SuperCom, Ltd.

Ladies and gentlemen, good morning and welcome to Supercom's fourth quarter and year-end 2023 financial results and corporate update conference call. At this time, all participants are in a listen-only mode. Should you need assistance, please signal a conference 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 1 on your telephone keypad. To withdraw your question, please press star, then 2. Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. Joining me from Supercom's leadership team is Ordan Shrovelsi, Supercom's President and Chief Executive Officer. During this call, Supercom's management may be making forward-looking statements, including statements that address Supercom's expectations for future performance or operational results. Forward-looking statements involve risks, uncertainties, and other factors that may cause Supercom's actual results to differ materially from those statements. For more information about these risks, uncertainties, and factors, please refer to the risk factors described in Supercom's most recently filed periodic reports on Form 20-F and Form 6-K, and Supercom's press release that accompanies this call, particularly the cautionary statements in it. Today's conference call includes EBITDA, a non-GAAP financial measure that Supercom believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net loss, a comparable financial measure, please see the reconciliation table located in Supercom's earnings press release that accompanies this call. Reconciliations for other non-GAAP financial measures and comparable GAAP financial measures are available there as well. The content of this call contains time-sensitive information that is accurate only as of today, April 22, 2024. Except as required by law, Supercom disclaims any obligations to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to Supercom's President and CEO, Ordan Sobalsi.

