Core AI Holdings (CHAI) Q2 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Siyata Mobile Q2 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Daniel Kim, Vice President, Corporate Development of Siyata Mobile. Please go ahead.

Good morning, everyone. Thank you for joining the Siyata Mobile Second Quarter 2022 Conference Call. Today, I'm joined by our CEO, Marc Seelenfreund; our CFO, Gerald Bernstein; and our VP of International Sales, Glenn Kennedy. We'll all be available for questions at the end of the presentation. During the course of this call, management will make express and implied forward-looking statements within the Private Securities Litigation Reform Act of 1995 and other U.S. federal securities laws. These forward-looking statements include, but are not limited to, those statements regarding future product offerings, the belief that we are in a path for strong organic growth, the goal to deliver strong year-over-year revenue growth and reach profitability in the coming quarters, the belief that the worst of the pandemic is behind us and that we will continue to see strong sales in all of our product lines and across our various markets and the timing and sale of the rugged handsets to North American and international carriers. Such forward-looking statements and their implications involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. The forward-looking statements contained in this presentation are subject to other risks and uncertainties, including those discussed in the Risk Factors section and elsewhere in the company's annual report on the Form 20-F for the year ended, December 31, 2021, filed with the Securities and Exchange Commission. I would now like to turn the call over to Marc.

Thank you, Daniel. As we discussed on our last earnings call, we have seen a resurgence in customer trials with all 3 of our primary product categories. We are disappointed that these trials have not translated into more robust top line growth in Q2 2022. However, many of these customer trials are being converted into purchase orders with increasing volumes, and we hope to deliver strong growth from this current quarter, Q3 and onwards. But first, I will discuss our financial results for the second quarter ended, June 30, 2022, and then we'll conclude my remarks with our outlook. Revenue for the quarter was $970,000 compared to $350,000 for the same period in the previous year. This increase of $600,000 or 172% was mainly due to rugged handset sales in EMEA as well as initial sales of our SD7 rugged handset in Q2 2022. Gross profit for the 3 months ended June 30, 2022, was $109,000 or 11.2% of sales compared to a negative $470,000 for the same period in the previous year. Gross margin in the quarter was negatively impacted by low-margin sale of legacy products in EMEA, which was offset by higher-margin sales of SD7 rugged handsets. Adjusted EBITDA was negative $3.4 million versus negative $4.6 million for the same period in the previous year, a decreased loss of $1.3 million. Turning over to significant business highlights. We continue to lay the foundation for growth with our game-changing mission-critical push-to-talk device, the SD7. Our recent attendance at APCO, in particular with our SD7 showcase at both the FirstNet and Verizon Communications booths, reaffirm the incredible interest and positive responses that we received from potential and current customers for this product offering. APCO, or the Association of Public-Safety Communications Officials, is the world's oldest and largest organization of public safety communications professionals. We are pleased to report that during the second quarter of this year, Siyata delivered on its plan to build and expand its potential customers for the SD7. We have announced that the SD7 is now certified and approved for use with many North American carrier customers, including FirstNet and AT&T, Verizon Communications, U.S. Cellular; and also international channel customers, including Logic Wireless, a leading distributor of business-critical communication solutions across the United Kingdom, Australia, New Zealand and the Pacific Islands; as well as TASSTA, a global MCPTT software provider and end-to-end solution for critical communications. This foundation of increased distribution is directly leading to many potential significant volume opportunities, of which we have begun shipping products in an increasing number of verticals beyond our primary focus on first responders, including government, school districts, utilities, security, logistics, retail, amusement parks and hotel resorts to name a few. I am pleased to say that the increase in number and size of our distributor base is translating into now a much-anticipated volume growth for our SD7 in the third quarter. Having said that, let me be clear that this is a process. Interest is strong and demand is growing, but we believe that we are just hitting the tip of the iceberg in a multibillion-dollar industry and that larger volume should follow as end customers grow to appreciate our unique offering in this new product category. Last but not least, we also recently announced an exciting new product category, a Siyata high power user equipment, or HPUE antenna, in conjunction with Assured Wireless Corporation. This unique solution is part of our cellular booster portfolio and is designed to be used specifically on FirstNet. We began delivering our first units in Q3 and over the course of time, this product category to contribute meaningfully to our revenue. Finally, I want to note that as we were reviewing our second quarter numbers, management and the Board's Audit Committee determined that the company's condensed consolidated unaudited interim financial statements for the 3-month period ended March 31, 2022, that was filed with the Securities and Exchange Commission on a Form 6-K on May 17, 2022, contained an error in the accounting treatment for the classification of the company's warrants as equity rather than as a derivative liability and, therefore, should no longer be relied upon. In addition, investors should no longer rely upon any communications relating to those condensed consolidated unaudited interim financial statements. The company has corrected this matter and has filed with the SEC its restated condensed consolidated unaudited interim financial statements for the 3-month period ended March 31, 2022, and its restated management discussion and analysis of results of operation and financial condition for the 3 months ended March 31, 2022, on a Form 6-K. The correct accounting treatment was carried forward in the company's unaudited financial statements for the quarter ended June 30, 2022. Now I would like to pass the line back to Daniel, who will discuss some of the industry trends and market dynamics that are benefiting our business.

