Magnet Forensics Announces Third Quarter 2021 Results

TORONTO--(BUSINESS WIRE)--Magnet Forensics Inc. (“Magnet Forensics” or the “Company”) (TSX: MAGT), a developer of digital investigation software used globally by public safety organizations and enterprises, today announced its financial and operational results for the three-months (“Q3 2021”) and nine-months (“YTD 2021”) ended September 30, 2021. Financial references are in U.S. dollars unless otherwise indicated.

Q3 2021 Financial Highlights

(Comparison periods in each case are the three months ended September 30, 2020, unless otherwise stated)

• Revenue of $17.8 million, an increase of 44%
• Gross Margin of 93%
• Net income of $2.2 million, an increase of 9%
• Adjusted EBITDA⁽¹⁾ of $4.6 million, an increase of 33%
• Annual Recurring Revenue⁽²⁾ (“ARR”) of $54.0 million, an increase of 48%

1) Non-IFRS measure. See "Non-IFRS Measures" and the reconciliation to the most directly comparable IFRS measure included in this press release

2) Key Performance Indicator. See "Key Performance Indicators"

“It was a strong quarter with ARR growth of nearly 50% to $54 million with continued momentum as we win new customers and grow our existing accounts,” said Adam Belsher, CEO of Magnet Forensics. “This growth is being driven in our public safety and private enterprise verticals as organizations meet the challenges of digital crimes and cyberattacks. We have expanded our product suite from our flagship product, Magnet AXIOM, to our more recently launched Magnet AXIOM CYBER, Magnet OUTRIDER, Magnet REVIEW and Magnet AUTOMATE offerings, which expands our addressable market and share of wallet opportunity with the more than 4,000 global customers we currently serve. Our comprehensive solutions offer value to both digital forensics specialists and the stakeholders they work with which is proving to be a winning strategy in this growing market.”

Q3 2021 Highlights

(Comparison periods in each case are the three months ended September 30, 2020, unless otherwise stated)

• Revenue of $17.8 million, an increase of 44% compared to $12.4 million, primarily due to a $2.7 million increase in term license revenue and a $3.2 million increase in software maintenance and support revenue. These increases are primarily a result of an increase in licenses sold to new and existing customers, growth in the user base and further adoption of the Company’s expanded suite of products, partially offset by a decrease in perpetual license revenue. The transition to a greater proportion of term license revenue compared to perpetual license revenue is part of the Company’s strategy to change the revenue mix to be more recurring and predicable in nature.
• Total Recurring Revenue⁽¹⁾ was $14.5 million, representing 82% of total revenue.
• Annual Recurring Revenue⁽²⁾ grew to $54.0 million, an increase of 48% compared to $36.4 million.
• Gross Margin was 93%, compared to 95%, a decrease of 2% due to a higher mix of professional service revenue.
• Net Income was $2.2 million, a increase of $0.2 million, primarily due to the growth in gross profit which aligns with the growth in revenue as the Company maintained the relative size of investment and infrastructure required to service our customer base.
• Adjusted EBITDA¹ was $4.6 million, an increase of 33% compared to $3.5 million.
• Cash of $110.1 million, compared to $21.2 million as of December 31, 2020, an increase of $88.9 million, as a result of the net proceeds from the Company’s initial public offering (“IPO”) during the second quarter as well as free cash flow generation.
• The Company’s approach of consistent and rapid innovation supported multiple software updates across its product portfolio.
• The Company acquired DME Forensics Inc. (“DME”), a video and multimedia company, which strengthens Magnet Forensics comprehensive digital platform with video evidence consolidation capabilities. Magnet Forensics acquired DME for cash consideration of $6.75 million plus a $2.25 million earn-out over two years.
• The Company won new customers across each of its public safety and private enterprise markets, including Europe, Asia and North America.
• The Company expanded its accounts with key public and private sector customers that drove increased revenue as customers expanded their adoption of the Company’s software solutions.

