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Operator
Greetings and welcome to the Safety Group Limited second quarter 2022 earnings 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 conference over to your host, Steve Gerson, Director of Investment Relations for Safety Group. Thank you. You may begin.
Steve Gerson
Thank you, Melissa. Good morning, ladies and gentlemen. Welcome to the Safety Group's second 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 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 information 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, filed with the Securities and Exchange Commission on March 29, 2022, and in any subsequent filings with the SEC. All such forward-looking statements, 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 and 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.
Melissa
Thank you very much, Steve. And welcome, everyone, to today's 2022 second quarter corporate update conference called for safety group. With me is Shai Avnit, our CFO. I am very proud to share our great financial results and our tremendous business developments. The last quarter is another milestone in the execution of safety's long-term strategy. At the beginning of 2019, after we concluded 2018 With revenues of $1.4 million, we initiated a new acquisition start strategy in order to straighten and expand our product portfolio. Today, probably three years after the launch of our new path, we can say that, one, we are at a sales rate that is almost 20 times higher than in 2019. Second, we moved to a recurring subscription-based revenue model, which means that our revenues are more predictable and that the company will benefit from these revenues over the coming years. Third, the company's losses in the last two years were mostly due to IP-related litigation expenses, as well as the investment in cyber for enterprises. We managed both issues efficiently, by reaching a final settlement with respect to the IP-related dispute and transferring the cost of cyber for enterprise for a business partner. As a result, you are now witnessing a decrease in our loss at the rate that will continue to improve and accelerate in the coming quarters. Furthermore, driving much of the company's losses are investments and not losses. expenses in acquiring customers that will bear fruit and pay itself in the coming years. Fifth, the company's business model, our talented team, and the growth over recent quarters allowed us to bring on both strategic findings that will allow us to continue and grow our business. Looking forward, we remain firmly focused on our cost reduction plan improving the efficiency of the business, and together with our new products and investment into our customer acquisition program, we expect to not only drive significant additional revenue growth, but deliver improved financial performance in the month ahead. The second quarter of 2022 was highlighted by the achievement of several operation milestones in our mission to continue our growth. In the first half of 2022, we delivered record revenues of $8.8 million, an increase of 181%, and $4.8 million in the second quarter, an increase of 168%. This increase in revenues is attributed mainly to our consumer business, but was supported by our privacy business for enterprises. Our enterprise privacy business unit NetNet reached break-even, excluding non-continuous legal expenses related to the patent litigation, which was dismissed following our settlement. Since we acquired NetNet, it has achieved rapid growth in revenues, started at $800,000 in 2017 to $5.3 million in 2021, and reached $3.6 million in the first half of 2022. It is our intention to implement some of the successful elements from NetMap acquisition into our working plan for our consumer privacy and cybersecurity business. As mentioned earlier, in May 2022, we announced the dismissal of patent litigation against NetMap, which was resolved by settlement. As a result, We expect a substantial reduction in general and administration cost in net net, which will be reflected also on a consolidated basis. We achieved a reduction of our net loss by 33% in the second quarter of the year compared to the first quarter of 2022. This cost reduction is expected to accelerate in the third quarter of 2022. During May and August, we secured $2 million in non-dilutive credit line from a leading Israeli bank and a strategic financing of up to $4 million. This strategic financing includes potential future funding, which would be priced at a premium valuation for the company. We are extremely proud to have secured those additional funding to create the financial initiative that support the company's growth without impacting our shareholders at the current market valuation. Those recent initiatives, which can add more than $5 million to our working capital, are not reflected yet in our current cash resources, as this reflects the status for the period ending June 30, and will enable us to facilitate our continued growth. We plan to allocate this fund to support our customer acquisition program, Customers in our business are our main assets, and