Omniq Corp (OMQS) 2021 Q1 法說會逐字稿

Good morning, and thank you for joining us for OMNIQ Corp's financial results and corporate update call for the first quarter ending March 31, 2021. Joining us today are Shai Lustgarten, CEO of OMNIQ, who'll provide an operational overview; and Neev Nissenson, who will -- I'm sorry, Chief Financial Officer, who will discuss financial results. Their prepared remarks will be followed by a question-and-answer session. I'll now take a brief moment to read the Safe Harbor statement.

During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions, or predictions about the future are forward-looking statements. Although they reflect our current expectations and are based on our best view of the industry and our businesses as we see them today, they are not guarantees of future performance. These statements involve a number of risks and uncertainties. And since those elements can change and in certain cases are not within our control, we would ask that you consider that and interpret them in that light.

We urge you to review the company's Form 10K and other SEC filings for a discussion of the principal risks and uncertainties that affect the company's business and performance and the factors that could cause actual results to differ materially. OMNIQ undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless otherwise required by law.

I'll now turn the call over to Shai.

Thank you, operator, and thanks to everyone joining us on the call today. I appreciate you taking the time to listening, and I hope this finds you and your loved ones safe and healthy. Before we discuss first-quarter results, I'd like to highlight last week's announcement that OMNIQ has entered into a definitive acquisition agreement pursuant to which OMNIQ will acquire 51% with an option to acquire additional 49% of Dangot Computers Ltd.

With this acquisition, we're creating a $91 million revenue company on a 2020 pro forma basis that is providing automation and object identification solutions position to drive increased adoption of OMNIQ's AI-based offering. We expect to exceed the 2020 pro forma revenue figure here in 2021.

Dangot is the leader in providing state-of-the-art technology, enabling frictionless automated order processing and digital payment processing products for retail, fast food, and parking; integrated working stations for physicians, drug delivery, and blood tests; robotics for smart warehouses, point of sales; and other innovative solutions for various verticals.

Upon the effectiveness of the acquisition, we will pay the shareholder of Dangot a total of approximately $7.6 million, comprised of approximately $5.6 million to be paid in cash and $2 million in restricted shares based on the average closing share price over the 30 trading days prior to signing. We will also have one year option to acquire the remaining 49% at the same valuation. Closing is expected shortly upon receipt of approval by the Israeli Competition Authority.

For financial backbone, Dangot's revenue for 2020 was approximately $35 million with attractive gross margins and profit before taxes of approximately $2 million. Dangot's advanced solutions widely sold in the demanding Israeli market create for us a unique opportunity to leverage our strong sales team in the US. Specifically, we plan to introduce the advanced solutions to the supermarket chains to whom we currently sell for over $20 million annually to hospitals through our customers that have the largest sales and distribution of medical equipment and drug in the US.

Dangot is a major supplier to logistics centers in Israel that includes automation and robotics for warehouse automation with great demand since the growing online sales during the COVID-19 period, a trend that we expect to continue also when pandemic is over. At the same time, we can accelerate merging our AI products into the supply chain customers served by both companies. I'm confident that Dangot's impressive customers will play a significant role in using OMNIQ's AI solutions to automate their operations and deliver groundbreaking performances and savings.

OMNIQ welcomes Dangot's Founder and CEO, Mr. Haim Dangot and the whole Dangot team and congratulates him on creating an impressive global entity that serves the values we both believe in, long term customer satisfaction through innovation, trust, and performance, and continuous investment in our operations. These are exciting times for us at OMNIQ. Together with Dangot, we are forging a significant solid foundation in executing our plan that was introduced three years ago. We're proud of the company that we're building.

And now, turning to our successful first-quarter 2021 results, we had a robust year-over-year growth in Q1 of 43% and achieving a record of close to $20 million in sales. New orders for our AI-based solution increased by 100% compared to the orders received in Q1 2020. Our achievement is mainly attributed to our strategy including our two main assets, our superior AI-based technology and a very strong and diversified customer base.

We're off to a great start. But before I go further, let me now turn this over to Neev to take a deeper look at our financial results. Neev?

