Xtract One Technologies Inc. (XTRA) Earnings Call Transcript & Summary

Hi, everyone, and welcome to Patriot One's live year-end earnings call. This is Will Maze from RB Milestone Group. For those of you who aren't already aware, Patriot One Technologies is an emerging disruptor in the stadium and public space security industry and has developed a multi-sensor threat detection platform. The company's shares are traded on the TSX under the symbol PAT and on the OTCQX under the symbol PTOTF. Joining us today is the company's CEO and Director, Peter Evans; and CFO, Karen Hersh. Today's earnings call will include a discussion about the state of the business, fiscal year results and some of Patriot 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. [Operator Instructions] This call is being recorded today, October 20, 2022, and will be available on the company's website shortly after the call. Before we start today's call, I would like to note that all dollars are in Canadian unless otherwise specified. Today's call contains non-IFRS performance measures. These measures do not have any standardized meanings prescribed under IFRS and are, therefore, not comparable to other reporting issuers. These non-IFRS performance measures are defined within the filed Management and Discussion and Analysis. Today's call may also contain forward-looking statements that are subject to risks and uncertainties that may cause actual results, performance or developments to 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 these events anticipated by forward-looking statements will occur or if they do, what benefits would the company will obtain from them. Also some risks and uncertainties may be out of control of the company. Patriot One has a full disclaimer contained in their presentation. Today's call should be reviewed alongside the -- with the company's fiscal 2022 financial statements, management's discussion and analysis and earnings press release issued today and available on the company's website and its SEDAR profile. Lastly, RBMG is not a registered investment adviser or a broker-dealer. For more information, please visit rbmilestone.com. And now it is my pleasure to introduce Mr. Peter Evans, Chief Executive Officer of Patriot One. Peter, stage is yours.