investment in user acquisition tries to translate into future high-margin recurring revenues. As we discussed in the past, our model estimates revenues for each acquired customer for the duration of their lifetime, LTV period. Under this lens, a significant portion of our certain marketing expenses reflected in our P&L is simply our investment in acquiring users, which we believe that according to our model will translate into more predictable future revenue streams. We started our investment in customer acquisition in the second half of last year, and we successfully generated a growing future revenue stream from subscribers. These customers are and will be an important asset to be a driver of value for safety and the shareholders. After several months of investing into sales and marketing to acquire a current customer base for our first consumer product, we are confident in the sales and marketing efficiency of our acquisition program and its ability to attract profitable subscribers. Our priority solution for consumers includes thousands of paying users that utilize our products today. These solutions are keeping online users' information private and secure, and in an encrypted, secured layer for online privacy. Over the past few months, we substantially expanded our reach by launching solutions that support a leading operating system in the world. Building upon the strong revenue foundation produced by our initial customer, Apple iOS products, we started the expansion of our portfolio, which will drive additional mutual growth. This effort began with the launch of AdWalker Pro, and anti-malvertising, which is a malicious advertising solution for Apple iOS devices earlier this year. In July, we launched our first consumer privacy solution for Microsoft Windows. The new desktop privacy solution prevents the user's personal data, online activity, and history from being accessed or monitored by Internet service providers, advertisers, and third parties. Our latest release was the introduction of our consumer privacy solution for Android mobile devices, including smartphones and tablets. Utilizing advanced encryption technologies, this new privacy solution prevents the user's personal data from being accessed or monitored. By blocking the ability to track or monitor users' online activity and history, their personal information remains private. Importantly, this new product across multiple untapped platforms with general additional revenue streams for the company. It is our intention to continue developing and launching new and advanced, easy-to-use privacy and cybersecurity tools to help protect consumers no matter which platform or operating system they use. As for our enterprise cybersecurity solution, we continue to preserve our position in the market throughout the 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 while enjoying a reduction in expenses, which are just now starting to positively impact our operating results. But before going further, I would like to turn the call over to Shai, discuss the financials for the quarter. Chad.
Steve
Thank you, Shachar. I will summarize our second quarter 2022 financial results, which are compared to our second quarter 2021 results, unless otherwise stated. All figures in this summary were rounded up for simplicity. Revenue for the second quarter of 2022 totaled $4.8 million, and revenue for the first six months ended June 30, 2022, was $8.8 million. This compared to revenues of $1.7 million and $3.1 million, respectively, for the equivalent periods in 2021. The increase in revenues is due to the consolidation of CyberKicks revenues following the completion of its acquisition on July 4th, 2021, and a steady increase in enterprise privacy business revenues. Gross profit for the second quarter of 2022 was $2.6 million, compared to a gross profit for the corresponding period in 2021 of $0.8 million only. The increase in gross profit was primarily driven by the increased revenues. Gross profit for the first half of 2022 was $4.7 million, compared to a gross profit for the corresponding period in 2021 of $1.2 million. Research and development expenses for the second quarter totaled $0.9 million. compared to $0.8 million in the second quarter of 2021. Research and development expenses for the first half of 2022 totaled $2.3 million, compared to $1.5 million in H1 2021. The increases It's a beauty to the consolidation of cyber kick switches and development expenses and the development of new products were partially offset by a reduction in the research and development expenses of the enterprise security segment, due to the agreement with terrorism. Sales and marketing expenses for the second quarter of 2022 amounted to $2.6 million in compared to $1.3 million in the second quarter of 2021 and $5.7 million for the first six months of 2022 compared to $2.4 million in the first six months of 2021. The increases are mainly attributed to the consolidation of CyberKicks sales and marketing expenses, primarily its media cost. and they were partially offset by a reduction in the sales and marketing expenses of the enterprise security segment due to the