Xtract One Technologies Inc.

Hi, everyone, and welcome to Extract One's live second quarter earnings call for fiscal 2023. This is Will Mays from RB Milestone Group. For those of you who aren't already familiar, 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 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 questions investors have sent in prior to and during the webcast. This call is being recorded today, March 9th, 2023, and will be available on the company's website after the call at extractone.com. Before we start today's call, I'd like to note that all dollars are in Canadian dollars unless otherwise specified. Today's call will also contain forward-looking statements. They're subject to risks and uncertainties that may cause actual results, performance, or developments to differ materially from those contained in the statements, and they're 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 company will obtain from them. Also, some risks and uncertainties may be out of control of the company. Extract one has a full disclaimer contained in their presentation. Today's call should be reviewed along with the company's interim condensed financial statements, management's discussion and analysis, and the earnings press release issued today, March 9th, 2023, and is available on the company's website and CEEDAR profile. Lastly, RBMG is not a registered investment advisor or a broker dealer. For more information, please visit rbmilestone.com. And now it's my pleasure to introduce Mr. Peter Evans, Chief Executive Officer of ExtractOne. Peter, the floor is yours.

Well, thank you very much, Will, and thank you to all our investors for joining us today. I'm very excited to be speaking with everyone today and really looking forward to sharing more information about our second quarter results and key milestones we've set for ourselves and how we've achieved those, as well as recent activities, including a strategic investment from Madison Square Garden Sports or MSG Sports and the planned deployments that will occur with Madison Square Garden Entertainment. We had a very strong quarter. It's our strongest quarter, in fact, for customer deployments to date. and added new sales to our bookings backlog, which will convert to revenue in future periods as these products are shipped and deployed and installed at customer facilities. Based on these results, we continue to be very optimistic about our outlook for fiscal 2023. I'd like to start by giving our investors a quick update on the business and a handful of the questions that we've received from our investors about things that are important to them, and most importantly, some of the key milestones, as I mentioned, that we have set out for ourselves and that we're tracking our performance against. Later, Karen will take us through all the financial results and the key financial trends. Excuse me. There are several key highlights this quarter I think are worth mentioning. One, that I often forget is the fact that we branded the company very, very successfully in this past fiscal quarter. Very pleased with those results and the positive feedback. Most importantly, too, it's our strategic partnerships and expansion with those. In October, we announced a strategic partnership with the Oakfield Group, where we continue to develop key customer relationships in the sports and entertainment industry through OVG's extensive network of OVG managed facilities and venues and their Alliance Arena members. Some of OBG's new customers that were deployed, excuse me, some of the new OBG customers that were deployed in this fiscal quarter included Total Mortgage Arena and Accra Share Arena in Palm Desert, California. Additionally, in February, we announced another strategic partnership with MSG Sports, who invested $8.4 million with us, and then, with the approval of our shareholders, plan to invest another $5 million to advance venue security and enhance patron experience across North America and beyond. I will talk about this key partnership in a few more minutes here. We really look forward to working with both of these groups and will continue to develop and announce other important strategic partnerships that we are focused on. On a business momentum side, in the first half of this fiscal year, we've made sales equal to or slightly above 125% of all of the fiscal 2022 platform sales combined. The company has nearly doubled the numbers of systems deployed into the field this quarter and installed with customers. That's driving an increase in our contractual backlog significantly, which Karen will speak to later during this call. We're also excited with the direction the company's headed and expect this trajectory to be steady and remain throughout the year or accelerate. This year has been the focus on scale, and we think about that as a key milestone. I talked about this in our last earnings call. We continue to drive efficiencies across the entire business. whether it's building qualified pipeline or sales conversions from that pipeline to revenues, all the way through cost effectively scaling manufacturing and installation and ongoing customer support models. Again, both Karen and myself will be coming back to this theme throughout our call. This is the year that we've established ourselves and are scaling as aggressively as we can, as shown in the results where we essentially doubled the installed base this past quarter. Last month, We are pleased and excited to report on and announce the $13.4 million strategic investment from MSG Sports. MSG Sports is the owner of the NBA's New York Knicks and the NHL's New York Rangers, as well as other activities. MSG Sports has been an invaluable