SuperCom's Investor Presentation Webcast - January 2023 Sidoti Conference

Thanks, Greg. And thank you everyone for joining us today for SuperCom's corporate presentation and updates. My name is Ordan Trabelsi, CEO of the company. So SuperCom's been around since 1988 as a global provider of electronic security solutions to governments around the world. Our current focus is on offender electronic monitoring, what some of you might know as house arrest. And the industry has evolved interestingly since the beginning. I entered the role in early 2021 as a new CEO with some other management and lately we've had a very nice momentum after some years of decline. In 2021 we had a year of growth and so far this year we're seeing more accelerated growth. In Q3 we had 102% year-over-year growth. We won a $33 million project that we announced in September, the largest that was awarded in Europe this year for domestic violence in Romania. We invested over $30 million in our R&D and that technology is helping us, the Pure Security suite, to win and expand into more areas of the industry. Our revenues are mainly recurring with over 83%. We have a very nice track record of over 50 government customers around the world and insider ownership of 13% or so.

Our mission is to revolutionize public safety around the world through proprietary electronic monitoring technology, data intelligence, and complementary services. It all comes together for one holistic solution. And what are the challenges we're facing in criminal justice around the world? There are many, but if we highlight the main ones, it would be high recidivism rates, the rate at which people recommit crimes once they leave prison, which leads to prison overcrowding, excessive costs, and at the end, unsafe communities for all of us.

In the US, if we look, there's actually a pretty big problem with recidivism rate of over 75%. Within five years, people recommit crimes with a 76.6% likelihood. So, they come out of prison and, you know, it's sometimes hard for them to find a job. Their social ties or family ties have been disconnected and if you don't support them, they're likely to recommit crime. This leads to the highest prison population in the world. In the US, 0.7% of the people are incarcerated, which is 10 times more than Sweden and Denmark. Big problem and we're working to solve it.

Besides those problems, there's prison overcrowding. Over 100% capacity of the prisons, not just in the US, this also goes for many countries in Europe and other places in the world where people have to share a bed or fight for a place to sleep. And also excessive cost. So roughly $80 billion operating prisons in the US per year and that could be saved, over 90% could be saved if people were to go over to house arrest and those are just at the arrest cost. So if people are at home instead of sitting in prison and behind bars and looking at the wall, they can actually work. They can actually educate themselves. They can help raise children and help their loved ones. So the indirect costs are actually much larger.

The market itself is a niche market, a very interesting one expected to reach 1.6 billion in 2025 with very high barriers to entry. There's only 10 global players that we see continuously and you have to have 5 to 10 years of experience to even bid on a contract like this. So it's a barrier to entry in an industry that's growing and we've been actually growing much faster than the industry itself and we're great attrition and expanding our footprint.

Our technology developed in-house proprietarily, the Pure Security suite, which boasts, you know, the PureTag with the lightest weight in the industry, the longest battery life in the industry. It communicates seamlessly with a smartphone, PureTrack. You have other components like the PureCom and PureOne and you have software that runs on the cloud for management. You can manage the entire array of offenders, where they are, if they've done any violations, and this allows us to offer a whole variety of solutions starting from house arrest, which just means a person has to stay at home, to GPS monitoring, you allow them to leave the house but only to specific places and specific times to work.

Domestic violence, you know, which is something that we've been pushing for to eradicate domestic violence more and more throughout the world. The project we won in Romania is around domestic violence and we were able to use our tag and our unique communication with the smartphone to track the offender when they're actually close to the victim. So if someone, let's say, hits a family member, has domestic violence, that individual would have a bracelet on their leg and every time they come close to the other family members, their phones would alert and the police would have notification to send them right back into prison.

We do tracking of offenders in the prison itself. So inmate monitoring and alcohol monitoring as well for people who have DUIs and other offenses of the sort. And we also provide rehabilitation services. So someone comes out of prison, we don't just throw them back into the community. We help them find a job. We help them with anger management, with substance abuse, and that leads to, you know, safer communities. People are able to reintegrate back into them. All in all, we won over 50 different projects in the recent years with our technology and complementary services.