agreement with Terrazone. General and administrative expenses totaled $2 million and $4.2 million for Q2 2022 and the first half of 2022, respectively, in compared to $1.5 million and $2.6 million in their respective periods for 2021. The increases are mainly due to higher professional fees, predominantly legal, in connection with NetNuts patent-related proceedings, which were resolved by a settlement on May 17, 2022. IFRS net loss for the second quarter of 2022 totaled $3.2 million or $0.10 basic loss per ordinary share compared to net loss of $2.4 million or $0.09 basic loss per ordinary share for the second quarter of 2022. For the first six months of 2022, IFRS net loss totaled $7.9 million or $0.26 basic loss per ordinary share compared to a net loss of $4.9 million or $0.20 basic loss per ordinary share in the first six months of 2021. Non-IFRS net loss. We use non-IFRS net loss measures which reconcile the effect of some non-cash expenses or income and certain other expenses as we believe it reflects better the performance of our business. Non-IFRS net loss for the second quarter of 2022 totaled $2.5 million, or $0.08 basic loss per ordinary share, compared to a loss of $2.2 million, or $0.08 basic loss per ordinary share in the same period for 2021. For the first six months of 2022, non-IFRS net loss totaled $5.9 million, or $0.19 basic loss per ordinary share, compared to a net loss of $4.2 million, or $0.17 basic loss per ordinary share in the first six months of 2021. Company's cash and cash equivalents for the six months ended June 30, 2022, totaled more than $4 million, compared to $3.8 million as of December 31, 2021. This company's cash balance does not account for up to additional $5.6 million in future funds under its recently secured credit facility and investment financing. As of June 2022, shareholders' equity totaled $17.3 million, or approximately $0.57 per outstanding American depository share. Compared to shareholders' equity, of $24.2 million on December 31st, 2021. The reduction is mainly due to the company's operating loss during the period December 31st, 2021 through June 30, 2022. Lastly, I wanted to touch base upon our share count as it stands today. On an outstanding basis, we have around 32.6 million ordinary shares or ADSs, On a fully dilutive basis, we currently have around 48 million shares or ADSs outstanding. With that, I'll turn the call back over to Shahar.
Melissa
Thanks, Shahar. In summary, during the second quarter this year, we made considerable progress towards implementation of our strategies. We delivered on our goal to present continued significant growth and expand our position in the consumer business. Looking ahead, we have a well-defined roadmap for execution, innovative technology, and established expansion plans, and most importantly, the funds to support it well into 2023. We plan to continue investing in each of our segments, encourage further growth, as well as to explore potential integration and migration of our existing technologies throughout our business. With that, I would like to open the call for any questions you have. Operator, please go ahead.
Operator
Thank you. At this time, we'll be conducting a question and answer session. If you'd 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'd 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 questions.
Jason
Thank you.
Operator
Our first question comes from the line of Jason Colbert with Dawson James. Please proceed with your question.
Jason Colbert
Good morning, guys. Congratulations on the quarter. Just wanted to understand a couple of things. Where was the greatest growth and how much growth was organic versus inorganic? And what also, can you just repeat, what was the outstanding common share count? I got the fully diluted number at approximately 48 million. What was the common number you're using?
Jason
Okay, Jason, thanks.
Melissa
So I will start from the organic and unorganic. So basically, I think the most important information is you can take a look only one quarter back and see the organic growth quarter over quarter, one quarter back, two quarter back, and three quarters back, okay? So basically, most of our growth, not most, all of our growth in the last three quarters is organically. Besides that, If you go back and you can see that we only in our privacy for consumer, for enterprises, which is basically the organic growth, because in the previous quarter last year, we didn't have yet the consumer, only for the third quarter, we can see also a two-digit organic growth. So meaning we are growing organically, inorganically, if you compare it to last year or compare it to the previous and the previous quarter, et cetera. Regarding the shares, so we have a total of 48 and floating of 32 million shares, if this was your question.
Jason Colbert
Okay, good, 32, thank you. And if we were to project a double-digit organic growth rate, call it 15 or 20% compound annual growth rate or a sequential growth rate, At what point, and I can certainly do the math, it looks like you're going to be close to break even in the next year or two. Does that seem reasonable to you? Okay.
