This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Instructions will be provided at that time for you to queue up for your questions. I'd like to remind everyone that this call is being recorded today, Thursday, November 11, 2021. I will now turn the call over to Evan Gappleberg, Chief Executive Officer Andrew Chan, Chief Financial Officer, and Julia Biola, Investor Relations at Nextech AR Solutions Corp. Please go ahead, ma'am.
spk03: Thanks, Operator. Good afternoon, and welcome to the Nextech Q3 earnings call. With me on the call are Evan Gaffelberg, Chief Executive Officer, and Andrew Chan, Chief Financial Officer. Today, before markets opened, Nextech AR Solutions Corp released its financial results for the third quarter ending September 30, 2021. A copy of the earnings disclosure is available on our website and on CDAR. Some of the information discussed on this call is based on information as of today, November 11, 2021, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release as well as in our CDAR filings. During this call, we will discuss IFRS results and non-IFRS financial measures. A reconciliation between IFRS results and non-IFRS financial measures is available in our MD&A which can be found on CDER. Neither this call nor the webcast archives may be recorded or otherwise reproduced or distributed without prior written permission from Nextech. To begin our call, Evan Gappelberg, CEO, will discuss the highlights of our third quarter as well as recent business developments, followed by Andrew Chan, CFO, who will review our financial results and outlook. Finally, Evan will make some closing remarks before opening up the line for questions. I'll now turn the call over to Evan Gapelberg, CEO.
spk02: Thank you, Julia. Good afternoon, everyone, and thank you for joining us today. First, I do want to thank our employees all over the world. They're in Canada, the United States, Europe, and, of course, the Asia Pacific region. Thank you all for your continued commitment. Nextech's success throughout the year and in the third quarter 2021 were made possible only through the hard work, creativity, and dedication of our talented and valued employees. Our culture of organizational learning and respectful collaboration continues to drive business excellence at Nextech. I would like to give a special thanks to Firas Abu-Tatha for his leadership and positive energy in his new role as general manager. In September, we issued a company update to shareholders highlighting our ongoing strategic initiatives and the important period of growth and transition that we are currently in. Since we issued the update, the excitement we expressed about our accelerating adoption of our augmented reality and metaverse solutions has been further reinforced with new deals closing for augmented reality for e-commerce at a pace that we have never experienced before. We believe that this will continue for the foreseeable future and are very excited about this timely industry development. As we look at Next Tech's Q3, it was a transformational, transitional quarter, and we are transitioning from a managed service business to a SaaS business and an augmented reality and metaverse business. So during the past 18 months, to give some perspective, the mass adoption and reliance on virtual events has And the buying burst that we saw in our e-commerce business throughout the worst of the COVID-19 pandemic in 2020 gave Nextech, it did give us a very welcome tailwind. However, as you all know, we never considered this thematic boost to our business driven really by a once-in-a-hundred-year pandemic to be permanent. While we navigated the pandemic, we have been investing heavily into augmented reality, both through R&D and through M&A. And we've always had our eye on the bigger business opportunity of augmented reality and the metaverse, which has finally arrived. The entire world, including us, we're in uncharted territories with COVID-19. Our virtual events and e-commerce business is and will continue to be strong. However, with the opening of the economy and related reduced spending in the entire virtual events industry, not specific to us, revenue growth around virtual events is leveling out. And while revenue from our AR solutions is accelerating rapidly, we expect to close 2021 with overall revenue in the range of 25 to 29 million, up from 17.6 million in 2020, which represents a greater than 60% growth year over year. Again, we see a rapid acceleration happening in augmented reality. We feel strongly that the growth engines going forward will be augmented reality and our metaverse business, which are merging, really, to become one suite of solutions called ARTize Metaverse Studios. Now, as we look at, again, in the rear view, at our virtual events and e-commerce space, it really did provide us with an ideal proof-of-concept launchpad for our augmented reality solutions. Again, we never