Yes. Hello, everybody. As Shai highlighted, reported revenue of $19.8 million for the quarter ended March 31, 2021, which is an increase of almost 43% from $13.8 million in the first quarter of 2020. The revenue increase reflects what we feel is higher demand from certain customers coming out of the COVID-19 pandemic as well as continued traction in our markets.

Total operating expenses for the quarter were $5.5 million compared to $5.1 million in the first quarter of 2020. Net loss for the quarter was $3.3 million or a loss of $.70 per share compared to a loss of $2.9 million or a loss of $0.74 per share for the first quarter of last year. Adjusted EBITDA, meaning adjusted earnings before interest, taxes, depreciation, and amortization, for the first quarter of 2021 amounted to a loss of $1.2 million compared with an adjusted EBITDA loss of $834,000 in the first quarter of 2020.

After fully paying off our $5 million credit -- line of credit, cash was $2.7 million for the period ended March 31, 2021. Let me now turn the call over back to Shai to talk more about the operational achievements and outlook. Shai?

Thank you, Neev. We had a strong Q1 and year-to-date results driven by our AI business and legacy AIDC business that we principally sell to the supply chain market. I'll now provide an update on both parts of the business. Starting with AI, I'll share A few highlights.

First, during the first quarter, we were selected by a city in the state of Georgia to deploy our Q Shield vehicle recognition systems technology to identify any vehicle driving through the city, which is uninsured or in violation of its registration requirements. Q Shield addresses a problem in Georgia that is endemic across the United States that approximately 36 million uninsured vehicles are traversing our nation's roads every day and states are losing millions of dollars from unregistered vehicles on the road.

We also received orders to provide Q Shield to a top defense authority for the prevention of terror attacks in the sensitive zone outside the US. We announced as well that the OMNIQ's AI-based vehicle recognition systems have been selected for public transportation in high-occupancy vehicle, HOV, lanes. Our technology addresses a severe problem as a global traffic survey in 2017 points out drivers in New York spend 91 peak hours stuck in traffic. This traffic congestion will cost an average of $100 billion over the next five years.

Finally, we expanded our AI-based solutions into the 1.2 billion-person African market. We partnered with South African-based Professional Logistics South Africa, a provider of operations and solutions addressing all aspects of risk control to aviation and logistics companies in South Africa and other countries in the continent and have already received initial orders to provide security, access control, and warehouse management solutions into the South African market.

And subsequent to quarter end, we announced the contract to deploy a Q Shield for security and access control to communities and home owner associations in Florida and the Caribbean. For context there are more than 351,000 HOAs in the United States, including more than 30,000 gated communities with the vast majority of those in California and Florida. Our system Q Shield is uniquely designed to serve the HOA, gated, and ungated communities with its machine vision platform in support of Q-Wire's services and operations throughout Florida and the Caribbean.

Turning to the legacy AIDC business, I'll share just a couple of highlights. First, we received an approximately $6.1 million purchase agreement from one of the largest food distributors in the US and North America with over $10 billion in annual revenue. The agreement calls for the supply of mobile computerized IoT equipment for thousands of trucks that deliver products in the US and Canada and is designed to collect, identify, track, and trace assets as well as share collected inventory data through the distributor's internal IT systems.

Also, we announced that we have received an approximately $6.8 million of purchase agreements from one of the largest specialty retailers in the US, which generates over $2 billion in annual revenue. The agreement calls for the supply of mobile computerized IoT equipment designed to support retail automation and inventory control applications as well as distribution center supply chain solutions and the growing e-commerce business.

Additionally, we announced receipt of a $1.1 million purchase order for data collection solutions from a leading global specialty retailer for apparel and accessories with annual revenue exceeding $3 billion, operating over 750 stores in North America. The agreement calls for mobile computerized IoT equipment as well as distribution center solutions to support their e-commerce initiatives and operations. We're pleased to supply this leading retailer with OMNIQ supply chain solutions to generate better efficiencies, service, and operations.

