SuperCom Ltd. (SPCB) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the SuperCom Q2 2021 Financial Results and Corporate Update Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 August 27, 2021. I would now like to turn the call over to Scott Gordon, President of Core IR, the Company’s Investor Relations firm. Please, go ahead, sir.

Thank you, Paul. Good morning and thank you for participating in 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-20F, and Form-6K and 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 reconciliation of these non-GAAP financial measures to net loss, its most directly comparable GAAP financial measure, please see the reconciliation table located in SuperCom earnings press release. The content of this call contains time-sensitive information that is accurate only as of today, August 10, 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 second quarter of 2021. A copy of which will be available in Investor Relations section of our website. Q2 was another successful quarter, as we continue to execute on our business plan. As mentioned last quarter, our primary focus is investing in sales and marketing to drive future revenue goals and then in turn, leveraging higher sales to improve profitability over time. During the second quarter, we continue to make progress with our sales and marketing efforts, particularly in IoT segment. It's important to remember that the sales cycles and processes with government customers, such as ours, are long. Our customers are discerning. But once you bring on a new customer, they tend to be very sticky and stay with us for 5, 10 or even 20 years on occasion. Although, we did start making moves and progress with our sales efforts. In Europe, we've seen increased RFP activity, as COVID related restrictions have started to ease. We have been more active than last year and won of the competitive tender for the Finland EM program of $3.6 million. In the USA as well, we've seen increased interest from different customers and RFPs of potential new one. We want a competitive RFP a for $4 million project which launched July 1, 2021, in California. During the second quarter, we opened up a small office in Kentucky, USA to help support our growing sales activity in the US. The new sales, sales Support and tech support resources, tailored to our unique offerings from the USA market. We believe, we can scale our offerings and grow our footprint. We’ve already began to see increases in customer interest. Since the beginning of the second quarter, we received requests to demo and evaluate our proprietary technology from over 15 new USA potential customers. While not yet resulted in increased revenues, increases in evaluation and video activity can lead to higher revenues over time. It will take some time to see our efforts, translate into revenues. However, we are confident that these investments will pay off, driving revenue growth and improve profitability over time. In our fourth quarter called last year, I highlighted significant change in our reporting transitioning from semi annual report into a normalized quarterly reporting cycle. This quarter is a second period of reporting quarterly earnings. During this transition, we have made various enhancements to our processes that have enabled us to improve the quality and timeliness of our reporting. These improvements are not only enabled us to report our earnings in a quarterly basis, but also be in a better understanding of our business operations and improve our cash allocation strategy. Our primary focus has been our IoT tracking segment, which provides products and services enable remote monitoring. This segment has applications in both monitoring criminal offenders and also quarantine compliance using reducing the spread of COVID-19. We see a large opportunity in this market, driven by various trends that are taking place. In recent years, there has been a trend towards correctional institutions increasingly using home confinement, as a tool to manage incarcerated populations. Ultra-filing provides several benefits as correctional facilities that are driving these trends. First, and most importantly, it is effective. By being able to monitor and manage the location of inmates, the facilities can effectively control these offenders, movement to show that they stay within the restricted areas. Secondly, using remote monitoring with offenders has been found to reduce recidivism and measure the percentage of former prisoners, who are rearrested for similar effects. This is driving many correctional institutions to rethink their objectives, and dealing with offenders, as it relates to rehabilitation versus punishment. Current trends are increasingly emphasizing the need to rehabilitate and enable these offenders to be under society, 1,500 also directly addresses the problem that many facilities are having with overcrowded prisons. Their overall growth and inmates have been exceeding the growth in prison facilities, causing facilities to be congested and overpopulated and creating problems and managing them. Finally, it provides dramatic cost savings to these institutions. Our cost of the government between $100 and $140 a day for each state and federal prisoner, they only cost $10 to $35 a day to keep someone on house arrest, by providing an alternative method of confinement at the inmates residents, it eliminates many of the costs associated with the housing and maintenance of these prisoners. This is a big benefit, is driving increased interest in IoT tracking solution. In addition to these benefits, recent demand has been magnified by COVID-19, as many overpopulated facilities and had severe outbreaks during the pandemic, causing authorities to rethink how they should manage this population. The demand for IoT tracking capabilities also increases government's look for solution that will provide viable options to verify quarantine compliance of people in an effort to reduce the spread of COVID-19. Our PureCare solution provides government's ability to effectively