planned on this to be our long-term core product offering. However, businesses have enabled us to individually validate market acceptance for each of our product categories, which really puts us in a leadership position as we really just are emerging companies into the augmented reality space right now. So AR for e-commerce, the 3D product visualizations and web AR, AR for advertising, the 3D ads, AR for human holograms with HoloLens, AR for higher ed with Wyerson Labs, and AR ties for bespoke immersive AR experiences. All those things, including our AR portal and 360 video visualizations, all those products that we've been working on for the past three years are now starting to pay big time dividends. The growth that we experienced since our launch as a public company and even since the founding in 2018 and continues into 2021 and beyond is undeniable. we have been growing we went essentially from zero to an estimated 25 to 29 million in 2021 we started out with ar in 2018 then it was e-commerce plus ar in 2019 then in 2020 it was e-commerce virtual events plus ar now As we enter 2022, our growth engine will almost exclusively be AR and the metaverse, meaning we'll have foundational revenue from our e-com and virtual events business, but the growth engine will almost exclusively be AR and the metaverse. We are just beginning to see the revenue and business emerge at a rapid pace and as we are full force into our transition into the augmented reality and metaverse business with our new SaaS offerings. We are just now entering the market, and just now AR is providing us with this engine of growth that will take us forward in Q4, which is looking very positive. The AR new sale, and we see that continuing in 2022 and beyond. We've already seen our business, our existing business with Kohl's, Kmart, Pier One, and Lightning Plus accelerate with reorders. And we are signing new deals every day with many notable brands. I think our e-commerce and events business, again, has foundational revenue streams, which will continue to grow. but not at the rapid pace that we've seen in the past. Rapid growth engine for us, again, is augmented reality in the metaverse. To give you an idea of what we're seeing already in Q4, currently we are at the signing stage with a large brand that is interested in 2,500 3D AR models to start that could grow to 10,000 models. We are quoting on a 20,000 3D model request that could grow to 400,000 models. We are quoting on multiple 10,000 3D model requests. As previously mentioned, we expect our integration with Shopify to happen in December, which will open up our solutions for the 3 million plus merchants in a frictionless and direct way. All this new business is set up to be MRR or monthly recurring revenue. So I'm super excited. As you can imagine, everybody at Next Tech is super excited. Couldn't be more excited about the business in our augmented reality solutions. This business And business opportunity is brand new in Q4. Imagine we will be in 12 months. This business was not possible for us to deliver on before the transformative acquisition of 3DAI. We believe we will win the business just mentioned and much, much more. Why? because we believe that we have the lowest cost, highest quality, scalable solution on the market today. Next Tech is more confident than ever in the accelerating momentum of our augmented reality and metaverse solutions and expects 2022 to be a year of hyper growth for all things augmented reality and the metaverse. It's a very exciting time to be a public company and investor in this space. Just listen to what big tech is doing and saying. Facebook rebranded itself, as everyone knows, as a metaverse company. Nextech is a metaverse company. Facebook came out and said, I believe the metaverse is the next chapter for the Internet. Go back to the history books. Take a look at what happened to Internet companies and Internet stocks in the 1990s. Apple is racing toward its first release of a mixed reality headset. That is going to light a fire on top of the fire that Facebook lit for the augmented reality metaverse space. Microsoft just came out with a metaverse solution. Epic Games, NVIDIA just announced the Omniverse. Niantic just came out with LightShift, their version of a metaverse solution. Google and all of big tech names are spending tens of billions to ensure each of their own unique version of the metaverse. And Next Tech is participating. We are part of that ecosystem, and we will rise up with big tech, regardless of how the big tech battle shakes out. One thing is certain, Nextech's place as a unique provider of augmented reality and 3D assets for the metaverse is solid. Our AR times metaverse studio could not be better positioned to benefit from surrounding big tech commitment and consumer adoption of the metaverse and augmented reality. Nextech has been committed to augmented reality since we launched in 