Xtract One Technologies Inc.

Welcome to the Extract One Technologies Fiscal 2024 Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Witte, Investor Relations. Please go ahead.

Good morning everyone and welcome to the Extract One Fiscal Fourth Quarter Conference Call. Joining me 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, financial results, and some of Extract One's recent milestones, followed by a Q&A session. This call is being recorded and will be available on the company's website for replay purposes. Please see the presentation online that accompanies today's discussion. Before we begin, I would like to note that all dollars are Canadian, unless otherwise specified, and provide a brief disclaimer statement as shown on slide two. Today's call contains supplemental financial measures. These measures do not have any standardized meanings described under IFRS, and therefore may not be comparable to similar measures presented by other reporting issuers. The supplementary financial measures are defined within the company's file, management, discussion, and analysis. Today's call may also include forward-looking statements that are subject to risk and uncertainties, which may cause actual results, performance, or developments to differ materially from those contained in the statements, and are not guaranteed the future performance of the company. No assurance can be given that any of the events anticipated by the forward-looking statements will prove to have been correct. Also, some risks and uncertainties may be out of the control of the company. Today's call shall be reviewed along with the company's annual consolidated financial statements, management, discussion, and analysis, and earnings press release issued October 24, 2024, available on the company's website and its Cedar Plus profile. And now it is my pleasure to introduce Peter Evans, Chief Executive Officer of ExtractOne. Please go ahead, Peter.

