Safe-T Group Ltd. (SFET)
Q4 2022 Earnings Conference Call
August 31, 2022 8:30 am ET
Corporate Participants
Steve Gersten - Director of Investor Relations
Shachar Daniel - Chief Executive Officer
Shai Avnit - Chief Financial Officer
Conference Call Participants
Jason Kolbert - Dawson James
Brian Kinstlinger - Alliance Global Partners
Presentation
Operator
Greetings and welcome to the Safe-T Group Limited Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Steve Gersten, Director of Investor Relations for Safe-T Group. Thank you. You may begin.
Steve Gersten
Thank you, Melissa. Good morning, ladies and gentlemen. Welcome to the Safe-T Group’s second quarter of 2022 earnings results conference call. I’m Steve Gersten, Director of Investor Relations for Safe-T Group.
Before we get started, I will read a disclaimer about forward-looking statements. This conference may contain, in addition to historical information, forward-looking statements within the meaning of the Federal Securities Laws regarding Safe-T Group. Forward-looking statements include information about plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are different than historical fact. These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may cause actual outcomes to differ materially from expectations reflected in these forward-looking statements.
Potential risks and uncertainties include those discussed under the heading Risk Factors in Safe-T's Annual Report filed with the Securities and Exchange Commission, on March 29, 2022, and in any subsequent filings with the SEC. All such forward-looking statements whether written or oral, made on behalf of the company are expressly qualified by these cautionary statements, and such forward-looking statements are subject to risks and uncertainties, and we caution you not to place undue reliance on these.
At this time, I'd like to turn the call over to Shachar Daniel, the company's CEO. Go ahead, Shachar.
Shachar Daniel
Thank you very much, Steve, and welcome everyone to today's 2022 second quarter corporate update conference call for Safe-T Group. With me Shai Avnit, our CFO.
I'm very proud to share our great financial results and our tremendous recent business development. The last quarter is another milestone in the execution of Safe-Ts long-term strategies. At the beginning of 2019, after we concluded 2018 with revenues of $1.4 million, we initiated a new acquisition strategy in order to strengthen and expand our product portfolio.
Today, probably, three years after the launch of our new test, we can say that one, we are at defense rates that is almost 20 times higher than in 2019. Second, we move to a recurring subscription-based revenue model, which means that our revenues are more predictable, and that the company will benefit from this revenues over the coming years. Third, the company's losses in the last two years were mostly due to IP-related litigation expenses, as well as the investment in fiber for enterprise. We managed both issues efficiently by reaching a final settlement with respect to the IP-related dispute and transferring the cost of fiber for enterprise for business partner. As a result, you are now witnessing a decrease in our loss and the rate that will continue to improve and accelerate in the coming quarters.
Fourth, furthermore driving much of the company's losses, our investment and not losses, expenses in acquiring customers that will bear fruit in phases in the coming years. Fifth, the company's business model, our talented team, and the growth over recent quarters allowed us to bring on board strategic funding that will allow us to continually grow our business.
Looking forward, we remain firmly focused on our cost reduction plan, improving the efficiency of the business and together with our new products and investments into our customers positioned for progress. We expect to not only drive significant additional revenue growth but deliver improved financial performance in the months ahead.
The second quarter of 2022 was highlighted by the achievement of federal operation milestones in our mission to continue our growth. In the first half of 2022, we delivered record revenues of 8.8 million, an increase of 181% and $4.8 million in the second quarter, an increase of 168%. This increase in revenues is attributed mainly to our consumer business that was supported by our privacy business for enterprises.
Our enterprise privacy business unit NetNut reached breakeven, excluding non-continuously the legal expenses related to the patent litigation, which was dismissed following our settlement. Since we acquired NetNut, it has achieved rapid growth in revenues started at $800,000 in 2017, to 5.3 million in 2021, and reached $3.6 million in the first half of 2022. It is our intention to implement some of the successful elements for network acquisition into our working plan for our consumer privacy and cybersecurity business.
As mentioned earlier, in May 2022 we announced the dismissal of patent litigation against NetNut which was resolved by settlement. As a result, we expect a substantial reduction in general and administration costing NetNut, which will be reflected also on a consolidated basis. We achieved a reduction of our net loss by 33% in the second quarter of the year, compared to the first quarter of 2022. This cost reduction is expected to accelerate in the third quarter of 2022.