manage travel into their country, while minimizing the risk of the spread of contagious diseases. These solutions are much more effective and less invasive, for the people who have to quarantine in comparison to run a hotels or with technology solutions attempted by companies we're not experts in tracking and monitoring. Our PureCare solution enables people to quarantine comfortably at their personal residence, while being monitored to ensure compliance. I want to share an update on the PureCare Quarantine Compliance project in Israel. Since awarded in March of 2021, we have continuously worked our integrations with Israeli Ministry of Police and Israeli Ministry of Health, although the projects have not gone fully live yet, at the Ben Gurion International Airport. Since the project was initially rewarded to us, elections took place in Israel, and a new government body and Prime Minister were elected. While we're still working on educating the new government on the effectiveness of our solution, which has been field proven and selected by the officials in the previous government. At this point, there is uncertainty with the new government around the timing and scope of the project. If for some reason, the project did not launched in the scope originally expected, we do believe we will be able to recoup our costs and investment into this project. That being said, the current COVID-19 environment in Israel is alarming for the rapid increase in the reported daily new infections over the past few weeks. The number of new daily COVID cases in Israel grew less than 50 a day in mid June to over 6,000 a day, as of yesterday, August 9, a very large number for the county – the country of Israel. We will continue to strongly believe that our PureCare solution which has been piloted and tested and chosen by the previous Israeli Government would be an effective tool in mitigating the spread of the virus. Our progress and footprint fencing IoT tracking segment has continued along with strong underlying market trends. On June 28, we were awarded $3.6 million National Electronic Monitoring Project in Finland, where our PureSecurity Electronic Monitoring Suite is being deployed by the government with objective – or plan to be deployed by the government with the objective of improving the country's public safety, efficacy, reducing prison overcrowding and lowering recidivism. This is a full year project, the potential for extensions and we received the award. Although, in early May, we also boarded a project in California valued at $4 million with initial term of two years and extendable up to three additional years, this project focuses on providing Juvenile Programming and Rehabilitative Services with the objective of supporting those offenders reentering the community and driving with a reduction in recidivism. This project in California, has actually already been launched as of July 1, 2021. This project will highlight the success of our marketing efforts in addition to validating our technology has been very competitive in the market. While the original COVID outbreak highlighted the overcrowding challenges many prisons and drove increased interest in the technology. We think that we are in the early stages of a secular trend towards using more home providing solutions to address overpopulated facilities, as well as reduce costs. As the cases of Delta variant COVID continue to expand, we're seeing increased interest as of late, in the PureCare solution, which we believe can play an important role to find the spread. Our win rate for project bids in recent years, for IoT tracking of offenders in Europe has been high over 65% which validates our secure technology and our highly regarded reputation in the industry. We will continue to invest in our technology to continue to offer the best solutions on the market. On June 30th, we announced the closing of a financing with gross proceeds of $5 million to the company. This capital supports the company's growth initiatives, as we focus our efforts on IoT business to take advantage of positive trends in the marketplace. This financing comprised of a two-year unsecured subordinated promissory note that was completely -- completed directly with institutional investor. The note consists of a 5% annual coupon, which is paid with the principal and a lump sum payment at maturity. And there's an option at SuperCom’s discretion only at the anytime after 12 months to pay down all or a portion of the note using its ordinary shares, subject to certain conditions being met. And for a quick Q2 financial overview. In the second quarter, we generated revenue of approximately $3.1 million, which was up 2% for the first quarter of 2021. Gross margins in Q2 were 57.5%, up sequentially from 55.3% in Q1. R&D was $589,000 in Q2 versus $657,000 in operating expense in Q1. Selling and marketing operating expense was $377,000 in Q2 versus $370,000 in Q1. General and administrative expenses were $976,000 in Q2, up from $830,000 in the prior quarter. Our operating income in the second quarter was negative $160,000. Our operating margins of negative 5.2% versus an operating loss of $180,000 in the first quarter. Our operating margins were negative 6%. Financial expenses were $797,000 in Q2 versus $1.1 million in Q1. Net income for Q2 was negative $964,000 and improvement from negative $1.3 million in Q1. As of June 30, the total cash and equivalents and restricted cash of $10.9 million, $1.5 million, of which was restricted. This compares to $4 million as of December 31, 2020, of which $815,000 were restricted. Total debt at June 30 was $30.5 million, of which $1.9 million was short-term. This compares to total debt as of December 31, 2020 of $22.2 million, $7.2 million of which was short-term, increasing that was partially due to recent financing June -- and now from June 30. Our working capital also increased to $24.5 million end of Q2 from $12.7 million at the end of Q1 2021. And with that, I'll turn the call over to the operator to open the call for questions. Operator?

