On Track Innovations Ltd.
Q3 2021 Earnings Call Transcript

Published: 15 Nov 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to OTI's Third Quarter 2021 Results Conference Call. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact OTI's Investor Relations team at GK Investor & Public Relations at 1 [phone] or view it in the News section of the www.otiglobal.com website. I would now like to hand the call over to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin, please.

[Kenny Green:]

Thank you, operator. I'd welcome everyone to On Track Innovations Third Quarter 2021 Conference Call. I would like to also thank management for hosting this call. With us on the call today from OTI are Yehuda Holtzman, the company's outgoing CEO; Amir Eilam, VP, R&D and the Company's new CEO and Assaf Cohen, the company's CFO. Yehuda will first provide some opening statements and hand over to Amir to provide some recent key highlights, while Assaf will review OTI's financial performance for the third quarter. Please be advised that certain information discussed on this call will contain forward-looking statements. They can be identified by the use of terms, such as may, will, expect, believe, intend, plan and other comparable terms. For example, any addition to those forward-looking statements mentioned in the company's results press release from earlier today, OTI is using forward-looking statements when it discuss, among other things, OTI's strategy, the potential of new customers growing business with existing customers and increased traction and opportunities. Current trends of price increases momentum, the impact of the global shortage of electronic parts, the impact from delays from suppliers, the shift to SaaS solutions and recurring revenues, traction in geographic regions OTI's cash needs and satisfaction there of, OTI's potential to raise additional funds to finance its business, increase in pipeline and ability to convert its orders and expected backlog. OTI's optimism for the mid-term, OTI's expectation regarding its growth in sales and sequentially and otherwise recurring revenues and profitability. While forward-looking statements reflect good faith, belief and best judgment based upon current information, they are not guarantees of future performance. They are subject to known and unknown uncertainties and risk factor including those details from time to time in the company's filings with the SEC. OTI assumes no obligation of update any forward-looking statements or information which speaks as of their respective date. The full Safe Harbor provisions are set forth in the press release issued earlier today, which is available OTI's website @investors.otiglobal.com. I'd also like to add that in the press release today, we inadvertently put in one in the GAAP the reconciliation of non-GAAP to GAAP adjustments, a column header saying six months ended September 30. It is actually nine months ended September 30. And this will be corrected online in due course, the 6-K it is correct. And with that, I would now like to hand the call over to the company's former CEO, Yehuda Holtzman. Yehuda, please go ahead.

[Yehuda Holtzman:]

Thank you, Kenny. Welcome all. Thank you for joining us today. To start with, I would like to congratulate Amir on his appointment as new CEO. Amir has been with OTI for over 15 years and has proven himself to be highly capable. I believe Amir will be a very strong CEO and will be able to bring about the accelerated revenue growth. Two years ago I was brought to OTI to bring about turnaround in the business. Over that time, I've worked together with management team to focus the business on its core operations and shift the business towards the long-term and sustainable business model. Now that we are on the right path, it is right time to hand the reins back to an OTI Insider. We focused on building a recurring revenue SaaS model which is starting to gain traction. I believe I am living OTI in good shape and in safe hands of both Amir, Assaf and the rest of the management team. And now I would like to hand over to OTI's new CEO, Amir Eilam. Amir, please go ahead.

[Amir Eilam:]

Thank you, Yehuda. This is my first time speaking with our investors in this forum and I look forward to maintaining an open dialog. Firstly, I would like to thank Yehuda for his tremendous effort for OTI over the last two years. He's been with us, we are pleased with the overall progress made and while it will still take time for the sustainable revenue model to scale, OTI is beginning to feel the traction. There were a number of positive developments in our results during the quarter, which are very encouraging and I would like to highlight them. Our revenue grew very nicely in this quarter for more than $5 million, which represent the growth of 69% year-over-year and 77% compared with the prior quarter. Furthermore, we continue to have a strong level of all those amounting to a few million dollars, which has gone into backlog and will be delivered in the coming quarters. The strength of incoming orders came primarily from the US market from both existing customers, as well as some new customer that we have recently signed up. Our software-as-a-service revenue was $0.4 million, which was up 12% over Q3 last year. And at similar level to that of last quarter, though, I would like to make a few points. In Q3, we successfully grew our payment terminals will be installed in the next quarters. And we expect to see the fruits of these new installations fit into our SaaS revenue stream over a long period into the future. The gross margin in the quarter was 26%, which is at the lower level that we typically see. This is mainly due to the shortage in electronic components that does increase the cost of goods, which reduced our gross margins in this quarter. We are taking a number of steps to manage the issues. And we believe we should be able to show improved gross margins in the upcoming quarters. Our pipeline continues to broaden and deepen. And we are becoming increasingly successful in converting this to orders across all our key geographic regions. We are winning, growing roster of new customers and their initial orders for products. While initial orders always tend to be of a small scale as we enter and build a new relationship with a customer. All these new customers have the potential to grow to something much more significant for OTI over time. We have seen a strong level of new customers and new orders growing our installed base which will ultimately lead us to an increasing portion of SaaS revenues, which guarantees our long term future. I believe where OTI is headed and I'm optimistic with regard to the company's long-term prospects. My goal is to continue the revenue growth into the coming years and to bring us to profitability. Now over to Assaf to review the financial results. Assaf?

