Q1 2021 COMSovereign Holding Corp Earnings Call
[music].
Good day and welcome to the common Sovereign Holdings Corp, first quarter 2021 earnings Conference call. All participants will be on listen only mode should you need assistance. Please signal of asbestos.
Specialist by pressing the Sarky 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 the 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.
Kirsten. Please go ahead.
Thank you operator, good afternoon, and welcome to calm sovereigns, holding Corp's 2021 first quarter earnings call.
My name is Steve Gersten, and I'm, the director of Investor Relations for comp sovereign joining us today is Dan <unk>, 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 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.
We're looking statements of generally identifiable by the use of forward looking terminology such as believes expects may looks too will should plan intend on condition target see potential estimates for.
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 include but are not limited to the impact of the current COVID-19 nine.
<unk> 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, the United States and worldwide.
<unk> and the company's ability to recruit and retain management technical and sales personnel.
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.
Courage you to review our publicly filed documents, including our SEC filings news releases and website for more information about the company.
With that I'll turn the call over to Dan. Thank you Dan.
Thanks, Steve Good afternoon, everyone I'll try to get away from this robotic sounding.
Items that have to be the 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 sort of 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 teams such as our CFO and CTO, who will address the financial and technical developments occurring in the business per.
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 of come sovereign.
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 could 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 kind of 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 on a range of 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.
For the three months ended March 31, 2021, total revenues were 2.086 million 452, compared with $2 million and 485204 for the three months ended March 31, and 2020 the decrease of 398752.
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 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 the acquisitions and increases in professional services, including the accounting legal and marketing.
As well as staffing levels across the organization.
Which are critical to support expected sales growth. Additionally.
Additionally, other expenses in the quarter amounted to $5 million, 910275% compared to $882375 for the three months ended the year ago March 31 2020.
This increase was largely due to the extinguishment of debt of 5 million 300.
Third 48469, 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 of 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 of debt converted to equity as well as paying down the other expenses accrued in the two years of organizational build out and the preparation.
In addition to the payoff of debt and cash payments for accrued expenses cash.
Cash was used for the purchase of capital assets, such as the 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 in the 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 140000 square foot Tucson production facility.
Net 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 on augment our cash position with additional funds source 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 of net proceeds from the raise on the new growth capital in January and February and completed our uplift to Nasdaq.
We expanded our top notch leadership team with the appointments of Marty weight of 40 year banking veteran with management option finance experience to be our chief financial Officer and <unk>.
But paterson, who brings over 30 years of operational and engineering experience on wireless communications to be our chief operating officer.
Through our acquisition of our vision, we added Brian Kelly on it.
Accomplished very successful manager and sales of later as our EVP of business development.
During that first quarter, we significantly expanded our aerial platform business with the acquisition of Sky's sapiens.
As a standalone developer and manufacturer 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 of fiber optic tether system, enabling surveillance and complete <unk> and <unk> LTE networks among other demonstrated payloads to.
Together with our drone aviation unit, we can now provide customers with the full range of capabilities for communications and ISR.
Activity in our drone business is picking up especially in regards interest 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.
Of our skies sapiens hover matched 100.
To be held at our Tucson facility.
Net demo was given the law enforcement and officials from the department of Homeland Security and based upon on 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 for street military on 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.
<unk> technology also features AI, driven electro optics 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 undervaluation of our 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 on want to talk to his feedback we received from investors about of perceived lack of news regarding contracts now.
Now on 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 more simply the contracting process, which also continues to be impacted by COVID-19, which has had some effect on 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 on the government sector.
So what I can say is it several large telecom customers happen testing, our upgraded radio equipment and products in the field and their networks. This is normal it's a procedure that usually precedes the new customer placing orders.
So I want to point out that in our business historically customers place orders with us constantly meaning we get a lot of pose from the myriad of different customers.
This is positive in the most business cases, as you know because customer diversity greatly reduces concentration risk.
In terms of larger opportunities there are several orders, we believe R&D pending in both the United States on Latin America, specifically in Mexico right now.
And those are with tier one 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 of update in which I listed just a small sample drawn from the list of over 100 customers, we shipped products to over the past 45 days.
Including the likes of Comtech executive on Telecom General dynamics, Motorola Nextera of Rogers Media Saab T mobile and Wavecom just a few.
And 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.