Well, good morning, and thank you very much, Chris, and thank you to all of our shareholders who have joined us today on this call. It's a great way to end the end of our best year ever with record results across almost every one of our financial metrics and targets and beating in general all of the analyst's estimates for the performance of our business. As Karen will review later, we reported record annual revenue of $16.4 million, which is more than four times of what we reported last year. I'm also very pleased to report that we ended the year strongly with $5.6 million of revenue coming from Q4 Loan, and I believe that we are very well positioned for further growth as we head into fiscal 2025. Given the strength of our bookings backlog, excuse me, I'm so sorry, for further growth as we head into fiscal 2025, particularly given, in my mind, the strength of our bookings backlog. Across almost every metric, whether it was revenue, profitability, reduction of burn, and managing OPEX, we exceeded our targets. Next, let's talk a little bit about innovation. It's been our mantra here at ExtractOne to always lead with innovation and deliver answers to some of the customers' most compelling problems. That's a core principle at ExtractOne, and while we've consistently iterated and improved upon our screening solutions over the years, in the past 12 months, we've announced two major new products that are delivering incremental value to our customers. The first of these is ExtractOne Vue, a SaaS-based product for fleet management and analytics across the entire portfolio of ExtractOne gateways. This has gotten a great response from the customers and provides them a lot of tools they need to further use digital innovation to streamline and optimize their business operations. Most recently, we also announced our next-generation product, ExtractOne Gateway. This new product offers bidirectional object identification and identifies weapons in environments with a medium volume of personal blogging. We'll talk about this a little bit more in detail later in this call and how this product is significantly increasing our market share as well as the size of the addressable TAM. We also onboarded many new customers during the year, including five professional sports teams, multiple school systems, and six new healthcare networks, and a handful of Fortune 100 companies. We accomplished what we set out to do a year ago and continue to execute on a business strategy that is designed for customer expansion, technology leadership and innovation, and cash conservation at the same time. I believe our investors are now coming to realize what we've said all along, that ExtractOne is on its way to becoming a premier security systems provider whenever and wherever large groups of people need to pass in and out of venues in a secure and rapid manner. Most compelling to me and what I'm most proud of is we set ourselves some milestones, we share those with the analyst community, and we'd be able to deliver and exceed on those milestones. And that's something I think gives us a lot of credibility in the market and something I'm personally proud of. Needless to say, however, we're also very happy with other accomplishments throughout Fiscal 2024, and we're excited about how the future prospects look as we accelerate into Fiscal 2025. I'd like to turn to slide five here and provide a little bit of additional color on the ExtractOne gateway and the impact that we believe it will have on our growth going forward. We specifically designed ExtractOne gateway in response to customers such as schools who told us about the laptop problem as they defined it. These are organizations and facilities where visitors regularly carry numerous personal items like laptops, tablets, insulated water bottles, binders, and other items in a large backpack, bag, or briefcase as they enter into a facility. One gateway is unique in that it has the ability to rapidly assess potential threats in these cluttered environments, in the backpacks, in the briefcases, without the need to separate items, stop the screening process, execute unnecessary acrobatics such as holding laptops above the head or purchasing X-ray machines, or doubling the customer's complexity with complex bag searches. The whole point of frictionless screening is to allow people to enter into a facility, just walk right in. Without all this extra security disadvantage. The next generation solution that we deliver here caters to each venue's unique security requirements, and it's particularly advantageous for places like schools, convention centers, and workplaces where the average individual is walking in with the backpack or the bag with the laptop. This is where the bulk of those entrants have large amounts of clutter like tablets, chargers, binders, eyeglass cases. On the slide you can see a picture of the gateway along with the estimated size of the end markets where we anticipate that we will be playing into with this product. I can say with confidence and specifically based on the feedback of customers who have paused certain purchases of competitive products that they begin to engage with one gateway, and they're telling us it is a game changer for their business operations or their school operations. We're already receiving requests for proposals from a wide variety of new potential customers, and that is elevating our presence in those target segments and target markets and creating a positive impact and more momentum as we begin entry into fiscal 2025. The solution has a unique ability to differentiate between potential threats and everyday items and most uniquely, specifically identify the type of item that is passed through. This is a gun. This is a knife. This is a laptop. This allows security to have a smooth and secure entry experience for all the patrons. In particular, we've also seen some incredible excitement in the school sector where it seems that we have unlocked the solution to the widespread problem and concerns about laptops causing alerts that are carried in children's backpacks. This