Xtract One Technologies Inc.

Hi, everyone, and welcome to Extract One's live first quarter earnings call for fiscal 2023. This is Will Mays from RB Milestone Group. For those of you who aren't already aware, Extract One Technologies, formerly known as Patriot One Technologies, is an emerging disruptor in the stadium and public space security industry and has developed an unobtrusive artificial intelligence-driven weapons and threat detection system. The company's shares are traded on the TSX under the symbol XTRA and on the OTCQX under the symbol XTRAF. Joining us today is the company's CEO and director, Peter Evans, and CFO, Karen Hirsch. Today's earnings call will include a discussion about the state of the business, fiscal quarter results, and some of Extract One's recent milestones. This will be followed by a question and answer session based on the questions we've received prior to the call and also during the webcast. If you're interested in asking a question or logged into the Zoom app or web platform, you can submit your question directly to us in the Q&A module. This call is being recorded today, December 6, 2022, and will be available on the company's website after the call. Before we start today's call, I would also like to note that all dollars are in Canadian unless otherwise specified. Today's call may also contain forward-looking statements that are subject to risks and uncertainties that may cause actual results, performance, or developments that differ materially from those contained in the statements and are not guarantees of future performance of the company. No assurance can be given that any of the events anticipated by forward-looking statements will occur or, if they do occur, what benefits the companies will obtain from them. Also, some risks and uncertainties may be out of the control of the company. Extract 1 has a full disclaimer contained in their presentation. Today's call should be viewed along with the company's interim condensed financial statements, management's discussions and analysis, and earnings press releases issued today and are available on the company's website and its CDAR profile. Lastly, RPMG is not a registered investment advisor or broker-dealer. For more information, please visit our website at rbmilestone.com. And now it's my pleasure to introduce Mr. Peter Evans, Chief Executive Officer of Extract One. Peter, the stage is yours.

Well, thank you very much, Will. And thank you again to all our investors for joining us today. We're very pleased to be reporting our first quarter results for fiscal 2023 and the second quarter in a row where we demonstrate a growth trajectory that we're on and the growing momentum and interest that we're seeing in the business. Based on the strong results that we've seen in the quarter, we're very optimistic about the outlook for fiscal 2023. I'd like to start by giving our investors a quick update on the business and some key milestones that we reached over the past quarter. Later, Karen's going to take us through the financial results and the financial trends that we're seeing that are key to the business. There are several highlights for this quarter that many of the investors have expressed strong interest in understanding. So let me address those first very succinctly, and then we'll get into the details. The headlines of these are simple. There's questions about our business momentum and bookings. In the first quarter of this 2023 fiscal year, we essentially booked as much business in that quarter for our platform solutions as we did for the entire fiscal 2022. That bears repeating. We did as much business in the first quarter as we did in all of the prior year. The business has hit an inflection point, and we expect this bookings trend to continue throughout the balance of fiscal 2023. Our booking performance builds on the reported results of our fiscal 2022, Q4, where we booked 840% more business than in fiscal 2021, with approximately 66% of that coming in that fourth quarter following the announcement of the smart gateway. The second key highlight is the customer growth and retention. I'm very, very pleased with the continued growth of new customers and contracts. We've been announcing almost one per week. We've brought on new brand names like Oakview Group and the San Jose Sharks and the sports and venue management businesses, and we've expanded into other market verticals, such as manufacturing, schools, government offices, much sooner than we originally anticipated. We had planned to and had targeted to primarily focus on the sports and live entertainment interests. But the high interest from these other segments and the pull that they're creating on us has really grown our pipeline also. Today, nearly 50% of our sales pipeline is made up of markets outside our target market of sports and live entertainment. This is further satisfying. What's further satisfying to me out of all of this is right now we have 100% customer retention The third highlight for me is the focus on scale. If 2022 was the year of execution for the company, listening to our customers, establishing the business, delivering smart gateway in record time, then fiscal 2023 for me and for the rest of the company is the year of scale. Scale comes from driving business efficiencies across the entire value chain of the company. From building a qualified pipeline, converting that sales pipeline to bookings, converting the bookings through manufacturing, installation, and support into revenue, and doing this in a scalable, repeatable, cost-effective manner. On the cashflow front, we continue to focus on cashflow management, judiciously investing where it makes sense, particularly in sales and customer support to convert those bookings to revenue. We're trying to accelerate our pipeline as quickly as we can and accelerate that conversion of bookings to revenue and we'll judiciously invest in doing so. We're highly focused also in taking out the costs of business, for example, customer acquisition costs and converting those bookings to revenue with the objective to achieve cashflow breakeven. With the current business model, operational model, and projected bookings and backlog trajectory, and with two quarters of trend information behind us