[Assaf Cohen:]

Thank you, Amir. As usual, I'll be covering some non-GAAP metrics including adjusted EBITDA from continuing operations. We believe this provides a better understanding of our ongoing performance. Please see the earnings release on our website for further details about these non-GAAP metrics, including reconciliation of adjusted EBITDA for a comparable GAAP results. As previously announced, we decided to sell our Polish subsidiary, ASEC that included the mass transit ticketing segment, and financial result of ASEC were included as discontinued operation and all the prior periods' information has been reclassified to conform with the current period's presentation. Our revenue in the third quarter amounted to $5 million, compared to $3 million in the third quarter of last year. In terms of the breakdown from where revenues were derived in the third quarter of 2021. EBITDA revenue was $4.5 million, or 90% of total revenues, or $0.5 million, or 10% of total revenues. Looking at the geographic breakdown in the quarter, the Americas accounted for $2.9 million, or 58% of revenues, compared with $1.1 million last year, or 35% of revenues. Europe was $1.3 million or 26% of revenues, compared with $1.3 million last year, or 42% of revenues. Africa was $0.3 million or 6% of revenues compared with $0.4 million last year or 40%. And APAC was $0.5 million or 10% of revenues compared with $0.2 million last year, or 9% of revenues. Software-as-a-service or SaaS revenues in the third quarter of the year were $407,000, up 12% year year-over-year and were 8% of revenue. This is compared to $362,000 or 12% of revenue in the third quarter of last year. Gross margin in the third quarter was 26% compared to the 39% reported in the third quarter of last year. As Amir mentioned, the lower level of gross margin in the quarter was due to the global wide shortage of electronic parts and their price increases. And we have taken steps to improve this issue. In third quarter operating expenses were $2.4 million. This is at around the same level compared to $2.4 million in the third quarter of last year. Net loss was $1.5 million, or loss of $0.02 per share, compared to a net loss of $1.6 million, or loss of $0.03 per share in the third quarter of last year. Now turning to our non-GAAP results, adjusted EBITDA loss from continued operation was $1 million in the quarter compared to adjusted EBITDA loss of $1.1 million in the third quarter of last year. Looking at our balance sheet, as of September 30, 2021, the company had cash and cash equivalents and short term investment of $1.3 million. I would like to make further point, as a result of the uncertainty regarding the likelihood that the company will be required to repay its loan agreement that is due and payable on December 17, 2021, OTI management has added a growing concern note in the third quarter of 2021 financial results. The company is negotiating the terms of the loan agreement with its controlling shareholder that could address its cash needs. I know that there can be no assurances that this process will be concluded successfully. And now, we will respond to your questions which were sent in following which we will open the call for a live Q&A. Kenny, please review the questions.

[Kenny Green:]

Thank you, Assaf. We have received a number of questions from investors ahead of this call. And we very much thank our investors for their continued interest in our business. So we will now endeavor to answer those questions. As some of you have risked to remain anonymous. We will not include the names unless you specifically ask us to. So the questions we received are as follows. Why are you not able to announce collaboration to sales to shareholders?

[Amir Eilam:]

So currently, we're focusing on gaining new customers and growing our business with them. We are collaborating with our partners in both sales and marketing. In general, we announced collaboration or sales only when both sides agreed and the agreements or the same is of significance.

[Kenny Green:]

Okay, thank you. What is the new CEO strategy with regards to shareholder communication?

[Amir Eilam:]

I value all shareholders and their commitment to OTI. I will continue to maintain the current communication channels. My goal is to remain as transparent as possible with shareholders.

[Kenny Green:]

What is OTI doing in order to increase shareholder value?

[Amir Eilam:]

I trust that our current focus on sales, which drives us revenue together with our growing business in the US, will increase the long-term value to our shareholders.

[Kenny Green:]

Okay. Where will OTI grow faster in the next few years by Patrician of AI payments solutions?

[Amir Eilam:]

We believe that in the long run, both businesses will grow in a significant manner. And we are focused on both businesses.

[Kenny Green:]

Costs communicating with charging stations; is OTI also working on these solutions?

[Amir Eilam:]

OTI is working to integrate its payment solution with multiple EV charging station vendors. We forecast that this segment will contribute OTI growth in the upcoming years.