So, our solutions at the end do create a positive social impact and improves public safety around the world. We reduce recidivism rate in some places down 35%. We save lives, help eradicate domestic violence, increase public safety, and of course save significant government expenditures and reduce the incarcerated population.

We have industry-leading technology which helps us win these RFPs. We put our foot forward with technology and that's our strongest point. We invest over $30 million in this tech over the years and that leads to over 65% win rate in Europe. So we alone in Europe in these bids win more than the other nine players put together. We won 165, there are 35, and these bids in Europe where we have been competing and our technology is superior in many ways.

But some of the highlights are longer battery life. So if you're familiar with the old bracelet, the one you may have seen on TV, it's a heavy brick and you have to charge it every single day in the wall. If you don't charge it, the battery runs out and the program fails. So with our tag, you never have to charge it throughout the program. The batteries last for over a year. It's ultra lightweight. You have a next generation location which also incorporates Wi-Fi communication to track the person. So if they're in a city like Manhattan or a very urban area, we can track them on the ground. We track them in buildings. We do video calls and we have unique solutions and architectural designs like the one we described for domestic violence.

We've had some recent wins that are interesting. The project in Romania for $33 million up to 15,000 offenders. Until this project, our most recent project was around 1,500. So this is substantially bigger. We also launched the first project in Croatia for electronic monitoring. We won the third project in Sweden which makes it all of the Swedish projects we've already won till date for juvenile and we won a new project in California of a little over $4 million which is expected to start this year. Most of these projects have revenues which would add on to our existing recurring base of revenues. As they add on these projects into our base, we generate more growth just like you saw in Q3 of 2022 where we announced 100% growth year-over-year.

Traction in Europe has been good and we actually been climbing the ladder. We started with the smallest projects, Lithuania, Latvia, just to get our foot in the door. And then you go up to Denmark and Finland and lately Sweden with $7 million of Ministry of Justice. And we just announced Romania at $33 million. And that puts us in, you know, the field of the higher larger projects. And what's interesting is there's over $200 million of projects like that out right now for award. So we're bidding on them. We're in various stages of the bid cycle. And we think we are well positioned to potentially win more. We've had over 50 wins over the last years and as we grew in size the wins are becoming bigger and bigger. And with our revenues in 2021 being $12 million annually, each one of these is substantial.

In North America, we're still in the earlier stages of our expansion. We acquired a company in California back in 2016 and since then won $25 million in new projects in California. We're still working through resellers who aggregate a lot of these small counties because rather than working with the ministry of justice or ministry of interior in a nation in Europe, in the US a lot of time we work with small counties and the counties don't always have the same in-house sophistication to deal with all these different types of technology. So they work with resellers, value added resellers and they provide full service and they aggregate some counties like Sacramento and Stanislaus and Solano into one. So we're right now working with small counties and resellers.

The win rate is very high in Europe and we believe we'll do the same in the US as we get into larger projects. We've been expanding to some counties in Texas, Georgia, Wyoming, Tennessee and along this path we continue to expect growth also in the US which is actually a market which is substantially larger than the European market where we started.

Our growth strategy today is multiple. In Europe we're growing up the ladder very nice and we're winning more and larger projects. We expect to continue doing that. In the US where we want to expand into more counties and also start getting into the state levels, selling directly to agencies and resellers. There's sometimes interesting, you know, creative acquisition opportunities just like the company acquired in 2016. There's many different value resellers throughout the US and sometimes through an acquisition at a very good valuation we can enter into another region with more presence, improve the operating margins with our technology and also offer a better solution with our advanced tech.

We used to bid passively on these projects. Now in the last year or so we've been bidding more aggressively and been more actively outreaching to customers and that's helping drive our growth. And of course technology. We're expanding into new markets. So if historically it was house arrest, GPS tracking, we're opening up markets like domestic violence that have not been so prevalent before. Our technology allows a bracelet that communicates seamlessly with a smartphone. So we're able to within the market open new markets and show customers new ways that they can make changes to the criminal justice industry.

