Adcore Inc.

uh we'll start the conference call in a few more minutes we'll give everyone some more participants time to join and we'll start in about two minutes time thank you for your patience Good morning, everyone, and welcome to our investor update conference call. All callers are in listen-only mode. On the call this morning, the company's CEO, Omri Bril, will provide an update on the company's operations and strategy, followed by a financial overview by Adcore's CFO, Yatir Sadot, of the company's Q2 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 information and forward-looking statements, including statements about the company. Forward-looking information may relate to the company's financial outlook and guidance, including revenue, gross profit, gross margin, and adjusted EBITDA, and anticipated events or results and may include information regarding the company's financial position, business strategy, growth strategies, addressable markets, budgets, operations, financial results, taxes, plans, and objectives. particularly information regarding the company's expectations of future results, performance, achievements, prospects or opportunities, or the markets in which the company operates, the achievement, of advances in an expansion of the company's technologies and platforms, expectations regarding the company's revenue, gross margins, and future profitability. The future impact of the COVID-19 pandemic and the Russian invasion of Ukraine and reactions thereto is forward-looking information. 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 and forward-looking information. These statements reflect management's current beliefs and are based on information currently available to management as of the date hereof. In addition, any statements that refer to expectations, intentions, projections, or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management's expectations, estimates, and projections regarding future events or circumstances. Forward-looking statements involve significant risks, 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. Such risks include the factors discussed under the risks and uncertainties section in the company's quarterly and annual MD&As, Other factors that can cause actual results or events to differ materially include, but are not limited to, loss of major clients, inability to acquire new clients, significant changes to policies and guidelines of media partners, and any significant change to the global business environment and or in specific territories in which the company operates. These factors should be considered carefully, and listeners and readers should not place undue reliance on the forward-looking statements. Although the forward-looking statements contained in this call and financial results press release are based upon what management believes to be reasonable assumptions, the company cannot assure listeners and readers that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this conference call, and the company assumes no obligation to update or advise them to reflect new events or circumstances, except as required by law. I will now turn the call over to Omri Brill, Adcore CEO, to update you on the operations and strategy of the business. Omri?

Yes. Thank you so much, Barak, and good morning, everyone.

Let me share my screen real quickly.