would previously have 100% alert time or alert issue for the customers, and we've solved that problem. We believe this market segment has the potential to be one of our largest growth drivers in the coming quarters, and in short, we believe that the One Gateway will provide the best weapons detection capability in the market today without the need for secondary screening, without the need for x-ray machines, and without the need for other complex operational gymnastics to bypass the laptop problem. Our promise of a non-invasive walk-rating experience is now delivered to these new market segments. The One Gateway further unlocks additional market potential not previously considered in our business plan or our addressable markets. By uniquely identifying objects, One Gateway can not only address the ingress and the concern about weapons, but address other use cases, such as a distribution center where they wish to alert on weapons entering into the facility, and they wish to alert on stolen electronics that are leaving this facility, where we've been told by some major retailers that as much as $10 million per year per distribution center is lost due to theft. This creates a great opportunity for us as a business and a great ROI and outcome for our customers. This not only underscores our leading position in the industry also as an innovator, it also illustrates that we're continuing to use that innovation to deliver better solutions and enhance the efficiency and streamline security processes for improving the everyday lives of our customers. Let's now turn to slide six, where I want to remind our investors some of the many new customer wins we've announced. During the last year, the total contract value of new bookings was about $30 million, or about double from what we did last year. In Q4 alone, the $5.5 million in new bookings was running at a pace of about one new customer per week, so that's about 10 total new customers and five existing customers that significantly expanded their deployment with our technology. We onboarded new customers across several market verticals, including professional sports, live entertainment, education, health care, and others. In Q4, about 60% of our total contracted value of new bookings actually came from customers outside of sports and live entertainment. We started with the folks on sports and live entertainment, the market segments, and we're not willing to wait for us and pull this into these other segments. Most interestingly, about 50% of our new business came from new customers in the school environment, and this occurred prior to our announcement of the One Gateway. We've seen that over the last four quarters, the proportion of our customer base outside of sports and live entertainment has been gradually increasing as we continue our manufacturing ramp and our marketing activities to support those activities. Last year, the vast majority of our customers were in sports and live entertainment, and fiscal 2024 to me was the year that we firmly expanded and established ourselves in other market verticals, again with about 50% of the bookings for the year coming outside the sports and live entertainment marketplace. This was, of course, a result of societal trends increasing the need for security in some of these other markets and investments we made in business development, marketing, and selling activities into those market segments where we showcased our technology to a broader array of customers. It's also due to the expansion of the investment that we've put into our channel partners that are now promoting and selling our technology within their network of their customers. Most recently, I'm also very proud to say that we announced three new very exciting wins with the Rocket Mortgage Fieldhouse, the home of the Cleveland Cavaliers, with the Amerit Bank Arena, the home of the Florida Panthers, and UBS Arena, the home of the New York Islanders. These locations are all facilities that take a high focus on security first, and when they do, that's where Extract One always leads. They were also facilitated in part by our recent DHS Designation Award, which we announced last quarter. We're very excited to be selected by these professional sports teams and to continue to engage with other NHL, NBA, and MLB teams who are very focused on the correct way to secure their venues with our -in-class AI solutions. As we begin fiscal 2025 and as we get momentum in towards the end of this year, we're very well positioned for continued growth and improved bottom line results. And I'm very pleased we're going to be able to continue to deliver some very good and aggressive growth rates. Given our current backlog, our demand dynamics in the marketplace, and our technology superiority, we're seeing a very active pipeline of opportunities, which I expect to continue. Our latest product offering, One Gateway, makes us much more confident in the new fiscal year, and we think it will be another great year of continuing accelerated growth. Just as fiscal 2024 was vastly better than the year before. As we've said in the past, the company continues to make progress towards profitability and to expand the top line and keep a tight handle on our expenses. The math is easy, and it tells the story of the journey towards profitability. We're very excited by the future and the potential it represents, and we did what we set out to do, which is something that again is very, very pleasing to myself and the rest of the team at Extract One. We focused on quadrupling our sales, expanding into new markets, serving new market segments, establishing ourselves as a key player in those segments, and executing on an operating plan that will result in higher production, higher delivery, and higher profitability with unparalleled customer satisfaction. These are the things that we consider our mantra for the business and things that we will continue going forward. Right now, I'm going to turn it over to Karen, who can provide a much more detailed discussion on our financial results. Karen, please take it away.

