OMNIQ Corp.
Q1 2021 Earnings Call Transcript

Published: 14 May 2021

[Operator:]

Good morning and thank you for joining us for the 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 will provide an operational overview and Neev Nissenson, Chief Financial Officer, who will discuss financial results. The prepared remarks will be followed by a question-and-answer session. I will 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 current expectations and our business 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 10-K 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.

[Shai Lustgarten:]

Thank you, operator and thanks to everyone joining us on the call today. I appreciate you taking the time to listen in and I hope this finds you and your loved ones safe and healthy. Before we discuss first quarter results, I would 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 Limited. With this acquisition, we are creating the $91 million revenue company on the 2020 pro forma basis that is providing automation and object identification solutions positioned 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 robotic 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 of over the 30 trading days prior to signing. We also have 1 year option to acquire the remaining 49% of the same valuation. Closing is expected shortly upon receipt of approval by the Israeli Competition Authority. For financial background, 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 demand in Israeli market, create for us a unique opportunity to leverage our strong sales team in the U.S. 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 drugs in the U.S. Dangot is the major supplier to logistic 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 am 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.

[Neev Nissenson:]

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 $0.70 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 the $5 million 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?

[Shai Lustgarten:]

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 will now provide an update on both parts of the business. Starting with AI, I will share a few highlights. First, during the first quarter, we were selected by the 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 the problem in Georgia that is endemic across the United States that approximately 36 million uninsured vehicles are traversing our nation’s roads everyday and states are losing millions of dollars from unregistered vehicles on the road. We also received orders to provide Q Shield a top defense authority for the prevention of terror attacks in the sensitive zone outside the U.S. 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 the severe problem as the 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 5 years.

[Operator:]

Thank you. Our first question comes from the line of , Private Investor. Please proceed with your question.

[Unidentified Analyst:]

Thank you. Hello, Shai and good quarter.

[Shai Lustgarten:]

Thank you, Hila .

[Unidentified Analyst:]

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

[Shai Lustgarten:]

So we are looking at 400 – across the nation about 400,000 in Ungated and Gated communities and HOAs. It’s a huge market. We are using an indirect sales channel that actually is the one that approaches and resells our products, approaches and directly all these residents and communities Gated and Ungated and these resellers that we are training with our Q Shield product and they are actually coming with an innovative solution that doesn’t exist today. We are not offered today by anyone where we takeaway 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 is entering the facility. And yes, we can talk a lot about it. But everything is using our AI infrastructure and machine vision technology. We are 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.

[Unidentified Analyst:]

Wonderful. So, the gross margin is lower, is it due to a specific product and how is the margin of the acquired company?

[Shai Lustgarten:]

The growth – yes, indeed, we saw in Q1, a lower growth, not lower, but kind of a continuous gross profitability, but we saw starting Q3 last year during the pandemic, basically, the simple fact and we have 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, etcetera, 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, Wi-Fi, etcetera and we see growth in that. But this growth comes with lower margins. It’s a legacy technology. The good points about it is that we are one, see growth in both our – 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 years. So we see growth in both businesses – business lines. And basically, when you see that growth, you will see of course the growth also of the GP, as we saw in 2019 and also Q1 and Q2 of last year. So, we will see that coming back immediately and – but it’s going to come from a much larger top line that so the cash generation for us is going to be much more much better this year as well. And in addition to that to this organic two business lines, of course the Dangot’s 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 coming 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 markets with legacy technology we serve. All these aspects probably give you the picture of how the series is going to end, which makes us very exciting.

[Unidentified Analyst:]

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

[Shai Lustgarten:]

Thank you so much.

[Operator:]

Thank you. Our next question comes from the line of Howard Halpern with Taglich Brothers. Please proceed with your question.

[Howard Halpern:]

Congratulations on the quarter guys.

[Shai Lustgarten:]

Thank you.

[Howard Halpern:]

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

[Shai Lustgarten:]

We do see that trend happening. And of course, we don’t have the sign – we haven’t finished the quarter of course, but we do see already that trend.

[Howard Halpern:]

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

[Shai Lustgarten:]

On the expense side and I am 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 both sides because of this merger. So that will significantly grow the EBITDAs 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 were 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 to by each company, by both companies, especially the Dangot’s products to the U.S. market that we do not offer today under our portfolio offering.

[Howard Halpern:]

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

[Shai Lustgarten:]

Primarily in Israel, but they do have global customers, but it’s not in the U.S. it’s more in Europe.

[Howard Halpern:]

Okay, okay. A lot of runway to grow them once it’s completed.

[Shai Lustgarten:]

Yes, sir.

[Howard Halpern:]

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

[Shai Lustgarten:]

Yes. 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.

[Howard Halpern:]

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 as with a lower workforce potential?

[Shai Lustgarten:]

That is a great question, because that 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 greater efficiencies in yard management, distribution centers, warehouse automation, etcetera. So, actually, this – the trend of employees that are not returning to work quickly, we have noticed that it is becoming an issue and actually increasing the interest in demand of our standalone AI products to provide the same automation that better automation without a touch of the 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 show them the benefits, the added values and respond to that need.

[Howard Halpern:]

Okay. Well, congratulations and that’s a good adaptation of your technology. Keep going.

[Shai Lustgarten:]

Thank you. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Mitch Swergold with Swergold Advisory. Please proceed with your question.

[Mitch Swergold:]

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

[Shai Lustgarten:]

Thank you. Thank you.

[Mitch Swergold:]

If I recall correctly, you had $25 million in bookings for the quarter, 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 recognize less than $20 million of that $25 million, could the – 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?