Okay, so let's jump right into it. So when we look at the quarterly result of Q2 2022, we can see that the top line revenue was 5.2 million compared to 4.7 million in Q1 2022. That's representing 11% gross quarter over quarter. And gross profit was 2.1 million in the second quarter compared to 2 million in the first quarter. This represented 5%. a quarter of a quarter growth. So overall, if you look at the quarterly metrics or the quarterly growth, we should be quite happy with the result. Obviously, if you need to compare it to what we had last month, sorry, last year, that can be a bit more negative. But again, the company believes that starting Q4 2021, the result should stand by itself. And the only, let's say, comparable quarter should be the next Q4. And equally important, when we look at the gross quality KPIs that we indicated many times before, then if you look at the indirect revenue, we saw that in Q2 2022, they reached almost 1.9 million compared to less than 1.4 million in Q1 2022. And then if you look at the entire year-over-year growth, it's almost 200%. So the companies continue to grow in this very important revenue stream, which comes with higher growth margin and better growth profit as well. And that's something that we are really, really happy to see. And that's, by the way, far exceeding the growth that we see the quote, the quarter over quarter growth that we saw, let's say, in the overall revenue of the company. So this important revenue stream is actually growing faster than the rest of the revenue streams of the company. And if you look at an important geo for us, North America, then yet again, we can see that was a record quarter in Q2 2022, almost 1.5 million in total revenue compared to less than 1 million revenue in Q1, 2022. And again, far exceeding the, I would say the average growth that we see. So in these two very important KPI for us, we can see that actually the results for Q2 was really good. And basically the momentum is there and not only there, it's actually getting stronger. That's something that we are happy to report and happy to see as well. When we look at working capital, then you will see, and also Yatir will touch it in his review as well, that the total working capital in the last quarter actually went down by 1.7 million. And the company is looking more at working capital than cash because cash for us is basically fluctuated a bit because of media buying and advertising. and stuff like that. So when we look at the 1.7 working capital loss in a quarter, then one should ask himself, where does capital loss come from? And the clear answer is, I would say the two major factors are A, almost half a million dollar buybacks that the company did in Q2. And we're going to touch that in the next slide. So that's a massive buybacks that we did during the second quarter. And obviously the continued investment of the company in the Amphi project as well, which is another half a million. So I would say, From this 1.7 drop, one million is an investment and let's say half a million is at least one time investment as well. So the company is quite bullish actually regarding being able to maintain more SRA working capital in the next quarters. As I mentioned before, in Q2, the company and also not only the company, also insiders within the company, including myself, bought almost 3 million shares during the quarter, totaling almost $600,000 Canadian dollar in money. Average price was around 20, 20-something cents. when we bought it. And I think that's maybe the stronger indicator about where the company believe the current or other companies see the current share price and where we believe the company is heading for in a sense like action speaks louder than words. And this is, I would say, maybe the strongest signals that you can get from a company and also from insiders within the company regarding what we believe the company direction is and what we think about the current share price. So we bought shares and we'll continue to buy shares if you see these still like fluctuation or different between where we think the share price should be and where the share price is. And the company is lucky enough to have enough cash in his book in order to support this effort as well. If you're gonna talk about Amphi a bit, so actually during the quarter, we soft launch a all new version of the Amphi website. This is something massive for us. And this is, I would say the biggest change that we did in Amphi since Amphi was incorporated, I think. So that's something big that we've been working on for the past six months and even more. And basically we'll be publicly announced it in September. That's the plan and all the special events just around it. But just to give you a few highlights, and obviously you can go to the AFI website and see it for yourself. I would say the biggest things that we change in the new version of AFI is A, Instead of only one app, which is classes or online courses, now we support three different apps, which is classes, kids, and places. So you can do virtual tours in cities, in museums using Amphi, take kids' classes and ticket activity online. And basically, you have much more variety than just online classes and courses. And if you look, let's say, on the Amphi UI and UX, we did a major effort to make it much more user-friendly, but not only that. We put a lot of effort also on media. So we create for the most important courses trailer. So when you go online, you will see for the important courses, you will see trailer like Netflix, for example. So you have a video of somebody speaking about the course, speaking about himself and explaining exactly what you're going to do during the course. So this is one thing. Another thing that we did We launched for a mobile, what we call a story view. So basically you can like in stories, you can go and swipe between different classes. And last but not least, we also introduce exploration, endless exploration. So basically when you scroll the website, you're going to see like classes loading all the time. So you can never like stop getting new content and new classes as well. So that's like fantastic. few highlights I would say about the things that the change in the AFI, but I encourage everyone, especially people that didn't visit AFI lately to go online, visit AFI and see it in firsthand. And like I say, we are planning to do a big event around it in September and officially launch the new