The projects are very long term. Sometimes it's a 5-year project then it goes to rebid to 10 years, 15 years, 20 years. Many of our customers have been with us for that long. The process is long, you know, it takes up to 24 months or even more for just a bid cycle and then you deploy for up to a year and then you're actually in the software as a service and SaaS stage where you're generating a lot of good cash flows and you have recurring revenue. So, it's a hard process to win, but once you're in, you could be there for a very long time. And we're actually able to breach into, you know, over 10 new countries in Europe with our technology and start, we already started winning rebids and hope to stay for many more.

There's been an interesting shift in our revenues. You look over the years until 2015, a lot of the business was identification. And we've shifted, we made a decision to shift from identification in developing countries such as in Africa and South America to tracking of offenders and public safety in developed countries and more the western world. And you see that the shift from revenues in identification went from nearly $28 million towards 1 to 2 million in the past year or so. And at the same time we grew our revenues in the public safety. In 2021 we had slight growth. Then in 2022 we're seeing more significant growth. And we hope the trajectory will continue as we add more projects on top.

So some interesting highlights that we talked about: the industry itself, niche, very interesting to be in, it's high barriers to entry. So you don't see a lot of new players. Most of the players we compete with we see all the time for years. Expected to reach 1.6 billion in 2025. We have been on a very nice trajectory with good momentum. We had 100% revenue growth year-over-year in Q3. We won a $33 million project in Romania together with a few other projects that we described in Sweden and in Croatia and in California. We have over 65% past win rate in Europe. And we're looking at over $200 million in upcoming bid opportunities in Europe that we think we're well positioned for. We had $25 million in past wins in California and $30 million that we invested in R&D which give us a continuously competitive edge. Our recurring revenue is significant with over 83% in recent years and a nice track record of over 50 project wins which allows us to win more and more projects. We have 13% insider ownership. Once in a while you see insider buying as well and that helps and, you know, our incentives are aligned with shareholders to create shareholder value.

Look at the financials. This is the last quarter, Q3 that was announced, cash return to cash of $3 million. You could see the revenues of 6.3. It doubled from the year before. And EBITDA positive of $400,000. You can see some adjustments, a lot of it from acquisitions we did in the past, our advertising or FX losses and financial expenditures. And that brings you up to positive EBITDA which we just returned to after a few quarters below the line.

Great. With that, I will open up the presentation to any questions, any Q&A.

Yes. Different from the past. SuperCom's been around for a long time since 1988. Our acquisition strategy today is mainly around companies that are in our industry. A lot of value added resellers in the US. We haven't acquired anything since 2016 actually any businesses, but we do sell to a lot of these value added resellers in the US and sometimes they offer us to potentially buy them. Now, what makes it interesting it depends usually on the valuation. We could expand ourselves into these different locations around the US as we've been doing. Sometimes when you acquire a company, it gives you a nice foothold and positioning in that region just like we saw in California. Look to buy it at creative valuations and less than one times revenues and if we see there's a good opportunity also to have cost synergies because we would provide them the equipment instead of where they get it from today, then it could be an interesting target. Could it be done in 2023? Yes. And also we'd be very fine if we don't have any acquisitions in 2023. We're growing organically and acquisition is just something that could complement the growth when the right opportunity presents itself.

So the American market is a little larger than Europe. Actually in Europe the technology is a little more sophisticated. We see they're looking for more cutting edge advances in technology in comparison to some of the counties that we're working with where they're okay taking the same technology from 5, 10, 15 years ago. We customized our technology at first to be more house arrest oriented which was more what they were looking for in Europe and now we are adding features mostly in the software to the US market. There was a type of hardware called the one-piece which essentially does not use a smartphone. Everything is just on one bracelet which some of the customers in the US asked for and we developed that and deployed it. It's called the PureOne. That was in the second half of 2022 and it's still new. But that kind of completes the suite for us so that in the US we could offer anything that is requested from a tech perspective and also in Europe. So we're well poised from a technology standpoint for the US and in terms of the actual projects you have to start small and grow in size. You know we're not yet at the, we haven't won big states yet in the US. So just like in Europe we started small and grew in size. That's what we're planning to do in the US.

