Shlomi Cohen
Thank you and good morning everyone. Thank you for joining us today to discuss our results for the second quarter of 2016. As you can see from the earnings release we issued this morning, our financial results for the quarter were strong across the board.
Growing demand globally for our industry leading payment solution drove an increasing revenue while our streamline manufacturing practice helped us to maintain a healthy gross margin. Q2 also marked our fourth consecutive decrease in operating expenses, fourth consecutive increase in gas profitability, as well as third conservative improvement in adjusted EBITDA. In fact, due to the onetime payment we receive from SuperCom, the second quarter was our first GAAP profitable quarter since Q4 of 2013.
While our financial performance is encouraging, perhaps more telling for progress since our results for the first half of the year. Nearly every metric improved when compared to the same period last year. However, of particular note, our gross margin was up 240 basis points to over 52%. Our operating expenses were down $2.4 million or including the SuperCom payment we generated positive GAAP net income versus a loss of $3.8 million. These significant improvements were driven by the efficiency program we implemented in the second half of 2015. These measures not only optimize our internal processes and manufacturing practice but also reduce costs and build a solid foundation for growth.
Before I go into further detail, I would like to turn the call over to our CFO, Yishay Curelaru, who will take us through the financials for the quarter. Yishay?
Yishay Curelaru
Thank you Shomi, and good morning everyone. Before the market opened today, we issued results for our second quarter ended June 30 in our press release. Our copy of the release is available on the Investor Relations section of our website.
As we reported in the press release, our total revenues increased 4% to $5.1 million from the prior quarter and increased 6% from Q2 last year. Now breaking down our Q2 revenues by source and the percentage of total revenue; retail and mass transit ticketing revenues was $3.2 million or 64%, petroleum revenue was $830,000 or 16%, MediSmart and access control product revenues was $740,000 or 15%, and parking revenues was $280,000 or 5%.
Looking at Q2 revenues by geographic region and the portion of each region contribution to the total revenue; North America accounted for $2 million or 41%, Europe accounted for $1.6 million or 31%, Africa accounting for $1.1 million or 22%, Asia and Israel accounted for $280,000 or 5%, and South America accounted for $70,000 or 1%.
Our gross profit for the second quarter of 2016 was up 4% to $2.66 million from the prior quarter and down 2% from Q2 last year. On a percentage basis, our gross margin was 52.2% which was consistent with the prior quarter and up 240 basis points from Q2 last year. The year-over-year increase in gross margin was driven by efficiencies realized from our outsourcing of manufacturing and production to third-party vendors.
Now turning to our expenses; operating expenses for the second quarter of 2016 decreased 2% to $3.2 million from the prior quarter, and decreased 30% from Q2 last year. Operating expenses for Q2 marked the lowest quarterly level for OTI in more than two years. A significant improvement year-over-year was primarily due to the cost reduction measures we implemented in the second half of 2015. It is important to point out that while we have realized the major financial benefit from this efficiency program, both in terms of gross margin enhancement and cost reduction, we will continue to evaluate opportunities to further optimize other expense structure and enhance operational efficiencies.
Our net loss for continued operation totaled $639,000 or $0.02 per share. This was an improvement from our net loss from continued operation of $2 million or $0.05 per share in the same year ago period. During the second quarter we received $2 million payment in accordance with the settlement agreement received from SuperCom. As a result of this payment we generated positive net income of $1.3 million or $0.03 per share on Q2 2016. This was a significant improvement from the net loss of $2 million or $0.05 per share in the same year ago period, not to mention, our third GAAP profitable quarter in more than two years.
Now turning on to our non-GAAP results; our adjusted EBITDA loss from continued operation for the second quarter of 2016 totaled $155,000. This is a significant improvement from EBITDA loss of $683,000 in the second quarter of last year driven by higher gross margin and lower operating expenses. Please refer today's earnings release for further details about this non-GAAP metric included reconciliation of adjusted EBITDA to our comparable GAAP results.
