Guardforce AI Co., Ltd (NASDAQ:GFAI) Q4 2021 Earnings Conference Call March 31, 2022 8:30 AM ET
Terence Yap – Chairman
Olivia Wang – Chief Executive Officer
Cynthia Ng – Chief Financial Officer
Conference Call Participants
Mike Albanese – EF Hutton
Hunter Diamond – Diamond Equity
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. [Operator Instructions] 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 statement about plans, objectives, goals, strategies, future events, 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 that 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 then 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 be 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.
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 to 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 plan 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 announcement of our entry into China with the acquisition of Shenzhen GFAI Robot Technology Company Limited formerly known as Shenzhen Keweien Robot Service Company Limited and Guangzhou GFAI Technology Company Limited, formerly known as Guangzhou Kewei Robot 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 as our entry into 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 remained strong. The growing need for automation accelerated by the COVID-19 pandemic, the increased funding on research for 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.
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 a dominant driving, driving first in this cash logistic business in Thailand. We started a year on the strong good team with the 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. And I am pleased that our Thailand business has been positioned as a leader in the outsource cash center business in Thailand.
In response to the growing COVID-19 pandemic situation, the Thai government announced several curfew, 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 US$34.3 million compared to the revenue offer US$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 the Thailand for the 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 for planting our flags in all industry verticals. We began to rollout deployment based on free shelf as part of our strategy. This main purpose was to educate the market and opt into feedbacks, allow us to create greater ratings and further revenue opportunities.
On this note, we announced the successful deployment of one – more than 1,400 robots within the Asia Pacific region. And we will continue with our strategic plans – we 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 service 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. As our Robotic Solutions business segment is currently still as its strategy. It represents approximately US$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 Information Security business. The Information Security business is our newest addition to our suit of service, which is driven by the Handshake Network, a cybersecurity company that we had acquired in the first quarter of 2021. As this is the first year of the combination Information Security represents approximately US$0.5 million, or 1.4% of our total group revenues. With the significant drivers globally, we are confident that Information Security business service will continue to grow.
In summary, currently the majority of revenue are 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, Cynthia to provide the financial highlights, please.
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 as 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 as compared to 0.6% for the year ended December 31, 2020. For our information security business revenue for the year ended December 31, 2021 were approximately $0.5 million.
Secondly, about our gross profit, our gross profit for the full year of 2021 was $4.1 million compared to 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 cost of overtime built consumption costs and reallocation of rental expenses from operating expenses in 2021.
Thirdly about our operating expenses, which comprised of 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 with 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, having reallocated to cost of revenues.
Let’s move on to talk about our loss from operations. 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 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 as 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 as 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 highlight my appreciation to our amazing finance team. Allow me to hand back this time to our Chairman, Terence for the closing remark. Thank you.
Thank you, Cynthia and Olivia. Looking ahead, we remain confident with 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 Instructions] Our first question is from Mike Albanese with EF Hutton. Please proceed with your question.
Yes. Hi. Hi, Terence. This is Mike on for Ben today. Congrats on your continued progress and thanks for taking my questions. Just have a couple if I may. First, as we look out to fiscal year 2022, I see roughly half 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 – the margin profile of like [Technical Difficulty] it 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.
Thank you. Mike, thank you once again. It’s a very important question. One that we are constantly track 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 are the secured largest [ph] business is actually a cash flow business. But the margins are rather thin. As we have seen it’s in the teens, sometimes it goes to low teens and in good times they go to high teens.
And the reason why we enter robotics and cybersecurity is because the margins are definitely a lot higher. Some of the cybersecurity companies have seen in comparable companies are listed in the U.S. Margins are as high as 60%, 70% from those disclosures. From our position, even though we have not provided those guidance yet, we are certainly very confident that as we scale up the business for the robotics and cybersecurity, we will definitely be more than the cash-in-transit are secured logistics business. So at this point in time because of the fact that the dominant parts of our business is still the secured logistics. We will continue to see that range, but as we start to grow and deliver our [indiscernible] and revenue growth. We would see an improvement on the gross margins.
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?
As I’ve mentioned before in several occasions, the robotics is like a sensor. For us, it’s important to plant the flag. Like a security camera, it collects data, et cetera. 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 itself, 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 the robots as many as possible is just like pushing out security cameras, except that this 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, providing a dashboard to our clients to empower them, our clients to actually have the ability to have more value added solutions from predictions to analytics, et cetera.
So 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 not only within Asia-Pac but globally.
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 like the legacy cash management business, more specific it comes to mind is the armor truck fleet, will that need to be updated in the near future? What’s kind of going on there?
Well, thank you for that question. Majority of the CapEx will actually be focused on the acquisition side and also the robotic solution. But there will certainly be certain 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 – a 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 logistic business to a system that has got AI capability whereby you can predict cash levels, the usage pattern. So those are some of the things that we are looking through in terms of improving further automation, data analytics and also AI capability even for the cash management and secure logistics business.
That’s great. Thanks again, Lei and Terence for taking my questions, and congratulations on your continued execution here.
