Earnings Transcript for COMSW - Q1 Fiscal Year 2021

Operator: Good day and welcome to the COMSovereign Holding Corp. First Quarter 2021 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to the Director of Investor Relations, Steve Gersten. Please go ahead.

Steve Gersten: Thank you, operator. Good afternoon and welcome to COMSovereign's Holding Corp.'s 2021 First Quarter Earnings Call. My name is Steve Gersten, and I'm the Director of Investor Relations for COMSovereign. Joining us today is Dan Hodges, 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 but 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. Forward-looking statements are generally identifiable by the use of forward-looking terminologies such as believe, expects, may, looks to, will, should, plan, intend, on condition, target, see, potential, estimates, 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

Daniel Hodges: Thanks, Steve. Good afternoon, everyone. I'll try to get away from this robotic sounding items that have to be 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 sole 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 team, such as our CFO and CTO, who will address the financial and technical developments occurring in the business. For our commitment on this call, I'd like to run through the first quarter financials and then move in to updating you on some of the important developments in the business, which I believe are directly relevant to the value we are creating at COMSovereign. After that, I'm going to open the call up for questions. [Operator Instructions]. If you have any follow-up questions any time after this call, you can 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 and arrange 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 the 3 months ended March 31, 2021, total revenues were $2,086,452 compared with $2,485,204 for the 3 months ended March 31, 2020, is a decrease of $398,752. 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 2 public equity offerings was deployed towards the end of the period into areas such as inventory and production, and that had not yet reached AR, 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 acquisitions and increases in professional services, including accounting, legal and marketing as well as staffing levels across the organization, which are critical to support expected sales growth. Additionally, other expenses in the quarter amounted to $5,910,275 compared to $882,375 for the 3 months ended a year ago, March 31, 2020. This increase was largely due to the extinguishment of debt of $5,348,469, 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 in net proceeds in January and February. We deployed a portion of the proceeds to pay off a maturing debt and accrued interest that totaled $20.4 million, which also included more than $15 million in debt converted to equity as well as paying down other expenses that had accrued in the 2 years of organizational build-out in preparation. In addition to the payoff of debt and cash payments for accrued expenses, 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 an 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 140,000 square-foot Tucson production facility and 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 and augment our cash position with additional funds sourced 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 in net proceeds from the raise of the new growth capital in January and February and completed our uplist to NASDAQ. We expanded our top-notch leadership team with the appointments of

Operator: [Operator Instructions]. Our first question comes from [indiscernible].

Unidentified Analyst: I'm wondering if you can tell us when you anticipate your new manufacturing facility being 100% online?

Daniel Hodges: It will be fully up with radio manufacturing in late August. In the meantime, InduraPower, as I mentioned, is already up and producing batteries. Drone will be up in manufacturing in late June, early July. And if any shareholders, by the way, are in Tucson and would like to tour the facility sometime, just let us know, we'd love to have you.

Operator: Our next question comes from Jamie Halegoua with Delaware Street Capital.

Jamie Halegoua: Just wanted to - you kind of touched on this a little bit, but just wanted to dive a little deeper into the rip and replace initiative. Why haven't we seen any kind of material contracts for many of the Tier 1 guys?

Daniel Hodges: Good question. Good question. So while individual carriers are already moving to begin this replacement of Huawei gear, the U.S. government hasn't 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 rip and replace is in the 6 gigahertz frequencies, largely in Colorado and some in the Midwest. And we're well - very well positioned, both in that frequency range and in those areas. So likewise, other countries are also preparing to rip and replace the Huawei radios. We're seeing a significant interest from those network operators for our products, for example, in Latin America. As the opportunities mature, both in the United States and in markets like Mexico, I have no doubt, we'll see that business throughout this year, and be assured, we are quite active in this, and hopefully, we will be releasing news on that front very soon.

Jamie Halegoua: All right. And also, just a 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?

Daniel Hodges: In a word, yes. However - I mean, we've looked at open market purchases. We've consulted with our legal counsel regarding this. And there are just extensive black-out periods for officers and directors and what windows might be available. I can tell you, the desire is certainly there. And we - you may see some Form 3 or 4 filings for that purpose soon.

Operator: [Operator Instructions]. Our next question comes from Dallas Salazar with ATLAS Consulting.

Dallas Salazar: Dan, congrats on the solid operational performance made during the quarter. Yes, it looks like you highlighted in your prepared remarks about your progress made in the Sky Sapience and Drone divisions. Can you talk about the current border crisis and if that is a primary driver for interest in your drone products? And in terms of the near-term market opportunity, how should we think about that in terms of revenue opportunity?