Now turning to the balance sheet; at quarter-end we had cash and cash equivalents and short-term investment of $11.2 million which was up by 16% from the end of prior quarter. We continue to believe our cash provides us with sufficient capital and runway to execute our growth plan. This complete my financial summary. For a more detailed analysis of our financial results please reference our Form 10-Q which we plan to file on August 15.
I would like to turn back the call to Shlomi for additional comments on our operational progress and outlook for 2016. Shlomi?
Shlomi Cohen
Thank you, Yishay. In addition to our improving financial profile, we continue to make meaningful progress during Q2 executing on our plan to capture market share and drive growth across our business segment including its volume, Internet of Things, and retail payments. This includes making progress in optimizing our cost structure and operations, building a professional sales organization and transitioning our business model to a more recurring revenue model.
As I mentioned on our last call, growth area of our business is our petroleum division OTI PetroSmart. OTI PetroSmart started deploying it's easy fuel plus solution to Puma Energy international retail site in Africa during the second quarter. The Easy Fuel Plus solution is expected to be deployed across Puma's Southern Africa network with roll outs into different countries in Africa during the third quarter. OTI PetroSmart also continued to build towards the future by helping Copec, the leading fuel and lubricant distributor in Chile, launch a premium fuel cost offering for its commercial customers.
Turning to our Internet of Things business; a core element of our long-term growth plan and strategic transitioning to our global system provider is our PayEnable platform. During the second quarter, we announced the availability of PayCapsule-Flex, one of the smallest payment cards globally. The PayCapsule-Flex payment enable us insert our design to turn any product and fashion government into a payment device. We are seeing more and more companies looking to implement and offer such wearable product and gadgets to the consumers.
In fact, Goldman Sachs estimates that $20 billion worth of connected variable devices will be sold in 2017. This supports the estimates by other research firms that focus transactions volume completed by wearable payment devices reaching $500 billion, annually, by 2020. Although it's still early and we have much more work to add. We believe PayEnable is positioned to capitalize on the Internet of Things evolution.
Shifting gears to our most important business today, our retail payments division. During the second quarter we continue to build the operational momentum we established at the outset of the year. This was demonstrated by our ability to form new strategic partnership and secure wins across your key geographic regions. One such recent win was successful pilot installation for our SATURN 6700 Reader and ATM throughout Europe, Asia and North America.
As I've talked about on our last two calls, key measures of our success in 2016 will be our ability to penetrate new regions and secure new customers. We continue to believe the North American market will be the primary driver of revenue growth in 2016. In addition to our success, queuing [ph] process although for our readers from longstanding channel partners, we anticipate new partnership.
Turning to our opportunities in the European markets; during Q2 we formed a strategic partnership with Swiss-based Microtronic, one of the leading European provider for closed loop cashless payment system for vending. Our joint solution which combine our CONNECT 3000 telemetry device and Readers with Microtronic e-vending solution, addresses a major unmet need in the vending market for secured payment system that accept both open and closed loop transaction.
By collaborating with Microtronic, we can now offer operators a turnkey solution that integrates the cashless payment outlook with telemetry, payment processing and cloud-based system management. We believe that this integrated solution is an industry first and advance our plans to expand our recurring revenue sources.
Shifting focus to our opportunities and progress in the Japanese market, last month we achieved significant milestone by receiving FeliCa Certification for the new SATURN 8700 Reader. This certification has provided us with an early mover advantage in the Japanese unattended vending market. With nearly six million vending machines nationwide, the Japanese market represent the second largest opportunity globally for cashless payment solution as its transitions to cashless payment to support demand from 20 million foreign travelers annually, and considerably more during the upcoming Tokyo Olympic Games in 2020.
