SuperCom Ltd. (SPCB) Q3 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the SuperCom Q3 2021 Financial Results and Corporate Update Conference Call. At this time, all participants are in a 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 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 and Form 6-K in 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 it's 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, it's 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 and 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 are fully owned subsidiary, leaders and 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 to force 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 the time 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 rehabilitated services for out of custody juvenile programming which is another example of our continuing execution in vertical within which we have over a decade of expertise in serving. This project really 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 initial evaluation term of one year. After the first year, the government agency will consider expanding the project with longer-term scope. The project is already launched and 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 by a press release earlier this year. Our success in winning these new projects in California is a function of three factors: Firstly, our general strategic focus over the past years has been to move away from our legacy identification business, the lumpy revenues in Africa and developing countries and focus more on recurring revenues in developed countries or 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 of a return to normal activity. Thirdly, we acquired Electronic Monitoring criminal justice in 2016 named LCA headquartered in Oakland, California. And with it's strong presence in the state since 1991. The large reference-based relationships and experience we inherited in California through 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 a 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've 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 voice, 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 scores 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 application is an important factor in this business when selecting a 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 such 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 products continue 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 in 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 smart phone electronic monitoring with dense, hard to monitor urban areas and subway. 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 continued 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 with 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 in the electronic monitoring market in the USA. There are local service providers that have developed a strong imputation and customer base in their respective local community, many of whom we know well through prior dealings. We are constantly monitoring this market of potential and accretive acquisitions at a good price that could 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 in 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 inmate has increased dramatically with the increase of incarcerated population. Our pure security solutions provide an effective way for institutions to manage our populations of offenders while significantly reducing the associated cost of housing and inmates. The cost savings associated with our solutions are substantial. The total costs 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 in a correctional facility in the U.S. Most importantly, home consignment has been shown to reduce recidivism, highlighting it's effectiveness in helping offenders improve their lives and promote public safety in our communities. Secondly, as correctional agencies have been dealing with overcrowded person. There has been a trend towards alternative options 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 alternatives in the way to address the issues with the outbreak of COVID and the need for social distancing, the problems of overpopulated prisons with amplify, causing more agencies to look for alternative long-term solutions. Thirdly, COVID pandemic has created a new potential revenue stream in our IoT segment with our Pure Care 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 could be effective at minimizing the spread of COVID while being less invasive in nature, enabling people traveling in a country to quarantine while being monitored to ensure compliance. Moving on to financial discussion. For purposes of comparison, SuperCom was not required to and did not report it's Q3 2020 financial results. Accordingly, comparable Q3 2020 financial results are not available without unreasonable effort and expense. In order to provide a reasonable comparison, an average of the company's financial quarterly results for it's third and fourth quarters of 2020 as 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 it's 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 U.S. 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 2021 compared to Q3 2020 average which was 27.3%. Gross margins were also negatively impacted by the rolling off of maintenance contract in Africa being maintenance related revenues. This is high-margin business which place -- which is replaced with projects that have lower margins at least in their earlier stages which include a lot of start-ups and deployment costs. R&D was $625,000 in the 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 and general and administrative expenses were $1.1 million in Q3 2021 compared to $1.3 million in the 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 benefited the prior period and these benefits were not available in Q3 2021. In addition, the company had a onetime charge of $689,000. That was from a settlement related to old dispute that happened several years ago. The company had an operating loss of $1.9 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 the 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 equivalents than the second quarter and the kind of cash was due to operating loss with working capital increase, including an increase of $400,000 in inventory as well as onetime uses of cash in the quarter for settlements of old liabilities reducing accrued expenses by $1.1 million and a onetime settlement expense of nearly $100,000 which we just discussed. And with that, I'll turn the call over to operator to open the call for questions.

[Operator Instructions] 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, it's in the press in the non-GAAP section and the share count is 26,234,102.

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 we have with Fortress. It's still on our balance sheet. We have a sub-debt that we have been putting on 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 $16 million of Fortress and the rest of sub-debt. Also straight debt but we the company has an option to pay it down with issuance of equity which we do some time.

Okay. So just to make sure that I have the new deals announced right, there have been four since the end of the June quarter. Is that right? four new deals and they have been implied.

So SINAN 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 11 has already launched and another one is expected to launch before the end of 2021.

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

Sinan-1 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 wins in front of me, just the ones in the recent quarter or so. But what we're seeing as described on the prepared remarks, uplift in activity for RFPs in Europe and the U.S. 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 score in [indiscernible] technology. So now we've been bidding effectively in Europe and we've also developed a new sales team in the U.S. that are supporting our existing which was one salesperson we've been enhancing it into a full sales team with new offices out of Kentucky and they are currently doing 20 to 30 new evaluations with potential customers in different counties around the U.S. which we hope will turn into the projects as well beyond the things that we've announced in California and in Europe.

Okay. You mentioned M&A opportunity. Could you characterize the U.S. 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, 2 billion is the highly varied, you can't bid on projects for tracking of offenders around the world if you don't have experience doing such and reference this logistics experience. So the manufacturers of the technology such as SuperCom are a handful, maybe 8 to 10 players around the world. Those are the ones that we see consistently when we're bidding on larger national project or if something that slides with State, California State of Florida or Texas. But when you look at the more county-level projects, a smaller one, they're very fragmented. You have dozens, not over 100 small providers, local service providers which serve the counties in the region, spread out throughout the U.S. and these local service providers are typically our customers in a way they leased out equipment from us or the other 8 to 10 players in the market and they provide the counties with full services. They provided technology but they also provide the manpower to put the braces on the personnel to where the 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 in the right price, we can essentially expand our footprint immediately into more into new locations, digital reference base and also unleash significant vertical synergies by deploying our technology into their ongoing operations. Example was done in 2016 of LCA and we're keeping our eye out for more opportunities like that in the coming future throughout the U.S.

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

So we're trying to manage our cash allocation strategies effectively. We continue to assess and optimize them every quarter. In the past, say, 2015, the majority of the revenues in the company were from electronic ID or e-Gov, nearly $30 million in annual revenues or 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 U.S., Canada and Europe. And a lot of that is through our IoT tracking business and our cybersecurity business. 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 expedite project but we prefer to use our cash for projects in IoT tracking where as we 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 VAD to begin this year is last year, it was close to $2 million annual revenue. It's down from 32 [ph] and now that's been declining further. And we've been countering that and also growing as a total revenue with the new wins in the IoT space. In terms of cybersecurity, we have $2 million in revenues annually with very high gross margins or selling software. We continue to maintain that with some investment in fiber but not to the same level and focus on cash investment as we have in IoT. For example, in the quarter, we invested a lot in purchasing more equipment to manufacture more places so that we're ready for larger projects, where there in Israel other places around the world.

Okay. Just to make sure I add that clear, you're actually manufacturing, not outsourcing.

We manufacture the whole chain of factor in the process. Some of it is outsourced. The chip manufacturing and we design it here but we send it out. Other parts are done in-house. And then 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 recent launches in our financial teams. And as you can see, we're back to reporting quarterly numbers as well as timely reports. We continue 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 to that, apologies.

We're in the same orders for the last few years with an Israeli firm in Halperin and they've developed a familiarity with the company and that helps us with our reporting and our annual audit to be done in a more streamlined fashion. And then 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] I would now like to turn the back over to Ordan for any 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 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.