Supercom Ltd (NASDAQ:SPCB) Q1 2022 Earnings Conference Call May 12, 2022 8:30 AM ET
Ordan Trabelsi - President & CEO
Conference Call Participants
Ladies and gentlemen, good morning, and welcome to SuperCom's First Quarter 2022 Financial Results and Corporate Update Conference Call. [Operator Instructions].
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. 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. These statements are only predictions and SuperCom cannot guarantee that they will, in fact, occur. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, 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, its most directly comparable GAAP financial measure, please see the reconciliation table located on SuperCom's earnings press release. Reconciliations for other non-GAAP financial measures to their most directly comparable GAAP financial measure are available in there as well. The content of this call contains time-sensitive information that is accurate only as of today, May 12, 2022. 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, we issued a press release with financial results for the first quarter of 2022. A copy of which will be available on the Investor Relations section of our website. We did have our 2021 annual earnings call about 6 weeks ago only. We maintain our commitment to timely quarterly reporting, and today, I'll provide a brief update on recent business highlights and strategy followed by a Q&A session.
We actually just secured another contract in the U.S., a second one in the state of Idaho, and a PR with more details will be released. With every quarter that passes, we get further along and capitalize on the transition from the legacy business to our new focus with IoT tracking business, serving public safety government customers in developed countries. While going through this process, we managed to demonstrate stable performance and are poised for the future growth of our IoT division. Last year, for the first time in 5 years, we achieved growth in annual revenues. And in this quarter as well, we were able to offset the decline from the legacy business with growth in the IoT business.
We continue to enhance our operational infrastructure, strengthen our workforce and maintain technology leadership. In addition, we honed our business plan and raised the needed financial resources to support during the time of volatility and uncertainty in the capital markets. With our SuperCom's 33-year history since its founding in 1988 and has always been a trusted partner providing cutting-edge electronic and digital security solution to dozens of governments worldwide. In recent years, we've become more and more aware of the immense challenges that nations worldwide face in dealing with their offender population. We have leveraged our technology, expertise and government security and excellent team towards our current focus in the public safety sector.
As part of our mission, we strive to revolutionize the public safety sector worldwide through proprietary electronic monitoring technology, data intelligence and complementary services. Many governments around the globe are facing severe challenges when dealing with our offender population. Firstly, many countries suffer from high recidivism rates where persons after finishing their sentence relapse more criminal behavior. This clouds the criminal justice system. For example, in the U.S., within a few years that they're released, 3 out of every 4 former prisoners are rearrested. Lower recidivism rates benefit society by reducing prison population, saving taxpayer's dollars and most pertinently, improving public safety in our communities.
Secondly, prisoner crowding is one of the key contributor factors to poor prison conditions worldwide. Prisons in over 118 countries exceeded their maximum occupancy rate. It is also arguably the most significant problem prisons are facing, resulting in prisoners sleeping shifts on top of each other or sharing the beds. Thirdly, in 2020, about $80 billion were spent in the U.S. to keep roughly 2.3 million people behind bars, meaning that nearly 1% of the entire U.S. population is incarcerated at any given time. Beyond that, it's a size of cost in incarceration, loss earnings, adverse health effect and more are estimated at 3x as direct cost.
Unfortunately, these issues aren't unique to the U.S. and are prevailing globally. It is clear that prisons are far from ideal for solving difficult challenges. SuperCom provides top-notch solutions to solve these challenges effectively using our technology and complementary services. Our PureSecurity technology solutions provide an effective way for institutions to enforce home confinement while easing overcrowded prisons. In addition, it allows them to reduce associated costs of housing an inmate significantly. For example, the total daily cost for monitoring an offender on home confinement through GPS monitoring is approximately $10 to $35, substantially lower than the $100 to $140 of a cost of a daily offender in correctional facilities. Most importantly, home confinement has been shown to reduce recidivism, highlighting its effectiveness in helping offenders improve their lives and making communities safer. We see a global trend of governments turning to innovative solutions rather than incarceration to ensure public safety. Offender's electronic monitoring is becoming more and more in demand as it solves most of the mentioned challenges. The electronic monitoring market was valued at about $1.1 billion in 2020 and is estimated to reach $1.6 billion by 2025. The U.S. and Europe constitute about 95% of this market. With the strong price and certification in both markets, we are well positioned for continued growth and capitalizing on new opportunities. In Europe, we have recently seen an uplift in RCF activity with over $200 million in expected upcoming bid opportunities in the next 18 months. In parallel, we continue to score well on competitive tenders. For example, we recently announced that we launched Croatia's first full-scale electronic monitoring project, and we'll deploy our PureSecurity Electronic Monitoring Suite. The project was formally awarded earlier this year in a formal bid process by Croatia's Ministry of Justice and Administration. The projects launched followed by the successful completion of the government approval process and contract institution. This project increases our hold in the European market and comes after a consistent streak of wins in this market, displacing incumbent vendors time after time with an over 65% win rate in competitive RFP in Europe.