Thank you, Operator. Good morning, everyone, and thank you for joining us today. Earlier this morning, we issued a press release of our financial results for the first quarter and full year of 2023, which you can find in the investor relations section of our website at www.supercom.com. Today, I'll start my comments with a brief update on our recent business highlight strategy in Q4 and 2023 results, followed by a Q&A session. I'm excited to share with you the Supercom's outstanding performance for 2020, which reflects the tremendous strides we've made in our operations and financial position. 2020 was a landmark year for Supercom. Annual revenue increased by 51% to a five-year record level of $26.6 million. And the company reached a five-year record positive EBITDA level of $4.8 million, working the sixth and second quarter of positive EBITDA after years of investing in our leading edge IoT technology. We also continued to improve operating cashers significantly from operating cashers in 19.4 million in 2021 at 4.7 million in 2022, and to only 2.4 million in 2023, increasing our cash flow by 75% in the past two years, affecting positive cash flow generation from new and old projects. This reflects progress in the right direction towards self-sustainability and positive cash flows. These financial metrics not only encourage a strong execution, but also the increasing efficiency and scalability of our operations. In the past year, we won several important contracts in the U.S. and in Europe, and we're excited about the opportunities we see ahead. I'll go into more detail in a few minutes, moments, and we're proud of these municipal achievements. I want to take a moment here and thank our incredible team at Supercom for their hard work and dedication to making this all possible. Thank you. For those new to Supercom, our mission is to revolutionize the public safety sector across the globe with our proprietary electronic monitoring technology, data intelligence, and suite of complementary services. With over 35 years of experience since our founding in 1988, We've been a trusted partner to dozens of national governments worldwide, providing cutting-edge electronic and digital security solutions. Our strategic footprint is straightforward yet powerful. Lead with innovative technology, develop superior solutions, and expand our global presence and deliver outstanding service. The strategy is back to mind. A proprietary electronic monitoring technology which scores highly in competitive government tenders and supports various programs such as fast rest, GPS monitoring, rehabilitation services, domestic violence prevention, and more. Since 2018, Supercomics has delivered over 50 new multi-year government projects. A strong growing reputation as a premium provider of electronic monitoring solutions and services enhanced our market position with each new customer one. opportunity is crazy. With electronic marketing, market productivity is 2.1 billion by 2026. The U.S. and Europe constitute about 95% of these markets. These successes and opportunities have resulted in growing business pipeline and strong recurring revenues. In 2023, we continue to amplify our technology leadership by submitting to R&D investors, leading to launch and brand solutions that can protect and cure one. These offerings are already making paid money into various markets, including the U.S., and are pivotal to become market expansion. PeerProtect is a life-saving domestic violence monitoring solution. The solution provides improved protection to families suffering from domestic violence. The innovative solution addresses domestic violence issues and further enhances the company's portfolio of products and services. PeerOne is a model-in-one GPS tracking cable case monitoring solution that integrates comprehensively-owned circuit abilities into a single device. It is a menu of products that offers top-notch features, placing it above the competition in most metrics. These products also expand the company's dresser market, We've been very pleased with the reception and traction of our newest solution, but expect it to help facilitate the tolerant expansion of Super Comp into the U.S. market and further European countries. We fortified our operations restrictions to support our growth, but have re-found our self-managing practice and outreach approach. Our sales team with deep industry expertise has been instrumental in achieving new wins and turning points. We've now seen progress ways in the U.S. and Europe for mobile passwords. Supercops continue to displace incumbent vendors and achieve an over 65% win rate with European-consented vendors. Despite macroeconomic contingencies and the ongoing Israel-Gaza war, supercop solutions are becoming increasingly important. Factors that cover citizen rates and inflating costs of income increase make our solutions not only cost-effective but also essential for governments looking to enhance public safety and reduce costs. The company's first security technology solutions have been designed to address this trend, offering an effective way for institutions to enforce home confinement, ease prison overcrowding, and lower cost significantly. For example, the total daily cost for monitoring a site on home confinement, or GPS monitoring, is approximately $10.35, compared to a much higher cost of $100 to $140 at a correctional facility. Most importantly, home confinement has been shown to reduce recidivism, highlighting the effectiveness and helping offenders improve lives and communities. On top of these field drivers, we have witnessed the surge in adoption of protection solutions for the market, which allows for a strategic plan and the launch of a new product, PeerProtect. In the European market, Supercom has traded businesses over 10 countries, especially in new contracts, which are typically avoided through a competitive debtor process. Supercom launched a $3.6 million national EM project in Finland With the national government in Q1 2023, by May 2023, the Peer Security EMC was fully deployed in the system, covering all the M4C improvements, cost tracks, GPS, and in-game monitoring. In Q3 2023, we secured a new national program in which the government is deploying our domestic violence monitoring solution. The deployment of our Peer Security suite, which is a peer-protected, peer-trapped, peer-tied, and peer-monitored to demonstrate the versatility and effectiveness of our solution at its core to leadership and electronic monitoring space. Our collaboration with Finland is a sign of confidence in trying to have a super company. Those who have experience in service often choose to broaden their engagement with our solution. So if we start with one solution, there's ample opportunity to deploy developers as seen here. Notably, at the end of the company won the largest industry award of the year for national truck monitoring crisis in Romania, right at $33 million, including up to 15,000 monitor defendants per month for up to six years. In 2023, we announced orders valued at over $10 million for America's Ministry of Interior, further extending our engagement in the country's National EM Project. This article promises to reinforce the strength of the security suite and cement the position as a trusted partner of governments worldwide. We've also launched a domestic violence solution of the European Union, and have recently launched them in the USA. In Israel, there's an extension from the