Projects have resumed. And we're driving record growth with increased repeat sales, bringing on new AI-based projects from smart city and parking and laying the groundwork to cross-sell AI-based solutions to our supply chain customers and our new Dangot customers.

And just to recap that high points of the Dangot transaction, consolidated OMNIQ and Dangot pro forma revenue for fiscal 2020 amounts to approximately $91 million. Dangot brings a strong and impressive customer base, including hospitals, supermarkets, manufacturing plants, retail chains, restaurants, municipalities, and government agencies.

Dangot's influence with early adopter customers including multiple AI pilots offers a very attractive opportunity to accelerate adoption of OMNIQ's proprietary AI solutions to automate the supply chain. And finally, OMNIQ's Fortune 500 customers provide a significant new market for Dangot's innovative solutions focused among others on the food and drug, medical, retail, and the transportation and logistic markets.

The future is exciting and bright for OMNIQ. And operator, I will now turn over the call for questions.

(Operator Instructions) [Hilla Taniski], Private Investor.

Thank you. Hello, Shai, and good quarter.

Thank you, Hilla.

I have a few questions, please. The first one, you recently you announced about a new business model, supplying the AI solution to gated and non-gated communities. I think you mentioned here, four in this. But how big is the market, and what's the sale and marketing model?

So we're looking at 400 -- across the nation, about 400,000 ungated and gated communities and HOAs. It's a huge market. We are using an indirect sales channel on that actually is the one that approaches and resells our products, approaches directly all these residents and communities, gated and ungated.

And these resellers that we are training with our Q Shield product, they are actually coming with an innovative solution that doesn't exist today or not offered today by anyone, where we take away the need for a touch of a man in a solution to provide not only efficiencies, not only savings, not only security, but also better experience for the residents in these communities by having the ability to seamlessly enter-exit, control visitors, know exactly who's entering the facility.

And yeah, we can talk a lot about it, but everything is using our AI infrastructure and machine vision technology. We're very excited about it. It's an indirect sales channel, and it's all sold as a SaaS revenue model where we charge monthly with our services as a recurring revenue.

Wonderful. So the gross margin is lower. Is it due to a specific project? And how is the margin of the acquired company?

The growth, yeah, indeed, we saw in Q1 a lower growth -- not a lower, but a continuous gross profitability that we saw starting in Q3 last year during the pandemic. Basically, the simple fact, and we've discussed this before as well, is that our AI products, AI technology that is designated to support parking, support traffic management, support education, public safety, et cetera unfortunately, got hurt.

But we did see huge growth. And we are continuing, like we mentioned before that we expect this to continue. We see growth in our object identification using our legacy technology, lasers, RFID, Bluetooth, WiFi, et cetera. And we see of our growth in that. But this growth comes with lower margins. It's a legacy technology.

The good points about it is that we, one, see growth in both our business lines because as we also mentioned, we see a ramp-up in the AI orders already started and already had shown its footprint in Q1 and will continue this way for the rest of the year. So we see growth in both businesses, business lines. And basically, when you see that growth, you will see, of course, the growth also, the GP, as we saw in 2019 and also Q1 and Q2 of last year. So we will see that coming back immediately.

But it's going to come from a much larger top line that -- so the cash generation for us is going to be much better this year as well. And in addition to that, to these organic two business lines, of course, the Dangot acquisition brings with it an impressive gross profitability as well, one that ranges between 30% to 35% on its legacy products, so the everyday products that are sold, which of course we come in with the $35 million of top line adding to ours, given the fact that we see ramp up also in the AI and in the additional legacy technology we serve. All these aspects probably give you the picture of how this year is going to end, which makes us very exciting.

Very, very exciting. Excellent. Thank you very much. Keep on the good job.

Thank you so much.

(Operator Instructions) Howard Halpern, Taglich Brothers.

Congratulations on the quarter, guys.

Thank you.

So with projects back on track in the second quarter, do you see gross margin bouncing back towards that 20% area starting in Q2?

We do see that trend happening. And of course, we don't have the final -- we haven't finished the quarter, of course, but we do see already that trend.

Okay. And with the acquisition, do you see -- what kind of synergies you see on the expense side, and what kind of synergies do you see on the revenue-generating side?

