COMSovereign Holding Corp.

the CommSovereign Holding Corp. First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your phone. To withdraw a question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to the Director of Investor Relations, Steve Gersten. Please go ahead.

Thank you, Operator. Good afternoon, and welcome to ComSovereign's Holding Corps 2021 First Quarter Earnings Call. My name is Steve Gersten, and I'm the Director of Investor Relations for ComSovereign. Joining us today is Dan Hodges, Chairman and CEO, who will provide prepared remarks, and then we will open the call up for questions. Before we begin, I'd like to remind everyone that certain statements made during this call that are not historical facts but are forward-looking statements that reflect management's current expectations, assumptions, and estimates of future performance and economic conditions and involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made herein. Forward-looking statements are generally Identifiable by the use of forward-looking terminology such as believe, expects, may, looks to, will, should, plan, intend, unconditioned, target, see, potential, estimates, preliminarily or anticipates or the negative thereof of comparable terminology or by discussion of strategy or goals or other future events, circumstances or effects. Moreover, forward-looking statements in this release but are not limited to, the impact of the current COVID-19 pandemic, which may limit access to the company's facilities, customers, management, support staff, and professional advisors, and to develop and deliver advanced voice and data communication systems, demand for the company's products and services, economic conditions in the United States and worldwide, and the company's ability to recruit and retain management, technical, and sales personnel. The forward-looking statements contained in this call are made as of the date of this call, and the company disclaims any intention or obligation other than imposed by law to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. We encourage you to review our publicly filed documents, including our FCC filings, news releases, and website for more information about the company. With that, I'll turn the call over to Dan. Take it, Dan.

Thanks, Steve. Good afternoon, everyone. I'll try to get away from this robotic sounding items that have to be talked about. And I'd like to start by thanking everyone who took the time to join us today on our first quarterly results conference call. While I am a sole host, For today's call, I can assure you that as we move ahead with the ramp-up of our business, I will be joined by other members of our executive team, such as our CFO and CTO, who will address the financial and technical developments occurring in the business. For our commitment on this call, I'd like to run through the first quarter financials and then move into updating you on some of the important developments in the business, which I believe are directly relevant to the value we're creating at ComSovereign. After that, I'm going to open the call up for questions to ensure I can get a chance to speak with as many of you as possible during this call. I ask if you'd please limit yourself to a single question at that time, strictly for this venue. If you have any follow-up questions any time after this call, you can always call or contact Steve Gersten, who just spoke. So first quarter results are in line and consistent with the results of 2020. And in particular, the fourth quarter of 2020, during which we were continuing to build and arrange the organization while beginning to operate the core business units. That was done with inadequate capital, as we mentioned, to really invest in R&D and production. For the three months ended March 31st, 2021, total revenues were $2,086,452 compared with $2,485,204 for the three months ended March 31st in 2020. It's a decrease of $398,752. These revenues were derived primarily from mobile network backhaul products, sales from Sovereign Plastics, and the sale of our Aerostat products and accessories. As I mentioned, the mild decrease was primarily driven by the lack of capital available during that period. The capital, however, from our two public equity offerings was deployed towards the end of the period into areas such as inventory and production, and that had not yet reached AR and therefore did not meaningfully contribute to revenue during the period. Other expenses in the period increased as expected due to the expansion of our business because of acquisitions and increases in professional services, including accounting, legal, and marketing, as well as staffing levels across the organization. which are critical to support expected sales growth. Additionally, other expenses in the quarter amounted to $5,910,275 compared to $882,375 for the three months ended a year ago, March 31, 2020. This increase was largely due to the extinguishment of debt of $5,348,469, a result of the exchange of debt for equity. Looking at our balance sheet, There are a few items I wish to highlight. As was noted in our CEO update I delivered in April, we successfully raised approximately $39 million in net proceeds in January and February. We deployed a portion of the proceeds to pay off maturing debt and accrued interest that totaled $20.4 million, which also included more than $15 million in debt converted to equity, as well as paying down other expenses that had accrued in the two years of organizational build-out and preparation. In addition to the payoff of debt and cash payments for accrued expenses, cash was used for the purchase of capital assets, such as a new production facility in Tucson, as well as for acquisitions, and approximately $4 million was initially invested into inventory and prepaid production. As a result, we recorded