Nextech3D.AI Corporation (NEXCF) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome, everyone, to the NexTech AR Solutions Corp. 2021 Second Quarter Results Conference Call. [Operator Instructions] I'd like to remind everyone that this call is being recorded today, Thursday, August 12, 2021. Yesterday, after markets closed, NexTech AR Solutions Corp. released its financial results for the second quarter ending June 30, 2021. A copy of the earnings disclosure is available on our website and on SEDAR. Some of the information discussed on this call is based on information as of today, August 12, 2021, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as in our SEDAR filings. During this call, we will discuss IFRS results and non-IFRS financial measures. A reconciliation between IFRS results and non-IFRS financial measures is available in our MD&A, which can be found on SEDAR. Neither this call nor the webcast archive may be rerecorded or otherwise reproduced or distributed without prior written permission from NexTech. To begin our call, Evan Gappelberg, CEO, will discuss the highlights of our first quarter as well as recent business developments; followed by Andrew Chan, CFO, who will review our financial results and outlook. Finally, Evan will make some closing remarks before opening the line for more questions. I'll now turn the call over to Evan Gappelberg, CEO.

Thank you very much for that intro. Good afternoon, ladies and gentlemen, and welcome, everybody, to NexTech's Q2 2021 results. I want to thank everybody that's here today. We have [ Brad Giddings ], who's going to be managing our Investor Relations for NexTech. Brad, if you're with us, I think there's a piece here for you to interact with our investor base.

Thank you for the introduction, Evan. I appreciate it. And to all of our investors, I look forward to working with you and helping you in any way that we can. Thank you, Evan.

