Earnings Call Transcript - GFAI Q4 2021

Operator, Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Guardforce AI Year-End 2021 Corporate Update Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, March 31, 2022. Before we get started, I will read a disclaimer about forward-looking statements. This conference call may contain, in addition to historical information, forward-looking statements within the meaning of the federal securities laws regarding Guardforce AI. Forward-looking statements include statements about plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements that are different from 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, which 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 Guardforce AI’s Annual Report on Form 20-F to be filed with the Securities and Exchange Commission on March 31, 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 we caution you not to place undue reliance on these. At this time, I’d like to turn the call over to Terence Yap, the company’s Chairman. The floor is yours.

Terence Yap, Chairman

Thank you, and welcome, everyone to Guardforce AI’s financial year 2021 earnings call. 2021 has been a busy, yet exciting year for us as we remain focused on our journey in developing robotic solutions business and information security services. At the beginning of this year, I highlighted that we will achieve between $33 million to $35 million in revenues for the full year of 2021. I am pleased to announce that we have achieved $35.2 million. The need for protection and security has remained consistent since the beginning of time. Today, it is about what to protect and how to protect that will continuously evolve and transform with time and technology. We are extremely excited to be at the forefront of this growth and look forward to capitalizing on the many opportunities that lie ahead. On this note, allow me to quickly highlight some of our notable achievements in 2021 and subsequent to the year-end. During the fourth quarter of 2021, we successfully uplifted onto the NASDAQ capital market with an initial public offering gross proceeds of approximately $15 million before underwriting discounts and other offering expenses to support our expansion plans. Followed by a private placement of ordinary shares and warrants for gross proceeds of approximately $10.3 million before deducting the placement agent’s fees and other estimated offering expenses, this further adds to our cash position that as of the end of December 31 stood at approximately $15.9 million to support our pipeline of accretive new partnerships. Second, during the first quarter of 2021, we acquired a majority stake in Handshake Networking, a leading penetration testing company based in Hong Kong. A significant milestone as we began our expansion into the information security space. We subsequently announced plans to enter the Malaysian market and also the Macau market with the merger of Macau GF Robotics Limited and GF Robotics Malaysia Sdn. Bhd. In addition, we made a strategic decision to announce the relocation of our corporate HQ to Singapore. Thirdly, during the first quarter of 2022, we continued our expansion plans with the announcement of our entry into China with the acquisition of Shenzhen GFAI Robot Technology Company Limited and Guangzhou GFAI Technology Company Limited. This has provided us with a foothold entry into the Greater Bay Area, one of the fastest economic regions in China. In addition, we are now entering the U.S. market with a strategic partnership with a U.S. based technology solution provider, focusing on the delivery of technology as a service to clients within the North American market. The key drivers for our business remain strong. The growing need for automation accelerated by the COVID-19 pandemic, the increased funding for research in robotics and AI, and the respective government policies will continue to drive our various business segments. We remain focused on developing our robotic solutions and information security services. In addition, we will continue to maintain our leadership position within the secure logistics business in Thailand. I will now ask our Chief Executive Officer, Olivia, to provide an update on operational highlights. Olivia, please.