Thank you. [Operator Instructions] And we do have a question coming from Ken Wiener [ph]. Ken, your line is live. Please note your affiliation, pose your question.

Yes, hi, good morning. I was wondering, there seems to be a problem with revenue growth in the company, it's kind of minuscule and you keep saying that COVID and the prison environment et cetera, et cetera, but it doesn't seem to show up in the numbers and I was wondering, how you view the revenue going forward/

That's a good question. And thanks for asking. There's actually a few trends that are going on underneath the surface. If you look at them in 2015, revenues were roughly $30 million, almost all of that was from our identification segment and the revenues from our IoT tracking solutions close to zero. Now in 2021, revenue from the identification segment, declined to $2 million. That's our traditional business mainly in Africa and South America. We have shifted over the years to more recurring revenue businesses in developed economies, such as the US and Europe. And so, while the declines from $30 million, down to of the identification business has occurred in parallel, we have seen growth in IoT business, but this growth is being masked by the decline of the other business, so altogether it reached revenues around $11.8 million last year. Now our new focus over the past few quarters is to invest in growth in the long-term that includes our investment in sales and marketing teams, and continue to invest in R&D. We have won over the past few years, even though our cash balances are very low. We've been able to win consistently in new projects with governments around the world. And those projects were won because of our technology. We scored very high and technology, we had a very small sales and marketing team, and we're able to just bid almost blindly on a lot of these tenders. And after we've proven our effective strategy and success with our technology. And now that we have more cash on hand, we can start deploying larger projects, and invest in our sales and marketing. As we mentioned in the past, a lot of our cash outlays required for new projects because in the first six to 12 months, there’s a cash requirement, as you're manufacturing the equipment, and only later next year's you're covering that expense.

[Operator Instructions] The next question is coming from Kevin Dede from HCW. Kevin, your line is live.

Thanks, Ordan for taking my question, congrats and get your numbers out. Dive in a little bit on the COVID tracking project in Israel. How is it you're comfortable knowing that you'll recoup your costs in there, while not knowing how the government may proceed, given the change, change in government?

It's a great question. With the help of the analysis from our legal department throughout the whole process of the project, we maintained step by step according to the formal guidance from the government. So we want to formal RFP, formal award for giving formal indications and writing to start manufacturing and production and integration with the government bodies. And so the things that we've done were based off of their requests and demand, so we believe that for whatever reason, this doesn't launch in the initial scope. We have substantial support to cover all our costs and investments. We hope. And we think it's very necessary, because it was happening in Israel, that the government here immediately deploy a quarantine compliance solution. And ours is the only one that's proven and tested here in Israel, to help mitigate the virus because the numbers are growing at a very rapid pace, in the Israel economy and country.

Given changing government, what's your -- I mean, what's your read on how they might evaluate? What you've done and proving to them? And if they -- what do you think the timeline is to some sort of feedback either, yea or nay?

So the question is a lot of the government or a lot of the new politicians in government, and that's called the expert technical people are brand new. So, some of them have heard those solutions. And they understand the solution. And they're not completely up-to-date of how it works. And what it does and doesn't do. The other question pro forma updates, but I am not received an exact understanding. We continue to be ready to deploy the solution. And our legal counsel continues to advise us on every step of the way and interactions with the government.

Okay. Ordan, if I would remember correctly, you had pilots in other countries for similar solution. And I'm wondering, if you can speak to those all.

Yes. We have requested in the past we sent our technology out for pilots, in the Middle East and South America, and other regions. A lot of that was at the start of the pandemic in 2020, where things are moving extremely fast. And it's very hard for a government to get a hold of the whole situation. We have requests, or at least theoretical requests that if, and they wanted to a solution they want 100,000 units, immediately, which is a very high amount of units to the manufacturer, then a timeline that's not feasible for any company in the field. So we were not able at the time to move at that pace. Now in the third wave as they saw it earlier this year, or the fourth wave, this is potentially developing some countries around the Delta variants, things are moving slower, governments understand things a little better, we will a little less stressed out and it did properly, consider and deploy a solution such as, our Tracking Solution. So we've continued to receive interest in governments around the world. These projects around COVID are very volatile in terms of the political environment. All things change very quickly.\ We've all seen in terms of requirements, restrictions, the regulations around, behavior of people around COVID. And similar is happening in Israel as well. Things are changing every day. And we stay close to it.

Have you seen, or can you speak to support, whether it's, research for pilots support financially?

Yes. You're right. You repeat that, I just you broke out for a second.

Yeah. I'm sorry for many of the pilots outside Israel?

