Supercom Ltd (SPCB) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the SuperCom Q3 2021 financial results and corporate update conference call. (Operator Instructions)

Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of the call through December 8, 2021.

I would now like to turn the call over to Scott Gordon, President of CORE IR, the company's Investor Relations firm. Sir, please go ahead.

Thank you, Kelly. Good morning and thank you all for joining today's conference call. Joining me from SuperCom's leadership team is Ordan Trabelsi, Chief Executive Officer.

During this call, management will be making forward-looking statements, including statements that address SuperCom'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 SuperCom's most recently filed periodic reports on Form 20-F, Form 6-K, SuperCom's press release that accompanies this call, particularly the cautionary statements in it.

Today's conference call includes EBITDA, a non-GAAP financial measure, that SuperCom believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net loss to its most directly comparable GAAP financial measure, please see the reconciliation table located in SuperCom's earnings press release.

The content of this call contains time-sensitive information that is accurate only as of today, November 11, 2021. Except as required by law, SuperCom disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call.

It is now my pleasure to turn the call over to Ordan Trabelsi. Ordan, please go ahead.

Thank you, Scott. Good morning, everyone, and thank you for joining us today. Earlier, we issued a press release and our financial results for the third quarter of 2021, a copy of which will be available in our Investor Relations section of our website.

We are encouraged by our accomplishments in the third quarter, which further demonstrate our continued execution toward our goals for 2021 and years to come as we strengthen our foundation for future growth with an emphasis on our IoT business, electronic monitoring of offenders. Our recent announcement of new contracts within California are exciting examples of our continued execution within a vertical, which we have a strong presence and excellent reputation.

We recently announced that our fully-owned subsidiary, Leaders in Community Alternatives or LCA, which we acquired in 2016, was awarded a new project with probation department in Central Coast, California, to provide rehabilitative services. This project, which also has an emphasis on employment services for women, supports those reentering the community from periods of incarceration by providing evidence-based and individualized services that contribute to reduction in recidivism. This new project is valued at approximately $1 million over a term of three years or approximately $340,000 per year and is expected to launch and start generating recurring revenue before the end of 2021.

We also recently announced a new contract win in California to provide juvenile programming and rehabilitative services for out of custody, juvenile programming, which is our example of our continuing execution and vertical within which we have over a decade of expertise serving. These projects and release supports those reentering the community from periods of incarceration by providing evidence-based and individualized services that contribute to reduction in recidivism.

As we announced in August, this project is valued at up to $240,000 per year, starting with the initial evaluation term of one year. After the first year, the government agency will consider expanding the project with longer-term scope. The project has already launched and it is currently servicing clients in this county.

On July 2021, we launched a new project in California, USA valued up to $4 million over up to five years to provide juvenile programming and rehabilitative services. This project win was announced via press release earlier this year.

Our success in winning these new projects in California has a function of three factors. Firstly, our general strategic focus over the past years has been to move away from our legacy identification business that lump the revenues in Africa and developing countries, and focus more on recurring revenues in developed countries with our IoT tracking business.

Secondly, while since the start of the global pandemic in 2020, we've seen a slowdown in RFP and procurement activity from our potential government customers. In 2021, we have been seeing more and more return to normal activity.

Thirdly, we acquired electronic monitoring criminal justice business in 2016 named LCA, headquartered in Oakland, California, and with its strong presence in the state since 1991. The large reference base relationships and experience we inherited in California to this acquisition integration over the years has allowed us to enter very effectively into the region with our new technologies and capabilities, unleash valuable synergies, and generate a continuous stream of new, multiyear recurring revenue projects.

In Europe, we have recently seen an uplift in RFP activity as well, and we continue to score well on competitive tenders. In June 2021, we announced a win through a competitive RFP of a project in Finland, the national electronic monitoring project there, valued at $3.6 million. The win comes after consistent streak of wins in the European market, displacing incumbent vendors time after time, boasting an over 65% win rate in competitive RFPs in Europe.

We won the $7 million national electronic monitoring project with the Ministry of Justice in Sweden, a $1 million project for domestic violence with the Swedish Police, the national electronic monitoring projects in Denmark, Estonia, Finland, Bulgaria, and Latvia, just to name a few in Europe.

We attribute our wins mainly to our proprietary technology which scored very highly in the competitive RFPs, and over time, to our strong reputation and recognition as a premium provider of electronic monitoring technology and services. We operate in a small niche market where customers know one another and having a strong reputation is an important factor in this business when selecting their vendor.

