers need us to be and allow for a quick mobile plus AI deployment for specific use cases or a comprehensive cross-departmental AI integration, and we're built to scale. This gives our customers a unique advantage to adopt AI incrementally while leveraging our infrastructure to scale their operations seamlessly. Let's talk about some of the specifics. Through our relationship with MyCanvass, we are actively exploring AI-powered solutions to transform civic engagement, leveraging Phunware's expertise in mobile and AI. This partnership enables us to deliver a next-generation platform that combines mobile engagement with advanced AI capabilities tailored for both federal and local applications and powered by localized LLMs. Our vision is to go beyond traditional voter outreach, equipping advocacy groups, nonprofits and public agencies with tools for broader civic participation and engagement. We can provide nuanced, context-specific insights to support a wide range of activities. And we allow organizations and governments to have tools that deliver precise data-informed strategies and help them connect more effectively with diverse communities. This is a real-time optimized outreach approach based on hyper-local data and allows us to have community messaging. We hope to set a new standard in civic engagement. Phunware's investment in infrastructure has positioned us to capture strong demand in the market for AI-driven solutions. We have a focus on scalable modular frameworks that integrate with existing platforms, giving our partners a foundation for sustainable growth. We can support high-value customer engagements across a myriad of industries and fuel momentum in both bookings and sales. Phunware remains debt-free. We have adequate resources to support our continued investment in AI, sales and engineering. We have financial stability that allows us to pursue a growth strategy judiciously while also ensuring we deliver long-term value to stockholders. Our commitment to fiscal responsibility is demonstrated in our efficient use of capital and in our balanced investment in strategic areas that align with our vision. We have a robust level of liquidity which allows us to support operational flexibility and resilience and will allow us to respond effectively to emerging opportunities and address challenges while allowing us to have sustained stability and growth. Phunware's vision leads to a $500 billion generative AI market. Phunware's foundational work in mobile technology is now propelling us into the rapidly expanding generative AI marketplace. We see our role as the AI integration engine that provides scalable, adaptable solutions to enterprises looking to enhance their mobile platforms with personalized AI. By driving engagement, operational efficiency and long-term growth, we believe Phunware is exceptionally well positioned to redefine how businesses and governments engage with customers, citizens and employees in the AI era. Phunware's journey from a mobile pioneer to a leader in mobile plus AI represents an exciting evolution. And with our recent changes, including the search for a new CFO, underscores our commitment to aligning our team with this strategic direction. This leadership adjustment is part of a broader effort to strengthen our alignment across all levels, ensuring we can fully leverage our foundation in mobile engagement while advancing our AI-driven initiatives. We're actively seeking individuals who can provide fresh perspectives and guide us towards achieving this vision with precision and agility. Thank you. And now I'll turn over the call to Troy to discuss our financial performance.