domestic violence project that the government has just passed, a law requiring domestic violence offenders to be monitored in technology such as ours. All of the Supercom already does business in multiple U.S. states. They're actively focused on further expanding its presence in the U.S. The company strategically prioritizes Pure One's expansion into new markets and geographies. It has already received high praise during its introduction into various regions in the U.S. Pure One has been successfully deployed and is actively utilized to monitor a lot of tenders. Moreover, sales activities for Pure One and community promising new markets outside Europe and North America. Our new strategic sales team in New Orleans has been the first asset to the company's U.S. market expansion strategy and have already been driving increased activity, visiting customers in New Orleans through demos and valuations of potential new ones. Our expansion in the U.S. market has been marked by another significant milestone with our security and new contracts in California through our subsidiary LCA. Since the launch of our Pure One solution in late 2023, we have already been secured Two new contracts in California and another contract in Canada to provide the solution. Introducing the Q1 solution was a game-changer in securing these contracts. The other scores are committed to competitive edge and commitment to delivering innovative and secure technology solutions. By securing these contracts, we further reinforce the position of American data. We view our capabilities as indicators of our growing influence and expansion potential in North America and both sides. As we mentioned before, we believe there is also an opportunity to get going with the U.S. growth through strategic acquisitions of local electronic monitoring service providers, which are potentially a customer base, in the respect of local markets. We constantly monitor the market for potential acquisitions that could generate significant value by immediately expanding market presence and providing vertical international synergies. Our acquisition for the dossier in 2016 for $3 million is a great example. This textile position has proven to be of great strategic value to over $30 million under Project Waste and has generated since then in California alone. I'll now turn to the financials. During our previous conference, Tom, I mentioned that we anticipated contributing to our financial results in S-Quarters as our ongoing projects matured. I'm delighted to share that we've sustained positive EBITDA in the last four years in total, 20 to 23, and seen remarkable operating improvements. As evident, our five-year record of EBITDA level this year, 2023, was $4.8 million. This is driven by a significant increase in revenue and long-term execution in corporate, optimizing, and prospecting. I'd also like to note that our annual revenue increased 51% to a five-year record, 26.6 million annual revenues, where IoT division being a primary growth engine. In perspective, while the global electronic monitoring market grows at approximately 11% per year, Supercom IoT revenues outpace global market growth by four or fivefold in each of the past two years. This growth is a testament to the fact that the market prefers our solution over the alternatives. Revenue from developed countries continues to increase. Revenue from European countries increased by 85% in 2023, reflecting the competition and completion of our transition plan to transform our business from less stable emerging countries to more stable and consistent developed countries. The following is a comparison between the financial results of fiscal year 2023 and fiscal year 2022. Gross profit increased by 50% to $10.2 million compared to $6.4 million, which is a direct outcome of revenue growth And the progress we've made across our projects, where margins have been enhanced, is projects in the short. We achieved a $485,000 decrease in total operating expenses, including other one-time expenses, through an operational optimization plan that was implemented gradually throughout 2023. R&D expenses amounted to $3.1 million. The decrease is $37,000 compared to the previous year, which indicates the maturation of a new technology launch and the optimization of the power structure. In addition, it says the market strength is around $2.2 million, a decrease of $4.6 million compared to the previous year. Moreover, the general and administrative strengths increased by $275,000, accommodating a managing team expansion in the U.S. as an increased focus in that region. The company had an operating loss of $3.3 million versus an operating loss of $6 million, resulting in a significant increase in gross profit and decreased operating expenses. The company's EBITDA improved by $2,350 million. percent to 4.8 million compared to 2.2 million, reflecting the benefits operating energy systems have had over the years deploying new IOT projects and continuing progress on the phases of our ongoing projects. This achievement underscores our focus on state growth and profitability. Our cap net loss improved to $4 million and our loss of $27.3 million. Our loss at a non-gap net profit improved by $5.5 million to be $2.2 million compared to $2.3 million loss in the former year. Positive non-GAAP EPS was moved to positive $0.47 compared to negative non-GAAP EPS of $0.61 in the former year period. Our cash and cash equivalents, and this is the cash balance, at the end of 2023 was $5.6 million. $4.5 million at the end of 2022. As noted, we continue to improve our operating cash flow significantly from an operating cash use of $9.4 million in 2021 to $4.7 million in 2022 and to only $2.4 million in 2023, increasing our cash needs by 75% in the past few years alone, affecting positive cash generation from new and old projects. New projects sometimes require cash to fund for manufacturing equipment, but they shift into cash flow profitability throughout the life of the project. Also, BASIC has completed a successful close with a $2.9 million profit offering to support the company's continued innovation and growth initiative. A testament to the investment community's trust in that vision and strategic strategy. In addition, the company had a one-time incentive of $2 million, mainly pertaining to the legacy business and allowing them to invest in that ecosystem. In closing, we're excited about the growth we're experiencing and about the growing demand for our products. After several years through which we transitioned, from our legacy business to the IT tracking of Fenner's business, we're happy to show the shift of rapid growth in revenue and profit. We believe that we're well positioned for continued growth by capitalizing on many opportunities in the forums. These are being driven by multiple factors, including our strong revenue reputations in the U.S. and European markets, the counter-psychical nature of the electronic monitoring industry, the growing public policy shift in monitoring instead of incarceration, and the growing adaptation of domestic finance and messaging solutions. We anticipate sustained growth by further expanding our market share in the U.S. and Europe. Our commitment to preserving our technological advantage and our robust growth foundation remains steadfast as we continue to invest in these areas and hope to continue to grow accordingly. With that, I'll turn the call over to the operator to open up for questions. Operator?