and in hand, we have line of sight now on the path to cash flow breakeven. Finally, an item that Karen will be talking about in more detail, there's questions about and interest in where we are from a cash position. Similarly, we have line of sight, which Karen will go into in a lot more detail. Before we dive into more details on our quarterly update, I wanted to spend some time addressing our new brand and new color palette that many of you have seen over the past week. We announced on December 1st that we were rebranding the company to Extract One and formally launched on December 1. In the past 18 months, we completely reinvented the company. We've refocused our product efforts and our product offering and our go-to-market strategy to bring that product to the market. And we've positioned ourselves as a trusted security provider and an innovation partner for our customers. With this incredible success we've seen over the past few quarters, we're in the midst of taking a leap as a company. We've disrupted the physical security industry as a whole, and we're very proud of the momentum that we've gained. At this turning point, at this inflection point that we've seen, it's an appropriate time for us to recognize this and relaunch ourselves with a new corporate rebrand. As of December 1st, the company now operates as Extract One Technologies. Along with this, our securities now trade on the TSX under the symbol XTRA and the OTCQX under the symbol XTRAF. Over the past 18 months, as I mentioned earlier, we've worked hard to kind of build this trust with our customers and make it our priority to have their best interests at heart. Our solutions and our approach to disrupting the physical security market is founded on the premise of pushing the limits of what's possible with artificial intelligence, coupled with very high, high levels of service to create the best results and outcomes for our customers. This process has been very long and arduous. But well worth it considering the success that we're now experiencing as a company and beginning to reap what we sowed. This rebrand is important to me also because it reflects and aligns with who we are as a company and the outcomes and the value that our customers have told us that they achieved from us. They see us as a tech forward company and our vision to create a world where great experiences and safety work hand in hand with each other. So we're a new company with a new name that fits our new brand values. And we're working to help improve the lives of all of our customers and our customers' customers with an enhanced safety and experience solution. We're also very pleased that we're now delivering a new growth trajectory for our investors. And finally, with this branding, we're shedding the final remnants of the past and delivering a new vision steeped in those brand values that we hold very true. So as we think more about this new trajectory for the business, we have experienced incredible growth over the last few quarters. This is a direct result of our accelerated sales and marketing efforts in the past 12 months, where we showcased our product to customers in their environments. These activities and the feedback received from those customers during some of those activities led to the release of the smart gateway portfolio and platform towards the latter part of last fiscal year. Smart gateway was purpose built to solve core issues being faced by our customers. They shared with us what they needed for their business operations and they shared with us what they liked and they disliked about other solutions and we improved upon both. The enhancements in our product and the folks that we put into building those solutions that meet the needs of those customers have actually led us to receiving two gold awards from American Society Today's Aster 2022 Homeland Security Awards. These awards are part of the US Homeland Security Awards program. that recognizes industry leaders in categories that include physical and border security, cybersecurity, and others to acknowledge those companies' efforts to keep the nation secure. We're very honored to win both of these awards for both the best pedestrian entrance control system and the best metal or weapons detection categories for our Gateway's highly effective capabilities. These activities, along with the release of Smart Gateway, have had a dramatic impact on our sales. In October, I shared with investors that we'd signed 840% more in contract value for the platform itself, and those agreements were signed in fiscal 2022 than we did in all of fiscal 2021. During the first quarter of fiscal 2023, as I mentioned, the contract value of signed agreements for the platform was essentially equal to all platform contracts during the prior year. In the first three months of fiscal 2023, we signed contracts for almost as much as we did in those 12 months in fiscal 2022. To date, the total value of this contract signed as a company is almost $12 million, of which approximately half has come in the last six months. So over the history of the company, we've done very well in the last six months. This is a testament to all the work of our sales organization, our marketing groups, the engineering teams, who over the last 18 months, who collected and executed on that feedback from the customer and delivered them the solution that they requested of us. One recent customer win I'm very proud of is the Lakewood School District in New Jersey. We're very pleased to be selected by the school district after an intensive analysis and evaluation of a number of different solutions that were available in the market today. Lakewood is considered to have one of the most stringent security models and people go to them to look for best practices. It's a model by which other school districts look to to repeat across the country. We're very pleased to be partnering with them. Student safety was at the forefront of their minds as they started to look at solutions and they had to deal with classrooms. So they had to deal with student requirements for safety in a number of different ways in the classroom and after school extracurricular activities on the sports fields and these sorts of things. Lakewood made it very very clear to us