In less than one year we were able to achieve so certification demonstrating the strength of our R&D capabilities and partnership with billing system. I am encouraged to report that we were able to already capitalize on our success in achieving FeliCa Certification by securing a letter of intent from a multi-billion dollar Japanese retailer to purchase 10,000 FeliCa Certified readers over the next two years. The retailer intends to purchase completed otiMetry solution which includes the SATURN 8700 FeliCa Reader and advanced telemetry. As I mentioned earlier, one of the drivers for growth is the transition to our recurring revenue model by focusing on selling a platform that includes telemetry system and payment processing devices.
During the second quarter we made progress in this important transition by securing our first telemetry sales and recognizing recurring revenue from system that has been activated. In summary, the second quote marked an important milestone in our business, both from financial and operational perspective. We had the right business model partners, products and team in place to further establish OTI as the growing leader in cashless payment solution globally.
With that, we are now ready to open the call for your questions. Operator, please provide the appropriate instructions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Joshua Elving with Feltl. Please proceed with your question.
Joshua Elving
Hi, Shlomi, Yishay, congratulations on a nice quarter. Couple of questions; one, the company was very active in and outing distribution agreement contracts, different positive developments over the first half of the year which I think can lead focus to believe we should see a significant ramp in revenue. Could you maybe talk a little bit -- I guess we didn't expect much in the second quarter -- could you maybe talk about the cadence or the opportunity to accelerate revenue growth from here? I think you did maybe $100,000 of incremental revenue in sequential quarter. Could we see that start to accelerate here into the back half of the year?
Shlomi Cohen
I think that -- first of all, we've put quite a lot of efforts to build the infrastructure that we didn't have in the previous year in different and also in new areas like ATM, the Japanese market -- the fact that we are having telemetry and we are actually moving from being a product company to a solution company, and by that we are actually generating our recurring revenue. When you're actually combining all those elements together plus the IoT division that we initiated end of last year, I think that basically we can assume that we will continue to accelerate our activities and eventually we will increase our revenue as well. To tell you the timing, exactly when it will be, it's a little bit difficult but definitely we are in this direction. In this direction I think that you can see it from our results, we are improving and we will continue with this positive momentum.
Joshua Elving
Okay. Another question, just trying to get a better sense for the economics of the recurring revenue that you hope to generate or that you are generating now but they hope to grow in both, Europe and Japan. Is there any way to give us a sense as we try to improve the quality of our modeling, is there any sense you can give us for the revenue you generate per connection in U.S. dollar terms. Is it the neighborhood of $5 a connection per month or how is that price? And then any kind of color you could offer on profitability would be helpful.
Shlomi Cohen
As you know Josh, we are not giving any kind of guidance but I will say the following; definitely, we are accelerating and we are moving very fast by activating more and more systems in the European market and with our business model that we are actually charging a flat rate and this something that is definitely profitable. Without getting into this you can assume it was profitable. The idea is to activate as much as possible system -- when I'm speaking about system, I'm speaking about Reader plus the telemetry and on top of it the service that we are giving for the payment processing. So we are doing our best to increase the number of the active system in the market. And so far it's working according to our plan and even above that.
Joshua Elving
Okay. Last question for me and then I'll hop back in the queue. Just -- thinking about the Japanese opportunity, I believe your hardware is on about 40% of vending machines that accept cashless in the United States. There is obviously huge opportunity in Japan and a mandate the put cashless acceptance on vast majority if not all vending machines by the time the Olympics come in 2020. Is it reasonable to assume you can secure -- maybe not similar but very high market share of the Japanese market as well?
Shlomi Cohen
I think that this assumption at the moment it makes sense and I will explain why. When you are actually looking on the list of all the companies that got to the FeliCa Certification, if I'm analyzing in correctly, we are actually the first western company that has such kind of certification. But again, this is according to the check out that we were doing lately and this is significant. And indeed, if you're taking the entire portfolio that we are having and the fact that we are aiming by the way not to be books moving in this market but actually to present the full solution and this -- actually the queries and the last retailer that actually gave us the letter of intent, like -- eventually the fact that we are presenting a full solution to this market, it's significant advantage in Japan. And I think that during the coming years, we should see improvement in results from this market.