partner over the past number of months and has provided vast amounts of feedback to us to help us continuously drive innovation and accelerate the improvement of our portfolio month after month after month. This has provided all sorts of innovation and opportunities for us to shape our product roadmap better, to serve those customers in the sports and entertainment industry better. We're thrilled to have one of the most elite players and one of the strongest brand names in sporting to be one of our supporters and our investors. This didn't come easy. We had to prove ourselves to probably one of the most stringent environments on the planet. We're very excited to be partnering with this company that also shares our focus on innovating and enhancing the fan experience. If you look at any of the MSG properties, you can see their vision for what innovation looks like, both short-term and long-term. And their endorsement of us as a key component of driving that speaks volumes to me. I look forward to weigh in the many ways that MSG Sports can and has already helped to uplevel our engagements through their network of connections and influence across the industry. We're also very excited to work with MSG Entertainment to deploy our smart gateway solution across MSG Entertainment's portfolio of iconic venues. These iconic venues include New York's Madison Square Garden, the theater, or some known to call it the Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theater, the Chicago Theater, and most interesting to me personally is the MSG Sphere in Las Vegas, which is expected to open in September of this year. We look forward to building upon our relationship with MSG Entertainment to promote that positive fan experience while protecting patrons with a touchless, frictionless security solution in all of these venues. MSG Sports continues to provide us with immense support, whether it's through their investment, which will again allow us to further innovate our security products and accelerate growth into new markets and new market segments, or the feedback, guidance, insights, and partnership they've shown us to allow us to introduce our product, and also the immense influence and branding that they have brought into the sports industry. This partnership continues to contribute to the efficacy of our company's security solutions, and it's setting a standard for excellence in the entire sports industry and the adoption of technologies like ours. All of the conversations that we have had with MSG Sports senior executives has confirmed to me that they are here to support Extract One for the long run, because this is about changing the industry. MSG Sports has committed to providing that additional $13.4 million of investment, of which $8.4 million has been completed already. And with the approval of our shareholders, MSG Sports will contribute a further $5 million. These funds will primarily be used for supporting the continued acceleration of our selling and marketing efforts, and also to fund this continued innovation in the vision we have together. Not only does this benefit the company, in terms of obtaining funding to accelerate our growth msg has an immense brand that has incredible value for us and they have a keen focus on delivering best-in-class security and a mindset to innovation this has validated our position as a leading company in the space of frictionless security technology as part of the process with msg sports and msg entertainment We undertook dozens and dozens of tests and retests in all sorts of different venues under all sorts of different environments. And with these results, we've been able to leverage this relationship and the brand power, excuse me, to accelerate new sales opportunities with several customers that have mentioned to us very specifically and very bluntly that the validation by MSG Sports has drawn them to our solution. To coin a phrase, it's New York. If you can make it there, you can make it anywhere. We've already seen the significant impact in many ways that the MSG Sports as an investor and a partner has had upon our company. Good things will come from this relationship, and I strongly encourage our shareholders to continue to work with us and work with the company to vote in support of the additional $5 million investment. which will help us continue to accelerate on our path, accelerate our growth and sales, leverage the relationship with MSG, and will allow us to focus on officially scaling the business towards a state of profitability. Moving forward a little bit, we are also seeing continued growth and momentum in the platform business overall. During the last quarter of fiscal 2022 and the first two quarters of this fiscal year, the companies produced record bookings numbers following the release of the smart gateway. We're very delighted to say that the second quarter of fiscal 2023 with our largest period of installations where we increased the number of deployed units by about 80% or perhaps a little bit more from the prior quarter. Nearly doubling our deployments in three months is a great milestone and it's a trajectory that we expect to continue on. This was possible due to the increased rate of sales, which were made during the prior periods, and also due to the efforts made to scale our manufacturing capacity. With a very healthy backlog, we're going to continue to focus on manufacturing deployment and conversion of the bookings to revenue. While there have been many positives with the number of metrics for the business, I personally am not satisfied with the actual bulkings number for fiscal Q2. We had a large number of opportunities, including Madison Square Garden's entertainment, that