Operator: Greetings, and welcome to the OMNIQ First Quarter 2020 Earnings Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. John Nesbett of IMS Investor Relations for OMNIQ. Thank you. You may begin.

John Nesbett: Good morning, and thank you for calling in. On the call today, we have Shai Lustgarten, CEO of OMNIQ; as well as Neev Nissenson, Chief Financial Officer. Shai will provide an operational overview, and we'll follow that with a question-and-answer session.

Let me just take a brief moment to read the safe harbor statement. During the course of this conference 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 businesses as we see them today, they are not guarantees of future performance. Please understand that these statements involve a number of risks and uncertainties. And since those elements can change and, in certain cases, are not within our control, we would ask that you consider and interpret them in that light. We urge you to review OMNIQ's Form 10-Q and other SEC filings for a discussion of the principal risks and uncertainties that affect our business, and the performance and the factors that could cause our 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 otherwise required by law.

Okay. With that, I will now turn the call over to Shai. Please go ahead, Shai.

Shai Lustgarten: Thank you, John, and thanks to everyone joining us on the call today. I trust everyone is safe. We continue to manage through this unprecedented period. And while the pandemic is certainly impacting our business, all things considered, we're performing well in this difficult environment. As we come out on the other side of this, I believe that our opportunity will only be larger, as more companies leverage artificial intelligence solutions similar to what we offer to drive automation and efficiency.

We reported revenue of $13.8 million for the first quarter. This was an increase of 21% from the fourth quarter, but down from a particularly strong Q1 last year. To give you some perspective, the annualized revenue run rate for the first quarter was just slightly below 2019 revenue. Our gross margin, although higher than Q4 2019, was impacted by the product mix during the quarter that consisted of a smaller share of our AI-based high-margin sales due to the market slowdown.

Total operating expenses for the first quarter of 2020 were $5.1 million, an increase over last year, mostly due to noncash expenses and professional fees, mainly related to the acquisition and other nonoperational activities. Net loss for the quarter was $2.9 million, and we reported a slight adjusted EBITDA loss of $0.8 million. We have a solid and loyal Fortune 500 customer base. The underlying strength of the companies that make up our customer base mitigates some of our risk in these uncertain times, and we believe these valuable relationships will continue to drive forward our growth as we implement our AI technology for the supply chain industry. Moreover, we address diversified end markets, with a strong presence in the food and drug industry sectors that are performing well and even seeing accelerated demand on logistics automation. In other verticals like Smart City, Public Safety and Parking, that require traveling, face-to-face meetings and our physical involvement in installations, we saw the sales cycle slow but thus far, have not received any project cancellations. We used the time to develop new marketing channels, approaching schools, colleges and municipalities that we believe will result in future orders.

I would like to take a moment to explain the importance of our asset acquisition of Eyepax USA during the quarter. As you probably know, our HTS sector was a pioneer in the neural technology behind automation for parking, AI-based Machine Vision identification of the license plate, and now also the color and make of the vehicle. Our superior accuracy and performance brought us success in winning over 30 airport projects in the U.S., including JFK, Newark, Laguardia, DFW, Dallas and many others. So selling the technology is a great achievement, but we could charge us for a fraction of the project. With this recent acquisition, we become a prime contractor and climb higher in the industry food chain and are able to offer the full solution, enabling us to enjoy a larger portion of the project in the very attractive $5.2 billion ticketless parking market.

The neural technology we developed is a key ingredient in homeland security and public safety, offering a proactive system that can prevent the crime and terror attacks rather than just helping to catch the criminals after the fact. We introduced the Quest Shield package for schools, campuses and religious institutes, and we have completed a few installations and are now working on approaching this huge market through different channels. In the homeland security vertical, we provided neural technology, the brain, in sensitive areas in the Middle East, and continue to be encouraged by the interest we are seeing in our verified make and color identification feature. We expect purchase orders to pick up soon given the foreseen emergence of the -- from the COVID-19 shutdown. Towards the end of Q1 and at the start of Q2, we announced several orders totaling approximately $6.8 million, which adds to our confidence that OMNIQ will exit the COVID-19 situation with a solid position.

The current situation with the COVID-19 virus highlights the importance of accessible hands-free automated solutions. As the world intensifies its efforts around public safety, with the goal of protecting both employees and customers, there is a strong desire for contact-less transport of items on warehouse to point of sale. Our products and solutions heighten the ability of organizations to embrace touch-free supply chain management. We believe our proprietary AI-based solutions can contribute significant value to the Supply Chain vertical, as they transition to relying more and more on automated solutions for enhanced operations. A few other achievements of note during and just after the quarter, we introduced SeeTire, a solution for tire identification, facilitating more efficient inventory management and collection of point of sales data, designed in conjunction with one of the world's largest tire manufacturer. We filed a patent for SeeHOV, a solution for high occupancy vehicle detection and enforcement.

As you see, we continue to work hard and allocate resources to sales and marketing and research and development, which are essential to our success, management or substantial shareholders. And while other companies in the sector are valued in excess of 2x revenue, our company is valued at a fraction of revenue. We know that capturing the growth opportunity in front of us is the key to driving sustained shareholder value.

