Safe-T Group Ltd.

Greetings. Welcome to Safety Group Lemon's third quarter 2022 earnings results conference call. This time, all participants are in 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 from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Shakar Daniel, co-founder and CFO.

Mr. Daniel, you may now begin.

Thank you, and welcome everyone to Safety Group's 2022 Third Quarter Earnings Results Conference Call. As is customary, with me is Shai Avnit, our Chief Financial Officer. I would like to provide a brief review of our business operations, summarize our accomplishments, and then turn the call over to Shai, who will briefly discuss the financial results of the third quarter and nine-month period before we open the call to questions. We are excited to present seven consecutive quarters of revenue growth. Safety Today is a different company than it was a year or two years ago and right where we planned it to be. I would like to explain how we successfully accelerated our growth quarter by quarter.

On a corporate level,

On a corporate level, all the actions and activities taken in recent quarters led to revenues of $13.6 million for the first nine months of 2022, already exceeding full-year 2021 revenues and presenting an increase of 109% compared to the nine-month period of 2021. Our greatest achievement this quarter was the ability to balance between continued growth and operating cost at loss, While maintaining our growth, we managed to significantly reduce our overall expenses and decrease our bottom-line loss. Our efforts to reduce operating expenses resulted in a 25% reduction in net loss and a 29% decrease in adjusted EBITDA loss. I would like to address one more important subject, and that is our recent funding initiative. In May 2022, we secured a $2 million non-dilutive credit line from a leading Israeli bank. In August 2022, we announced a strategic financing of up to $4 million, the $4 million in finances including a commitment for the $40 million, with the additional $2 million to be made available subject to achievement of certain milestones. The successful customer acquisition program allowed the waiver by the investor of the milestone condition for the second part of the funding, and we secured the second funding of $2 million, which in total will be made available to the company through a series of cash installments until July 2023. We are extremely proud to have secured these fundings that support the company growth without impacting our shareholders at the current market valuation, resulting in the addition of over $4 million on top of September 30, 2022 capital resources. On a business level, I would like to provide a short summary of our enterprise privacy business, NetNut. NetNut operates in the fast-growing market of IP proxy, in which with each year, the demand for solution in this field increases. Although several companies operate in this sector, the ability to provide and support enormous number of customers and interest is not trivial. NetNut proxy network has been established and developed five years ago And during recent years, we have invested a wide range of resources, including building an experienced, motivated marketing team to grow and strengthen its network. I am proud to say that today, our network and infrastructure are one of the most advanced and reliable in the market, serving hundreds of customers. In recent months, we redesigned our scalable infrastructure in order to meet growing demands and continue to scale as we expand with our partners and customers. We recently announced that our network doubled its usage volume within one month with more than 36 billion request forces, the latest spike in usage. Our ability to handle over 100% increase in traffic loads within a short period of time and scale client business without affecting performance is gaining customer confidence in our solution. In the past month, we recognized traction from new vertical and exciting markets such as cybersecurity companies, increased demand from our current and new e-commerce customers, and with this increased inquiries for advertising fraud detection, mitigation, and prevention solutions. Advertising fraud is an existing and growing industry issue, one that costs a waste of billions of dollars annually for both enterprises and consumers. According to Business of Apps, The total cost of advertising fraud in 2022 reached to $81 billion, predicted to increase to $100 billion by 2023. We expect demand for this segment to keep growing and to represent bigger share in profits from our privacy enterprise units. During the third quarter, from the beginning of the year 2022, our consumer privacy and cybersecurity business evolved significantly as well. we were excited to launch our solution in additional platforms, making them accessible to Android users as well as for iOS and Apple devices users. By launching across the top mobile platforms, we're expanding our offering to additional thousands of potential users. Last month, we announced one of the biggest milestones to date of our consumer privacy business that reached 5 million in downloads in a very short time. Moreover, our Apple iOS privacy application is ranking among the top 10 privacy application in the category of productivity in the U.S. App Store. Similar to our enterprise privacy business, our expert professional team and our marketing and technology capabilities contribute greatly to our growth. In addition, the expansion of our user base for the consumer also depends on our ability to successfully acquire customers. Customers is our business main assets, and investments in user acquisition translate into future high-merging recurring revenues. Our model estimates revenue for each acquired customer for the duration of their lifetime value, which is LTV period. Under this plan, a significant portion of our sales and 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. For example, during the third quarter, we invested $1.2 million in customer acquisition, which has already returned in a very, very short time 20% of the investment. We believe that these investments will generate millions in future and in revenues. Before going further, I would like to turn the call over to Shai to discuss the financials for the quarter in more detail. Shai, go ahead.