we fully expected to close in Q2. Due to things like the seasonality of the business, Right. Time that people are waiting during the holiday season and the beginning of fiscal years. These opportunities took a little bit longer for us to work through and close those contracts a little longer than we expected. What I am happy to say, and I'm very confident in, is that none of these expected opportunities have gone away. They aren't lost. And we fully expect to continue to close those and are closing those in Q3. Earlier, I mentioned that in the last six months, the platform sales were 125% of all sales for the last fiscal year. This, again, is a direct result of our accelerated sales and marketing efforts during the past 12 months, where we focused on showcasing our products to customers in live environments. Referenceability is a key characteristic and requirement, and it's critical for the security industry. CSOs talk to each other. With high, high levels of customer satisfaction and no customer churn or cancellations, our existing customers are now hosting prospects to view the product live and interact with the systems in their environments. This has significantly accelerated our sales processes, and it provides incredible referenceability and endorsements from customers, particularly those such as Madison Square Garden, who have gone and rigorously tested our products side by side with others. We continue to see the growth in our sales pipeline, which has increased by about 25% over the last quarter. It now totals in excess of $90 million, and the portion of that associated with a platform business is about $57 million. The continued interest of customers in sports, entertainment, and manufacturing distribution and public settings such as schools and hospitals and government agencies continues to grow. Our record number of deployments is also possible due to the support of our supply chain and manufacturing partners. Working with those partners over the last several months, we've been able to secure a large volume of key componentry, many of those which would have had long lead times in delivery. Actively sourcing these components has been critical for us in order to meet the demand that we're seeing for our products and to continue on a pace that's allowed us to increase installations so successfully. We continue to work with these manufacturing partners to increase our production capacity so that by the end of the fiscal year in response to demand and expected bookings, we have very little lag in deployment. This increase in capacity will help ensure that we can quickly convert all sales into deployed systems and convert that then to revenue-generating installations. In summary, we've made significant strides in the first half of the fiscal year growing the business, including partnering with two key players as strategic partners to innovate the patron experience in sports and entertainment industry. While I'm pleased with these first six months, the ongoing activities and the new engagements make me even more excited and more confident about what's to come in the second half of the year. And I look forward to continuing more of these key milestones with the shareholders and our success in achieving them along the same track record as what we've delivered so far. At this point, I'm going to turn it over to Karen, who can take investors through the second quarter financial details. Thank you very much.

Thanks, Peter, and hello, everyone. I'm happy to be speaking to you all again, and I'm excited to share our second quarter financial results for fiscal 2023. First, let's talk about the continued growth in revenue generated from platform sales. For the first half of the year, revenue from the platform operating segment was 1.1 million, which was almost 50% more than platform revenue for all of last year. In Q2 alone, the platform revenue increased by nearly 70% relative to last year and was more than triple the revenue recognized in the second quarter of last year. This positive trend can be attributed to the significant increase in the number of platform customers compared to prior periods. As Peter mentioned, we almost doubled the number of deployed systems in the second quarter relative to last quarter, which has considerably improved our monthly recurring revenue. We'll continue to benefit from this annuity revenue in future periods as our platform subscribers continue to pay over the duration of their contract terms. These trends demonstrate real momentum and keep us optimistic for our financial performance for the remainder of the year. During the quarter, Extract's innovation team continued to duly focus on supporting the internal platform development efforts, while also developing the AI-based solutions contracted through public sector agencies. Revenue from this operating segment was approximately $313,000 for the first half of fiscal 2023, which is down quite a bit from the $1.5 million for the same period last year. This reflects the timing of certain contracts, including the $1 million contract with the Canadian Department of National Defense, or DND, which took place last year and was completed in March 2022. We continue to be selective about which innovation contracts we accept, ensuring that only new contracts that we take on are synergistic to the platform business. In tandem with the increase in revenue, we also continue to see significant improvements in our total contractual backlog and signed agreements, which totaled about $6.9 million at the end of the second quarter. I should also mention that this excludes the signed commercial agreement with MSG Entertainment, which occurred subsequent to the period. We