You're welcome, Brad. So to begin, I want to thank everybody for joining us. All of our employees from all over the world, including Canada, United States, Europe and Asia Pacific, I want to thank them for their continued support of our mission and our business. NexTech's successes in Q2 and really throughout 2021 were made possible through the hard work, the creativity and dedication of our talented and valued employees. Our culture of organizational learning, respectful collaboration is energizing and really driving business excellence. So thank you for all your hard work, and we're really just getting started. So if we look at Q2, Q2 was fueled by the combination of all of our businesses, not just one. We're a unique small-cap company in that we have diversified businesses. Augmented reality is, of course, our focus, and we are more confident than ever that we are the leading augmented reality company with our products in the industry today. Our augmented reality is the fastest-growing part of our business, and it's connected to everything we sell, which is really creating this incredible flywheel effect within our company. As of now, many of you have seen this week's announcement of ARway. NexTech signed a definitive agreement to acquire ARway, which will expand its augmented reality solutions to include metaverse solutions. ARway is a U.K.-based spatial computing company. And this acquisition of ARway gives us an augmented reality, SDK, or software development kit, providing us with spatial mapping, which is key to the metaverse. You need the spatial mapping platform. It's critical to building the metaverse. And it really rounds out NexTech's offering with what we believe is an essential building block of a complete augmented reality suite of products. We are pleased that ARway's founders, Baran and Nik, are joining NexTech's team as we integrate this important functionality into the NexTech offerings. ARway already is in market today and brings an impressive list of clients, including British Telecom, London, Guildhall, Westfield mall in London, Bosch and many others. Most importantly, ARway has already developed ecosystem. They have over 1,000 developers that develop augmented reality experiences in its metaverse platform, on its platform that uses its scanning technology. And this is without any budget or any ad spending, completely bootstrapped. With NexTech now driving its going forward growth plans, we expect to see a rapid expansion of this ecosystem and rapid ramp-up of developers and customers. The platform is currently a SaaS platform that has the potential to generate significant revenue in 2021 and beyond. When paired with our existing AR content creation tools, including Threedy.ai's product creation tools, and holoX people, holographic human creation tools, we believe that we can create tremendous value throughout our technology stack and be first to market with a metaverse studio offering. I believe that this acquisition is a major turning point for our company and for our augmented reality businesses, specifically becoming a key driver of revenue. This metaverse announcement is just the beginning. And in the coming weeks, NexTech will continue to expand on our product suite, and we will continue to announce a well-defined product and solution umbrella strategy, including what we view are the critical components of a complete augmented reality offering. Super excited about the metaverse. Let's talk about Q2, which is in the rearview mirror. So in 2020, when you look at the landscape, when we came into 2020 and 2021 even, we had huge tailwinds from our e-comm and virtual events business fueled by the pandemic and a complete lockdown of society, which was a once -- well, hopefully, once in a business lifetime opportunity. NexTech will probably never experience that again. And so with the rollout of vaccines in 2021, things have now normalized. However, we are seeing a sharp pickup again in our virtual events business because of the Delta variant. We're seeing repeat customers that are now coming back to the table and booking more virtual and hybrid events than they were prior to Delta. So there was a bit of a bump, I'd say, in demand in Q2 that's now starting to turn up in Q3 and Q4. So while Q2 2021 is a down quarter over Q1 2021, year-over-year, we are up 73%. And for the first 6 months of 2021, our revenue is up 130% over 2020, which is no small feat for a small public company. However, like all you investors, we see the stock is down. We are not satisfied with these results. We believe that Q2 will be our slowest quarter in 2021, and that it was a quarter of change for our company. We were dealing with the economic reopening and the cross currents in our events business switching from 100% virtual in 2020 to 100% reopening. In Q2, we also started the transition to a self-serve, highly scalable business model across all our businesses, which is ongoing development work that is expected to be complete in early Q4. We're in the process of turning all our platforms into scalable solutions. This means exponential growth is ahead of us. Most importantly, for shareholders, we are working on the integration of all our augmented reality solutions into 1 unified platform so that our customers can log in, get a dashboard with a selection of all our augmented reality solutions from a single log-in. WebAR for e-commerce, 3D AR ads, human holograms, all those creator tools, even the metaverse solution studio, our newest addition to the NexTech family, will be part of this 1 dashboard 1 view. This offering is a major undertaking for the company and will allow us to be a leader in the AR space. As we move forward into Q3 and Q4, we are now seeing a reacceleration in our technology services businesses. We see book deals with some notable wins, including Schneider Electric, United Nations. Recently, we announced Ryerson added another $150,000 in augmented reality lab orders. Northwell Health, a Northeastern HMO, has just come back and reordered. Kohl's has tripled down on their AR services with us. So it's a 300% increase in business from Kohl's, 100% increase in business from Kmart. So as we go into the second half of 2021, I feel we are positioned better than ever to take advantage of a multi-decade, multi-trillion-dollar megatrend in augmented reality that is just getting started. It reminds me, and it's very similar to the birth of the Internet back in 1995, nobody really understood it. You had dial-up modems, so the experience was suboptimal. But today, 25 years later, we now take the Internet for granted as we shop on Amazon, we search on Google, and we get our daily dose of news from CNN or Yahoo or wherever. It's just part of everything we do, and we take it for granted. Augmented reality will be the same way. And we are first mover with an incredibly valuable technology stack, allowing us to create mini metaverses and populate these mini metaverses with our augmented reality solutions. So just to recap, in just the first half of 2021, we've started turning our AR solutions into self-serve, low-touch, no-touch businesses that could grow exponentially. We've laid a solid foundation with the transformative acquisition of Threedy.ai for scaling content creation and Threedy products for e-commerce. And it simultaneously created a solution for scaling the creation of human holograms in AR by leveraging artificial intelligence technology to bring to market what we believe is a very valuable technology, which is human teleportation on demand. We call that holoX. All of that in 1 word is holoX. We've just acquired ARway, which puts us in the metaverse, puts us at the forefront of augmented reality technology with the ability to create 3D spatial maps and then populate it with our AR, providing an unrivaled AR solution for use of the metaverse, which we believe; which Mark Zuckerberg, the CEO of Facebook, believes; which the CEO of Microsoft believes; the CEO of Unity believes, is very, very valuable. That, of course, is the metaverse. Finally, we've signed key partnership agreements with Microsoft, Ericsson and Singtel, which expands our global reach into their customer base. With holoX, we've announced that we're integrating with HoloLens, for an AR experience like none other. Of course, the global event market, even without a pandemic, is still a $30 billion a year industry. And so LiveX is our product offering for that industry. It's our showcase platform for enterprise customers to host fully customized, large-scale events globally as hybrid events. We have live chat, live streaming. And we do have our newly launched ARoom, which our investors have patiently been waiting for. It is live, and it is launched. We have a full broadcast suite, polling, gamification and of course, a full suite of augmented reality experiences. LiveX is a platform that's being used by some of the biggest and best companies in the world, including Schneider Electric, MIT, Harvard, the UN and many, many others. Our business model has not changed as we are in the augmented reality, virtual experience business, which is the fastest-growing, highest demand technology on the market today. The imminent products and solutions umbrella strategy mentioned earlier on this call will be more well defined that will essentially lay out what we have always set out to do, which is to lead the way in AR solutions and offerings. In conclusion, NexTech is focused on its key strategic priority of maintaining financial strength and liquidity. Since inception, the company has been advancing efforts and evaluating potential acquisitions to optimize its capital structure, improve liquidity and enhance long-term shareholder value. We will continue to walk this path. And we are in discussions with multiple exciting AR companies, both large and small. In our Q2 2021 results, once again, we're reinforcing the importance of our 3 foundational pillars. We're a leader in augmented reality technology, underpinned by enabling digital transformation and growing our key verticals like education, entertainment, events, retail, medical, and marketplaces on LiveX. We are full steam ahead. I have total confidence in our plan and in our team and the direction that our company is going. With that, I'm going to turn the call over to Andrew Chan, our Chief Financial Officer, who will provide further commentary on the quarterly financials. Andrew, take it away.