an end-of-quarter cash balance of approximately $11 million. At quarter end, our remaining debt principally consists of the 6.5 million outstanding mortgage balance on the 140,000 square foot Tucson production facility, and approximately 11.7 million in convertible notes related to the acquisition of Fastback, which mature in 2026, but are expected to be converted to equity. Although we expect to achieve positive cash flow from operations during the third quarter, other opportunities ahead of us could require further investments in inventory and production, And therefore, we intend to prepare and augment our cash position with additional funds sourced from revolving credit facilities or debt. To recap, just a few of the milestones of the first quarter. Furthering our strategic development plan, we secured over $39 million in net proceeds from the raise in the new growth capital in January and February and completed our uplist to NASDAQ. We expanded our Top Knox leadership team with the appointments of Marty Wade, a 40-year banking veteran with management, ops, and finance experience, to be our chief financial officer, and Bud Patterson, who brings over 30 years of operational and engineering experience in wireless communications, to be our chief operating officer. Through our acquisition of our vision, we added Brian Kelly, an accomplished and very successful manager and sales leader as our EVP, business development during that first quarter we significantly expanded our aerial platform business with the acquisition of sky sapiens which is a standalone developer and manufactured of tethered aerial rotorcraft platforms that are already delivering to and serving customers in defense homeland security and commercial markets these units are built around the unique ai driven aerial unit and a fiber optic tether system enabling surveillance and complete 4G and 5G LTE networks, among other demonstrated payloads. Together with our drone aviation unit, we can now provide customers with a full range of capabilities for communications and ISR. Activity in our drone business is picking up, especially in regards interests we're seeing from the Department of Homeland Security. As evidence of this, a few days ago, we posted information about an invitation-only flight demonstration of our SkySapiens Hovermast 100 to be held at our Tucson facility. That demo was given to law enforcement and officials from the Department of Homeland Security, and based upon the positive feedback and further requests received, the company is hosting a series of additional demos over the coming weeks to a wide variety of interested users in law enforcement, forestry, military, and telecom. The other acquisition we closed on during the first quarter, as I mentioned, was Our Vision. It's a developer of technologically advanced environmentally hardened video and communications products, and physical security solutions designed for government, private sector, and commercial markets. Our vision's technology also features AI-driven electro-optic and infrared sensors, integrated network communications capabilities, and both of those make it ideal for a large number of applications, including global smart city, safe city programs. Together with our other business units as of today, We now have systems under evaluation and are already going into smart city projects in several states and multiple overseas locations. Now let me talk to you about what's happening in the business units. First issue I want to talk to is feedback we receive from investors about a perceived lack of news regarding contracts. Now in some cases, contracts have taken longer to move through the funnel, either due to production limitations primarily due to chip availability, which I'll cover in a bit, or simply the contracting process, which also continues to be impacted by COVID, which has had some effect in nearly every case. Furthermore, while we know it is important to provide the market with regular updates, it is equally important to note that in many cases we're precluded from disclosing customer relationships or contracts for competitive or security reasons. This is especially true regarding the work we do in the government sector. So what I can say is that several large telecom customers have been testing our upgraded radio equipment and products in the field in their networks. This is normal. It's a procedure that usually precedes a new customer placing orders. I also want to point out that in our business, historically, customers place order with us constantly, meaning we get a lot of POs from a myriad of different customers. This is positive. In most business cases, as you know, because customer diversity greatly reduces concentration risk. In terms of larger opportunities, there are several orders we believe are indeed pending in both the United States and Latin America, specifically in Mexico, right now. And those are with Tier 1 operators. We also anticipate significant U.S. government orders over the next three quarters. Now, with all of that said, I refer you all to the CEO update in which I listed just a small sample drawn from a list of over 100 customers we've shipped products to over the past 45 days, including the likes of Comtel, ExecuLink Telecom, General Dynamics, Motorola, NextEra, Rogers Media, Saab, T-Mobile, and Wavecom. Just a few. In our backhaul radio business, consisting of Dragon Wave and Fastback, we entered the second quarter with production lines at our contract manufacturing partners, online with low-rate initial production volumes, and we're ramping those up, the production curve is increasing monthly. As I also noted in our CEO update, it is this baseline production volume that allows us to now begin accepting higher PO volume from our customers. In fact, POs accepted in the month of April exceeded the