Thank you, Marc. North American carriers have recently delivered robust results with some seeing record customer additions, while others expect somewhat moderated but still robust high single-digit wireless service revenue growth. Importantly, for Siyata, the low-cost, mission-critical, push-to-talk device, SD7, is ideally suited to grab market share away from land mobile radio, or LMR customers, which will help carriers drive accretive subscriber growth. There are millions of LMR devices in use in North America, and we believe push-to-talk over cellular is a next-generation technology. And by working with leading carriers and distributors, we hope to be a key vendor driving this replacement cycle. In July 2022, FirstNet, a dedicated cellular network for American first responders, announced it supports over 3.7 million connections and 21,800 agencies. This compares with 3 million and 19,500, respectively, reported at the end of 2021. On past calls, we often discussed the expected growth in the global push-to-talk over cellular industry. Importantly, I'd like to highlight the more recent catalysts that are driving this growth. First and foremost is consistent call quality, i.e., no drop calls and high-quality audio with clear sound. But other more recent factors include, first, the global pandemic, which ironically in past years has slowed our growth plans is now driving the need for push-to-talk over cellular that it is being increasingly used by government and disaster management agencies in hotspot areas or containment zones. Second, work-from-home policies across industries and sectors has also increased the demand for push-to-talk over cellular technology. Third, the pandemic has created a remote work environment and has increased the demand for this technology for public safety communications. Finally, our core focus market, North America, is expected to dominate the global PTT market as adoption is happening across multiple industries and public safety organizations that are driving increased demand for efficient and cost-effective solutions. With that, I'd like to pass the line to Glenn.

Thank you, Daniel. Looking at our sales funnel, we continue to see healthy sales potential in each of our 3 product categories. First, in our rugged handset product category. We have begun shipping the SD7 PTT handset that supports mission-critical push-to-talk, or MCPTT, to North American wireless carriers, and we displayed this handset during Q1 at several trade shows during and after the quarter, including just last week at APCO in Anaheim, California. The initial sales, the responses from early customer trials, the feedback at these shows and the direct engagements from senior personnel within the wireless carriers has been very strong as these wireless carriers aim to capture new customers who have been using traditional LMR or two-way radios. One major Tier 1 U.S. carrier has recently made a significant investment in purchasing a high quantity of sales demo SD7 handsets so that they can support many more customer demo trials through their sales teams. We're also seeing strong customer interest in our VK7 vehicle kit that works with our SD7 PTT handset and also in our rapid kit for emergency response, which is a suitcase full of 6 SD7 PTT handsets and spare batteries to quickly deploy in emergencies. Our objective remains to expand our launch with additional North America and international carriers and with additional PTT application partners later this year. As a result, we are confident that this will translate into multiple thousands of SD7 handsets sold throughout the rest of 2022. Secondly, in our in-vehicle devices category, we are continuing to conduct trials with our UV350 in-vehicle device with customers throughout North America and internationally. We have initiated new proof-of-concept trials with several government agencies in the U.S. and in Canada. So we anticipate further POs for UV350 in-vehicle device throughout 2022. With Telstra, the largest wireless carrier in Australia and together with our distribution partner, we are pursuing multiple large opportunities there, and we are pursuing opportunities in Europe and the Middle East. This shows continued demand for our unique solutions. And thirdly, in our cellular booster product category, we saw continued demand for cellular boosters. And we are focusing on building relationships with more and more booster channel partners, especially in the U.S. market, who pursue small and midsized booster sales opportunities every day. We've recently launched a new product in this category, which is an HPUE antenna for government and commercial vehicles that use an HPUE vehicle solution on FirstNet. We also see growing demand and additional trials for first responder organizations who require both AT&T, FirstNet cellular coverage and Verizon cellular coverage. Overall, we're very pleased with the growing acceptance by customers of our truly unique disruptive solutions. And we expect, based on what we're seeing today, rapid adoption in all 3 of our product categories with especially strong growth coming from our rugged handset product category based on the early success from our SD7 PTT handset and its VK7 vehicle kit. I will now hand the line back to Marc for closing remarks.

