COMSovereign Holding Corp (COMS) 2021 Q1 法說會逐字稿

Good day and welcome to the COMSovereign Holding Corp. First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to the Director of Investor Relations, Steve Gersten. Please go ahead.

Thank you, operator. Good afternoon and welcome to COMSovereign's Holding Corp.'s 2021 First Quarter Earnings Call. My name is Steve Gersten, and I'm the Director of Investor Relations for COMSovereign. Joining us today is Dan Hodges, Chairman and CEO, who will provide prepared remarks, and then we will open the call up for questions.

Before we begin, I'd like to remind everyone that certain statements made during this call that are not historical facts but are forward-looking statements that reflect management's current expectations, assumptions and estimates of future performance and economic conditions and involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made herein. Forward-looking statements are generally identifiable by the use of forward-looking terminologies such as believe, expects, may, looks to, will, should, plan, intend, on condition, target, see, potential, estimates, preliminarily or anticipates or the negative thereof of comparable terminology or by discussion of strategy or goals or other future events, circumstances or effects.

Moreover, forward-looking statements in this release include, but are not limited to: the impact of the current COVID-19 pandemic, which may limit access to the company's facilities, customers, management, support staff and professional advisers and to develop and deliver advanced voice and data communication systems; demand for the company's products and services; economic conditions in the United States and worldwide; and the company's ability to recruit and retain management, technical and sales personnel.

The forward-looking statements contained in this call are made as of the date of this call, and the company disclaims any intention or obligation other than imposed by law to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We encourage you to review our publicly filed documents, including our SEC filings, news releases and website for more information about the company.

With that, I'll turn the call over to Dan. Take it, Dan.

Thanks, Steve. Good afternoon, everyone. I'll try to get away from this robotic sounding items that have to be talked about. And I'd like to start by thanking everyone who took the time to join us today on our first quarterly results conference call. While I am a sole host for today's call, I can assure you that as we move ahead with the ramp-up of our business, I will be joined by other members of our executive team, such as our CFO and CTO, who will address the financial and technical developments occurring in the business.

For our commitment on this call, I'd like to run through the first quarter financials and then move in to updating you on some of the important developments in the business, which I believe are directly relevant to the value we are creating at COMSovereign. After that, I'm going to open the call up for questions. (Operator Instructions) If you have any follow-up questions any time after this call, you can always call or contact Steve Gersten, who just spoke.

So first quarter results are in line and consistent with the results of 2020 and, in particular, the fourth quarter of 2020, during which we were continuing to build and arrange the organization while beginning to operate the core business units. That was done with inadequate capital, as we mentioned, to really invest in R&D and production. For the 3 months ended March 31, 2021, total revenues were $2,086,452 compared with $2,485,204 for the 3 months ended March 31, 2020. It's a decrease of $398,752. These revenues were derived primarily from mobile network backhaul products, sales from Sovereign Plastics and the sale of our aerostat products and accessories.

As I mentioned, the mild decrease was primarily driven by the lack of capital available during that period. The capital, however, from our 2 public equity offerings was deployed towards the end of the period into areas such as inventory and production, and that had not yet reached AR, and therefore did not meaningfully contribute to revenue during the period.

Other expenses in the period increased as expected due to the expansion of our business because of acquisitions and increases in professional services, including accounting, legal and marketing as well as staffing levels across the organization, which are critical to support expected sales growth. Additionally, other expenses in the quarter amounted to $5,910,275 compared to $882,375 for the 3 months ended a year ago, March 31, 2020. This increase was largely due to the extinguishment of debt of $5,348,469, a result of the exchange of debt for equity.

Looking at our balance sheet, there are a few items I wish to highlight. As was noted in our CEO update I delivered in April, we successfully raised approximately $39 million in net proceeds in January and February. We deployed a portion of the proceeds to pay off maturing debt and accrued interest that totaled $20.4 million, which also included more than $15 million in debt converted to equity as well as paying down other expenses that had accrued in the 2 years of organizational build-out in preparation.

In addition to the payoff of debt and cash payments for accrued expenses, cash was used for the purchase of capital assets, such as the new production facility in Tucson, as well as for acquisitions, and approximately $4 million was initially invested into inventory and prepaid production. As a result, we recorded an end of quarter cash balance of approximately $11 million.

At quarter end, our remaining debt principally consists of the $6.5 million outstanding mortgage balance on the 140,000 square-foot Tucson production facility and approximately $11.7 million in convertible notes related to the acquisition of Fastback, which mature in 2026 but are expected to be converted to equity.