As one example, McKinsey estimates that AI is expected to annually add approximately $3.5 trillion of value to worldwide supply chain operation. Our enhanced AI capabilities are the growth engine for our company, and we are very focused on gaining market share in the supply chain industry, public safety, automation of parking and smart city sectors.

I will now turn the call over to questions.

Operator: [Operator Instructions]

Our first question comes from the line of [indiscernible], private investor.

Unknown Attendee: Shai, first of all, impressive results. I have a few questions, please. The first one, can you expand about the new acquisition? What new capabilities were acquired? And how the company is going to generate significant revenue? And also, what is the TP expected?

Shai Lustgarten: Thank you for the question. Yes, for sure, the acquisition that we conducted in Q1 allowed us to cut through the different layers of the industry, and really touch directly the end users. It gave us the opportunity to offer a cloud-based touchless, and even gateless, parking garage management and operation solutions. This solution is relevant to places of worship as well as the shopping malls, office buildings, different public locations, et cetera, that we're discussing many times. Within the smart city market, in the automation of parking space, this acquisition, with it, we became I think the only company in North America that really has a complete A-to-Z solution under one roof. This gives us a lot of abilities and tools others are limited to, such as price offering, different business cases that we could be flexible for and be more relevant to customers, especially at these times. In addition to that, we are able this way to customize our solution to different spaces and be flexible and really create an attractive solution. So it gives us a lot of tools, it, gave us -- and we could have done this, of course, on home, but say, many years of development, and came with a great reference, and we're seeing already the traction for it.

Unknown Attendee: Excellent. Another question is about the corona. How did it affect the gross margin?

Shai Lustgarten: It impacted us both positively and also temporarily a negative way. We've seen -- the simple answer is that we did still see growth in GP in our margins, because we are more and more expanding our solutions and AI capabilities to our customers. But aside from only the margins, it showed us a lot of positive and negative sides as well. On the negative side, we see that it's really temporarily, as we all see the markets are starting to open up. On the positive side, it's very significant, because our Fortune 500 customers, for many years now, proved what we are saying for many -- we're saying a lot already, over and over, that these customers, this customer base of Fortune 500 customers are solid and our biggest strength. While in these challenging times, we see companies that are falling or shutting down, our greatest strength, our customers remain strong and solid, and continued even further to show their interest in our IoT devices and technology. On the negative side, in the parking market, our deliveries got postponed. Yes, we saw that. And only now starting to ramp up as markets are opening up back again. All in all, it is doing good for us so far. And the market and the whole world understand today what we're saying and what we invested our resources in, that we have to advance forward to an artificial intelligence, Machine Vision technology, which creates a touchless, frictionless flexible ecosystem. This will assist us tremendously in continuing penetrating our markets with our Machine Vision products. And the picture is very simple if you look at the OMNIQ today. Our customers and the diversified end markets that we serve, they continue to show us growth in our margins still, even though in the AI, we fell a little bit, and that's what contributed to a lesser growth in the margins, but we also see still growth in revenue, and the growth of the need of products that we offer, which are touchless, frictionless and cloud-based solutions. So all in all, it hurt our growth in the margins, but created a tremendous opportunity for us to penetrate even faster than we thought with our current offering.

Unknown Attendee: Great. Last question, please. We read about the public safety efforts for schools and other institutes. When do you think that will pick up?

Shai Lustgarten: So yes, we recently, as I said, we introduced that solution to school, the Quest Shield solution to schools and places of worship, et cetera. And I'm happy to say that sale started, and you will hear about it already soon, very soon. We expect this market to pick up the traction still in the coming months, still in 2020, but very significantly in 2021. The scalability opportunity that we have in this market is huge. There are more than 34,000 private schools, 133,000 public schools, there are about 5,000 colleges and universities. Our solution is exactly what they need. It's unique and it doesn't exist there. And we do believe that, especially today, especially, unfortunately, in this situation today, these challenging times, still, all of the added values that we have in our solutions are very visible, very brought forward as a need by the market. So we do expect still in 2022 to receive traction and grow, but 2021 is expected to be a very significant growth year for these products.

Operator: Thank you. Our next question comes from the line of Ashok Kumar with ThinkEquity.

Ashok Kumar: Shai, could you comment on end markets, right? I think given that better than 50% of revenue is targeted from food and related distribution, which is not as highly impacted as some of the other sectors like airline and travel. So could you address how that positions you in the near-term in terms of increased demand for -- in the hands-free handling and automation?

Shai Lustgarten: Thanks for that question, and I hope everything is well. Yes, like you said, approximately, I would say, close to 50% of our revenue from our customers come from the food and drug sectors. These markets, as we know, are growing. But you got to also pay attention to another very significant point. Most of our products, most of our IoT devices, product solutions are going towards the -- to run the distribution centers, not only the point of sales, not only the stores, but mostly are going to be -- most of our products go to run the supply chain that is running in the distribution centers of our customers. And what it means, and we all see is very simple. Today, the online e-commerce, the online shopping is growing so much. It is a necessity. No one is going out to stores. The world changed, right? And that's exactly why we see growth with our current customer base, because the online shopping is running only from the distribution centers. That's the heart of the supply chain. That's where it's conducting. That's where the deliveries are going from, and that's exactly where our main focus is on. So the demand is growing from all of our customers, but mainly from the food and drug sectors. We are, because of that, positioned very, very well, and our backlog grows tremendously, very significant.