Well, thank you, Will, and thank you to all our investors for joining us today. We're very pleased to be reporting our annual results which are indicative of the growing momentum that we are seeing for the business. Based on strong demand that we've been experiencing, particularly in our fourth quarter, we're very optimistic about the outlook for the business in fiscal 2023. I'd like to start by giving our investors an update on the business overall and some of the key milestones that we've reached throughout the past year. Later, Karen will take time to take us through our annual financial results and some key financial trends that we are seeing as a result of fiscal 2022. The company has experienced incredible growth this past year. In the past year, we have publicly announced numerous contract wins in multiple industries such as auto manufacturers, sports arenas and casinos. I'm very happy to share with all our investors that today we have signed 244% more contract value than this year or -- this year than in last year in fiscal 2021. What I'm even more excited about, though, as you saw an 837% increase in the value of the contract signed for our platform in the Platform operating segment compared to last year. By platform -- SmartGateways, the majority of these contracts were signed following the release of the SmartGateway. As many of our investors know, we designed this product with the direct feedback that we needed to hear from our sports leagues and live entertainment customers and venues. Those folks who shared with us the key features and functionalities that they needed from touchless screening technology that they had not experienced previously. Our team did that with a SmartGateway, turning around that product in record time, and we're seeing immediate results from the day we announced that and from the making of that investment. Both in -- we've seen those results both in the final quarter of fiscal 2022 and even more so in the start of fiscal 2023. This is worth repeating. With the announcement and delivery of SmartGateway, we saw an immediate uptick in orders and revenues with 66% (sic) [ 67% ] of our 2022 bookings for the platform occurring in the fourth quarter after delivery of the SmartGateway. We see this growth trend continuing and accelerating in future quarters. These customer installations represent an important milestone for Patriot One as we work to become the preferred patron screening solution in the initial target market with sports, live entertainment and other venues. In addition to providing us with this validation from the marketplace about our gateway solutions, these customers have demonstrated in real-world environments exactly how we provide exceptional security and a return on investment to all of our customers. As an example, patrons who attended this year's Citi Open tennis event, would have seen our SmartGateway in Washington, D.C., where we unobtrusively screened over 80,000 spectators and employees and athletes over a 9-day period. Having to stop and remove personal items resulting in delays is not an experience as conducive to the brand of the Citi Open or ATP Tennis overall. I'm very pleased to share that the average wait time throughout the event was less than a minute for anyone entering into venue, where previously, they typically experienced about a 2-hour wait time. This is a testament to the design intent of SmartGateway to be very flexible and aligned and be able to serve different market opportunities and different market needs and requirements. We designed the SmartGateway to be very flexible to work in very temporary environments like the Citi Open or for permanent installations, such as the Kia manufacturing plant in Georgia. In Kia, we are protecting all of the entire entrances for all visitors to that facility. The speed in the workers is much faster than we previously experienced in an environment where every minute of shift change, downtime and delay equates to up to $1 million of loss revenues. This is part of our ongoing commitment to private fans, patrons, businesses, their employees and others with world-class safety and security wherever those people gather. In a similar manner, we are excited to be working with the SAP Center and the Tech CU Arena out in San Jose. This is the respective homes of San Jose Sharks and San Jose Barracuda. And they also host many other live entertainment events throughout the year. The deployment of San Jose Sharks is particularly exciting to me and a major milestone for us as a company. We're very proud to be the first advanced technology screening provider to be selected and announced in an NHL arena. We've had the pleasure of working with the entire team at SAP throughout our journey with them and throughout with the San Jose Sharks in the past year as they embedded our technology alongside competitive products. Our product can prove to be exactly what they needed to provide both a safe as well as elevated experience not only for the staff, but also for the spectators themselves. The experience in San Jose is a testament to all the work that we've done in developing the SmartGateway in response to the market's needs specifically. We believe personally and as a company, that this win represents the first of many venues that host professional sports teams. We look forward to continuing our work with these professional leagues, those teams and the arenas and other stadiums to enhance venue security overall and improve and drastically change the experience for their patrons. We're also very happy to be working with the Oak View Group. This organization owns and manages several hundred over 350 venues globally, including venues like Climate Pledge Arena, all with the NHL Seattle