Thanks, Peter, and good morning, everyone. This has been a fantastic year of operating performance. While Peter spoke about some of the customer-centric milestones that we achieved this year, I want to focus on how we perform financially and how we believe this sets the stage for fiscal 2025. Let's start by turning to slide eight. Total revenue for the year rose to $16.4 million, up 344% from $4.1 million in the prior year. Total revenue was approximately $5.6 million for the fourth quarter, more than triple that of the same period in the prior year, and another new quarterly record for us. During the year, approximately 68% of revenue came from upfront purchase contracts versus approximately 65% during the previous year. As a reminder, the mix of purchase versus subscription contracts will fluctuate from quarter to quarter due to new customer spending priorities and expanding markets. Generally speaking, we are agnostic as to whether a customer opts for a purchase or a subscription agreement, and we found that it is highly dependent on each customer's priorities and business operations. We remain dedicated to top-line growth and are proud of this year's overall performance. We anticipate continued strong growth in fiscal 2025 as we start to see the impact of our new one-gateway solution and the potential sales opportunities, both in terms of new markets and deal sizes, which may lead to some variance in the sales cycle and associated bookings over the next few quarters. Our gross profit margin for the year was approximately 63%, up from 60% last year. In Q4, we reported 65% gross profit margin. We anticipate that we will maintain strong margins in fiscal 2025 as we continue to expand the company and leverage economies of scale while keeping operating expenses in line. Now turning to slide 9, we continue to grow the value of our contractual backlog and signed agreements pending installation. At the end of the quarter, this collectively totalled around $26.8 million. The company's contractual backlog was $13.8 million, and we estimate that $6.6 million of this will convert to revenue over the next 12 months. At year end, we had an additional $13 million worth of signed agreements pending installation, the majority of which are expected to be installed within the next 12 months. Our backlog is up significantly year over year, while the modest change relative to our third quarter reflects the fact that a significant portion of prior signed agreements pending installation have since moved into revenue or contractual backlog, while at the same time being backfilled with new customer bookings. While we anticipate that bookings and backlog will continue to grow in fiscal 2025, the launch of Extract One Gateway may push a small number of contracts into the second half of the year, particularly as it pertains to the education market. Now let's turn to slide 10, which shows annual operating costs year over year and fourth quarter operating expenses sequentially versus Q3. Selling and marketing expenses were $5.6 million for fiscal 2024 compared to $4.6 million last year. In Q4, selling and marketing expenses were $1.5 million versus approximately $1.3 million last year. We continue to invest in business development and other initiatives to accelerate top-line growth and expect these costs will rise modestly as we continue to expand into several new market verticals. As a reminder, such spending may vary quarter to quarter depending on the seasonality, timing, and scheduling of marketing opportunities. Costs associated with research and development were $8.3 million for fiscal 2024, which is a 17% increase from last year. In Q4, we invested $2.3 million in research and development, which is relatively consistent with our investment from last quarter. However, during Q4, we capitalized about $430,000 of development costs associated with Extract One Gateway as we successfully completed our beta testing and moved towards commercialization. As we said many times before, the company is committed to leading through innovation and delivering new products and services to our customers. We anticipate R&D will remain around current levels or increase slightly as we introduce new products to market and enhance the functionality of our existing product suite. General and administrative costs were $7.5 million for fiscal 2024, which is an increase of approximately $700,000 relative to last year. The slight increase in these costs during the year was primarily due to an increase in personnel-related costs. The company continues its ongoing effort to reduce non-strategic discretionary expenditures. We expect general and administrative expenses will remain steady or increase slightly in the upcoming period. Finally, on slide 11, I'll discuss operating cash flow. We've made great strides during the year at reducing our operating loss. Excluding changes in working capital, the company has had an operating cash outflow of $8.1 million for fiscal 2024, compared with $13.1 million in fiscal 2023. Over the past several quarters, we've also managed to steadily reduce our quarterly operating cash burn, which was $1.3 million during Q4. We continue to focus on reducing our quarterly operating loss as we ramp up revenue while maintaining our operating expenses. In closing, Peter and I are very pleased with the company's performance in fiscal 2024, highlighted by significantly higher revenue, increased backlog, many new customers, and a reduction in the company's cash burn rate. We're grateful to our customers, our sales partners, and of course the team here at Extract One that have made the results possible. While we're proud of what we've achieved this past year, we look forward to the year ahead and to continue our growth trajectory and bring new and innovative products to the market. And with that, Peter and I welcome any questions that investors may have.

