OMNIQ Corp. (NASDAQ:OMQS) Q4 2022 Earnings Call Transcript

OMNIQ Corp. (NASDAQ:OMQS) Q4 2022 Earnings Call Transcript April 1, 2023

Operator: Hello, and welcome to the OMNIQ Corporation’s Third Quarter (sic) and 2022 Earnings Conference Call. My name is Halley, and I will be coordinating your call today. With us on the call are Mr. Shai Lustgarten, Chief Executive Officer; and Neev Nissenson, Chief Financial Officer. Today’s call is being recorded and you should have access to the company’s fourth quarter and year-end 2022 earnings press release issued after the market closed yesterday. This information is available on the Investor Relations section of OMNIQ’s website at www.omniq.com. During the course of this call, we will make certain forward-looking statements. All statements that address expectations, opinions or predictions about the future are forward-looking statements.

Although, they reflect our current expectations and are based on our best view of the industry and our current expectations and our business as we see them today, they are not guarantee of future performance. These statements involve a number of risks and uncertainties and since these elements can change and in certain cases are not within our control, we would ask that you consider that and interpret them in that light. We urge you to review the Company’s Form 10-K and other SEC filings for a discussion of the principal risks and uncertainties that affect the Company’s business and performance and the factors that could cause actual results to differ materially. OMNIQ undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Following the prepared remarks, the company will be taking questions as time permits. Now I will turn the call over to Mr. Shai Lustgarten, CEO. Mr. Lustgarten, please go ahead.

Shai Lustgarten: Thank you, operator. And good morning, everybody. Thank you for joining us today to discuss our Q4 and year-end 2022 financial results. To start, I’d like to thank each one of our employees across the entire company for their continued hard work and dedication to our vision and strategic plan. During today’s call, I am pleased to share with you our financials as well as give you an update on our recent achievements, and a clearer understanding of our future focus and potential opportunities. I’m proud to announce that we experienced record breaking revenues of $102.5 million for 2022, growing from $78 million in 2021 and $55 million in 2020. In addition, we recognize the record gross profit of $22.1 million, an increase of $5 million, or 33% over last year, and 100% over 2020.

Also, we recorded positive cash flow from operations totaling $1.2 million, another strong milestone. This growth came from a diverse group of customers in a wide variety of sectors including safe city, supply chain, hospitals, restaurants and retail. This diversity proves once again that our platform designed offering has demand and success from multiple large verticals will depend on our technology and services to improve their operations and increase safety. It is also important to note that our AI revenue increased over 100% from 2021 to 2022, as our higher margin products gained momentum. While we have incurred upfront expenses related to our AI product and sales, our revenue share model will allow for higher margins going forward. As we look to 2023 and beyond, we see ongoing strength across verticals and are excited about both the progress and opportunities ahead.

During the year, we made several significant announcements, including 14 contracted cities for Q Shield or Safe City products completed the closing of 100% of Dangot Computers, formalized the banking relationship increasing the strength of our balance sheets, named a total solution partner for one of the largest global leaders in enterprise asset intelligence for robotics, supply chain management, deployed our AI and machine vision solutions to our 50th Airport and many more achievements, which you can see from the numerous press releases throughout the year. As we look into 2023, we have three company initiatives as well as three areas of growth that we believe will drive our company to continuous success. I will start with the company’s initiatives.

First, selling deeper and wider to our existing Fortune 100 and 500 customers in all three business lines. Second, increased focus on generating cash and profitability by further efficiencies in operations, and continued focus on sales growth. And third, focusing on the momentum in our deployments of our AI products to existing and newly penetrated markets. Before I go further, let me turn the call over to Neev Nissenson, our Chief Financial Officer who will go over our financial results in more detail. Neev?

Neev Nissenson: Yes, thank you, Shai. Hello, everybody. In the year ended December 31 2022, OMNIQ reported records revenue of $102 million, which is an increase of 31% from $78 million at year ended December 31, 2021. We also reported record gross profit of $22.1 million in 2022 compared to $16.7 million in 2021. Our gross margin for 2022 also slightly improved to 22%. Total operating expenses for the year was $31.7 million compared with $27 million for last year – for a year before last 2021. Net loss for 2022 was $13.6 million or a loss of $1.82 per share, compared with a loss of $13.1 million or loss of $2.20 per share in 2021. This loss includes one-time expenses incurred from the implementation of our ERP system company wide.

