Adcore Inc.

Good morning everyone and welcome to our investor update conference call. All callers are in a listen only mode. On the call this morning, the company's CEO, Omri Brill, will provide an update on the company's operations and strategy, followed by a financial review by Edgar's CFO, Yatir Sadat, of the company's Q1 2022 financial statements, after which we will answer pre-sent questions and take questions from participants. I would like to take a moment to remind participants of the Safe Harbor Statement. This conference call contains certain forward-looking statements, including statements about the company. Wherever possible, words such as may, will, should, could, expect, plan, intend, anticipate, believe, estimate, predict, or potential, or the negative or other variations of these words or similar words or phrases have been used to identify these forward-looking statements. These statements reflect management's current beliefs and are based on information currently available to management as of the date hereof. Forward-looking statements involve significant risk, uncertainties, and assumptions. Many factors could cause actual results, performance, or achievements to differ materially from the results discussed or implied in the forward-looking statements. These factors should be considered carefully, and listeners should not place some due reliance on the forward-looking statements. Although the forward-looking statements contained in the conference call are based upon what management believes to be reasonable assumptions, the company cannot assure listeners that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this call, and the company assumes no obligation to update or revise them or reflect events or circumstances except as required by law. I will now turn the call over to Omri Vriel, ECRU CEO, to update you on the operations and strategy of the business.

Omri, the stage is yours. Thanks. Thanks, Ilana. Thanks.