We will now begin the question and answer session. To ask a question, you may press star, then one, on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. And our first question today comes from Adhir Kadev with 8 Capital. Please go ahead.

Good morning, Peter and Taryn, and congratulations on the quarter. I just want to talk about the pipeline of deals heading into fiscal 2025. You know, as we compare them to prior years, especially with the new products, you know, with the DHS certification, I'm sure it has grown. But can you maybe speak to the demographic of who your customers are, the deal sizes, and then from a vertical angle as well, just heading into next year?

Sure. Fantastic question. Thanks for that, Adhir. A handful of thoughts. The first is we're definitely seeing more segmentation of the pipeline, reflecting the success that we're seeing in the marketing activities to create awareness in different market protocols. Whereas two years ago, we were not specifically targeting schools. We are now. And the pipeline is reflective of that. We're seeing the same thing also with hospitals, with manufacturing, with distribution and other vertical market segments. We've also become very, very judicious about how we qualify opportunities to make sure that we're going after those that are very, very accretive to the business and not a distraction to the business. There's a wealth of opportunity out there in the market. We're barely touching the tip of the iceberg in terms of the market, Tam. And to make sure we're using our time effectively, to make sure that we're using our resources effectively and not unnecessarily taking on incremental costs, we're qualifying that pipeline very, very carefully and cautiously and going after the quality deals. Overall, I think for certain market segments, we're seeing the deal size definitely increase. And in some cases, the sales cycle shorten. In other cases, we're seeing the sales cycle lengthen out. And I think that's a little bit more of a reflection of the market. As we move into sort of the mass market, as opposed to the early adopters for technology like ours, people are taking a little more time to make sure they've got the whole -to-end business processes correct. So you are not sure if that answers all of your questions. But overall, I see a lot of quality opportunities. I see more opportunities and a greater diversification across our pipeline in different segments. And having more diversification across different verticals, we expect we'll start to smooth out some of the curves in terms of the seasonality of buying cycles for different vertical segments.

And are you finding that, just given you've had a lot of marquee customer wins with Amerenbank Arena, UBS Arena, some big recognizable names, of course, in the past with MSG, are you just finding that referenceability kind of coming through now as you've been in the market for some time now? And is it becoming easier for you to sell deals, kind of going more from educating people on who your product is to kind of they kind of know who you are? And so I guess what I'm asking is, is selling just getting much more easier for you guys

now? Well, it's multiple factors there. I'd say yes. The referenceability is critical. And you've heard me talk about this before a dear number of times. You know, building that stable of like brand names, high quality chief security officers for well-known marquee accounts. Madison Square Garden is an example. You know, this is a location that is probably under terrorist threat at various times. So they have to take security seriously. And so having folks like that in your camp and backing you and endorsing you certainly gives a lot of momentum. And we've seen the impact of that with some other large significant opportunities in terms of does that shorten the sales cycle? I think that puts us front and center very, very quickly. But most organizations these days, you know, they're not looking at security as a checkmark in a box. We've seen a significant shift in people really thinking about, you know, what are the true outcomes? How do I put this in my environment and test it for 30 days to make sure I've got a lot of data that I can then architect? Let's use an arena, for example, the ticketing correctly and the staffing correctly and the flow of the people correctly. And so I think there's more time being spent and more thought that's being put into the correct deployment solutions. But the front end interest has accelerated definitely because of the referenceability.

Okay, excellent. And then maybe from my last question, I'll ask is a comment that you had made on the new One Gateway product. You said you're you're getting a lot more RFPs. You're getting you're taking market share from that product. Can you just maybe unpack that comment a little bit? Where are you seeing that? Of course, I know it's in the educational vertical, but can you just unpack the comment a little bit?

Yeah, particularly in education, I think it's very interesting what we've seen as a result of the One Gateway announcement. You know, there's a lot of schools. I think there was an article I read about one school board just recently where they're having a challenge because they can't get enough security staff to manage the their current choice for a weapons detection solution because the laptops all alert. They have to have an extra set of security staff to go man tables off of the side where the kids are all put into backpacks and the officers have to go through all those backpacks. Now, no parent or child wants some stranger going through your backpack. And so, you know, not only is it a little bit invasive, but it's also requiring significant amounts of security staff. So as soon as we announce One Gateway, you could see the light bulb popping for a lot of people. This will solve my staffing problems. In this case of the school, they're having to get the people who do traffic management out in the parking lot, teachers and others to come and man the front entrance. So they've got enough people to deal with the complexity of the products. So no staff are available for other activities after occur before school. That's acrobatics that the schools don't have the time or the luxury to deliver. They should be focused on a great environment of education. So as soon as they hear about One Gateway and the fact that a child can walk through with their backpack with a laptop with their binders, all these other things that some schools have prohibited, we've seen schools have prohibited binders. That's silly. Let the kids go to school the way they expect to go to school. As soon as they see One Gateway, they said, aha, that's the solution that we're looking for. I had one school superintendent tell me when we were doing a demonstration of the Smart Gateway, if you solve the laptop problem, not only do we want to buy this product and put it in all of our schools, I think I'm going to buy stocks in your company. That brings me joy as I know that we've solved a problem for all of the schools that here before they were having to navigate their way around.