2018. Our name, Nextech AR Solutions, speaks volumes. We now have a head start in what is now emerging as a metaverse opportunity. During the third quarter and into Q4, our completion of the ARWay acquisition and and our integration of the 3DAI acquisition already leading to new revenue opportunities. Again, they were simply not possible in prior quarters. Our introduction of the mini metaverse during the third quarter was also well received, and customer adoption has already begun. Last month, we announced the City of London's implementation of our spatial mapping technology at Harmony, of london uh wall place it's really just the beginning that there are endless opportunities for the application of next tech spatial mapping and anarchized metaverse solutions from arv in the city of london is really again just the beginning in fact i got a phone call today from somebody in Big Telco asking if they could partner with us on a metaverse 5G solution. So there's just a lot of interest in this space, a lot of demand. We have a proven suite of solutions combined with Airways Cloud and 3D mapping technologies, which opens a huge addressable market within the metaverse. The ARTized Metaverse Studio as a SaaS product is launching in Q1 2022. We have not seen the fruits of that product offering yet. It will be available for pretty much anybody to turn their space into a mini Metaverse, whether it's a mall, a university, a corporate headquarters, even for regular people who want to turn their house into a mini Metaverse, just like our CTO Nima did last week. It's all possible with Nextech's ARTize Metaverse Studio. The augmented reality tidal wave is finally here, and we are here and ready to take full advantage of it. It's gone from AR, VR to now becoming the Metaverse wave, driven by big tech adoption. It's here to stay. It will be a multi-decade, multi-billion dollar per year wave I've been talking about it for three years, but it's here. Mass adoption is really just in the beginning. Big tech is building the AR ecosystem that Next Tech eats and breathes in. And we feel strongly that Next Tech's realization of market share capture within this burgeoning new industry is happening. And again, we are just at the beginning. Furthermore, to our confidence in 2022 revenue growth and beyond, it's really bolstered by the go-to-market strategies of both our SaaS 3D for e-commerce solution as well as from our Metaverse Studio rollout, now integrated as one solution onto NextTech's ARTize Metaverse Studio, which I said is a big deal. It really is a big deal. Once consumers and businesses experience 3D, they do not return to 2D. Once you experience 3D, there is no going back, which means that we have a very, very sticky product. Think of it like this. It would be like going from a dial-up modem to a high-speed modem only to go back to the dialogue if you went back to 2D. It just does not happen. Our AR products are sticky and have significant implications for monthly recurring revenue and annual recurring revenue, which will accelerate with the adoption and stickiness of our entire augmented reality suite of products and services. As we speak about our SaaS product roadmap, in late Q3, really the last two weeks, we began to roll out our AR for e-commerce SaaS platform during the quarter. Our AR business is already the fastest growing segment of our business. 3DAI is already SaaS and self-serve enabled. And during this quarter, HoloX, will be SaaS-enabled. It's a very, very near future. ARtize Metaverse Studio in Q1 will be live. Our CAD to Poly, HoloX, 3D advertising, TV AR, all of this is going to be SaaS, and all of this is going to be self-serve in the near term. SaaS and self-serve integration that I referenced ago, it really does have enormous implications for the scalability of our product suite and our future revenue growth. With SaaS and self-serve, Next Tech will move away from a managed solution platform toward monthly recurring revenue. Business scalability is key. Low touch, no touch is key. And this has already begun, which is key. In the near future, we will begin disclosing more details around monthly recurring revenue related to our emerging SaaS business. Now, we did include a graphic in the press release that went out today. The key to that graphic is that our model-making demand is rising exponentially. So we have You know, a lot of customers that are lining up at our door that are asking for more and more and more models. And that is a very, very healthy sign for our business. You can see brands that we're working with, as mentioned previously, Kmart, Sears, Lighting Plus, Pure One, Kohl's, and brands that we're speaking to. We are already seeing in Q4, in just a few weeks, a rapid ramp-up in demand for the 3D models that we make. And so it's just important that everybody that's listening understand that our Q3 is rear-view mirrors. What I'm speaking to is what's happening