Alarum Technologies Ltd.

Greetings and welcome to the Safety Group LTD first quarter 2022 earnings results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Steve Gerson, Director of Investor Relations. Thank you. You may begin.

Thank you, Operator. Good morning, ladies and gentlemen. Welcome to Safety Group's first quarter of 2022 earnings results conference call. I'm Steve Gersten, Director of Investor Relations for Safety Group. Before we get started, I will read a disclaimer about forward-looking statements. This conference call may contain, in addition to historical information, forward-looking statements within the meaning of the federal securities laws regarding Safety Group. Forward-looking statements include statements about plans, objectives, goals, strategies, future events of performance and underlying assumptions, and other statements that are different than historical fact. These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may cause actual outcomes to differ materially from expectations reflected in these forward-looking statements. Potential risks and uncertainties include those discussed under the heading Risk Factors in Safety's Annual Report filled with the Security Exchange Commission, the SEC, on May 31st, 2022, and in any subsequent filings with the SEC. As such, forward-looking statements written, whether written or oral, made on behalf of the company are expressly qualified by these cautionary statements, and such forward-looking statements are subject to risks, uncertainties, and we caution you not to place undue reliance on these. At this time, I'd like to turn the call over to Shakar Daniel, the company's CEO. Go ahead, Shakar.

Thank you very much, Steve, and welcome everyone to today's 2022 First Quarter Corporate Update Conference Call of Safety Group. With me is Shai Avnit, our Chief Financial Officer. In the first quarter of 2022, we achieved important milestones in our past to become a leading cybersecurity and privacy company that serves consumers and enterprises. I will now review our operations, starting the enterprise side of the business, then focusing on our consumer business. We will provide updates and some insights to help investors better understand our roadmap. Our enterprise privacy business continued to grow in the first quarter of 2022, driven by continued momentum and interest in our products. For example, the company added over 75 new clients from the Asia-Pacific market, including e-commerce and NFT organizations, for a newly upgraded enterprise privacy product, which was introduced in the fourth quarter of 2021. We recently announced an important update regarding the dismissal of patent litigation. With the mutual settlement agreement in place, we expect this agreement will contribute to a significant reduction in the company's overall general and administration costs expressed fully in the third quarter of 2022. The significance of this agreement is that combined with the expected growth in revenues in our enterprise privacy business, we believe that this unit will be operating on the verge of break-even going forward. Now, turning to our cybersecurity for enterprise operations. In January, we entered a strategic collaboration with TerraZone on sales and development of our Zone Zero, Zero Trust Network Access software. We believe that these steps will allow us to maintain the value of our IP and partnering in sales, we are enjoying a reduction in expenses, which are just now starting to positively impact our operating results. Over the past few months, as you may have heard us say, we shifted our business from primarily focused on solutions for enterprise towards consumers as well. Because the consumer business operates a different business model and sales method, I want to take some time now to discuss this important part of our business. Currently, we offer consumers with two product lines, a privacy and a cybersecurity product, the most recent of which we launched last year. We are currently executing against a plan to not only increase the capabilities and features of our existing products, but to release a number of complementary solutions across mobile and desktop platforms throughout this year. Unlike marketing for enterprises, consumer marketing requires a more enthroned approach, engagement, and investment. However, costs related to consumers' marketing investments led to the creation of immediate revenue streams and predictable monthly recurring revenues. We refer to our marketing effort in the consumer segment as our customer acquisition program. The program is based upon a five-year business model that employs a user lifetime value, LTV metric. LTV is a calculation of the average dollar amount of revenues anticipated to be received from subscribers over their retention period. According to this model, the company can estimate future recurring revenue based upon the number of users at any given point of time multiplied by the relevant LTV. We started our investment in customer acquisition at the second half of last year and we're successfully generating a growing future revenue stream from subscribers, one which is and will be an important asset and a driver of value for safety and its shareholders. After several months of investing into sales and marketing to acquire a current customer base of our first consumer product, we are confident in the sales and marketing efficiency of our customer acquisition program and its ability to attract profitable subscribers. Although these efforts contribute significantly to the company's expenses, we see it as an investment for the long term that will generate for the company a valuable recurring revenue stream. With a solid business model, in the first quarter of 2022, we generated a record revenue of $4.02 million at 199% over the first quarter of 2021 results. Our gross profit for the three-month period ended March 31, 2022, amounted to $2.2 million, an increase of 378% compared to the corresponding period in 2021. We are proud of our continued revenue growth and our ability to rapidly identify opportunities and launch advanced products. I want to address questions I'm frequently asked by investors regarding our expenses structure, Our net loss for the first quarter of 2022, our non-IFRS net loss, which excludes non-cash expenses, amounted to $3.2 million. We are not indifferent to our overall cost in the past month, and in the past month, we initiated several directed actions that tackle our expenses structure, results of which will, in the near future, become visible in our results. First and foremost, we settled our patent litigation that had a significant impact on our expenses. As mentioned before, the saving of this legal cost will be reflected partially in the second quarter of 2022 and fully in the third quarter going forward. To demonstrate, this net loss for this quarter would have been cut at 50% if you take out from our current net loss the IP litigation expenses and the last payment for the transition of our cybersecurity for enterprises. In addition, we gained a vote of confidence from United Mizrahi Bank, which granted the company a non-dilutive 12-month line of credit for up to $2 million. The credit line represents a validation of our input financial profile and the potential of our consumer business, allowing us to invest in our continuous growth without having to consider dilutive fundings. With additional expected reductions from our enterprise cybersecurity operations, alongside with our continuous growth in revenues, I believe that we have the ability to fulfill our potential. But before going further, I would like to turn the call over to Shai to discuss the financials for the quarter. Shai.