[Shai Lustgarten:]

It’s not – I wouldn’t say that the 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 am very happy about still, because these are like you mentioned also in your question, these are SaaS sales cycle items, which create the fuel for a company to build our future and implement our AI business to our existing customers. The COGS again are not higher. The – we do when you work on large projects like the 6.8, we announce 6.1, we announce several very large broad projects, you compete also and price is an issue. And sometimes you got to lower a little bit of price. So percentage wise, you will see the COGS go higher, but they didn’t raise - they didn’t – the COGS not go up.

[Mitch Swergold:]

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

[Shai Lustgarten:]

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

[Mitch Swergold:]

In Q2, okay, great. And that’s also more legacy oriented business?

[Shai Lustgarten:]

Yes, but definitely with growth with our AI ones.

[Mitch Swergold:]

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

[Shai Lustgarten:]

The cash actually – the cash, which is managed nicely, is ranges between the $2 million to the $5 million, depending on how we use our line of credit. And we prefer to actually lower interest costs 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 does allow us to actually do this quickly.

[Neev Nissenson:]

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 to fold. We are still using it, but at a lower rate than we used in the past.

[Mitch Swergold:]

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

[Neev Nissenson:]

Yes, they have the another agreement, they are going to have to keep similar working capital in a way that they will not – 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.

[Mitch Swergold:]

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

[Neev Nissenson:]

I am not sure I understood the question.

[Mitch Swergold:]

Often companies bill with 30 day receivables, so 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 am wondering if that has happened for you?

[Neev Nissenson:]

It did. It is definitely one of the reasons that also the line of credit was sold low, it was a payment in transit, kind of at the end of the quarter, which causes a situation where we have collected quite a lot of cash in April.

[Mitch Swergold:]

Great, that’s great to hear. Thanks a lot. Congratulations on the quarter.

[Shai Lustgarten:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of George Guttman with Jericho Partners. Please proceed with your question.

[George Guttman:]

Good morning Shai.

[Shai Lustgarten:]

Good morning.

[George Guttman:]

As a 51%, owner of the new company, and you can consolidate all their numbers, I am 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?

[Shai Lustgarten:]

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 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 its 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 U.S. with our amazing self in. So and of course the penetration of our AI products to their existing customer base and it would be same not to execute our option and recognize the ability to actually double all these numbers that will consolidate once we get the 51%.

[George Guttman:]

Okay, in 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 it will be profitable this year?

[Shai Lustgarten:]

The update on the uplift is that we are on track with our aggressive plan to execute and get up listed quickly. It is not only up to us, there is a process we are leading with both exchanges, New York Stock Exchange and NASDAQ hoping to get to see one of them advance, whomever is going to advance quicker. That’s the one we are 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.

[George Guttman:]

Okay, and one final question. I brought up the main last time Encore. As far as I see there is absolutely nothing there, yet they have done a magnificent job in getting your stock to a $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 are doing, so that you could apply it to us to our shareholders? Because, I mean I don’t see how their stock could be where it is. And I don’t see how our stock could be where it is?

[Shai Lustgarten:]

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

[George Guttman:]

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

[Shai Lustgarten:]

That we have nine patents that protect our technology, and doesn’t matter the name of the company could be Ricor, could be Motorola for eye care. We are going to always protect our technology. We got an expert IP team that looks at everything. And whomever we see that that’s breached our patents we will go after them. And they are taking care of it.

[George Guttman:]

Thank you, and hopefully each quarter will be better than the previous quarters. Thank you. Have a great day.

[Shai Lustgarten:]

Thank you.

[Operator:]

Thank you. Our next question comes from line of Calvin Hori with Hori Capital. Please proceed with your question.

[Calvin Hori:]

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

[Shai Lustgarten:]

Well, we are looking at – we are 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 are 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 will be able – again the market is still not open up completely, but we will probably be smarter by the end of this quarter and next quarter to say that we – the numbers stabilized and growth is still advancing.

[Calvin Hori:]

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

[Shai Lustgarten:]

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 is 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 are not so wrong in these numbers because they were till – that the firm that does their audit, even as a private company, is why, so we are in good hands.

[Calvin Hori:]

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

[Shai Lustgarten:]

That’s definitely our plan Calvin.

[Calvin Hori:]

Okay. And is there – are you going to get a going concern or not in your 10-Q?

[Shai Lustgarten:]

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 are doing. They are seeing the assets go up. The company gets stronger and stronger implementing the plan we have discussed at the beginning of the year, that support part of the base, that supports the elimination of the going concern. Hopefully, we will be successful in that as well, to get it off our books.

[Calvin Hori:]

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

[Shai Lustgarten:]

Well, I don’t know if anything may happen this year. We have got a lot of work on our hands on our plate to finish. We got to do the up-listing. We got to become profitable. And we got to be more than $100 million company that generates double-digit capital. That’s what we want to do. That is our plan. And we are 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 will have to observe look at it, bring it to the Board for their analysis. But I think we have created enough. I mean, we advanced for our plan, and we now got to finish the work.

[Calvin Hori:]

Okay. I mean, during the last few months you have been announcing some nice orders and haven’t heard anything from you in the past month or so. There is still a lot of stuff in the pipeline going on.

[Shai Lustgarten:]

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

[Calvin Hori:]

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

[Shai Lustgarten:]

Thank you very much.

[Operator:]

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

[Shai Lustgarten:]

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 in at the end of quarter for the second quarter. Thank you so much and keep saving.

[Operator:]

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