Although we expect to achieve positive cash flow from operations during the third quarter, other opportunities ahead of us could require further investments in inventory and production, and therefore, we intend to prepare and augment our cash position with additional funds sourced from revolving credit facilities or debt.

To recap just a few of the milestones of the first quarter: Furthering our strategic development plan, we secured over $39 million in net proceeds from the raise of the new growth capital in January and February and completed our uplist to NASDAQ. We expanded our top-notch leadership team with the appointments of: Marty Wade, a 40-year banking veteran with management, ops and finance experience, to be our Chief Financial Officer; and Bud Patterson, who brings over 30 years of operational and engineering experience in wireless communications to be our Chief Operating Officer. Through our acquisition of RVision, we added Brian Kelly, an accomplished and very successful manager and sales leader, as our EVP of Business Development.

During that first quarter, we significantly expanded our aerial platform business with the acquisition of Sky Sapience, which is a stand-alone developer and manufacturer of tethered aerial rotorcraft platforms, that are already delivering to and serving customers in defense, homeland security and commercial markets. These units are built around the unique AI-driven aerial unit and a fiber optic tether system, enabling surveillance and complete 4G and 5G LTE networks, among other demonstrated payloads. Together with our Drone Aviation unit, we can now provide customers with a full range of capabilities for communications and ISR.

Activity in our drone business is picking up, especially in regards interest we're seeing from the Department of Homeland Security. As evidence of this, a few days ago, we posted information about an invitation-only flight demonstration of our Sky Sapience HoverMast 100 to be held at our Tucson facility. That demo was given to law enforcement and officials from Department of Homeland Security. And based upon the positive feedback and further requests received, the company is hosting a series of additional demos over the coming weeks to a wide variety of interested users in law enforcement, forestry, military and telecom.

The other acquisition we closed on during the first quarter, as I mentioned, was RVision. It's a developer of technologically advanced, environmentally hardened video and communications products and physical security solutions, designed for government, private-sector and commercial markets. RVision's technology also features AI-driven electro-optic and infrared sensors, integrated network communications capabilities, and both of those make it ideal for a large number of applications, including global smart city, safe city programs. Together with our other business units as of today, we now have systems under evaluation or already going into smart city projects in several states and multiple overseas locations.

Now let me talk to you about what's happening in the business units. First issue I want to talk to is feedback we received from investors about a perceived lack of news regarding contracts. Now in some cases, contracts have taken longer to move through the funnel, either due to production limitations -- primarily due to chip availability, which I'll cover in a bit; or simply the contracting process, which also continues to be impacted by COVID, which has had some effect in nearly every case. Furthermore, while we know it is important to provide the market with regular updates, it is equally important to note that in many cases, we're precluded from disclosing customer relationships or contracts for competitive or security reasons. This is especially true regarding the work we do in the government sector.

So what I can say is that several large telecom customers have been testing our upgraded radio equipment and products in the field in their networks. This is normal. It's a procedure that usually precedes a new customer placing orders.

I also want to point out that in our business, historically, customers place order with us constantly, meaning, we get a lot of POs from a myriad of different customers. This is positive in most business cases, as you know, because customer diversity greatly reduces concentration risk.

In terms of larger opportunities, there are -- several orders, we believe are indeed pending in both the United States and Latin America, specifically in Mexico, right now. And those are with Tier 1 operators. We also anticipate significant U.S. government orders over the next 3 quarters.

Now with all of that said, I refer you all to the CEO update in which I listed just a small sample drawn from a list of over 100 customers we've shipped products to over the past 45 days, including the likes of CommTel, Execulink Telecom, General Dynamics, Motorola, NextEra, Rogers Media, Saab, T-Mobile and Wavecom, just a few.

In our backhaul radio business, consisting of DragonWave and Fastback, we entered the second quarter with production lines at our contract manufacturing partners online with low-rate initial production volumes, and we're ramping those up. The production curve is increasing monthly. As I also noted in our CEO update, it is this baseline production volume that allows us to now begin accepting higher PO volume from our customers. In fact, POs accepted in the month of April exceeded the entire first quarter revenue.

We're seeing strong demand in our wireless backhaul business driven by segments such as: WISPs, wireless Internet service providers; and Tier 1 network operators in the U.S. and international markets. This is especially true of Fastback, where demand is increasing faster than expected and the company now anticipates significant revenue at Fastback for the remainder of 2021. In fact, to meet this demand, production at SMC, our contract manufacturing partner for Fastback, is expected to be increased by over 5x current levels starting next month in June. Our anticipated product line increase for DragonWave will come from our next-gen common architecture radio platform called Polaris [G1], which I'll discuss as we move closer to production.