version. And other things that we started to do in AFI is focusing more on B2B activity and B2B sales. And I'm happy to report then in Q2 already, 40% of the ARFI revenue actually came from B2B orders and this is compared to 0% in Q1. So this is actually the fastest growing segments for us now in ARFI and we have high expectation from these segments moving forward as well. And when we look at the report, and I understand the result are mixed, especially if you need to compare them to last year, but for us, A, obviously the half glass is more full than empty. And I would say equally important when we already bypassed the middle of the year and look forward for the second part of the year, and actually our outlook for the second part of the year is actually very bullish. And these few factors that I would like to base, that basically supporting our bullish outlook, some of them are the fact that in the second part of the year, we expect much better or stronger tailwind. Travel activity, for example, resumed now to the levels that it was for us in 2019. So basically, there was a big sector for us that basically was underwater for the past two years. And we're glad to report that it has now come back in full force. And obviously, the third quarter, which is the summer holidays, maybe the strongest quarter for travel spending, seasonality. Again, third quarter and four quarters historically for online advertising are the strongest quarter of the year. Obviously, summer spending and then the holidays in Q4. So we are turning into the better part of the year in that sense. We also did and still are doing some I would say measurement in order to keep our expenses under control. A, we look at, let's say, high-level salaries, especially B-level salaries, which you think like currently are too high. Basically, maybe we can replace the current position with, I would say, younger employees that come maybe more hungry and willing to work for lower salaries. So basically, that's one thing the company is doing. Also, when we recruit now, we are more, I wouldn't say that we stop recruitment, but we still recruit. But we are now asking ourselves, let's say twice or sometimes even three times before publishing a new position because we understand, okay, this is not exactly business as usual. But, and the company need to also to reflect that as well. And not only that, when we look on expenses, we try now to authorize only essential expenses. So if it's not essential, we don't like to approve it anymore. And again, that should, come down to lower expenses when we're moving into q3 and a q4 as well but i would say i'm generally saying like the philosophy of the company is something that we learn in a during a covid actually that if you're going to be too aggressive cutting a cost of cutting people and talented then actually when it's going to up the app not going to be as strong because we're going to lack of resources. So we want to keep it under control for one end, but from the other end, we know there is a business to run and we are very optimistic regarding, let's say, the coming quarter. So for us, we want to maintain the current, I would say, expense, maybe cut it down a bit. But again, we don't want to cut it too much because then when the eye is going to come, we're not going to be able to enjoy its fruit. And other things that I would like to see, and that's why it would make us very positive regarding future quarters. The company invested a lot in the last couple of quarters in building more quality growth. If you remember, we talk about that we aim to be in the round 40 to 50 gross margin. And basically, we would like to focus on, let's say, not only quality by any cost, but also the quality of the gross. And we saw that, let's say, the two main KPIs of the company look at the indirect revenue stream. And let's say it streams that their revenues are coming from North America. Both of them actually are now accelerating and growing more strong than before. So that's something that help us to be a bit more bullish regarding the following quarters. And last but not least, some of the new activities that the company, again, invested a lot of time and effort during the past quarter are starting to bear fruit. And this is going to contribute to the, let's say, top line, bottom line, and middle line as well of future quarter results. So if you're noticing the PR, that was the first quarter the company give a revenue guidance for the second quarter. Usually companies in ethical size don't give a revenue, Sorry, for the third quarter. So usually company and ethical size don't give a revenue quarter, but we think we've been around public long enough and the company is established enough and we have a solid financial teams that can help us building now revenue models, then we can start doing that. We're not going to give an yearly revenue guidance because we think it still can fluctuate a lot, but we are happy to give now at least quarterly revenue guidance. And this is like, again, that's the first quarter that we're going to do it. So when we look at the third quarter, Quarter outlook actually is quite bullish. We believe the revenue is going to be in the range of 6.1 million to 6.75 million. That's a big increase if compared to the 5 million or 5 and a change millions that we did in Q2. Gross profit trend should be around 2.9 million to 3.2 million. That's, again, a big increase if you need to compare it to the current gross profit number. And gross margin as well, we expect them to improve to around or exceed 45%. So the company is quite bullish regarding Q3. And I would say equally important, bear in mind that the best is yet to come. Q4 should always be the best quarter for us. And this is like for everybody that are in the online advertising business. It's the same concept, I would say. So let's actually conclude my remarks. Again, I want to thank everybody that joined us today. And obviously, we'll take any questions that you guys might have. But for us, especially the guys that have been working very hard during the last quarter or so, I would say, Yeah, it wasn't the best quarter in the same year to year comparison, but overall, we are very happy in the direction the company is going. And I can say I'm much more happy now than I was in the beginning of the year, for example. And I think next quarter will prove us right. So we'll see you guys in the Q&A section, and I'm going to add it now to Yathir.