Okay, so good morning everyone and thank you so much for joining us today for the company Q1 earning call. Basically what I would like to do today in my statement is to give an overview of the way management read the report and what should we expect Erez Agmoni- A moving on a this year in 2022 and basically give some highlights regarding the company focus area in this year so. Erez Agmoni- Few remarks with regard to the company revenue in Q1 2022 so. Total revenue in Q1 2022 was 4.7 million, which is a decline compared to the 8.6 million we had in Q1 2022. But actually, if we deduct the cost of revenue, which were a big portion of the revenue in Q1 2021, then we can see that Gross profit for both remained the same, actually improved a bit in Q1, 2022. And that's exactly the same trend that we started to see in Q4, 2021. So again, declining top line revenue, but when we look at, when we deduct the cost of revenue from the total revenue and we look at gross profit, we see in Q4, 2021, actually an increase, a small increase in gross profit. This means that the company, is giving away less or lower emerging revenue in extent to higher emerging revenue. And basically, even though we had lost around 4 million revenue, the company is still doing the same gross profit or even better. so that's one thing to take into consideration so that's very important with at the company to deduct i would say the cost of revenue portion in order to see the true value of the company can bring to the to to the table so that's one remark and then when we look one layer down into the report. And we look at the gross profit, like I mentioned before, Q1 2022 was 2 million compared to 1.9 million in Q1 2021. And it's a slight increase in revenue, although we saw a large decrease in top line revenue. Equally important when you look at gross margin for Q1 2022, we see that the gross margin were 43% compared to 23% in Q1 2021. This represent almost 100% to 87% decrease in gross margin. That means the company is generating more quality revenue, and that's exactly where we would like, that's the direction the company would like to take moving forward. And we started to see this trend in Q4 2021 already. Now, if you're going to drill down one more step into the revenue, and then we can see that actually the two very important quality indicators that we spoke about in the last earning call, that indirect revenue, which are higher margin revenue for us, we can still see that it's growing in 160% year over year if you need to compare it to Q1 2021. And obviously Q4 was a bit higher, but we need to deduct seasonality because Q4 in advertising will always be a stronger quarter. And then when we look at North American revenue, which is again another quality indicator for us in terms of the quality of revenue, then still we see the revenue in Q1 2021 from North America growing almost 100% if you need to compare it to the previous quarter in the last year. And again, If you deduct seasonality that is quarter four related, then we can still see a strong increase in these two quality revenue streams. When we look at working capital, there was a slight decrease in working capital in Q1 2021. The main reason for the decrease is that we had investment related to AMFI in Q1 2021. So it wasn't in the report in 2021. And there was some, I would say, seasonality-related expenses, basically, in the migration between 2021 to 2022. And other things that the investor need to take into consideration is that historically, For us Q1 was almost the slowest quarter in the year. So the year actually for us picking up as the quarter moving along. So Q1 historically is the slowest quarter and then Q2 become a bit better, Q3 even better. And then obviously Q4 is where the real action is. So basically when we look at the report, bear in mind that Q1 is historically was a slow quarter for the company. When we look at the Amphi result, and we need to compare it to the way they did last year, then we can see a significant increase in all important parameters in Amphi activity, related activity. So total new classes that were added to Amphi in last quarter was 631. This represent almost 40% increase year over year. Total visitors to the Amphi website was almost 40,000. Again, almost 150% increase. Yochanan Shachmurove. sign up, this means new users and students that sign up to the platform almost 1,500 again more than 150% increase year-over-year and total transaction that's been class booked in Amphi. Up. Yochanan Shachmurove. Up in almost 80% so again it doesn't matter which parameter we look in the Amphi activity, we see a meaningful or significant improvement over there. So basically if we need to summary the Q1 2022 result and also give investor what would they need to expect next in 2022, I would highlight the following. A, Q1 2021 was a strong quarter for us in terms of client acquisition. The company announced 40 new clients acquisition across all regions of the company operating. Two of them actually were big brand names, Best and Less, which is a massive brand in Australia, and Cadelfox, again, an Australian and a UK-based operation for online earning as well. So very big acquisition for the company in Q1 2021, which obviously will start to bear fruit, or we can start to enjoy for them as they move along. tourism budget are back. So that's something that we started to see in Q1, 2022, but for sure now in Q2, 2022, because it's actually picking up and we can now fairly say that if we need to compare or to estimate the tourism budgets that were important part of the ethical activity up until 2019 or like 2019 for sure, but then 2020, 2021 will almost diminish because of COVID, then we can now estimate say with a lot of confidence that 2022 is going to look a lot different and more close to where we used to be in 2018 than where we were in 2020 and 2021 with regard to tourism budget and Edco manage very large and big brand tourism names. Some of them are Israeli travel ministry or tourism ministry, for example, that control a lot of budget. For us, that's actually very great, like big news for us. And other things that I would like to emphasize that the company took a strategic decision in the late part of 2021, that we would like to focus on quality over quantity. Obviously for the long run, we believe we can achieve them both. So we can believe we can achieve quality and quantity, but now the company decided that actually quality of revenue are more important for the companies that quantity of revenue. That's why we are focusing on higher gross margin. And we can see like two quarters in a row that we have steady improvement in the company gross margin. Now we are nearing where the company would like to be, which is between the 45% and the 55% range for the long run. We see a steady increase in the indirect revenue stream, which again comes with higher or better gross margin. And we see a steady improvement in revenues coming from North America, which us, we decided to be a strategic reason for us. If you look further down the road in 2022, and that's very important because there was a lot of shift in, let's say, the company focus and the way the reports move. Prior, I would say, to Q4 2021 and the way they are looking now, and maybe investors are a bit confused and asking themselves, you know, what should we expect moving forward? Then I would say the following. We believe that Q2 and Q3 2022 are going to behave similar to what we saw in Q4 and Q1. That means we're going to continue to see a decline in cost of revenue because the company is going to focus more on quality revenue. And we believe we can see an improvement in both gross profit and gross margin as well. So similar trend. For sure, I would say in Q2, but probably also into Q3 as well. Q4 2022, we'll compare better actually, because that's gonna be the first quarter that we can compare Apple to Apple. So that's the first quarter that we can say, okay, we shift strategy and Q4 2021 was already with the new strategy and our Q4 2022 gonna look like. So reports from Q4 2022, onward should look better and compare better to what they are comparing right now. So that's, again, positive news for the company and for investors. Like I stated before, the 2022 company goals, I would say, are to A, to achieve gross margin of over 40%. We believe that's a doable task. And again, we see a study improvement in this metric a quarter over quarter. And even though we are given away some lower managing revenue, we still would like to see in gross profit of at least 15% year over year. If you can achieve these two goals in 2022, that I can say that as far as management percent, 2022 gonna be a very successful year. And with regard to Amfi and people have some, you know, like a question regarding Amfi, where Amfi stand, where the company stand with the Amfi project, I would say the following. A, investor will need to bear in mind that Amphib was actually only incorporated in Q2, 2021. So the first quarter we started to report the report result with regards to Amphib was Q2, 2021. So we are only as a reporting, let's say company only three quarter into the cooperation. So that's not a long time in a company life. And before that Amphib I would say was still running on a beta mode. So that wasn't like a generate any significant number. we foresee or expect revenue to start increasing from the second part of H2 2022. So as far as we consent for the first four quarter, I would say Q2 2021 until Q2 2022, we're still going to be in the zero to one stage. This means that we are still developing the platform, still building, let's say, the platform in order to cater. And then once we can be sure that we have the right product offering, the right product to market fit, then we can start slowly to scale it up. Again, I wouldn't expect to see significant revenue coming from Amphi in 2022, but from the second part of 2022 and when we enter in 2023, Amphi should start generating more significant revenue as well. Bear in mind that until then, we're making sure to... Fadi Bardawil, Ph.D.: : Every good control of the fee expenses so basically the fee been read, we continue to like continue to be relatively low and that's under the company controls of the company believe we can. Fadi Bardawil, Ph.D.: : continue to invest in the after project and hope to see fruits from this investment in second part of the year, and obviously a for many years to come, but again do it reasonably with relatively low expenses as well.

