Xtract One Technologies Inc.

TSX:XTRA

Q3-2025 Earnings Call

[Operator]

Good day, and welcome to the Xtract One Technologies Fiscal 2025 Third Quarter Earnings. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Chris Witty, Investor Relations Advisors. Please go ahead.

[Chris Witty]

Good morning, everyone, and welcome to Xtract One's Fiscal Third 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, quarterly financial results and some of Xtract One's recent milestones, followed by a Q&A session. This call is being recorded and will be available on the company's website for replay purposes. Please see the presentation online that accompanies today's discussion.

Before we begin, I would like to note that all dollars are Canadian unless otherwise specified and provide a brief disclaimer statement as shown on Slide 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 and 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 interim condensed financial statements, Management's Discussion and Analysis and earnings press release that were issued on June 5, 2025, available on the company's website and at SEDAR+ profile.

And now it is my pleasure to introduce Peter Evans, Chief Executive Officer of Xtract. Peter?

[Peter Evans, executive]

Well, thank you, Chris, and welcome to all our investors and analysts who are joining today's call. Let's start by turning to Slide 4. I'd like to start by beginning with the discussion by talking about the elephant in the room, the weaker than desired third quarter results. I trust that our investor community and the stakeholders have previously appreciated my transparency on the business, whether the news was good or bad, but to continue to provide clear directions and transparency on what we're doing and how we're doing it. And I'd like to continue that approach today.

Our results for Q3 were below our business plan or expectations, and frankly, the outcomes I hold myself and the company to. However, these results are not an indication of the current health of our business or the industry, but rather are largely a function of some onetime events and some shift in the dynamics of the kinds of customers and the markets that we are serving. And we'll talk about that a little bit more. Some items that impacted the Q3 results include the following: first, the mix of our business and our business model has shifted quite significantly from smaller companies and deals to much larger organizations, particularly Fortune 100-type organizations.

Accordingly, these larger organizations tend to invest a lot more time in the analysis, the budgeting, the security design, the con ops and the flow of their overall business mapping out that whole process and often request pilots that last from 30 to 90 days, where previously we might have seen pilots lasting for a day. In the short run, this has delayed bookings and pushes out revenues. However, over the long run, we are hugely positive about what the impact is to our business. And we expect to recognize increased revenue in the future and benefit from greater overall predictability in terms of our operations and the growth of our bookings with these types of significant customers.

In addition, there was a noticeable pause with some of our customers as they evaluate the impact of the business from the rapidly changing U.S. economic policies and therefore, the timing for the deployment of our solutions. A lot of questions about tariffs, about the economy stabilization and other activities, which we expect these customer -- that we expect these customers have worked their way through that drove some pauses in the business and some declines in Q3. We expect that to decline over time as the economy stabilizes and some of these debates about tariffs stabilize.

And lastly, we experienced some shifts from an interest in the SmartGateway to our new Xtract One gateway with some customers resetting their pilots and activities to also evaluate the One Gateway before making the decision on the right solution for them and their deployments. However, we believe this will only be a short-term impact as more customers who have initially chosen the SmartGateway simply determined that either SmartGateway or the Xtract One Gateway would indeed be the best fit for them after they've extended their testing on operations and other activities.

Going forward, we believe that this issue will be resolved and new prospective customers will have the benefit of seeing both products in place with other customers from the start of their evaluations. All the items above are mentioned -- that I just mentioned above slowed down business decision-making by our customers. However, it is fundamentally important to me, I'd like to highlight to all of our investors that the business remains strong. The pipeline remains strong. These orders and opportunities with these customers and the backlog are still in place. It's really just delays in timing.

The backlog is near record levels, and we're on track for a very solid year in fiscal 2025. The orders that we expected to occur in Q3 have not disappeared. They simply have taken longer due to the maturity and due to the size of the deals and other matters, as I've just discussed.