Thank you, Stephen, and good afternoon, everyone. I'd like to thank you for joining us today for our review of Phunware's third quarter 2024 financial performance. As we move through our results, I'll be discussing GAAP financial measures, unless otherwise specifically noted. Our press release, 8-K and website provide a reconciliation of all GAAP to non-GAAP financial results. As a reminder, our previous business, Lyte Technology, is reflected in our financials as a discontinued operation in accordance with GAAP. The financial information I'm about to share is solely focused on our continuing operations. And with that said, let's take a look at the numbers. Year-to-date software subscriptions and service bookings, which represent executed contracts and future revenue, for the 9 months ended September 30 were approximately $2.2 million in 2024 as compared to approximately $600,000 in 2023, nearly a 300% increase. Net revenues for the third quarter of 2024 totaled approximately $665,000 compared to approximately $1.3 million in the third quarter of 2023, with 2023 net revenue benefiting nearly $300,000 from a contract breakage fee. Net revenues for the 9 months ended September 30 were approximately $2.6 million in 2024 as compared to $3.9 million in 2023. Gross margin for the 9 months ended September 30 was approximately 51% in 2024 as compared to approximately 32% in 2023. Excluding noncash stock-based compensation, gross margin was approximately 56% in 2024 as compared to approximately 43% for the comparable period in 2023. Total operating expense was approximately $3.5 million for the third quarter of 2024 versus approximately $4.9 million for Q3 2023, which excludes $9 million of goodwill impairment expense in Q3 2023. Excluding the 2023 goodwill impairment, our operating costs decreased approximately 28% period-over-period. On a year-to-date comparison, excluding the goodwill impairment, our operating expenses decreased approximately 44% in 2024 as compared to 2023. Non-GAAP adjusted EBITDA loss was approximately $2.9 million in the third quarter of 2024 compared to a loss of approximately $3.3 million for the third quarter of 2023. Year-to-date, our non-GAAP adjusted EBITDA loss was approximately $7.3 million versus approximately $13 million for the comparable period in 2023. Net loss from continuing operations for the third quarter of 2024 was approximately $2.8 million or $0.25 per share compared to a net loss from continuing operations of approximately $13.7 million or $5.72 per share for the third quarter of 2023, which reflects a 96% improvement. The weighted average shares used to calculate earnings per share was approximately 11.1 million versus approximately 2.4 million in the third quarter of 2023, which does reflect the reverse stock split effectuated in February 2024. Moving to the balance sheet, we closed the quarter of 2024 with approximately $35.6 million in cash and no debt. During the third quarter of 2024, our cash increased as a result of utilizing the at-the-market equity program, having sold approximately 2.9 million shares of common stock, which raised gross proceeds of approximately $16.8 million before commissions and fees. Subsequent to the end of the third quarter, we have continued to periodically utilize our ATM equity program, selling additional shares of approximately 8 million, which raised gross proceeds of approximately $79.8 million through November 5, 2024. Phunware has approximately $70 million of capacity remaining under our existing ATM program. As a result of all that, as of November 6, we have approximately $100 million of cash and cash equivalents on hand. The utilization of our ATM equity program has significantly boosted Phunware's cash reserves and fortified our balance sheet. With that, we'd like to turn the call back over to the operator so that we can begin the question-and-answer session.

Our first question is coming from Darren Aftahi with ROTH Capital.

This is Don on for Darren. First, regarding some of your plans around your SaaS platform that you're set to launch sort of mid next year. Can you talk about some of your goals with that? And then do you have some of the resources that you need to get there such as staff or technology? Or like how are you looking at investing in that in order to get from where you're at today to the platform that you envision when you're launching that?

Yes, this is Steve Chen. I'm pleased to address your question. It’s not really a major shift from what we have traditionally done. Phunware has been in the mobile space for 19 years, and historically, when customers want a mobile app, we can develop it in just a few days, sometimes even hours. The main bottleneck has typically been the Apple Store and the Google Store. We have now expedited that process even more. In the past, our engineers have been assembling different modules to develop the app. With our current platform, we are simply adding a field at the front end for users to input the app they wish to create, and we are in the process of automating everything on the back end. To answer your question, yes, we are best in class. We have successfully done this for some of the largest companies in the Fortune 500. We have the necessary tools for this. We are also focused on being cost-effective; we recognize that we are currently operating at a loss and are actively seeking ways to be more efficient with shareholder funds. Thank you.

As a follow-up regarding the balance sheet, how do you view organic growth with the initiatives you are pursuing, as well as inorganic growth? If you are considering acquisitions, what types of companies are you targeting?