1) Non-IFRS measure. See "Non-IFRS Measures" and the reconciliation to the most directly comparable IFRS measure included in this press release

2) Key Performance Indicator. See "Key Performance Indicators"

Financial Outlook

Revenue and Adjusted EBITDA for the year ended December 31, 2021 (“Fiscal 2021”) are anticipated to be in the following ranges:

• Revenues of $66.5 - $68.5 million, representing 30%-34% growth over Fiscal 2020
• Adjusted EBITDA⁽¹⁾of $14.5 - $16.5 million, representing margins of 22%-24%

1) Non-IFRS measure. See "Non-IFRS Measures" and the reconciliation to the most directly comparable IFRS measure included in this press release

Notice of Conference Call

Magnet Forensics will host a conference call, today, Tuesday, November 9, at 8:00 am Eastern Time to discuss its financial results. Mr. Adam Belsher, Chief Executive Officer, and Mr. Angelo Loberto, Chief Financial Officer and Chief Operating Officer, will co-chair the call. All interested parties can join the call by dialling [phone] or 1 [phone] with the conference identification of 2681291. Please dial in 15 minutes prior to the call to secure a line. A live audio webcast of the conference call will also be available from the events page of the investor relations section of Magnet Forensics’ website at https://investors.magnetforensics.com.

About Magnet Forensics

Founded in 2010, Magnet Forensics is a developer of digital investigation software that acquires, analyzes, reports on, and manages evidence from digital sources, including computers, mobile devices, IoT devices and cloud services. Magnet Forensics’ software is used by more than 4,000 public and private sector customers in over 90 countries and helps investigators fight crime, protect assets and guard national security.

Non-IFRS Financial Measures

This press release contains certain non IFRS measures, specifically Adjusted EBITDA and Total Recurring Revenue. These measures are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of the Company’s results of operations from management’s perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under IFRS. These non-IFRS measures are used to provide investors with supplemental measures of the Company’s operating performance and liquidity and thus highlight trends in its business that may not otherwise be apparent when relying solely on IFRS measures. The Company also believe that securities analysts, investors, and other interested parties frequently use non-IFRS measures in the evaluation of issuers. The Company’s management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts, and to determine components of management and executive compensation.

“Adjusted EBITDA” represents net income (loss), and net income (loss) as a percentage of total revenue, respectively, adjusted to exclude depreciation and amortization, income tax expense (recovery), stock-based compensation expense, foreign exchange loss (gain), interest expense (income), and certain transaction-related expenses that are one-time or non-recurring in nature. The Company uses Adjusted EBITDA as a supplemental measure to review and assess operating performance, assess its ability to generate cash-based earnings, as well as provide a more complete understanding of factors and trends affecting the Company’s business that may not otherwise be apparent when relying solely on IFRS measures.

The following table reconciles net income to Adjusted EBITDA for the three months and nine months ended September 30, 2021 and September 30, 2020:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Net income	$2,167	$1,996	$6,535	$6,061
Depreciation and amortization^(1)	528	468	1,518	1,407
Income tax expense	1,019	636	2,627	1,934
Share-based compensation^(2)	642	16	1,163	45
Foreign exchange loss (gain)^(3)	(142)	222	(10)	(160)
Interest expense	86	121	342	325
Financing-related expenses^(4)	97	-	1,479	-
Acquisition-related expenses^(5)	293	-	293	-
Adjusted EBITDA	$4,690	$3,459	$13,947	$9,612
Adjusted EBITDA margin	26%	28%	29%	27%
Net income margin^(6)	12%	16%	13%	17%

________________

Notes:

(1) Depreciation and amortization expenses are primarily related to right-of-use assets and property and equipment. Depreciation and amortization expense for the three and nine months ending September 30, 2021 includes recognized depreciation expense on right-of-use assets of $197, and $612 (September 30, 2020 - $198 and $687). For the three and nine months ended September 30 ,2021 interest expense related to lease liabilities was $92, and $280 (September 30, 2020 - $105, $275).