Let's dig into the details just a little bit more. First and most importantly, our total backlog remained strong this quarter at $36.5 million, near record levels. While revenue was negatively impacted by installation timing and the percentage of upfront deals, we remain in great shape as we near the end of our fiscal 2025, and we've achieved a number of key milestones for the business that actually continue to position us for future accelerated growth. We're on track to have another solid year of performance with all evidence pointing to top line acceleration and solid Q4 results. We have an expanding pipeline, a growing number of demonstrations and contracts under negotiation, increasing deal sizes and expanding addressable market that we can uniquely serve with our unique solution.

While cash burn did increase during the quarter, and Karen will talk about some other impacts to cash, it's very important to understand that this was largely due to some onetime investments and expenses related to the rollout of the Xtract One Gateway. Introducing a new hardware product is very complex and costly. In the early stages, there is a heavy investment upfront for those first systems that come off the line. You have not yet had the opportunity to optimize your supply chain, your manufacturing and these sorts of things.

We're already starting to experience the early returns on this investment as previously announced earlier this week. Since that press announcement, we've had additional deals signed and they are middle of negotiating multiple other contracts for the One Gateway. We are very pleased with the orders generated for the One Gateway thus far, and the future potential for this unique and innovative product. And I'll touch on that a little bit more in just a moment. While not all customers allow us to announce wins as quickly as we'd like, we did publicize two meaningful contracts over the past few months. One was a master services agreement for a global customer, a large global media and entertainment organization where our SmartGateway was selected as the company's preferred screening technology initially, now with the first deployments at a venue in Asia and future deployments to come.

This selection followed rigorous testing in two different locations in two different countries and we believe this has a potential for expansion over time across the brand's portfolio of hundreds of entertainment venues, retail stores and production facilities worldwide. The first installation was just recently completed, and the feedback from the customer who had tested other solutions has been outstanding. They are very pleased.

The second major announcement we did was with the Colorado Rockies Major League Baseball team, who will be using the SmartGateway at their home ballpark, Coors Field, for the upcoming season. This collaboration reflects our continued commitment to advancing stadium security across major MLB teams and other leagues and organizations. And we look forward to contributing to a positive worry-free experience for everyone entering into more than 50,000 person capacity sitting at Coors Field.

Of course, for every customer announcement we make there's obviously many, many more dozens that have not been made publicly, hence, our large and growing backlog. As previously stated in every one of these calls, when we are allowed to announce new customers, we will. I have absolutely no interest in holding back customer announcements, but we are bound by strict NDAs. And in many cases, the CSOs have told me bluntly, we do not announce security technologies. We remain upbeat about the future of our solution for threat detection in North America and across the globe. Xtract One is at the forefront of this business with an AI-enhanced next-generation technology, which we believe puts the company on track for significant growth and continuing improvement on bottom line results.

I'd like to turn to Slide 4 and provide some more details on where we are with the One Gateways market and the status of its rollout. First of all, I'm very pleased to say that the demand for One Gateway continues to rise and that the potential customers are very impressed with the efficacy of this product. We've hosted dozens and dozens of demonstrations at schools, at conferences, at health care organizations, warehouse and distribution companies, manufacturers and a long list of interested parties who are looking for further details, proposals and with many other customers in the early stages now of contract negotiations.

We're very excited by the market's overall growth potential and outlook. Most pleasing to me and it ports into the future of the company as many of the customers that we are working with have undertaken head-to-head competitive pilots and have indicated that they are selecting and going with Xtract One. I love when I get things like a text from a customer and he sends a picture of Babe Ruth with a comment "home run underneath." We are on track to start shipping on schedule in July. Inventory is currently being built for our first 5 customers who have aggregate order values of approximately $6.7 million. A very pleasing trend that we're seeing is that the average deal size is growing significantly, almost threefold from what our standard deal size used to be.

The One Gateway has already been certified in the U.S. and Canada with the U.K. and EU set to be certified within the month and additional international markets anticipated to follow very shortly after. Suffice it to say that we're pleased with the overall market response so far. Demand continues to rise when working on additional contracts at present, following an intense period of outreach and customer engagement. We're very excited to see this product put to use in the very near future across multiple applications and for our specific target markets that the One Gateway was built for, organizations such as schools, convention centers and office buildings.