Olivia Wang, CEO

Thank you, Terence. As mentioned, 2021 has been an incredible year for us, allow me to highlight operational results of our major key business segments. Firstly, I’ll cover secured logistic business. Our secured logistic business remains dominant in the cash logistics business in Thailand. We started the year strong with a notable win in January 2021. We were selected as the authorized operator of the Consolidated Cash Center, the CCC in Khon Kaen province of Thailand for a period of five years starting from April 19, 2021. The decision to appoint Guardforce AI has jointly been made by the Thai Banking Association, representatives from Thai Commercial Banks and the Bank of Thailand. We were subsequently selected as the authorized operator of the Consolidated Cash Center in the city of Hat Yai. This CCC covers seven provinces in total. I am pleased that our Thailand business has been positioned as a leader in the outsourced cash center business. In response to the growing COVID-19 pandemic situation, the Thai government announced several curfews, travel restrictions, and other social distancing measures, which had an impact on the economy and our business in Thailand. Revenues from our Secured Logistics division for the full year of 2021 totaled $34.3 million compared to the revenue of $37.4 million for the full year of 2020. This represents a slight decrease in our Secured Logistics revenue of approximately 8.3%. I am grateful to our operational team in Thailand for their work in the face of these challenges. Secondly, I would talk through the results of our Robotic Solutions business. We continued to execute our plan to penetrate the market extensively by planting our flags in all industry verticals. We began to roll out deployment based on free shelf as part of our strategy. This main purpose was to educate the market and opt into feedback, allowing us to create greater ratings and further revenue opportunities. On this note, we announced the successful deployment of more than 1,400 robots within the Asia Pacific region. We will continue with our strategic plans to roll out our plans. During the year, we also announced the development of the Intelligent Cloud Platform, the ICP, which is the robotic management platform that will provide us the ability to remotely manage, monitor and scale other value-added services to our clients. As we work towards diversifying our revenues, the growth in robots as a service will be a large contributor to the shifting revenue mix. Our Robotic Solutions business segment is currently still in its strategy. It represents approximately $0.4 million or 1% of our total group revenues. As we continue with our deployment plan, we are confident that it will be a significant revenue contributor for our group over the next two years. Lastly, I will talk about the Information Security business. The Information Security business is our newest addition to our suite of services, which is driven by the Handshake Network, a cybersecurity company that we acquired in the first quarter of 2021. As this is the first year of the combination, the Information Security business represents approximately $0.5 million, or 1.4% of our total group revenues. With the significant drivers globally, we are confident that the Information Security business will continue to grow. In summary, currently the majority of revenue is derived from our Secured Logistics business. As we continue to invest in the development of the Robotics Solution and Information Security services and expand our presence globally, we will generate a more meaningful revenue mix. Once again, I would like to thank our frontline executives for their contribution during the challenging year of 2021. On this note, I would like to hand over to Cynthia, our Chief Financial Officer, to provide the financial highlights, please.

Cynthia Ng, CFO

Thank you, Olivia. To our listeners, allow me to summarize our financial results for the year. Firstly, about our revenue, despite the ongoing challenges of the COVID-19 pandemic, our revenue for the full year of 2021 totaled $35.2 million. This represents a slight decrease of approximately 6.6% compared to the revenues of $37.6 million for the full year of 2020. The decrease is a result of client business closures and temporary suspension of businesses. However, we are equally encouraged by the growth in our other technology-related solutions, such as the GDM business, which is a remote integrated cash deposit machine in Thailand. GDM solutions experienced continuous double-digit increases in the past several years, increasing by 12.9% in 2021 to $1.6 million or approximately 4.7% of our total revenue compared to 3.9% for the year ended December 31, 2020. For our Robotics AI solution business, revenue increased by 67% in 2021 to $0.4 million or approximately 1.4% of the total revenue compared to 0.6% for the year ended December 31, 2020. For our information security business, revenue for the year ended December 31, 2021 was approximately $0.5 million. Secondly, about our gross profit, our gross profit for the full year of 2021 was $4.1 million compared to a gross profit for the full year of 2020, which was $6.3 million. As the percentage of revenue, the gross margin was 11.6% for the year ended December 31, 2021 compared to 16.7% for the year ended December 31, 2020, which is primarily due to an increase in labor costs, overtime built consumption costs, and reallocation of rental expenses from operating expenses in 2021. Thirdly, about our operating expenses, which comprised selling, general and administrative expenses, our total operating expenses for 2021 were $7.6 million compared to total operating expenses for 2020 of $6.7 million. The increase in total operating expenses was primarily driven by an increase in our external professional fees and listing fees, which was offset by the decrease in employee compensation and related expenses due to the reduction in manpower in 2021 and a decrease in rental expenses for the Thai office due to a portion of rental expenses being reallocated to cost of revenues. Let’s move on to talk about our loss from operations. The loss from operations was $3.7 million compared to $2.1 million in the same period of 2020. EBITDA loss was $0.2 million on a non-IFRS measurement, compared to EBITDA of $3 million in the same period of 2020. Net loss for the full year of 2021 was $5.5 million or $0.31 loss per share compared to a net loss of $3.1 million or $0.18 loss per share in 2020. Non-IFRS net income was $1.8 million compared to $4.8 million in the same period of 2020. This was mainly due to an increase in operating expenses. As for our cash position, cash balance provided by operating activities for the full year ended December 31, 2020 totaled $1 million compared to net cash provided of $4.9 million in the full-year ended December 31, 2020. This was mainly due to the adjustment of non-cash items like depreciation and amortization of $5 million, which was mainly comprised of depreciation of fixed assets and depreciation of right-of-use assets. Cash balance totaled $15.9 million at December 31, 2021 compared to $10.1 million at December 31, 2020. And lastly, about our share count, on a fully diluted basis, we currently have approximately 31.5 million shares outstanding as of the date of this report. With that, I would like to add by highlighting my appreciation to our amazing finance team. Allow me to hand back this time to our Chairman, Terence for the closing remark. Thank you.

