NEXCF Q3 2023 Earnings Call
Operator: Good afternoon, ladies and gentlemen. Welcome everyone to the Nextech3D.ai Third Quarter Earnings and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-answer session. Instructions will be provided at that time for you to queue up for questions. I'd like to remind everyone that this call is being recorded today, November 29, 2023. I will now turn the call over to Julia Viola, Investor Relations at Nextech3D.ai.
Julia Viola: Hello, and welcome to the Nextech3D.ai Q3 2023 Earnings Call. With me on the call are; Evan Gappelberg, Chief Executive Officer; and Andrew Chan, Chief Financial Officer. Today after markets closed, Nextech3D.ai released its unaudited financial and operating results for its third quarter ended September 30, 2023. A copy of the earnings disclosure is available on our website and on SEDAR. Some of the information discussed on this call is based on information as of today November 29, 2023 and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as in our SEDAR filings. During this call, we will discuss IFRS results and key performance indicators. Neither this call nor the webcast archive may be recorded or otherwise reproduced or distributed without prior written permission from Nextech3D.ai. To begin our call, Evan Gappelberg, CEO will discuss Q3 2023 highlights as well as recent business developments followed by Andrew Chan, CFO who will review our financial results and outlook. Finally, Evan will provide closing remarks before opening up the line for a question-and-answer period. I will now turn over the call to the CEO and Founder of Nextech3D.ai Evan Gappelberg.
Evan Gappelberg: Thank you, Julia. So Q3 is in the rear view and we're now deep into Q4, but myself and my team are very, very focused on 2024 because that clearly is the next big growth opportunity for Nextech. As we look at our Q3 numbers they were solid. Really our nine-month numbers are what I'd like our investors to focus on showing almost 100% growth. But before we even get into the numbers I want to just speak to our valued shareholders. It's important to keep everything in perspective and I think a lot of times things get out of perspective especially in the stock market when everybody is consumed by share price share price and share price. Obviously, our share price in my opinion is extremely undervalued relative to the business prospects that we are currently seeing. We are currently navigating a very dynamic landscape in the technology industry. And I really want to provide a little bit of an update about what lies ahead. But first I think it's important to take a minute to talk about artificial intelligence. Globally, Artificial Intelligence or AI has become the epicenter of this technological transformation that we're witnessing and the innovation that AI is bringing is creating already in 2023 billions of dollars in value. And I believe in 2024 and beyond it will create trillions of dollars in valuation in the stock market. It has been said by many, many smart people that AI will impact civilization more profoundly than fire, more profoundly than electricity and even more profoundly than the Internet itself. Those are the foundational technologies that we stand on today and AI is going to eclipse all of them. At Nextech, we are not just recognizing this transformative potential. We are actively harnessing it to drive productivity across all our businesses with a particular emphasis on our 3D modeling venture. So let's address the key questions that you might have, how does AI actually work? How are we integrating AI into our operations? What can we realistically expect from our AI initiatives? And the most intriguing question that everybody, can AI predict our share price? Let's talk about AI and how it works. At its core, it involves the creation of algorithms. We have three four full-time employees that work on AI algorithms at NexTech in-house. That cannot be understated how valuable that team is to us. They create algorithms and models that enable machines essentially to mimic human cognitive functions such as learning and problem solving. And it happens instantly with these algorithms, whereas, it might take me or my team weeks or months it becomes instant. In practical terms, AI models -- it creates models after analyzing vast amounts of data to identify patterns, make predictions and continuously refines itself based on new information. It's dynamic. And it's evolving process that allows us to automate complex tasks for NexTech we're using it primarily for the creation of 3D models. We have our own AI models, tailored directly to our unique business needs. And if you think of our 3D modeling business, I've said many times, it's a massive opportunity. The AI is bringing that opportunity to our footsteps. It's allowing us to work with the likes of Amazon and really makes me very, very excited about our future because we're using AI to identify models that we've already made parts within those models and really allowing us to increase and optimize our productivity faster turnaround times, higher quality models gives us a competitive edge in the market. This is already starting to take hold at NexTech. It's incredibly exciting and valuable to talk about this and we will talk about some more tomorrow on our live stream. The bottom line is we're lowering our cost of production and increasing our productivity. That's what you want in any business. So what can we expect? Our commitment to AI is driven by the belief that it can pick our business to the next level. It's not something that happens overnight. AI needs data. Up until recently, the data