SuperCom, Ltd.

Ladies and gentlemen, good morning and welcome to Supercom's second quarter 2024 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 one 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 Trabelsi, Supercom's President and Chief Executive Officer. I'd like to remind you that during this call, Supercom 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 20F, 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 GAAP 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, August 15, 2024. Except as required by law, Supercom disclaims any obligation 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 Trabelsi.

Thank you, Operator, and good morning, everyone, and thank you for joining us today. Earlier this morning, we issued a press release of our financial results for the second quarter of 2024. You can find a copy 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 highlights, strategies, and future results, followed by a Q&A session. The second quarter was an outstanding quarter for SuperColumn, marking our second consecutive period of remarkable net income growth, with a 183% increase quarter-over-quarter this time. We achieved a record-breaking high-year high in quarterly net income of $2.2 million, reflecting a $3.3 million year-to-year improvement. This is the second quarter in a row where we're breaking our record. Our cash flows from operating activity decreased by $5.3 million to a positive $2 million this quarter, year over year, reflecting the strength of our operational performance. We are thrilled with this outstanding performance and look forward to maintaining this momentum in the coming quarters. During this quarter, we executed in advance of various projects in our portfolio. and utilize operating leverage and prior investments in our proprietary technology to achieve a significant EBITDA increase of 83% year-over-year to $1.6 million this quarter. We're particularly proud to have successfully integrated the PureOne solution into multiple new markets during this period, reflecting our continued commitment to innovation and our ability to meet the evolving needs of our clients. This, along with other strategic initiatives, has positioned us to deliver sustained growth and profitability. For those new to SuperCon, our mission is to revolutionize the public safety sector worldwide with our proprietary electronic monitoring technology, data intelligence, and suite of complementary services. With over 36 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 blueprint is straightforward yet powerful. Lead with innovative technology. on proprietary technology monitoring technology, which scores highly in competitive government tenders and supports various programs, such as house arrest, GPS monitoring, rehabilitation services, domestic violence prevention, and more. Moreover, we've recently broadened our portfolio to include advanced AI-driven analytics, which are an integration in our electronic monitoring solutions. This addition enhances our ability to provide predictive insights and improved outcomes for our clients. We're developing superior solutions. Since 2018, we've secured over 50 new multi-year government projects with these solutions. We're expanding our global presence. Our strong growing reputation as a premium provider of electronic monitoring solutions and services enhances our market position with each new customer we're with. And we deliver outstanding service. Our strategic focus on the IoT tracking business in developed markets is where the opportunity is the greatest. With the electronic monitoring market projected to reach $2.3 billion by 2028, the U.S. and Europe constitute about 95% of these markets. We continue to amplify our technological leadership with significant R&D investments, leading to the launch of advanced solutions like Geoprotective Tier 1. These offerings are already making headway in various markets, including the U.S., and are pivotal in Supercom's expansion. PureProtect is a life-saving domestic violence monitoring solution, providing preventative measures to families suffering from domestic violence or stalking, thereby increasing their safety. PureOne is an all-in-one GPS tracking and cooperative monitoring solution, integrating comprehensive monitoring capabilities into a single device. Like many of our products, it offers top-notch features, placing it above the competition in most metrics. Our cloud-based software enables pure security product lines has been particularly effective in monitoring offenders and managing real-time information. This real-time advantage is a game changer, empowering authorities with actionable insights and timely intervention to mitigate potential risks and ensure public safety. These products have significantly expanded the company's addressable market. We've been very pleased with our reception and traction and expect them to help facilitate the accelerated expansion of Supercom into the US market and further into European countries. We fortified our operational infrastructure to support our growth and have revamped our sales strategy with a proactive outreach approach. Our sales team with deep industry expertise has been instrumental in achieving new wins and driving growth. Over the past month, we announced many new orders and projects in the US and Europe, Supercomic continuously displaced incumbent vendors and achieved over 65% win rates in European competitive tenders. In the European market, Supercomic secured several national tracking programs across Europe over the past two years, with bids and contracts at various stages of execution. Notably, the company's large-scale domestic violence offender tracking programs, like the one launched in Romania, have the potential to catalyze further uptake from existing European customers. As more European countries adopt these technologies, we anticipate a broader expansion of our solutions across the continent. In the European market, Supercom expanded its business into over 10 countries and secured significant new contracts, which are typically awarded through a competitive tender process. Besides winning new projects, we continue to execute and receive ongoing orders from our partners. Just about four