And we are ramping those up.
The production curve is increasing monthly.
As I also noted in our CEO update it as this baseline production volume that allows us to now begin accepting higher 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 one network operators in the U S and international markets.
This is especially true of SaaS back.
Where demand is increasing faster than expected and the company now anticipate significant revenue of fast back for the remainder of 2021 in fact to meet this demand production that SMC our contract manufacturing partner per month per fastback is expected to be increased by over five times current levels. Starting next month in June.
Our.
<unk> product line increase for Dragon wave will come from our Nextgen common architecture radio platform called the Polaris G, One, which I will 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 ship 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 on our efforts to secure an immediate supply of core components, which together provides what we believe is adequate inventory for our planned production on into 2022.
And how the situation has impact of Dragon the way more than our other lines as some of the chips utilized in our existing harmony on harmony <unk> 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 Ibi 3000 radios and to produce those dragon wave.
I'm on the line radios Alan.
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 G. One 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.
The 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 <unk>, but.
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 Dragon way before we took it over and where sadly seeing that same to thinking and rationale on 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 com sovereigns is poised to deliver a multiple times revenue growth in 2021 over 2012.
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.
And battery drone and radio of production via our Tucson facility.
In our drone business, which includes the operations of drone aviation and Sky's sapiens.
We continue to see strong interest, especially in government and military markets. This is 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.
The ANZ has been refining and optimizing its for <unk>, LTE and <unk> radio systems, including development of its new <unk> and signal strength upgrades for its next generation Featherlight 2.0, and right products. It is also finishing up our.
<unk> edge computing and cloud solution.
While also launching multiple customer engagements and partnership ventures, including the recently announced <unk> Cooperative research and development agreement or creator.
Is 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 of reality.
At Enduro power production on the first generation of batteries is now underway in Tucson on lots of new line of design and testing work is being completed on the next generation units, we anticipate executing of significant OEM contract we've been working on for some time.
On interest in the capabilities of our AI driven battery management system for new applications is quite healthy.
Backstrom has been deep into the in band full duplex testing as previously mentioned.
<unk> <unk> and <unk> 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 <unk> band full duplex technology operable within our own equipment by year end and available for license royalty.
The other wireless develops developers globally by the first quarter of next year.
I can't stress enough how important this technology as an order for <unk> 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 on.
Operator.
We will now begin the question and answer session to ask the question you May Press Star then one on your phone.
If youre using a speakerphone, please pick up the handset before pressing the keys.
If at any time of your question that bad debt I mean, we'd like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble error there.
Our first question comes from the Larry column of.
All of the family Office. Please go ahead.
Hi, Dan and good afternoon.
I'm wondering if you can tell us when do you anticipate your new manufacturing facility being 100% online.
Hi, Larry good afternoon.
It will be fully up with radio manufacturing in late August.
Meantime, enduro powers, I mentioned is already up and producing batteries.
The drone will be up in manufacturing in late June early July.
And if any shareholders by the way are in Tucson, and we'd like to tour. The facility sometime just let us know loved the have you.
Thank you Dan.
You bet, thanks for asking.
Our next question comes from Jamie, Jamie how gala with Delaware shrink capital. Please go ahead.
Hi, Dan.
Just wanted to kind of.
Touched on this a little bit, but just wanted to dive a little deeper into the written replace initiatives.
Why haven't we seen any.
Kind of.
The material contracts for.
For many edge given one guys.
Good question good question so.
While individual carriers are already moving.
To begin this replacement of Huawei gear of the U S government Hasnt, yet released appreciable funds.
To allow that although the money is earmarked already.
It is important to note most of the existing hardware in the U S. On this written replaces and the six gigahertz frequencies largely on Colorado and some of the Midwest.
And we're well very well positioned both in that the frequency range and in those areas. So likewise other countries are also preparing to rip and replace the <unk>.
Huawei radios, we're seeing a significant interest from those network operators for our products for example on Latin America.
As the opportunities mature both in the United States and in markets like Mexico.
I have no doubt, we will see that business throughout this year.
Yes.
And be assured we are quite active in this and hopefully we will be releasing news on that front are very soon.
Alright.
And also just the second question I know you said only one but has the management or the board considered purchasing stock in the open market to give shareholders a little bit more confidence.
And of word yes.