Fadi Bardawil, Ph.D.: : So.

Last but not least, today morning before the market opened, the company announced a buyback plan. Obviously, that's still subject to the TSX approval, so that's a conditional plan. But the way the company said, And at the board seat, I would say the following. A, the current share price of 0.66%, we don't believe represent the true value of the company. And if any, it represents a buying opportunity. And that's exactly what we are planning to do. So this is, I would say, our first remark. Our second remark is that, obviously, we would like to put this plan into motion, also to show support and solidarity to the foreign shareholders. We understand people lost money on the ethical story. Obviously, that's not the only tech company or other companies that their stock has been slammed lately. Nobody likes to lose money. It doesn't matter if you lose it on Tesla, you lose it on Netflix, or you lose it on Etco. And what we can do in order to source some solidarity is obviously to announce this type of a buyback plan. So under this plan, we can purchase up to 5% of the outstanding shares. That represents a maximum amount of around 3.2 million shares. And we can do it over a period of 12 months. So again, the way management and both see it, the current share price is way too low. We don't believe it to reflect the true value of the company. And the company now is lucky enough to be in a position that we have enough cash in order to being able to announce such a plan. And that's exactly what we are doing, decided to do, but already put it in motion, and this is what we are planning to do. And again, we will do it as long as it takes, and as long as the share price is not going to make any sense as far as we're concerned. Also, Edco is in a relatively strong position as a company, and basically we are lucky enough that even if the current downtrend in the market is going to continue well, I would say, into Reza Azard, The end of 2022 the see let go is a solid company and we don't believe that it will like not like some other companies that urgently needed to recruit. Reza Azard, To to have like another fundraising or anything like that, so it can survive it not only we will survive it. Reza Azard, We will survive it as a better company and basically with more shares that we are buying back because the current share price doesn't make too much sense so that's. As far as I'm concerned, I can say that on a more personal note, I would say the following. Obviously, we are not stupid. We understand Q1 wasn't the greatest quarter for the company. Having said that, we don't believe it's a complete catastrophe as well. The company has a strategy in place. We know what we are doing. If you look at the important markets like gross profit and gross margin, actually, they were improving, and also the quality of the growth. So overall, for the long term, terms, we are very positive around this, I would say, new strategy and what value it can bring to the shareholders as well. And I think shareholders should understand it. They should know now better what to expect also in the coming quarters. And at the end of the day, me as, let's say, the CEO of the company, I have full confidence that, A, Edco will survive this downtrend in the market and actually rise from it as a better, stronger company, maybe with the opportunity to buy other companies as well. B, continue to support this talk if necessary. And see, we remain focused in the long-term, let's say, vision of the company. Only today, with the conference call and with everything that's going on and with all, let's say, the pressure, believe me or not, I had three interviews, you know, for different departments within ETHCO for job interviews that they needed to make. One of them is actually after this conference call. So that's been the day-to-day continue. The company is very much focused on what needs to be done. And this is exactly what we are doing every single day, including today. So thank you so much. And I will add it back to you now, Ilana.

Thank you very much, Omri. I will now turn the call over to Yatir Sadat to quickly review the first quarter financial in more detail.

Yatir? Thank you, Ilana.