On the on the expense side, and I'm talking about low-hanging fruits, not year-over-year efficiencies that, of course, we will create. On the expense side, we see about -- between $1 million to $2.5 million of cuts that we can make on sides because of this merger. So that will significantly grow the EBITDA of -- the consolidated EBITDA.

And on the top line, we see, of course, the immediate increase to bring it to -- if you look at 2020 pro forma, it's about $91 million. But as we already stated, and we're very firm about that, we'll see that exceeding already in 2021, that number. So the growth, the top line to your question, will grow and will grow from offering both products by each company, by both companies, especially the Dangot's products to the US market that we do not offer today under our portfolio offering.

Okay. And do they have customers globally? Or are they primarily -- well, where are their customers located primarily?

Primarily in Israel, but they do have global customers, but it's not in the US. It's more in Europe.

Okay. Okay. A lot of runway to grow there once it's completed.

Yes, sir.

Okay. And as the US is opening up again, what kind of deal flow or flow are you seeing even from state and local governments as they're getting back to work and have funds to spend? What are you seeing -- what are the trends in the last number of weeks or months that you're seeing?

Yeah. We see especially the traffic management products, AI products demand go up significantly. That, we see already. We see also the Q Shield product that goes into the public safety market. These are the two AI products that we see the demand not only ramping up, but actually getting to a spike. And we continue seeing the growth also for the object identification products that we have based on the legacy technology.

Okay. And one last one, as your established legacy business, what are you seeing in terms of being able to expand your AI capabilities in there, given that, I guess, workers do not -- the workers aren't coming back as fast because they -- as fast as some of the supply chain people want them to. So how is your product going to be able to take advantage and increase productivity as time goes on with a lower workforce potential?

That is a great question because that this is something that we didn't think about, but it is actually happening and gladly happening. Because basically, all of our products, as we always state, are machine-to-machine products that don't need the touch of a man and that are providing real-time detection and creating proactive, intelligent decision making.

This is something that we can either use with our existing customers, either use with people like on smart glasses that we started piloting, together with also ones that are just -- our centers are located in strategic areas in the different locations that we want to provide services to the existing customers to run, manage, create efficiencies in yard management, distribution centers, warehouse automation, et cetera. So actually, the trend of employees that are not returning to work a quickly, we've noticed that it is becoming an issue and actually increasing the interest and demand of our stand-alone AI products to provide the same automation, better automation without a touch of man.

So that is definitely a trend that we see right now. And we are working together with our customers in order to really do the correct implementations in the field to tell them the benefits, the added values and respond to that need.

Okay. Well, congratulations. And that's some good adaptation of the technology. Keep it going.

Thank you.

Mitch Swergold, Swergold Advisory.

Good morning, Shai and Neev. Congratulations on a great quarter.

Thank you.

If I recall correctly, you had $25 million in bookings for the quarter. So I was just wondering if you can help us to understand. Because obviously, that means you have over $5 million in backlog entering Q2 if you recognized less than $20 million of that $25 million. Are the COGS a little higher than we normally see? Also because there are COGS attributable to -- I don't know what the timing is on how you recognize the COGS versus the over $5 million that wasn't yet recognized. Can you help me to understand that, please?

It's not -- I wouldn't say that COGS -- the COGS is not higher. The margins of the legacy products that are still the majority of our revenue mix, by the way, which I'm very happy about still because these are, like you mentioned also in your question, these are fast sale cycle items which create the fuel for our company to build our future and implement our AI business to our existing customers.

The COGS, again, are not higher. We do -- when you work on large projects like the $6.8 million we announced, the $6.1 million we announced, several very large projects, you compete also. And price is an issue, and sometimes you've got to lower a little bit the price. So percentage-wise, you will see the COGS go higher, but they didn't raise. They didn't -- yeah, the COGS did not go up.

Got it. So with respect to the -- can you help me understand where is the -- the other $5 million that is sort of unrecognized from the bookings, is that the backlog with which you entered Q2 for recognition in the near term? Or are those longer duration contracts such that they'll be recognized over time? Or how does that work?