During May and August, we secured a $2 million in non-dilutive credit line from a leading Israeli bank and a strategic financing of up to $4 million. This strategic financing includes potential future funding, which would be priced at a premium valuation for the company. We are extremely proud to have a secured those additional funding through creative financing mitigation initiatives that support the company's growth without impacting our shareholders the current market valuation.
The recent initiatives, which can add more than $5 million to our working capital, are not reflected yet in our current cash resources, as this reflects the status for the period ending June 30 and will enable us to facilitate our continued growth. We plan to allocate these funds to support our customers position program, customers in our business are our main assets, and investment in user acquisition price translate into future high margin accounting revenues. As we discussed in the past, our model estimates, revenue for each acquired customer for the duration of their lifetime LTV period. Under this lens, a significant portion of our sales and marketing expenses reflected in our P&L is simply our investment in acquiring users, which we believe that according to our model with what will translate into more predictable future revenue streams.
We started our investment in customer acquisition in the second half of last year. And we successfully generated the growing future revenue stream from subscribers these customers and will be an important asset to be a driver of value for Safe-T and the shareholders. After several months of investing in the sales and marketing to acquire a current customer base for our first consumer products, we are confident in the sales and marketing efficiency of our acquisition program and its ability to attract profitable subscribers.
Our privacy solution for consumers includes 1000s of paying users that utilize our products today. These solutions are keeping online users information private and secure, and in an encrypted, secure layer for online privacy. Over the past few months, we substantially expanded our reach by launching solutions that support a leading operating system in the world. Building upon the strong revenue foundation produced by our initial customer Apple iOS product. We started the expansion of our portfolio which will drive additional future growth. This effort began with the launch of Ad Blocker Pro an anti malvertising which is malicious advertising solution for Apple iOS devices earlier this year.
In July, we launched our first consumer privacy solution for Microsoft Windows. The new desktop privacy solution prevent the user personal data, online activity and history from being accessed or monitored by Internet service providers, advertisers, and third parties. Our latest release was the introduction of our consumer privacy solution for Android mobile devices, including smartphones and tablets.
Then utilizing advanced encryption technologies, this new privacy solution prevent the use of personal data from being accessed or monitored. By blocking the ability to track or monitor users online activity and history, personal information remains private. Importantly, this new products across multiple untapped platforms will generate additional revenue streams for the company. It is our intention to continue developing and launching new and advanced, easy to use privacy and cybersecurity tools to help protect consumers no matter which platform or operating system they use.
As for our enterprise cybersecurity solution, we continue to preserve our position in the market through our strategic collaboration with Verizon on sales and development of our ZoneZero Zero Trust Network Access Software. We believe these steps will allow us to maintain the value of our IP and are doing in sales while enjoying a reduction in expenses, which are just now starting to positively impact our operating results. But before going further, I would like to turn the call over to Shai to discuss the financials for the quarter. Shai?
Shai Avnit
Thank you, Shachar. I will summarize our second quarter of 2022 financial results, which are compared to our second quarter 2021 results unless otherwise stated. All figures in the summary were rounded up for simplicity.
Revenue for the second quarter of 2022 totaled $4.8 million and revenue for the first six months ended June 30, 2022 was $8.8 million. This compared to revenues of $1.7 million and $3.1 million, respectively, for the equivalent periods in 2021. The increase in revenues is due to the consolidation of CyberTech’s revenues following the completion of its acquisition on July 4 2021, and a steady increase in enterprise privacy business revenues.
Gross profit for the second quarter of 2022 was $2.6 million, compared to a gross profit for the corresponding period in 2021 of $0.8 million only. The increase in gross profit was primarily driven by the increased revenues. Gross profit for the first half of 2022 was $4.7 million, compared to a gross profit for the corresponding period in 2021 of $1.2 million.