Kraken, UBS Arena, home of the Islanders and multiple other venues such as the Moody Center in Austin, Texas. Oak View Also manages and owns various casinos, convention centers, theaters, arenas and stadiums globally, such as the Central Bank Center in Kentucky and many others that they manage as part of their OVG360 organization. Places like the Mayo Civic Center in Minnesota, Total Mortgage Arena in Bridgeport, Connecticut. And in Hamilton, for those of you who are Canadians on the call, in Hamilton, the FirstOntario Centre. A couple of weeks ago, we were thrilled to announce a major strategic partnership with this organization to enable Oak View Group, otherwise known as any OVG, any OVG owned and operated properties to utilize Patriot One's patron screening solution in a very streamlined manner. This was a culmination of many, many months of work, including multiple rigorous tests and validation of the technology with OVG security professionals and numerous red team events that will run by Prevent Advisers at OVG venues and events such as the NBA All-Star event that occurred earlier here in Cleveland. Prevent Advisors is a subsidiary of OVG that works with the NBA, Major League Baseball NHL and other supporting organizations to validate technology and best practices for security and assist those venues to build and maintain safe and secure facilities. Their endorsement of us is a major milestone that I'm very proud of. The partnership with OVG will significantly streamline and simplify the buying process with standard terms and conditions for purchase and provide all videos under the OVG umbrella with access to our technology that has been rigorously tested and preapproved by Oak View Group for using those venues. In essence, this will streamline the acquisition process by all venues with the solution that's already been tested, already been proven, already been validated and already together with a standard and improved agreement template and make it very easy for them to purchase versus having to go through that rigorous process themselves individually. We're very confident that this partnership will become a strong catalyst for many new deals with many other Oak View venues. The partnership has already enabled us to deploy in several places that OVG owns or manages on behalf of others, including places like Rupp Arena, the Moody Center, the Lexington Opera House and then recently announced Angel of the Winds Arena in Everett, Washington. This is the home of the Western Hockey League, Everett Silvertips. We're engaged with multiple other locations as a result of this announcement, and all the venue managers had the opportunity to experience the SmartGateway in Austin at the VenuesNow event. We continue to work daily with OVG and many other of the 400-plus venues that they manage to help them provide their patrons with all of the benefits of safe, fast and frictionless entry. With these wins from the last fiscal year. And so far, from what we've seen in the first quarter of fiscal 2023, it's evident to me that the incredible demand that exists for our platform products and the most importantly, the trajectory that we're on now, we have yet to begin to tap into the total addressable market for our product and accordingly, I see a huge future growth potential for the business. I also see evidence of this in the size of our sales pipeline, which is more than quadrupled since last year, and we continue to see it growing by about $2 million every month. As we continue to work with customers through the sales cycle and we continue to see the incredible growth in our sales pipeline, which was about $63 million when we last reported in July. Over the past few quarters, we've significantly increased our customer engagements by attending very focused activities such as conferences, league events such as the NBA All-Star game that I mentioned earlier and visiting prospective customers on their premises. These events have allowed us to demonstrate the capabilities of our products and help customers experience the product in their own environment and then help them to design their own circuitry operations. Through these engagements, we create these aha moments for those buying decision makers. As a simple example, the San Jose Sharks organization tested our SmartGateway first at several concerts out their venue 2 years ago. The team that SAP was able to witness the benefits -- all of the executive team is able to witness the benefits. And they started the journey together, which began the process to work through items like risk management, any insurance programs, security operations designs and these sorts of things to allow them to adopt us with company. I mentioned during the last earnings call, there were a few projected deals that we expected to close in Q3 slipped over to Q4. I'm very pleased to confirm that these deals have closed, and our total backlog of signed agreements and signed contracts at the end of the year is $4.1 million. I also want to make clear that this value does not include those contracts that we've announced so far in fiscal 2023. Looking at the increase in the customer engagement backlog, the pipeline and these sorts of metrics that we track all the time. I'm very proud of how clarified we've come in the last year. My outlook for fiscal 2023 is incredibly positive due to all the groundwork that we've laid for the last 18 months and the trajectory that we've experienced in the past quarter and as we start to move into 2023. I look forward to what's to come. I really can't wait to share a lot more of these wins with our investors. At this point, I'm going to turn it over to Karen, who can take you through the details of our financial results for 2022.