they need a security solution was very versatile and very flexible to work in all of these situations for everyone at extract one it's been incredibly warning rewarding to work with Lakewood School District and be able to help provide them the solution that they needed that fit their needs as opposed to had to be forced into their needs The acceleration in sales is also due in large part to the major strategic partnership we announced with Oakview Group in early October, in our first fiscal quarter. This organization owns and manages several hundred venues internationally, including hosting NHL, MLS, and other pro sports venues, along with convention centers, theaters, and other live entertainment venues. The strategic partnership with Oakview Group, otherwise known as OVG, has enabled OVG-owned and operated organizations and venues to utilize our Extract One patron screening solution in a very, very streamlined manner. The partnership was a culmination of many, many months of work doing rigorous testing with the preventer advisor organizations who did such things as red-teamed us at events such as the NBA All-Star Game to validate our technology on behalf of all of the Oakview Group venues. Prevent Advisors is a subsidiary of OVG which works with the NBA, NHL, MLB, and others to validate their security programs and their security solutions. They're a preeminent provider of this kind of solution for pro sports teams. The partnership with Oakview Group has significantly streamlined and simplified the buying process for all of their venues. In the last few months, we've announced several wins with OVG. affiliated organizations such as Angel of the Winds Arena, who is the home of the WHL's Everett Silver Tips, Total Mortgage Arena, which is the home of AHL's Bridgeport Islanders, Accresure Arena, the home of AHL's Coachella Valley Firebirds, and we're engaged in many, many more discussions with numerous other OVG venues regarding their security needs. I'm very pleased with the inbound pace by which we're seeing interest by the OVG organizations. With these wins over the last few months, along with our announced sales so far in Q2 of 2023, it's evident to me that the incredible demand exists for our platform products and is accelerating for our platform products. I believe that this is just the beginning. We're still in the commercialization stages and have yet to begin to truly tap the total addressable market for our products and our solutions. The technology is complex and is difficult to replicate this creates very high barriers to entry for others to enter in this space, then that will continue to allow us to capitalize on the market opportunity, and so I seek a huge future growth potential for the business as evidenced in the past two quarters. Excuse me, we continue to work with customers throughout the entire sales cycle and we continue to see growth of pipeline, as a result of this. Our sales pipeline has grown to about $74 million of qualified opportunities at the end of October October almost 20% higher than the end of last quarter. The sales pipeline, though, has also changed significantly in composition. Nine to 12 months ago, approximately two-thirds of the opportunities were tracking to that sports and entertainment market, the market that we were specifically targeting for the best product market fit. Today, that number is about 50% of our total sales pipeline. We see now markets like manufacturing, distribution, schools, healthcare, government bodies are making up a significant portion of our sales funnel. So while we're still focused on the sports and entertainment industry as our primary marketplace, we continue to see strong interest in these adjacent marketplaces, and we will serve them when there's a good product market fit for our solutions. These new markets open us up, though, more importantly, from about a $4.6 billion marketplace based on our calculation to about a $40 billion marketplace. It's opened that market up to us sooner than we expected, and we're graciously accepting that and moving into that market quickly. Investors who attended the AGM in November would have heard me talk about scaling the business in fiscal 2023. Part of this is directly tied to our base of installed products across North America. Based on the current backlog of signed contracts at the end of the quarter, we're on a path to double the number of installed smart gateway systems in Q2. As we work to convert these contracts to revenue, we will continue to push more and more of the solutions out into the marketplace. This means doubling our current annual recurring revenue, providing investors with much more predictable revenue streams, and also supporting the business with much more cash as needed to continue to increase that customer base further. I alluded earlier to a 0% churn in our customers, which I really believe is because of the focus we've been building on building trust with our customers throughout the sales process and think about their security needs holistically, not just in terms of a product. We act as partners and advisors to our customers and to the best of our ability, we'll continue to do that for them. In these cases, these challenges get added to our product roadmap as the customers provide us insights and things that will further streamline their security operations. It's our intent to always make sure we're the first product and the first solution that will meet their needs. Looking at the increase in customer engagements, the backlog, and the pipeline, I'm very, very proud of how far we've come in such a short period of time and significantly over the last couple of months. My outlook for the remainder of fiscal 2023 is very positive due to the groundwork that we've laid in the last 18 months, and I expect XTRAC1 to continue to deliver bookings very similar or better than what we've seen in fiscal Q1. I look forward to sharing a lot more of our wins with our customers. It's something that makes me very personally happy every time we can announce a new customer, very satisfied with our solutions. At this point now, I'm going to turn it over to Karen to take investors through the details of our financial results and the first quarter of fiscal 2023. Karen, over to you.

