Xtract One Technologies Inc.

TSX:XTRA

Q1-2026 Earnings Call

[Operator]

Good morning, and welcome to the Xtract One Technologies Fiscal 2026 First Quarter Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Adviser. Please go ahead.

[Chris Witty]

Good morning, everyone, and welcome to Xtract Ones' Fiscal 2026 First Quarter Conference Call. Joining me 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, financial results and some of Xtract Ones' 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 2. Today's call contains supplementary financial measures. These measures do not have any standardized meanings prescribed 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 filed management's discussion and analysis.

Today's call may also contain forward-looking statements that are subject to risks and uncertainties, which may cause actual results, performance or developments to differ materially from those contained in the statements, that are not guarantees of 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 should be reviewed along with the company's consolidated financial statements, management's discussion and analysis and an earnings press release issued December 3, 2025, available on the company's website and its SEDAR+ profile.

It is now my pleasure to introduce Peter Evans, the Chief Executive Officer of Xtract One. Peter?

[Peter Evans, executive]

Well, good morning, Chris, and once again, good morning, and welcome to all of our investors and all the analysts joining us today. We're going to start with Slide 4 and provide a little bit of perspective on the business and where we are. It seemed just weeks ago that we reported our Q4 results, and here we are once again to talk a bit about the momentum for the business and specifically the first quarter results for fiscal 2026. What I'm most pleased about overall is that we continue to be on track for a transformational year in fiscal 2026 for the performance. With revenue in the first quarter beating the prior year period. And as Karen will review further in a moment, recently increasing our total backlog to a new record of $53 million.

What's pleasing to me is the quality of that backlog and the opportunities that have been signed. As we've always seen, sometimes signatures on contracts take a little bit of time, and we might have seen a little bit of top line softness, but we're pleased with the momentum that's behind that $53 million. We've also seen increasing demand for our Xtract One Gateway such that approximately half of the bookings in the quarter were from the education market for the Xtract One Gateway. This speaks volumes to us as a business and reaffirms the strategic investment that we made in the One Gateway.

As the expanding interest in this groundbreaking application continue to take more and more traction in the marketplace, the product comprises a growing part of our overall backlog to deploy in this fiscal year. It is due to such demand that we have high confidence in the quarters to come and particularly as we've previously discussed, while we are ramping up our manufacturing partners' production capacity in order to meet this significantly higher demand than we originally forecast for the product.

Building on the strong and accretive momentum of the Xtract One Gateway, we also continue to secure a new SmartGateway contracts in a very steady, consistent pace. We recently announced Nova Scotia Health care, and we continue to see more and more opportunities like that, which we are engaged-in and actively working. These wins further expand our already significant backlog, which continues to be actively deployed. Both the SmartGateway and Xtract One Gateway offer distinct capabilities that meet the needs of specific market segments are well aligned with their respective opportunities. This provides balance across our portfolio for further business predictability, and differentiated value for each of our customers with products specifically aligned to each vertical markets specific needs.

Our phased deployment of larger, longer-term contracts provides us with greater visibility for the remainder of fiscal 2026 knowing how those phased deployments will roll out week-over-week, month-over-month and quarter-over-quarter, than we might have had in previous years. And given the most recent public offering that we just completed, our cash position and balance sheet is in the best shape ever, allowing us to further invest in business development and growth activities and further increase our production for both of our solutions in order to meet the customer demand. We remain on track for continued backlog growth for continued revenue acceleration and improved bottom line results, as we make continuous progress towards getting to cash flow breakeven in the near term.

Let's now turn to Slide #5. I'd like to give some additional color on the continued rollout of Xtract One Gateway. The growing interest for Xtract One Gateway is evidenced by a regular and steady set of new bookings for the product. And as I just mentioned, it means a number of things to us. First, it is a testimony to the success of our sales organization who have actually responded to the inquiries and engaged school districts and other customers and providing numerous demonstrations in addressing the business approaches needed, to make sure that we are able to close the deal in a manner that addresses the customers' outcomes and requirements. Once we showcased our technology, we seem to find that there's a strong aggressive movement towards moving to the contract closure.