The clients who have tested the One Gateway are thrilled at the way that we can improve the overall efficacy and security by accurately and quickly alerting staff to the specific dangerous items instead of just anything made of metal. When I look at the overall market opportunity for the One Gateway, we believe we're barely scratching the surface at present. As an example, the K-12 school threat detection market in the U.S. is estimated to be between about $15 billion and $30 billion by itself alone. And the Xtract One Gateway serves that market very, very well without the need to bolt-on an x-ray machine, resulting like in an ESA-like entrance experience for students or complex bag checks and searches and other nonsense in the operations.

We've also had a very new, exciting market opportunity, which we estimate to be about $8 billion with distribution centers, manufacturing organizations and other customers. When developing the One Gateway we realized that we could deliver certain unique capabilities that were not in the original design. We've now created an object identification product and therefore, an object identification market, which has incredible untapped potential in an area where there is no other solution that has previously been able to compete, including ourselves.

Think of conference centers, warehousing and distribution organizations and commercial and government buildings, even potentially retail locations. I continue to be surprised daily by the inbound discussions and use cases brought to us by our customers, such as one call I just had this morning with this unique capability for object detection at walking speed without the need for x-ray systems, without the need for a second and third and fourth technologies is very compelling. As one executive shared with me when he saw the One Gateway, he said, "This is a solution I've been looking for, for 3 years and I finally found it." At present, we are bidding on roughly $46 million of RFP opportunities alone, bringing us on a pace to potentially in fiscal 2025 with new record backlog levels and/or positioning us well for the year ahead.

Some of these backlog numbers and these RFP numbers -- sorry, some of these RFP numbers are not included in my calculations of the pipeline that we'll talk about here in a moment. With all the positive momentum for the One Gateway, we're pleased with the continued growth of the SmartGateway also in the market segments that it was specifically designed to serve. As evidenced by the Rockies news, we're seeing strong demand in sports venues, theaters and arenas, hospital organizations as well as particularly with those hospitals in Canada and the U.S. Our total pipeline of opportunities for the business remains at approximately CAD 100 million, of which conservatively about $40 million of that, excluding those RFPs are in late stages of development.

I only include in my calculations, fully qualified opportunities when analyzing our pipeline. For this reason, I remain very optimistic about the future and the steps that we're taking to accelerate that top line growth, improve the underlying results and move quickly towards cash flow breakeven. The past few quarters, while impacted by lower upfront purchases and certain installation delays, have provided ammunition for the future in terms of record-breaking backlogs and investment in new product rollout. As I personally work with the sales team through all these specific contracts and customer engagements, I truly believe that we're on the precipice of a step function change in our overall size market position, and I'm confident in the people that we have in the company as we navigate this road to success.

At this point, what I'd like to do is turn it over to Karen, who can provide a lot more details on the financial results. Karen, over to you.

[Karen Hersh, executive]

Thanks, Peter. Let's start by turning to Slide 7. Total revenue was approximately $3.5 million for the third quarter versus $4.7 million in the prior year period with approximately 65% of sales coming from upfront purchase contracts versus approximately 80% in the third quarter of fiscal 2024. As we said before, a lower percentage of upfront sales negatively impacts immediate revenue recognition and create some uneven quarters. However, the company has an improved outlook for sales over the longer term given the recurring revenue inherent in subscription contracts.

In addition to our Q3 top line being impacted by installation timing, we've also noticed some lengthening of the sales cycle as we're now pursuing larger, more complex customer opportunities that can take longer to close, as Peter previously mentioned. Ultimately, we feel these larger opportunities while initially taking additional time upfront to bring to completion, will lay the foundation for expanded markets and increased bookings and revenue for many quarters to come.

Revenue for the third quarter was spread across numerous customers and industries with the largest contributors being entertainment, education, sports and health care. We anticipate our revenue mix to continue to grow and diversify going forward, particularly with the One Gateway where we are making headway in schools and commercial environments. Overall, sales are expected to accelerate in the fourth quarter, leading to strong results for the fiscal year.