Adjusted EBITDA or adjusted earnings before interest, taxes, depreciation, amortization and non-recurring loss events for the year ended 2022 amounted to an adjusted EBITDA loss of $2.9 million compared with an adjusted EBITDA loss of $4.1 million in the year that ended December 31, 2021, an improvement of $1.2 million in our adjusted EBITDA profitability. Let me turn the call back to Shai to talk more about our operational achievements and focused goals. Shai?

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Shai Lustgarten: Thank you, Neev. Now that we have discussed what we have accomplished last year, let’s now shift focus on our plan, and what our shareholders can expect. While we continue our efforts on all sectors, we are specifically enthusiastic and focused on three verticals including safe city, supply chain and traffic management. As we look at our entire businesses and with these three verticals in mind, we expect to see accelerated growth and strong results. I’d like to take a few minutes now to expand on each of these three key verticals so you have a better understanding of the opportunity ahead. First, safe cities. Safe City is driven by Q Shield our proprietary AI offering that has been labelled by our first customer as the force multiplier.

In addition, this solution removes the need for a physical officer by utilizing our proprietary vehicle recognition system and our cloud based citation management technology. The technology operates 24/7 while providing an unbiased approach eliminating the potential for conflict that has traditional report. Our solution is unique in both the patented technology as well as the revenue share model that we created and has resulted in both the safety benefit as well as the revenue generator for the cities we serve. The system identifies any vehicle driving through the city, which is our National Crime Information Centre database, NCIC or on the city’s local Bureau of Investigations database. Within 20 milliseconds, our system alerts the authorities of potential criminals, and if any vehicles are driven, unregistered or uninsured, as well as a full menu of other violations that the individual city can choose from.

Our strategies to target small and medium and medium sized cities who see immediate impact from Q Shield with over 16,000 small and medium cities across the country, our potential is that while gaining rapid momentum in 2022, we continue to believe this represents a significant opportunity of growth and margin expansion for the company. Our current backlog of cities continues to grow as our exposure expands and have targeted an additional 35 to 40 cities to potentially be contracted this year. Next supply chain. OMNIQ continues to enjoy solid sales from our long standing customers, many of whom have relied on the company for over 20 years to handle their logistics and supply chain challenges. This segment represents a foundational business for us servicing some of the largest companies in the world, including many Fortune 100 and 500 companies.

We are proud of several awards were received including the $4 million contract from a multinational transportation logistics company, and $29 million order from a large supermarket chain and the $4 million order for advanced supply chain equipment from a Fortune 50 company. It is important to note that not only this is stable generated revenue, it also have a significant opportunity to sell our AI related products into these corporative customer base, which over time brings an opportunity to both increase our revenues, as well as our margins significantly. And finally, traffic management. This vertical includes our AI solution for airports, commercial and public parking, and our newly introduced HOV solution with over 50 airports deploying and using our solution we have a solid presence across the nation and continue to add many new locations.

We’re currently servicing thousands of parking lots and are introducing our latest technology that utilizes both ticketless and gateless parking solutions, which allow for both a better customer experience, as well as increased efficiencies for the parking facilities. Our HOV product now not counts passengers driving down the highway, it also is currently being utilized by a large public company with a green initiative utilizing our passenger counting technology, which is tied into their CRM and HR department the company is able to collect habits by their thousands of employees. This dynamic solution ensures they reach their green goals as they are now able to efficiently and accurately incentivize and reward their staff. As you can see, we have disciplined focus on three key areas of growth, as well as three company initiatives.

Before I turn the call over for questions, I’d like also to quickly discuss one of our newest verticals, the restaurants and retail sector, which we feel offers additional growth potential. As you may have seen, we have already announced several contracts this year including an initial order for our Q-post integrated AI machine vision solution from a major retailer for up to 5,000 units. We also received both an initial order as well as a follow on order from U.S. based fast food chain with over 800 locations. Both contracts represent growth groundbreaking achievement, as retailers and restaurants are looking for ways to stay ahead of their competitors, as well as growth. Utilizing OMNIQ technology will provide tools to better understand consumers consumption habits, while improving each unique customer’s interaction.