Secondly, the backlog tells me that it underscores the acceptance and demand for our unique capabilities. In other words, potential customers are impressed with what we can offer versus our competitors in the marketplace. And as an interesting anecdote, I had a recent discussion with a school district who moved to deployment discussion based solely on a simple Zoom demo because the obvious benefits were visible to them, just by seeing the product versus competitive solutions that require an x-ray system. The capabilities are so obviously aligned to that school's needs that they decide to forgo further conversations with any alternatives.

Thirdly, what the backlog tells me is it indicates that we, as a company, are able to commercialize a new system and roll it out while navigating through supply chain constraints that have challenged the marketplace for the entire year. And we're being able to do new product introductions in a meaningful manner and work closely with our suppliers to ramp up manufacturing to increase delivery of the product in a phased approach, so we can match our clients' requirements and increase installations in an efficient, productive manner over succeeding quarters.

The interest level, I'm happy to report is much higher than I initially expected, and we as a company initially expected at this point. The schools where we've already deployed are very pleased with the product's efficacy and we're now turning those schools into very solid referenceable customers. In addition, we are on track with future installations at these school districts as well as new educational organizations every single month. Most pleasing to me and the business team is that we have closed approximately $15 million worth of Xtract One Gateway orders in a very, very short period of time. And we have a backlog of almost 100 systems that are pending installation, in addition, to the systems already installed previous to this call and previous to this time.

Overall, I could not be more pleased with the product rollout, and we're on track to have our contract manufacturing expand production capacity further within our fiscal second quarter, which is critical to continue to grow the shipments of our very large -- to our very large and eager customers and also to strive driving more and more and more revenue growth for the business and meet our operating goals for fiscal 2026. We continue to have over $100 million in our qualified sales pipeline across both of the product lines, and we anticipate that will rise as the year progresses due to ongoing demand trends and the success of our products already on site, and both domestically and internationally.

And most importantly, the referenceability of those installed customers to help us gain and close further customers. It's amazing to me how one school board can be very, very successful and very happy with our solution and they start telling all the other school boards. We're very aware of how these key school districts are ready to move forward with new contracts, and they're watching the deployments of the other schools to validate that indeed, we have the model put in place well and we're pleased to say that we do.

While the market may slightly slow down to normal seasonal factors, related to things like holidays and closures of certain market segments and then reopening, our revenue should rise sequentially and remain on this trend for the latter half of fiscal 2026 as we continue to convert more and more of that backlog particularly around the One Gateway to more installations and more revenue.

As I said last quarter, we are at the start of a major step function change for the business in both the scale and size of the company's operations, given our backlog, the increasing demand for our Gateway Solutions and the investments we've made in the past year to expand our suppliers' manufacturing capacity and the need to do that once again in this quarter. At this point, I'm going to turn it over to Karen to provide a more detailed discussion of our financial results. Karen, over to you.

[Karen Hersh, executive]

Thanks, Peter. I'm happy to review the financial highlights for our first quarter of fiscal 2026, which demonstrates a strong year ahead of us. Turning to Slide 7. Total revenue was approximately $4.6 million for the first quarter versus $3.6 million in prior year period. We're pleased to see sales up year-over-year and continue to anticipate higher top line growth going forward, with revenue back-end loaded for fiscal 2026, in line with production ramps, that Peter talked about. We expect sequential growth going forward and remain on track for a record year from a revenue perspective.

As previously discussed, our revenue growth in previous quarters has been a phased development approach, which has been preferred by some of our larger clients, including school districts and healthcare facilities. This systematic structured deployment is still expected to result in higher revenue as the year progresses, and we're very excited to see coming quarters play out, particularly given the record backlog at the end of this quarter.

In terms of our key markets, revenue for the first quarter was once again spread across numerous customers and industries with the largest contributors being the education and healthcare sectors. As always, this mix of business will continue to fluctuate and diversify given the order of acceleration and interest in our products across an expanding array of industry.