Thank you, Shachar. I will begin with a summary of our third quarter 2022 financial results, which are compared to our third quarter 2021 results, unless otherwise stated. All figures in this summary were rounded up for simplicity. Revenue for the third quarter of 2022 totaled $4.8 million, a 42% increase compared to revenues of $3.4 million for the third quarter of 2021. The growth is attributed to an organic increase in enterprise, privacy business, and consumer business revenues. Gross profit for the third quarter of 2022 was $2.6 million, compared to a gross profit for the corresponding period in 2021 of $1.8 billion only. The increase in gross profit was primarily driven by the increased revenues. Operating expenses in the third quarter of 2022 totaled $5.1 million compared to $6.2 million in the equivalent quarter of 2021. As of September 30, 2022, the company's cash and cash equivalents balance aggregated to $3.8 million compared to $4 million on June 30, 2022. These companies' cash balance for September 30, 2022 does not account up for up to additional $4.3 million in future funds under its recently secured credit facility and investment financing. As of September 30, 2022, shareholders' equity totaled $15.7 million, or approximately $4.8 per outstanding American depository share. compared to shareholders' equity of $17.3 million or approximately $5.7 per ADS as of June 30, 2022. Net loss for the third quarter of 2022 totaled $2.4 million or $0.07 basic loss per ordinary share compared to a net loss of $3.7 million or $0.12 basic loss per ordinary share as of September 30, 2021. Adjusted EBITDA loss decreased sharply to $1.7 million compared to an adjusted EBITDA loss of $3.1 million for the equivalent quarter in 2021. 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, which equal to approximately 3.26 million ADSs. On a fully diluted basis, we currently have around 49.4 million shares or 4.94 million ADSs outstanding. With that, I'll turn the call back over to Shahar.

Thank you, Shay. In summary,

During the third quarter this year, we continue to realize our mission, including the delivery of significant revenue growth, reducing our loss, and expanding our solutions reach. On a personal note, we are not indifferent to the share price and the capital market, as many other companies, safety too, suffer from the challenging market conditions. Over the past year, our financial results show that we are building a high-growth company with high gross margins, Our board and team are committed to building a strong and robust company as a top priority and over time. We believe that the value of our business will become greater because of the decisions being made now and will translate into shareholders' value. Alongside our commitment to improving our business operations, we are also committed to expanding awareness to safety through more frequent contact and participation at investment conferences. Looking ahead, we have a well-defined roadmap for execution, technology innovation, and expansion plans for the near term. The cybersecurity and privacy markets are growing into a global multi-billion dollar opportunity in response to the incredible surge in privacy and cyber attacks issues for both organizations and individuals. We are optimistic regarding the future of the company and are building our business plans to support our continuing efforts for improved financial results. With that, I would like to open the call for any questions. Operator, please go ahead.

Thank you. At this time, we'll be conducting the question and answer session. If you'd like to ask a question today, please press star 1 on your telephone keypad, and 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. Thank you. And our first question is from the line of Brian Kinslinger with Alliance Global Partners.

Please proceed with your questions.

Hi, Gray. Thanks for taking my questions. First, can you break down the third quarter revenue consumer versus enterprises? And now that your acquisitions have anniversaried, what are reasonable growth targets for each of these businesses?

Okay. So the breakdown is around $2.6 million. for the consumers, privacy and cybersecurity business, and around 2.2 for the privacy enterprise business. What's the other question, Brian?

I'm curious, you know, the growth rates are currently impacted still by the acquisition of CyberKick year over year in the third quarter, right? You had a full quarter, but you didn't have a full quarter last year. So I'm curious.

No, no, no, no.

No.

The answer is no. If you compare the... All right, July, the beginning of July.

Yeah.

Okay. No, you're right.