Joshua Elving
Thank you very much. I'll get back in queue.
Operator
[Operator Instructions] Our next question comes from Edward Schwartz with Schwartz Investments. Please proceed.
Edward Schwartz
Good morning, nice quarter. Just a couple of housekeeping questions; I know over six months ago the company received its listing orders from NASDAQ, so is that listing satisfied?
Tamir Ben-Yoseph
Hi, this is Tamir, the General Counsel. Yes, we have received a notice from NASDAQ that we are in full compliance with the minimum bid requirements and accordingly the compliance matter has been closed.
Edward Schwartz
Very good. Also in Q2, you said two litigation/lawsuits, was there any revenue realized from these and how are they accounted for on the balance sheet or income statement?
Tamir Ben-Yoseph
This is Tamir, again. The first one was Verizon, as we reported the time, there was no revenue associated there, there was some cross-licensing in that transaction. AT&T, as you may have seen from pacer [ph], it has been settled and that case has been dismissed. The revenues from that are going to be in the Q3 reports in the next couple of months, and they will be reporting as -- reported as licensing revenue at that time.
Edward Schwartz
Okay, thank you very much. And just want to have a quick question for Shlomi, do you have a payment processor in place for Japan or is that coming?
Shlomi Cohen
This is something that we are now evaluating together with our partner Billing System in Tokyo. And I believe that before the end of the year we will have payment processor in place, we have time.
Edward Schwartz
Okay, thank you very much.
Operator
Our next question will come from Mike Ladamor [ph] with Norland Security. Please proceed with your question.
Unidentified Analyst
Thanks, this is Nick Goldman [ph] filling in for Mike, couple of questions. Can you guys give any more color on your partnership with SamsungPay?
Shlomi Cohen
We don't have any kind with Samsung and the only thing is that they were eventually certifying our products but it's not related to any kind of partnership with Samsung.
Unidentified Analyst
Okay. And then are you guys seeing any increased momentum in the North American vending market yet?
Shlomi Cohen
Yes, I think that all in all when you're looking on there -- on our activities in U.S., as you know, we are working with two biggest vending operator in this market and we initiated also the partnership with Priva [ph] regarding the kiosks. So all in all, when you're looking on the entire activities that we are having in North America, it's actually based on the vending kiosks and the ATM. So those are the three verticals that are quite active for us as the moment and we believe that as we mentioned before, the U.S. market will continue to be our biggest revenue generator, also for 2016.
Unidentified Analyst
Thanks.
Operator
Our next question is from Kurt King with Harvest Capital. Please proceed.
Kurt King
Shlomi, I have some questions for you around the '18 opportunity. I'd just like to understand the details of how that opportunity works a little bit better. So your partner as I understand is the unnamed supplier of the magnetic card readers that go into existing ATMs. So now that we're starting to actually see NFC Reader show up on ATMs deployed by the big banks, at least in North America where I am. I'm wondering if given who your partner is -- if your opportunity is tied to them selling new magnetic card readers into new ATMs or if they are also part of the retrofits that we're seeing going on existing ATMs?
Shlomi Cohen
No, the idea with this ATM and partner [ph] that we are in agreement with is actually to deliver a contact list reader only. The main idea is to make sure that the entire ATMs worldwide will be contact list. The reason for that is to -- first of all, is to give the option to the new card holder that are reading already the contact list element on the credit cards, and to make more secure transactions with this reader. And the second thing, the moment that will leave contact list reader on the existing and also in the new ATM machine, you will be able to do quite a lot of activities with your mobile phone, something that you're not able to do today, that's the main purpose of installing the contact list reader on the face of the ATM.