We expect a lot of those, so some of them are already in late stage meaning we've already submitted a proposal for them and we're waiting for an award. It could have been, you know, there's a few that could have been awarded already but they haven't, the governments go through the process and they have their own timelines but the majority of the current opportunities should be awarded within, it could be in the coming weeks and months and it could be 12 months out but in the coming year. We expect to audit them unless they have changes internally but these processes could be anywhere between three months and 24 months the bid cycle in the process but we're already in the late stage of many of them so hope sooner than later.

We had to displace the incumbents in Europe. In many of these countries, in Sweden they were the pioneer of electronic monitoring in Europe early 24, 25 years ago. We had to displace them, to do the same thing in Denmark and many other countries. So when you're coming in to displace someone it's a little harder than being an incumbent. But still we won over, you know, I think it's 12 nations already in Europe that we were able to displace with our technology. What we do lose is when the customer decides that it's more comfortable for them to just stay with what they have and they don't want to learn a new system. They don't want the headache of dealing with it. Might be more cost-efficient for the existing player to offer a very low price because they already deployed everything there. So sometimes with aggressive pricing from the competition or the comfort of being the incumbent is when we don't win which is extremely natural. We still have the 65% win rate. A lot of it was smaller projects. We'll see how that will hold up for the larger ones as well, but we don't have to have such a high rate. You know, even winning a few of these large ones is extremely valuable for our company considering where our annual run rate was in 2021 with $12 million.

It's a good question and it depends what happens with the projects. The project won in Romania is a purchase not a lease. And when you have purchase projects, they're purchasing a lot of the components, a lot of the bracelets and a lot of the units and then the cash is a little better in terms of they'll pay you at each purchase rather than lease where you have to manufacture everything up front and then they pay you over time. So this project's actually good for cash flows and depends what other projects we win. So if we win a big leasing project that would be a little more burdening but right now we're doing pretty good with this project and it's helping us with cash flows and other projects are also in their, you know, cash generating stage. So it's still yet to be seen what happens with the rest but so far.

We don't share the amount total but with some projects, like this one's up to 15,000. Other projects are 1,000 or 1,500. The average in the US it's usually between 1,000 to 1,500 per unit per year for an offender that you're tracking per year. In Europe it could be actually more than that and also sometimes a little less. It depends if they're buying it or if they're leasing.

And the thing is the ARPU is better. But it's a little more cash heavy for the company. And when they're purchasing, you get the cash in a more favorable timeline, but the cost is a little lower. So we see it across the board. In Europe, it's either way. In the US, it's usually, you know, they'll pay three, four, $5 per unit per day, depends what they're doing. And if they want services as well, if you're also putting the bracelet on the offender and you're also writing the report and also talking to them, they could pay you $12 a day, $14 a day, $16 a day. So, we have 70 people in California and a lot of what they're doing is the services, you know, they're helping people rehabilitate. They're putting the bracelets on and we charge more for that. And if they want just the technology and the government officers want to do that themselves, then there's an appropriate price for that as well. Either way, what's important to note is as you have more bracelets in the same region, let's say in the US where you already have inventory management and you already have the support and you already have the language and the training done, the contribution margin is very high for every additional unit. Similarly in Romania, we started off with deployment. So there's a lot of deployment costs for it and hardware installation and training and as the project goes through, we'll have higher and higher margins with contribution of additional bracelets on the same infrastructure.

We can expand organically into the US market and we can also complement it with acquisitions. It just depends on speed, the pricing for them. We typically would be interested in more that under one times revenue. Of course, it depends the profitability. But when we look at the profitability margins of the businesses, then we apply our synergies from replacing their existing device manufacturers with our technology. We become very creative and very valuable opportunities. Again, has to be the right opportunity in the right location with the right teams. But there are a lot of opportunities out there and that's what we did in 2016. It was very valuable for us at the time because we needed also more presence and more of a track record. Now, you know, we have more presence globally and we have more experience in the US as well. But there's still good opportunities which could complement growth and generate good expansion and good presence.