we were feeding it was the 3D models that we were making. But recently, Amazon has given us access to their library of millions and millions of models; we're now feeding our AI additional data. We anticipate that that is going to pay huge dividends in increasing our productivity, reducing our operational costs and ultimately set us apart in the rapidly evolving tech landscape. The potential applications of AI in our 3D modeling business alone are vast and very, very valuable. Can AI predict share price? Well, unfortunately no. But they can predict market trends or at least analyze them, they can identify patterns and it does allow us to make more informed decisions that contribute to the overall success and resilience of NexTech. If you look at our AI journey, we're leveraging cutting-edge technology to drive tangible business outcomes. And as we continue to integrate AI into our operations throughout our multiple businesses, we're confident it's going to deliver profit and cash flow for years to come. It just takes some time, but we are on the path. Now, if we look at Q3 2023 results, we made a strategic pivot. Everybody should know by now we pivoted to India. And that caused a bump in the road. Ultimately it's going to pay huge dividends in 2024 and beyond. But the pivot was real, it was hard and it was a bump in the road. And what that means is that Q3 did not meet our usual high standards in terms of revenue and in terms of profit margin. But it's a temporary bump in the road. That's what a bump is a temporary thing. So it was a strategic decision we made during Q3. And ultimately we are back on track and we are making an enormous amount of progress in our new business venture in India. And this was a strategic move that we essentially did with our eyes wide open, geared towards optimizing costs, enhancing our productivity as we compare for hyper scaling in 2024 with Amazon and Seller Central. If you look at pioneering technologies and you look at companies that are working in this space, it's not without its challenges. And I'm the first to admit that. So as a startup our journey has been marked with an occasional bump in the road, but it's overcoming these challenges that really demonstrate our resilience and commitment to our shareholders and the innovation. And we are extremely focused on our future growth and on our business in Q4 and 2024 and beyond. If we look at Q3 results, they may be seen as mediocre, but it's essential to recognize to the broader context of our ongoing business in that we clocked in with almost 100% growth in 2023 over 2022. If you compare apples-to-apples, 3D modeling business, a 3D modeling business and the AI breakthroughs that we just spoke about, are going to contribute significantly to our growth and profitability in 2024 and beyond. If we look at some of our portfolio companies ARway is having a tremendous amount of success, Toggle is struggling a bit. ARway is one of our spinouts. They're making enormous strides over 50 new accounts signed up in just the last few months. And the outlook for 2024 is exceptionally positive. We anticipate, ARway to be a breakout success story for our company. On the other hand Toggle, has been facing some challenges in finding its product market fit in the SaaS world. But, on the flip side, it's been making substantial progress in the Amazon model texturing niche. So while Toggle is struggling to get mass acceptance on the SaaS business, it is executing on delivering enhancements to our productivity, using its AI texturing for Amazon production that we do. And we expect that Toggle is going to overcome its current hurdles as we move it from a pure SaaS to a pay-to-use platform and royalty model. So to conclude, AI is the key to our future business, its breakthrough technology. It's going to allow us to create 3D models faster and cheaper. I believe we're on the cusp of a significant breakthrough that promises to have a materially positive impact on our business in 2024 as AI and 3D models continue to shape the future of e-commerce, we have positioned ourselves at the forefront of this transformative wave. And we are ready to capitalize. If you look at technology, as a whole, it's fast evolving. Adaptability is, key to sustained success. Our strategic pivot, the robust performance of ARway and the promising developments of our AI Library showcase our commitment to navigating challenges and seizing opportunities. As we approach the end of 2024, I remain optimistic about our position in the market and the potential for 2024 becoming our breakout year. One more thing of note, during my marketing efforts for our financing which we just concluded today, we received an enthusiastic response from our existing shareholders. And I want to personally thank them, for their continued support of our dream. I have also met with new investors, who quite frankly were puzzled by the current valuation. They were scratching their head. These are high net worth global investors. Some of them were individuals, but others were strategic investors. And they were quite puzzled, by the current valuation. And with that, they saw opportunity. And they made acquisition overtures, due to the extraordinary upside and the low valuation. And although I cannot comment explicitly at this time, we are in multiple M&A discussions, all with the intention of increasing shareholder value. I want to thank all of our shareholders for your continued support and trust in our vision. We look forward to sharing more positive updates as we continue to embark on this exciting journey together. With that, I'm going to turn it over to Andrew Chan, our CFO.