now and the future, which is what you're investing in. So when you look at the potential applications for what Next Tech is building and the anticipated market adoption, we estimate a total addressable market for our metaverse opportunity to be $250 billion by 2024 for SaaS e-commerce alone as a segment of the entire $250 billion metaverse addressable universe, we see a total addressable market of $102 billion. So the bigger number is $250 billion, and then you have $102 billion, which is really the e-commerce piece of that. The most exciting thing happening today globally, not at Nextech, is that all objects are being turned into 3Ds. on the web with no app required. All objects refer not only to e-commerce, but everything that is manufactured, apparel, automotive, electronics, aerospace, oil and gas, real estate, et cetera. The reason why that's so exciting is really two reasons. One, it's ubiquitous. The web dial tone is everywhere. And anything that's ubiquitous gets interesting. Two, we think we have figured out a way to own it. What's so compelling about creating and owning all these 3D assets is there's going to be a lot more innovation in AR that will be foundational for the emerging metaverse. And, of course, for us, owning those 3D models means a never-ending stream of monthly recurring revenues. As we continue down this path of becoming the 3D model factory for the world, and the metaverse specifically, we do expect that our gross margins around our emerging augmented reality and metaverse solutions offerings to increase rather dramatically, particularly as we bring the SAS into the equation. On another note, speaking to our uplifting goal, I would also like to take a moment to reassure our shareholders that our previously stated goal of U.S. uplifting is still on the table. It is still a priority issue. Well, there have been many, some bumps, and, you know, maybe we got stuck in the mud on this attempt during 2020, 2021. We feel we are better prepared than ever to achieve this goal. During the third quarter, we did announce our change of auditors to Markham, a very, very reputable U.S. audit firm within extensive experience in U.S. exchange uplifting market companies like Nextech. We've also began the build-out of a much more robust investor relations program in order to observe and comply with U.S. exchange and SEC regulation and preparation of entry onto U.S. exchange. We cannot specify timing around this objective, but we can state it is a priority for us We are taking all necessary steps in order to achieve U.S. exchange uplisting, including hiring a U.S. investment bank, H.C. Wainwright. It was a big step for us as a public company to have a U.S. investment bank that has the ability to write research reports and introduce us to their institutional investors. So we're excited about that. In closing, and I know everyone wants this to end, Q3 was an important quarter for growth and transition for Next Tech. Next Tech is focused on advancing and garnering greater industry leadership in the augmented reality space and the metaverse and our entire suite of increasingly interconnected products. Now, if we look around us and we see where does Next Tech fit in, Where do we fit into the ecosystem? Where do I put next tech? We believe we fit in with the tech giants who essentially own a market. When you have a new industry, everything gets reset. There's an opportunity for the small company to become the big company. And there's an opportunity for the big company to fall behind. Today, Apple owns your phone. Google owns the search. Amazon owns shopping. Facebook, Snap, Facebook, Snap, and TikTok, they own your social media. And Next Tech, as the owners of the 3D model creation, and importantly, the models themselves, our position at this table will become increasingly important to the development of an agnostic platform And we believe that we will be the 3D model supplier globally that dominates that sector. We currently have many customers that use our 3D modeling technology, including some of the biggest brands. But we are still just getting started. It feels like all of our hard work is about to pay off as we are entering the the first inning of our transformation to a self-serve SaaS business model, which will allow us to populate the world with 3D models and AR visualizations. A lot has changed since we spoke on the last quarter's earnings call. Since then, augmented reality and the metaverse have taken center stage, and this is what we have been preparing for. This is what I've been preparing for. This is why I founded Next Tech in January of 2018. Today, we have a head start. Our solutions have already been validated in the market, and now we are poised to benefit from the coming mass adoption of augmented reality and the metaverse. With that, I'll turn the call over to Andrew Mann, our CFO, to provide further commentary on the quarterly financials.