Thanks, Peter. And hello, everyone. I'm happy to be presenting our first quarter financial results for fiscal 2023 and to share some financial highlights and key milestones we've hit during this quarter. On the whole, we're very pleased with our quarterly results. As you'll see in the slide chart, our revenue for the platform business is trending upwards quarter over quarter, particularly since Q4 of fiscal 2022, when we started to see the benefits of our Smart Gateway product. First quarter revenue was $650,000, which is slightly lower than the $710,000 from last year. However, revenue from our platform operating segment increased by 125% compared to last year. Moreover, platform revenue for the first quarter of the year is over half of the platform revenue recognized during all 12 months of last year. We expect this trend to continue in future quarters as we build reoccurring subscription revenue and continue to increase our install base of subscriber contracts. Today, between 60 to 70% of our platform contracts are done through subscription arrangements. Peter mentioned that our total backlog and signed agreements collectively were 6.6 million at the end of the first quarter. Considering the growth in our backlog and the number of signed agreements, along with strong interest in the market for our products, as evidenced by the growth in our sales pipeline, we expect that our platform revenue will continue to increase significantly in fiscal 2023 relative to last year. We continue to build the company's backlog of sales commitments, which at quarter end was over 2.6 million with an additional $4 million pending installation or successful trials. This contractual backlog represents revenue that will be recognized in future periods as we fulfill our obligation over the duration of the underlying contracts. The total value of our backlog and signed agreements is 58% higher than the same balance at the end of last year, sorry, last quarter. Perhaps most importantly, we're starting to see stronger market awareness for our solutions which has translated into a shorter sales cycle for our solutions. We continue to see strong interest and demand from multiple market verticals, including manufacturing and distribution, schools, and healthcare markets. During the quarter, Extract's innovation team continued to duly focus on supporting the internal platform development efforts and the associated machine learning complexities of the various solutions under development, while at the same time also developing and delivering the AI-based solutions contracted through public sector agencies and a growing number of private sector parties. In addition to 220,000 of revenue recognized during the quarter related to professional services, Extract maintained a backlog of signed contracts of approximately 700,000. This innovative AI team continues to build a pipeline of opportunities and an ever expanding set of capabilities. Part of our plan to scale the business includes maximizing contract value from customers. We are not the same company that we were 18 months ago. We have a sizable backlog of signed agreements with referenceable customers like OBG, the San Jose Sharks, Kia Motors, and the Office of the Inspector General. This means that going forward, we can leverage credibility in the marketplace to maximize the value we receive from customers in return for our products and services. Many of these strategy changes are already taking place. And we anticipate the impact of these changes to be evident in the balance of fiscal 2023 and into fiscal 2024. Based on the sales activities that we've seen in the last few months and the recently announced partnership with the Oakview Group, where we have previously announced the onboarding of five of their venues, we expect revenues to continue to grow at an accelerated rate in upcoming quarters. In the past year, the company has been focused on top line growth. As we continue to advance our business strategy, we'll also be focused on achieving operational efficiencies and gross margin improvements. While we continue to monitor our operating expenses, which in general are lower than previous years, we continue to review our operations for further efficiency gains. Where appropriate, we've begun redesigning internal processes with the aim of improving our operations to either reduce expenses or to enhance our cash conservation cycle. In some cases, these changes may also include internal restructuring to improve our business processes going forward. As Peter mentioned at the start of the call, our theme for fiscal 2023 is scalability, which we believe is essential as we strive towards cash flow neutrality. Sales and marketing expenses were $800,000 for the quarter, which is 146% higher than the same period last year. This increase relates to the company's intensified sales efforts as we work to capitalize on the existing market activity and interest for touchless patron screening