Andrew Chan: Thank you, Evan, and good afternoon. As a reminder, unless otherwise noted all the figures reported on today's call are in Canadian dollars and under IFRS. All the preceding financial information are unaudited and was made available through today's press release and also available on our website and on SEDAR. Total revenue for this quarter was $1.2 million, up 30% from the same quarter last year, and up 97% year-to-date over the same period last year. We saw consistent revenues in our 3D modeling and Map D business and with Amazon contributing to over 50% of our revenue over the respective periods. We are confident that our new product offerings to our Map D customers and the opening of Amazon Seller Central will result in material increased revenue in 2024. Gross profit increased 18% for the nine months ended over the same period last year. This quarter we saw some temporary downward pressure on cost of sales due to scaling of our operations in India as we previously announced. With significant lower labor costs going forward, gross profit will increase in the immediate upcoming quarters. We will also anticipate gross profit margins to increase as we continue to implement AI technologies that Evan just mentioned in our 3D modeling production process to allow us to increase our model creation capacity at scale. Operating expenses excluding non-cash items such as stock-based compensation, depreciation and amortization for the quarter was down $1 million compared to sequential Q2 resulting from lower sales and marketing expenses as well as lower general and administrative cost expenses. Investment in AI drove the increase in the research and development expense this quarter. Looking forward, with our new operations in India, we are projecting to save $4 million annually as previously disclosed thus lowering expected expenses significantly in the upcoming quarters. Net loss from continuing operations for this quarter was $5.4 million, or $0.03 per share which is $1.2 million lower than Q2 or $0.03 per share lower. As of September 30, 2023 we had a cash balance of $3 million in addition to today's announced private placement close of $1.1 million in gross proceeds to fund our future growth efforts and we continue to hold the 13 million shares in both ARway and Toggle with a total market value of approximately $6 million. This quarter, I'm very excited about the operational shift to India and the positive impact it will have in our future cost in the quarters to come. With that, I turn this presentation back to Evan.
Evan Gappelberg: Thank you, Andrew. With that, we will open it up to some Q&A.
Operator: [Operator Instructions] Our first question comes from the line of Lisa Thompson with Zacks Investment Research.
Lisa Thompson: Hi, Evan and Andrew.
Evan Gappelberg: Hi, Lisa.
Lisa Thompson: So let's just go through what exactly happened with the move to India and why revenues were down sequentially just to hit the main issue. Can you kind of describe chronologically kind of the events? Is it a lack of orders or you couldn't get the models out? What -- physically what happened during the quarter?
Evan Gappelberg: Yeah, I'll answer that. So obviously our production was impacted as we pivoted to India, where there's -- it's just a massive move that opening up an office in India. We hired roughly 50 new people, and there was a training period. So our productivity slipped a bit. At the same time, that that was happening, we also saw due to interest rates spiking in the first six months of the year, a lot of the deals we had signed contracts on the customers just kind of sat on their hands. So it was kind of the perfect storm where you had signed deals, but no follow-through from some substantial customers. And at the same time our production slipped a bit as we pivoted to Amazon. And at the same time, our costs went up, because we basically -- we were paying for training of new employees and letting old employees go and paying severance and so, it was a double dipping kind of thing on our business expenses. So, it was a rocky -- like I said, it was a bump in the road.
Lisa Thompson: Okay. So can you describe where we are right now and what you're thinking about Q4?