spk01: Andrew, take it away. Thank you, Evan, and good afternoon, everybody. Just as a reminder, unless otherwise noted, all figures reported on today's call are in Canadian dollars and are under IFRS. Total revenue in the third quarter was $5.7 million, up 23% from $4.7 million in Q3 of 2020, and slightly down from the Q2 2021 revenue. Year-to-date, our revenue was $19.6 million, up 83% from the same time last year. Product sales increased 61%, technology services and renewable software increased Revenues increased 238% on a year-to-date basis year-over-year. Q3 2021 product sales were $4.6 million, an increase of 20% over Q3 2020 and up by 3% compared to Q2 2021. Due to our expanded product offering since last year and adding additional sales channels, which increased our capacity to facilitate the fulfillment of sales. Our Q3 2021 technology services and licenses revenue grew 34% over Q3 2020 to $1.2 million. However, it declined 30% compared to Q2 2021 as summer tends to be slow for event hosting. In addition, the nature of this revenue will vary from quarter to quarter based on the number, size, and timing of our customers' projects that are underway. Gross profit during Q3 2021 decreased by 39% to $1.8 million for the quarter and increased 14% to $7.4 million compared to Q3 2020. As a percentage of revenue, gross profit was 31% in Q3 compared to 63% for the same period last year and 38% in Q2. This was a result of higher product costs due to the global supply chain issues from our e-commerce business that other companies are facing as well. And there was also a lag in reallocating resources from our events team to our growing AR business during a time of reduced events over the summer months. Both these factors affected our gross profits negatively. However, we expect gross profits and margins to increase as we ramp up our AR and metaverse business through 2022 and beyond, as Evan mentioned earlier. Operating expenses for Q3 were $9.9 million compared to $8.8 million in the prior period. The increase in operating expenses was due to higher expenses in sales and marketing, general and administrative, and research and development. During the quarter, we structured our Salesforce to a more cost-effective model for the new pursuits in AR sales, with the intention of lowering overall sales cost as a percentage of revenue over the upcoming quarters. General and administrative costs increased slightly as we upgraded our technology infrastructure and moved to our new Toronto office. Increase in research and development expenses was driven by assumed cost from our recent acquisitions as we continue to focus on AR and metaverse development. We had a net loss of 8.2 million compared to a loss of 5.9 million in the prior period. However, due to the contingent gain consideration recognized in Q2, but once we normalized that gain, our net loss for Q2 was 7.3. So we roughly increased our loss by about $1 million, largely due to the factors that I just mentioned. Over this quarter, we expanded our team's size, skill set, and capabilities while reducing elsewhere in the company. As of September 30, 2021, we had cash of $8.3 million, inventory of $4.6 million, and a positive working capital of $10.1 million. As you will have seen, we've closed a $5 million private placement last week, which will provide us with the influx of cash and increase our strength of our working capital as we head into the new year and allow us to make the necessary strategic investments to take advantage of the AR and metaverse industry growth. With that, I'll turn the call back over to Evan.
spk02: Thank you, Andrew. To sum things up, it's full steam ahead with our augmented reality business and our metaverse business. I believe we are in the right place at the right time with the right technology stack, with the right leadership team to become a major player in the metaverse. I want to thank all of our employees. I want to thank all of our shareholders for sticking with us through a pandemic and the other side of the pandemic. I do believe that in 2022, everybody's going to be rewarded for their patience and support. And I want to thank all of our shareholders for continuing to share my vision on behalf of next tech thank you for your support and as always thank you for taking the time to join us on the call operator we are now ready for questions and answers thank you sir to ask questions at this time please press star one on your telephone keypad and again that is star one
spk04: And to withdraw the question, please press the pound key. And we do have a question from the line of Lisa Thompson of Zacks Investment.
spk05: Good morning, guys.
spk02: Hi.
spk05: It's always interesting when you report. There's so much going on.
spk02: Yes, yes.
spk05: Okay, so I have a number of questions. I think probably the The first I think people will be curious about is given that you gave the graph with the model count, can you talk a little bit about how number of models translates to revenues and when you are bidding these new customers? Like how are they supposed to pay? Do they pay per model or, you know, 6E? Like how does that work?
spk02: Yeah. So like every other SaaS platform, it's got tiers. So tier one would be you pay $150 per month for 25 models. So if you use that math, it comes out to $6 per month per model. So as you scale up that number keeps on growing. And so the more models that we have in the metaverse, the more monthly recurring revenue that we generate. But it really doesn't stop with just the models. For us, because we've been building technology for years, a lot of our business is actually based on the upsell. So the model is one... foundational piece of revenue, but then we offer additional upsells. Like we, we announced the 3d showroom, uh, which is a $500 a month, uh, you know, cost. And we also have the 3d ads, which are now starting to gain traction, which again is another upsell. So the, the model creation piece is one piece. It kind of opens the new account. And then there's all these other services that we sell as upsells, Lisa.
spk05: Okay. And you hinted about having different information or metrics. I see you got rid of bookings and backlog. Is there something else you're going to be using going forward?