Thank you, Omri. Good morning, everyone.

Before beginning the financial overview, I would like to remind you that the following discussion includes GAAP financial measures as well as non-GAAP results. All amounts will be presented in Canadian dollars. Q2 was characterized by a continued acceleration of the strategy we started in mid-2021 to focus on higher margin indirect revenue. We continue to focus on the more scalable and durable indirect channel revenue, which we believe in the long run will result in a more sustainable and profitable business. Now let's discuss in more detail For the three months ended June 30, 2021, we delivered revenue of 5.2 million compared to 7 million in 2021, a decrease of 1.8 million or 26%. Indirect sales were 1.9 million or 37% of sales compared to 274,000 or 4% of sales in Q2 last year. Indirect revenues increased by 1.6 million or almost 600% year over year. Cost of revenue decreased by 16% to 3.1 million compared to 3.7 million in the second quarter of 2021. Gross profit was 2.1 million compared to 3.2 million, a decrease of 1.1 million or 34%. Our gross margin was between the expected range of 40 to 50%, as discussed earlier this year. We expect to see an even higher gross margin in Q3, like Omri mentioned before, and even exceeding the 45% gross margin. Moving to operational expenses. Research and development expenses for the quarter were 0.4 million or 8% of revenues compared to 0.3 million or 4% of revenues in the prior year. Sales and marketing expenses and general and administrative expenses for the quarter were 2.3 million or 44% of revenues compared to 2.6 million or 37% of revenues in 2021. We saw two different trends. On the one hand, we saw an increase in salaries and M fees investment year over year. On the other hand, we didn't have financing related costs during this quarter compared to the same period last year. Bottom line, SG&A decreased by 0.3 million or 12%. Operating loss was 0.6 million compared to an operating profit of 0.3 million. This increase was mainly driven by the decrease in direct tech lines revenue and the increase in research and development expenses. Net loss was 1.2 million compared to a loss of 0.7 million, a loss increase of 0.5 million or 76%. On the next slide, you can see that we exceeded the second quarter with a strong cash and liquidity position. Total working capital of 10.2 million compared to 12.9 million at December 31st, 2021. A decrease of 2.7 million or 21%. Cash and cash equivalents. of 9 million as of June 30, 2029, compared to 14.1 million at December 31, 2021. The decrease in cash and working capital was mainly attributable to, first of all, purchasing shares, as Omri mentioned in his part. So the first purchasing of shares was from a former officer and through the company's buyback plan that we announced last quarter. The company sees this is a too strategic and important investment in the company in order to try to drive more value to Adcore shareholders and investors. The second reason was Amphiz investment. We continue to support and invest in Amphiz project. And the third reason related to media payments related to 2021 that were paid in the first quarter of 2022. Bottom line, total assets of 17.3 million compared to 22 million in 2021, a decrease of 21%. You can see that the company continues to be a debt-free company on the balance sheet. And on the next slide, I would like to discuss the revenue breakdown. As I previously mentioned, the most significant revenue trend we saw during the last quarter was the increase in IR margin indirect sales to 1.9 million for the three months ended June 30 2021 compared to 0.3 million in the same period in 2021 this has been a key strategic focus of our as we look to drive long-term shareholder value that 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 range for the second quarter was between 40% and 50%, like I mentioned before, which we met that goal. And we expect to exceed the 45% and even more during the third quarter of this year. Now I would like to present you the revenue mix strategy that we start pushing from Q4 2021. So as we can see in these three charts, since Q4 21, we've been experiencing an ongoing increase in the indirect revenues portion of the total revenue. from 24% in Q4 21 to 36% in Q2 22 leading to a higher margin revenue mix. Adjusted EBITDA. Our quarterly non-GAAP results reflect adjustment for the following items. Depreciation and amortization totaled 0.3 million. Share-based payment totaled 0.1 million. Other adjustment totaled 0.2 million. And for the three months ended June 30, 2021, adjusted EBITDA was minus 30,000 compared to 1.5 million for the same period in 2021, a decrease of 100%. Excluding Amphi from the Maltec activity, adjusted EBITDA, as you can see, was 167,000 compared to 2 million for the same period in 2021, a decrease of 92%. So on an intentionally lower revenue basis, we transitioned to an enhanced revenue model. We were still able to report a positive adjusted EBITDA on the Martech activity. As you can see under this slide, as our more robust and higher margin revenue model scales and as AMPHIS grows, we are confident that we will be able to derive even better results in the next quarters. Now with that, I will turn the call back to Barak.

Thank you, Yatir.

With that, we will turn the call over to questions. So Omri, first question from Kolowol Akinmoji. Do you intend to start providing quarterly or yearly guidance?

So actually I discussed it in my remarks and yes, the answer is yes, the company will start and we already started this quarter to provide quarterly guidance and hopefully that's something that this time we can also increase it to early, but for now we feel comfortable with providing, starting at least to provide quarterly guidance.

