This will be my first look and review of Xtract One in what appears to be some heavy interest out of the Wolf Den discord.
Xtract One Technologies is a Toronto-based company that develops and commercializes AI-powered weapons detection and threat detection gateway solutions. They also trade on the big boy TSX exchange and currently trade at just under a $150M market cap.
They released their Q3 just over two weeks ago to some fanfare (at least for a short spell), which sent the stock up as much as 58% during the week, but has since given back 22% from their June 11th post financials run. Longer term holders are likely satisfied with their investment as XTRA is up 64% over the past year. On the other hand, if you purchased shares at their 52 week high back in October, you’re down 40%. Welcome to microcaps.
The growth story is impressive with $24M of revenue on a TTM basis after doing just $4.1M in their 2023 fiscal year. The rest of their fundamentals are much less impressive however. They are still an operational cash burning organization with $6.4M of burn (TTM), and trade at over 6.5x P/S and are still heavily unprofitable on the net income and EBITDA lines.
So, in the words of Total, “What the Dealio” with Xtract One?
As with all initial coverage stocks, this deep dive will be available to paid subscribers with a free release scheduled for July 6th.
Balance Sheet:
Sixty percent of Xtract One’s current liabilities, and two thirds of their total liabilities are made up of deferred revenue. I like to removed deferred’s from my ratio calculations and when this is done, the company has a very impressive current ratio of 6.4. It’s more than ok with deferred revenue left in as well.
At the end of April the company had $15.6M of cash on hand, $4.3M of receivables, $4.2M worth of inventory and $2.9M of other short term assets against $4.2M of liability commitments over the next twelve months. Xtract is debt free.
Receivables have tripled in their last nine months and they do not provide an aging report, although it is notable they have not made any provisions for write-offs at this stage.
Solid start.
Cash Flow:
Through three quarters, XTRA has burned through $5.4M in operational cash flow (OCF), only a slight improvement over the $5.6M of operational burn experienced at this time last year.
That might not tell the whole story. As you can see below, prior to working capital adjustments there was a 72% improvement in their burn rate. Their A/R growth and inventory investments have inflated their burn YoY. They still of course have to collect those receivables and have positive sell through of their inventory moving forward, but I’m going to suggest their OCF is better than it appears here.
Even at the $5.4M of operational burn, they do have the balance sheet to withstand future similar burn rates and likely have a cash runway of at least two years at these levels.
The reason their balance sheet looks as good as it does is due to the $11.5M raised in November of last year at 75 cents. Investors in that round are down by 21%. They also raised $2.6M through warrants. Xtract has not spent a penny within investing activities, highly unusual through nine months.
Overall their cash position is 90% greater then where they began the year.
Share Capital:
259.9M shares outstanding, 19% dilution over the past twelve months
A whopping 76.6M warrants outstanding. 16.9M are currently ITM with the most recently issued 8.6M well out of it. But another 51M are within a nickel all expiring with in the next two years.
17M options with 5.1M ITM and another 6.1M within a dime.
Very small insider ownership of 0.52% with 1% institutional ownership. The largest shareholder is MSG Sports with a 13.5% stake. (per SimplyWallSt)
Small insider purchases in May and insiders have been exercising options at or just out of the money
Income Statement:
Revenue in the quarter was outstanding at $10.26M, just shy of 3x of the $3.47M they generated in the comparable quarter. Xtract delivers very healthy margins - 60.8% in Q3 which is 380 basis points higher than they delivered last year. That in turn generated 215% more gross profit dollars.
In addition, they also managed their operating costs efficiently, only growing by 29% on three times the revenue.
Even though there is a slight net loss of $245k in the quarter, that compares to a $3.08M loss in Q3 of last year. That type of revenue and margin improvement, along with impressive operating expense controls is good enough to award them the Wolf Trifecta for the quarter.
YTD metrics are pretty good as well
Revenue up by 97% to $20.65M vs $10.51
Margin of 58.3%, down over 500 basis points from 63.7% generating 85% more gross profit dollars
Expenses up 16% - excellent conversion on 85% more GP
Net loss of $5.5M vs $8.4M, a 34% reduction
They miss out on the Wolf Trifecta due to the margin erosion, but their metrics are headed in the right direction.
Summary:
So the balance sheet is excellent, the P&L improvements in this latest quarter are very good and while the cash flow section doesn’t look great in comparison to last year, it does show some signs of improvement too - they were in fact cash flow neutral in Q3
This float on the other hand leaves a lot to be desired. Including warrants that are within a nickel and options within a dime, we’re looking at a float of nearly 325M shares, an additional 24% dilution from where we stand and an implied market cap of over $191M. That takes their P/S valuation to 8x.
With nearly 20M warrants expiring in April of next year and another 30M a year afterwards around today’s share price will create a lot of overhang concerns.
Based on the above, you’re really going to have to love the due diligence. To begin I will attach the company’s investor deck below:
The Madison Square Garden relationship definitely adds some credibility to the bull case, their largest shareholder by far and they also hold millions more in warrants. In addition to traditional stadium security, the company is expanding into schools and healthcare sectors.
Those expansion markets aren’t just aspirations as they have been able to land health care centers on both sides of the border in the last few months.
They have also been able to land the PNE, multiple schools, and the British Museum (which I happened to visit last month), so they have been able to expand their reach beyond their initial offerings of stadiums, casinos and theatres. It is also encouraging that they have been able to expand across North America, showing tariff resiliency and across the pond as well.
None of those news releases announcing new contracts have any dollars attached to them unfortunately. They do have a current backlog of about $45M. That is up about 26% so therefore it appears they will be quite lumpy revenue producers and I would not expect the next couple of quarters to triple like their recent Q3.
I’m intrigued but I am leery of this valuation. Their closest publicly traded competitor appears to be Evolv Technologies ($EVLV - Nasdaq). Evolv’s revenue is about 10x larger, and so is their market cap, therefore you could argue it’s trading appropriately compared to peers (or peer).
Technically, I don’t love this chart and the stock is down 3% and appears to be losing 58 cent support with a 200MA test likely in the near future.
It does move near the top of my watchlist, but only a mid 2.75 star opening review for the time being. At 47 - 49 cents, I could be a buyer.
Disclaimer:
My intent is for my reviews to be a bolt on to due diligence that you have already completed. I receive dozens of review requests a week, therefore my own DD may be great or none whatsoever. Unless otherwise stated or implied, my opinions are on the financial performance of the company based on their most recent filings. I conduct these reviews to assist other retail investors whose research skills are limited when it comes to reviewing financial statements. I do not accept compensation of any kind from companies I review.
Wolf FINS Reviews are intended to be informational and are based on personal opinion. They are not intended to be financial advice, and all readers are encouraged to perform their own due diligence prior to their investment decisions, including discussions with their investment advisor.