Most of them are going to be recognized that same quarter in Q2.

In Q2. Okay. Great. And that's also more legacy-oriented business?

Yes, but definitely with the growth with our AI ones.

Okay. Super great to hear. And it looks like you paid down your line of credit, which is great to see. I'm just wondering in terms of working capital and your cash on hand, which has now gotten a little bit low, has cash come in at the beginning of the quarter that helps improve your liquidity? Or what's the situation with that currently?

The cash, actually, the cash, which is managed nicely, ranges between the $2 million to the $5 million, depending on how we use our line of credit. And we preferred to actually lower interest cost, and we paid down the line of credit when we could. Cash came in because of the nice sales that we had in Q1 that generates more cash, fast sales cycle, Fortune 500 customers that pay on time. So that allowed us to actually do this quickly.

Hi. This is Neev. I just want to mention that the balance was zero in the line of credit, but it's still available for us at the cap. So it's not that will continue forward. We're still using it, but at a lower rate than we used in the past.

Great. Okay. Thanks. And is there any cash on the Dangot balance sheet that you'll acquire?

Yes. They have the -- under the agreement, they are going to have -- to keep a similar working capital in a way that we will not be required to put any cash out of our current companies in order to support that. So they are profitable, and they have the cash that they need in order to continue operations without any need for infusion from the rest of OMNIQ.

Okay. And have there been any collections early, in I guess in the first half of this quarter since we're halfway through already that would reflect better on this current number?

I'm not sure I understood the question.

Often, companies bill with 30-day receivables. So if you did a deal at the end of the quarter, and it's paid within 30 days, your cash position might be better 30 days out from the end of your quarter than at the actual end of quarter. So I'm wondering if that has happened for you.

It did. Definitely. One of the reasons that also the line of credit was so low is there was a payment in transit kind of at the end of the quarter, which caused this situation where we've collected quite a lot of cash in April.

Great. That's great to hear. Thanks a lot. Congratulations on the quarter.

Thank you.

George Guttman, Jericho Partners.

Good morning, Shai.

Good morning.

As a 51% owner of the new company, you can consolidate all their numbers. I'm wondering what the advantage would be to buy the other 49% and spend $7 million. To me, it would seem that it would be a good idea not to buy the 49% and save the $7 million. Or what am I missing?

We are not buying the company or would not buy any other company just for its numbers. We buy a company after long investigation of how much and what added value would it be bring to the consolidated entity and not just for a consolidation of numbers and owning the company 100%, bringing it to the next level to allow itself to actually double itself since it's only doing whatever it's doing, which is very impressive, $35 million and growing, by the way, in the Israeli market with innovative solutions.

Imagine what this company would do in the US with our amazing sales team and of course, the penetration of our AI products to their existing customer base. And it would be a shame not to execute our option and recognize the ability to actually double all these numbers that we'll consolidate once we get the 51%.

Okay. And the last -- thank you. That actually makes sense. I appreciate the answer. Last call, you mentioned that we may hear something soon about an uplift. And you also said that you expect to be profitable this year. Anything new on the uplift? And do you still think you will be profitable this year?

The update on the uplist is that we are on track with our aggressive plan to execute and get uplisted quickly. It is not only up to us. There is a process we are leading with both exchanges, New York Stock Exchange and NASDAQ. I'm hoping to see one of them advance.

Whomever is going to advance quicker, that's one we're going to go with. And we are working with both exchanges to get this done quickly. It is still according to plan to get it done this year and before Q4. That is our plan. And regarding profitability, the answer is still yes.

Okay. And one final question, I brought up the name last time, Rekor. As far as I see, there is absolutely nothing there, yet they have done a magnificent job in getting their stock to $1 billion. Even now, after it has gone down by almost 50%, it's still like $400 million.

Is there anything that you can learn from them, what they're doing so that you could apply it to us, to our shareholders? Because I mean, I don't see how their stock would be where it is, and I don't see how our stock could be where it is.