Great. Second question, also from Colo. As you continue to grow your indirect customer base, are there plans to report on other metrics like ARR or MRR, customer retention, et cetera?

Yeah, so the company believes that currently, like we already have like a complex reporting system with MarTech, EdTech, Amphi and other activities. So we don't want to complete a segment even further. So for now we are feeling comfortable with the current reporting. Obviously, if it's something that we would need to report or think it's going to contribute value to shareholders, then we're going to consider adding it in the future as well.

Moving on to more questions that were sent over. What is your plan going forward with your repurchase plan? Do you anticipate continuing to purchasing shares?

So the short answer is yes. And the long answer is yes, it's depend. So, yeah, I mean, like we have enough ammunition in our pocket, you know, to buy more shares if needed, but it's very much depend where the stock price is gonna be and where the stock momentum gonna be. But if the company will believe this opportunity and the price of the stock is undervalued, then yes, we'll purchase more shares if needed.

Will you be profitable in Q3 based on your targets?

So we should be profitable in Q3 or at least break even around break even in the Q3 based on our targets. But yet, like as you saw, we don't feel comfortable enough to report, let's say, profit or adjusted EBITDA and guidance, but to think like top line and middle line is something that we are already comfortable enough to report. And we think that's a good starting point. But if you do demand, then the answer is yes, we should be profitable or at least break even during Q3.

A question that we just received from Mitai Do. What is the future for Amphi?

So Amphi is going under a lot of changes lately. We recently launched an all-new website to Amphi. This is a new, I would say, or more more, let's say, focused vision regarding where do we want to take our feed. There's a lot of focus on B2B activity as well. And I think for us, we're doing a lot of preparation, you know, in order now to grow the activity stronger in Q3. And equally important, I would say, even in Q4. So Q4 is going to be a very important quarter for us in our field. We're going to see that everything, all the artworks that we put Or let's say the R&D time and the different efforts that we put during, I would say, the past six months or so are starting to bear fruit. But ideally, we still believe ARFI is a good investment for the company and should start driving value for shareholders awfully sooner rather than later.

Question for Yatir. What percentage of revenue is direct and what is indirect?

So, as I mentioned before, and let me jump again to that specific slide, the mix between indirect and direct for the second quarter this year was 36% for indirect and 64% for the direct.

And while I have you, I'll ask you another question. Did you have any revenue in Russia?

No.

No, no, we didn't have. Omrid, do you feel that we are coming off a bottom here from a revenue standpoint?

Yeah, I think so. I think it's not like a, obviously if I look, let's say internally to ETHCO, I would say definitely A, historically Q1 and Q2 are the slowest and more challenging quarter of the year. So that's almost goes without saying. And B, I think like the company did, go under a lot of changes, starting Q4 and refocusing in a quality of growth. And I think for us, Q2, in a sense, marked the bottom. In a sense, I would expect Q2 to be even better, but that's something we're probably going to start seeing in Q3 results. So the company put a lot of effort And the fruit of this effort we're going to should start seeing in Q3 and obviously Q4 and the moving years as well. So the answer is yes, I'm very positive and optimistic about the direction the company is going. And again, you know, like, and I also put my money where my mouth is and I bought enough shares, I think this quarter will continue to do so if I see opportunity, by the way.

Another question that we just got in, how many resources are devoted to AMFI of your workers?

Yeah, so maybe Atir can answer this one better for me, but I would say the in-house headcount is around 10 people.

That's correct.

And how much of the expenses in the quarter was related to AMFI?

Yatir?

Again, Barak, can you repeat that question? How much of the expenses in the quarter was related to AMPI? So we have another slide specifically for that.

Okay. So we invested almost... almost 500,000 during this quarter, specifically in Amphi. And I think Omri saw that number at the beginning of his... Yeah, half a million Canadian dollars.

Okay.

So I think with that, we will conclude the Q&A session. And we'd like to thank everyone for joining us today and we wish you all a great day and a wonderful weekend that's coming up ahead. So thanks everyone. Thanks. Bye. Thank you. Bye guys.