entire first quarter revenue. We're seeing strong demand in our wireless backhaul business, driven by segments such as WISPs, wireless internet service providers, and Tier 1 network operators in the U.S. and international markets. This is especially true of Fastback, where demand is increasing faster than expected and the company now anticipates significant revenue at Fastback for the remainder of 2021. In fact, to meet this demand, production at SMC, our contract manufacturing partner for Fastback, is expected to be increased by over five times current levels starting next month in June. Our anticipated product line increase for Dragon Wave will come from our next gen common architecture radio platform called Polaris G1, which I'll discuss as we move closer to production. I now want to take a moment to address one macro issue impacting nearly every sector of this wireless economy. That is global chip shortage. This has impacted our business, but we have been fortunate thus far in this regard. thanks to both supply contracts we have in place and the fact that we've been successful in our efforts to secure an immediate supply of core components, which together provides what we believe is adequate inventory for planned production on into 2022. Now, the situation has impacted DragonWave more than our other lines, as some of the chips utilized in our existing Harmony and Harmony MC radios are reaching end of life, Because of this, and due to demand, we've made a strategic decision to maximize production of the Fastback IBR3000 radios and to produce those Dragon Wave Harmony line radios, allocating the chipsets we already have in inventory and the verified component pipeline to exploit the highest margin products. We expect to have healthy customer demand for the new Polaris G1 line of radios later this year, which will relieve chip constraint pressure on our legacy product line chips. Any information on that you wish further, again, speak with Steve Gersten. This situation brings up what I believe is an important business and investor issue we're constantly focused on. That is operating our business to maximize value. Looking across our industry, many of our competitors and peers have recently announced first quarter earnings, showing top line first quarter revenue growth and confirming the large potential of 5G. But this growth is often accompanied by very poor net profitability metrics. Philosophically, we also believe strong earnings is critical to running our business, but net profits are far more important than gross profits than just seeking high revenues and willingly taking loss leader contracts in an effort to capture market share. Ideally, this might work, but in reality, that is what damaged the business of DragonWave before we took it over, and we're sadly seeing that same thinking and rationale in our industry once again in some of our competitors. As you may recall, in March, we published some basic details of our target model, highlighting our EBITDA margin goals, and based upon current metrics and expectations and streamlining our product lines and management, we believe Comsovereign is poised to deliver a multiple times revenue growth in 2021 over 2020, and to do so with far more significant profitability. This will be achieved through a combination of technological leadership built on our in-house technology and acquisitions and a large installed base of customers and the ability to control our production and supply chain in battery, drone, and radio production via our Tucson facility. In our drone business, which includes the operations of drone aviation and Sky Sapiens, we continue to see strong interest, especially in government and military markets. This is true for use on the border, where we currently have WASP aerostat units from drone already deployed. Demand for rapid deployable aerial platforms for communications and surveillance is high and still growing higher. In response to this interest, as I noted earlier, In the weeks ahead, we intend to perform a series of demonstrations for law enforcement and officials from the Department of Homeland Security. PNC has been refining and optimizing its 4G LTE and 5G radio systems, including development of its new 5G and signal strength upgrades for its next-generation Featherlight 2.0 and RAID products. It is also finishing up our 5G edge computing and cloud solution, while also launching multiple customer engagements and partnership ventures, including the recently announced 5G Cooperative Research and Development Agreement, or CRADA, as the acronym goes, with the National Institute of Standards and Technology, or NIST. This is along with ventures with academic institutions to make smart cities and smart campuses a reality. At Endurapower, production on the first generation of batteries is now underway in Tucson on its new line, and design and testing work is being completed on the next generation units. We anticipate executing a significant OEM contract we've been working on for some time, and interest in the capabilities of our AI-driven battery management system for new applications is quite healthy. Flextrum has been deep into the in-band full duplex testing, as previously mentioned, covering 4G and 5G LTE waveforms, and we're seeing even better than expected performance results with respect to data throughput and signal clarity. This translates to an expectation of having the in-band full-duplex technology operable within our own equipment by year-end and available for license and royalty to other wireless developers globally by the first quarter of next year. I can't stress enough how important this technology is in order for 5G to become an affordable reality in dense urban environments. So at this point, you're probably tired of hearing me bloviate. I'd like to open the call for any questions. Operator?