In addition, we continue to roll out our channel partner program, which remains a valuable contributor to the company's growth accounting for approximately 65% of Q3 bookings. Our gross profit margin was approximately 57% for the quarter versus 58% in the prior year period. Margins were slightly lower sequentially versus the second quarter of fiscal 2025 due to certain onetime start-up costs incurred as we ramped up our manufacturing for the launch of Xtract One Gateway. We anticipate margins to improve in the fourth quarter and potentially increase further in fiscal 2026 due to the higher revenue and operating leverage that we hope to achieve.

Turning now to Slide 8. Our contractual backlog and signed agreements pending installation continue to be strong. At the end of the quarter, this collectively totaled $36.5 million, just slightly under Q2, but significantly higher than this time last year when the total backlog was $26.6 million. It's important to note that while the total backlog decreased slightly in terms of Canadian dollar reporting relative to Q2, the actual total backlog in Q3 was higher than Q2's backlog but was negatively impacted on conversion due to the drop in the exchange rate of the U.S. dollar relative to the Canadian dollar during the quarter.

New bookings for the quarter were $4.6 million, of which approximately 30% were subscription contracts. As mentioned on prior calls, the mix of purchase versus subscription awards often varies depending on our customers' priorities and the business operations. The company's contractual backlog at quarter end was $15.4 million, with an additional $21.1 million worth of signed agreements pending installation, the majority of which are expected to be installed within the next 12 months.

Based on our large pipeline of opportunities and the increasing interest in One Gateway, we anticipate bookings and backlog to reach new record levels before the end of fiscal 2025. As previously indicated, RFPs are moving towards larger, more complex system installations and multiple site locations, putting us on sound footing for fiscal 2026 and beyond.

Now let's turn to Slide 9, which shows third quarter and year-to-date operating costs year-over-year for each of our key operating expense categories. Sales and marketing expenses in the third quarter were $1.6 million for the quarter versus approximately $1.3 million a year ago as we continue to reach a broader set of target markets, while costs with research and development were $1.6 million this year versus $2.2 million in fiscal 2024. General and administrative expenses were approximately $1.9 million for the quarter in both years.

Overall, we reduced operating costs year-over-year even as we sustained a robust backlog and invested in the rollout of One Gateway. We continue to actively manage operating expenses as we maintain a focus on our path to profitability and cash flow breakeven.

Finally, on Slide 10, I'll discuss cash flow. During the quarter, the company had operating cash usage of $3.4 million compared to $2.4 million in the prior year period. And excluding changes in working capital, we spent approximately $2.2 million compared to last year's $1.9 million. The higher use of cash this quarter compared sequentially to Q2 of fiscal 2025, which had considerably low cash usage reflects a greater loss for the period and an investment in higher prepaid deposits due to our investment in Xtract One gateway manufacturing and rollout as previously discussed. Basically, the third quarter included more cost and outlays related to new product inventory builds and start-up costs which are not expected to reoccur going forward. We believe Q4 cash flow will be greatly improved. And in fact, we currently have more cash today than we did at quarter end. Accordingly, we feel comfortable in current cash levels to carry us through our next phase of growth.

And with that, Peter and I welcome any questions investors may have.

[Operator]

[Operator Instructions] Your first question today will come from Amr Ezzat with Ventum Capital Markets.

[Amr Ezzat, analyst]

Peter, Karen, I appreciate the color you guys gave in your prepared remarks on booking volatility, but I'd like to focus on the current backlog. The $36.5 million backlog is near all-time highs as you guys mentioned, but the quarterly sales are flat sequentially and you guys spoke to timing of installation really delaying that conversion. So I'm just trying to understand, when you guys see the timing of installation, is there like structural friction in customer onboarding? Is it site readiness or maybe internal capacity constraints? More color would be appreciated.

[Karen Hersh, executive]

Sure. I guess I'll jump in first, I think.