We'll try to learn from anyone whatever would work better for our company absolutely. And we got a professional team that looks at everything. It's also PRs and also any other -- whatever we can do better, we'll do better. But always, as I mentioned, we have our own agenda. We're laser-focused on our targets, and we're moving forward in our unique way with our professional, amazing team to achieve these targets this year.

One final question, one of the shareholders that I have in OMNIQ happens to be an IP lawyer. Okay. And while he said that he has not checked into it in depth, he thinks that you may have a good case against Rekor for patent infringement.

Since they have $70 million in cash, what are the chances that you're going after them for patent infringement and getting some of that cash? I know it's a lot of process. I know it's not as easy as I made it sound, but what are your thoughts on that?

That we have nine patents that protect our technology and doesn't matter the name of the company. It could be Rekor; it could be Motorola, for all I care. We're going to always protect our technology. We've got an expert IP team that looks at everything. And whomever we see that have breached our patents, we'll go after them, and they're taking care of it.

Thank you. And hopefully this quarter will be better than the previous quarters. Thank you. Have a great day.

Thank you.

Calvin Hori, Hori Capital.

Oh, hi. Good morning, Shai and Neev.

Hello.

I know you said in the quarter that the AI business grew like 100%, but it's obviously off a small base. Can you give us some kind of range of numbers for that piece right now?

Well, we're looking at orders that came in compared, like we mentioned, to Q1 of last year that exceeded and doubled from the $0.5 million to $1 million, but we're actually at the $1.4 million. So we are exceeding that, and we see that continued growth also in Q2. Again, the market is opening up, and we expect probably to get stability, I would say, the next quarter.

But definitely now, we saw a good trend in our backlog of the AI products. And we'll be able -- again, the market is still not open up completely, but we'll probably be smarter by the end of this quarter, next quarter to say that the numbers stabilized, and growth is still advancing.

Okay. And on the Dangot, what are the EBITDA margins on that business roughly?

Non-GAAP is 35%; gross profitability with an EBITDA of about, I would say, between $4 million to $5 million. And again, that's not including the low-hanging fruits cuts that we discussed. And again, when I say non-GAAP, it's because we are conducting an audit by our GAAP auditors as a public company and bring them to that level. But we definitely think that we're not so wrong in these numbers because there were -- the firm that does their audit even as a private company is EY. So we are in good hands.

Going forward, once everything is consolidated, maybe in the second half of the year, do you see the combined gross margins in excess of 20%, 25%?

That's definitely our plan, Calvin.

Okay. And are you going to get a going concern or note in your 10-Q?

We are working on that as well very aggressively now that parameters are getting better. And auditors, our auditors, view it positively. They like what we're doing there. They're seeing the assets go up. The company gets stronger and stronger implementing the plan. We've discussed at the beginning of the year that support -- part of the base that supports the elimination of the going concern. Hopefully, we'll be successful in that as well to get it off our books.

Okay. And then looking forward, will there be further acquisitions coming up this year, or is this it for you?

Well, I don't know if anything's going to happen this year. We've got a lot of work on our hands, on our plate to finish. We got to do the uplisting. We got to become profitable, and we got to be more than $100 million company that generates double-digit EBITDA.

That's what we want to do. That is our plan, and we're laser focused to get it done. We always look at two strategies to grow, which is organically and M&A. So whatever opportunity comes in, we'll have to observe, look at it, bring it to the Board for their analysis. But I think we've created enough. I mean, we advanced for our plan, and we've now got to finish the work.

Okay. I mean, during the last few months, you've been announcing some nice orders and haven't heard anything from you in the past month or so. Is there still a lot of stuff in the pipeline going on?

First, yes. Second, because we really wanted to finish this acquisition.

Right. Okay. Alright. Great. That's all I have for now. Thanks.

Thank you very much.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Lustgarten for any final comments.

Thank you, operator. Thank you, all, for your support. Special thanks to the OMNIQ team for doing an amazing job, and I am looking forward to speaking with you all at the end of the second quarter. Thank you so much, and keep safe.

Thank you. Ladies and gentlemen, this concludes our conference call today. You may now disconnect your lines. Thank you for your participation.