Thanks, Peter, and hello, everyone. I'm pleased to join you all today and to report our year-end financial results for the company as well as outline some of the financial highlights and the key milestones that we hit during the year. This past fiscal year has been a record year in terms of revenue growth. We ended the year with $3.6 million of revenue, which is 235% higher than the $1.1 million of revenue recognized last year. Moreover, from our Platform operating segment has increased by 582% compared to last year. This is a testament to the increased and focused sales and marketing efforts that our team has undertaken along with the completion of third-party validation and testing of our products, including the operational exercise performed by NCS4 and FBS countermeasures, both of which were completed during the year. We also continue to work with the Department of Homeland Security to become an improved technology under the Safety Act and expect that this will help shorten our sales cycle for certain customers. But most importantly, we see this increase in revenue as a validation of our SmartGateway solution for not only our target market of stadiums, arenas and live entertainment venues, but also for adjacent markets such as manufacturing, distribution and health care facilities. In fact, almost half of our qualified sales pipeline is from opportunities outside of our original target market. Considering the growth in our backlog, the number of signed agreements along with the strong interest in the market for our products, as evidenced by the growth in our sales pipeline that Peter referred to earlier, we expect that our platform revenue will continue to increase in fiscal 2023 and as the proportion of revenue generated from this operating segment relevant to total revenue will also increase. We have continued to build the company's backlog of sales commitments, which at year-end totaled just over $2.2 million with an additional $1.9 million pending installation of successful trials. This contractual backlog represents revenue that will be recognized in future periods as we fulfill our obligations over the duration of underlying contracts. While our total contractual backlog balance did not significantly change from last year, the composition of the backlog between platform and extract contracts did. At the end of fiscal 2022, almost [ 60% ] of our contractual backlog was from platform agreements compared to 51% in the prior year. In addition to gaining a multitude of new customers in a number of different markets ranging from stadiums and arenas to casinos to manufacturing plants, we're also seeing follow-on orders from existing customers asking to expand their use of our products with either additional lanes in existing facilities or to further their expansion into other locations. With all the positive feedback we've received from customers in the recent months, we expect several more expansion deployments to take place in 2023 and beyond. The value of our contractual backlog continues to be one of the most important measures of the company's performance. As we sign long-term subscription contracts, revenue is recognized over the term of the contract and will initially sit in our backlog. Today, between 60% to 70% of our platform contracts are done through subscription arrangements. Our revenue and backlog figures in fiscal 2022 reflected some delays in installations due to certain supply chain constraints and other delays during the latter part of the year that have subsequently been resolved. As a result, certain opportunities that we expected to be closed in the year have slipped into fiscal 2023. Subsequent to the year-end, we since announced a number of these contracts, as Peter mentioned before, SAP Center, Tech CU Arena and Angel of the Winds. Based on the activity that we've seen in the last few months and the recent announced partnership with the Oak View Group, we expect revenue to continue to grow at an accelerated rate in the upcoming quarters. Looking at our expenses now. Through fiscal 2022, we continue to be mindful of our operating expenses, which overall have declined dramatically from prior periods. We continue to look for opportunities to reduce nonstrategic expenses and best in short-term and near-term revenue-generating activities. As Peter and I have already stated, the company remains focused on top line growth and continues to invest in targeted sales and marketing activities to drive revenue for the business. Accordingly, sales and marketing expenses were $2 million for the year, which is a 34% increase over last year. This increase relates to the company's intensified sales efforts as we work to capitalize on the existing market activity and demand for touchless patron screening solutions. We expect sales and marketing expenses will remain steady or increase slightly as sales activity continues to grow in the upcoming periods. Research and development costs, which is presented net of grants in our financial statements, were $4.5 million for fiscal 2022, representing an increase of 62% compared to last year. But I think we have to look deeper than that and look at the grant money -- the R&D expenses before grant funding, which actually declined by 5% relative to 2021. And -- the decrease is primarily attributed to the completion of supercluster projects and other related spending that we did in the early months of 2022. The company continues to invest in very focused R&D activities as we refine, improve and expand our platform solutions based on our technology road map and the feedback that we receive from customers. Loss and comprehensive loss was $39.7 million for the year, which is 140% higher than our $16.6 million loss in fiscal 2021. However, our loss for fiscal 2022 included $25.6 million relating to noncash write-down of our goodwill. This write-down reflects market-wide changes in the cost of debt and general changes in the risks associated with small cap companies when uncertainties exist in the broader market. It's not an indication of significant changes in our expected future performance or growth. Further, we do not believe that this noncash accounting transaction is something that will be repeated in future years. Excluding this onetime noncash transaction, adjusted loss and comprehensive loss, which is a non-IFRS performance measure was $14.1 million. The decrease in this adjusted -- this -- the decrease in this adjusted loss compared to last year's $16.6 million is primarily due to an increase in revenue year-over-year, partially offset by reduced non-diluted funding received in fiscal 2022. Finally, basic and diluted loss per share was $0.26 for the year compared to $0.11 at the end of last year. If we exclude the onetime noncash write-down of goodwill, the adjusted basic and diluted loss per share was $0.09, which is an improvement of 18% compared to last year. Turning to our cash flow. During the year, the company had a negative cash flow of $3.4 million compared to negative cash flow of $12.8 million last year. The cash flow used in operating activities was $9.3 million for the year, which was 21% lower than the $11.7 million cash flow in fiscal 2021. We will continue to manage our cash judiciously in future quarters. In March 2022, we also raised $6.9 million of gross proceeds with the completion of a public offering, providing further capital in support of the company's operations and to drive growth in our backlog of sales and commitments. Excluding the company's financing activities, the company actually reduced its cash burn by 23% relative to fiscal 2021. As the company continues to sign contracts and deploy products at each customer site, we expect that the company's cash burn will continue to improve and subject to decisions to further invest in our expansion plans, which may result in periods of increased rates of cash use. In summary, we're very pleased with the traction that we've made this year, and we're just getting started. We're still early in our commercialization efforts and our focus on customer engagement, providing exceptional customer service and building a solid backlog of sales commitments. And with that, Peter and I are pleased to answer any questions that investors may have.