I now want to take a moment to address one macro issue impacting nearly every sector of this wireless economy, that is global chip shortage. This has impacted our business, but we have been fortunate thus far in this regard, thanks to both supply contracts we have in place and the fact that we've been successful in our efforts to secure an immediate supply of core components, which together provides what we believe is adequate inventory for planned production on into 2022.

And now the situation has impacted DragonWave more than our other lines, as some of the chips utilized in our existing Harmony and Harmony MC radios are reaching end of life. Because of this and due to demand, we've made a strategic decision to maximize production of the Fastback [IVR 3000] radios and to produce those DragonWave Harmony line radios, allocating the chipsets we already have in inventory and the verified component pipeline to exploit the highest-margin products. We expect to have healthy customer demand for the new Polaris G1 line of radios later this year, which will relieve chip constraint pressure on our legacy product line chips. Any information on that you wish further, again, speak with Steve Gersten. This situation brings up what I believe is an important business and investor issue we're constantly focused on, that is operating our business to maximize value.

Looking across our industry, many of our competitors and peers have recently announced first quarter earnings, showing top-line first-quarter revenue growth and confirming the large potential of 5G, but this growth is often accompanied by very poor net profitability metrics. Philosophically, we also believe strong earnings is critical to running our business. But net profits are far more important than gross profits, than just seeking high revenues and willingly taking loss leader contracts in an effort to capture market share. Ideally, this might work, but in reality, that is what damaged the business of DragonWave before we took it over. And we're sadly seeing that same thinking and rationale in our industry once again in some of our competitors.

As you may recall, in March, we published some basic details of our target model, highlighting our EBITDA margin goals. And based upon current metrics and expectations and streamlining our product lines and management, we believe COMSovereign is poised to deliver a multiple times revenue growth in 2021 over 2020 and to do so with far more significant profitability. This will be achieved through a combination of technological leadership, built on our in-house technology and acquisitions, and a large installed base of customers, and the ability to control our production and supply chain in battery, drone and radio production via our Tucson facility.

In our drone business, which includes the operations of Drone Aviation and Sky Sapience, we continue to see strong interest, especially in government and military markets. This is true for use on the border, where we currently have WASP aerostat units from drone already deployed. Demand for rapid deployable aerial platforms for communications and surveillance is high and still growing higher. In response to this interest, as I noted earlier, in the weeks ahead we intend to perform a series of demonstrations for law enforcement and officials from Department of Homeland Security.

VNC has been refining and optimizing its 4G LTE and 5G radio systems, including development of its new 5G and signal strength upgrades for its next-generation FeatherLite 2.0 and RAID products. It is also finishing up our 5G edge computing and cloud solution while also launching multiple customer engagements and partnership ventures, including the recently announced 5G Cooperative Research and Development Agreement, or CRADA, as the acronym goes, with the National Institute of Standards and Technology, or NIST. This is along with ventures with academic institutions to make smart cities and smart campuses a reality.

At InduraPower, production on the first generation of batteries is now underway in Tucson on its new line. The design and testing work is being completed on the next-generation units. We anticipate executing a significant OEM contract we've been working on for some time, and interest in the capabilities of our AI-driven battery management system for new applications is quite healthy.

Lextrum has been deep into the in-band full duplex testing, as previously mentioned, covering 4G and 5G LTE waveforms, and we're seeing even better-than-expected performance results with respect to data throughput and signal polarity. This translates to an expectation of having the in-band full duplex technology operable within our own equipment by year-end and available for license and royalty to other wireless develops -- developers globally by the first quarter of next year. And I can't stress enough how important this technology is in order for 5G to become an affordable reality in dense urban environments.

So at this point, you're probably tired of hearing me bloviate. I'd like to open the call for any questions. Operator?

(Operator Instructions) Our first question comes from [Larry Holum] of [Holum Family Office].

I'm wondering if you can tell us when you anticipate your new manufacturing facility being 100% online?

It will be fully up with radio manufacturing in late August. In the meantime, InduraPower, as I mentioned, is already up and producing batteries. Drone will be up in manufacturing in late June, early July. And if any shareholders, by the way, are in Tucson and would like to tour the facility sometime, just let us know; we'd love to have you.