(2) These expenses represent non-cash expenditures recognized in connection with the issuance of share-based compensation to our employees and directors.

(3) These losses (gains) relate to foreign exchange translation on financial assets and liabilities.

(4) These expenses include certain professional, legal, consulting and accounting fees, certain employee compensation, and listing fees that are specific to both the IPO and final short form base shelf prospectus preparation and public filings, and are considered non-recurring and not indicative of continuing operations.

(5) These expenses relate to post-combination compensation of certain key employees of such acquired businesses and represent a portion of the consideration paid that is contingent upon ongoing employment obligations and performance criteria being achieved of $56, and certain legal fees incurred of $237 as a result of the Company’s acquisition of DME Forensics. Inc.

(6) Calculated as net income expressed as a percentage of revenue.

“Total Recurring Revenue” represents the total revenue recognized during the period from contract elements that are recurring in nature, and includes revenues recognized as “License – term” and “Software maintenance and support” under term license contracts (“Term License Contracts”) and revenue recognized as “Software maintenance and support” from term subscriptions for software maintenance and support (“Software Maintenance and Support”) purchased by customers under perpetual licenses (“Perpetual Licenses”). The Company believes that Total Recurring Revenue is an indicator of business expansion and provides visibility into its ability to generate predictable cash flows.

Term License Contracts and subscriptions for Software Maintenance and Support provide that customers must renew their contract upon expiry, permit customers to terminate their contracts for convenience and do not contain penalty provisions in the event of early termination, though customers that terminate early are not entitled to refund of amounts paid under the contract. The Company facilitates customer renewals generally through automatic delivery of renewal notifications sent in advance of renewal dates, followed by a personal contact from a member of the Company’s sales team. Based on the Company’s past experience, early terminations by customers have not been material and a significant majority of customers renew their contracts upon expiry.

The following table presents Revenue and Total Recurring Revenue for the three months and nine months ended September 30, 2021 and September 30, 2020:

Revenue	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Product Type
License - perpetual	$841	$2,190	3,313	7,278
License - term	3,878	1,206	10,633	3,279
Software Licenses Total	4,719	3,396	13,946	10,557
Software maintenance and support	10,610	7,422	28,975	20,910
Professional services	2,444	1,534	5,978	4,175
Total Revenue	$17,773	$12,352	48,899	35,642
Less:
License - perpetual	(841)	(2,190)	(3,313)	(7,278)
Professional services	(2,444)	(1,534)	(5,978)	(4,175)
Total Recurring Revenue	$14,488	$8,628	39,608	24,189

Key Performance Indicators

The Company monitors Annual Recurring Revenue as one of a number of performance indicators to help it evaluate its business, measure its performance, identify trends affecting its business, and formulate strategic plans. Each of these key performance indicators utilizes revenue from contract elements that are recurring in nature, which include Term License contracts and subscriptions for Software Maintenance and Support, and excludes non-recurring Perpetual License fees and training and implementation fees.

“Annual Recurring Revenue” is defined as the annualized value of contracted recurring revenue from all customers that have contracts for the Company’s products and services as at the date being measured. The Company calculates Annual Recurring Revenue by dividing the contracted recurring revenue of each customer contract in effect as at the measurement date by the term of the contract, expressed in years. The Company’s calculation of Annual Recurring Revenue assumes that active customers will renew their contracts with it at the time of renewal. Based on the Company’s past experience, a significant majority of customers renew their contracts upon expiry. In addition, while subscription agreements may be subject to price increases on renewal, the Company do not assume price increases on subscription agreements when calculating Annual Recurring Revenue. The Company believes that Annual Recurring Revenue is an indicator of business expansion and provides visibility into its ability to generate predictable future cash flows.