You repeat that, I just you broke out for a second. You are right.

Yeah. Sorry Ordan, so sorry. Yeah, I was just wondering if you can speak to any financial support, you've received, either on the R&D side or initial deployments, for the deployments -- the deployments, outside of Israel.

What do you mean by financial support that we've received?

Yeah, your income money checks, wire transfer.

No, but we went from actual customers, sorry from -- we have raised financing.

Oh yeah, no from customers. Yeah, no, no, customers were potential customer support, financial support.

Okay, yeah. Now at this point it hasn't been significant financing support. It's the way these projects usually work because you manufacture the equipment, and then you lease it out to the customer. At the end of the project you maintain ownership of the equipment, you're to use it in other places but it's usually a lease model and IoT tracking and that allows us to maintain recurring revenue streams, which give us comfort and predictability into our future revenues. So that is the model, mainly in our industry and also here.

Okay, can we talk about Kentucky just a little bit, please? Why -- my understanding was that LCA was based in California. You also -- if I remember correctly hired a -- an executive to help run your business in the States but I don't think he was based in Kentucky, I'm just wondering why you chose Kentucky, whether or not there's been changes in executive leadership in the US and how you think we should think about that business growing, given that you've gotten the 15 new trials.

Right, so a lot of our experience in the space of electronic monitoring in the US. There's some companies around that area this universities around, we have put office for new talent. We can in comparison to Southern California where we had some of our tech monitoring centers in the past. Here we get great talent at better rates, so to speak. So where you have already had people there, for the past five or six years in the sales department and we've expanded onto that, with additional personnel, and a small office location to help with the synergies among all the different personnel related to this.

Okay, any changes in leadership there because I know you were proud to have hired an individual that had a lot of experience in this business. I don't know if that was maybe two years ago, is that person so there or there are other changes in leadership there?

Right, so you're speaking more on the treatment side in California. A few years ago, we brought some personnel there has been -- a lot of the team is still there, that maybe one or two people in senior management has -- have since moved, and we have new people in there, but that's in the treatment business just like the project we had in North California and the electronic monitoring side of the business, where we provide our technology. And then provide our services across the US, it's the same people that buy the program directors of electronic monitoring in different regions in the US as well as our VP of sales, Jason Gilbert has been with us for five or six years, as well as some other personnel. So far it's been very effective. You can see we -- it's a high number of new demos and evaluations in a short period of time. And this is just the beginning of our estimates we expect those numbers to continue to actually grow over time, and our technology has already been scoring very highs and now a lot of it is just operating effectively on the sales and marketing channel.

Okay. Your prepared remarks you mentioned, that -- the 15 new deals can, I mean, I get -- they're not consummated at this point. But can you just speak to where they stand, and what your expectation is on getting feedback? And, you know, how that might be reflected going forward?

So in the past few years, our investment has been on the offender tracking field in Europe, where we won large national projects in Sweden, Denmark, in Czech Republic, Bulgaria. We just announced a win of a tender in Finland in the second quarter. And the technology there is more tailored to house arrest in Europe. In the US, it's a little different it’s more tailored to GPS tracking. And the use of our smartphone solution is much more prevalent there where you can also track people and also have video call. So just to remind you the old solution, the traditional incumbent technology, the ankle bracelet, may have seen on TV is a very heavy bracelet on your leg, and you have to charge it every single day. You have to connect to the wall and charge it because the battery runs for up to 24 hours. We have a brand new technology products that are developed at SuperCom, battery runs for one years or two years. You never have to charge it. It's lightweight. And it communicates seamlessly with smartphone, which has additional tracking capabilities developed by Samsung, and then we are able to leverage that offer content, offer communications, offer video conferencing, and much more. And especially for [indiscernible] populations majority of the -- this is a very effective and useful solution. So a lot of locations around the US, many different states and counties has showed interest in trying out our technology. Most people that look our technology are interested in it because of the valuable and capabilities that it offers. They're going to get personnel to talk to people and to do the demos and for them to evaluate. And now that we started investing more into those operations of sales and sales support, we're able to handle more demos, more evaluations and we think that those will more positive. In the US, I've mentioned in the past that business is more fragmented. It's not just the country of Sweden, which run programs, in the country of Denmark. They were looking at state programs, but beyond that, many, many different programs on the county level, which are managed by small local providers with our customers or more government municipalities, which are our customers as well.

Thanks for taking my questions, Ordan. I appreciate it. I'll turn the floor over.

Thank you.

Thank you. I will now pass the call back to Ordan for closing remarks.

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

Thank you, ladies and gentlemen. That 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.