Thank you, Evan, and good afternoon, everybody. As a reminder, unless otherwise stated, all figures reported on today's call are in Canadian dollars and under IFRS. As Evan mentioned earlier, total revenue in the second quarter was up 73% to $6.1 million, as strong growth for product sales, technology services and renewable software increased. Total revenue for the first half of the year was up 130% to $13.8 million. Product sales grew 43% to $4.4 million for the quarter and grew 88% to $10.4 million during which -- during the first half of 2021 due to the expanded product offerings, adding additional sales channels and increased capacity to facilitate the fulfillment of sales. Our technology services grew 632% to $1.4 million for the quarter and 1,066% to $2.7 million for the first half of 2021. As previously noted, the nature of this revenue will vary from quarter to quarter based on the number, size and timing of customer projects that are underway. We continue to be pleased with the diversity and strength of our total revenue base. Gross profit increased by 6% to $2.3 million for the quarter and increased by 41% to $5.6 million for the first 6 months. As a percentage of revenue, gross profit was 38% in Q2 compared to 61% for the same period last year. This was a result of a higher product cost and delivery cost and customer service costs associated with technology services as we cope with higher demands for our products and services during this period. Total bookings for technology services was steady at $1.7 million this quarter with $4 million for the first half of the 6 months. After deducting revenues recognized in this quarter, we had a backlog of $2.2 million as at June 30, 2021, the majority of which will be recognized as revenue before the end of the year. Operating expenses for Q2 were $8.8 million compared to $3.4 million in the prior period. The increase in operating expenses, again, was primarily due to higher head count and related compensation costs and sales and marketing, research and development and corporate expenditures as the company continues to grow and invest in its growth strategy. We had a net loss of $5.9 million compared to a loss of $2.3 million in the prior period largely due to the factors that I just mentioned. Over the past 2 quarters, we've aggressively expanded our team size, skill set and capabilities across all functions organically as well as through our acquisitions. We believe that these investments will continue to support our growth strategy. As at June 30, 2021, we had cash of $15.4 million, inventory of $4.1 million and a positive working capital of $17.6 million. We continue to operate in this unusual period with the pandemic. However, we continue to monitor and respond to the conditions as they unfold. With that, I'll turn the call back over to Evan.

Thank you, Andrew. In closing, I'd like to thank our employees, our loyal shareholders and our partners for their continued support as we remain focused on preserving and increasing the long-term value of our company. On behalf of NexTech, I would like to thank you for your support and, as always, for taking the time for joining us on this call. Operator, we are now ready for questions and answers.

[Operator Instructions] And your first question comes from Lisa Thompson from Zacks Research.

So let's just start like on the big picture of what's going on. I know that you have a lot of discretion as to how you want to treat the e-commerce business. What is the current strategy now?

So the current strategy, if you were listening, Lisa, is the metaverse.

No, no, no. One thing at a time. We'll get to that.

Yes. So the e-comm business is a business, as you know, that we've been growing since 2019. It continues to grow. And from NexTech's perspective, we continue to use it as a sandbox. We've just taken all of our augmented reality experiences that we created on those websites and converted them into much better experiences by using the Threedy.ai technology that we just acquired. So we're upgrading, updating and enhancing those sites to increase the value and increase the click-through rates.

Okay. Do you have any objective as far as whether it should be cash flow positive or whether you should just grow revenues? Or does it really matter?

Yes. I mean at this point, we're just coming out of 2020, which was a year of just hyper growth because, as you know, everything shut down. So we're kind of assessing what to do next with our e-comm business. But clearly, it's not our focus, Lisa.

Right. Right. Okay. And then on to the AR business, can you describe a little bit -- first off, is ARway closed yet or no?

I believe it's closing on the -- I think it's the 18th of August. But the definitive agreement is signed. So yes, for all practical purposes, it's a done deal.

And can you talk a little bit -- so they have an SaaS platform?