Yes, we want to approach this carefully. In terms of organic growth, we are exploring opportunities that will enable us to expand our SaaS platform. Currently, we are still assessing the pricing for these platforms, and it will require significant volume to achieve the revenues we aim for. Therefore, we are focused on automating the process and developing a sales automation strategy. Additionally, we intend to leverage our history as a public company with a strong balance sheet, audited financials, and a professional team to effectively engage with enterprises and federal governments in implementing AI solutions. There are many powerful large language models available, but for enterprise and government contracts, it is essential to have a localized solution that can be easily audited and secured, allowing for traceability of data inputs. If issues arise, we need to trace back to the exact line of code. Our experience in building enterprise applications, exemplified by our past collaboration with 21st Century Fox on global streaming, positions us well. We aim to utilize our legacy and balance sheet resources to develop teams that can pursue these enterprise and federal contracts. Regarding our M&A strategy, we employ a highly metric-driven approach. We have a diligence checklist that evaluates market analysis, looking at how well potential acquisitions position us for federal AI contracting and enterprise engagement. Financial assessments are critical; we focus on companies with strong revenue growth and stability and maintain an interest in products within a $1 million to $10 million range. Smaller, traditional SaaS products are less appealing as they may not significantly contribute to our revenue growth rate. We assess operational compatibility, striving for standardized processes and best practices internally. Our focus is on KPI-driven and scalable solutions. If scalability is not feasible, an opportunity becomes less attractive. From a technology standpoint, we evaluate how new technologies integrate with our existing infrastructure; if they do not fit our modular app ecosystem, it may be more efficient to develop solutions internally. We also emphasize synergy, particularly cross-selling opportunities with consultants or firms that have existing federal and enterprise contracts, are profitable, and rapidly scaling their business. However, we are cautious about overpaying for acquisitions. My background in the ABL credit markets informs our collaborative growth strategy, as illustrated by our stock-based Campaign Nucleus transaction that aligns with our philosophy on growth. Regulatory compliance is important, but cultural fit is crucial to us. We strive for alignment with a corporate culture based on integrity, urgency, ownership, innovation, and curiosity. I believe that consistently measuring these attributes will help establish a nimble culture needed in this competitive landscape. The AI sector presents many opportunities, but they can only be realized with high ethical standards and personal integrity. We are committed to maintaining a sense of curiosity and innovation while engaging our customers. Given our extensive experience with hospitality and healthcare sectors, we are eager to partner with organizations. If you are looking for a proactive, motivated team that prioritizes urgency and ownership, please reach out. We are evaluating ourselves and would be excited to collaborate. Additionally, if there are organizations with products seeking a capital partner to create something exceptional, please connect with us. Thank you.

Our next question is coming from Scott Buck with H.C. Wainwright.

Stephen, very nice to meet you. Can you help us understand what exactly you're getting with MyCanvass and Campaign Nucleus? Is there a real revenue-generating business there? Or is it more about people and tech?

I'm glad to address that to the best of my ability. The situation is that, since we are in the early stages of a new partnership, we are still figuring out the appropriate timing and methods for disclosure, as well as the necessary approval processes. Regarding MyCanvass, we have established a system where campaign tools operate effectively from hyper-local levels up to state, federal, and national levels, and these tools are quite advanced. The area that remains somewhat disorganized and divided is hyper-local canvassing. To illustrate, when I was in high school, I participated in canvassing for various candidates, and that process relied heavily on cash transactions, which is still the case today. For local assembly members, the process is manual and rather chaotic, lacking efficiency in data use. Typically, assembly members set out to engage 20 individuals, map their areas, delegate people to different locations, and pay based on the responses received, whether that includes leaving flyers or getting turned away. In our vision, we can provide highly relevant content that resonates with individuals and communities, tracking this engagement in real time through a platform. This access to rich data enhances understanding of constituencies and aids planning for regulations and policies, significantly empowering civic engagement and amplifying voices. There is considerable interest from various parties who are prepared to invest in our services. From a tool development perspective, we are well-equipped, as this project has been underway for a significant period. It's applicable not just to presidential elections but to all forms of civic discussions, including local and national elections. The technology applies universally, including for analyzing public sentiment, allowing us to segment data not merely by ZIP code but down to specific mile markers. Our established expertise in wayfinding positions us as leaders in this area, and the combination of hyper-local information with generative AI creates a powerful tool for canvassers, transforming them into real-time ambassadors conveying issues that are important to their communities. At its core, this represents the essence of democracy and genuine civic engagement, where information progressively improves over time. These discussions may be challenging for many, especially in such a polarized environment, but they present an opportunity for us to share our fundamental beliefs constructively with each other. I hope this provides some clarity on your inquiries.

Yes. I can appreciate that. And my second one is just in terms of visibility. Speaking for myself, it's a challenge at this point to envision what this business looks like 12 months from now or 24 months from now. I know there are a lot of kind of things in the pipeline here. But if you could give us any kind of color on how to think about how kind of revenue develops from where we are today, which is basically zero.

