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

Good afternoon, folks, and welcome, everyone, to this webinar today. We want to talk a little bit about our latest announcement, the Xtract One Gateway. I'm Peter Evans, the CEO of Xtract One, and I could not be more proud to be spending this time today and talking about some of the new innovations to the marketplace. So everyone, welcome to the world of the Xtract One Gateway, a new form of noninvasive weapon screening technology that's found its place in the marketplace already. We've introduced this new product to the world and the expansion of our portfolio earlier this week at the GSX show, and we're going to talk a little bit about some of the positive results we've already seen as a result of that reveal at the GSX show. Moving to the next chart here. We want to talk a little bit first about who we are at Xtract One and why the One Gateway. As a company, we've always been focused on security first, whether it was with the SafeGateway, the SmartGateway or now the One Gateway, our focus has always been on let's detect the broadest set of weapons possible, and have that validated by third parties like the TSA and the FAA and the [ NPSA ] and others, letting those third parties put their hands on the technology and actually validate it does what it says it's going to do. So we've always started with security first, and then say, now let's focus on improving the AI algorithm so we can get better and better and better ingress speeds, lower and lower and lower false alert rates and more and more efficacy in the solution. The second approach that we're always focused on and we're very proud of is this idea of being a customer-back and not a product-forward approach to the business. Listening to our customers and how they define their problems and needs and creating solutions that actually fit those needs, as opposed to forcing the customers to do unnatural acrobatics in their con ops to work around the shortcomings of technology. And through this, because we are very comfortable with the third-party validations, we're very big on a form of transparency and innovation to lead the industry. With this in mind, what you're seeing today is the next major milestone in our history, in our journey and our customers' journey to provide a highly effective, noninvasive weapon screening solution. The One Gateway has already been deployed in a limited manner in a number of customer environments. We have one Fortune 100 customer who's had the One Gateway in the main lobby of their building for over 4 months now, with thousands of their employees walking through it every day. This has benefited us significantly because it's added a lot of data to our AI models to ensure that we're delivering on the promise that we're giving to those customers. But it's also validated that 1,000 employees every single day to walk through with backpacks, laptops, tablets, 3-ring binders, eyeglass cases and not alert, while at the same time, still detecting the weapons that could be on those individuals. We'll talk more about that in a little bit more. We continue to fine-tune our models to be able to deliver this business and deliver this value proposition to the customers. Let's talk a little bit about the history of how we got here and why the One Gateway and the state of the art of the industry today. If we look at the next set of charts here, we'll talk a little bit about the background. All technologies, the old walk-through metal detectors, our technologies, some of our competitors' technologies, they all work on the same basic approach to physics and the same idea of electromagnetic interference. This was actually a technique that was invented or discovered by Alexander Graham Bell back in 1881 when he was working on the telephone. And he noticed that metal objects that passed by a coil of wire giving off a magnetic field actually caused a disruption in that field. Fast forward to the [ data ] solutions, they all work at that same basic principle. The key differences are the architectural design choices made by companies like Xtract One that have given us the ability to have the highest efficacy in terms of detecting weapons at a very, very low false positive rate. The limitations, though, of this electromagnetic interference technology are prevalent when you start to look at the change in environments in the marketplaces that are looking for solutions or lightly cluttering environments or better said, for environments where the number of personal items on a person are minimal. There a [ light ] amount of things, cell phone, watch, wallet, keys, right? These technologies have done a good job of advancing the art of weapon screening versus, say, the old walk-through metal detectors. However, when you start to move into different segments, we've got much more personal items on an individual, laptops, binders, Hydroflask bottles, these sorts of things. All these systems generally fail. They've just too much metal there to accurately detect weapons while having a low or tolerable false positive rate. It's the state-of-the-art of the physics, there's nothing unique about that. And so in low-volume personal belonging environments, these solutions work very well. The challenge is when we get into those environments where you have a much higher number or a much higher volume of personal items. We have significantly -- looked at significantly enhancing the [ patron ] experience when you start to get to these medium clutter environments or medium volume environments. Let's move to the next chart to talk a little bit about that. As we started to see more and more demand from schools, from convention centers, from commercial offices where the average individual is walking in with a medium volume set of capabilities or products on them, laptops, chargers, these sorts of things. We ran into what people would affectionately call the laptop problem. And as one school superintendent told me when we were doing a demonstration [ point ] in one day, they look to me and said, "If you can solve the laptop problem, where 100% of the laptops alert on this kind of solution, not only will we be deploying you in all of our schools, but I'm personally probably going to buy stocks in your company." That, to me, is a really nice commentary because it also reflects back what we talked about earlier, our customer-back approach, delivering solutions that the customers want and that they see as highly valuable, not only for them, but for the rest of the marketplace. So to solve the laptop