spk02: We are going to be using MRR and ARR as the primary services. yardsticks for measuring our augmented reality metaverse business.
spk05: And will that happen for the year, when you report the year?
spk02: That's a question for Andrew, if that's going to happen in 2022 or Q4 2021.
spk01: Yeah, you know, we're going to have to kind of take a look at that and provide the opportune time to present that. But, yeah, it will be either Q4 2021 or Q1 2022. Okay, great. While I have you, operating expenses this quarter are around $10 million.
spk05: They went up from the second quarter. What's your feeling going forward? I had thought they were supposed to come down, but that didn't happen.
spk01: Yeah, I mean, I think, you know, we talked about how we're, you know, moving resources, and that takes time. So, you know, in a quarter, you know, with revenue not as strong as we'd like, that obviously, you know, us not only from a gross profit perspective, but also from an operating expense perspective. But we are, you know, reviewing these metrics on a monthly basis and even more frequently than that. But we just have to make decisions about how much we want to invest into the AR metaverse, which we're pretty excited As you can see, we are pretty high on. So, you know, also you'll see increasing expenses from some of the acquisitions we made as well. So we inherited some of those expenses as well this quarter.
spk05: All right. As far as e-commerce for the fourth quarter, you're kind of hinting that you're possibly supply constrained. Do you have some feeling of what you can do in Q4? In e-commerce?
spk01: Yeah, I would say there's always, you know, positive wins from, you know, just a seasonality perspective. um yeah it's just a matter of how much we're willing to pay for inventory uh to achieve you know some of those but you know we i think you know we do have a very strong kind of inventory book now at around four million so we're going to be kind of selling a lot of that during that time so the inventory is kind of in um but you just may not be as profitable as uh prior year uh but I'm sure you know everybody else is having these kind of issues. You can't even buy a car these days, apparently.
spk05: I've heard, which I am not. All right. And then I guess the big question, Evan, is can you talk about 2022? Do you have any sort of vague feeling what kind of revenues you could do or what percent of the business is coming from what products? Anything you can give us.
spk02: Sure. So I've always spoken about this idea that we really don't want to be long-term in e-commerce or even the virtual events business. So we are now, even more than previously, looking at the potential spin-out of of our uh let's say ecom business and so is we you know if we did that in 2022 um that would align us i think much better with the metaverse and augmented reality solution but what it also does is i think gives a clearer understanding of of the revenue and revenue potential When we look at 2022, Lisa, obviously it's difficult to predict. What I can say is that when you look at monthly recurring revenue, it's a snowball. So it's not like it shows up, you know, in a month. It shows up month after month. It just keeps growing. And we see that continuing at an exponential rate. It's hard for me to put a number on it today, but I think by the end of the year, it'll be a lot easier to kind of start talking about numbers. I think today is a little premature considering we've been aggressively in market just since really the last couple of weeks of September. We're seeing a surge in business in Q4. There's the potential that we sign up millions of dollars worth of business in augmented reality, 3D models. But even if we signed up millions of dollars in new business in Q4, it's monthly recurring revenue. So we don't recognize, as you understand, we don't recognize the revenue in Q4. Q4, it's over a 12-month period and then, you know, extends to 24, 36 months. So we really, as a company, need to wrap our heads around that revenue stream to be able to give you a clearer vision to what numbers we can look forward to in 2022. Does that make sense?
spk05: Yes, I just wanted to see where we were in figuring it out at this point, so now we're on the same page.
spk02: I look at it like this, Lisa. Today, as we stand here today, our e-com business and events business foundational revenue, let's just call it $25 million in run rate. Everything else is going to be driven primarily by the growth of our augmented reality and metaverse business. And we see that growing very, very rapidly.
spk05: Okay, great. I think that's all I have for questions. Thank you.
spk02: Thank you, Lisa.
spk04: And again, ladies and gentlemen, for any questions at this time, please press star 1. And at this time, sir, there are no further questions in the queue. Would you like to proceed with closing remarks?
spk02: I'd just like to thank everybody for joining us today. It's exciting for us to be talking about the metaverse, about augmented reality, and we will see you next time. Thank you.
spk04: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Disclaimer