Thanks, Glenn. To summarize, the first half of this year was focused on building our channel infrastructure to get to end customers as quickly and as globally as possible. Beginning the second half of this year, we are laser focused on delivering sales of significant volumes for a multitude of verticals and opportunities. We, therefore, extremely pleased with our progress this year and hope to have many positive announcements in the weeks and months to come. The aforementioned industry trends, coupled with our refreshed product portfolio, should allow us to deliver double-digit growth in 2022 and beyond. Our recent attendance at APCO confirms the explosive interest in our products from cellular carriers and distributors as well as from both enterprise and government customers. This was another exceptional show for us as we've never seen such strong interest in our product portfolio. We are very excited for what is to come in '22 and beyond and hope to deliver to shareholders many positive catalysts. New customer wins, significant carrier launches, a continuous upgrade of our product portfolio and ultimately strong organic growth will drive the profitability in the coming quarters. That concludes our formal remarks. With that, operator, kindly open the call to questions. Thank you.

[Operator Instructions] Your first question comes from Jack Vander Aarde with Maxim Group.

Okay. Great. I appreciate the update and good to hear all the positive moving developments playing out. And if you can't hear me, just let me know. I want to make sure you can hear my voice okay.

We do hear you okay, Jack. Thank you.

Great. Okay. Marc, so let me start a question for you then. With the SD7 and VK7 devices in North America, obviously, revenue has been slower to ramp, but it's very encouraging to see -- I think since June, you've had a slew of press releases and positive announcements, getting approved at AT&T, FirstNet, Verizon, U.S. Cellular, just to name a few. Can you speak in general maybe about the importance of each of these carrier partners and how you kind of size them up? And then how do you prioritize the expected demand and initial shipments from each carrier, just given -- I feel like demand is kind of outsizing the current supply level that you have. So how do you balance those relationships and prioritize all 3 of them or in any, in addition to the other carriers you've signed up?