Thank you, Shachar. I will summarize our first quarter 2022 financial results, which are compared to our first quarter 2021 results, unless otherwise stated. All figures in this summary were rounded for simplicity. Revenue for the first quarter of 2022 totaled $4 million, compared to revenues of $1.3 million for the equivalent period in 2022. The increase in revenues is due to an increase in enterprise privacy business revenues and the consolidation of CyberTix revenues following the completion of its acquisition on July 4th, 2021. Cost profit for the first quarter of 2022 was $2.1 million, compared to a gross profit for the corresponding period in 2021 of $0.4 million. The increase in gross profit was primarily driven by the much larger rise in revenues compared to the rise in the cost of sales. Operating expenses total $6.7 million compared to $2.9 million in the equivalent quarter of 2021. The increase is mainly due to, one, the consolidation of CyberTix operations and costs, and especially the customer acquisition costs Shachar just discussed, and two, higher enterprise privacy costs due to an expansion of this segment's activity. This increase was partially offset by early savings from our cost reduction plan in our enterprise cybersecurity business, which Shahar also discussed. Net loss was $4.7 million, which really means a loss of close to $0.16 per share, as compared to a net loss of $2.5 million or a loss of $0.11 per share in the first quarter of 2021. Net loss on a non-IFRS basis, which reconciled the effect of some non-cash expenses or income and certain other expenses, was $3.3 million or $0.11 per share as compared to a non-IFRS net loss of $1.9 million or $0.09 per share in the first quarter of 2021. As of March 31, 2022, the company's cash and cash equivalents balance and short-term investment balance total approximately $7.2 million, or approximately $0.24 per share. compared to $9.7 million on December 31st, 2021. The decrease resulted mainly from their companies operating non-ANIFRS loss. And lastly, I wanted to touch base on our share count as it stands today. On an outstanding basis, we have around 30.4 million ordinary shares representing an equivalent number of ADSs. On a fully diluted basis, we currently have around 40.7 million shares or ADSs outstanding.

With that, I'll turn the call back over to Shahar. Thank you, Shay. To summarize,

During the first quarter this year, we made a significant progress implementing our vision. We delivered on our goal of consecutive quarter of significant growth and laid the foundation which will support our continued success. Looking ahead, we will continue to develop our position as a leading provider of privacy and cybersecurity solutions. The cybersecurity and privacy protection sector are experiencing hyper-growth into a global multi-billion dollar market to the incredible volume of cyber attacks on organizations and individuals. In response, we are leveraging our expertise to expand sales and promote our customer acquisition plan while efficiently managing our expenses. We look forward to the continuous growth and innovation of our products and service and to a strong reminder of the year. With that, I would like to open up the call for any questions. Operator, please go ahead.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for your questions. Our first questions come from the line of Brian Kitzlinger with Alliance Global Partners.