problem or solve this problem of doing highly accurate weapons detection in these medium volume environment is a challenge. Most companies who have looked at this or most customers have looked at this by taking some different approaches to kind of work around the shortcomings of the technology. In some cases, they will lower the sensitivity. This introduces risk that a weapon can actually get through because you're not detecting those anymore. They're separating the laptops or separating the bags from the individual, which -- most people don't like being separated from their personal items, but this also slows down entry and introduces more issues with operations, more staffing, lower throughput, delays while bags are being checked while the individual is still trying to have the fast, frictionless experience. We've had some scenarios where people are holding laptops above their heads, which then informs individuals how to actually get a weapon into the venue. Let's hit the next chart, where we'll see some of these kinds of examples. As we kind of walk through some of these flashes, you see 2 hour lines at schools where children are supposed to be walking through systems to protect them. And yet they're not being educated and welcomed to the environment or you see things like children holding items above their head. You'll see people carrying their bags, their backpacks in the middle of their body, in the front of their body because that's not alerting, but it's also not alerting on the weapons [ they have ] in those bags in the middle of the body because of the lack of sensitivity in those locations. We also see scenarios where you've got people completely bypassing these sorts of solutions. These, to me, are a challenge because this is a failure of technology to address a business problem. We also see some approaches where instead of having the technology do what it's supposed to do, we're actually bolting X-ray machines beside the weapons detection solution, which ultimately defeats the point of the weapons detection solution. In fact, those X-ray machines can cause those weapon detection solutions to fail due to the interference with the magnetic signals. One organization that we've worked with has told us in one case, they actually had to spend about $250,000 building a whole new vestibule just to be able to house the solutions in order to solve this problem because of the shortcomings of some of these competitive technologies. All of these approaches are unnecessary. They create unnecessary delays, unnecessary avoidance, unnecessary staffing and most importantly, they introduce risk to the business or the school or the convention center when people are asked to take on excessive processes to address the shortcomings of technology. The science and the physics of all of these technologies are such that when you get to a medium or heavy volume environment, you will have these sorts of challenges. So as we think this through just a little bit more, and we think through these unnatural behavior and acts that we had to have people go though, they're not conducive to how the real world works. We started looking at technology's the answer to solve this problem, right? Let's not let technology create more problems, but let's let technology create answers to these sorts of solutions for our customers. And as such, as weapons detection systems move beyond arenas and stadiums and into places where more and more people are mandating screening such as convention centers, such as schools, such as hospitals, such as potentially casinos, which are looking to have a fantastic experience where people are walking in with their luggage. The answer here is to solve, again, the laptop problem, as it's been affectionately called, or the medium volume problem. What is required here is innovation. And what I'd like to do is talk to you a little bit more about what we've done with the One Gateway that we announced last week and revealed earlier this week. Let's move to the next chart, please. The Xtract One One Gateway is a purpose-built solution to deal with those medium volume environments. It's based on new innovation in sensor technology and AI software technology that will allow the solution to detect guns, knives and other concerns of mass casualty as well as not alerting on items like laptops and 3-ring binders. Our focus is on innovation. Innovation in the same way that we see people like Apple delivering the Apple 16 phone and completely reinventing that marketplace yet again. Innovation in the same way that NVIDIA turned upside down the entire chip industry against stalwarts who have been around for a long time, such as Intel. Innovation in the same way that Tesla completely reinvented the car marketplace, and now has all the other car manufacturers following them in how to set a standard for electronic vehicles. [indiscernible] innovation work and having to bolt 2 or 3 machines together to solve 1 problem. Let's move on and show you what the Xtract One One Gateway looks like. The system, as we can see here, is very lightweight, very portable solution that can be moved around within a venue and delivered in a venue. It has a lot of flexibility in its componentry, whether it's the lighted strips that show exactly where the weapon is on pass or fail for individuals going through as well as removable tablets that can place on front, the back, the left, the right in the hands of the security individual regardless of where they want to operate. We've ensured that when we deliver this solution, it's got the maximum flexibility so it fits into the current venue operations as opposed to the venue operations having to work around the shortcomings of the technologies and find space for multiple pieces of technology. We started our journey to deliver the One Gateway to do 2 things: to not alert on laptops, and to effectively detect weapons at a very high level. We had a happy surprise in this process. In developing these next-generation sensors as well as the AI that go along with this, we found out that we can actually do object classification. So as somebody walks through the system, the system will be able to detect, this is a gun, and alert. This is a gun that went through or this is a knife, and alert that this was a knife that went through. Well this is a laptop, and alert that, that's a laptop that goes through. This has allowed us to engage the customers not only to deal with the medium volume environment, but also to think about new applications that we are hearing are prevalent in the industry. As