Evan Gappelberg: So, right now, we have recovered. So, we have recovered. We're back on track. Our productivity actually has gone up. The office is open. The training has happened and we're actually in a much, much better place because our cost of goods has gone down quite dramatically. And the productivity now is equal to or better than it was before we went into Q3. So, we're in the best financial position in terms of our ability to make money than we've ever been, because of this pivot to India and we've lowered our burn. We've done all the difficult things that needed to happen to allow us to survive and thrive in this business. So, as far as Q4 goes, we haven't seen, let's say the floodgates open from customers yet. But I would say that the climate is in, but it's not -- the floodgates have not quite opened yet. I think that we're still waiting for Amazon to open Seller Central. They're transferring technology to us. And they have indicated that Q1 is when it's going to happen. And that Nextech is going to get a badge that gives us the ability to be a preferred supplier. In fact, they've changed their business model and they're not going to allow anybody to bring 3D models onto the Amazon platform. They've told us that we are going to be one of a select exclusive few companies that will be able to bring 3D models on to Amazon whether they are 3D models that Nextech creates or 3D models that the customer already has. It will have to go through our QA, which is proprietary and given to us by Amazon as a tech partner, where we're going to essentially be doing the QA for all 3D models that come through Nextech that go on to Amazon. So, that's what we're gearing up for in Q1, 2024. As far as Q4 Andrew, I don't really have the visibility. How does Q4 look for you Andrew?
Andrew Chan: Yes. So, I think, we can have kind of like Q3 plus a little bit. And I think definitely we're going to be over $5 million for the year, which will -- that's kind of our target a little bit over five for the year as a whole.
Evan Gappelberg: Perfect.
Lisa Thompson: I was curious have you seen any sort of seasonality in the business? Are people less receptive this time of the year to even signing on? Or how does that work?
Evan Gappelberg: It's a very good question. I've been asking myself the same thing. But remember, this is kind of first year of mass production for us. In previous years, we did see some seasonality with the slowdown in Q3, but it's hard to really say and I don't believe that that's going to continue in 2024 because again, once Amazon opens up Seller Central, you're talking about 10 million merchants, 300 million products all of a sudden that becomes new demand on the market. So that's really an event for us.
Lisa Thompson: Okay. And I think the one last thing I want to ask you about, is it in your press release on the financing you described selling a part of the platform or something? Can you get more specific on what that cryptic sentence meant?
Evan Gappelberg: Yes. So, I cannot be explicit, but I've been approached by a number of suiters let's say that are looking at the 3D modeling business, specifically and seeing it as grossly undervalued and looking at it as possibly acquiring a piece of it, investing in it, that kind of thing. And that is something we're entertaining depending upon of course the price. But it's -- the only thing that I'm focused on in those conversations is increasing shareholder value, because my opinion is the same as these sophisticated investors' opinion is that we're grossly undervalued relative to the opportunity.
Lisa Thompson: So what do they want versus just being a large shareholder -- like could they get a license or what -- is it a strategic investors? What kind of thinking is it that they just don't buy a block of on?
Evan Gappelberg: Yes, it would be a strategic type of deal where they would be in, let's say, the Asia Pacific region a different part of the globe opening up new markets using our technology to develop and paying us a substantial amount of money for that benefit.
Lisa Thompson: So that could even be a joint venture?
Evan Gappelberg: Yes. It could even be a joint venture. Yes. And it's the conversations in terms of valuation is significantly higher than the current market cap of Nextech.
Lisa Thompson: Okay. All right. Great. That's all the questions I've got.
Evan Gappelberg: Okay.
Operator: Our next question comes from the line of Scott Buck with H.C. Wainwright. Please go ahead.
Scott Buck: Hi. Good afternoon, guys. Thanks for taking my questions. Evan, can you talk a little bit about what the current model backlog looks like? I mean I assume the third quarter kind of pushed things out a little bit. But what that in terms of numbers do you have on order at the moment?
Evan Gappelberg: So we've caught up on the backlog from Q3. So there really isn't any backlog. Like I was explaining to Lisa, Scott our business has never been better. Our productivity has never been better. Our cost of doing business has never been lower. We are locked and loaded for 2024. It was a strategic pivot. One step back, two steps forward is the way I look at it.