Melissa
So you said something very important. You can do the math by yourself because according to our current growth rate, we can be profitable early or let's say in one year from now. The question is, what will be the decision? Because if we want, for example, you know, in my picture, just describe the new products that we launch. And I mentioned again and again, I know that it sounds like everyone says it, but in our case, When we acquire a consumer, we are not losing. We are investing because he's a monthly subscriber. So, yes, in the first, second month, you can lose. But if you have a good product, well-established product, you will have a great return in the next year.
Jason
So the question is how much money we want in consumer acquisition for new products.
Melissa
In the privacy business for enterprises, I can say very proudly because it's the first time, you know, we bought a company two years ago. And after two and a half years, we bought it from almost $1 million.
Jason
But it's profitable.
Melissa
We know how to bring a business to be a profitable business. It's still growing. And now we need to take the decision regarding the B2C, the privacy and security for consumers.
Jason Colbert
I agree 100%. The question is, you know, the efficient use of your capital and the return on invested capital is greater if you redeploy that capital. And I guess that's my last question, which is, Where do you get the most bang for your buck at this point with any capital that you have? Is it in, you know, sales and marketing that's driving that growth rate? Or are you looking at this point, you know, what strategic acquisitions are you thinking to make that would complement your revenues and kind of continue to support this very, very solid growth rate?
Melissa
Okay, good question. So basically, we don't have any plan, any strategic plan to add additional acquisitions in the coming period. We think that we have a great business, that our funds can come into our current businesses and show a significant growth, significant numbers, and significant and impressive new products. But, you know, if something will come in, we will have an ad hoc opportunity that we will not miss. So we will consider it. But most of the capital we are investing in-house in our great and talented team to develop new and innovative products. And, of course, in sales and marketing, because you see the results, we know how to do it.
Jason Colbert
Great. Thank you so much.
Jason
Congratulations on the quarter. Thank you.
Operator
Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Brian Kinslinger with Alliance Global Partners. Please proceed with your question.
Brian Kinslinger
Great. Thanks so much for taking my questions. Can you start with sharing what percentage of the recurring revenue you'll be sharing for the first five years under the privacy solutions with your lender and how that will impact gross margin? which is, I assume, where you'll see the impact. And then how do you expect this funding is going to drive stronger revenue growth, if at all?
Melissa
Sorry, Brian, but the line, when someone is asking, is a little bit broken, not only yours. I have a little background noise, so if you can say it again and slower, because I can barely hear you.
Brian Kinslinger
Okay, let me take off my... Give me one second, maybe I'll...
Jason
No, no, no, it's not yours.
Melissa
The line is a little bit broken. I can barely hear you.
Brian Kinslinger
If you just speak again. Okay, certainly, certainly, certainly. So I wanted to start by understanding what percentage of recurring revenue are you going to be sharing for the first five years under the privacy solution with your lender, how that's going to impact gross margin, and then how you expect that will impact revenue growth as well.
Melissa
Okay, so if I understand you correct, you are asking in the next five, what are the future revenues that we have now according to our formulas and models for the next five years in our consumer business? Yes, this is your question?
Brian Kinslinger
No, no, no. You got the funding, right, the non-diluted funding.
Melissa
Ah, the funding. Yeah, you're going to share some piece.
Brian Kinslinger
So what's the impact on gross margin? What's the revenue share? And then how will it drive stronger revenue growth?
Melissa
Okay, so Shai, correct me if I'm wrong, but the funding will have a zero impact in our financials on the gross margin or on the revenues, yes?
Steve
Yes, correct. It will affect, Brian, only on the financial expenses because it's considered as financing, like a loan. So all margins belong to this financing will be shown under the operating profit or loss margin. under financial expenses. So it won't affect the gross margin and the operating margin.
Brian Kinslinger
So, and what is that percentage of each sale? Is it 50%? I saw after five years, it's 50%. Are you paying 50% in financing?