Mike, thank you.
Our next question is from Hunter Diamond with Diamond Equity. Please proceed with your question.
Hi everyone. Congratulations on the quarter and the year. So my first question, what do you view is the biggest misconception in the marketplace when it comes to GFAI and where the company is today?
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 – that’s not such a big following yet. And that’s one of the reason why we are constantly trying to improve in terms of our communications with our stakeholders and be more proactive as well. In fact, earlier this year we actually decided to do an investor conference in our efforts to improve communication. And we will continue to do that because I believe it’s important for us to communicate well to ensure that our stakeholders understand the 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. We are just a secure logistic business. It is important for them to actually start to understand that we are actually 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 my existing customer base. The biggest asset that we have is actually the relationships they 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 has 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, to go into AI, to go into information security. And so that was the reason why over the past month or so we start to change in terms of 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. And hopefully as we go along we begin to see more attract – will attract more stakeholders to understand more business. For myself, I would certainly invest more time and resources to hopefully educate and also communicate with the market.
Great. Thank you. And that’s much appreciated. I’m sure by the investor base you have. The next question I wanted to know more about the recently announced Dubai and Australia expansions. Was that always something the company was planning or was that an opportunity that just arose?
Well, it was something that we have always planned. We have a grand strategic plan for the next two, three years and we are taking things in different phases. Dubai is a really strategic opportunity because of the innovation that the government – the UAE is put in place. As you may know, UAE announce its innovative plans to develop Dubai City to be a Smart City. And I think that’s a role to play in terms of robotics and AI. Dubai is reinventing a city and it should be and we are excited to have an opportunity hopefully to contribute to this innovation and also the development.
Australia, it’s an interesting country because it’s largest island in the world. And the population is truly one of the most educated; it’s also mature market as well. More importantly, we have also seen that because of the labor cause 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, whether it’s using robotics for reception, et cetera, labor costs has gone up very, very high. And so clients are also trying to make use of technology to make their operations more efficient. And I think Australia is a great opportunity that that we can try to 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 that everything is in place.
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?
The acquisitions that we are going about right now, most of them should have, ideally we have a existing sales distribution network, should have a customer base that we can really match on because we think it’s important for us to enter market very quickly. And the best way is really to improve acquisition, acquiring companies with the necessary network. And for example, like myself ourselves in talent, the reason why we have been doing well in terms of rolling our robots is because we have going to establish distribution network in Thailand. We have more than 21.
Well, we have 21 branch offices all over Thailand, that we have got established customer base that we can easily knock on the door and say, hey guys, we’ve got this new solution. Which would you be willing to try because of the long standing relationship that we have had with our clients in talent, they were willing to try it out.
And that has been a really encouraging factor. And so therefore that I think is an important factor as we go into other markets, that is important to identify partners that also have a similar experience or similar distribution network that will allow us to expeditiously moving to the market and grow it effectively in terms of what companies that we don’t think will buy. I think we will, we’ll stick with companies that are not at a startup phase. We are – I will be interested to look at companies that are in the traditional security space as well, because it’s then easy for us to transform the business, like what we have done for Thailand.
But so for really an tested technology companies, we may not buy, but we never know. But for now the focus is really to expand our distribution network. So if companies out there have got an existing network, good clientele based, great relationship with clients that will allow us to propel our growth expeditiously as worthwhile to consider.
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?
Well, the competition that we’re seeing within Asia Pacific mainly from robotics manufacturers. Now robotics manufacturers do what they do best, which is to sell the robot that to sell it as a one off and say, you guys can deal with it, et cetera, where 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, good quality robots will buy and then eventually put it onto our ICP platform, which is the intelligent cloud platform.
So I believe the advisors that we have is that we are not a robots manufacturer. We are truly a robot as a service. So we prefer that we actually lease out the robots as a monthly service, there couple of reasons for it, I love recurring revenue streams because recurring revenue streams generally in cash flow for us.
So eventually if we are able to build a nice recurring revenue stream of robot a service, then it’s great. So I don’t think anyone else is really going to this year because a lot of the manufacturers are, still focusing on selling robots. Going onto a robotic service is an entire different model. I take my analogy from my days as a manned guarding provider, in a manned guarding business; we are also providing manned guards on a monthly basis. So we charge a monthly fee for a guard, but instead of a guard right now, it’s now replaced by robot. So the concept of recurring of rest – robotic service is similar to the security guarding part of it.
And it’s important. We are not selling people. We are really selling a service. The service includes technology, maintenance. Helping the clients to actually resolve the solution or resolve the problem that they have, whether it’s costs or whether it’s improving the operational efficiency, that’s where the rest model or the robotic service model is in play. And so I think, at this point in time, we have an advantage because we are able to push things out very quickly and we are not really selling robots. We are actually doing as a robot as a service in the market.
Great. No, makes perfect sense. So again, congratulations on the results and appreciate you taking my questions.
Thank you. Thank you, Hunter.
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.
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 continue to update you on our progress. So with that, thank you once again.
This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.