However, I mean, we've looked at open market purchases, we consulted with our legal counsel regarding.
On this and Theyre, just extensive blackout periods for officers and directors.
And what windows might be available I can tell you the desire of certainly there.
<unk>.
You may see some form of three of four filings for that purpose.
On.
Alright, Thank you very much I'll step back into the queue.
Thank you.
Again, if you would like to ask the question. Please press Star then one.
Our next question comes from Dallas Salazar with Atlas consulting. Please go ahead.
Hey, Dan Congrats on the solid operational performance made during the quarter.
Thanks House.
Yeah. It looks like you highlighted in your prepared remarks about your progress made in the Sky sapiens on drone divisions can you talk about the current border crisis and if that is of primary driver for interesting your drone products and in terms of of the near term market opportunity. How should we think about that in terms of of revenue opportunity. Thank you.
Okay.
Yeah, you bet and I'm glad you asked.
Because my excitement level is enormous on this so the answer is the resounding, yes that the board of crisis is driving it.
And there is we're seeing bipartisan support for that and appropriations. So as you may or may not know.
We already have a number of aerostat waspy units and use on the border.
They called on the aid apt units, we get positive feedback quite regularly on that.
It is it is providing enormous support for them.
On the demand for long duration of what surveillance operators called persistent.
Rapid deployable area of monitoring is growing almost at a geometric rate. There. So we believe the both the wasp and the Sky sapiens upper mass platforms provide tremendous capability enhancements of especially with some of the newer payload systems not just cameras on not just communications with the or some other.
Very unique systems it.
Eight of our border security, notably, we sell now and are getting similar demand.
The interest for both systems from customers for use of outside of the United States as well.
Not just the U S issue there are a lot of.
Foreign customers in that same.
Bailiwick.
I hope that answers your question.
It does and just one follow up in terms of the border patrol are they using this to monitor drug traffic or is it human traffic or both thank you.
It's both and more.
The the distance with which detection can be made.
Identification can be made.
The tracking an interception.
You probably heard me before that the largest.
Sentinel.
Capture yet to date.
It was done in our units were largely responsible for that intersection so.
They they catch all sorts of of.
The legal and nefarious activity on our borders.
Got it great I will drop back into the queue. Thank you.
You bet.
Our next question comes from Graham Gordon Private Investor. Please go ahead.
The operator I'm not hearing the question if that's.
Intended for me.
Great Darren.
<unk>.
Hi, Dan.
Will the company disclose backlog data and if not why.
Hi, Chris.
Question.
So I'm going to answer it this way and telecom.
Our large backlog is not necessarily a good thing it means you're failing to deliver to customers on a timely basis. So.
I might suggest that a better metric is with which is work in progress and of course of validated pipeline hence.
We feel it might be counterproductive to focus on backlog, although we have a small one now.
But we have a better work in progress and a better validated pipeline, which means we are delivering and I don't intend to really highlight backlog going forward.
Got it thank you.
Again, if you would like to asking the question. Please press Star then one.
Out of your parking momentarily to assemble our roster please standby.
I thought it was going to get off easy.
Okay.
Our next question comes from Michael Shah with Shah Capital. Please go ahead.
Alright, good afternoon, and thanks for taking my question Dan I have one question in two parts if I may the.
The company has made a number of acquisitions how is the integration going and have the operational synergies have been identified and the second part related to that is given all of these integration and the handling who's handling sales on what is the sales organization look like.
Okay, well, that's a pretty broad, but I'm going to I'll give her a shot as far as your first questions about the acquisitions and how they're integrating.
On the synergies.
The integrating very very well as we noted in the CEO of update.
<unk> cases.
Principles of our business units are now fully engaged in their multi cast.
With mutual responsibilities across all lines.
So the working quite well together, we've been actively eliminating redundancies in.
And the impact is going to show up as the lower overall G&A burden than perhaps our competitors have.
As far as how sales is looking.
We are fortunate to have quite of few of channel partners assisting us with the sales load so firms like RF engineering there.
Expanded their distribution of Dragon weight products.
Quite a bit late next year future taxes, and the other along with many other partners.
This is in addition to our direct sales release and relationships with existing large customers.
And our new business development Edp, Brian Kelly.
He came on board through the our vision acquisition, the he's been working around the clock, making our sales and marketing team.