Melissa
No, no, no, no, no. So let me explain, okay? So there are two steps. One step still gets, you know, If it goes well, they will get this kind of loan back. And then after this step, after five years and not more, till five years and not more than five years, we will have a red share of 50% only on the specific consumers that were acquired with this specific investment. So they have a kind of a roof, okay? It cannot be more than five years.
Brian Kinslinger
Great. the press releases there's a revenue share on on so what is that revenue share even if it's in financing expenses what's the revenue share right away for all incremental sales so only for the specific product for the uh the armor product if you remember we have a product for ios only
Melissa
only for the specific consumers that were acquired by this specific investment. At the beginning, it's 100%. 100% is going to the investor, okay? It's going to the investor until he covers his loan. And then after this, it's 50% each, meaning a ref share of 50% until five years. After five years, it's going back 100% to safety.
Brian Kinslinger
Got it. Okay, that's helpful. And then can you talk about how the partnership with TerraZone is going? I think you previously said it would drive customer acquisition in the second half of the year and as well as drive expenses down. So just talk about how successful this has been. Does it need more education on TerraZone's part? Any update would be helpful.
Melissa
To be honest, I don't have any important or something to update at this stage. You know, Terrazone has rearranged now with safety products. They made some very significant developments in the product. As I mentioned a quarter ago, all the product now is in the cloud. They developed the full suit for organizations. They have a few very, very interesting customers and few engagements. But it's still in their beginning. They are adding some layers from their portfolio. So I cannot say now something that will be significant at this stage. Hopefully, at the rest of the year or next quarter, we will have something to update. And then, of course, it can be also significant update. So we will do it in the next financial, so in a specific period.
Brian Kinslinger
Okay. And then I think you mentioned to one of Jason's questions that the consumer can be lost quickly. So you invest once you win that consumer. What is the churn in the consumer business?
Jason
What is the what again?
Brian Kinslinger
The churn? The churn rate.
Melissa
Okay, so we are talking about the churn rate internally a lot, by the way. It's a good question because I can give you so many answers because there are so many ways to measure a churn. I can tell you now that we are not measuring according to churn, but we have our formula that says that every consumer we acquire in five years will triple the investment, will have an ROI that is three times, almost three times than the investment, okay? It takes into account the churn. It takes into account the lifetime value, the average lifetime value. into account many other factors. And most importantly, it takes into account our current, with that, beside of the market standard and market benchmark that we have, because really we have experts in this area. So this is the most important formula. By the way, this is the formula that the investors, both of them, and also the commercial bank and the strategic investors that came in, totally showed, you know, made a significant diligence on our numbers and our results until now. And they truly believe in this formula. That's why they put their money in.
Brian Kinslinger
Okay. And then I guess lastly, can you quantify how much lower you expect operating expenses to be in 3Q compared to 2Q? I think if I calculate in 2Q, they were 5.5, but it sounds like legal expenses are coming down And the sales and marketing from the enterprise solution business is going to be coming down. So, you know, how much lower do you see operating expenses?
Melissa
I prefer, Brian, if you don't, I prefer just to say that now we are in the end of the second month of the third quarter, meaning two-thirds of the quarter behind us. We expect to see, as I mentioned in my pitch, we expect to see the trend of net loss that are decreasing in this quarter and in the next quarter, even a significant decrease. If it's very important for you, I can ask Shai, but I think this is the most important information. Yes, at the end of the day, it's the bottom line, which is the net loss.
Brian Kinslinger
Yeah, I just think there's only two of us covering the stock, and we'd like to manage the expectation of what you already know. That's the only reason I asked. But whatever you feel you should share is great.
Jason
Oh, good. Okay, thank you. Thank you very much, Brian.
Operator
Thank you. Ladies and gentlemen, as a reminder, once again, if you would like to join the question queue, please press star 1 on your telephone keypad. We'll pause a moment to allow for other questions. Thank you, ladies and gentlemen. This concludes our question and answer session. I'll turn the floor back to Mr. Daniel for any final comments.
Melissa
Okay. Thanks a lot for joining us today.
Jason
We look forward to continue to update you on our progress.
Operator
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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