This technology will be part of the CRM system, allowing for dynamic decisions based on each unique customer visits. Together with Q Shield security enforcement in each location, our total solution is unparalleled in a unique offering. This first of a kind integration will also include vital data collection services, providing a more complete solution and offer additional revenue opportunities for both OMNIQ and our customers. In conclusion, our business saw significant improvement in 2022 with record revenues and positive cash flow from operations. Additionally, and we are starting up 2023 with continued momentum, a clear focus and a disciplined approach on the initiatives and segments that I have shared with you. As we turn over the call for questions, I would like to extend my sincere thanks to our loyal customers and suppliers, our professional team and other strong supporters.

Last but not least, we would like to thank our shareholders for their trust in us, as well as wish you all continued success. Operator, I’ll now turn this call over for questions.

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Q&A Session

Operator: Certainly. Your first question for today is coming from Jaeson Schmidt at Lake Street.

Jaeson Schmidt: Hi guys, thanks for your taking my questions. Shai not looking for specific guidance but just curious if you could comment what you’ve seen from an order pattern perspective year-to-date here?

Shai Lustgarten: Hi, Jaeson. Thanks for the question. Yes, we still continue to see – we discussed that in the previous quarters as well, the backlog of stability growth and then continue to be firm at high levels. And we still actually continue to see that as we started 2023 as well, it is solid, and at a much higher level than we’ve seen before, and remains that way with the additional growth in sales.

Jaeson Schmidt: Okay. And I’m sorry if I missed it, but did you say 35 to 40 cities to be contracted this year for the Safe Cities?

Shai Lustgarten: Yes, sir.

Jaeson Schmidt: Okay. And how should we think about the number to actually be rolled out?

Shai Lustgarten: So the number to be rolled out varies from state to state depending on the certifications required for the deployments, some states and cities? It’s worth very quick, much quicker than others. But certainly, we should see at least half, or I should say between the third to half of that amount getting deployed.

Jaeson Schmidt: Okay, that’s helpful. And then just the last one from me, and I’ll jump back into queue. Obviously, Q4 gross margin was pretty depressed but how should we think about gross margin trending here this year?

Shai Lustgarten: Yes. Unfortunately Q4, we did see lower margin there but the good news is that it was due to one-time events that had to be recorded in Q4. And that is, to your question, that is not carried on to Q1 or into 2023. These were a one-time events accounting wise, that had to be considered in Q4 and not repeated going forward.

Jaeson Schmidt: Okay, perfect. Thanks a lot, guys.

Shai Lustgarten: Thank you.

Operator: Your next question for today is coming from , a private investor.

Unidentified Analyst: Hi Shai. Congratulations, hope to see doubling to $200 million again within three years.

Shai Lustgarten: Hi, hello. Thank you very much.

Unidentified Analyst: Thank you. So I had a few questions, please. First, can you explain the deployment of the Q Shield and the Cities? The revenue model? What is the status now? And if there are more cities in the pipeline?

Shai Lustgarten: Yes. So first of all, absolutely there are more cities as we discussed in this call today. We have a growing backlog, a very solid one and we expect to more than double what we did in 2022. Regarding the revenue model, that is one of our unique offering that comes with Q Shield to the Safe City to provide safety to the cities we serve. And that is a revenue share model where out of the citations issued by Q Shield through it’s cloud based technology, we are able to send out dissertations electronically and do a revenue share with the city basically there is a split depending on the agreement with the city, the percentage from the citation that remains with the OMNIQ and the percentage that goes further and gets paid to the city.

All that payments of the citation go through OMNIQ’s bank account and we’re the ones actually writing the checks to the cities. The cities this way, get a revenue stream that they’ve never had before, never could have achieved before as well. And we’re very proud of the different use cases used actually to be – when they use these funds, for example, to schools, buying laptops to students, doing some community events, et cetera, et cetera, very exciting stories coming out of the cities, using the capital, using the money that OMNIQ generates to them. At the same time, enforcing regulations. And, like I said, the whole platform is a game changer. It is something that we see spreading very nicely. Going now into different other states, we started from the first state and now it’s going into three additional states.

So we feel very solid, this is going to be a very good growth engine for the company.

Unidentified Analyst: Excellent. Thank you. Can you explain how the Dangot acquisition is performing?