Our gross profit margin was 58% for the first quarter versus 64% in the prior year period. As previously stated, margins were expected to be somewhat negatively impacted in the near term by costs related to the initial production and installation of the Xtract One Gateway. However, we expect this will improve over time with broader commercial deployment later in fiscal 2026, leading to operating leverage and efficiencies in our supply chain. That being said, the gross margin for SmartGateway remains healthy, and we do not expect market pressures to impact the SmartGateway in upcoming quarters for both upfront and subscription deals.

Now turning to Slide 8. New bookings for the quarter were $8.4 million compared to the prior year quarter bookings of $4.2 million, of which a substantial portion of these were upfront contracts meaning that a majority of these new contracts will translate to revenue relatively quickly. As it can be seen from the bar chart, approximately 60% of our Q1 bookings were for the Xtract One Gateway, which speaks volumes for the increasing traction and higher demand for this unique product offering. It should come as no surprise given these orders that approximately 51% of new bookings were in the education sector this quarter, up from 44% last year, while 36% were in healthcare versus just 14% in the first quarter of fiscal 2025. The continued expansion into these markets reflects our diversification strategy as well as an excellent product market fit across both of our product lines as some sectors such as sports, entertainment facilities and certain healthcare facilities continue to prefer the SmartGateway application. We are aggressively pursuing a number of new industries and applications to further broaden our base of business and accelerate growth as we ramp up production this year.

Moving to Slide 9. Our contractual backlog and signed agreements pending installation rose again to another record level, as Peter previously mentioned. At the end of the quarter, our backlog collectively totaled $53.2 million, almost double of last year's backlog of $26.9 million. This backlog was comprised of $14.1 million of contractual backlog with an additional impressive $39.1 million worth of signed agreement pending-installation. Approximately 2/3 of the signed agreements pending-installations are upfront deals with the remaining 1/3 being the subscription deal. Overall, we expect the majority of agreements pending-installation to be deployed within the next 12 months. Given our current total backlog of over $53 million and a substantial pipeline of opportunities reflecting strong bid activity and expanding interest in both of our Gateway products, we anticipate bookings to continue to increase, keeping us on track for record results in fiscal 2026.

Now let's turn to Slide 10, which shows first quarter operating costs year-over-year for each of our key expense categories. Sales and marketing expenses were $1.9 million in the quarter versus approximately $1.7 million in the prior year period, reflecting increased business development initiatives across a wider array of industries while costs associated with R&D were $1.7 million in the quarter versus $1.8 million in the prior year period from continued streamlining of R&D activity. General and administrative expenses were approximately $2 million for the quarter versus $1.9 million last year. Overall, there was a modest increase in total operating costs year-over-year as we grew our backlog and invested in the rollout of Xtract One Gateway. We will continue to actively manage operating expenses while growing the business, demonstrating the scalability of our business model as we move forward on our path towards cash flow breakeven.

Finally, on Slide 11, I'll discuss cash flow. During the quarter, the company had operating cash usage of $1.2 million compared with $2 million in the prior year period, and excluding changes in working capital, we spent $1.8 million compared to last year's $1.9 million. We ended the quarter with $9.1 million in cash and cash equivalents on hand.

Subsequent to the quarter, in November, the company closed another successful public offering of a Bought Deal that raised aggregate gross proceeds of approximately $11.5 million, including the full exercise of an over-allotment option. This funds as with the prior raises will be used to fuel growth, which includes enhancing the production capability of our Gateways, as Peter alluded to earlier in the call and for general corporate purposes. Our balance sheet is the strongest it's ever been, which puts us in an excellent position to meet current and future demand for our weapon detection solutions. We anticipate fiscal 2026 will be a transformational year for the company given our backlog, increased interest in our products and an expanding array of target markets and the strength of our balance sheet.

With that, as always, Peter and I welcome any questions investors may have.

[Operator]

[Operator Instructions] And our first question today comes from Amr Ezzat with Ventum Financial.