Please proceed with your questions.

Hi, guys. Thanks for taking my questions. Nice results. Can you first talk about where you're seeing the most demand increase, either on the consumer side or the enterprise side, and which products specifically are you seeing the most demand for right now?

Hi, Brian. Thanks for asking.

So basically, as I mentioned, we see a spike in the consumer side, especially in the privacy product, and in the enterprise side, in the privacy product also. It's more or less equal, so a small advantage at this stage for the privacy for the consumer.

And just to be clear, on the consumer side, all of your sales are through channel partners, not direct. Is that right? So you're not having to increase your marketing spend?

No, no. In the consumer side, we are selling our products only in dependent, direct sales.

Got it. And so then talk to me, because I heard you talk about you need to have predictable revenue streams when you spend on the marketing side. How are you thinking about marketing expenses and customer acquisition over the next six to 12 months? Is there going to be a spike in those given their surging demand? Is it going to kind of level off? How do you think about that?

Just to make sure that I understand your question, you are talking now on the expenses side?

The consumer side of sales and marketing, there's a direct correlation between how much you spend, I take it, and customer acquisition and revenue. So how are you thinking about that?

Okay, so basically, as I mentioned, at this point of time, we are acquiring assets, meaning we spend money in marketing and sales, of course, in a very efficient and very smart marketing and sales environment. And one of our targets is to have, you know, to decrease our consumer acquisition cost, which is the CAC. And from the other side, to improve our product and to get a better and better retention and to keep in touch with our consumers. So... What is that retention rate?

Sorry, again? What is... What is that retention rate? So...

I don't want to mislead you and the audience because, you know, we are quite young and we have one year of experience in this product, not because we have well-experienced. But basically, it looks like that in five years model, we can get at least 3X on the consumer acquisition cost. So imagine yourself that in the big numbers, in one or two years from now, we will have enough recurring revenues you know, to see growth from quarter to quarter with minimum expenses. And then at this point of time, you can start and discuss about being profitable and show tremendous growth. At this point of time, we are buying our assets for the future. We have a CAC. I don't want now to expose the specific numbers, you know, not from investors' perspective, but from competition perspective, okay? So I guess you understand me. But at this point of time, the formulas are working very well. It's a very interesting ROI, and it makes us more eager to invest and to generate the assets that will serve us and our investors in the future.

And one more follow-up on that. How much recurring revenue do you have at this point? What percentage of your revenue is recurring?

Almost 100%.

And then I wanted to just touch on TerraZone. I'm curious the progress you've made since the announcement. Is this a partnership today that's generating revenue? If it is or is not, how should we think about the ramp of its contribution over the remainder of this year and next?

Okay, so at this point it creates a low amount of revenues, okay, if you compare it to our other business lines. But from the other side, the expenses are accordingly. Terrazone are now experiencing very interesting opportunities in the market with our new, you know, the guys of Terrazone react different our products and now we are offering to the market again secure email, digital, secure vaults and secure remote access in the same package in the cloud. A very interesting offering. starting for small-medium business, and hopefully in the future, you know, we'll jump to enterprises. It looks like there are some very interesting opportunities now in Europe. In Israel, it started to grow quite well. So I think there is a kind of expectation that it will also, you know, start to generate traction, revenues, and interesting clients.

in the future. So it sounds like a 2023 catalyst to start accelerating. Is that right?

Significantly, yes. Compared to our current numbers, you see, Brian, we discussed, I think, first time a few years ago when the whole company did $1.5 million yearly. The company now is on a run rate of $4 million quarterly. So comparing to these numbers, yes. If you want to see the significant part of it, I'm saying it proudly. So yes, it looks like 2023 can be maybe an important catalyst in our portfolio.