Daniel Hodges: Yes, you bet. And I'm glad you asked because my excitement level is enormous on this. So the answer is a resounding yes, that the border 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 WASP units in use on the border. They call them the ADAPT units. We get positive feedback quite regularly on that. It is providing enormous support for them. The demand for long duration or what surveillance operators call persistent rapid deployable aerial monitoring is growing almost at a geometric rate there. So we believe that both the WASP and the Sky Sapience HoverMast platforms provide tremendous capability enhancements, especially with some of the newer payload systems, not just cameras and not just communications, but there are some other very unique systems that aid our border security. Notably, we sell now and are getting similar demand interest for both systems from customers for use outside of the United States as well. It's not just a U.S. issue. There are a lot of foreign customers in that same bailey way. I hope that answers your question.

Dallas Salazar: 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?

Daniel Hodges: It's both and more, the distance with which detection can be made, identification can be made and tracking and interception. You probably heard me before that the largest fentanyl capture yet to date was done, and our units were largely responsible for that interception. So they catch all sorts of illegal and nefarious activity on our borders.

Operator: Our next question comes from Graham Gordon [ph], Private Investor.

Daniel Hodges: Operator, I'm not hearing a question, if that's intended for me.

Unidentified Analyst: Will the company disclose backlog data? And if not, why?

Daniel Hodges: Good question. So I'm going to answer it this way. In telecom, a 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 WIP, which is work in progress, and of course, a 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.

Operator: [Operator Instructions]. Our next question comes from Michael Shah with Shah Capital.

Michael Shah: Dan, I have one question in two parts, if I may. The company has made a number of acquisitions. How is the integration going? And have the operational synergies been identified? And the second part related to that is, given all this integration and the - who's handling sales? And what does the sales organization look like?

Daniel Hodges: Okay. Well, that's 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 and synergies, they're integrating very, very well. As we noted in the CEO update, in most cases, the principals of our business units are now fully engaged, and they're multitasked with mutual responsibilities across all lines. So they're working quite well together. We've been actively eliminating redundancies, and the impact is going to show up as a lower overall G&A burden than perhaps our competitors have. As far as how sales is looking, we're fortunate to have quite a few channel partners assisting us with the sales load. So firms like RF Engineering, they expanded their distribution of DragonWave products quite a bit late last year. Future Tech is another, along with many other partners. This is in addition to our direct sales relationships with existing large customers. And our new business development EVP, Brian Kelly, he came on board through RVision acquisition. He's been working around the clock, making our sales and marketing team as robust and effective as they come. And we're actively looking to expand our professional sales force with the additional hires. And of course, our advisory Board, if you've been keeping up with that, and we have some new folks coming aboard as well, that's contributing greatly to our business development efforts. So don't discount that, and pay attention to that. I hope that answers your query.

Operator: Our next question comes from Brian Gutlin [ph] with Ignyte Assurance Platform.

Unidentified Analyst: I just wanted to hit on the CRADA agreement between NIST. So as you know, I'm sure, edge computing is being abstracted, everything is software-defined now, especially with telecommunications and 5G being a part of that coming down 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 that NIST brings besides maybe helping develop secure configurations and things like that and a time line to maybe measure success of the program?

Daniel Hodges: Yes. You bet, you bet. And I'm glad you asked that because it's been on my mind. There's several things that I don't think the investing publish - public or our shareholders really understand completely yet. And then I was hoping somebody would ask something about NIST. So the National Institute of Standards and Technology, or NIST, that is the standard setting organization in this country. Go to NIST, N-I-S-T.gov. So it's obviously a government organization. Look on the advanced communications link there. And as their name implies, they are the U.S. leader in research and standards, and they coordinate with all relevant parties in deploying advanced communications technologies. So us being chosen as the 5 equipment - 5G equipment provider for this project, which is targeted at the national first-responder network, that's quite an honor. You don't just get in, walk in and get this. We'll be working with the team at NIST to establish critical benchmarks for network connectivity, such as bandwidth, low latency and utilizing our 5G core and front-edge radios. So the NIST saw something in us, and then they invited us in and that - we are the company responding to this. This information is going to be used to define future ops requirements, for instance, for any hardware that'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, sometimes it's long, or how quickly their final report will be published. But I will tell you this, coming out as a validated technology from NIST is extremely, extremely significant. It sets you as a standard going forward. So I'm glad you asked that. I'm glad I got to comment on it. And I do encourage shareholders, please research NIST. You'll see what this really means for us.

Operator: [Operator Instructions]. It seems we have run into some technical difficulties. If you have any questions, please direct them to Steve Gersten. This concludes our question-and-answer session. I would like to turn the conference back over to Dan Hodges for any closing remarks.

Daniel Hodges: All right. 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. That's our promise. Finally, the last few comments I want to make is that we continue to execute on our overall strategy in a very disciplined fashion. It may not look like it from the outside, but I can assure you, with our management team, which is world-class, it is a very disciplined means of approaching this. The strategy is built around 3 core principles and that is

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.