[Andrej Vukovic, analyst]

This is Andrej on behalf of Amr. Last quarter, you flagged customer side friction, construction delays, internal reorganizations, but also noted that deployment friction was easing and installation momentum was improving as you enter Q2. So I was wondering if you can update us on that and specifically what measurable indicators give you confidence that installation friction is, in fact, easing as we move through Q2 and into the rest of the year?

[Peter Evans, executive]

Yes. So let me add my first thoughts on that. Thank you so much. It's a great question. And in some cases, with some of these customers, we are starting to see things ease, particularly in those areas that are associated with the federal government. Things pause quite a bit due to some of the government cost-cutting measures earlier in the year, as we're starting to see some stabilization. We're starting to see things moving once again. So that's very, very pleasing to us with particular customers where we have contracted business, but they've been going through various reorganizational changes.

In other cases, I think I might have mentioned, for example, a professional sports organization who is undergoing an arena kind of rebuild. We're still seeing that activity paused a little bit, but starting to now move towards conversations about how we can participate in things like CAD/CAM drawings and things. So some of these things take a little bit of time to work their way through but we are starting to see the easing and starting to see the movement of systems again to those delayed customers.

[Andrej Vukovic, analyst]

Okay. Great. That's helpful. And switching gears on the One Gateway. You noted demand running ahead of expectations, clearly, a good problem to have and that you're doubling capacity by the end of Q2. Can you walk us through what specifically surprised you on the demand upside there, like whether it was higher unit count per customer, faster adoption in certain verticals or higher win rates or partner channel contributions or trial activity converting more quickly than you modeled?

[Peter Evans, executive]

I think it's a couple of things, sort of two, three thoughts immediately come to mind. When you introduce a new product to the marketplace, particularly hardware products, there's always a little bit of reticence of people to be the first adopters. They want to make sure that the hardware has got its kinks worked out. We all are familiar with the old analogy, don't be the first one to buy the new version of a car or the new iteration of a car model. And so I think there's always a little bit of that reticence. But once we have more customers out who can attest to the quality of the product, and there's that referenceability, it starts to alleviate any of those concerns.

The second is that there has been, I think, a lot of organizations, particularly schools who want to deploy weapons detection systems, but there is air quotes, the laptop problem that has always plagued the industry. If 100% of the children are walking with a laptop and 100% of laptops are alerting, there's been all sorts of workaround solutions, whether it's bag inspections, X-ray machines, kids holding laptops above their head, that made the whole ConOps very clunky. And so as more of the early adopters for schools saw some of these issues, they tapped the brakes on further deployments.

Well, now that they've had the chance to experience the One Gateway as a solution that overcomes those issues and is delivering on the vision of what they were expecting, there's been a pent-up demand that is suddenly coming to our door and asking us to get in their environment, do demonstrations and see what we can do about deploying the product. So I think what we're seeing is the initial early adopters had some disappointments with the broad marketplace solutions. They slowed down some of the adoption, but the pent-up demand never went away, and we're being the generous beneficiary of that pent-up demand.

[Karen Hersh, executive]

I would also add to that, that the size of the deals, which is one of the things you mentioned is definitely turning out to be larger than we perhaps initially anticipated. The customers that are approaching us have very, very large installations. These districts are large. We're also seeing other different school boards elsewhere that have very, very large installed base. So I think that was something that we maybe hadn't initially anticipated when we were sort of doing our initial projections.

[Andrej Vukovic, analyst]

Okay. Great. And one last one for me on the bookings that came in at a healthy $8.4 million in the quarter, double versus last year. I know you mentioned half the bookings were from education. I'm wondering if you can break out the remaining vertical composition behind that bookings figure? And obviously, given the growing contribution from education, is there any identifiable seasonality in terms of deal flow, for example, when districts tend to evaluate trial and sign contracts that we should consider when interpreting quarterly bookings?

[Peter Evans, executive]

So let me add my few cents here -- or go ahead, Karen. You go first, and then I'll add my thoughts, please.