[Peter Evans, executive]

Sorry, Karen, I was on me, please continue if you'd like, or I can jump in.

[Karen Hersh, executive]

It's up to you. It's up to you. Why don't you go ahead.

[Peter Evans, executive]

Let me start here and you can add color commentary. Amr, thank you so much for the question, as always. It's really not anything to do with us internally. We have the manufacturing capacity. We have the installation capacity through ourselves and through our partners. It's really timing on the customer's part. A simple example, one very large customer is going through some reorganizations and some policy shifts. This is a federal organization. And so they've tapped the brakes on the deployment schedule for a significant number of systems.

We've got another customer as an example, is going through a very large major renovation to their live entertainment venue. So they've tapped the brakes as they figure out some of those construction requirements. So there's things like that, that has slowed things down. But in terms of the internal issues, it's not related to us, it's related to customer activities and their ability to absorb the systems on the schedule that we hope.

[Amr Ezzat, analyst]

Okay. Fantastic. Then to help me understand the point you brought up on some clients evaluating the One Gateway instead of the SmartGateway, which makes a lot of sense, by the way, that impact just new bookings, right? Or do you have some of your current signed backlog clients looking maybe to switch their order?

[Peter Evans, executive]

That's a great question also, Amr. I think there's sort of a good news story here on both. The bulk of that is customers who are moving aggressively down the path of the smart gateway. They had decided that the innovation that we brought to the market was the right solution for them after their competitive analysis. But as One Gateway become more prevalent in the marketplace, obviously, they wanted to check it out before making investment in the technology.

In some cases, these customers run 60- or 90-day pilots, and they paused those pilots and said we'd also like to now run a 30- or 60-day pilot on the One Gateway. So the interest is still strong. It's a decision to buy from Xtract One. We're just trying to make sure that they are actually getting the maximum value out of the right solution for their business needs.

In terms of people swapping out, what we have seen with a couple of customers, as they said they really like what they're doing with the SmartGateway. They would also like to evaluate the One Gateway and are discussing an upgrade program from A to B. But interesting enough, let's say those same customers still see value in the SmartGateway and they're starting to redeploy them to other locations such as other organizations who are part of their supply chain.

[Amr Ezzat, analyst]

Understood. Then on the One Gateway shipping in July, can you walk us through what gives you confidence in that time line? What milestones still need to be hit before units actually go out of the door next month? Are there any gating factors that we should be thinking about, whether it's I mean, manufacturing client readiness certification that did still impact that July shipment time line that you guys put forth?

[Peter Evans, executive]

Well, right now, we're very, very confident on the July time line. And as you can imagine, Amr, this is something that I pay close attention to every single morning, and we do analysis on the business in that time line. We've got customer contractual commitments and expectations for delivery. If you think about it this way, many of the schools start back in August, and they're holding our feet to the fire about delivering in July. And accordingly, we're holding our subcontract manufacturers and our supply chain.

We've worked our way through a lot of the supply chain items, and we have confidence in the delivery of the componentry. We've already built units in the factory part of the process where you build the first handful of units and you test those extensively before you move to volume production. And so we're now at the final stages of fine-tuning some of those production processes before the fully -- before the manufacturing line is fully ramped up. So at this point, I don't have any concerns about our ability to meet July.

[Amr Ezzat, analyst]

Okay. Thanks for the color. Then maybe one for either you or Karen. I appreciate the color that you guys gave on the revenue mix in general, being like this quarter, 65% upfront? But I wonder whether you're willing to give color on the $21 million in signed agreements pending install. What sort of like very roughly a sense of the split between upfront purchases and subscription?

[Karen Hersh, executive]

That's a good question. I think from what I have seen we are still dealing with about the same type of split where the upfront is about 70% of the pending backlog and subscription is 30%. And interestingly, about 1/3 of that might be related to the One Gateway. And so that's pretty much the color that we can provide at this point. It's also split between a variety of industries being sports, education, health care, the usual split that we normally see in the pending backlog. So certainly, it's a helpful note there to know that it's about a 70-30 split upfront versus subscription.