Our strategy in this has been to build amazing technology, expand our presence, and deliver outstanding services. Each customer won and project deployed further strengthens our reputation, making us even more competitive. And in this quarter, we have further progress on each of these elements and have achieved recognition for sites awards from existing customers and new ones in existing regions as well as new regions. We're expanding into over 30 new government projects in the past few years alone.

Our strategy has always been to lead with our technology. This quarter, we continued investing in research and development to ensure that our product continues to be the most competitive in the market. Our reputation in the industry with regards to our IoT solutions continue to be stellar as a result of these investments. And as evidenced, these efforts are paying off.

With these product investments, we continue to introduce new features and technologies into our proprietary platform, extending our lead in the market space, whether it's new features and biometric capabilities, battery life, and communication, or entirely new solutions for domestic violence, alcohol monitoring, and smartphone electronic monitoring with depth parts to monitor urban areas and subways. Our R&D teams continue to innovate and disrupt the status quo.

We've been fortunate to have been able to expand so quickly and aggressively into the government services space of electronic monitoring of offenders, which has very high barriers to entry. Importantly, we have done this without much investment in sales and marketing. Our focus, as of late, has been to capitalize on this success and build a global team to help us accelerate our growth and expand our footprint even faster.

During the third quarter, we continue to invest in our sales and marketing teams in the USA and in Europe with a focus on IoT solution. While sales cycles in this market can be long, the duration of the relationships with these clients can last for years. The investments we have made thus far have been driving increased activity with existing customers as well as numerous new demos and evaluations of potential new ones. We expect to see continued momentum, particularly as COVID-related restrictions release and improve.

In addition, we are also focused on expanding our global footprint to deliver our technology to additional geographies. We believe there's opportunities to further enhance our growth through strategic acquisitions and electronic monitoring market in the USA. There are local service providers that have developed a strong reputation and customer base in their respective local community, many of whom we know well through prior dealings. We are constantly monitoring this market for potential accretive acquisitions at a good price that can generate significant value through immediate expansion of market presence and providing vertical integration synergies. An example of this strategy was our $3 million acquisition of LCA back in 2016.

Taking a step back to reaffirm our positive view on the market, we are seeing various shifts and demographic trends benefiting our electronic monitoring business, which we believe will drive future growth in our IoT segment. First, many correctional institutions are facing budget constraints as the cost of housing an inmate has increased dramatically with the increase of incarcerated population. Our pure security solutions provide an effective way for institutions to manage their population of offenders while significantly reducing the associated cost of housing an inmate.

The cost savings associated with our solutions are substantial. The total cost for monitoring an offender on home confinement or GPS electronic monitoring for both technology services and manpower are approximately $10 to $35 a day in the US, substantially lower than the $100 to $140 daily cost for each inmate at a correctional facility in the US. Most importantly, home confinement has been shown to reduce recidivism, highlighting its effectiveness in helping offenders improve their lives and promote public safety in our communities.

Secondly, as correctional agencies have been dealing with overcrowded prisons, there has been a trend towards alternative options to incarceration. Our pure security electronic monitoring suite of products provide an efficient and effective way to enforce home confinement while easing overcrowded prisons. We are seeing institutions increasingly evaluating home confinement alternative as a way to address the issues.

With the outbreak of COVID and the need for social distancing, the problems of overpopulated prisons was amplified, causing more agencies to look for alternative long-term solutions. Further, this COVID pandemic has created a new potential revenue stream in IoT segment with our PureCare solution, which provides governments the ability to effectively manage travel into the country while minimizing the risk of the spread of contagious diseases. These solutions can be effective in minimizing the spread of COVID while being less invasive in nature, enabling people traveling into country to quarantine while being monitored to insure compliance.

With regard to financial discussion, for purposes of comparison, SuperCom was not required to and did not report its Q3 2020 financial results. Accordingly, comparable Q3 2020 financial results are not available without unreasonable effort and expect. In order to provide a reasonable comparison, an average on the company's financial quarterly results for its third and fourth quarters of 2020 is presented in the press release, which I will denote as Q3 2020 average for comparison purposes.

As mentioned in previous earnings calls and as apparent now, the company has invested in its financial reporting resources and has returned this year to quarterly and timely report. During the third quarter of 2021, our revenues were 25% higher than the Q3 2020 average, representing growth from new projects and some bounce back from COVID on existing project numbers.