Thank you, Ilana, and good morning, everyone. Before beginning the financial overview, I would like to remind you that the following discussion will include GAAP financial measures as well as non-GAAP results. All amounts will be presented in Canadian dollars. Q1 was characterized by an acceleration of the strategy started in mid-2021 to focus on higher margin indirect revenue. We deliberately honed our revenue to focus on the more attractive, predictable, and durable indirect channel, which we believe in the long run will result in more sustainable, profitable business. Now let's review in more detail the financial results. For the three months ended March 31st, 2022, we delivered revenue of 4.7 million compared to 8.6 million in 2021. A decrease of 3.9 million or 45%. Indirect sales were 1.4 million or 30% of sales compared to 342,000 or 4% of sales in Q1 last year. Indirect revenues increased by 1 million or 304% year over year. Cost of revenue decreased by 4 million or 60% to 2.7 million compared to 6.7 million in the first quarter of 2021. Gross profit was 2 million compared to 1.9 million, an increase of 33,000 or 2%. Although the company experienced a decrease in revenue, we saw an increase in gross profit as we saw significant increase in indirect clients with higher gross margin as Omri mentioned before. Moving to operational expenses, research and development expenses for the quarter were 390,000 or 8% of revenues compared to 449,000 or 5% of revenues in the prior year. The decrease was mainly due to increased asset capitalization of both MarTech and EdTech development activities. Sales and marketing expenses and general and administrative expenses for the quarter were 2 million or 44% of revenues compared to 1.5 million or 18% of revenues in 2021. The increase was mainly due to hiring more talents and related employment compensation. Operating loss was 446,000 compared to operating profit of 36,000. This increase was mainly driven by the decrease in direct clients revenue and the increase in SG&A expenses. Net loss was 838,000 compared to a loss of 327,000, a loss increase of 511,000 or 156%. We exceeded Q1 with a strong cash and liquidity position. Total working capital of 11.9 million compared to 12.8 million at December 31st, 2021, a decrease of 886,007%. Cash and cash equivalents of 11.1 million as of March 31st, 2022, compared to 13.9 million at December 31st, 2021. The decrease is mainly attributable to media payments related to 2021 that were paid in January, 2022. This is the technical shifting that Omri mentioned before. We also see significant low debt. The company doesn't hold any financial debt on the balance sheet as you can see. Total assets of 18.3 million compared to 21.7 million in 2021, a decrease of 15%. Now let's discuss the revenue breakdown. So as I've mentioned, the most significant revenue trend is the increase in higher margin and higher quality in direct sales to 1.4 million in the three months ended March 31st, 2022, compared to 342,000 in the same period in 2021. This has been a key strategic focus of ours as we look to drive long-term shareholder value. Thus far, we see that this strategy is working And we reported improved gross profit on an intentionally much lower revenue base. Our gross margin target, as Omri mentioned before, is between 40 and 50%. And this is the goal of the company in the next two years. Now let's discuss the yearly adjusted comprehensive income. As you can see, ENFI's total expenses in the first quarter of 2022 was 323,000, excluding ENFI from the market activity operating loss of, the operating loss was 128,000 compared to operating profit, of 36,000 in 2021, a decrease of 164,000 or 451%. Net loss for the Martic activity alone in the first quarter of 2022 was 515 million compared to a loss of 329,000 in the same period in 2021. Adjusted EBITDA, our quarterly non-GAAP result reflects adjustment for the following items. Depreciation and amortization totaled 299,000. Share-based payment totaled 195,000. Other adjustment totaled 37,000. And for the three months ended March 31st, 2022, adjusted EBITDA was 85,000 compared to 584,000 for the same period in 2021, a decrease of 97%. Excluding Amfi from the amount of activity adjusted EBITDA was 382,000 compared to 584,000 for the same period in 2021, a decrease of 35%. So on an intentionally lower revenue base, as we transitioned to an enhanced revenue model, while also investing in Amfi, we were still able to report positive adjusted EBITDA. And then as our more robust and higher margin revenue model scales and as ENFI grows, we are confident that we will be able to derive significantly improved results in the rest of the year. I would add as a side note to what Omri mentioned before, that in addition to the current level of the revenues that we present in the first quarter of 2022, We expect to add the traditional tourism and leisure budgets now that many countries opened their gates after the pandemic. Another significant revenue that we expect to see in the following quarters in 2022. Now, with that, I will turn the call back to Ilana. Thank you.