[Amr Ezzat, analyst]

That's very helpful. Then I just want to double click on the gross margin dynamics. How much of the decline sequentially is tied to the early One Gateway production costs? Or are there any factors that we should be thinking about outside of that?

[Karen Hersh, executive]

It really isn't, Amr. That's a good question. There's just -- I think when we're dealing with the numbers that we're talking about, any kind of change can have some impact a percent here or there. If you think about it in a more holistic larger viewpoint, there really is nothing to be concerned about. Our business is operating exactly as it did in previous quarters, and we don't see any external factors that are impacting us in any way. It's just this particular quarter. As Peter had mentioned that some of those early units that first come off are obviously not going to be where we expect. And we saw this type of dynamic when we started with the SmartGateway back in 2021, where you've got initial things to work out in the first year of commercialization and manufacturing of the product.

So there's a little bit of that going on, but it's business as usual for us and SmartGateway continues to support higher margins that we have been fortunate enough to achieve in the previous quarters.

[Peter Evans, executive]

Amr, if I could just add a little bit more color and context to that. As anyone on this call could imagine when you're building a new piece of hardware, your upfront cost, getting your manufacturing line set up, NRE costs for tools and tooling and jigs and shaping the plastic forms and all these sorts of things, that's an expense of upfront investment. And then those first handful of systems, we built about a dozen systems or so with about a half a dozen already shipped to a customer, and they're almost hand managed as opposed to something that's just coming off an assembly line. And so that hand management of those and that extra attention to that is a lot more cost. And so like when we think back to the SmartGateway, when it first came to the marketplace 4 years ago, we were probably running about 50% GM. Fast forward 4 years later, we're bumping up against 70% as you start to get operational efficiencies, supply chain efficiencies, and you've got any kinks in that manufacturing process ironed out.

[Amr Ezzat, analyst]

Yes. I'm not fully -- I'm not totally surprised by the gross margin. In fact, we are thinking that they would get compressed like this quarter. But what surprises me is in your prepared remarks, you guys are speaking to the margin improving as early as Q4 when you guys are only starting shipments in July and who knows when in July. So what sort of gives you that confidence that we start to see a ramp in margin as early as Q4 as opposed to Q1, which is what I was wondering.

[Peter Evans, executive]

From my perspective, and I'd invite Karen to jump in, but those first half a dozen units, they had a high cost to build. And we already know what the manufacturing -- when the units start coming off the manufacturing line in more systematic way, we have a good view on what that cost will be. Karen, over to you.

[Karen Hersh, executive]

I think you've addressed it. Thanks, Peter.

[Operator]

Your next question today will come from Scott Buck with H.C. Wainwright.

[Scott Buck, analyst]

Peter, I thought you did a nice job laying out in your prepared remarks some of the reasons behind the deployment delays. A lot of that seems structural. So I'm curious, a month into the fiscal fourth quarter here, whether you're seeing any kind of easing with any of those headwinds or we should really consider it to be more the baseline moving forward?

[Peter Evans, executive]

No, Scott, it's a great question. Thank you. And of course, anything can change as we always know, but right now as we're a month into the fourth quarter, we've seen sort of that drawback stopping and it's almost back to business as usual. I think they're, in fact, starting to accelerate significantly for us. We're very, very busy, which I'd like to be. And so I think it's safe to say that we've seen some of those headwinds easing throughout the fourth quarter.

[Scott Buck, analyst]

Perfect. That's great to hear. And I'm curious the $21-plus million of pending installations, can you talk about customer concentration there? Or maybe just the customer concentration in general in the backlog. Are we talking about 1 or 2 particularly large orders? Or is it more widely spread?

[Karen Hersh, executive]

No, there's about -- nice to hear from you, Scott. There's about a dozen customers that are sitting in that pending backlog, give or take. So probably more than that, actually, sorry, probably closer to 2 dozen. And the mix is split. So there are a few that are larger and a few that are smaller. They seem to work out to slightly larger than our usual deal size. I think it's fair to say. I'm not sure what other commentary we can give except that probably half of it is in sports and entertainment and live entertainment. We have at least 20% of this point in health care, a solid 10% in education. I think we see that probably changing and growing considerably in Q4 and then a mix of all kinds of other industries for the balance of, say, 10% or 10%, 15%.