an example, in very large distribution centers, theft is an issue. So now we can support those distribution centers by effectively alerting [ are ] weapons on the way in, but also alerting a [ lot ] on electronics on the way out. And the promise of what we've delivered here to those customers is that instead of having to think about sensitivity levels, they can start thinking about a policy that -- where I can set, by the way in the door, I would like to alert on guns and knives. On the way out of the door, I want to alert on people who have ear buds, cell phones, laptops and potential other stolen goods. This completely changes the dynamic when you think about theft of intellectual property, theft in retail environments, theft in distribution centers, theft in commercial properties. And as we start to think through more and more applications, we're very pleased that all of the customers who have seen the technology this week at GSX, at the reveal event where we had over 100-plus people or throughout the week where we've had probably 100 to 250 companies come in and walk through the system and test and validate that it indeed does what we're talking about today. The Xtract One Gateway is built on a revolutionary approach that we think is going to fundamentally change the industry. Let's move to the next chart, if we can, please. So recapping a little bit about the uniqueness of the things that we're most proud of with the Xtract One Gateway. First off is object identification, the ability to specifically highlight which objects went through the platform. Secondly, the ability to not alert on medium volume of clutter and doing that all within a singular platform. Third, the ability to have bidirectional learning at different levels depending on what you're specifically trying to do as a business. And fourth, a very, very flexible platform. There's [ IP65-rated ] that has the flexibility to be indoors, outdoors and adjust to the specific con ops of the venue's environment, whether you have a small lobby, a large outdoor space or a very large manufacturing facility. We also built this product in a manner that it's got a learning mode to it, and we can do more and more with customers as they tell us about those unique things that they wish to do object identification on as people walk into or out of a venue. Effectively, what we believe is we've delivered something that is significantly more valuable than the current solutions on the marketplace, and overcomes many of the shortcomings of all solutions in the marketplace. With that in mind, what I want to do is kind of move quickly because of questions and some feedback that we've heard from some customers. The feedback we've heard first off from customers who have been beta testing this, as I mentioned, a large Fortune 100 company, other organizations who have had this in their headquarters office locations, some schools and others who have participated in our journey over the last year or so as we brought this product to market. First off, one organization said, "In the short period of time that we had your solution with the thousands of employees coming in, we avoided 20,000 bag searches that we otherwise would have had to do, which is highly significant value when you're trying to get people into the office to work." We've had other folks tell us that they had tested out our SmartGateway. They loved it. They were deploying it everywhere. We put in a [ One ] One Gateway for a day, and they were ecstatic about. We've had other customers that have come to us and very specifically said, "There are places where the SmartGateway is a perfect fit and the One Gateway is a great fit too." One of the questions we had was very specifically on that idea. "Is there a place for both a SmartGateway and the One Gateway? Does the One Gateway replace the SmartGateway?" And answer is emphatically no. The SmartGateway was purpose built by customers for customers through their feedback, particularly for the arena and stadium environments, live environment, and we've got broad deployments in places like Kia in West Point, Georgia, that absolutely love the platform and it fits very, very well for their business and specific needs, and we continue to sell SmartGateways today, and we've got a backlog of orders for more SmartGateways tomorrow. We also have customers like the one large Fortune 100 company who specifically said to us, "I would need this many SmartGateways in this location and this many One Gateways in this location because each has a unique set of capabilities to deal with different environments very, very well." So both products complement each other, but have unique capabilities to serve different market segments uniquely and differently. Moving forward just a little bit to some of the other questions. Someone asked very specifically, "Who is One Gateway for?" One Gateway is for those convention centers, those schools, those workplaces, where the amount of personal items carried by an individual -- but some people have termed as clutter, but I think it more -- these are your personal items, let's not negatively call them clutter, where you're carrying your laptops, your chargers, your tablets, your cell phone, your Hydroflask bottle, your keys, your eyeglass cases, everything. We did demonstrations all day yesterday and on Monday, where people will walk in through with backpacks, with 2, 3 laptops, tablets, binders and all these things, and not alerting. It was fabulous to watch, and I'm very pleased with the innovation our team has delivered, and that is the product that will suit those kinds of market segments very, very well. It's the only market product on the marketplace to actually deliver this value. Some people have said, "Is this just a software download to the SmartGateway to get this capability?" And the answer is no. There are a whole new set of sensors that are built into this, that is purpose-built for this specific requirement. And so those sensors have to change. That's a -- there's a hardware change. But as I said previously, there is a place for the SmartGateway that is very well suited, and there's a place for the One Gateway that is very, very well suited. Someone asked a question, "How many items can be in a backpack, in a bag?" We've had some backpacks and bags going through with 2 laptops, tablets and again, all the other items I've mentioned. Again, in the past 100 days or so, plus 100 days plus at this one headquarters location where approximately 2,000 to 2,200 people were walking through the system every single day, they