Thank you very much, Yatir. With that, we will turn the call over to questions. We'll start with the first question. We talked a little bit about this, but this one coming from Francisco Aguero. What caused the decline in revenues?

So we mentioned it, both myself and Yatir mentioned it in our overview regarding the remarks regarding the result of Q1. But I would say the following. The big drop is many because of the drop in cost of revenue. So the company were giving away revenues that coming with lower merging, was that a lot of cost of revenue associated to them and wanted to focus in more or less a quality type of revenue. So that I would say was the major drive of the lower, the drops that we saw in revenue.

All right, thank you. Next question is, where do we stand with analyst coverage?

It's a good question. And we've been actively looking to get analyst coverage for quite a while now. I need to be honest with the shareholder that says that obviously it's becoming more and more difficult with the current market condition because obviously the company A markup is now going down and obviously analysts don't want to now take a position before because they don't really know what's going to happen in the market. So the company ability now to get solid, I would say analyst coverage was a bit diminished because of the market condition. Having said that, We did get a very positive around the corner report from Carnacode and continue to build very strong relationship with the Carnacode analyst coverage. We're also talking with other analysts for Marshall and other banks as well. And for the long run, I believe once the market will become a bit more positive, then we'll also see starting to get the analyst coverage for the company. I think now, with the shift that the company did in focusing on more quality revenue instead of just any revenue, I think that's going to make the analyst's life also a bit more easy in order to anticipate what to expect in the next coming quarters. And that's going to make their life a bit easier. And actually, when they started to cover a company like Edco.

Thank you. Our next question is from John Lee. What has been the churn rate for AMC?

So we split it in two. I would say if it's AMC, we have two types of offering. We have the free offering, basically. And over there, we can see around 40% churn rate. So there's a lot of, I would say, small clients, accounts, and basically going into the platform, using the app for free, for example, effortless marketing. And we can see over there around 40% chain rate, which makes sense for a free app offering. But when we're talking about the premium app, like Fiditor and other, then the chain rate is actually very low. We talk about around 8% per quarter. So basically, if it's premium, we see a very low chain rate. And if it's free, which makes sense, we can see a bit higher chain rate. Mm-hmm.

Next question from Mr. Guerra. Will you need to raise equity this year?

Well, I already mentioned it a bit. I would say, A, the company have a strong cash position. So the short answer would be probably no, but I would add to exempt exemption for this answer. And if you believe that they're going to be a meaningful company, M&A opportunity, and it's going to be bigger than what the company currently afford using only our care, then maybe we can turn into to look to raise some capital to support this deal. This can be one exemption. And another exemption can be to support the further growth of Amfi. But again, if you're going to do that, it's going to be probably directly to Amfi, not related to the So I would say overall for the core business of Nartec, the short answer is no, but it's not bad.

Thank you. What is the company M&A pipeline?

So we're actively working and we discussed it a few times before. We're actively working in order to build a pipeline. We're looking to few potential M&As deal right now. Some of them I would say more, close to the type of acquired type of M&As. It means that we are always looking for people. And I mentioned before that just today with all the conference call, earning call and everything, I need to free time to interview three different candidates for three different departments within the company. So we all the time still continue hiring. And so acquired type of M&A is something that we're actively looking to do. And also other, let's say, I would say more strategic type of M&As that can give us some advantage or give us an access or entry point to, let's say, two areas that the company currently not very good at or would like to enter into. So that's the two type of potential M&As that we're looking to do.

Thank you, Omri. Our next question is from Patrick Irish. Why did the board decide on a 5% and not a 10% and a CIV? Also, did they discuss options like a tender offer at 40 cents for 5 million shares to absorb any sellers in the market?

So it's two different questions. I would start with the first one. So basically, the way the plan are set up, you can actually decide whether you want to go for 5% from the total outstanding shares. And for us, it was a bigger number than 10% of the floor, because the floor is not so big. So when we did the math, actually, 5% of the total outstanding come a larger number than the 10% from the total float. That's why we decided to go with the 5%. So 5% may sound like a smaller number than 10%, but actually represent more shares the company can buy. And for the second option, the board didn't have the discussion about it yet. We would like to give the new plan a chance to succeed and to prove itself. But if you still see that there's a lot of weekends in the market and people would like to to go out from the stock, then we can proceed the other option as well. Like I say, we believe in the company. We put our money where our mouth is and start to buy shares back. And we continue to do so as long as it's going to take.