Shai Lustgarten: Yes, the acquisition is a very solid, positive one. We’re very happy with the performance. We’ve been able to very quickly achieved a lot of the goals that we had hoped for to achieve from this acquisition, for example, the cross sales both ways into Dangot’s existing customers of OMNIQ’s AI product together with cross-selling the products of Dangot to OMNIQ’s existing customers in the U.S. So that immediately took effect and we’re very happy about that. And it created the significant growth as well, which overall represents a very solid organic growth, as we saw going up from $78 million last year, into the $102.5 million this year.

Unidentified Analyst: That’s wonderful. And regarding the AI technology, is the Israeli Ministry of Defense buying from OMNIQ?

Shai Lustgarten: Yes, the IMoD, the Israeli Minister of Defense is one of the very good customers of OMNIQ today, using the AI for their control product, which we have for governments and militaries. And, yes, we’re very happy every year to extend the services and probably exclusively providing the border control security to the Israeli Minister of Defense, which is very exciting. And very, we’re very proud of that. Yes.

Unidentified Analyst: Yes, impressive. And then can you explain the usage of the AI for AI for the retail sector that you talked about before? What is the potential in it also?

Shai Lustgarten: Well, absolutely the QSR, the restaurant and fast food chain market for OMNIQ the new vertical, this new vertical, of course, is a huge one. We’re talking about thousands of thousands of thousands of locations throughout the nation, not even mentioning worldwide. And what is nice about again, the solution that OMNIQ provides, it allows to learn customers behavior through our AI machine learning capabilities, and this way, automate actions and we’re all hearing about and reading about – I’m receiving from many people on this call articles through texts, or they send me by email of different AI solutions of voice recognition that automate or to better performance in drive throughs for example, but OMNIQ, what we say here in OMNIQ is why do you need even to speak to, to describe to on the mic or focus on that.

You can from starting using OMNIQ solution we immediately from the second customer comes into a drive through for example that is when we start learning its habits, the habits of that customer and the next time that same customer comes, we are 95% accurate in the order that he’s going to be placed and we can automate the action without even the consumer or the customer needing to even interact with anyone. So basically we do that through different parameters. And it is all based on our machine vision technology.

Unidentified Analyst: That’s amazing. I have to say – I have to ask, how do you see the Q1?

Shai Lustgarten: We started – as we mentioned, as well, we don’t give guidance. But we did mention that we started Q1 with a strong momentum. So I would we feel very comfortable. And we’re now at the end of Q1, and we still feel very positive and comfortable with the results.

Unidentified Analyst: That’s good to hear. And are you considering it another acquisitions?

Shai Lustgarten: As we always said before, we look at two strategies for growth. One is organic for of course, and the other one is M&A. And we’re always examining all the time on the M&A opportunities we have that come to our table or that we search for, and yes, definitely. I mean, once we feel comfortable, and this is going to be something that is beneficial to reach our objectives quicker, we’ll jump on it and make it happen.

Unidentified Analyst: Okay, wonderful. Thank you very much, Shai. Thank you very much.

Shai Lustgarten: Thank you.

Operator: Your next question is coming from Blair Abernethy at Rosenblatt.

Blair Abernethy: Hi, good morning. Shai just wanted to just dig in a little more on this fast food restaurant, when the sort of 800 stores? Can you just describe to us sort of how this came about. Did this come directly or is this through, you know, certain channel partners? And what, you know, what’s sort of the rollout here? Are they going to pilot a few stores? Or just give us some – sense of the pace of that kind of rollout?

Shai Lustgarten: It came from a reseller, what we focused on — what we started focusing on in 2022 is to establish a reseller channel, because there’s no way we can reach all of the customers in that sector, nationwide by ourselves. And there are many more, it’s not only drive throughs that are at restaurants, these are drive throughs also at some other retail providers in different other markets. So like we said before, there are so many of them, hundreds, tens of thousands certainly. So there’s no way OMNIQ can do that by itself. And in 2022 we started establishing our reseller channel and very proud that this opportunity came from one of them. And what we’ve done, we’ve already had concluded the pilot. And today, we have already deployed in more than 14 locations.