[Karen Hersh, executive]

Sure. I'll just give a little bit of a breakdown. It's -- it wouldn't take long. The education, as you said, was just over 50% of the bookings this quarter. Healthcare came in really strong with 36%, and then really, it was interesting -- an interesting split between nonprofit, real estate, automotive, these were sort of the areas. I think it really is a testament to the fact that we just have -- every quarter, we see a different mix of industry and the applications just continue to grow, and new ones keep popping up all the time in areas that we hadn't really anticipated. So definitely strongly towards education and health care this quarter. But as I said, all kinds of interesting things like real estate and nonprofit that are also showing up on the board. So I'll turn the rest over to you, Peter, from there on.

[Peter Evans, executive]

Yes. And to kind of answer the question, one would expect that there might be some seasonality, particularly for things like schools. Schools wanting to deploy in the July, August time frame before the kids come to back to work. you would expect that, but it's not true. We are actively engaged just this month alone, I can think of probably 6 different school boards that we're engaged with, with demos, if not more. And so there's interest throughout the year and once they've determined a solution, they go apply for the grant money. So there isn't really seasonality in health care organizations. There isn't seasonality in manufacturing. There is not some seasonality in schools.

If anything, we might see it with a little bit with budget applications in office areas and also with sports arenas and stadiums, who tend to get their budgets on a certain period of time, and that's when they start spending. But overall, if there's anything around seasonality, I'd say it's really the sports stadiums.

[Operator]

And our next question comes from Scott Buck at H.C. Wainwright.

[Scott Buck, analyst]

Peter, I was hoping to get a little more detail on gross margin and kind of the headwinds you're facing there in terms of ramping up a new product. Is it quality control issues with these initial machines? Is it just volumes? What kind of added color can you provide there? And then what can we be thinking about in terms of kind of run rate gross margin. Can we get back to 70-plus percent on a regular basis?

[Peter Evans, executive]

Yes. So good question, Scott. It's good to hear from you again. I hope you're doing well. The first part of the answer is like any new product, as you add more volume, you get buying leverage on your supply chain, so the cost of parts goes down with higher volumes. You also get buying leverage on your subcontract manufacturer. When they're initially building the first 10 products, for example, it's a little bit more hand managed, a little more costly. But when you get to a run rate, we're just kind of cranking through tens or hundreds of systems and just think like a Henry Ford's manufacturing line, you start to get a lot of cost efficiencies, not only on the labor, but on the time it takes to build the system, as well as the leverage on the supply chain. So you start to see the overall gross margins for the bill of material cost, if you will, and the assembly costs decreasing over time.

We saw that with the SmartGateway probably 3, 4 years ago. We were in mid- to high 50s, and we're now kind of bumping up to 70s, and we expect the same thing to happen with the One Gateway over time. There's nothing about it that is unique that we can't repeat the same sort of volume -- critical volume that once we get to that kind of that flywheel going, that we're not going to see the bill of material costs go down as well as the support cost, the selling cost and any other thing that we add to our cost of sale.

[Scott Buck, analyst]

Perfect. That's very helpful, Peter. And then my second question, I'm just kind of curious if you could give us an update on what you're seeing outside of North America. It seems like things are pretty local-centric at the moment, but curious what kind of momentum you might be seeing in Europe or even Asia?

[Peter Evans, executive]

Well, Scott, if we were face to face, you'd see me smiling to myself right now with that question. Just having this conversation with Karen. As a company, we've got demand where I'm starting to look at, okay, this week in January, how do we get to 4 different countries and do those properly, with some very, very compelling activities. Just this past week, I saw a note out of Australia, they're working on Jack's law, which is their variant of Martyn's law out of the U.K. So the demand for weapons detection solutions globally is expanding and expanding very rapidly. We are seeing our business take off very well in the U.K. and we're starting to build a very quality pipeline there as well as Asia. So the demand is there. I'd say it's probably lagging what we're seeing in North America by 1 year or 2, but it's picking up momentum.

[Operator]

[Operator Instructions] Our next question comes from [ John Hyde with Strategic Investing Channel ].

[Unknown Analyst]

Peter, Karen, first one I had was on One Gateway in particular. You guys -- I think we know SmartGateway-wise, you guys have said that you are not production constrained. But will it be safe to say that with One Gateway right now, you guys are?