Great. Last question on the expense side. You talked about the two items that you could adjust for. Could you quantify the litigation expense in 1Q as well as the cyber expenses that will transition, and if I'm not mistaken, but maybe I am, in the second quarter, the litigation will disappear, but in the third quarter is when the cyber expenses will disappear, is that right?

Yeah, no, you know, when you start a process, it takes one or two quarters to fully implement, okay? Right. Again, this from a legal perspective, I don't want to expose the exact numbers, but I mentioned, and I will say it again, that if you would remove from our balances this quarter, okay, the current quarter, you would remove these two items, which will be removed very fast. This and the next quarter, you would see 50% improvement in the net loss, in the IFRS net loss, non-IFRS net loss. 50%, okay? So meaning from an operation perspective, the company is improving dramatically the revenues and also the expenses. We just had this burden on our neck, but hopefully it looks like it's behind us. I'm talking not on the cyber, by the way, only on the litigation.

The cyber is not a burden. Okay. Thanks so much. Thank you very much.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question has come from the line of Robert Smith with the Center for Performance Investing. Please proceed with your questions.

Good morning from here, and thanks for taking my question. Can you tell me what your principal challenges are in the enterprise area and your strategies to address them? Thank you.

So basically, I will talk about our enterprise. Thanks for asking, first of all. I'll talk about our enterprise privacy. So I think that today, our enterprise privacy business is one of the leading five companies in this space. And the challenges is only the competition. We don't see any other challenges at this point of time. Of course, as always, If you have, you know, double human resources and double resources, so of course the numbers will be accordingly. But comparing to our plans and to our projections and to the current budget of the company, the only challenge is the competition. And we are trying to be one step ahead. They are trying to be one step ahead. I don't see any other major challenges. besides of any regular challenges of each and every vertical.

So how do you get a leg up on the competition?

Sometimes it can be the quality of the product, the quality of the network, the stability, the performance. It's very important for our customers. Sometimes it can be the features. And if you ask me, it's Also, the personal kind of skills of our sales and marketing guys that know how to approach customers, how to make customers to stay with us, to retain them. And sometimes you need to be kind of agile from price perspective and sometimes not, so you know it's the business game. How to attract customers, how to stay in touch, how to leave them motivated. how to make them stay with you and to increase the rotation and the lifetime value.

Is there resistance in dealing with an Israeli company as opposed to one that would be domestic in the States?

No.

To be honest, I don't want to use this excuse, totally no. We are doing everything, by the way, 99% of our sales are with zero physical touch, okay? It's online. We are joining events and marketing events, but from sales perspective, it's online. Maybe behind the scenes, someone would prefer to buy from a domestic company, yes. But to see it as a trend of something significant that is disturbing us, I don't see it as an issue.

Hmm.

Are there any developments in cybersecurity that sort of are transformational, I mean, that could impinge upon your operations? Or how do you see, what's the direction of things are going here?

Well, you know, you can read articles of hundreds of pages and hear webinars of hours of hours on the trends in the cybersecurity. You know, to be modest, we cannot discuss about everything. We are not experts in everything. We just see one thing in our cybersecurity, by the way. We just discussed about the privacy side. Now, if you want to touch the cybersecurity side for enterprises, First of all, there is a spike in the amount of attacks. You don't need me in order to see it in every place, in every statistics, in every article. Last year, 50% of U.S. citizens reported on a cyber attack event. I'm talking on the citizens, not on enterprises even. So from enterprise perspective, we think that the small media business is suffering from lack of resources. some lack of knowledge, and sometimes some lack of investment in cybersecurity. That's why we developed a very, very simple product in the cloud, easy to operate, easy to run and operate, which can give you in one package some of your critical security needs for your organizations, like your emails, like the way you exchange data with the world, outbound and inbound, And like the way you let your employees or other stakeholders to connect remotely, we think that this solution is easy to implement. It's cheap because we want to get a mass of customers. But for each and every organization, it's doable, meaning even a small organization of 10 lawyers can take it very fast. and doesn't need a chief information security officer in the organization in order to implement it. So we think this trend is in favor of us, and this is the place that we are pushing at this stage for marketing and sales perspective.