Our next question comes from Jamie Halegoua with Delaware Street Capital.

Just wanted to -- you kind of touched on this a little bit, but just wanted to dive a little deeper into the rip-and-replace initiative. Why haven't we seen any kind of material contracts for many of the Tier 1 guys?

Good question. Good question. So while individual carriers are already moving to begin this replacement of Huawei gear, the U.S. government hasn't yet released appreciable funds to allow that. Although the money is earmarked already, it is important to note, most of the existing hardware in the U.S. on this rip-and-replace is in the 6 gigahertz frequencies, largely in Colorado and some in the Midwest. And we're well -- very well positioned, both in that frequency range and in those areas.

So likewise, other countries are also preparing to rip-and-replace the Huawei radios. We're seeing a significant interest from those network operators for our products, for example, in Latin America. As the opportunities mature, both in the United States and in markets like Mexico, I have no doubt we'll see that business throughout this year, and be assured, we are quite active in this and hopefully we will be releasing news on that front very soon.

All right. And also, just a second question, I know you said only one, but has the management or the Board considered purchasing stock in the open market to give shareholders a little bit more confidence?

In a word, yes. However -- I mean, we've looked at open market purchases. We've consulted with our legal counsel regarding this. And there are just extensive black-out periods for officers and directors in what windows might be available. I can tell you, the desire is certainly there. And we -- you may see some Form 3 or 4 filings for that purpose soon.

(Operator Instructions) Our next question comes from Dallas Salazar with ATLAS Consulting.

Dan, congrats on the solid operational performance made during the quarter. Yes, it looks like you highlighted in your prepared remarks about your progress made in the Sky Sapience and Drone divisions. Can you talk about the current border crisis and if that is a primary driver for interest in your drone products? And in terms of the near-term market opportunity, how should we think about that in terms of revenue opportunity?

Yes, you bet. And I'm glad you asked because my excitement level is enormous on this. So the answer is a resounding yes, that the border crisis is driving it. And there is -- we're seeing bipartisan support for that and appropriations. So as you may or may not know, we already have a number of aerostat WASP units in use on the border. They call them the [ADAPT] units. We get positive feedback quite regularly on that. It is providing enormous support for them.

The demand for long duration or what surveillance operators call persistent rapid deployable aerial monitoring is growing almost at a geometric rate there. So we believe that both the WASP and the Sky Sapience HoverMast platforms provide tremendous capability enhancements, especially with some of the newer payload systems, not just cameras and not just communications, but there are some other very unique systems that aid our border security.

Notably, we sell now and are getting similar demand interest for both systems from customers for use outside of the United States as well. It's not just a U.S. issue. There are a lot of foreign customers in that same bailiwick. I hope that answers your question.

It does. And just one follow-up. In terms of the border patrol, are they using this to monitor drug traffic? Or is it human traffic? Or both?

It's both and more, the distance with which detection can be made, identification can be made and tracking and interception. You probably heard me before that the largest fentanyl capture yet to date was done, and our units were largely responsible for that interception. So they catch all sorts of illegal and nefarious activity on our borders.

Our next question comes from [Graham Gordon], private investor.

Operator, I'm not hearing a question, if that's intended for me.

Will the company disclose backlog data? And if not, why?

Good question. So I'm going to answer it this way. In telecom, a large backlog is not necessarily a good thing. It means you're failing to deliver to customers on a timely basis. So I might suggest that a better metric is WIP, which is work in progress, and of course, a validated pipeline. Hence, we feel it might be counterproductive to focus on backlog, although we have a small one now. But we have a better work in progress and a better validated pipeline, which means we are delivering. And I don't intend to really highlight backlog going forward.

(Operator Instructions) Our next question comes from Michael Shah with Shah Capital.

Dan, I have one question in 2 parts, if I may. The company has made a number of acquisitions. How is the integration going? And have the operational synergies been identified?

And the second part related to that is, given all this integration and the -- who's handling sales, and what does the sales organization look like?

Okay. Well, that's pretty broad, but I'm going to -- I'll give her a shot. As far as your first questions about the acquisitions and how they're integrating and synergies, they're integrating very, very well. As we noted in the CEO update, in most cases, the principals of our business units are now fully engaged, and they're multitasked with mutual responsibilities across all lines. So they're working quite well together. We've been actively eliminating redundancies, and the impact is going to show up as a lower overall G&A burden than perhaps our competitors have.

