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 CEO, Omri Brill will provide an update on the company’s operations and strategy, followed by a financial review by Adcore’s, CFO, Yatir Sadot, 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 risks, uncertainties and assumptions.

Many factors could cause the 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 undue reliance on the forward-looking statements.

Although the forward-looking statements contained in this 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 to reflect new events or circumstances, except as required by law.

I will now turn the call over to Omri Brill, Adcore’s CEO, to update you on the operations and strategy of the business. Omri, the stage is yours.

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 a overview the way management read their report in there, what should we expect moving on a this year in 2022.

And basically give some highlights regarding the company focus area in this year. So 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 will big portion of the revenue in Q1, 2021, then we can see that gross profit for both remained the same actually improved EBITDA Q1, 2022 and that’s exactly the same trend that we started to see in Q4 when it was.

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 a small increase in a gross profit.

This means the company is giving away less or lower merging revenue in extend to IRA merging 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 the company to deduct say the cost of revenue portion in order to see the true value of the company can bring to the table.

So that’s one remark. And then when we look one year down into the [Indiscernible] 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 the gross margin a were 43% compared to 23% in Q1, 2021, this represent almost 100% to 87% decrease year-over-year in gross margin, that means the companies generate 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 equality 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% of 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 America 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 going 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 Amphy in Q1, 2022. So that wasn’t reported in 2021.

And there was some, I would say seasonality related expenses basically in the migration between 2021 to 2022. Other things that investor need to take into consideration that historically, for us, Q1 was almost the slowest quarter in the year.

So they actually fast picking up as the quarter moving along. So Q1 historically is the slowest quarter, 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 historically was slow quarter for the company. When we look at the Amphy we need to compare it to the way they did last year, then we can see a significant increase in all important parameters in Amphy activity related activity.

So total new classes that will added to Amphy last quarter was 631. This represents almost 40% increase year-over-year.

Total visitors to the Amphy website was almost 40,000. Again, almost 150% increase year-over-year sign up this mean you use us in a student’s sign up to the platform is almost 1,500.

Again, more than one 150% increase year-over-year. And total transaction that’s mean class booked in Amphy up in almost 80%.

So again, it doesn’t matter which format that we look in the affair activity we see a meaningful or significantly improvement over there. So basically, if you need to summary the Q1, 2022 results and also give an investor what would they need to expect the next 2022 I would highlight the following.

A, Q1, 2021 was a strong quarter for us in terms of client acquisition, the company announced a 14 new clients an acquisition. It was all region the company operating.

Two of them actually will be big brand names best, which is a massive brand in Australia and Candle Folks again in Australia and in a UK based operation for online learning 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.

[Indiscernible] so that’s something that we started to see in Q1, 2022 but for sure now it up to 2022 because it’s actually picking up and we can now fairly say that if you need to prepare to estimate the budgets that we reported part of that activity up until 2019 or like 2018, but then 2020, 2021 will Almost diminished because of COVID then we can now say, with a lot of confidence that 2022 going to look a lot different and more close to where we used to be in 2018 than where we were in a 2020, ‘21 with regarding to the reason budget and Adcore managed very large, a big brand to resume a name. Some of them are Israeli, travel Ministry, or Tourism Ministry for example, that a lot of budget.

And so for us, it’s actually very great, like big news for us. And another things that I would like to emphasize that the company took a strategic decision in the last 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 company’s quality of revenue. That’s why we are focusing on our gross margin and we can see like two quarters in a row that we have steady improvement in the company gross number, 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 come with [Indiscernible] gross margin. And we see a steady improvement in revenues coming from North America, which 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 shifting, let’s say the company focus on the way the reports look, prior would say to Q4, 2021 and the way they’re looking now and maybe the investors are a bit confused in the last thing to say what should we expect sorry, moving forward, then I would say the following; A, we believe that Q2 and Q3, 2022 going to be similar to what we saw in Q4 and Q1 that’s mean, we’re going to continue to see equal a declining costs of revenue because the company’s going to focus more on and quality revenue. And we can see we believe we can see like an improvement in both gross profit and gross margin as well.

So similar trend, for sure within Q2 but probably also into Q3 as well. Q4 2022.

We’ll compare better actually, because that’s going to be the first quarter that we can compare apples to apples. So that’s the first quarter that we can okay, we shift strategy.

And Q4, 2021 was already with the new strategy. And our Q4, 2022 going to look like so reports from Q4, 2022.

Onward should look better and compare better to well, words 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 two A, to achieve gross margin of over 40%. We believe that’s a doable task.

And again, we’ve seen a steady improvement in this metric a quarter-over-quarter. And even though we are given away some local merging revenue, we still would like to see in gross profit of at least 50% year-over-year if we can achieve these two goals in 2022 that I can say that as far as management percent 2022 [Indiscernible] And with regard to Amphy and people who have some you know like a question regarding off you will understand where the company started with Delphi pro a project, I would say the following, A.

investable need to bear in mind that Amphy was actually only incorporated in Q2, 2020 was so the first quarter we will started to report the report result with regards to Amphy was Q2, 2021. So we are only as 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 Amphy would say was still running on a beta mode.