Ashok Kumar: And also, in terms of the verticals, the Supply Chain, Public Safety and Parking Automation, right? So I think those would be longer term, some of the faster-growing verticals, and also positions you for higher market share in the addressable market looking at '21 and beyond.

Shai Lustgarten: We're already in 2020, sir, because basically, the -- you're right, it's a longer term, but still, we are seeing the need for it. We came out, we invested in a gateless environment, in a touchless environment, a very flexible environment, solutions coming from the AI from the Machine Vision technology, and the acquisition provided us the platform to run and manage everything through a very simple dashboard, cloud-based one. So basically, we are seeing that indeed, immediate lower sales rate with our current solutions that we used to sell in Q1, we saw that trend, but again, like I said, none of the projects canceled or anything, but we did see an accelerated need and already traction and orders coming in for the new solutions that we invested in due to the fact that they were -- nobody's forecasting.

Operator: [Operator Instructions] Our next question comes from the line of [ George Gutman ], private investor.

Unknown Attendee: So one of the things that I was extraordinarily happy about was the increase in cash, which means that with the lockdowns and business slowdowns everywhere, we have plenty, which is something that very many small companies can't say. Did that come from cash flow generated by the business? Or some other source?

Shai Lustgarten: Of course, you always have different sources. But the majority, 80% came from the business. And that is a good sign. Like you said, that is a great sign for us.

Unknown Attendee: So when you announced those 2 new patents, the Tire and the HOV, as you know, I like [blink]. To me, I thought that was like unbelievable. Like how many small companies have stuff like that? But I'm always coming back to the same issue. How could you get it in front of enough people to make a difference? Is there a possibility that you will either license it out or take on a big partner that has nationwide reach? Or maybe even global reach?

Shai Lustgarten: It is the scalability, like you said, and that's why we invested in this. The scalability for these products in these markets is huge. Game changers for the company. And like you mentioned, the main effort need to go into making sure that we know how to reach the market and create sales. One of the greatest strength that OMNIQ has, and we spoke about it in the brief, is our customers. So if there is -- when you have other companies that come out with great technologies, great solutions, now they have to really jump through hoops and have a lot of challenges and difficulties to get -- and it takes time to get into the market and expose these technology or unique solutions they have and create sales. What OMNIQ has, we already have the customers. So that is why we invested in this direction because not only the scalability exists and each one of them is a huge and significant growth engine for the company, could actually double our revenue, and not only it is built on top of unique technology, unique offering that creates a lot of barriers for others to penetrate and compete with us on, also, we already are serving the customers that need these solutions, we serve them today. So to us, the challenge is to make sure the products are firm, packaged correctly. Now taking it to the market is exactly what we do every day with our current offering, and we've already, before we invested in each of these directions, we've already conducted, you must believe me, that we already had invested efforts in understanding and talking to our customers today. What would they say if we had that technology? If we had that product? And of course, receiving a very receptive and positive remarks from them, that's when we went into. And now you saw that we filed for patents and everything. And now that we have the customers, we are -- we can penetrate the market much quicker than anybody else.

Unknown Attendee: Are these products actually in the field already? Or are they being tested in the field?

Shai Lustgarten: Tested in the field, yes.

Unknown Attendee: I know if I'm going to ask you how the tests are going, you can't answer. So I'm not going to ask you that. Is there a chance that we could probably -- okay, do you have a time frame when this test will be concluded and we could see some results, maybe like sales, et cetera?

Shai Lustgarten: Within the next few months, we should be able to be at a different, much more advanced status with the testing, with the pilots and everything.

Unknown Attendee: When you're talking about that, you're talking about the Tire and/or the HOV or both?

Shai Lustgarten: Both.

Unknown Attendee: Both. Okay. Well, I'll tell you what. It really sounds great. And hopefully, sometime in my lifetime, others, besides the usual gang of suspects will realize what a great bargain we have here, what great potential we have here. Thank you very much.

Shai Lustgarten: Thank you for your support, George. I appreciate that.

Operator: [Operator Instructions] Thank you, ladies and gentlemen. This concludes our time for questions. I'll turn the floor back to management for any final comments.

Shai Lustgarten: Thank you. So I'd like, of course, like always, I would like to thank again our amazing team of employees that we have. Nothing can be done without our team. We do have the best team. It doesn't matter what challenges we face, it doesn't matter what we wake up in the morning to, what obstacles we have. Our team is very focused towards getting our objectives done. And we do operate as a united team. And especially today, in these challenging times, that makes me very proud, and I thank each one of them, like I said, we have the best team, and we can achieve anything this way.

I would like also to conclude with wishing everyone good health, keep well, and thank you for your continuing support, and I look forward to speaking with you very soon. Thank you very much.

Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.