In the U.S., we announced that our fully owned subsidiary, Leaders in Community Alternatives, launch projects that at up to over $5 million over 5 years to provide various programming and rehabilitation services. In addition, we secured contracts in 3 new states: Texas, Idaho and Wyoming for the PureTrack GPS tracking platform serving adult and human, thus further expanding our footprint in the U.S. We actually just secured an additional contract in Idaho based on a good referral from our first customer in the state. Our recent announcement of new contracts in Europe and the U.S. are compelling examples of our successful business plan execution within a vertical in which we have a strong presence and an excellent reputation.
Our success in winning these projects is a function of 2 main factors. We attribute our wins mainly to our proprietary technology, which scores very highly in the competitive RFPs and our strong reputation recognition as a premier provider of electronic monitoring technology and services. Our electronic monitoring technology supports various programs such as house arrest, GPS monitoring, rehabilitation services and more and has won over 40 multiyear government projects since 2018 alone. Also, our strategic focus shifted from our legacy business with onetime project revenues in Africa and South America to focus on our IoT business with recurring revenues from developed countries.
However, we see more and more RFPs and procurement activity from our potential government IoT customers. In addition, we acquired an electronic monitoring and criminal justice business in 2016 named LCA, headquartered in Oakland, California, with a strong presence in the state since 1991. Through this acquisition and integration, the large references, relationships and experience we inherited in California have allowed us to enter the region with our new technologies and capabilities effectively unleash valuable synergies and generate a continuous stream of new multiyear recurring revenue project. Since this acquisition, we have won over $25 million worth of new projects in California.
We are well positioned for growth into more locations and larger projects. We have strengthened the company's global sales division, recruiting a new VP of Sales and Sales Managers with industry experience and a shift from passive bidding to an active outreach sales set strategy. Moreover, we continue to invest in our R&D division, including a new VP of R&D and experienced engineers, product managers, quality assurance, and support personnel to serve the growing government customer needs for leading state-of-the-art technology in the space. The investment we have made thus far have been driving increased activity and existing with existing customers and numerous new demos and evaluations with potential new ones. We operate in each market with customers know each other and having a solid reputation is an essential factor in the business on selecting the vendor.
The new wins, combined with our improved sales teams, are the first step in executing the company's U.S. market strategy. We also consider a strategic acquisition of resellers in key locations as part of our growth plan. Our strategy in this has been to build amazing technology, expand our presence and deliver outstanding services. Each customer win, each project deployed further strengthened our reputation, making us even more competitive. We have further progressed in each of these elements and achieve recognition for such by awards from existing customers and new one -- in this region and the new.
Our strategy has always been to lead the technology, as mentioned, and entering 2022, we continue to invest in research and development to ensure our products remain the most competitive in the market. Our reputation in the industry regarding our IoT solutions continue to be stellar due to these investments and is evidence that these efforts are paying off. We continue to introduce new features and new technologies into our provisory platform, extending our lead in the market space. And our R&D teams continue to innovate and disrupt the status quo, whether there's new features and biometric capabilities, battery life, communication capability or entirely new solutions for domestic violent, alcohol monitoring and smartphone electronic monitoring within dense hard-to-monitor urban areas and subways.
We believe there's opportunity to enhance our growth in the U.S. to the future acquisition of local electronic monitoring service providers, who have developed a strong reputation and a customer base in their respective and local communities. We constantly monitor the market potential acquisitions that could generate significant value by immediately expanding market presence and providing vertical integration synergies. An example of this strategies reflected to a $3 million acquisition of LCA back in 2016 and the amend strategic value and new project win that has provided us.
Moving over to financial discussion. As mentioned, in our previous earnings call and apparent now, the company has invested in its financial reporting resources and returned to timely quarterly reporting. This quarter, we've also acted to strengthen our balance sheet on March 1, 2022, raised approximately $4.65 million gross proceeds in a registered direct offering with a similar credit institutional investor, providing us additional capital to execute on their business plan.
Revenue in the first quarter of 2022 was approximately $3 million. Once again, our IoT division grew faster than the decrease in the legacy identification business, and we continue to progress with the transition in the legacy business to the IoT transmit business. When comparing Q1 '22 results with last year corresponding period, we see gross margin of 42.3% compared to 55.3%, also reflecting traditional costs associated with the deployment of new IoT projects ahead of the current revenue streams to come. We increased our research and development spending by $300,000 quarterly. Working on developing new products keeping us at the cutting edge of innovation and technology leadership in the space.
Our sales and marketing expenses increased by $300,000 to support the company's new proactive growth strategy. In general, administrative expenses exceed $400,000 [indiscernible] management team. The company had an operating loss of $1.5 million versus an operating loss of $200,000 and an EBITDA of $200,000 -- negative $200,000 compared to a positive $600,000 in the previous period, reflecting an increase of investment in R&D by 30% and an increase of 90% in sales and marketing. Our cash and restricted cash balance at the end of Q1 was around $6.6 billion. We will continue to invest in our sales and marketing as well as R&D to drive revenue growth, expand our global footprint and execute on our business line.
And with that, I'll turn the call over to the operator and open the call for questions. Operator?
I want to thank you all for participating in today's call and for your interest in SuperCom. We look forward to sharing our progress on our next conference call, filings and press releases. Thank you, and have a good day.