So this wasn’t like a generate any significant number. We foresee or expect revenue to start increasing from the second part of age to 2022.

So as far as we’re concerned for the first full quarter I would say Q2, 2021 and Q2, 2022. We 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 assured that we have the right product offering the right product market fit. Then we can start slowly to scale it up.

Again I wouldn’t accept to see expect to see significant revenue coming from Amphy in 2022 but from the second part of 22, and when we enter in 2023, Amphy should start generate more significant revenue as well. Bear in mind that until then, we making sure to have a good control of Amphy expenses to basically Amphy burn rate, we continue to like continue to be relatively low.

And that’s under the company proposal, the company believes we can continue to invest in the Amphy project and up to see fruits from this investment in second part of the year and obviously, for many years to come. But again, do it reasonably with relatively low expenses as well.

So last but not least. Today morning before the market open, the company announced the buyback plan, obviously, that says subject to the TSX approval.

So that’s a conditional plan. But the way the company said, and the board said, I would say the following A.

The share price of [Indiscernible], we don’t believe represented 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 secondary remark, obviously, we would like to put this plan into motion also to sow support and solidarity to the common shareholders.

We understand people lost money or debt for story. Obviously, that’s not the only a tech company or other companies that they’re stoking been slammed lately, but nobody likes to lose money doesn’t matter.

If you lose it on Tesla, you lose it on Netflix or lose it on Adcore. And what we can do in order to show 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 represent 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 board see, 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 be able to announce such a plan.

And that is exactly what we are doing, not 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’s taken as long as the share price not going to make any sense as far as we can send. Also Adcore is in a relatively strong position as a company.

And basically we are lucky enough that even if they [Indiscernible] the market will continue well, I would say into the end of 2022, the stiletto is a solid company. And we don’t believe that Adcore like not like some other companies that urgently needed to like another fundraising or anything like that.

So Adcore can survive it, not only we will survive it, 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 concerned. I can say that on a more personal note, I will say the following.

Obviously, we are not stupid. We understand Q1 wasn’t the greatest a quarter for the company.

Having said that we don’t believe it’s a complete a catastrophe as well. The company every strategy plays, we know what we are doing, if we look at the important markets like gross profit and gross margin, actually, we were improving and also the quality of the growth.

So overall, for the long term, 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 bit of what to expect also in the coming quarters and in the end of the day me as let’s say the CEO of the company, I have full confidence that A, Adcore will survive this downtrend in the market and actually rise for me with a better stronger company maybe with the opportunity to buy other companies as well. B, continue to support the stock if necessary and C, 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 that say pressure, believe me or not, three interviews for different departments within Adcore for job interviews that I needed to make.

One of them is actually after this conference call. So that means 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 head it back to you now Ilana.

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

Yatir?

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 31, 2022, we delivered a 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 a 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 Adtech 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 and loss increase of 511,000 or 156%.

We exited Q1 with a strong cash and liquidity position. Total working capital of 11.9 million compared to 12.8 million at December 31, 2021, a decrease of 886,000 or 7%.

Cash and cash equivalents of 11.1 million as of March 31, 2022, compared to 13 .9 million at December 31, 2021 the decrease is mainly attributable to media payments related to 2021 that were paid in January 2022. This is the technical shift that Omri mentioned before.

We also see significant low debt. The company doesn’t hold anything financial debt on the balance sheet as you can see.

Total assets of 18.9 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 31, 2022 compared to 342,000 in the same period in 2021. This has been a key strategic focus of ours as we look to derive 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, Amphy’s total expenses in the first quarter of 2022 was 323,000 excluding Amphy 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 show the market 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 results reflect adjustment for the following items; depreciation and amortization totaled 299,000. Share based payment totaled 195,000.

Other adjustments totaled 37,000. And for the three months ended in March 31, 2022 adjusted EBITDA was 85,000 compared to 584,000 for the same period in 2021, a decrease of 97%.

Excluding Amphy from the market 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 transition to an enhanced revenue model, while also investing in Amphy we were still able to report positive adjusted EBITDA and then as our more robust and higher margin revenue model scales and as Amphy 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 budget now that many countries open their gates after the pandemic.

Now, there are significant a 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’ll 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, what caused the decline in revenues?

So we mentioned both myself and Yatir mention it in our overview regarding the remarks regarding the result of Q1. But I would say the following; A, the big drop is many because of the drop in cost of revenue.

So the company will given away revenues that come in with lower merging with a lot of cost of revenue associated them and wanted to focus in more or less equality type of revenue. So that I would say was the major driver of the lower drop in the revenue.

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

It’s 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 it obviously is becoming more and more difficult with the current market condition because obviously the company 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 there I would say analyst work was a bit diminished because of the market condition.

Having said that, we did get a very positive around the corner report from [Indiscernible] and continue to build very strong relationship with the [Indiscernible] analyst coverage. We also talking with other analysts [Indiscernible] 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 life also a bit more easy in order to anticipate what to expect in the next coming quarters. And that’s going to make the life a bit easier.