Sorry. I apologize. No, you're right. Yep, yep. So in the press release, you talk about challenging market conditions. So given the economic uncertainty, I'm curious, has there been an impact on your enterprise business, whether it's slower... spend by enterprises, any change in sales cycles? What has been the impact to your business?

Okay, so I wanted to explain what I meant in my quote in the PR. From a business commercial perspective, I will be totally honest, no impact. Meaning, no, it goes very well. You see the growth, you see the numbers. When I say challenging market conditions, I meant to the capital markets.

Wow. I see. So there's been no impact to consumer or enterprise, churn, anything like that thus far?

No, not something that I can point as significant. You know, here and there, but it's always the routine. Always we will have market conditions. But I cannot point to something significant that impacts our business. I think that we met all our targets and even more. I'm talking from market conditions, it's the capital markets.

Yep. Okay. So again, back to consumer enterprises, you think about going forward, which business might grow faster going forward? Is the consumer side given the capital that you have for that? And what are reasonable growth targets for those two businesses?

Okay, so basically, as you see, you know, in the last quarter, you can see around 50-50, sometimes it can be 60-40, but this is more or less the split, and this is the target of the company. We do not have any specific preference for one of them. And just to elaborate, so as we mentioned in the PR, The enterprise business is basically in a break-even. It can be profitable very soon. And at this point of time, we don't have plans to invest more resources, but we have plans to grow organically and to stay profitable around the break-even. It's going very well. The demand is unbelievable. And we think that we can do it without any further investments. In the consumer business, as I mentioned a few times in the past and also now in this call, we can divide our expenses for two parts. One is the operation expenses, which is very, very efficient, but the most significant investment is the consumer acquisition. As you saw in the last two quarters, two very, very significant let's say, branded organizations like a commercial bank or like a strategic investor shows a huge belief in our formulas and models. And they invested in the consumer acquisition, meaning for us, it's not a loss. It's an investment. And we have many ways to fund it externally without diluting our investors. And it's not only us. It's part of this business. If you go to other B2C companies, the giants and the smalls, If the model is working, if the team is performing, so you have many organizations that love this model because it gives you a great IRR over the time and fast return, and it's very stable. So basically, these are the plans for the coming future for both business units.

And just to word it differently, so do you think consumer can grow 25% plus in terms enterprise maybe grows a little bit slower since you're not investing as much in it? How do you think about their revenue growth rates going forward?

You know what, Brian? I cannot point on a number divided to percentage. I didn't say that I think, I didn't say because I don't think so, that the enterprise business is growing organically without any further investment. meaning we are using the profits in order to scale the team, to scale the infrastructure, to have more marketing activities. I think that in the next quarter, we will see around the 50-50 between both. Both of them need to grow. It depends. Sometimes it's the season, sometimes it's the... Situation around the privacy sometimes is shining, sometimes the consumer is shining, but I cannot point on a specific business unit that is going to grow more than the other.

Okay. Last question. You got the 5 million downloads you announced. What's the conversion rate to subscribers?

Okay, so basically, Brian, I think as I told you in the last call, regarding the internal formulas and conversion rates that we have, we are keeping it quite confidential, not to the capital markets, but due to the competition. I think that if you look around, you will see that any company in the B2C exposing their conversion rates, etc., But I can tell you one thing, that our conversion rates, the churn rate, the lifetime value, and the CPA, which is the cost per acquisition, according to statistics, are in the top. And as I mentioned now, you know, we are in the first 10 places in the app store in productivity because of this statistic and this performance of our team. By the way, this is our sweet spot. The ability of our team to have a great marketing and sales performance and statistics.

Great. I guess I have one follow-up to that. Without giving me safety's information, what are industry standard conversion rates? You say you're at the top.

What would be a standard number? Standard number to what?

You said the industry standards for the conversion rates, if you look at them, what I think you were intimating is that you're well above that. What are you comparing that to? What are the averages in the industry for conversion rates?

Okay, so it's a good question, but to be honest, I don't have it in front of me, and The conversion rate is something that each company choose to present sometimes what it's good for, what I mean. You know, download and the conversion is between a download to a paying customer. Now, over the time, over the last two years, you know, you have also a churn rate. So you need to aggregate the number for all the paying customers versus the downloads. And then it's the real number, but if it's very interesting for you, I'm willing to jump on a deep end call with you and to discuss about the market statistics and the market standard.