Excellent, guys. Congrats again on the quarter. I wish you the best of luck and all the best of luck.

Thank you.

Thank you.

And our next question today comes from Scott Buck with HC Wainwright. Please go ahead.

Good morning, guys. Thank you for taking my questions. Peter, I want to ask about the contract that was announced earlier in the week with the Global Automaker. Yes. Can you give a little more color on the sales process there, how long that process took, and then what is the implementation timeline look like?

Yeah, that's a great question, Scott, and it's good to hear from you. Thanks for dialing in today. You know, we're very pleased because I think this is our fourth major auto manufacturer, global auto manufacturer that has selected us. Typically, when an organization like that is going to make a decision on weapons detection, they have to take it very seriously. There's unions that they have to consider. There's employee satisfaction they have to consider. They want to make sure many of these organizations have got their operations fine tuned, and they want to make sure that when they introduce a technology like this, you're not fundamentally having to change the operations, slowing down the ingress of the patrons or the workers, and affecting your business operations, revenues, and profitability. So they take this very seriously, and oftentimes they will go through, as this auto manufacturer did, they'll go through a pilot period of 30, 60, 90 days to really gather a lot of data. They cannot just make a two-hour demo and then find out when they deploy the solution. Also, the workers are 10 minutes late for their shift, which has multi-million dollars of ramifications. So there was an aggressive bake-off with all technologies. They put them into one of their manufacturing plants, including us, and they aggressively tested those technologies to find which fit the operations best, caught the most weapons, addressed all of their concerns, and they felt was the best fit for them for the multiple set of objectives they were trying to achieve. The number one being, catch all the weapons, do not affect business operations. Okay. And so with that, we then went through the contracting process with them, and it is a phase rollout. This is a global auto manufacturer. In North America, they have over a dozen manufacturing facilities, and we've got a defined set of phases to go into one, then the next, then the next, then the next.

So Peter, the contract is for five, right? But you said they have 12, so there's an opportunity there to even expand your business with this particular group, correct?

Well, for clarity, I said over a dozen, and I don't want to give out too much details about that customer because we do not have their permission to use their information in painful detail. But the initial contract is for five, and we expect it to expand in North America over time as we continue to deliver value to that customer and they see that value. And then as that plays out successfully, we'll then engage in conversations about global.

Great. I appreciate the color there, and then kind of as an attack on and more broadly in terms of implementation capacity, I know sometimes you're limited by the customer's timelines, but I think that's a good point. Is there any stress that you see on your ability to implement in a timely manner for or just given the size of the pipeline, or is that not an issue that you worry about?

We're doing very well in terms of the implementation. I can't think of a single customer right now that we have not met or exceeded their implementation timeline, and so that's not a concern,

Scott. Okay. And then last thing, just real quick, can you give me an indication of how many channel partners you're working with, whether it be on the education side or some of the other nine, you know, sports and entertainment, the venue side of the business?

We're north of two dozen right now, Scott, and there's two thoughts around that. We intentionally chose to be a direct solution. You know, when myself and Karen came on board and said, look, we need to reinvent this company and turn it around. I wanted the proximity to the customer to hear from the customers exactly what their business needs were and what they liked and didn't like about competitive solutions so we could improve upon both of those. So, you know, we wanted to be at that pointed end of the stick to really get that proximity to customers. Now that we have an out of the box, simple to install, doesn't need to be calibrated every single day, you know, super easy to deploy solution. It's a perfect time to be ramping up the channel activities. And we started that activity, you know, in earnest about a year or so ago. We've been very selective about the channel partners we're working with. We want those folks who are not opportunistically just going to go into opportunities, but are actually taking our message, taking the value of what we do and bringing it to their entire footprint and the value of what we do. And then they're with their Lodex of their customers. So quality is more important than quantity of partners. And so far, we're very pleased with the partners that we've onboarded.

That's great. Well, I appreciate the added color, guys, and congrats on the results.