Scott Buck: Okay. So what are the conversations like with potential new customers that you're talking to? I mean are people open to doing something? Or has that kind of been shut down until we get better visibility.
Evan Gappelberg: Yes. So there's no shutdown. In fact, the main -- the interesting part about our business is that customers keep coming back for more. We continuously are getting customers that buy 100 and then they come back six months later and they buy another 100 3D models. We just got a confirmation from a customer that buys 500 3D models from us in the beginning of the year and they said they want to do another 500. So we're seeing the value. The customers are seeing the value in the technology and the product and our service, it's just about scale. The bottom line to all of this is scale. And Amazon is that opportunity for us to scale. So far our experience has been that sure we could supply coals, we could supply PB2, we could supply others with 3D models. But relative to the size of Amazon, it's small potatoes. It's a solid business but we want to be doing tens of millions and hundreds of millions in revenue. And the only path that I could see to that is Amazon.
Scott Buck: That's helpful Evan. With the move to India, can you talk a little -- and I guess AI. Can you talk a little bit about modeling capacity? I mean can you do 250,000 or 500,000 models a year in, I don't know, 2024, 2025, whatever happens to be?
Evan Gappelberg: Yes. So in 2024, I don't see that happening. In future years, it's absolutely a possibility. But the key to all of this is, let's just explain how the AI works and what scaling is. So over the past year, we've had to have humans do 80% of the work and the AI went from zero to 10% to 20% as it started to get better. We talked about -- I talked about this earlier on the call that Amazon has now given us access to their 3D model library. We're now training our AI on that. And what that means is that we have a massive, massive competitive advantage because we have all this data. If you think of ChatGPT and all the tech and language models that it analyzes, we have 3D models now that our AI is analyzing. And so when we show the computer vision, a 3D model that we're being asked to produce, a new 3D models. It searches in the existing library just like ChatGPT searches and it basically terms up the three closest meshes 3D models. And that gives the artist anywhere from 50% to 80% to 90% of what he needs. It puts him on the 50-yard line, 60 yard, 70, puts them all the way down field. When all of a sudden he's doing -- or she's doing essentially touch up. That is where you get the scale where the AI is not even building it from scratch, it's going into existing library and then we just make it work for -- use that mesh and then we're able to texture it using Toggle, which is a pure AI platform and all of that could take minutes versus hours or days. And so that's how the scale is going to -- that's what's going to allow us to do 500,000 or 1 million models in a year. You still need people though. And it's a process, it's a pipeline. And that's what we're building for 2024 and that's why I'm excited because I now see the light. I could see the light at the end of the tunnel where it's pretty obvious to me and my team that this is going to be happening. It's happening.
Scott Buck: Yes. No, that's helpful. When Seller Central opens, are you the only provider of 3D models? And if not do you know how you'll be priced versus any competitors that may be in there?
Evan Gappelberg: Yes. We're not going to be the only ones. Amazon is definitely not going to rely 100% on Nextech. There's not going to be a lot of suppliers relative to the size of opportunity. It's a very small select group. As far as pricing goes, our pricing model is going to be quite different than our competitors. My strategy is flat rate pricing. Our competitors' is peered pricing where based on volume but also based on complexity of the model a simple model is much cheaper than a complex model to make and so it makes sense to have peered pricing. I'm taking an approach of well we kind of already know based on the volumes that we've done what the breakdown of complexity is and what our profit margin is on high-volume production. So, we're just going to go with flat rate pricing Scott and we think that that's going to give us a competitive advantage.
Scott Buck: Great. I appreciate that. And then last one for me Evan. Just on cash kind of post-raise, what kind of runway do you think that gives you into 2024?
Evan Gappelberg: So, with our new cost structure, we think we have enough capital to essentially turn cash flow positive as long as -- once we get the volume the key to this is volume. We need more volume to break out. But in terms of just cash and burn, we have almost a year assuming nothing good happens.
Scott Buck: Yes. Perfect. I appreciate the time guys. Thank you.
Evan Gappelberg: Thanks Scott.
Operator: There are no further questions at this time. I would like to thank our speakers for today's presentation and thank you all for joining us. This now concludes today's call and you may now disconnect.