And this is an ongoing process with our customer. The deployment – they’re looking to deploy that all over. So we’re engaged with them on a deployment schedule. I would mention also that we’re receiving another contract for another – to automate another drive through like I mentioned from another retail sector, not the restaurants. But again, the drive through is a drive through. And there we’re talking about an opportunity which is four times larger than the one we’ve just discussed in the of this restaurant chain. So, and we over there – this contract we already received, we had finished the pilot as well and now expecting the first order of deployment into we expect at least 20 locations.

Blair Abernethy: Would that be something like a bank potentially bank drive through?

Shai Lustgarten: No, but that’s a great idea.

Blair Abernethy: So the banks might be interested in seeing this kind of –

Shai Lustgarten: Yes, I agree. And that’s exactly the point sir. When you look at the – that the I would say the best emphasis that I would put on this remark you just had because is when you have a technological platform like ours, the machine vision, one, which senses and creates automatic actions, you could actually utilize that in every sector, right? It’s a platform. And now it is our objective to try to capture as much as possible as quick as possible. So we’re trying. And yes, bank, like you just mentioned is just one another example of where we could be very, you know, attractive to, in utilizing not only automatic actions, but actually think about the data, which is even more interesting. And in the customizations, and the characteristics now that you can provide through the data you gather, and all the analytics that comes with it.

Blair Abernethy: Excellent. And just on that – on the fast food chain that you’re working on now, what’s the recurring revenue component look like in that deal?

Shai Lustgarten: So as this was our first customer, the recurring revenue portion of it, I think, if we try to put it in percentage of the – out of each location would be something like 25%. Of course, going forward, we’re looking at raising that, that component, the recurring component in the business model to achieve – to be at 60% minimum.

Blair Abernethy: Okay. Okay. And just from the overall company perspective, Neev, on the Q4. Do you provide or will you provide some sense of what the recurring revenue component is?

Neev Nissenson: Yes. I think that Shai had mentioned that revenue coming from the AI machine vision has increased over 100% smaller last year. That revenue does have of course, a portion of recurring revenue that is also increasing and we expect it to increase specifically .

Blair Abernethy: Okay. Presumably, at some point, you’ll start disclosing an ARR and annualized recurring revenue amount. Is that in your plan sort of maybe this year or next year?

Neev Nissenson: I think that as we’ve been pretty consistent about this, we kind of give general ideas of these types of information and we haven’t made a decision yet on disclosing the specific amount of recurring revenue that we have compared to longer term.

Blair Abernethy: Okay. And then secondly, on the gross margins. So — and I know you’re not giving guidance at all, but should we expect — given the pipeline you’ve got that you think you’re going to execute on 2023, should we be expecting incremental improvement in gross margin in ’23 over ’22?

Shai Lustgarten: Go ahead.

Neev Nissenson: As I mentioned in Q4, we had a military loss event that hit the cost of goods sold, which is not expected to recur, which I think had the effect of suppressing our gross margin. And it’s not going to occur in 2023, I do expect the gross margin to improve in 2023.

Blair Abernethy: Okay, great. And just one other question for me. On the Safe City area, Shai, obviously, it’s been – great traction and seen with a number of smaller municipalities and so forth. And I’m just wondering either directly or through channel partners, are there opportunities to go after some of the large cities or major cities – major metropolitan centers, but something that might look like a much larger longer term contract. Is that — are those out there? Or what’s your approach to that end of the market?

Shai Lustgarten: Well, the answer is yes, but I would like also to mention that a contract is a contract. I mean, we found that small cities, large cities, medium cities, it would be rare to not continue using us for at least five years due to the – again, game changing, it’s not only the revenue share. I mean, when you look at the – when you look at the success stories that we have solving missing person investigations, bringing back an elderly person on the silver alert, bringing back the person home after an 1.5 hour been missing. Doing that kind of stuff, which is very exciting. This has a lot of effect. If we continue to perform this way, and provide the game changers and affect our everyday life of the residents in these different cities, I don’t see a reason for them to replace us.

So we’ll definitely continue working on that. So the contract I think for larger cities or small cities or medium cities, the term of these contracts will remain solid for several years the same. And like I said, the answer is yes, to go after a larger cities. The very good point there is that we already have references in this large cities. For example, let’s say we – Los Angeles now wants to get a Safe City product They will go to these very big large integrators that would not wake up in the morning if they were not going to receive $100 million contract to do this. And we will come with something that is very different, very unique and I would say much more innovative as well and provide them even better, I would say, ROI – immediate ROI.