While growth compared to the recent quarter, Q2 2021 was minimal. We had a maintenance contract with one of our clients in Africa come to completion at the end of Q2 2021, which accounted for around $300,000 in revenues per month, negatively impacting revenue growth in the third quarter. This, however, was offset by new projects won in the US and Europe, enabling us to report an increase in revenues compared to last year Q3 average and the previous quarter of 2021.

Gross profit increased to 34.9% in third quarter of 2021 compared to Q3 2020 average, which was 27.3%. Gross margins were also negatively impacted by the rolling off of the maintenance contract in Africa. Being maintained through the revenues, this is high-margin business, which was replaced by projects that have lower margin, at least in their earlier stages, which include a lot of startup and deployment costs.

R&D was $625,000 in third quarter of 2021 versus $700,000 in the Q3 2020 average. Selling and marketing expenses were $457,000 in Q3 2021 versus $374,000 in Q3 2020 average. General and administrative expenses were $1.1 million in Q3 2021 compared to $1.3 million in Q3 2020 average.

Compared to Q2 2021, operating expenses increased in the third quarter as a result of the benefit from the Paycheck Protection Program, which benefit the prior period, and these benefits were not available in Q3 2021. In addition, the company had a one-time charge of $689,000. That was from a settlement, but it's an old dispute that happened several years ago.

The company had an operating loss of $1.9 million (sic - see press release, "$1.8 million") versus an operating loss of $2.2 million in Q3 2020 quarter average. Net income for the quarter was a loss of $2.5 million versus a loss of $3.7 million in Q3 2020 average. These are GAAP numbers, and we've also shared the non-GAAP numbers on our press release for EBITDA.

As of September 30, 2021, we had total cash and cash equivalents of $6.3 million, of which $1 million was restricted cash. This was down from total cash equivalent than the second quarter and decline of cash was due to operating loss with working capital increase, including an increase of $400,000 in inventory, as well as one-time uses of cash in the quarter for settlement of old liabilities, just in accrued expenses by $1.1 million and a one-time settlement expense of nearly $700,000, which we just discussed.

And with that, I'll turn the call over to the operator to open the call for questions. Operator?

(Operator Instructions)

Okay. And your first question is coming from Kevin Dede. Please pose your affiliation and your question.

It's Kevin Dede at H.C. Wainwright. Hi, Ordan. How are you?

Hey, Kevin. Thank you. I'm good.

So can we start with maybe the share count? Because that didn't show up in your press. Share count average for September, do you have that somewhere?

Yes. In the press, in the non-GAAP section, the share count is 26,234,102.

Apologies for missing it. Thank you.

Can we talk a little bit about the covenants associated with the long-term bank loan and how you executed that conversion from the agreement you had with Fortress?

We actually have not converted any of the debt yet with Fortress. It's still on our balance sheet. We have sub-debts that we've been putting on and through the quarter, sometimes have the option to convert it or pay it down with equity.

Okay. So the line, that's $29.5 million, that's with Fortress?

That's a mix. That's roughly $60 million with Fortress and the rest, sub-debt.

Also, subject to that, we, the company, has an option to pay it down with the issuance of equity, which we do sometimes.

Okay. Thank you for that clarification. So just to make sure that I have the new deals announced straight, there are -- have been four since the end of the June quarter. Is that right? Four new deals?

There have been -- so Finland was announced right at the end of the June quarter, $3.6 million in value. And we launched at the beginning of July a $4-million project in California. And we announced two new ones in California throughout the quarter, and one of those two new ones has already launched. Another one is expected launch before the end of 2021.

And then the Finnish one, too, correct? That's new?

The Finland one was announced, yes, right at the beginning of the quarter in June 29 or early July, with the Finland $3.6 million project announcement.

Okay. So can you compare the number of wins there versus the number of wins in the first half of the year?

I don't have that readily available right now. All the ones in front of me, just the ones in the recent quarter or so. But what we're seeing, as I described on the prepared remarks is uplift in activity for RFPs in Europe and the US. And so there was a slowdown throughout the pandemic and lately there's been more of a release.