[Peter Evans, executive]

There's a reason that we're investing in increasing the capacity, John, and that's because the demand is outstripping the manufacturing capacity today. And that's why we're working very closely and very quickly on doubling that capacity. And as demand increases, we will double capacity again. So I think the capability to expand assuming the demand is there, but we're not going to overinvest in underutilized manufacturing capacity until we see the demand that -- and we have those kind of early sensors, if you will, that are out there watching the pipeline, watching the quality of the pipeline so we can make those decisions and try and expand that capacity within a quarter.

[Unknown Analyst]

Okay. That's good to hear. And then on the One Gateway as far as outside of schools, obviously, schools right now is kind of your main market there. But outside of schools, when we think about things like anti-theft, distribution centers, things like that. Can you give us any updates, anything that you're seeing trends, anything like that?

[Peter Evans, executive]

I'd say that where we're seeing the kind of after schools, the next kind of highest level of interest is in convention centers. There is a strong interest in antitheft, but that's still an early application and a lot of folks are working their way through what does that mean to their business operations and the changes. And in many of these environments where you think about antitheft, you've also got considerations for the employees, for the unions and other items that have to be worked through. So it's not an overnight sale into antitheft for distribution sales centers, but I think it's going to be a very, very strong market for us, and we're engaged. It will just take a little time for it to mature.

[Operator]

And our next question comes from [ Stephen Garcia ], Private Investor.

[Unknown Attendee]

Mr. Evans and Ms. Hersh, I just wanted to ask about the bookings chart that you guys had on Slide 8. I noticed that quarter-over-quarter, we kind of see how it's under $5 million in bookings and then over $10 million and then under $5 million again, then over $10 million. And the last quarter, we see kind of -- we're moving upwards here on this graph, which looks good. But I was just wondering if you can maybe kind of give us a little bit more information on the nature of that pendulum there. Is that maybe some seasonality that you guys are noting in the industry, just market conditions? Or does it have something to do with the way Xtract One is going about pursuing these bookings that's kind of having it move in this pendulum direction?

[Peter Evans, executive]

Well, I'll give my quick views on that. Karen, I invite you always to add your thoughts too. But sometimes, Steve, first off, it's a great question, Steve. And if we could force customers to sign exactly when we want them to, that would be a wonderful skill. But sometimes internal approval processes with customers take a little bit longer than we would expect. 3, 4, 5 deals or 1 very large deal for a school district that we are expecting to close within the quarter might slip a week or 2 or a month. And that's okay because those businesses haven't gone away. Their interest in Xtract One hasn't gone away. Just a time for them to get through their reviews of contracts or, in some cases, one customer that I know that we're working with quite closely.

They want to make sure they've got everything figured out in terms of the hiring of staffing that they want to add to their security organization, going through all their training activities, going through all the internal policy decisions. And so sometimes, we -- like we've got a very, very healthy pipeline. We spend a lot of time kind of forecasting what will happen when, but sometimes there are things beyond our control where a deal might slip from one quarter to another. So you see a little bit of that pendulum swing. Over time, as we continue to grow, we expect that to smooth out with a larger and larger set of customers that we're engaged with.

[Unknown Attendee]

Appreciate the extra information there.

[Peter Evans, executive]

Thank you, Steve. The headline that I would say, is the takeaway. The deals never go away. Sometimes they just take a little longer.

[Operator]

And there appear to be no further questions in the queue. So I'll turn it back to Mr. Evans for any closing remarks.

[Peter Evans, executive]

Well, first off, everyone, again, it seems like we were just talking a few weeks ago. I cannot emphasize how pleased I am with where we are as a business, how pleased I am with where we are with One Gateway and the demand that we're seeing. It's -- we're very, very busy, but it's good, busy. I smile every morning when I wake up when I see all the demand that's coming from our customers, and now it's just a matter of us continuing to execute. Thank you, everyone, for your continued support. Thank you, everyone, for taking the time out of your day to join us today on this call. And we look forward to the next call and continue to provide further updates through announcements in the press and these earnings calls.

[Operator]

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.