I really appreciate that. I'm not one to exaggerate, but your assessment is accurate. This is part of the reason we hold ourselves to high standards, which is why I began by mentioning integrity. We truly value shareholder capital, recognizing that it's not ours. Our goal is to build and scale something meaningful because it's what people have entrusted us with. Starting from zero is actually an opportunity for us, allowing us to explore localized AI and generative AI. We have a strong balance sheet and no debt, along with a team of culturally aligned individuals passionate about building. Looking at macro trends, the generative AI space stands out as untapped, with no clear market leaders. The real power of technology isn't just in someone's laptop; it's in the advanced computing devices everyone carries in their pockets. If we can integrate those effectively and ensure access in a meaningful and secure way for everyone, including those in government, it could be transformative. However, building from the ground up will take time and effort. We’ve taken a postmortem approach, giving us a long runway, potentially up to two decades. Even without being overly cautious, we're looking at a decade-long timeline. We’re analyzing what could go wrong and ensuring we plan to avoid those pitfalls. We believe some of the largest opportunities lie within enterprise and federal government sectors, which require different partners and market approaches. Engaging with established channel partners that already serve enterprise customers and the federal government on platforms like GovCloud will allow us to add unique value. We want to deliver our stability, insights, and dedication in a way that expands potential opportunities. While these engagements may lead to longer sales cycles, we've been experiencing extended sales cycles anyway. We are particularly focused on securing contracts worth between $1 million and $10 million, building strong relationships, and continuing to leverage our historical connections, particularly with those associated with MyCanvass, as we emphasize integrity and meaningful problem-solving.

Our next question is coming from Ed Woo with Ascendiant.

It's very nice to meet you. My question is, will you still predominantly focus on the U.S.? Or have you thought about international opportunities?

I come from an emerging markets background and have spent much of the last few years overseas. The answer is absolutely yes. However, I understand that most of our core relationships and current partnerships are domestic. Our rollout plan involves identifying target clienteles, establishing and deepening channel partnerships, maintaining high compliance, and creating a strong foundation based on our existing relationships and government contracts we aim to secure. We intend to launch pilot programs and case studies to showcase our capabilities and success. In what I would call Phase 3, which is about three years out, we can begin to explore larger market outreach, leverage our success stories, participate in more international events, and implement targeted digital campaigns. While our partners are currently engaged in these activities, they also have a more developed business. We want to take things step by step, demonstrate real value, address genuine issues, and only then will we broaden our discussions. Until we can confidently say that we've effectively solved someone's problem and received adequate and profitable compensation for it, our focus will primarily remain on the U.S. market.

Our next question is coming from Howard Halpern with Taglich Brothers.

Congratulations on this big transformation. So we know this part of going to enterprises and going to the federal government through channel partners is going to take time. What about the digital advertising part or opportunities out there? And might that bring in revenue quicker using the AI technologies?

That's a great question, and I appreciate the well wishes. We are committed to our transformation, which goes deep to the core of our operations. Recent management changes reflect our shift in direction, and while we wish our former colleagues well, we are moving forward in a significantly different way. This transformation requires a dedicated mindset and a substantial cultural shift. I want to highlight the importance of culture because launching new initiatives isn't true transformation without a change in mindset and people. That's why I transitioned from being the Chair into a hands-on role; we are here for a transformation that safeguards shareholder investments. Your question about revenue is important. We generated $5 million, half coming from hospitality and the other half from advertising. Our expenses mainly stem from the former, while our revenue derives from the latter. We've engaged an external sales consultant specializing in SaaS to enhance our scalability and improve sales automation. This small but profitable team is key to our focus, and we are excited to provide them with the necessary support. We're closely monitoring value attribution and managing our costs effectively, ensuring we maintain revenue while reducing expenses. We have set clear metrics for new hires to ensure they contribute to revenue growth in a specified timeframe. As CFO, I firmly believe in the integrity of capital stewardship, and we are dedicated to reducing our burn rate. We are exploring how to automate processes quickly and efficiently, and we've implemented internal metrics aimed at boosting productivity with the tools available to us.

Right. And so you're going to be using your own developed generative AI internally to help productivity and advance...

We have been doing that every single day for the last 2 months. We are particularly seeing adopters. We are clearly seeing the non-adopters. And it goes back to that same metric of curiosity, right? This is the most transformative technology for God knows how long. And if we are not using it, I could only imply that we're not curious about it. So yes, very much we are using that tool every single day. Thank you all for joining us today. We're excited about the future and believe we are well positioned for our next phase of growth. We maintain strong financial stewardship and disciplined execution. We look forward to reconnecting with you soon.

Thank you, ladies and gentlemen. This concludes today's call, and you may disconnect your lines at this time. And we thank you for your participation.