Thank you, Scott. It's always good to catch up with you.

Again, if you have a question, please press star, then one. And our next question today comes from Jeffrey Hulke with TD Wealth. Please go ahead.

Good morning, Peter. How are you?

Doing very well, Jeffrey. Thanks for joining us today.

Thank you. Quick question. Well, not a quick question, but are you able to comment on the success rate you've had with installing Patriot One or sorry, Extract One? What the success rate has been you had with detecting weapons? The reason I'm asking because I'm driving in my car, listening to Fox News, the NYPD uses the vault down in the New York subway stations, and they've had a lot of false positives. Whereas over 150 guns weren't like were detected, but they weren't really guns. And now the NYPD spokesperson says they have to go back to the drawing board to reevaluate their this process. So can you comment on Extract One's success rate on when you put something in, when you implement your Extract One into a school or into a stadium or wherever, that there's been a number of people, I guess, arrested with weapons?

Yeah. So there's sort of two, three thoughts to unpack that, Jeffrey. And I apologize for a longer answer that I'll try and keep crisp. The first thought is we rely very heavily on third party testing and verification of our solutions. And we take that to some of the most well known security organizations who are responsible for the security of every one of us on our everyday life. So FAA, NPSA out of the UK, DHS and others. And they put their hands on the technology and they put out reports that says that this sensitivity level, you know, a sensitivity three, a sensitivity four, sensitivity five, this is what our testing results will provide you. And we use that information as well as test on customer sites to help them dial in what is their sweet spot of what level of weapons they want to detect, what level of false positives they are willing to tolerate and what ingress speed they can get. Those three factors all inter-react, inter-relate with each other. If I don't want to get down to very, very small razor blades, I'll dial the sensitivity up, but the false positive rate is going to go up. Okay, so we work with each customer to find that balance. There are some customers are only worried about firearms and not knives. Other customers are worried about the smallest of little razor blades, but if they do not want a caregiver in a hospital to be attacked by an individual who might be having an episode. Okay, so there's no kind of hardcore answer that says you catch all these weapons. We can catch all these weapons at this sensitivity level, but we want to make sure the customers understand that there may be this level of alerts, this level of throughput. Okay, now when you get to an environment like the New York subway system, and I wrote a blog on this about a year ago, I think the state of the art of the physics of this technology, us, our competitors, anyone, is such that when you get to too much metal clutter, like a laptop, this system will alert. And the only way to address that, if you dial the sensitivity way down, the laptops will still alert 30, 40, 50% of the time, but you will then miss a whole bunch of weapons. So someone like the subway system has to determine, am I willing to accept those weapons getting through to lower the annoyance factor or not. In an environment where you've got a lot of large laptops, almost 100% of the people who have one are going to alert if you're serious about catching the weapons. That's what we wrote about in the blog. Okay. That's where we were very proud of what we're doing with the One Gateway to take that leapfrog innovation to overcome those problems so the average individual with their backpack with a laptop can walk through, won't alert, but we can still catch the weapons. I think a deployment in an environment like a subway is premature for the state of the art of the technology until something like One Gateway has presented itself. So, you know, Jeffrey, I'm not sure if that answers your question entirely. Those are just kind of some thoughts off the top of my head.

That's good, Brad. I appreciate the time. Thank you.

My pleasure. Thank you, Jeffrey.

And our next question today comes from John Hyde with Strategic Investing Channel. Please go ahead.

Hi, Peter, Karen. Thanks for taking my questions. I got a couple if possible. First, obviously you guys had a very nice increase in gross margin this quarter. And Karen, I know you said you're expecting margins to stay strong going forward. Can you maybe expand on that a little bit, especially how you were able to achieve the increase this quarter, whether it be cost efficiencies or other factors?