all just walked in with what they would normally walk into work every day. It wasn't tested for one set of criteria. It was tested on thousands of people and their unique personal items that they reach carrying into work. And we're very pleased to say that the alert rates were very, very low and significantly lower than we would have experienced had they used a walk-through metal detector, as an example. We still do have an alert rate because we're still tuning the AI models. But every month, that alert rate is going down significantly to the point where it's significantly lower than what we're seeing in the marketplace today with current solutions. Another question that came in was, "What is the estimated market size for the system?" Well, doing some back-of-the-envelope math, it is about 130,000 K-12 schools in North America alone, in U.S. alone. There's about 5.9 commercial office -- [ 5.9 ] million commercial office buildings in the U.S.A., not all of them would need a solution like ours, but for arguments sake, let's say there's 1 million commercial office buildings, bank headquarters, other headquarters of other organizations. There's over 250 convention centers in the U.S.A. also, and they're more similar to an arena, where they're typically going to deploy some of between 10 and 20 systems. So when you think about it, the market is very, very large. And the back of the envelope math I did on this was it's in excess of about a $30 billion marketplace for this specific solution to deal with medium volume personal items. The next question that we came in was, "When will it begin to be installed? And do you already have customers?" And the answer is yes. We're currently going through the certification process, which are necessary to deploy any solution, validating it for things like UL certification, CE certifications, medical certifications to ensure that we're not going to affect things like pacemakers negatively. And we have to complete all those certifications before we can actually start shipping. It's the law. We expect that to complete in the very early part of next year in sort of the mid of Q1 time frame. And we already have a backlog of orders from our customers who've seen the product, they've either flown to our offices in Toronto or who have actually had the product in their office and they said, "I want to be the first one on the manufacturing line to get the first units coming out the door." So we're very pleased that we're continuing to build the backlog. And even as recent at the GSX conference where some various significant folks as well as various school systems and others saw the system, those are now converting over to discussions about their deployment time frames for the One Gateway. The final question I have here is, "Isn't the naming of a stand-alone hardware [indiscernible] like gateway, a little bit of an oxymoron [indiscernible] counter intuitive?" That's true. I tend to call it the One Gateway, with the concept being that this is the One Gateway solution, one system, one device, one solution to address multiple needs. Not a scenario where I have to have one device per scanning bags like an extra machine, another device for scanning people, another device with cameras for [indiscernible]. We can do it all with the system, and so we tend to think as the one system that addresses multiple needs for customers. I, therefore, euphemistically call it the One Gateway or the Xtract One Gateway. Ultimately, I like that much more because it's positioning things as the one solution as opposed to being a sales individual walking to a customer and saying, "Hi, I've got two things to go solve your one problem." That's really not an advantageous position. It also is kind of counterintuitive from a competitive standpoint. We had some other questions about how do we see some of the other products in marketplace. I guess my answer to that very simply is, why would I buy two products with twice the footprint, with twice the security staff, with twice the operational complexity, when I can do it all with one? There's another question that came out about clarify the statements on the ability catch as casualty weapons. Well, for those who are following us, our focus has always been on the most effective solution to deliver the broadest set of weapons, and we aren't going to stop that. We're also very transparent in the approach that we're always going to make sure we tell you exactly what we can do and exactly what we can't do. Today, we continue to refine the AI algorithms, and we will not claim success until such time the third parties have validated that indeed, we do everything we do. So you don't have to rely on our marketing, you don't have to rely in our salespeople, rely in those third parties. Today, we've got it verified and tested against all firearms and we've got it tested against knives, down to about a 4-inch level. We're currently working on that third-party verification and the AI algorithms to ensure that we can catch the broadest set of much smaller knives as we do with SmartGateway. We're highly confident that we will have this done because we did it with a SmartGateway, and we actually are gathering about 5x more data with the One Gateway than we did with SmartGateway. So we're confident we can get there, but we're not claiming victory on the much smaller knives yet because we haven't had the third-party validation. But we'll get there and that's in process. So in the spirit of transparency, that's where we are today. At this point, we're getting very near the end of the webinar. I hope this has been informative for people, giving a little more information about what it is we're doing. In summary, we're very, very pleased with the response that's come back for the marketplace. We're very, very pleased with the backlog of orders that we're already starting to see for folks who want to be the first ones to receive the SmartGateways when we start coming off the manufacturing line as soon certification has finished. We're very pleased that we're driving innovation and keeping everyone safe as the driving mantras for our business and our business strategy. And finally, I could not be more proud of the team and the customers who work with our team to develop this kind of innovation to the marketplace right now, that we think is a leapfrog step in terms of the benefit of what is detection solutions for the broader industry. Thank you very much for joining us today, and I hope everyone has a great rest of the GSX show, and has a safe week. Thank you very much.