Thanks, Peter and Karen. And we've received a number of questions from investors while you were speaking. Let's try and answer as many of these as we can in the remainder of the time we have. The first question that has come in relates to Patriot One's customer mix. The question is, I would like to know more information about the breakdown of Patriot One's existing contracts between various customer segments. Also, do you anticipate that the customer mix will change in the next 12 to 24 months? Peter, I think you're on mute.

Thank you for that, Will. That's a great question to start off with. I appreciate -- I appreciate you letting me know I'm on mute. While we talked about this on many investor calls before, our primary target when we first decided to go down the path of SmartGateway and get very hyper focused was to chase after arenas, stadiums and similar live entertainment venues. We do have a number of customers, most of which would follow into 4 segments. The first of which is both sports, live entertainment arenas, stadiums, et cetera. The second is casinos. The third are manufacturing and distribution organizations and the fourth, let's generally call it, government, education and health care, right, which have very similar kind of buying characteristics. Sports and entertainment makes up about half of our customers at present, and it's approximately half of our sales pipeline also. And as Karen mentioned, most of our outbound marketing is geared and targeted towards those companies who operate in those kinds of venues. This is where SmartGateway has become a perfect fit, right? And again, designed by the customers and built for those customers. However, having said that, we have inbound requests from others in other segments, the other 3 that I mentioned, right? So we don't -- we expect our primary market is going to stay very hardened and very focused and probably the bulk of our business will be around sports and entertainment venues. But we are seeing about 50% of our pipeline from these 3 other segments. We've had incredible success with us, particularly within the manufacturing and distribution segment, where the customers I mentioned earlier with Kia, where their return on investment is a unique selling point to them, every minute of downtime or shift change has significant impact and revenue impact for them. So this is a unique selling point for our technology. In recent months, we've engaged with a number of companies in this segment, and we expect a larger proportion of our sales to actually come from these customers and to see that steadily increase over time.

Along the same lines, Peter. The next question is, I hear Patriot One talk about the size of the pipeline? And how much it has grown over the last 12 to 18 months? And while it's helpful for this information in order to understand the relative demand for Patriot One's products. It does not adequately help investors understand future sales. Can you share information around Patriot One's win rate as well as the typical length of the sales cycle?

Well, again, a great question as people start to model out our business. Unfortunately, it's not a simple question to answer, right? Or they expect us -- investor was kind of hoping for in the nature of that question. The reality is that the win rate which we think of as a proportion of opportunities that were won, actually compared to those that are still in the pipeline are not won, it was running about 20% in fiscal 2022. Of those that didn't close, the other 80%, some of them lost the competition, but the bulk of them just really had no decision. The customer has not moved through to a decent-making cycle or they parked it for a period of time, right? So the customers decide to wait. What really is kind of more promising and more interesting to me though is as we've introduced our SmartGateway, we've seen our win rate increase, right, from that 20% which was kind of the bulk in 2022. To the last fiscal quarter of the year, it changed and it's much more like about 35% or so. And I don't expect this to change. I attribute this change to the release of SmartGateway, which, again, was designed and based on direct customer feedback. And so it's got that perfect line fit to them. I expect this trend for the increased close rate, win rate to remain and we'll probably continue to improve over time as we get more and more months and quarters of experience behind us. In terms of the other part of the question, I'm sorry, Will, I forgot you asked the second part, the sales cycle, right? Again, this truly depends also for a first-time buyer, the sales cycle can range from a few months or in some cases, over a year. This would be the case with over a year for much larger organizations who particularly have a very stringent security mandates, right? They've got to be a high standard of security, and they've got the experience. Think of it like a professional sports team or an organization like that. We have some customers who bought from us in a second time within months because they've already done their first deployment has already been very successful, and they're expanding their business. So they don't have to go through all the trials and demonstrations and security operations, design work that they had in the first iteration, right? So when we talk about the pipeline, I think how quickly the sales cycle could be. And we talked about a sales qualified pipeline of $63 million, right? That pipeline, the good news is it's quadrupled over the last 12 months, so that's good, right? I think this information is that it's going to be indicative of kind of future revenue growth and what we expect to see in terms of that close rate against that pipeline in the next 9 to 12 months. That's not going to all convert over in a month, but over the course of the year, we expect that to convert all.

Great. Well, the next question relates to the company's marketing program. The question is, can you share Patriot One strategy around marketing? I don't see advertisement on television or buses or other public places. How are you getting the word out?