Research and Development expenses for the second quarter totaled $0.9 million, compared to $0.8 million in the second quarter of 2021. Research and Development expenses for the first half of 2022, totaled $2.3 million, compared to $1.5 million in H1 2021, the increases attributed to the consolidation of CyberTech features and development expenses, and the development of new products were partially offset by a reduction in the research and development expenses of the enterprise security segment due to the agreement with Verizon.
Total marketing expenses for the second quarter of 2022 amounted to $2.6 million in compared to $1.3 million in the second quarter of 2021 and $5.7 million for the first six months of 2022 compared to $2.4 million in the first six months of 2021. The increases are mainly attributed to the consolidation of CyberTech sales and marketing expenses. Primarily its major costs, and they were partially offset by a reduction in the certain marketing expenses of the enterprise security segment, due to the agreement with Verizon.
General and administrative expenses totaled $2 million and $4.2 million. For Q2 2022 and the first half of 2022 respectively and compared to $1.5 million and $2.6 million in their respective periods for 2021. The increases are mainly due to higher professional fees, predominantly legal in connection with NetNuts patent related proceedings, which were resolved by settlement on May 17, 2022.
IFRS net loss for the second quarter of 2022 totaled $3.2 million or $0.10 basic loss per ordinary share compared to net loss of $2.4 million or $0.09 basic loss per ordinary share for the second quarter of 2022. For the first six months of 2022, IFRS net loss totaled $7.9 million or $0.26 basic loss per ordinary share compared to a net loss of $4.9 million or $0.20 basic loss per ordinary share in the first six months of 2021.
Non-IFRS net loss, we use non-IFRS net loss measures, which reconcile the effect of some non-cash expenses or income and certain other expenses as we believe it reflects better the performance of our business. Non-IFRS net loss for the second quarter of 2022 totaled $2.5 million, or $0.08 basic loss per ordinary share, compared to a loss of $2.2 million, or $0.08 basic loss per ordinary share in the same period for 2021.
For the first six months of 2022, non-IFRS net loss totaled $5.9 million, or $0.19 basic loss per ordinary share, compared to a net loss of $4.2 million or $0.17 basic loss per ordinary share in the first six months of 2021. Company's cash and cash equivalents for the six months ended June 30, 2022, totaled more than $4 million, compared to $3.8 million as of December 31, 2021. This company's cash balance does not account for up to additional $5.6 million in future funds under its recently secured credit facility and investment financing.
As of June 2022 shareholders equity totaled $17.3 million or approximately $0.57 per outstanding American Depository shares compared to shareholders equity of $24.2 million on December 31, 2021. The reduction is mainly due to the company's operating loss during the period December 31, 2021 through June 30, 2022.
Lastly, I wanted to touch base upon our share count as it stands today. On an outstanding basis, we have around 32.6 million ordinary shares or ADSs on a fully diluted basis, we currently have around 48 million shares or ADSs outstanding
With that, I will turn the call back over to Shachar.
Shachar Daniel
Thanks, Shai.
In summary, during the second quarter of this year, we made considerable progress towards implementation of our strategy. We delivered on our goal to present continued significant growth and expand our position in the consumer business. Looking ahead, we have a well-defined roadmap for execution, innovative technology, and established expansion plans and most importantly, the funds to support it well into 2023. We plan to continue investing in each of our segments encourage further growth, as well as to explore potential integration and migration of our existing technology throughout our business.
With that, I would like to open the call for any question you have. Operator, please go ahead.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Jason Kolbert with Dawson James. Please proceed with your question.
Jason Kolbert
Good morning guys. Congratulations on the quarter just wanted to understand a couple of things. Where was the greatest growth? And how much growth was organic versus inorganic? And what also, can you just repeat, what was the outstanding common share count? I got the fully diluted number at approximately 48 million, what was the common number you're using?
Shachar Daniel
Okay, Jason, thanks. So I will start from the organic and non-organic. So basically, I think the most important information if you can take a look only one part of it and see the organic growth quarter-over-quarter, one quarter back, two quarter and three quarters back, okay? So basically, most of our growth, not most, all of our growth in the last three quarters is organically besides that, if you go back and you can see that we only in our cyber secure now privacy for consumer for enterprises, which is basically the organic goals, because in the previous quarter last year, we didn't have yet the consumer. Only for the first quarter, we can see also a two digit organic growth. So meaning we are growing organically and un-organically, if you compare it to last year compared to the previous and the previous quarter, et cetera.