weeks ago, we announced a receipt for new orders valued at over $2.9 million from European governments, totaling over $11 million in orders from European clients. Last year, we secured a national program with the Finnish government to deploy our domestic violence monitoring solution. The deployment of our peer security suite, consisting of PeerProtect, PeerTrack, PeerTag, and PeerMonitor, demonstrates the versatility and effectiveness of our solutions and underscores our leadership in the electronic monitoring space. Our collaboration with Finland is a prime example of the confidence that clients have in Supercom, as those who experience our services often choose to broaden their engagement with our diverse array of solutions. Notably, at the end of 2022, the company won the largest industry award of the year for a national electronic monitoring project in Romania, valued at $33 million, including up to 15,000 monitored offenders per month for up to six years. The project has been progressing smoothly and demonstrates substantial advancement, further extending our engagement in the country's national EM project. This large-scale project reinforces the strength of our true security suite and cements our position as a trusted partner for governments worldwide. We've also launched domestic buy-off solutions in other European regions and have recently launched them in the U.S. While the European market continues to grow, it's important to know that the U.S. market offers an even larger opportunity, bringing approximately three to four times the size of the European market. With the introduction of our PureOne electronic monitoring product, now available in the U.S., and the expansion of our domestic bio-extraction solution, we believe Supercom is well-positioned to unlock substantial growth potential in this untapped market. Although Supercom already does business in multiple U.S. states, we are actively focused on further expanding our presence in the U.S. Our wholly owned subsidiary, LCA, located in California, is actively expanding the size and scope of existing programs, winning rebates with existing customers and winning new programs with new customers. The company strategically prioritizes Pure One's expansion to new markets and geographies, but Pure One has already received high praise during its introduction to various regions of the USA, where it has been successfully deployed and actively utilized and monitored by the centers. Moreover, Sales activities for Pure One have commenced and promising new markets outside Europe and North America. Despite our longstanding presence in parts of California, the U.S. market remains largely untapped for us. Since we began investing in outbound sales efforts in 2022, we have secured wins in California, Idaho, Texas, Kentucky, and Wyoming, to name a few. The launch of Pure One in 2023, Coupole, with the positive feedback from initial deployments positioned us to accelerate market capture across the U.S., unlocking significant growth opportunities. Our new strategic sales team and new wins have been the first steps in executing the company's U.S. market expansion strategy, and have already driven increased activity with existing customers and multiple new demos, resulting in a significant increase in the company's pipeline. Launching our 301 solution In US markets in May 2022, it was a significant milestone in the US expansion strategy. Entering 2024, we've already announced three new projects in North America to provide the solution. Through LCA, we won a new project in California valued up to $2 million to provide a comprehensive jail-based program focusing on reentry services for adult inmates. The award was a result of winning a formal competitive process. Moreover, LCA secured a new contract in California with an established California services provider in the judicial sector. This contract is particularly notable for Supercom's successful displacement of long-time incumbent competitors. Finally, Supercom won a new project in Canada with a renowned Canadian industry partner in the tracking solution sector. This project expands its existing collaboration with this long-standing partner, transitioning from providing R&S-based technology to embracing new GPS technologies. As I mentioned earlier, introducing our pure one solutions game changer during these contracts. It underscores our competitive edge and commitment to delivering innovative and superior technology solutions. By securing these contracts and others, we leverage our technologies and our services and our track record experience to win our competitive tenders. And with securing these contracts, we further reinforce our position as a market leader. We view our recent wins as indicators of our growing influence and expansion potential in North America and worldwide. In conclusion on strategy, despite macroeconomic uncertainties and ongoing global challenges, including those in Israel, Supercom's solutions are being increasingly relevant. We continue to see growth driven by high recidivism rates, the escalating cost of incarceration, and the surge in the adoption of victim protection solutions worldwide. The company's peer securities technology solutions have been designed to address these trends. offering new effective ways for institutions to enforce home confinement, ease prison overcrowding, and lower costs significantly. For example, monitoring an offender on home confinement or GPS calls, about $10, $35 a day, which is 90% less than the $100 to $140 daily cost at a correctional facility. Moreover, home confinement helps reduce repeat offenses, highlighting its effectiveness in helping offenders improve their lives and communities. As we've mentioned in previous calls, we believe there is also an opportunity to enhance our U.S. growth through strategic acquisitions of local electronic monitoring services providers with a strong reputation and customer base in those local markets. We constantly monitor the market's potential acquisitions that generate significant value by immediately expanding market presence and providing vertical integration synergies. Our acquisition of LCA in 2016 for $3 million is a great example. The successful acquisition has