So it's a wide range of customers, a wide range of industries, a split between upfront and subscription, a split between channel and direct. So it's really no concentration in any one particular customer or industry.

[Scott Buck, analyst]

Great. That's helpful. And besides the kind of uptick, I guess, in contract size, any material structural changes from maybe a year ago? Is duration shorter or longer? Any kind of meaningful change in terms, I guess it would be interesting to get some color on.

[Karen Hersh, executive]

No, I don't think so. I mean we certainly average usually a 3-year contract, but we are seeing a few that are extending perhaps 4 or 5 years. So perhaps they're slightly longer, but really, they tend to -- even with the One Gateway, they tend to follow our same sort of contract time line.

[Scott Buck, analyst]

Okay. Perfect. And then, Karen, last one for me. On operating expenses, can we maintain the current levels here or the depressed cash position, maybe mean we pull some levers on OpEx to rein that in near term? Or do you potentially spend a bit more maybe on the sales and marketing side to try to accelerate top line?

[Karen Hersh, executive]

That's a good question. I mean, we tend to be very nimble, and we're able to adjust our levers quite easily depending on how we see it, how we're hitting our milestones and where we feel that there's short-term revenue gains or midterm revenue gains that we want to invest in. We're a highly revenue-generating focused organization. Everybody is highly focused on revenue generation. We believe that, that's really important to us. And so we'll spend accordingly when we feel that there is a good return from a revenue standpoint.

We're a pretty lean shop as it is, but we can turn the levers up and down as needed to address short-term revenue opportunities for us, and we're going to continue to do that in the quarters to come. I don't see that changing anytime soon.

[Operator]

[Operator Instructions] Your next question today will come from [ John Heed ] with Strategic Investing Channel.

[Unknown Analyst]

Peter, Karen, my first one is kind of around One Gateway, just One, it seems like -- just looking for some clarification, but it seems like at least most of or maybe all of the $6.71 million you guys have announced. Is that already included in the bookings that we've seen so far in Q3 and maybe Q2 if we got some of those earlier. And then around kind of that as well, I know you mentioned some customers upgrading to the One Gateway or switching from the One Gateway from the SmartGateway. Just curious how much of that there is going on? And kind of two, just how does that, in general, work when you guys have an upgrade like that? I mean is it different for a subscription contract versus an upfront? Just any information around that would be great.

[Karen Hersh, executive]

Why don't I address just the first part and then, Peter, you can talk about the sort of upgrade process. And let me give my view on this. As we previously announced, we've already signed with 5 customers for a total contract value of $6.7 million and we learned a lot from these first orders. First of all, from what we've seen so far, the One Gateway deals tend to be quite a bit larger than our SmartGateway deals, perhaps 2 to 3x the total contract value. Secondly, these contracts tend to cover a number of market verticals and they're well suited, particularly for schools and commercial buildings.

In terms of revenue recognition and the timing of those orders, it's highly dependent on a number of factors in terms of when we recognize that revenue and the contracts, depending on whether they're upfront or subscription and whether they're phased installations. And so I think that's all that we can really reveal at this point, John, but we look forward to sharing more information about the One Gateway in the upcoming releases and our next earnings call as well.

[Peter Evans, executive]

And on your second question, John, we've only had a couple of customers who've looked at an upgrade. And those are folks interesting enough, who are coming to the end of their term on the SmartGateway contracts, but they want to retain the SmartGateways. There is a place for the SmartGateway and there's a place for the One Gateway. They address different market needs and different application needs. And so for one customer that I'm thinking of in particular, they're getting towards the end of their SmartGateway contract. They'd seen the One Gateway, they booked their orders for the One Gateway and they already have a plan for redeployment of the SmartGateways to other entrances around their facility.