Regarding the shares, so we have a total of 48 and floating of 32 million shares if this will be your question.
Jason Kolbert
Okay. Good. 32 Thank you. And if we were to project a double-digit organic growth rate, call it 15% or 20%, compound annual growth rate or a sequential growth rate? At what point and I can certainly do the math, it looks like you're going to be close to break even in the next year or two, does that seem reasonable to you?
Shachar Daniel
Okay. So you said something very important. You can do the math by yourself, because according to our current growth rate, we can be profitable early, or let's say one year from now. The question is what will be the decision because if we want, for example, in my [indiscernible], just described the new products that we launched. And I mentioned again, and again, I know that it sounds like everyone says it but in our case, when we acquired a consumer, we are not losing, we are investing because it is a monthly subscriber. So we had seen the first, second month you can lose. But if you have a good product, a well established you will have a great return in the next years.
So the question is how much money we want [Technical Difficulty] consumer position for new products. In the privacy business for enterprises, which I can say very proudly, but it's the first time we bought a company two years ago, and after two and a half years, we bought it from almost [Technical Difficulty] but it's profitable. We know how to win a business to be profitable and still growing. And now we need to -- we will need to take -- we will need so just take the decision regarding the business in the privacy and security for consumers.
Jason Kolbert
Agree 100%. That question is, the efficient use of your capital and the return on invested capital is greater if you redeploy that capital, and I guess that's my last question, which is, where do you get the most bang for your buck at this point, with any capital that you have? Is it in, sales and marketing that's driving that growth rate? Or are you looking at this point, what strategic acquisitions are you thinking to make that would complement your revenues and kind of continue to support this very, very solid growth?
Shachar Daniel
Okay. Good question. So basically, we don't have any plan -- any strategic plan to drive additional acquisitions in the coming period. We think that we have a great business that our funds came into our current businesses and showed significant growth, significant numbers and significant and impressive new products. But if something will come in, we will have an ad hoc opportunity that we will not miss, so we will consider it but most of the capital, we are investing in the house, in our great and talented team to develop new and innovative products and of course incentive marketing because if you see the results, we know how to do it.
Jason Kolbert
Great, thank you so much. Congratulations on the quarter.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.
Brian Kinstlinger
Great, thanks so much for taking my questions. Can you start with sharing what percentage of the recurring revenue you will be sharing for the first five years under the Privacy solutions with your lender? And how that will impact gross margin? Which is I assume where you'll see the impact? And then how do you expect this funding is going to drive stronger revenue growth if at all?
Shachar Daniel
Service line but the line when someone is asking is limited with work and not only your, okay, if you have a little background noise? Or if you can say it again, and then slowly because I can barely hear you.
Brian Kinstlinger
Okay. Let me take off my -- give me one second. Maybe I'll --
Shachar Daniel
No, no, no, It's not yours, the line is a little bit broken, I can hear you.
Brian Kinstlinger
Certainly. So I wanted to start by understanding, what percentage of recurring revenue are you going to be sharing for the first five years under Privacy solution with your lender? How that's going to impact gross margin? And then how you expect that will impact revenue growth as well.
Shachar Daniel
Okay, so if I understand you're correct, you are asking in the next slide, what are the future revenues that we have now according to our formulas, and model for the next five years in our consumer business? This is your question, no?
Brian Kinstlinger
No, you got the funding. Right, a non-diluted funding.
Shachar Daniel
Yes, the funding. The new funding.
Brian Kinstlinger
You're going to share some piece. So what's the impact on gross margin? What's the revenue share? And then how will it drive stronger revenue growth?
Shachar Daniel
Okay. So, Shai correct me if I'm wrong, but the funding is zero, will have zero impact in our financials on the gross margin on the revenues, yes.
Shai Avnit
Yes, correct. It will affect Brian only on the financial expenses, because it considered financing is like loan. So, all our margins belong to this financing will be shown under the operating profit or loss margin under financial expenses. So it won't affect the gross margin and the operating margin.