continue to build the company's backlog of sales commitments, which at quarter end was over $3.9 million with an additional $3 million pending installation. This contractual backlog represents revenue that will be recognized in future periods as we fulfill our obligations over the duration of the underlying contracts. Given the progress that we've made with deployments this year with the help of our supply chain and manufacturing partners, we deployed a record number of systems this quarter, which translated into 79% increase in the total value of our contractual backlog for the platform segment compared to the balance at the end of last quarter. In addition to this, Extract, our AI partner division, maintained a backlog of signed or awarded contracts of approximately 600,000 and continues to build a pipeline of opportunities and an ever-expanding set of capabilities. Looking forward, subsequent to the quarter, we entered into the commercial agreement with MSG Entertainment. for the deployment of our smart gateway solution across MSG Entertainment's portfolio of iconic venues. Looking at expenses, although the company's been focused on top line growth and continues to invest in targeted sales and marketing activities to drive revenue for the business, we're also working towards achieving operational efficiencies and gross margin improvements. Where appropriate, we've begun redesigning internal processes with the aim of improving our operational efficiencies to either reduce expenses or to enhance our cash conservation cycle. The goal for these changes is to ensure that we are able to scale in an efficient manner as the company focuses on reaching profitability. Sales and marketing expenses were $1.2 million for the first six months of the year, which is 30% higher than the same period last year. This increase relates to the company's intensified sales efforts and certain one-time expenses occurred in the first quarter of fiscal 2023. In general, we expect sales and marketing expenses will remain steady or increase slightly compared to prior years as sales activities continue to be a focus for us. Research and development expenses, excluding the impact of grant funding, remained relatively consistent at 3.5 million for the first six months of fiscal 2023, decreasing about 4% relative to last year. The company continues to invest in R&D activities to refine, improve, and expand our platform solutions based on our technology roadmap and feedback that we receive from customers. Personnel costs were $1.2 million for the three-month period ended January 31, 2023, as compared with $1.1 million for the same period in 2022, representing an increase of 9%. The change is primarily related to the 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. 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 grow the company, we'll continue to focus on improving operational efficiencies as we continue to scale the business. This will be a key focus for us for the remainder of the year. Turning to our cash flow now. During the first half of the year, the company had a cash out flow of $5.3 million compared to $3.2 million last year. During the quarter, the company focused on cash management and specifically focused on reducing operating expenses. During the second quarter, cash flow used in operating activities was $1.1 million compared to $3.9 million in the first quarter of fiscal 2023. It's important to note that during the first half of last year, the company recorded 3.3 million of non-dilutive funding, which offset certain expenses in that period. In the current year, we didn't receive such funding and didn't have any offsets to our expenses. In February of this year, we announced a private placement investment with Madison Square Garden Sports Corporation, or MSG Sports. We expect that the full investment of $13.4 million commitment will allow the company to focus on continued growth of our platform business and to expand into new markets where we see a strong fit for our products. We're thrilled to have partnered with MSG Sports on this investment. They've shown a strong commitment to the company over the last several months, performing extensive product testing of our products, providing executive introductions to contacts in their extensive network, and continuing to provide us with specific and detailed feedback to help us serve the sports and entertainment market. This investment demonstrates to us their support and belief in us as a company and our ability to alter the industry with our leading edge solutions. We believe this relationship will provide immense benefits to the company, both in terms of improving our balance sheet and through the auxiliary benefits of being associated with the MSG Sports brand and their network. In summary, we're very pleased with the traction that we've made during the first half of fiscal 2023. We see ourselves on an upward trajectory in terms of the number and value of contracts signed and units deployed. Our focus for the next few quarters continues to be on scaling the business by accelerating top line growth while containing expenses. Customer support is key and we will continue to concentrate on customer engagement and providing exceptional customer service. In time, We expect to continue to build a solid backlog of sales commitments to provide our investors with predictable recurring revenue. In order to ensure that we can get to this state as soon as possible, I encourage our shareholders to vote in favor of the second tranche investment from MSG Sports at the extraordinary meeting of shareholders on April 11th, 2023. And with that, Peter and I are pleased to answer any questions that you might have.