It's a great question. And for those who know me well know that I love marketing. I've been the CMO of 4 publicly traded companies, including companies like Dell. So I love the marketing aspects and trying to get the highest efficacy out of the dollars we spend. It's first most important to understand who do you sell to in terms of getting the most bang for your buck out of marketing dollars. Our technology is sold to businesses with the key stakeholders in the decision being like people like the business owner, those who are involved in security and operations, chief operating officers, chief security officers. And additionally, those people who track things like the guest experience. okay? So those are the key personas we're going after in a business-to-business relationship, we have to keep them in mind. As a startup company, you've got a limited number of dollars you can spend on marketing. It isn't an endless pool. So we have to use every dollar very, very judiciously in a targeted manner to make sure those people who are the buyers are the ones who are seeing your story. Business-to-business marketing is very different than business-to-consumer market. Business consumer market is often very expensive with TV ads, wrapping buses, I can't remember everything else, the person have billboards, advertising and newspapers, radio ads, things like that, advertising in airports. And you're competing when you try and do that amongst all the other noise and clutter of all the other B2C advertisers hoping that the right person at the right time might happen to be standing on the street corner when the bus goes by, right? Low probability, very expensive, right? And very ineffective unless you've got a lot of dollars to invest, highly effective B2B marketing starts with understanding who your buyer is and where do they go for trusted insights and information and guidance, right? For example, where does the Chief -- the typical chief security officer go. If he's of a sports arena, sports venue and auto manufacturer, know where they go and where do they go for trusted insights and advice to solve their problems. Do they go to trade shows? Do they go to tech publications? What do they read? Do they participate in best practices at farms with their peers, right? And then what you do is you target those spaces where they go, so they hear your message in a very effective manner. That's the best way to get the maximum value for the lease spend, right, which is what we're trying to do as a company. A very simple example. We attended the VenuesNow Conference, which was attended by 1,000 key decision makers. I was riding up and down the elevator with the owner of one of the hockey teams, right, as he went to his room from the gym, right? All the right people who wanted to talk were there. The cost of us attending the VenuesNow Conference was less than the cost of wrapping 2 buses for a week, right? So it's a very judicious spend. Not all investors may experience that spend because they're not experiencing the things the CSOs are doing are going to those places where the CSOs are.

We've had a few questions come in pertaining to future growth outlook. For example, this question is, with the terrible events that continue to occur all throughout the United States, I would be expecting strong demand for Patriot One. What do you expect that growth to look like? And how do you plan to scale and manage that growth?

It's a good question. We get this question very often. And unfortunately, we do live in a world where threats are growing. And we don't see this changing. We don't see this changing any way at all. Our solution -- the good news is our solution is somewhat immune to the ups and downs of the market. For example, we're in a recession right now. During times of recession, there's more crime, right? And as a result of more crime, more people are looking for more security solutions, right? During up markets, right when the market is doing very, very well. The stock market is doing very, very well. Businesses are doing very, very well. That's the time when they invest in innovation to propel their business forward. So we're somewhat immune to that. So I think we do well in good times and bad times, right? We believe the overall the market for touchless security screening is expansive and it's growing because the security problem will not go away. All of the market data suggest to us that we are playing in a several billion-dollar market, right? And that's not going to go away. And they're industry analysts who we track who tell us that they estimate the global security marketplace is going to grow to about $230 billion by about 2030, right? And that's about a CAGR of 12.9% or so according to those industry analysts. In terms of the market demand and specific market demand for our solutions, my observation is that customer interest and demand is only ramping more and more and more every day. And particularly in the last couple of quarters, we've seen a change in the tone in our customers. For the segments that we were not targeting, we would get 2 or 3 inbound calls a month asking about our solution, and they were tire kickers, right? What we're seeing now is 2 or 3 inbound calls a day as is this accelerated demand and the tone and the interest has changed. This has moved from tire kickers who're exploring solutions to those who have a budget and are doing -- they told us we are going to do something in the next couple of months. So the market demand has changed and the tone of the market demand has changed. And so most people are thinking about either I need to shift from traditional metal detectors to a solution like ours or I need to consider a solution for -- for the first time in the right play. So I expect the demand to continue growing right? And to scale that demand, we will judiciously invest in the business at the right time in the right way against certain milestones that we've measured that says we've hit this milestone, now is the time to add more of this capacity, more of this people, more of the staff, okay?