Brian Kinstlinger
So, what is that percentage of each sale? Is it 50%, I saw after five years, it's 50%, are you paying 50% in financing?
Shachar Daniel
No, no. So let me explain okay. So, there are two steps. One step still gets till the investors if it goes well -- they will get this kind of loan back. And then after this step, after five years and not more than till five years and not more than five years, we will have revenue share of 50% only on the specific consumers that will acquired with this specific investment. So they have a kind of a roof, okay, it will it cannot be more than five years.
Brian Kinstlinger
Right. But the press releases says there is a revenue share. And so what is that revenue share, even if it's in financing expenses, what's the revenue share right away for all incremental sales.
Shachar Daniel
So only for this specific product for the [AMO] [ph] product. If you remember, we have a product for iOS only, only for this specific consumers that were acquired by this specific investment. At the beginning, it's 100% is going to the investor. Okay, it's going to the investor till it covers its loan. And then after this, it's 50% each meaning the rev share of 50% till five years, after five years, it's going back 100% to Safe-T.
Brian Kinstlinger
Got it. Okay, that's helpful. And then can you talk about how the partnership with TerraZone is going? I think you previously said it would drive customer acquisition in the second half of the year and as well as drive expenses down. So just talk about how successful this has been, does it need more education on TerraZone part, any update would be helpful?
Shachar Daniel
To be honest, I don't have any important or something to update at this stage, TerraZone rearranged now with Safe-T products. They went through some very significant developments in the product as I mentioned a quarter go, all the product now is in the cloud, they develop the full suit for organizations. They have a few very, very interesting customers and few engagements. But it's still in their beginning. They're adding some layers from their portfolio. So, I cannot say something that will be significant at this stage hopefully the rest of the year. Next quarters, we will have something to update and then of course, it can be also significant update. So we will do it in the next financial [indiscernible].
Brian Kinstlinger
Okay. And then I think you mentioned one of Jason's questions, that consumer can be lost quickly. So you would invest once you win that consumer, what is the churn in the consumer business?
Shachar Daniel
What is the word again, churn?
Brian Kinstlinger
The churn rate.
Shachar Daniel
Okay. So we are talking about the churn rate internally a lot. By the way, it's a good question, because I can give you so many answers, because there are so many ways to measure return, I can tell you now that we are not measuring according to churn, but we have our formula that says that every consumer we acquire in five years we will triple the investment, we will have a ROI that is 3x, almost 3x than the investment, okay? It takes into account the churn, it takes into account the lifetime value, the average lifetime value, it takes into account many other factors and most importantly, it takes into account our current, we sat beside of the market, standard and market benchmark that we have, because really, we have experts in this area. So this is the most important formula. By the way, this is the formula, the investors, both of them, now, also the commercial bank, and the strategic investors that came in totally shows -- made a significant due diligence on our numbers and our results. And they truly believe in this formula. That's why they put their money in.
Brian Kinstlinger
Okay. And then I guess, lastly, can you quantify how much lower you expect operating expenses to be in 3Q compared to 2Q, I think if I calculate in 2Q, they were 5.5 but it sounds like legal expenses are coming down. And the sales and marketing from the enterprise solution business are going to be coming down. So how much lower 2C operating expenses?
Shachar Daniel
I prefer, Brian, if you are not going to prefer just to say that now we are in the end of the second month of the third quarter, meaning two-thirds of the quarter behind us, we expect to see as I mentioned in my pitch. We expect to see the trend of net loss start going that are decreasing in this quarter and in the next quarter, even a significant decrease. It's very important, I can ask Shai but I think this is the most important information. Yes, at the end of the day, it's the bottom-line, which is the net loss.
Brian Kinstlinger
Yes. I just because only two of us covering the stock and we'd like to manage the expectation of what you already know. That's one of the reason I asked. But whatever you feel you should share is very great. Okay, thank you.
Shachar Daniel
Thank you very much Brian.
Operator
Thank you. [Operator Instructions]. Thank you, ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Daniel for any final comments.
Shachar Daniel
Okay. Thanks a lot for joining us today. We look forward to continue to update you on our progress.
Operator
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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Safe-T Group Ltd. (SFET) Q2 2022 Earnings Call Transcript