We've also looking at contracts with customers that are currently working through the details, where they've seen both products and they're purchasing both products. And they'll be using SmartGateways out with certain entrances and One Gateways at other entrances. And so we're very pleased that both products are very viable and both are delivering value for customers in their applications. We've had very minimal people who have said they're halfway through the SmartGateway contract and we upgrade it to the One Gateway because the SmartGateway fits their needs, it's purpose built for a specific application, and those applications are being well served.

[Unknown Analyst]

Okay. Awesome. One -- well, another question here. We've seen a lot just from news releases and things like that, but it seems like there's a lot of interest from Canadian hospitals. We've seen several articles recently and just it seems like in the last month that Canadian hospitals are looking for weapons detection systems. A lot of them seem to be testing the SmartGateway. Can you guys touch on maybe some of the demand you're seeing there? Is it a significant increase? Or is it just that this is now getting some press?

[Peter Evans, executive]

I think what you're seeing like everywhere in the world, John, is there's an increasing level of security concerns everywhere. And if you look at the statistics, about 76% of all workplace violence issues occur within the health care marketplace. And it's not surprising when people are in pain or they're having drug-related issues or other related issues, and they're looking for service and they're looking for it fast. And so there's an increase in violence, particularly in health care. So why, for example, if you look at a lot of the strikes by the nurses, one of the #1 priorities is keep us safe at work. And so we're seeing a significant piece of interest for the SmartGateway in the health care environment because it uniquely picks up the edge weapons, the small little razor blades and knives and things that are an issue and their specific need for a hospital environment.

When the caregiver is that close to the patient, it's not just a firearms issue, you have to catch the knives also. And that's what we do extremely well. In Canada, in November, December, January of last year, there was 4 major events in 4 different hospitals, firearm-related events and knife-related events. These are news that you can research. But for example, in Nova Scotia, a patient stabbed three nurses and one needed life-saving surgery. And so we're seeing a high interest in Canada as well as we are in the United States for the Healthcare segment itself.

[Unknown Analyst]

Okay. Awesome. And just one quick follow-up to that one. You guys have a lot of investors from the U.S. and other countries outside of Canada. And I know there's been some kind of debate in the retail investor community and whatnot around the decision-making process and everything. I know where I'm at in Southern California, for example, you could have one county like San Diego County or L.A. County might have dozens of different hospitals that are managed, owned and operated by up to 15 or 20 different entities or organizations, whereas it seems like it's a lot more centralized in Canada that I think that might offer you maybe some advantages. Can you touch on that?

[Peter Evans, executive]

I think like any kind of market segment, sometimes you have a centralized decision-making. A school district will be looking at technology for the entire school district. They don't buy on a school-by-school basis. Similarly, when you look at health care, you might see a health care system. I think in California, near you, John, you might have places like San Mateo or Sutter Health or Adventist Health or any of these others. They will typically buy on a kind of a hospital-wide basis. Or they may just simply have an issue with one particular hospital where it might be in a part of town where they're seeing a higher level of violence. And so the primary focus is there. Regardless of how the customers wish to buy, whether they wish to do it for a single location for a broad set of locations, we're going to serve them, and we're going to take good care of them with good solutions.

[Operator]

At this point, there are no further questions in the queue. So I'll turn it back to Mr. Evans for any closing remarks.

[Peter Evans, executive]

Well, thank you very much, everyone, for taking the time out of your day to listen to us. Thank you to all our continued support from all of our investors. We are in a very good position as a business. We've seen a few headwinds that have caused us to kind of think about our go-to-market model. But the thing that's most pleasing to me overall is the business continues to grow. We have great engagements with some unbelievable customers. I could not be happier with the market response we're getting from both the One Gateway as well as the continued market response for the SmartGateway. And as we work our way through Q4 and the rest of the fiscal year, you can count on us to be very, very focused on driving bookings and converting those to revenue as quickly as possible -- as we can possibly. Thank you, everyone, for listening in today. I very much appreciate it.

[Operator]

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