5% of 63 million or 10% of 22 million. So this is the difference.

Thank you. Next question is any color on the large customer living at court?

Yeah, so we didn't have any large customer leave at core, but we did so a meaningful, I would say, reducing this customer activity. And I would say it's mainly attributed to two things. A, switching some of their activity from do it for me to do it yourself. So obviously the entire media related costs that were part of this revenue are no longer exist. And B, I would say, In this specific reason, which is, I would say, Asia, we had more impact of the iOS 14 and the Facebook and new regulation on it. So I would say both of them impact. Having said that, we did see a decrease, but this client is still alive with the headcount.

Thank you, Marie. Our next question is from Tim. Why do you change strategy so often? First, you wanted to focus on top line revenue growth, and now you change towards bottom line growth with better margins, again, being the strategy. Should investors be worried about your non-consistent strategy choices?

Yeah. So I would say the following. There's a lot of things in now our world to be worried about. I would say like it's fair enough to say that you can, one of the things you need to worry about is basically the company strategy decision. I would say historically up until 2021, the company gross margin area was always at around 50% and without a big portion of cost of revenue that attached to it. So that's historically was the case here after year up until 2021. And then in 2021, a large chance because of COVID, we saw a massive spike in direct client activity. We thought it's a big opportunity for the company and basically decided to take it. But that's also come with a high price tag of, let's say, lower gross margin. So that's something that I would say was very much COVID related. And if any, now the company is going back to, I would say, to the historic norm. So the company is not jumping around from one strategy to another strategy. Bear in mind that we are in business for a long time, since 2006. And we've seen a lot during this year. So we know how the quarter looked like. We know how the years looked like. COVID was an unusual time. And sometimes unusual time required unusual measures. But I would say 2022 will be much more similar to, I would say, historic norms than 2021 was, if that makes sense.

Thank you, Omri. We have time for two more questions, although many are asking. So let's start with Michael Wu. What is the advertising revenue and margin from the Israel tourists before the pandemic? What's currently revenue trend from this customer?

Yeah, so we don't tend to discuss specific revenue from a specific client. Also bear in mind that we are under an NDA agreement with them. So that's something the company cannot disclose. But what we can disclose and was disclosed in the PR that let's say the overall budget, let's say advertising budgets that we're talking about are 25 million. Obviously, from this, let's say, cut, the company A, we have another, let's say, company that's managing parallel to Edco some of this budget. And B, I would say, historically for this sum of budget, I would say anywhere between 5% to 10% is usually the company cut. But again, it's not to talk about this specific client. I mean, investor can understand whatever they want to understand for me.

Thank you, Marie. We're going to have one last question. What are the company outline plans to boost investor confidence?

First of all, Trust me, I hear you. Like, I understand your pain. You know, like I'm also beside it for M investor and lost a lot of money on much bigger, better brand name companies like Tesla, Airbnb that I like a lot and other brands out there. So I can understand it. And nobody likes to lose money. You know, like there's a lot of things you can like in life. Losing money probably is not one of them. But Again, me as an investor, what I'm trying to say, to tell myself, hey, to see, let's say, the downtrend in the market is buying opportunity, and I do need full ad hoc and full other, let's say, companies that I like, and I believe they're going to do good for the long run. And I would say for investors, either... do the same. Or I would say stay quiet. You know, people lost a lot of money on the ethical story on other stories as well. So I think like investors need to be a bit more patient. The trend in the market is not going to last for, I don't know, three or four years. It's something that I would say it's a few more quarters away. And I personally think expect it, you know, like we're going to see maybe some uptrend or maybe some sideways movement. But for the long run, Edco is a solid company. We did a lot now with the buyback plan. So that's, I think, show a lot of solidarity and support to the current shareholders. And like I stated before, we continue to do whatever it takes in order to support the story. And trust me, we know that people lost money and we know that they are not happy about it.

I'm not happy about it as well. Thank you very much.

With that, we will conclude the Q&A portion of this call. Thank you, Omri. Thank you, Atir. And thanks, everyone, for joining us today. Have a great day.