We're seeing a lot of RFPs in Europe. And as you might remember, our win rate in Europe has been over 65% for most of the RFPs that we've been bidding on, thanks to our high scoring on the technology. So now we've been bidding effectively in Europe, and we've also developed a new sales team in the US. They're supporting our existing salesperson. We've been enhancing and it's a full sales teams with new offices out of Kentucky. And they are currently doing 20 to 30 new evaluations with our potential customers in different counties around the US, which we hope will turn into projects as well beyond the things that we've announced within California and in Europe.

Okay. You mentioned M&A opportunity. Could you characterize the US market? I think you've talked to it before and you see it fragmented. Is that essentially the way it is?

Let me explain, which is interesting. So the market itself, [a few billion] dollars. It's highly varied. You can't bid on projects for tracking offenders around the world if you don't have experience doing such and reference with those experience. So the manufacturers of technology such as SuperCom are handful, maybe eight to 10 players around the world. Those are the ones that we see consistently when we're bidding on larger national projects or something applying for state, California state or Florida or Texas.

But when you look at the more county-level projects, a smaller one, they're very fragmented. We have dozens, if not over 100 of small providers, local service providers, which serve the counties in the region, spread out throughout the US. And these local service providers are typically our customers in a way they lease out equipment from us or the other eight to 10 players in the market, and they provide the counties with full services. They put the technology, but they also provide the manpower to put the bracelets on the personnel's' regular reports and so forth.

So while we sell to these service providers sometimes, there are interesting opportunities to acquire them just like we did in 2016. If we can get it at the right multiples and the right price, we can essentially expand our footprint immediately into more -- into new locations, additional reference base, and also unleash significant vertical synergies by deploying our technology into our ongoing operation. The example was done in 2016 with LCA, and we're keeping our eye off from opportunities like that on the coming future throughout the US.

Can you talk a little bit about e-Gov and your software, your safe, and development? How are you balancing investments in that versus the attack given tough resources?

So we're trying to manage our cash allocation strategies effectively. We continue to have to assess and optimize them every quarter. In the past, let's say 2015, the majority of revenues in the company were from electronic ID or e-Gov, nearly $30 million in annual revenues were from that space in Africa and South America. We made a strategic decision to shift away from that region of the world and focus on recurring revenues from developed countries in the US, Canada, and Europe. And all of that is through IoT tracking business and our cybersecurity business.

And so one project just rolled off in Africa, generating $300 million a quarter with high margins. And instead of reinvesting our cash to focus more on extending that project, we prefer to use our cash for projects in IoT tracking, where, as you said, the niche market. We have a very strong position with our technology and we can leverage the cash to capitalize and grow our presence and continue to generate recurring revenues in developed countries.

So EID, at the beginning this year or last year, was close to $2 million annual revenue. It's down from $30 million to $2 million, and now it's been declining further. And we've been countering that and also growing the total revenue with the new wins in IoT space.

In terms of cybersecurity, we have given revenues annually with very high gross margins for selling software. We continue to maintain that with some investment in fiber, but not to the same level and focus our cash investment as we have in IoT. For example, in this quarter, we invested on purchasing more equipment to manufacture more bracelets so that we're ready for larger projects, whether they're in Israel or other places around the world.

Okay. Just to make sure I have that clear. You're actually manufacturing, not outsourcing?

We manufacture the whole chain (inaudible) process. Some of it is outsourced. The chip manufacturer, we design it here, but we send it out. Other parts are done in-house. And then at the end, we have a full supply chain, which involves third-party providers, manufacturers, and our in-house teams.

Okay. Last question for me. How -- what sort of progress you're making on finding a CFO?

Good question. We've actually invested more resources in our financial teams. And as you can see, we're back to reporting quarterly numbers as well as timely reports. We continued to search for a CFO and hope to have one in the coming future to finalize our investment on the financial department, which we believe is important.

Okay. And then which auditors did you settle on? Ordan, I lost track of that, too. Apologies.

We're on the same auditors for the last two years, with an Israeli firm named Halperin. And they've developed familiarity with the company and that helps us with our reporting and our annual audit to be done in a more streamlined fashion, and their understanding of our business very well and experienced in recent years.

Great. Thanks so much for taking my questions, Ordan. Appreciate it.

Thank you, Kevin. Thanks.

(Operator Instructions)

There are no additional questions in queue at this time. I would now like to turn the floor back to -- over to Ordan for any closing remarks.

I want to thank all of you for participating on today's call, for your interest in SuperCom. We look forward to sharing our progress on our next conference call. Thank you and have a good day.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.