So -- okay. It's a good question. So from the time that we announced that we actually get approval at the carriers, it still takes, I want to say, 6 to 8 weeks or 6 to 10 weeks until we actually start sales because they have to get their salespeople moving. They have to get their orders in. It just takes time. It's a process. And all -- every single one of these carriers that we're working with, they are massive. They have -- AT&T and Verizon have over 100 million subscribers. So they're very large-scale carriers. U.S. Cellular is also a nice size carrier. And it's just a process of ramping up their internal sales process until we start sales. So our initial sales were, as you noted, in June, that's where we started just initial sales. We're already seeing a very nice ramp-up in this quarter, Q3. We think that in the coming quarters, Q4 and in 2023, we're going to have even further ramp-up. The various verticals that we're going after are far, far greater than what we had ever thought we were going to go after initially. We were thinking that the general focus for SD7 was going to be police, fire, ambulance, first responders, okay? This world of first responders extend way beyond police, fire, ambulance, okay? It goes to waste management, utilities, yellow school bus. If there's a tornado or a hurricane or some kind of an emergency in a certain area, there are many other types of people that need to have good communications that are considered first responders, okay? Waste management that come in to a city that need to clean up, they are actually considered first responders. We're going after all of these different verticals. And therefore, just the size of the market is far greater, and we're already seeing traction in multiple opportunities outside of contractual including sales and multiple opportunities outside of police, fire, ambulance, okay? We don't think that amusement parks was going to be such a -- we didn't focus at all on amusement parks. But we're already selling them to amusement parks. We see very large-scale opportunities there. We didn't focus on the security, but we see there's a lot of security companies that we're doing trials with, and we actually started to sell to security companies. So there's just a lot of different types of verticals that we're focused on. One of the most interesting verticals that I personally focused on very much so because I think that's the largest vertical for us are schools, in general, school. Everybody knows that teachers have to have better communications in schools for obvious reasons. And we believe that the SD7 is the perfect device for schools, right, because it allows you to have better communication within the school between the principal and the teachers and the people that are working in the school. But because it's push-to-talk over cellular, you can now plug in from fire, ambulance and first responders, right? So we think that, that's a very, very meaningful vertical for us, and that's something that we're very focused on right now. So to your question, we are ramping up sales in Q3. We think that we'll continue to ramp up sales in the coming quarters after Q3. Our market, as you've noted, there are always millions of land mobile radio devices that are out there in the field, we want to replace them with next-generation push-to-talk over cellular devices. And we are still the only company that has anything like this that's carrier approved in the United States that has a device that looks and feels like a land mobile radio. And we think that, that's going to be very advantageous for ourselves and our shareholders because the market is outstanding. It's really is -- it's endless as far as we're concerned. And we are building up inventory accordingly, right? So we want to be in a situation that we have enough inventory to sell for our customers, we do, and our money is spent on buying inventory and making sure that we have enough inventory to meet the sales, and we do have that inventory on hand. We're very careful because everything that has to do with supply chain management, which is not attributable for any company in this market in this day and age. So we're putting a lot of emphasis on making sure that we have the right components and making sure that we have devices to be able to meet the customer demand. Until now, we've been very good at it. We think that going forward, we'll continue to be good at it, and we'll do our best to try to stay good at it, and we won't have a problem with devices. And like I said, we're really very focused right now on sales, right? We're not focused as much on carriers. We've gotten the carrier approvals for the main carriers. We're working on additional carrier approvals. But the big carriers we've already gotten under our belt, we're very focused now on sales, and we think that that's going to make a very big difference for us from Q3 and onwards. I hope that answered your question.

Yes. I appreciate all the added color there. And then speaking of which, just a follow-up on the inventory supply chain. So your second quarter inventory looks like it did pick up about -- is it $4.7 million, I'm showing. Just given -- can you just give an update maybe on the current supply chain environment and how you expect your inventories to trend? Is there a balance there? Are you -- do you need to pay extra to expedite or place deposits for inventory? Do you see supply chain environment improving, just given the level of anxiety for SD7?

Yes.

Go ahead.

Yes. Yes. So supply chain movements, in general, is getting better. I think that the only thing that is costing us more is shipping. Shipping has become much more expensive than it was in past years. It's not just for us, it's for everybody. So we're trying to balance how we ship between freight and air to make sure that we get the lowest price shipping as possible. We do a lot of quality control, so do quality control at the level in our factories in China. We do quality control in Canada. We do quality control in the United States. We're spending a lot of time and efforts on quality control and that -- we've always done that, and we continue to do that because we think that it's super important if we're selling the device to an ambulance or to a police officer, we want to make sure that, that device comes with great quality and that works well. And again, it’s -- I'm not going to tell you that there are no supply chain issues because anybody who tells you that is just not telling you the truth. Of course, there are supply chain issues, but we are dealing with it, whether it's getting long-lead components upfront to make sure that we have enough of those components on hand. Whether it's ordering enough inventory to make sure that we're not short. And I think we're just managing it, and we'll continue to manage it going forward. It's something that we spend a lot of effort on but until now we've been doing fine with it. And I think that -- you'll see that from our Q3. So the ramp-up we saw in Q2 of inventory was towards our sales for Q3, and I think that you will see also a similar ramp in our sales in Q3. That's the plan.