Well, sure. And thank you for joining us today, John. It's always great to connect with you. In terms of our gross margin, you know, we are very, very focused on maintaining our prices and managing our BOM is really the key factor of it. And we think that that's a little bit of our secret sauce and that we've managed to really keep our BOM costs down and we continue to improve our BOM over time. And part of that process is being able to have some economies of scale. And that helps us to buy componentry and other elements of our product with greater efficiency. And so we're going to continue to work to drive that cost down of our BOM. And that's really the biggest factor towards a gross margin. We've also made improvements in terms of the support of the product. Peter mentioned on the call that we have our OneView product. And that product really allows us to help our customers proactively and reactively, virtually, to assist them with any issues that come up in the field for whatever reason. And that is also helping keep our costs down in terms of the support of the products. So all these factors together are basically leading us to believe that we're going to continue to maintain our gross margin going forward. So we feel quite positive about that. Not sure if that answers your question or whether there was anything else specifically you wanted me to address.

No, that's great. It's actually an interesting point on the service there. One other question, if I can. I know you had also mentioned this earlier on the call about the One Gateway and the timeline on that. Obviously, I think we're all excited for the demand for that product and what that product is going to do for you guys. But you did mention there are some customers, probably especially schools, that really want that product but are maybe going to delay their purchase until that product is available. So can you maybe expand a little bit more on how that's going to work, maybe the timing for the product release and whether you think that's maybe going to be a short-term headwind on bookings? And then maybe we'll see a much stronger finish to the year and how that might play out.

Yeah, John. So let me address that question. A couple of thoughts. The first is, I don't know that it actually creates a headwind but creates a whole new set of interested customers. Whereas a customer might have been evaluating us and our competitors and trading off those differences. And they might have had a two, three, four month cycle to evaluate the solutions. Now they're hearing about One Gateway. We're able to demonstrate One Gateway to them. And they're saying, OK, that's a clear decision for me. I'd rather buy the right product and have it delivered to me in a handful of months from now versus making the wrong decision now, regardless of what the solution is. So it's not that it's really delaying. I think it's actually ensuring that those sales come in our direction. So we're very pleased about that. You also have to think about the fact that One Gateway is really targeted towards a certain kind of marketplace. It's targeted towards schools. It's targeted towards convention centers, commercial office buildings and headquarter buildings and things like that. Where the average individual is walking in with a backpack with a laptop. You know, when we were at the GSX show a month ago, as an example, I pointed to every single person around me and said to the individual I was talking to, how many people have a backpack and we weren't going through a normal system? And they laughed and they said, everyone. Well, we've solved that problem. So it's specifically targeted those markets. And if anything, it's accelerating our success and our growth in those markets. The Smart Gateway does very, very well for the markets that it's intended to serve. It does very well in stadiums, arenas. You know, we're actually selling it into hospitals these days and it's doing very well. So we haven't seen any slowdown in those markets because those are the markets that are interested in Smart Gateway.

Great. Great. That's really good to hear. Congrats on the quarter and thanks again for taking my questions. Always a pleasure, John.

Well,

thank you very much. And to end, to everyone who's on the call here, first off, thank you for taking your time out of your day to join us. I hope that you all share the same excitement that we have. And I know that I personally feel every single day working here at Extract One. It's been a great year. We're off to a good start for the new year. And I guess I want to leave everyone with a brief message. Our demand for systems continues to grow. But we're still at the tip of the iceberg when it comes to the penetration of the total addressable market and the new total addressable markets that we've opened up with the One Gateway. We're really proud of our position as an innovative leader. We're proud of our position that we take in the marketplace of transparency and high integrity and high touch and customer support. You know, we've come a long, long way in just one year. And as we've expanded our market presence, as we've expanded with a much more savvy marketing team and unparalleled technology, we have a great set of customer success organizations that really embrace our customers and give them that white glove level of service. I really believe the sky's the limit for us as a company and where we can go and what we see as the future achievements in the quarters to come. Couldn't be more excited about what I personally do. I love my job. I love the team I work with. I love our customers. So thank you, everyone, for joining us on today's call. We appreciate everything that you do for us. We appreciate your interest at X-Rayq 1 in our future, and we look forward to talking to everyone again soon, potentially on the next earnings call.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.