Terence Yap, Chairman

Thank you, Cynthia and Olivia. Looking ahead, we remain confident in the trajectory of our business growth. We are reaffirming our guidance for 2022 of net revenues of approximately $55 million to $60 million. This represents a growth of more than 66% compared to 2021. We expect inorganic revenues, i.e., revenues from companies to be acquired during 2022, of approximately $21 million, representing 36% of our total revenues. We expect non-cash revenues, including robotics, information security, and other non-cash related services to expand to approximately $25.5 million. This represents approximately 44% of our total revenues. The world continues to evolve and adapt to the post-COVID environment. We will continue to focus on developing our robotic solutions, capabilities, and offerings. We will also continue to expand via smart acquisitions that will allow us to extend our geographical reach and market penetration. We will continue to focus on improving and refining our solutions with ongoing feedback from the market and our partners. Ladies and gentlemen, thank you for being part of our journey. And with that, I’d like to open up the call for any questions. Operator, please go ahead.

Operator, Operator

Our first question is from Mike Albanese with EF Hutton. Please proceed with your question.

Mike Albanese, Analyst

Yes. Hi. Hi, Terence. This is Mike on for Ben today. Congrats on your continued progress and thanks for taking my questions. I just have a couple if I may. First, as we look out to fiscal year 2022, I see roughly half of the year revenues are expected to come from the Robotics segment. I know it’s going to take some time to integrate these recent acquisitions and kind of ramp up the businesses, but do you have any insight really on how we could be thinking about your margins? Is there an expectation that your margins will be better than the cash management business? Is it comparable, what would it take to get there? Any insight on that would be great.

Terence Yap, Chairman

Thank you, Mike, thank you once again. It’s a very important question. One that we are constantly tracking within our business as well. It is also one of the reasons why we want to transform. As we know, the cash-in-transit business, or the secured logistics business, is actually a cash flow business. But the margins are rather thin. As we have seen, they are in the teens; sometimes it goes to low teens, and in good times they can go to high teens. The reason why we enter robotics and cybersecurity is because the margins are definitely a lot higher. Some of the cybersecurity companies have seen comparable company margins in the U.S. are as high as 60% to 70% from those disclosures. From our position, even though we have not provided guidance yet, we are certainly very confident that as we scale up the business for the robotics and cybersecurity, we will definitely see better margins than what we currently see in the cash-in-transit and secured logistics business. So at this point in time, because the dominant part of our business is still the secured logistics, we will continue to see that range, but as we start to grow and deliver our revenue growth, we would see an improvement in the gross margins.

Mike Albanese, Analyst

Thank you, Terence. That was great. So then if I can follow up with that, to that point, you’ve been doing a great job here expanding your distribution channels across multiple geographies. You had mentioned you rolled out I think 1,400 robots in Asia Pacific. And obviously I’m sure more of that is coming for economies of scale, as you lay this infrastructure, maybe you could talk about how you see that unfolding whether that’s expected to come through additional revenue streams or leveraging the ICP, but any insight there would be great?