Bust and effective as they come and we're actively looking to expand our professional sales force.
The additional hires.
And of course, our advisory board, if you've been keeping up with that and we have some new folks coming on board as well that's.
That's contributing greatly to our business development efforts, so don't don't discount debt.
The attention of that.
I hope that answers.
That's great that's great. Thank you very much thank you.
Okay.
Our next question comes from Ryan.
Lynn.
Ignite.
Sharon platform. Please go ahead.
Hi, Dan. Thank you for taking my question, Sir just wanted to hit on the credit agreement between.
The next so as you know I'm sure edge computing as being abstracted everything software defined now, especially with telecommunications in <unk> being a part of that.
Coming on the pipeline.
It doesn't really solve the hardware modernization issue that's for another discussion, but I guess.
Can you provide more information on the value of that and this brings besides maybe help the develop secure configurations and things like that.
And the timelines maybe measure of success on the program. Thank you.
Yes, you bet your bad debt and I'm glad you asked that because it's been on my mind share.
Several things that I don't think the investing publish public or our shareholders really.
I understand completely yet.
Hoping somebody would ask something about mist.
The.
So the National Institute of standards and technology or NIST.
That is the standard setting organization in this country.
The go to NIST Nista Dot Gov. So it's obviously the government.
Organization look on the advanced Communications link there and as their name implies.
Are the U S leader in research and standards and the coordinate with all relevant parties and deploying advanced communications technologies.
US being chosen as the five equipment <unk> equipment provider for this project, which is targeted at the National first responder network, that's quite an honor.
Just on.
I'll, just get an walk in and get this.
We will be working with the team at net to establish critical benchmarks for network connectivity.
Such as bandwidth low latency and utilizing our <unk> core and furniture radios.
So the net saw something on US and then they invited us in on that and we are the company.
The responded to this this information is going to be used to define future ops requirements for instance for any hardware.
It's going to be purchased for use in the National first responder network.
I can't comment how long the testing will take sometimes it's short tons on much longer how quickly their final report will be published.
But I will tell you this.
Coming out as a validated.
Technology from this is extremely extremely significant it sets you as the standard going forward.
So I am glad you asked that I'm glad I got to comment on it and I do encourage shareholders. Please research and as you'll see what this really means for us.
Again, if you would like to ask a question. Please press Star then one.
Non entirely.
Two of sample error there.
It seems.
We have around interest and the technical difficulty.
He of any question.
Please direct Glenn.
Keith Grossman.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Dan Hansen for any closing remarks.
Alright, thanks, operator.
I do encourage you to if you have any other questions reach out to Steve.
We will answer every last one of them.
Our promise finally, the last a.
A few comments on want to make is that we continue to execute.
On our overall strategy in a very disciplined fashion.
It looked like it from the outside but I can assure you with our management team, which is the world class. It is a very disciplined means of approaching this.
The strategy is built around three core principles and that is number one we're building advanced end to end.
Telecommunications hardware and software solutions for carriers.
But network operators and governments and buy in the and we need solutions that span from the front of edge or the access point of the network.
The connects to the user cell phone to an Iot wireless unit.
And develops the elements of the smart city or a smart utility grid, all the way through to the data backhaul and internet connections in fiber.
This is critical to connect the estimated 29 billion devices globally.
Gonna be in use by the end of 2023.
We've got of connectors to wireless <unk>.
So number two we'll continue to build the portfolio of cutting edge technologies and IP, the differentiates our products and services in the market.
By developing industry, leading platforms script performance reliability and supporting the needs of today's advanced four G LTE networks.
And five <unk> networks that are forthcoming and number three we weren't of capitalize on the made in America opportunities through domestic product development manufacturing and.
And sale of cutting edge products and technologies.
We have a lot of things coming up in the coming days and weeks and please please stay attentive to those.
And I'd like to close the call by saying our team remains focused on wisely building.
Sovereign to assure.
We capitalize on both the top line and more importantly bottom line growth opportunities. We see ahead of us as the telecommunications industry on go undergoes this transition from 40 to five G.
And it's true this focus.
We will continue to produce value for all the stakeholders.
Customers partners employees and investors.
Again, I encourage you to remain incentives as more and more of our strategy and growth is going to emerge very quickly and it will become evident to you. So I want to thank everyone for joining us today.
Thank you have of Gregory.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.