[Kenny Green:]

And the final question which was submitted what is the status of Petrosmart relationship with the Dover Corporation gas station equipment suppliers that was first announced in April 2017.

[Amir Eilam:]

Unfortunately, we cannot provide information on sales with specific customers.

[Kenny Green:]

So that concludes the pre submitted questions we received, and we will now open the call for the live question-and-answer session. Operator, please open the line for the Q&A.

[Operator:]

The first question is from Nahomoshit.

[Unidentified Analyst:]

Yes, hi. Congratulations for the good quarter. I wanted to know first of all, do you think that this -- the better solution or better revenues you gave? Do you think it will continue quarter after the quarter? That's the first question.

[Amir Eilam:]

So obviously, it's hard to focus. At the same time, as we mentioned, we have gained in the last couple of quarters, quite few new customers. So I believe that we have a good infrastructure to support additional revenue numbers. And that, obviously, to see as the time progresses.

[Unidentified Analyst:]

Okay, thank you. My second question is, first of all, I want to congratulate you on being the CEO. And I want to ask are you going to stay CEO for long time or is OTI is looking for another CEO?

[Amir Eilam:]

So thank you very much. I don't have any plans to leave OTI; I've been within OTI for 15 years now. So this is like a second family to me. So in that respect, the planning to work and support OTI for many years to come.

[Unidentified Analyst:]

Okay. And another question. The last quarter I talked with, with Mr. Holtzman and he said, I asked him everybody's paying today with and with cashless payments. And I wanted to and asked him how big the share of the company can be today that everybody's already using it. So Holtzman told me that actually OTI is for the unattended market. And I tried to look out what does it mean? And I think fine. So I would like if you could please explain it to me and elaborate mostly -- cash. Thank you.

[Amir Eilam:]

So your question is regarding what is the unattended payment market or within the unattended payment market? What are we doing for mobile payments?

[Unidentified Analyst:]

Yes, what does he mean? What's the market that you --

[Amir Eilam:]

So the unattended market is any payment station without cashier. It can be a vending machine or self service kiosk, entertainment stations and such. Regarding mobile payments, we can divide them to two main applications. Let's say there are the traditional credit card base payment which can be Apple pay, Google Pay, and such. And these are treated as a credit card transaction. And on top of that, there's a growing introduction of new applications which provide your application mobile application and in that respect, we are adding to our existing product line the necessary infrastructure to support these kinds of applications as well. So as from the holistic point of view, we try to accommodate the solution to all payment methods, credit card base, mobile base, and others.

[Unidentified Analyst:]

Okay, thank you very much. Do you invest in research also to be in front of everybody else? I mean, R&D, do you invest in R&D?

[Amir Eilam:]

Certainly, we do.

[Operator:]

The next question is from Marty Elbaum of Horizon Networks.

[Marty Elbaum:]

Yes, gentlemen, yes. Congratulations on your positive results this quarter. Now, you don't have too much money. Where do you expect, how do you expect this company to constantly lose money and continue with a $1.5 million you've -- how do you stay in business? You don't have too much life left. So what are your plans to raise additional money?

[Assaf Cohen:]

Hi, Marty, this is Assaf. So as I stated in my script, currently, we will add in our reports a growing concern note, as a result of the uncertainty of the loan agreement that is due end of the year. But in the same breath, we are negotiating terms of the loan agreement with the controlling shareholders in order to address our cash needs.

[Marty Elbaum:]

Is that Jerry Ivy you are negotiating with?

[Assaf Cohen:]

Yes, that's correct. He is a controlling shareholder.

[Marty Elbaum:]

We've been made so many promises over the years that this company is going to turn profitable, it seems like you're in a great space, I can't understand how could be mismanaged to the point where you can't make a profit, especially during the time when the cashless payments are really very hot now.

[Assaf Cohen:]

That's really we, as we mentioned before, what we have done in the last several two years, let's say and more, is to try and shift the focus of the company to SaaS based solutions , this is in order to create a better infrastructure for our future revenues. And I've mentioned we do see the improvement in performance. And with the increase of additional terminals in the field, this will become more substantial portion of our revenue.

[Marty Elbaum:]

Well, I hope you're right, and you turn the company around.

[Assaf Cohen:]

We at management, we'll do our best.

[Operator:]

There are no further questions at this time. Mr. Eilam, would you like to make a concluding statement?

[Amir Eilam:]

On behalf of OTI, I would like to thank you for your continued interest and long-term support for our business. I would like also especially to thank those of you that submitted enough questions on our call today and make it more interesting for all of us. And we'd like to wish you the farewell and good luck. Thank you and have a great day.

[Operator:]

Thank you. This concludes OTI's third quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.