Okay. Sounds good. Thank you.

We have a lot of statistics about it, by the way, if it's interesting for you. Thank you. Okay. Thank you.

As a reminder to ask a question today, you may press star one. The next question is from the line of Jason Colbert with Dawson James.

Please proceed with your question. Mr. Colbert, please proceed. Your line is open for questions.

Thank you. Can you go through what the final share count is after the reverse split?

I didn't catch that. One second. Yes, sorry. Hi. Hi, Jason. Hello. Just a minute. USADR. Okay.

Okay. The share count ADS perspective right now is about 3.26 million ADSs outstanding. Okay.

Thank you. And you talked a little bit about reducing expenses in the quarter. But, you know, according to the filings, I see that, you know, selling and marketing was actually up. Cost of goods as a percent really didn't change. R&D didn't change. So I just see it was focused on G&A.

So is that correct? Yes. Okay, so going forward, how are you looking at those other expenses?

Talking on the all expenses of the company or just on the G&A?

All of the expenses broken up by R&D, sales and marketing, G&A, and also, you know, cost of goods. You know, what direction do we expect that to run?

Okay, so basically our current expenses, we think we can optimize the revenues and we build an infrastructure. As I mentioned also in the call, we invested a lot in the last quarter to build the infrastructure from product and technology perspective, from human resources perspective. And we think that our costs should remain more or less the same while we think that we can scale up with revenues based on more or less the same costs. So this is the current trend that we're for the next quarters.

And I know you're hesitant to give a revenue guidance, but we have been anticipating that this was kind of a year of building a base with kind of as you move out on the traditional hockey stick plan. Is it going to take more time to realize those significant revenues? I mean, I had you out to 50 million in 2025. And so I'm trying to understand what you're thinking strategically in terms of, you know, when you're going to be able to leverage those revenues across the infrastructure.

What do you mean to leverage, Jason?

I don't understand. Well, you said you had essentially a fixed cost of goods and that as revenues grow, you're going to build. So I'm trying to understand how your revenues are going to build over the next couple of years.

Okay, so if you look at our presentation, our target since last year, which basically we are better than this target, is to have a 50% growth year over year. If you would calculate, you will see that if we meet this plan, we will be in 2025 in around $50 million in revenues. So I think that our current revenues are significantly growing. The company in 2018 was in $1.4 million in revenues. Now in 2022, it's almost, you see the numbers and you can calculate regarding the, the whole year. And if it goes like this, I think that it's totally significant growth, significant revenue, leveraging everything, just trying to understand what specifically you want to understand.

No, that's fine. I just wanted to hear you say that you're still on track for that growth rate. And talk a little bit about Cash on the balance sheet and kind of what the cat you said that it's been a difficult capital financing market. Tell me a little bit about how you're planning to manage the current cash and how long you think it will last.

Okay, so we have. What the company now is in a very good position because we have a kind of few plans. One of them can take us further ahead with the current cash. And we have, as Shai mentioned, we have, and also in the PR, you can see that we have on top of the current cash for September 30, we have additional $4 million. committed from the bank and from the strategic investor. We're paying installments in the next few quarters. So basically, we have the current cash to support the growth and to support the current customers and the technology of the company. As I mentioned to Brian, our consumer acquisition plan is very attractive for many investors to come and be partners. The way a RefShare model, as we did with the last strategic investor. So from consumer acquisition perspective, due to the fact that our model is working very well and is very attractive from IRR perspective, we think that we can fund it even forever from this RefShare model and keep the company to be Look at the difference between the cash in the end of the second quarter to the end of the third quarter and imagine yourself that we can keep like this for many quarters. And again, it depends on the market conditions and in many other terms, but we have some plans and we will adjust the plan according to the market conditions and the growth rate that we will define for the company.

So what I hear you saying is that you can take the current cash balance And with adjudicating expenses, you can manage on this cash balance until their market conditions allow you to bring more cash into the company.

Absolutely. Okay. Thank you very much. I appreciate the update. You're welcome. Thank you. Thank you. There are no additional questions at this time. Would you like to make any closing comments? Yes. Thanks, everybody, for joining us today.

We look forward to continue to update you on our progress. Thanks.

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.