Got it. I appreciate the color there. And then maybe just a last question, maybe for Glenn and Dan, either of you gentlemen maybe have some insight into this as well. You mentioned that you're hearing strong feedback and demand from customers for definitely the SD7 handset at APCO and other trade shows. Are you -- can you just describe a little more in detail what -- how these trade shows are working? Do you expect active purchase orders or have you received active purchase orders from these trade shows? Or It's more of a funnel of just beginning discussions and that lead to follow-up discussions and eventually purchase order. Just -- are you seeing any specific orders coming in from those trade shows, that would be helpful?

So, Glenn, do you want to...

Yes, it's Glenn here. Yes, sure. Thanks, Jack, for the question. Yes, so I can maybe talk a little bit about last week's efforts. The good thing was we had a great booth location right next to the FirstNet booth. And so actually, what happened at that show the -- many of the FirstNet sales team would walk their customers over -- after having a discussion in the FirstNet booth, they would walk them over to our adjacent booth and then show them the SD7 PTT handset and show them the VK7 vehicle kit and some of our other products as well. And so it was really introducing customers to get -- allow them to see for the very first time, what they've been talking to them about for the past period of time. And so it's really building our funnel of opportunities with customers. And that very same thing happened in the Verizon booth as well. We had a pod set up inside the Verizon booth that said Siyata Mobile, and we had our SD7, VK7 on display there as well. And once again, the Verizon sales team would walk their customers who are in attendance at the show over to our section of their booth and show them. So it's really an opportunity for us at these shows to increase our funnel of opportunities and for customers that are already maybe at the trial stage, it allows them an opportunity to ask questions and further develop those sales opportunities.

Helpful color.

Go ahead, Marc.

If I could just add one thing. AT&T are selling our device with a data plan and a PTT plan for $20 a month, okay? So that's considered very, very inexpensive. And it allows them to offer this to multiple types of verticals because it's first responders specifically, because it's a low-cost product, it's mission-critical PTT. It's on the FirstNet network. And therefore -- it's an upgrade from LMR that's very easy. It's a very simple upgrade from a radio to the device. So it's not only in our interest, it's also in AT&T's interest because every single customer they put on their network, they're now getting $20 a month for probably forever, right? So it's not just in our interest, it's very much in the carrier's interest to be selling our product, and they're making a win-win situation both for us and for the carriers.

Got you. That's helpful. And like you said, it sounds like there's no other product that's really competing with you that's also approved on the carrier's network like AT&T. So it sounds like all these developments are happening like within just the last couple of months. So it sounds exciting. Do you expect Verizon -- I don't know, is there any trade-off there between -- I mean can you share any color with Verizon and what you're expecting there? It's been a lot of talk about AT&T. Is Verizon at similar scale and a similar opportunity size as AT&T? Or do you expect AT&T be the bellwether for you, at least in the near term.

So that's a great question. Verizon is definitely a strong player in the first responder market. They have traditionally been the strongest player in the first responder market in general. AT&T, FirstNet is doing very well in taking customers from all the carriers, okay, and putting them on the FirstNet, they got a dedicated network that's only focused on first responders. So to your question, we definitely expect Verizon to be a serious partner of ours in the distribution of our pivotal products. But we certainly also feel that AT&T and FirstNet are very, very strong in this market, and we're very focused on it. You have to understand, in Verizon, they're not as focused as FirstNet. FirstNet is a separate entity that only focused on first responders, whereas Verizon is part of their overall sales teams, right? So in that sense, we're definitely getting more focus from FirstNet than we are from the Verizon sales teams. But having said that, we do plan on selling a lot of products through Verizon. And we know that they have customers -- many, many hundreds of thousands of customers that we would be selling to, if not more. So we're planning on working with both of them. But to your question, we do see FirstNet as a very, very serious partner for us, simply because they are dedicated only to first responders.

[Operator Instructions] There are no further questions at this time. Please proceed.

Thank you for joining our conference call today. If you have any further questions, please feel free to reach out to me, Marc, or to Dan, our VP of Corporate Development. And we look forward to being in touch with you in the future. Thank you very much.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.