Terence Yap, Chairman

As I’ve mentioned before on several occasions, robotics is like a sensor. For us, it’s important to plant the flag. Like a security camera, it collects data, etc. And that’s where the ICP, or the Intelligent Cloud Platform, plays an integral part of how we want to manage it remotely, control it, and collect the data, because ultimately once we collect the data, we can analyze it and create intelligence out of it, thereby creating more value add to our clients. So where we are going through right now, we want to push out as many robots as possible; it’s just like pushing out security cameras. Except that these robots have the capability of generating revenue for us not only through a RaaS model, meaning the robot as a service model, but also in the future, whereby we collect the data, control it, and provide a dashboard to our clients to empower them, allowing our clients to actually have the ability to gain more value-added solutions from predictions to analytics, etc. We are extremely excited about it because it presents a whole new revenue opportunity and growth opportunity, given the need for automation that has been growing within Asia-Pacific and globally.

Mike Albanese, Analyst

That’s great. Thank you. It seems like you have a really nice strategic plan and I look forward to seeing this play out. And then just one more quick question if I may, this one regarding capital expenditures. Obviously, you’ve been focused on investing in acquisitions and expanding the robotics business. I’m just curious, kind of what are the upcoming needs, capital needs of the legacy cash management business? More specifically, it comes to mind is the armor truck fleet; will that need to be updated in the near future? What’s going on there?

Terence Yap, Chairman

Well, thank you for that question. The majority of the CapEx will actually be focused on the acquisition side and also the robotic solution. But there will certainly be some maintenance CapEx – I think that’s what you are referring to, the maintenance CapEx, and those are really part and parcel of our business that has been there for the past 40 years. So it’s no different in that sense. We do not see any particular increase in that maintenance CapEx over the next year or so. What would be interesting is that we are actually planning to upgrade our system, especially within the cash logistics business to a system that has AI capability, whereby you can predict cash levels and usage patterns. So those are some of the things that we are looking through in terms of improving further automation, data analytics, and AI capability even for the cash management and secure logistics business.

Mike Albanese, Analyst

That’s great. Thanks again, Lei and Terence for taking my questions, and congratulations on your continued execution here.

Terence Yap, Chairman

Mike, thank you.

Operator, Operator

Our next question is from Hunter Diamond with Diamond Equity. Please proceed with your question.

Hunter Diamond, Analyst

Hi everyone. Congratulations on the quarter and the year. So my first question, what do you view as the biggest misconception in the marketplace when it comes to GFAI and where the company is today?

Terence Yap, Chairman

Thank you very much, Hunter. It’s a very interesting question for us as well. I guess a lot of it is because we are truly under-discovered. I think a lot of people still don’t know about us and that’s why there’s not such a big following yet. That’s one of the reasons why we are constantly trying to improve our communications with our stakeholders and be more proactive as well. In fact, earlier this year, we decided to do an investor conference in our efforts to improve communication. We will continue to do that because I believe it’s important for us to communicate well to ensure that our stakeholders understand our story. The second part of the confusion, well, I guess the misconception is that in the past a lot of these people in the market assume that we are really just a cash and transit business, just a secure logistics business. It is important for them to actually start to understand that we are going beyond the cash and transit. We are using the fundamentals and the advantage that we have gained over the past 40 years to build a new business opportunity adding on new revenue opportunities for our existing customer base. The biggest asset that we have is actually the relationships we have with our clients. For the past 40 years, we have built a relatively great brand name, a brand name that is based upon professionalism, credibility, and our staff have done a great job for that. Now it is important for the market to actually understand we are going beyond that to go into robotics, AI, and information security. That was the reason why over the past month or so we started to change our strategy to actually provide more details in terms of our progress thus far, in terms of robotics deployment, in terms of the market expansion. Hopefully as we go along, we will begin to see more attraction and will attract more stakeholders to understand our business. For myself, I would certainly invest more time and resources to hopefully educate and also communicate with the market.

Hunter Diamond, Analyst

Great. Thank you. That’s much appreciated. I’m sure by the investor base you have. The next question I wanted to know more about is the recently announced Dubai and Australia expansions. Was that always something the company was planning or was that an opportunity that just arose?