Thanks so much, and good luck going forward. You're welcome. Thank you very much for asking.

Thank you. Our next questions come from the line of Jason Colbert with Dawson James. Please proceed with your questions.

Hi, guys. Congratulations on some great numbers. I guess I want to follow up on some of the questions that have already been asked, which is fantastic job in terms of driving what I would consider to be organic growth. But what I want to understand is that if you had an additional $10 or $20 million of capital that you could deploy in terms of marketing, would that translate into greater market share or new customer acquisition? I'm trying to understand, are capital resources holding you back from really hitting that sharp, sharp growth element that I think everybody would like to see?

Hi, Jason. Yes. Shalom. The answer is absolutely yes. You know, we build the infrastructure.

We have the product, as you see. The product is growing. The only missing thing to see, although the numbers are great, but we can double the numbers and triple the numbers.

if we have additional capital to invest? Of course, the answer is absolutely yes. Okay. Yes.

I know it's kind of an obvious question, but I think it needs to be stated because it seems to me that what you've done is you've done a fantastic job of demonstrating proof of concept here, and now it's just the machine needs fuel in order to run.

Absolutely.

And one other question, you know, we were all very concerned with international events with Russia and the idea that there would be, you know, a dramatic rise in cyber warfare. And have you seen that actually come to fruition? So, you know, I'm saying something that sounds bad.

It was too short, okay? because the world, if you remember, the world was under panic for two weeks. It's not like the COVID, okay? The COVID changed everything. The demand, the way people are working, of course, it worked in favor of us almost from every aspect. The war between Russia and Ukraine was in the headlines for two, three weeks. And yes, of course, from these specific regions, we saw a demand. And that makes us to drive one of our very, very interesting products. We announced about it. But it doesn't matter, Jason. The world is under panic of cyber anyway, before the war and after the war. And it becomes worse and worse and worse. And every day we see the amount of cyber attacks on consumers, on organizations. It becomes more and more difficult to... you know, to defend and to protect from these cyber attacks. So the war, yes, the war was part of it, but I cannot say that it was something significant.

Okay, fair enough. That makes sense. Maybe it just acted to raise awareness of a problem that's already been there and growing. Thank you so much, and congratulations on a strong quarter.

You're welcome. Thank you very much, Jason.

Thank you. Our next question has come from the line of Brian Kitzlinger with Alliance Global Partners. Please proceed with your questions.

Just one question, follow up on the revenue line. Given that your revenue is all recurring, you obviously have some churn. Is it fair still to say that the first quarter should be the lowest revenue quarter and you can build sequentially with more or additional incremental sales, both on the consumer enterprise side? Should this be slowly building each quarter?

You know, Brian, basically that's the definition of recurring revenues. So it's fair to say, but to be kind of, it's fair to say, and it's fair to say, of course, you know, we have two months in the second quarter, okay? So I have a high level of confidence To answer you and to reply, yes. But to be cautious a little bit, we are still in this specific product. We don't have five years or six years customers that we know to project in a very accurate way. But basically, the answer is yes. Sometimes it can be a season or the summer is a little bit different than the winter. But from annual perspective, I have more confidence to say yes.

Essentially, what you're saying is you're going to be acquiring new customers and growing revenue. It's hard to tell today with the short experience you have in these products if churn increases in any given month or quarter and then comes back to normal. So that's the hard part.

Yes, I can say today But, you know, basically, when we will discuss in the help of God next year, okay, I will have more level of, higher level of confidence to say this yes. But going, looking on the fourth quarter, you know, you see the results of the fourth quarter, the first quarter. And now, as I see, you know, in this, in the last two months, so I can tell you yes. But let's wait a little bit.

Yep, understood. Thank you so much. Thank you very much. Thank you.

There are no further questions at this time. I would like to turn the call back over to Shahar Daniel for any closing comments.

Thank you very much, all of us, all of you for joining us today.

We look forward to continue to update you on our progress. Thank you. This does conclude today's teleconference.

We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.