Forward-Looking Information

This press release contains “forward-looking information” and “forward-looking statements” (collectively, “forward-looking information”) within the meaning of applicable securities laws. Forward-looking information includes or may relate to the Company’s financial outlook for Fiscal 2021 (including revenues, net income and Adjusted EBITDA) and anticipated events or results and may include information regarding its financial position, business strategy, growth strategies, addressable markets, budgets, operations, financial results, taxes, dividend policy, plans and objectives. Particularly, information regarding the Company’s expectations of future results, performance, achievements, prospects or opportunities or the markets in which we operate is forward-looking information.

In some cases, forward-looking information can be identified by the use of forward-looking terminology such as "plans", "targets", "expects", "is expected", "an opportunity exists", "budget", "scheduled", "estimates", "outlook", "forecasts", "projection", "prospects", "strategy", "intends", "anticipates", "believes", or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or, "will", "occur" or "be achieved", and similar words or the negative of these terms and similar terminology. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management's current expectations, estimates and projections regarding future events or circumstances.

Forward-looking information is necessarily based on a number of opinions, estimates and assumptions that we considered appropriate and reasonable as of the date such statements are made, and is subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, including but not limited to the factors described in the “Summary of Factors Affecting our Performance” section of the Company’s MD&A for the three months ended September 30, 2021 and in the “Risk Factors” section of the Company’s Short Form Base Shelf Prospectus dated October 29, 2021, which is available under the Company’s profile on SEDAR at www.sedar.com. Certain assumptions in respect of, among other things, the Company’s ability to build its market share, retain existing customers and attract new customers; the Company’s ability to retain key personnel; the Company’s ability to maintain and expand geographic scope; the Company’s ability to execute on its growth strategies; the Company’s ability to maintain and protect its intellectual property rights and proprietary information; the Company’s ability to prevent unauthorized access to or disclosure, loss, destruction or modification of data, through cybersecurity breaches or computer viruses disrupting the functionality of the Company’s products; the Company’s ability to obtain additional financing and maintain existing financing on acceptable terms; currency exchange and interest rates; the impact of competition; changes and trends in the Company’s industry and the global economy, including the impact of the ongoing COVID-19 pandemic; and changes in laws, rules, regulations, and global standards, are material factors made in preparing forward-looking information and management's expectations.

If any of these risks or uncertainties materialize, or if the opinions, estimates or assumptions underlying the forward-looking information prove incorrect, actual results or future events might vary materially from those anticipated in the forward-looking information. The opinions, estimates or assumptions referred to above are described in greater detail in the "Summary of Factors Affecting our Performance" section of the Company’s MD&A for the three months ended September 30, 2021 and should be considered carefully by prospective investors.

Although the Company has attempted to identify important risk factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other risk factors not presently known to the Company or that the Company presently believes are not material that could also cause actual results or future events to differ materially from those expressed in such forward-looking information. There can be no assurance that such information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information. No forward-looking statement is a guarantee of future results. Accordingly, you should not place undue reliance on forward-looking information, which speaks only as of the date made. The forward-looking information contained in this press represents the Company’s expectations as of the date of hereof (or as of the date they are otherwise stated to be made), and is subject to change after such date. However, the Company disclaims any intention or obligation or undertaking to update or revise any forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities laws.

All of the forward-looking information contained in this release is expressly qualified by the foregoing cautionary statements.

Magnet Forensics Inc.
Condensed Consolidated Interim Statements of Financial Position
Expressed in thousands of US Dollars (Unaudited)
As at September 30, 2021 and December 31, 2020

	September 30, 2021		December 31, 2020
ASSETS
Current assets
Cash		$ 110,100	$ 21,205
Accounts receivable		16,459	10,208
Prepaid expenses and other assets		2,443	895
Income taxes receivable		468	-
		129,470	32,308
Non-current assets
Property and equipment		2,422	2,583
Right-of-use assets		4,634	5,246
Contract acquisition costs		1,071	767
Acquired intangible assets		5,337	508
Goodwill		1,345	-
Deferred tax assets		4,670	3,882
Total assets		148,949	45,294
Current liabilities
Accounts payable and accrued liabilities		8,225	5,973
Deferred revenue		37,430	28,356
Government loan payable		514	513
Lease liabilities		969	866
Income taxes payable		-	5,254
		47,138	40,962
Non-current liabilities
Deferred revenue		6,980	5,572
Government loan payable		1,395	1,689
Acquisition-related payables		707	-
Lease liabilities		6,027	6,769
Total liabilities		62,247	54,992
Shareholders’ equity (deficiency)
Share capital		90,725	1,977
Contributed surplus		1,511	394
Deficit		(5,534)	(12,069)
Total shareholders’ equity (deficiency)		86,702	(9,698)
Total liabilities and equity		$ 148,949	$ 45,294