Thank you. Ladies and gentlemen, if you wish to ask a question on today's call, you will need to press star then the number one on your telephone. If you're using a speakerphone, please pick up your handset before entering your request and speaking on the call. If your question has been answered and you wish to withdraw your request, you may do so by pressing the pound key. One moment, please, while we poll for questions. Thank you. We have a question from Matthew Galenko with Maxim Group. Your line is live.

Hey, thanks for taking my question and congrats on a strong 2023. Thank you. I guess my first question is entering, you know, how does the pipeline look to you entering 2024 versus the pipeline entering 2023?

The pipeline still looks strong in the past year and this year. We have some projects that we've already bid on and some that were in late stages like presentation stages or contract negotiation stages. We have other projects that are in the pipeline as opportunities that we expect to bid on or potentially win throughout the coming year or two. Things still look strong and we've been executing well on Got it.

Okay. And I guess with the launch of the, you know, uh, single piece products in the U S and I guess North America, uh, I think that was second half of, of the 2023. How has the pipeline evolved in terms of geography? Is it, um, Is it kind of a stronger U.S. pipeline now than, you know, obviously I think than a year ago, but how meaningfully has that changed the composition of the pipeline?

So Europe, as you mentioned in the past, we continuously have been on national projects, and that would depend on the timelines of the different nations around Europe and the projects they have. So we were dependent in a way on their timelines and we were continuously bidding. We had a very high win rate of over 65%. This year, as we expanded more into the U.S., we're also looking at opportunities that are not necessarily at a large national level. We're also looking at counties and states. We're also looking at counties and states and resellers throughout the U.S. So the tech line in the U.S. is growing. The actual market in the U.S. is three times that of Europe, according to market estimates. And we're starting off with the smaller projects, just like we did in Europe. We started off with Latvia and Lithuania, which were $100,000 projects. And so they grew to projects like Finland and Denmark, which is $3 to $4 million, and Sweden of $7 million, and then Romania of $32 million. It's kind of like a ladder. You start smaller, you go to the track, because they're going to go to larger projects. In the U.S., we're still at the earlier stages. But the pipeline in the U.S. has certainly been growing since we started expanding our focus on the U.S. market, together with the Q1 product, which has already started being rolled out, and it's receiving very good feedback from customers.

Got it. Thanks. And last question for me, and I'll jump back in the queue. You mentioned the declining use of cash from operations over the last three years. I guess... The declining use of cash. Yes. Do you expect or can you point to a number on EBITDA maybe that you think gets you to break even? Like if 2023 was around 5 million EBITDA, you know, is it kind of linear and you just expect to be to be maybe closer to 7 million EBITDA to be at a break even cash from operations level? Or is it a little harder to pin down based on where you are in a project cycle? Yeah, it's a good question.

But actually, the EBITDA over time should reflect our cash use. So if I have $4.9 million EBITDA, that should certainly reflect the cash flow positivity. The reason why you see the gap between operational cash flows and EBITDA is mainly because of the timelines and the cash needs of projects. So some of these projects, we have to manufacture a lot of equipment, and then the cash comes in over the years. So that movement throughout the project is what creates this gap. But over time, things need to stabilize. And if we didn't have continuously newer and larger projects added on to our recurring revenue base, we wouldn't see this gap. So if things kind of stabilized on the same project for, for a while, you would see the capsules. So closer and closer to EBITDA. So it's hard to give you a specific number because it depends on, on where, but, um, but it is good to know that EBITDA does reflect, uh, in a way, uh, obviously for the past potential creation of the company. Got it.

Thank you.

Thank you. Once again, if you have any remaining questions or comments, please press the star key followed by one on your phone at this time. Okay. We currently have no further questions on the line at this time. So I will pass the call back to Mr. Trabelsi for any closing remarks. Oh, sorry. We have that. Oh, no. Do apologize, sir. Continue.

If we have any more questions, we can take them.

Okay. Yeah, we do have a question, sir, from Jay Giatoshi, who is an investor. Your line is live.

Yeah, hi. Congratulations again on a great quarter and a great year. Question around your intellectual property. I see that you're using AI. Is that something you could patent in order to prevent other competitors from entering your market?

Thanks, Jack. So we do have the company over a hundred different patterns and we've spent a lot of resources in the past on writing these patterns. Lately, we've been so busy on our growth and our expansion that we haven't stopped as much to start writing new patterns. Our AI capabilities do have unique applications to our specific market. And after we deploy them, we We see their effectiveness. It's something that we can consider if we want to utilize like we've done in the past patents.

Okay.

Thank you. Thank you. Once again, if you have any final questions, please indicate so now by pressing star 1 on your phone. Okay, I believe we have a question from Matthew Galenko. Again, Matthew, sir, your line is live.

Oh, sorry, I didn't have any follow-up questions.

Oh, apologies, sir. It was still on the line. Thank you. Okay, sir, we currently have no further questions at this time.

All right, I'd like to thank All of you participating in today's call, if you're interested in Supercom, we wish you a happy Passover. Please contact us directly if you have additional questions. We look forward to sharing our progress with you on our next conference calls, filings, and press releases. Thank you very much, and have a good day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.