And when they will talk to us about that, they will understand that we already do this in their airports because we’re already in the Los Angeles airport and we’re already doing across the city many of their parking lots as well. So the OMNIQ is not a stranger to these very large cities once the opportunity will be there.

Blair Abernethy: Great. Thanks very much for that and nice job on the year guys.

Shai Lustgarten: Thank you, sir. Appreciate your support.

Operator: Your next question for today is coming from , a private investor.

Unidentified Analyst: Shai, how are you doing, my friend?

Shai Lustgarten: Good, sir. How are you, Rich?

Unidentified Analyst: Good. Congratulations hitting that $100 million cash flow positive. And I know this is — I’ve mentioned this, I’m always concerned about this one part is based on the current cash you have, the credit lines, the growth that you have, you feel pretty confident that you’re able to meet these – the backlog and without having to raise on equity at this point in time?

Shai Lustgarten: Yes. We feel comfortable about that. And like we just had that discussion yesterday with one of our friends here internally and where I mean, this person like yourself, Rich, he have been with us for a long time now and we’ve been as much, I would say, sensitive times before. So today, we’re much stronger and definitely have more tools to cope with different events not only internal like the growth you mentioned, et cetera but we just went through Covid and recessions now and stuff like that. And you’re seeing that we’re still continuing our growth – and continuing to support our growth and do a lot of very exciting things. So the answer is yes.

Unidentified Analyst: Yes. And the other thing is that drives me crazy. I look at record doing $20 million a year in revenues, losing a ton of money, creating in a market cap that’s probably twice your market cap today. And based on where you currently are, you’re in exciting areas. What is it going to take for a company in the industry to say, these guys just broke through the $100 million level. We got to work with them. We want to have an ownership in this company. And I would not mind if a major company said, we’d love to give you $25 million and really work with you in some areas. What point revenue wise would you have to be at? What point technology wise would you think that would be at?

Shai Lustgarten: I’ll answer it to you this way, Rich. We have our objectives and agenda. We wake up every morning to execute that. We measure ourselves every morning on last — on yesterday measure everything we did until that morning and see if we’re going the right way. We have our objectives and our plan. We have an amazing team that executes that. We have a groundbreaking technology that gives something that doesn’t exist in many areas we penetrate. And we’re getting approached but again, this is a board decision always how to advance with the approaches that we’re getting. We’re just very excited here getting — executing our plans, getting our objectives done and trust me, Rich, as you know, and seeing what we’ve done till now, we only by the performance or by very measuring everything that we do to the details, we learn internally that we could actually double our objectives every year and that’s what makes us excited.

And whatever comes, whoever notices, whoever is going to be interesting, that’s great. We’re just going to continue our success.

Unidentified Analyst: Perfect. So I greatly appreciate as always. Keep up a great job.

Shai Lustgarten: Thank you, sir. Appreciate your support.

Unidentified Analyst: You bet. Of course.

Operator: Your next question is coming from Neil , a private investor.

Unidentified Analyst: Hi, Shai.

Shai Lustgarten: Hello, sir.

Unidentified Analyst: Hi, I got a couple of quickies, before I get to what I really wanted to ask you. I’m just trying to clarify a couple of things. What would the margins have been in Q4 if you didn’t have those two nonrecurring one-time items?

Neev Nissenson: Margin?

Shai Lustgarten: Yes, go ahead, Neev.

Neev Nissenson: I think that the margin would have been – it would have been closer to 20%.

Unidentified Analyst: Okay. So pretty consistent with the rest of the year. And then, bullet number four, where you say your AI machine vision revenue more than doubled in 2022. Is your classification of AI machine vision revenue, is that software only or is it recurring revenue only or is it software, hardware and recurring revenue everything related to anything AI?

Shai Lustgarten: Everything and anything related to AI.

Unidentified Analyst: Okay. So it’s the cameras, it’s the software, it’s the recurring revenue component, it’s the installation, it’s everything.

Shai Lustgarten: Yes.

Neev Nissenson: That is correct.

Unidentified Analyst: And one last thing that I just want to clarify. Shai, when you were asked about the recurring revenue component of the 20 fast food locations that could expand to 100s. You said that the recurring revenue was 25% and that you wanted to going forward with new customers make it – get it up to 60% But what are we talking about? 25% and 60% of what?