solutions. Included in this period are some one-time expenses that we do not anticipate will be repeated in future periods, as we invested heavily in certain key conferences and demonstrations to showcase our new smart gateway solution. This quarter was heavier than usual for sales and marketing expenses, And so we anticipate Q2 will see a small reduction in these expenses. In general, however, we expect sales and marketing will continue to be a crucial area of investment as sales activities continue to be the focus for us. Research and development costs, which is presented net of grants in our financial statements, were 2 million for the first quarter of fiscal 2023, which is an increase of 550% compared to the same period last year. However, Last year, we had almost 2.4 million of grant funding for research and development to offset our costs. If we look at R&D costs before grant funding, our actual R&D expenses remained relatively consistent, increasing only about 4% relative to the first quarter last year. The company continues to invest in R&D activities as we refine, improve, and expand our platform solutions based on our technology roadmap and feedback that we receive from our customers. Personnel costs increased by 57% to 1.6 million for the first quarter of fiscal 2023. The change is primarily related to inflationary market factors, as well as an increase in the size of our sales and customer support teams. As we continue to focus on revenue generating activities and providing exceptional customer service to our growing list of customers. As well, the first quarter of last year had some COVID-19 wage subsidies. the actual change in personnel costs is only about $100,000. Sorry, it's about $100,000 lower after removing the impact of these subsidies. As part of our plans to optimize the company, we continue to assess whether we have the correct mix of skill sets within the company. To date, we've made several changes within research and development, sales and marketing, and corporate functions as we continue to assess our personnel needs as we scale the business. Loss and comprehensive loss was 4.9 million for the quarter, which is 352% higher than the 1.1 million in the first quarter of last year. However, our loss for fiscal 2022 included 2.5 million of non-diluted funding. Excluding these grants, our loss in the current quarter increased by about 1.3 million, which is primarily due to the changes in sales, marketing, and personnel that I previously discussed. Finally, basic and diluted loss per share was 3 cents for the quarter compared to one cent last year. Excluding the same grant funding received in fiscal 2022, our loss per share year over year increased by one cent. We've made great strides in the last year and in particular the last two quarters in building up a solid backlog of contracts. As we continue to grow as a company, we'll also begin to focus on improving operational efficiencies as we start to move towards achieving cash flow neutrality. As I mentioned previously, this will be a key focus for us in fiscal 2023. Turning to our cash flow now, during the quarter, the company had negative cash flow of 4.1 million compared to the negative cash flow of 2.7 million in the first quarter of last year. However, during the first quarter of last year, the company had the same 2.5 million of non-dilutive funding. In the current year, we did not receive any grant funding to offset our expenses. To address our rate of cash use, we've developed a comprehensive plan to reduce the rate of cash burn that we're currently experiencing. First, as I previously discussed, we've implemented several new strategies to maximize the value of our contracts. Secondly, we've made and continue to make changes to how we operate our business. These initiatives include internal restructuring of our people, reducing the cost to acquire a customer, investigating strategies to reduce our manufacturing costs, and even reevaluating certain fixed costs such as our need for office space. Although it will take time for the impact of these strategies to be seen, our expectation is that these changes, paired with the continued growth trajectory of our sales, provides us with line of sight to reach cash flow breakeven. Subject to future expansion plans, we expect to demonstrate gradual improvement in our cash use as revenues increase and our business optimization plans get implemented. In summary, we're very pleased with the traction that we've made during the first quarter of fiscal 2023. We see ourselves on an upward trend in terms of the value of contracts signed and units deployed, but our work is not done. Our focus for the next few quarters continues to be on customer engagement, providing exceptional customer service and scaling our business to provide our investors with predictable recurring revenue and a path towards profitability. And with that, Peter and I are pleased to answer any questions that investors might have.