Some competitors could do some things. We don't see as much comprehensive approach. Some competitors are good with alcohol monitoring. And the domestic violence for example, we don't see as much dynamic domestic violence like we have that the victim, that the offender, every time they go close to a victim, wherever it is, the victim is notified and the officer and essentially the police are notified. What they have is more of a static domestic violence. They have the bracelet, their old bracelet, and if they're close to the home, then it alerts. But if the family member, the female, let's say at the park or at the mall and the offender comes close, they don't have that as much. And even when they have these different programs, it depends how good they are doing the programs. How much did they update their technology to meet the needs of today? Developed something 15 years ago and it worked great then when they were just starting this kind of program. Today things are much different. When you're tracking in urban areas, it's very hard with GPS and cellular. You have to leverage the Wi-Fi networks. We use the Android operating system together with the Samsung phones which continuously come up with new versions every few months to always be front line with the latest advances in technology. So they're always utilizing all the best things that are out there for our solutions.

Good question. Depends who the customers are. Sometimes the counties, and if they don't have a chief information officer or chief security officer, they don't deal as much with the tech, they might not be as familiar with everything. They'll know that there's house arrest and they know the tracking and they know it helps with alternatives to incarceration. So let's say put these people on bracelets and track them but they want the different types of programs and different types of technologies and we'll educate them and we'll help them to understand what is best for their specific needs. When it's larger projects like the let's say the UK national project or the ICE project in the US or again even large states like Texas and California and Florida they're more well versed. They've been doing it for a long time. They've tried different technologies. They've seen different technologies. You know, and there's conferences that they'll go to and we'll go there as well and show them. So it's a little bit of a mix and we continuously try to adapt to the needs of the customer.

We're able to manufacture up to 10,000 units per day. This happened in COVID because a lot of the customers require quick release of people from prisons. So we changed our supply chains that's not dependent, we're not dependent on China. We could do a lot of it through Israel and reach a very high manufacturing rate but also adapt very quickly. We don't have to go all the way through China. We could do it in-house. We have some of it here in Italy and then through other manufacturing facilities in Israel. So we're able to adapt and provide different solutions of the same Pure Security suite to different customers. We have, you know, many customers right now running programs at the same time. And each one has different variations based on the requests and the specific needs that they want. In Sweden, they want the offenders that are to be tracked in the facilities and also that same offender to go home on the weekend sometimes and track them as well. So, the same technology tracks the inmates and they track them when they become offenders at house arrest, for example.

We do see that in some places as tailwinds. There's always a lot of different changes in the policies in the US in different counties and different states and, you know, there's the pre-trial and there's probation and there's sheriff and there's different programs and different layers of programs. But yeah, for example if they're releasing people without the cash bail and they do want to try to track them in some way and they ask us to put a bracelet or other players. If there's DUIs in California the second DUI they'll offer them alcohol monitoring, the attorneys will actually offer it to the judge. Let's put them on alcohol monitoring. Don't send them in prison yet. Look, they could be, you know, a good steward of society and they're going to be off alcohol for 60 days. So there's always new ideas and new things, but the industry more and more we see is going to alternatives to incarceration. One because the things we've talked about, this very high cost, prison overcrowding, and high recidivism rates but also the way to get people into society and make the community safer is actually to provide this full re-entry service not just put them in prison where they can learn how to become potentially better criminals and release them but also have the whole process through. So the alternatives are working well and in almost every region in the world where we see a program that started years ago the amount of units increases. So even California state they had a program back in 2004 I think there was 300 units or so now it's, you know, over 10,000 and in many other regions of the world we're seeing the same thing. So the industry is working well and we're happy to be in the industry and also take a better position with more faster expansion as the years go by.

Okay. Thanks, Greg. And thanks everyone for your time today. I hope you'll stay in touch and we'll see you soon. Bye.