Kurt King
Understood. In fact, I can today use my iPhone to withdraw cash from my local ATM, something that's got -- I think some very good reviews from people who put it to the test but my question is, if I -- for example, see a contact list reader show up on a Bank of America ATM, is your partner -- the channel through which you would get an opportunity like that given that it's a retrofit with existing ATM or is there some other set of opportunities you would be going after given how I believe you're getting to the market?
Shlomi Cohen
The partner is actually not telling us where he is actually installing the contract list reader. So we are actually delivering those guys the readers but eventually the final location of instalment is not familiar to us.
Kurt King
Okay. So I think I already know the answer of this if you say you don't know who the customers are but the thing that's most visible right now is what the big banks are doing, like I mentioned, Bank of America. At the same time those big banks account for a pretty small fraction of all the total ATMs that you've referenced as your target opportunity. So if I'm looking at what's going on with bigger North American banks with their deployment of contactless readers, do you have any sense whether I’m looking in the right place for where OTI would be involved or, alternatively, should I think that you’re really about the smaller players who have ATMs deployed around the world?
Shlomi Cohen
Honestly, I don’t know the answer for that. Again, we don’t have any kind of visibility regarding the who is the end user of our contactless reading.
Kurt King
Okay, let me throw one more at you. Obviously, you added cash during the quarter, you reduced operating expenses. Is there anything in your planning horizon that suggests that we would see the cash balance reduced significantly, or should be assume that what we see there today is pretty much what the balance sheet is going to look like?
Yishay Curelaru
This is Yishay here. You can assume that, looking forward to the next quarter, you assume the pieces [ph] that the general level of our cash, I don’t see any future large reduction there ahead.
Kurt King
Okay, thank you, and keep up the good work.
Yishay Curelaru
Thank you.
Operator
Our next question is from Mike Vermut with Newland Capital. Please proceed.
Mike Vermut
Hi there. Great progress so far, guys. Can you think, kind of -- can you kind of dive a little bit into the internet of things opportunity? The types of -- not naming names, but the types of companies and products we’re working with, looking at, the market opportunity, how fast everyone is moving -- it’s an extremely fast moving space and I’ve got to believe that there’s opportunity out there to be had over the next year. And just where we stand on everything. And a little more in-depth explanation.
Shlomi Cohen
The internet of things, as I mentioned before, during Q2, we presented the and this is some kind of revolution because with this technology we are able to convert any product to a payment device or payment product. And this is a major achievement. Taking also into consideration that we -- that the product is flexible, it’s washable, wrinkle resistant; you are able to implement it actually in every available product today. So this is [indiscernible]. We decided to be focused on three major verticals regarding IOT. The first one is the automobile, the second one is healthcare, and the third is fashion and food because both of them are having the same characteristics.
So far, the discussions and the accounts that we are facing at the moment are mainly from the fashion and from the food industry. And with those accounts we are trying to promote our solution that eventually will be -- will fit to the customer requests and we believe that we will be able to tailor to those accounts a solution that is a significant advance and we’ll answer all the requests that the customer is actually presenting regarding payment.
Mike Vermut
So if I’m right and I’ve heard them speak and talk about this, a Nike and an Underarmour and an Adidas, those types of companies inserting the product into their clothing line? Is that an example of what this would be like? Or where the product would be used?
Shlomi Cohen
I think that the notion is correct. The only thing that I would say that all the elements that the companies that you mentioned now -- they are implementing inside the clothes are not related to payment. They are related to -- I don’t know, blood pressure, or level of sweat, and so on. But none of them at the moment, the clothing, to my knowledge, are implementing the payment element inside the clothes that they are manufacturing.
Mike Vermut
Okay. And then back to the overall numbers here. So you are close to breakeven on the EBITDA line. Would you expect the break over into positive EBITDA by the end of the year? I’ve assumed it’s not going to take much on the revenue line. Is that a fair assumption?