Yes.

So how do they get paid? How do they charge people for what they provide?

Well, to date, they've been charging people for usage. So you could sign up for free and then you can start dropping in spatial maps and then dropping in AR experiences. And then you pay them a monthly subscription for using their platform. But we're going to restructure the whole payment plan there because we see lots more value. And so right now, it's set up for success, but we're going to take it to the next level, Lisa.

Okay. And when you integrate all these different tools into your umbrella strategy with a single log-in, how do you charge people? Like is it all going to be standardized? Or...

No, you'll have different -- yes. So the content piece will likely be -- over time, that becomes more of a commodity, the content piece, but they'll pay for platform usage. So you'll pay a subscription fee and then you'll pay for usage, just like you do with any kind of cloud service kind of thing.

Okay. All right. That makes sense. And how far off is that to being launched?

That's in motion now. So there will be likely multiple releases, the first release in Q4. And then the second and complete release will probably be Q1 of 2022.

Okay. Sounds good. And let's -- I want to go back to just expenses. I know you took a big initiative to streamline a lot of things last quarter. I was wondering where we are as far as a baseline operating expense level.

We are aggressively pursuing controlling our expenses. And the goal is to bring the burn down to in the range of $1 million a month. So we're working very, very hard internally to bring the burn down. And ultimately, the goal is to get to cash flow positive, which that's what we're focused on. So we're in the process of executing on that as we speak.

So to just look at Q3 versus Q2, if you take whatever you spent in Q3 minus the $1.5 million gain on contingent consideration, is that the dollar amount we should look for? Or is that going to come down?

I'm going to let you take that offline with Andrew. And -- yes, you could talk to Andrew about that.

Okay. All right. Sounds good. Do you want to talk a little bit more about metaverse and how that fits in with everything? I'm still trying to understand it.

Yes. So think of the metaverse, Lisa, as being -- like you can either watch a movie, which is the current state of the augmented reality space, or you could essentially walk into a movie and have it envelop you where it's all around you. So imagine you have augmented reality experiences today where you scan a QR code and you put a product in your room and you're able to see it in your space and interact with it. Imagine you don't have to scan a QR code. Imagine you're in your room and you're able to just visualize an augmented reality experience. It's permanently there like a piece of furniture today that's in your living room. Imagine the augmented reality experience is also in your living room at a geolocation and it's always on, always present, always there. And so you could imagine in your living room, maybe it's not that as exciting. But imagine you go to museums or you go to places where it would be more exciting, even a theme park, and you have experiences that are always on. So that's kind of the metaverse in a nutshell. So we now have the technology to scan, which is the key foundational piece with ARway, create a spatial map, that's a 3D map with geolocation, pins inside that map. And then drop in an AR experience that lives in that map forever. Is that clearer? I'm trying, Lisa.

Yes. No, it is. I'm just trying to envision the core sales force and how they figure out how to sell what product to whom.

Well, I don't think it's that hard to sell because, believe it or not, we've already seen use case -- there was just this Ariana Grande metaverse concert that just happened the other day through Epic Games, I believe. And so the metaverse has already started. And so from our standpoint, if you approach enterprise account, imagine a sporting event, let's just use that as an example. You go to a Yankee Stadium or Shea Stadium if you're a New Yorker, and you walk in and there's a metaverse experience there, where you have wayfinding, where you could find your seat, and there's arrows that are literally directing you. Where there's holograms of either past players or current players that are popping into your experience as you're walking around. It's this full-on immersive world of holograms, and that's something that's, I think, pretty easy to understand. And for our sales guys, they couldn't be more excited. They want to start selling this yesterday. So I think it's actually going to be a relatively easy sale because everybody is looking for more immersive experience when they go out and about in the world today.

All right. Well, that sounds great. Okay. So my last question is, do you have any updated guidance either revenues or bookings or any way to look at 2021 and 2022?

We have not talked about 2022. We have come out and kind of revised our 2021 range 30 to -- to $35 million to $50 million, which is up over 100% from 2020. And we see 2022 as a pivotal year where our augmented reality business really starts to take off with the SaaS platform. So this year is still a year of building the technology out. And next year, we kind of see -- like in Q4 and beyond, we see the tech starting to really take off, the augmented reality of tech stack.

Okay. So just clarify, 30 to 35 -- $35 million to $50 million U.S. or Canadian?

All of our numbers are Canadian as we're -- as we report in Canadian, we're a Canadian company.

Right. Just checking. Just making sure. Because like the last thing you just bought was in U.S. dollars million, right? So...