Actually when they come in to cover it, when they started to cover a company like Adcore.

Thank you. Our next question is from John Lee.

What has been the churn rate for AMC?

So we split into two. I would say if it’s AMC and two type of offering we have the free offering basically and over them we can see around 40% churn rate.

So these a lot of would say small clients accounts basically going into the platform, using their app for free for example, effortless marketing and we can see over there on 40% churn rate which is makes sense for free up offering. But when we talking about the premium app like [Indiscernible], then the churn rate is actually is very low, we talk about around 8% per quarter.

So basically, if it’s pro premium, we see a very low churn rate. And if it’s free, which is makes sense we can see a bit higher churn rate.

Next question from Mr. [Indiscernible] will you need to raise equity this year?

So I already mentioned it a bit I will say A, the company has a strong cash position. So the short answer would be probably no.

But I would have to accept exemption for the same answer. A, if we believe that there’s going to be a meaningful M&A opportunity, and it’s going to be bigger than what the company currently afford using only our cash then maybe we can turn into to look to raise some capital to support this deal.

This is can be one exemption. And another exemption can be to support the further growth of Amphy.

But again, if you’re going to do that, there’s going to be probably directly to Amphy not directly related to the Adcore group company. So I would say overall for the core business of market the short answer is no, but it’s not but.

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

So we actively working and we discuss it few times before we are actively working in order to build a pipeline. We look into few potentially M&A deals right now.

Some of them I would say more close to the type of acquire type of M&A that means that we are always looking for people. And I mentioned before that just today with all the conference call, any 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 acquire type of M&A is something that we’re actively looking at to do. And also, I would say most strategic type of M&A that can give us some advantage, or give us an access to entry point to let’s say two areas The company currently not very good at would like to enter into.

So that’s a two type of fair petition M&A that we’ll look into that.

Thank you, Omri. Our next question is from Patrick Irish.

Why did the board decide on a 5%? And not a 10% CIB?

Also, did they discuss options like tender offer at $0.40 for 5 million shares to absorb any sellers in the market, in this market?

It’s two different question, 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 that was a bigger number than 10% of the flow because the flow is not so big. So when we did the math, actually 5% of the total outstanding come in larger number than the 10% from the total flow.

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 of the company can buy.

And for the second option, the board didn’t have discussion about it yet we would like to give the new plan a chance to succeed and to prove itself. But if we still see there is a lot of free cans in the market and people would like to go out from the stock then we can proceed.

There are other options as well. Like I said, we believe in the company, we put our money where our mouth is and start to buy a 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.

Yes. So we didn’t have any large customer leave Adcore, but we did so meaningful I would say reducing customer activity.

And I would say it’s mainly attributed to 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 didn’t this specific reason, which is I would say, a Asia with more impact of the iOS 14 and the Facebook a new regulation on it.

So I would say both of them impact. Having said that, we did see decrease, but this client is still alive with Adcore.

Yes. So I would say the following A, there’s a lot of things in now our work to be worried about.

I would say like, it’s fair enough to say that this you can this 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 result a big portion of course of revenue that attached to it. So that’s historically was the case after 2021.

And then in 2021, a large change because of COVID, we saw a massive spike in the [Indiscernible] activity, we saw, it’s a big opportunity for the company, and basically decided to take it but it’s also come with a high price tag of let’s say, low gross margin. So that’s something that I would say was very much COVID related if any.

Now the company’s 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 seen a lot during this year, so we know how the quarter look like, we know how the use look 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 the 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 the Michael. What is the advertisement revenue and margin from the Israel tourists before the pandemic?

What’s currently revenue trend from this customer?

Yes, 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 disclosing prior that let’s say the overall budget let’s say advertising budgets we’ll be talking about are 25 million obviously from this let’s say cut the company A, we have another let’s say companies managing parallel to Adcore some of these budgets and B, I would say historically for this type 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 Omri. We’re going to have to one last question.

What are the company outlined plans to boost investor confidence?

First of all, trust me like I understand your pain. Like I’m also beside that I am invested and lost a lot of money on much bigger bit of a brand name companies like Tesla, Airbnb like a lot and other brand of them so I can understand it and nobody likes to lose money, like there’s a lot of things you can like in like losing money probably is not a one of them.

But again, me as an investor what I’m trying to say to -- A, let’s say the downtrend in the market is buying opportunity and I do need for Adcore and for other let’s say companies that are lacking believe they’re going to do both for the long run, and I would say for investors either do the same, or I would say, stay quiet, people lost a lot of money on the other stories as well. So I think like investor need to be a bit more patient.

The downturn in the markets not going to last for I don’t know , three or four years. It’s something that I would say it’s few more quarters away.

And I personally expect it to, like, we’re going to see maybe some uptrend or maybe some sideways movement, but for the long run Adcore 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 COVID 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’re 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 Yatir and thanks, everyone for joining us today.

Have a great day.