proven to be of great strategic value throughout the over $35 million of new project wins it has generated since then in California alone. I'll now turn to the financials. During our previous conference call, I mentioned that we anticipated contributing to our financials results in the subsequent orders as our ongoing projects mature. I'm delighted to share that we've substantially improved our financial and operating results. Our gross margin improved by 20.4 percentage points to 49.6% year-over-year. Moreover, our operating income improved by $1 million, reaching $0.4 million, a significant year-to-year turnaround from an operating loss of $0.7 million, driven by the substantial rise in our gross profit. Our non-dapment income surged by 874% year-over-year to $3.3 million, reflecting the benefits operating leverage associated with higher revenues and continued progress in our IoT projects. This quarter's results highlight our ability to seize the high margin potential of our project portfolio through successful execution and progression in different stages of these projects, showcasing our focus on sustained growth and profitability. Our momentum is also evidenced by our improved cash flows from operating activities, which increased by $5.3 million year-over-year to $2 million in operating cash this quarter from negative $3.3 million in Q2 of last year. The following is a comparison between the financial results of the second quarter of 2024 and the second quarter of 2023. Gross profit increased by 65.2% to $3.7 million compared to $2.3 million, reflecting the progress we've maintained across our projects, where margins typically enhance as projects mature. Typically, initial project stages incur higher expenses, while advanced stages yield higher gross margins, causing fluctuations in our gross profit depending on project and revenue composition and deployment stages. As the project pipeline matures, we expect an upward trend in gross margins, based on our evolving project portfolio. As we deploy additional braces in regions where we run existing projects on our existing infrastructure, the contribution margins for each additional braces can be as high as 70% or more. We observed a slight increase in operating expenses this quarter, which balanced the increase in gross profit. These expenses are primarily aimed at supporting the future growth of our pipeline, maintaining our technological edge, and ensuring high levels of client satisfaction. We increased R&D expenses by $150,000 as we continue to develop and launch new features and improve existing products to meet the needs of the new existing client, ensuring that we remain at the forefront of innovation and technology leadership in our space. In addition, our sales and marketing expenses increased by $130,000 to support project wins in new territories and fields, such as domestic violence prevention. We plan to continue to invest in our sales and marketing as well as R&D to expand our global footprint and execute our business plan. EPS improved by $0.27 to positive $0.06 from a negative EPS of negative $0.21 in the former year. Companies EBITDA improved by 83% to $1.6 million this quarter compared to $0.9 million, reflecting the benefits of operating leverage associated with higher revenues, deploying new IOT projects and continued progress in the phases of our ongoing projects. This achievement underscores our focus on sustained growth and profitability. Our net income improved by $3.3 million to a new record profit of $2.2 million from a net loss of $1.1 million last year. And our non-GAAP net profit improved by $3 million to a $3.3 million profit this quarter from $0.3 million last year. Positive non-GAAP EPS improves a positive 9 cents compared to non-GAAP EPS of 7 cents last year. we've made considerable strides in reducing our long-term liabilities by $4.5 million year over year, which includes multiple exchanges with our creditors of debt to equity and negotiated premium prices of up to 100% premium to market price. Our operating cash flows improved by $5.2 million year over year, and our cash position grew by $4.1 million to $5.7 million quarter over quarter. Supported by a successful close of a $2.9 million public offering, as well as $2 million in positive operating cash flows this quarter. This marks our highest reported cash position in the past few years. We remain focused on reducing our need for external funding as we continue to win and execute new projects. These improvements further strengthen our financial foundation to support our ongoing growth initiative and strategic investment. In closing, I'd like to thank our global teams for the hard tireless work to achieve our company's record-setting performance once again. We've developed the right technology and products to help criminal justice system clients overcome challenges and make better use of the over $80 billion spent annually in the USA on operating rehabilitation centers and prisons. With research showing an approximately 75% recidivism rate in the USA, there's significant room for improvement when effective programs and technologies are deployed. We're excited about the growth we are experiencing and about the growing demand for our products. After several years through which we transitioned from our legacy business to the IoT tracking or vendors business, we're happy to show the shift in nice growth in revenue and profit. We believe that we're well positioned for continued expansion by capitalizing on the many new opportunities that lay before us. These are being driven by multiple factors, including our strong presence, reputation in the US and European markets, the counter-significant nature of the electronic monitoring industry, the growing public's policy shift to monitoring instead of incarceration, and the growing adaption of domestic violence prevention solutions. We anticipate sustained growth by expanding our market share in the US and Europe. A commitment to preserving our technology advantages and robust growth foundations remains steadfast as we continue to invest and the investment will support the expansion into more locations. With that, I'll turn the call over

to the operator to open for questions. Operator?