Shai Lustgarten: So again, it depends on the amount of — it varies every location. Is not the same and depends on the cameras, amount of sensors that we have to deploy and size of the location as well. So that’s kind of very — and you’re looking at —

Unidentified Analyst: Is it 25% of the initial hardware cost? Or is it — I don’t understand it’s a percentage of what number.

Shai Lustgarten: It’s 25% of the total revenue per deployment.

Unidentified Analyst: Okay. Okay. Got it. Okay. So what I really would be interested to hear you talk a little bit more about Shai is you’ve got this enormous list of legacy customers, the Fortune 500 customers, Fortune 100 customers. They’re in all these different verticals, grocery, tire manufacturers, retail, paint companies on and on and on. Talk a little bit about what you’re doing with these companies now that’s generating the tens of millions of dollars of revenue every year and talk about what it is that you want to move them to. You talk about wanting for them to move from what they’re doing now to the AI related products for supply chain and inventory management. Can you talk a little bit about what exactly your vision is for them to move to and what’s the timeframe until we might see one or two of these customers actually do it?

Shai Lustgarten: Yes. So what we do for our customer — existing customers today is we create automation for them. And this automation of the supply chain levels within warehouses, within their distribution centers, within their stores, within the transportation, between each of these levels as well. The automation that we create is creating the efficiencies. And it all is based on what we do for them today is all based on image processing. Now image processing that identifies objects and mostly is done today by either scanning barcodes and that’s how you identify the object and that’s how now you know what’s going on and what’s where and the assets when they reach a location, if there is anything missing and create all that and we aggregate all that data of the objects we identify within the warehouses, within the distribution centers at each of the steps of the way of the workflow, for example.

And we aggregate that data and integrate it into the different ERP systems. And that’s how you start creating the automation and analytics and that’s how they run their operation. And it’s all based like I mentioned on image processing of barcodes and scanning the barcodes and — but it’s still — that’s image processing where what we want to do is continue to do the same thing, but replace the image processing technology, which is today based on scanning of barcode to replace that with our machine vision technology that would not only identify the barcode, but now look at the whole product and create a much higher confidence level in the identification, eliminate many, many millions of dollars of errors, tens of millions of dollars of errors for each of our customers by providing a better identification process and then aggregate that same data into the ERP systems, get the analytics, but it will be in real time.

It will allow also additional — the machine learning allows analytics that basically will learn better what’s going on in real time once you sense everything much more than when just pointing a scanner or a barcode, now you see many more things that happen in that image. And this is how you create many more efficiencies and become even proactive and actually expect and prevent problems from recurring in the future for that same customer. So It’s a long answer. But Neil, it’s very simple, is we are going to take away the scanning from the wall and replace it with machine vision. And that’s why we always say that $1 billion valuation is just the first milestone for us.

Unidentified Analyst: Okay. Well, Shai, that’s great. And I think the long answer was exactly what I was looking for, so we can visualize where you are and where you want to go. Let me make my last question on this same topic. Do you have the capability today to do what you just described the future of inventory and supply chain management is going to be? Can you do that today? And do you think we’ll see some of these large industry recognizable companies make the move to the next generation by the end of 2024? Or is this something down the road three, four years?

Shai Lustgarten: So we are — I’ll start from the last portion of the question. Our objective is to already make and do something this year, not wait for 2024 or down the road couple of years. We want to — that’s one of our objectives for this year. And to answer the first portion of your question, we have — I would say we have the solution — yes, we do have the solution but we are today — not but — and we are today using to complete it with additional third party company, for example, for the hardware same as we did today with — in parking or Q Shield in cities. We’re not manufacturing the sensor. We are in many situations assembled the sensor, but we don’t want to deal with that hardware, we want to focus on software.

Here is the same thing. We have the software. We have the algorithms. We know how to train the engine already to identify and we proved that we don’t need a scanner to read. We already did that. We can read barcodes by smart glasses with smart glasses rather than using anything else. And then what we are — so we have the capability to train our engine, the algorithms to do that. And we are now expanding it to also identify the additional parameters of a product of our customer. For example, if it’s – if it’s a tire, then we already trained our engine how to identify what is a tire and also all the markings on the tire, the date, the batch number, etcetera. So now it’s not only, for example, I’ll just talk about it in 10 seconds and that’s it.