As far as how sales is looking, we're fortunate to have quite a few channel partners assisting us with the sales load. So firms like RF Engineering, they expanded their distribution of DragonWave products quite a bit late last year. [Future Tech] is another, along with many other partners. This is in addition to our direct sales relationships with existing large customers. And our new business development EVP, Brian Kelly, he came on board through RVision acquisition. He's been working around the clock, making our sales and marketing team as robust and effective as they come. And we're actively looking to expand our professional sales force with the additional hires.

And of course, our advisory Board, if you've been keeping up with that, and we have some new folks coming aboard as well, that's contributing greatly to our business development efforts. So don't discount that, and pay attention to that. I hope that answers your query.

Our next question comes from [Brian Gutlin] with Ignyte Assurance Platform.

I just wanted to hit on the CRADA agreement between NIST. So as you know, I'm sure, edge computing is being abstracted, everything is software-defined now, especially with telecommunications and 5G being a part of that coming down the pipeline. It doesn't really solve the hardware modernization issue, that's for another discussion. But I guess can you provide more information on the value that NIST brings besides maybe helping develop secure configurations and things like that and a timeline to maybe measure success of the program?

Yes. You bet, you bet. And I'm glad you asked that because it's been on my mind. There's several things that I don't think the investing publish -- public or our shareholders really understand completely yet. And then I was hoping somebody would ask something about NIST.

So the National Institute of Standards and Technology, or NIST, that is the standard-setting organization in this country. Go to NIST, N-I-S-T.gov. So it's obviously a government organization. Look on the advanced communications link there. And as their name implies, they are the U.S. leader in research and standards, and they coordinate with all relevant parties in deploying advanced communications technologies.

So us being chosen as the 5 equipment -- 5G equipment provider for this project, which is targeted at the national first-responder network, that's quite an honor. You don't just get in, walk in and get this. We'll be working with the team at NIST to establish critical benchmarks for network connectivity, such as bandwidth, low latency and utilizing our 5G core and front-edge radios.

So the NIST saw something in us, and then they invited us in and that -- we are the company responding to this. This information is going to be used to define future ops requirements, for instance, for any hardware that's going to be purchased for use in the national first responder network.

I can't comment how long the testing will take -- sometimes it's short, sometimes it's long -- or how quickly their final report will be published. But I will tell you this, coming out as a validated technology from NIST is extremely, extremely significant. It sets you as a standard going forward.

So I'm glad you asked that. I'm glad I got to comment on it. And I do encourage shareholders, please research NIST. You'll see what this really means for us.

(Operator Instructions) It seems we have run into some technical difficulties. If you have any questions, please direct them to Steve Gersten. This concludes our question-and-answer session. I would like to turn the conference back over to Dan Hodges for any closing remarks.

All right. Thanks, operator. I do encourage you to, if you have any other questions, reach out to Steve. We will answer every last one of them. That's our promise.

Finally, the last few comments I want to make is that we continue to execute on our overall strategy in a very disciplined fashion. It may not look like it from the outside, but I can assure you, with our management team, which is world-class, it is a very disciplined means of approaching this. The strategy is built around 3 core principles and that is: number one, we're building advanced end-to-end telecommunications hardware and software solutions for carriers, private network operators and governments. And by end-to-end, we mean solutions that span from the front edge or the access point of a network that connects to a user's cell phone to an IoT wireless unit, and develops the elements of a smart city or smart utility grid, all the way through to the data backhaul and Internet connections and fiber. This is critical to connect the estimated 29 billion devices globally that are going to be in use by the end of 2023. We've got to connect those to wireless 4G and 5G.

So number two, we'll continue to build a portfolio of cutting-edge technologies and IP that differentiates our products and services in the market by developing industry-leading platforms, performance, reliability and supporting the needs of today's advanced 4G LTE networks and 5G networks that are forthcoming.

And number three, we want to capitalize on the made-in-America opportunities through domestic product development, manufacturing and sale of cutting-edge products and technologies. We have a lot of things coming up in the coming days and weeks, and please, please stay attentive to those.

And I'd like to close the call by saying our team remains focused on wisely building COMSovereign to assure we capitalize on both the top line and more importantly, bottom line growth opportunities we see ahead of us, as the telecommunications industry undergoes this transition from 4G to 5G. And it's through this focus we will continue to produce value for all the stakeholders: customers, partners, employees and investors.

Again, I encourage you to remain [intentive] as more and more of our strategy and growth is going to emerge very quickly, and it will become evident to you. So I want to thank everyone for joining us today. Thank you. Have a great week.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.