Magnet Forensics Inc.
Condensed Consolidated Interim Statements of Income and Comprehensive Income
Expressed in thousands of US Dollars, except per share figures (Unaudited)
Three and nine months ended September 30, 2021 and 2020

		Three months ended September 30,		Nine months ended September 30,
		2021	2020	2021	2020
Revenue		$ 17,773	$ 12,352	$ 48,899	$ 35,642
Cost of sales		1,331	648	3,038	1,959
Gross profit		16,442	11,704	45,861	33,683
Expenses
Sales and marketing		5,722	3,819	14,943	11,315
Research and development		4,764	3,615	13,100	10,276
General and administrative		2,826	1,295	8,324	3,932
		13,312	8,729	36,367	25,523
Income before the undernoted items and income taxes		3,130	2,975	9,494	8,160
Interest expense		86	121	342	325
Foreign exchange (gain) / loss		(142)	222	(10)	(160)
Income before income taxes		3,186	2,632	9,162	7,995
Income tax expense (recovery):
Current		584	711	1,684	2,160
Deferred		435	(75)	943	(226)
		1,019	636	2,627	1,934
Net income and comprehensive income	$ 2,167		$ 1,996	$ 6,535	$ 6,061
Earnings per share
Basic ^(1)		0.05	0.06	0.17	0.19
Diluted ^(1)		0.05	0.06	0.17	0.18

1) After giving effect to the amalgamation completed as part of the Pre-IPO Reorganization, including a conversion of the Company’s pre-closing common shares on a one-to-three basis. Additional information related to Magnet Forensics Inc. and the Pre-Closing Reorganization completed can be found within the Prospectus and can be found on SEDAR at www.sedar.com.

Magnet Forensics Inc.
Condensed Consolidated Interim Statement of Cash Flows
Expressed in thousands of US Dollars (Unaudited)
Nine months ended September 30, 2021 and 2020

	Nine months ended September 30,
	2021		2020
Cash provided by (used in):
Cash flows from operating activities:
Net income	$ 6,535		$ 6,061
Items not involving cash:
Income tax expense	2,627		1,934
Depreciation of property and equipment	711		565
Amortization of intangible assets	195		155
Depreciation of right-of-use assets	612		687
Share-based compensation expense	1,163		45
Unrealized foreign exchange loss (gain)	20		(222)
Non-cash interest on government loan payable	95		69
Interest expense on lease liabilities	280		275
Changes in operating assets and liabilities	3,712		673
Income taxes (paid) recovered	(6,905)		371
Net cash from operating activities	9,045		10,613
Cash flows from investing activities:
Purchase of property and equipment Acquisition of business	(549) (3,887)		(1,689) -
Net cash used in investing activities	(4,436)		(1,689)
Cash flows from financing activities:
Proceeds (repayments) of government loan payables	(388)		722
Stock options exercised	272		-
Repurchase of common shares	-		(344)
Shares issued per offering	93,583		-
Share issuance costs	(7,070)		-
Lease incentives received	-		1,166
Interest paid on lease liabilities	(280)		(275)
Principal payments on lease payments Repayment of acquired promissory note	(658) (1,173)		(518) -
Net cash from financing activities	84,286		751
Increase in cash	88,895		9,675
Cash, beginning of period	21,205		25,276
Cash, end of period		$ 110,100	$ 34,951