Terence Yap, Chairman

Well, it was something that we have always planned. We have a grand strategic plan for the next two to three years and we are taking things in different phases. Dubai is a really strategic opportunity because of the innovation that the government of the UAE has put in place. As you may know, the UAE announced its innovative plans to develop Dubai City into a Smart City. I think that there’s a role for us to play in terms of robotics and AI. Dubai is reinventing a city and we are excited to have the opportunity to hopefully contribute to this innovation and the development. Australia is an interesting country because it’s the largest island in the world and the population is truly one of the most educated; it’s also a mature market. More importantly, we have also seen that because of the labor costs and markets, and also because of the pandemic situation, we are seeing that a lot of clients are now going towards automation, whether it’s automated cleaning solutions or using robotics for reception, etc. Labor costs have gone up significantly. Clients are also trying to make use of technology to make their operations more efficient. I think Australia is a great opportunity that we can tap into besides the Asia Pacific as well. So that has always been our plan. It’s just that we are taking one step at a time in terms of phasing out and making sure that everything is in place.

Hunter Diamond, Analyst

Great. And going along, I guess, the growth topic, what makes an ideal acquisition for GFAI, and is there anything that you won’t consider or in terms of your criteria?

Terence Yap, Chairman

The acquisitions that we are considering right now should ideally have an existing sales distribution network, have a customer base that we can really match because we think it’s important for us to enter the market very quickly. The best way is indeed to improve acquisition, acquiring companies with the necessary network. For example, like ourselves in Thailand, the reason why we have been doing well in terms of rolling out our robots is that we have established a distribution network in Thailand. We have more than 21 branch offices all over Thailand that have established customer bases we can easily approach and say, 'Hey guys, we’ve got this new solution. Would you be willing to try?' Because of the long-standing relationship we have had with our clients in Thailand, they have been willing to try it out. That has been a really encouraging factor. So that is an important factor as we go into other markets to identify partners that also have similar experience or similar distribution networks that will allow us to move to the market effectively. For companies that we don’t think we will buy, I think we will stick to companies that are not in a startup phase. I will be interested in looking at companies that are in the traditional security space as well, because it’s easy for us to transform the business, like what we have done for Thailand. But for truly untested technology companies, we may not buy, but we never know. For now, the focus is really to expand our distribution network. So if companies out there have an existing network, a good clientele base, and great relationships with clients, that will allow us to propel our growth expeditiously; that’s worthwhile to consider.

Hunter Diamond, Analyst

Great. Makes perfect sense. And I guess my last question would be, can you talk a little more about the competitive market for robotics as a service and why you feel your company’s products are best-in-class?

Terence Yap, Chairman

Well, the competition we are seeing within Asia Pacific mainly comes from robotics manufacturers. Now robotics manufacturers do what they do best, which is to sell the robot and say, 'You guys can deal with it,' etc., while we are coming at a slightly different angle. We are almost robotics agnostic, meaning if there’s someone who can provide us with good terms and quality robots, we will buy them and then eventually put them onto our ICP platform, the Intelligent Cloud Platform. So I believe the advantage we have is that we are not a robot manufacturer; we are truly providing a robot as a service. We prefer that we lease out the robots as a monthly service. There are a couple of reasons for it; I love recurring revenue streams because they provide cash flow for us. If we build a nice recurring revenue stream through the robot as a service, then it’s great. I don’t think anyone else is really going into this area because a lot of manufacturers are still focusing on selling robots. The robot as a service model is an entire different model. I take my analogy from my days as a manned guarding provider in a manned guarding business; we are providing manned guards on a monthly basis. So we charge a monthly fee for a guard; instead of a guard now, it’s replaced by a robot. So the concept of recurring robotic service is similar to the security guarding part of it. We are not selling products; we are really selling a service. The service includes technology, maintenance, and helping clients resolve issues, whether it’s costs or whether it’s improving operational efficiency. That’s where the robotic service model comes into play. I think at this point in time, we have an advantage because we can push things out very quickly, and we are not really selling robots; we are actually offering robots as a service.

Hunter Diamond, Analyst

Great. No, makes perfect sense. So again, congratulations on the results and appreciate you taking my questions.

Terence Yap, Chairman

Thank you. Thank you, Hunter.

Operator, Operator

We have reached the end of the question-and-answer session. And I’ll now turn the call over to Terence Yap for closing remarks.

Terence Yap, Chairman

Ladies and gentlemen, thank you very much once again for joining me today. And thank you for being part of our journey. It’s important for us to remember that we are in the business of growth. My team and I will continue to work hard in achieving our strategic plans. I certainly look forward to providing you with continued updates on our progress. So with that, thank you once again.

Operator, Operator

This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.