Today’s problems with identifying tires is that it has the way to identify tires, it has barcode stickers on them. When you send tens of thousands of tires in the container, it peels up, it turns up, it’s torn from the tire. And many, many, many times, it seems weird, but even huge, I don’t want to mention names that we’re talking to, but the largest companies in the world that manufacturers don’t know what’s going on into the stores. They know the quantity, but they don’t know all the other material. We already have trained our engine to read all the marks, identify each tire and do this on the fly. So to answer your question, yes and that’s one example, something that we already did.

Unidentified Analyst: Okay. All right. And Shai, I’ll hang up after this. But is anybody beta testing this? Is anyone – is anyone now currently doing internal testing of what the solution would look like for them? Or is this all yet to come?

Shai Lustgarten: No, we started beta testing with one customer. It did stop due to them coming after Covid and trying to rearrange things, et cetera. But we did start the process and looking forward to not only continue that with that customer but actually continue with the two others.

Unidentified Analyst: Okay. So you’ve got two others that want to start testing this year?

Shai Lustgarten: Yes.

Unidentified Analyst: Okay, great. All right. Well, listen, thank you very much. I think all that’s certainly helpful for me.

Shai Lustgarten: Thank you, sir. I appreciate your support.

Operator: With the interest of time, our final question will be coming from Curt Stauffer, Seven Summit Capital.

Curt Stauffer: Hi, Shai. This is Curt Stauffer. How are you?

Shai Lustgarten: Hello. How are you?

Curt Stauffer: Good. Congratulations on your growth. And I just have a question related to your sales effort in terms of sales reps that are currently employed and what growth you see in your sales rep numbers this year and then going into 2024?

Shai Lustgarten: Thank you. Yes, like we discussed also before, our focus is to, not – I wouldn’t say, in large, our sales force, our sales force today really is sufficient to what we need. If we need to grow it or reduce it, nothing is significant there. It sounds like we need to double or increase it by a third to reach our objectives. Now we’re very comfortable with what – with the sales force that we have today. The focus though is on growing the sales channel and making it a more larger one in each vector, in each market that we penetrated, say cities, retail, restaurants, fast food, et cetera, et cetera. So that is our focus of schools, universities, all of that. That is our focus to really establish a good and firm and stable sales channel that is trained to resell our equipment, our products in each of the sectors that we’ve penetrated.

Curt Stauffer: Okay. So you’re saying you’re going to — you’re relying resellers as opposed to direct sales force.

Shai Lustgarten: We do rely on our, of course, existing sales force, but in order to achieve the scalability and potential in the market, there is no way we can reach 16,000 – more than 16,000 small and medium cities by ourselves. So we are getting today the revenue and the amazing potential we have comes from our direct sales and that’s the opportunity here because we’re doing it ourselves and it’s doing well. So imagine when we have a firm sales channel, the growth of these companies yet to come.

Curt Stauffer: Is your sales force that’s in place now? How is it structured? Is it regional? Is it regional by geography or is it by business line? Or is it by customer type?

Shai Lustgarten: First period is by business line. Then within the business line, it tries to be geographically. But in many — in some of the cases, in some of the business lines, it is account based and the relationships we have for so long with different accounts. For example, in the supply chain market where we have direct and we don’t need to use resellers there. We have direct relationships with all of our customers there, all of the sales is done directly and each of these customers, Fortune 100, 500 customers we have there can double the company switching into the AI products. So these are direct sales. For example, if we go into safe cities, you’re talking about today getting the sales. What happens is that we’re making the sales directly and only few cases came from reseller, but most of the sales will come from the reseller channel going forward.

Because like I said, there is no way we can do this ourselves and it is geographically divided between the salespeople. So it depends on the business line.

Curt Stauffer: All right. Thank you very much.

Shai Lustgarten: I appreciate it. Thank you.

Operator: We have reached the end of the question-and-answer session. And I will now turn the call over to Shai for closing remarks.

Shai Lustgarten: So again, it was a pleasure talking to you all, and thank you for your continued support and looking forward talking to you soon on our next conference call. Thank you, everyone.

Operator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your cooperation.