Yishay Curelaru
This is Yishay. We will try to continue and improve our adjusted EBITDA line and looking forward to improve it. So I think that all in all, we are in the right direction. And eventually, you know that the target of the company is to be profitable and we are going to be.
Mike Vermut
Excellent. Great progress guys and keep up the great work.
Yishay Curelaru
Sure.
Operator
Our next question is from Issac [ph], a private investor. Please proceed.
Unidentified Analyst
Good morning. Can you elaborate on the activity of EasyPark [ph] in the United States , while I was in Israel, I was able to use my cell phone to pay for my own parking while here in New York and I guess in the United States mostly you’ve to pay still with cash and with credit card. So do you’ve any plans to penetrate more in the United States area of parking?
Shlomi Cohen
The easy parking or the parking division that we’re raising is actually on our maintenance and so far we don’t have any kind of plans to develop the system in U.S. and all-in-all we’re actually putting the entire activities under valuation and I believe we will soon we will reach to our final decision regarding this division.
Operator
Our next question comes from Joshua Elving with Feltl. Please proceed.
Joshua Elving
Just a couple of additional questions, one, you had talked historically about trying to maintain gross margin at or around 50% and with last two quarters being maybe around 52% and with discussion around sequential high margin and recurring revenue in the future. What is your outlook for the kind of consolidated gross margin and a year or two out, do you still 50% is the right area to target or is there potential for expansion on the gross margin line?
Shlomi Cohen
Our intention is to continue to do any kind of efforts in order to increase our gross margin. It's depend on few activities, definitely you mentioned the [indiscernible] so this is activity at the moment is profitable for us and we’re doing all our efforts to increase that profitability, although with different activities not only related production but also related -- but also there to renew. The same thing with mass transit that we’re having and definitely with our activities related to the telemetry, meaning to the solution, ultimately the solution that we presented. So of course we’re aiming to increase the gross margin but the improvement we were doing so far, I don’t think that we will continue with such kind of improvement also in the same speed. It's challenging and it will take much more time to improve such kind of element but again this is on our [indiscernible] and we will continue with our efforts improvement.
Joshua Elving
Okay, you’ve referenced 67,000 readers being deployed, I believe something around that number and I miss the commentary on that.
Shlomi Cohen
I think it's a mistake because we referred to the model 6700, the UNO6700 so it's misunderstanding.
Joshua Elving
I didn’t hear what the commentary was around that, was it ATM terminals that were deployed?
Shlomi Cohen
Also yes, the answer is yes.
Joshua Elving
And that was with the large partner that you described earlier in the year?
Shlomi Cohen
That’s correct.
Joshua Elving
And then finally, you had some commentary that suggested your partnership with Microtronic's regarding the close loop system, the turnkey solution, was unique in the industry. Is that unique in the European market or how is that different from say one of your U.S. partners in the United States?
Shlomi Cohen
Yes when you’re looking on the solution today in the market, you need a different element in order to implement close loop and open loop. In order to combine two solution in one system it's quite challenging, we’re actually presenting together with Microtronic on the same platform the end user is able to use both open and close loop and this is relatively unique because so far when you want to differentiate between the close and the open loop you need totally different platform and most of the operators were trying actually to put themselves only one vertical. Today with a solution that we’re presenting together with [indiscernible] you’re able to implement both of them on the same platform, that’s the uniqueness of this solution that we’re presenting with them.
Joshua Elving
I guess maybe last question and I don’t know if you’ve this available but as far as I try to kind of think about, my model and the opportunity for generating additional reader revenues, do you’ve and you’ve referenced how many terminals you’ve sold in recent quarters. Do you’ve a number of terminal sales in the quarter or is that a -- a metric.
Shlomi Cohen
You know that we’re not giving guidance, so I don’t have to comment in that.
Joshua Elving
No, not guidance, in the future. I'm just talking about in the second quarter results. Do you’ve a number of readers you sold in the quarter?
Shlomi Cohen
We definitely have but we’re not going to share this information.
