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NEXCF: NexTech AR Reports FYQ1 2020 On Target

10/31/2019

By Lisa Thompson

OTC:NEXCF

READ THE FULL NEXCF RESEARCH REPORT

Today, NexTech (OTC:NEXCF) reported the FYQ1 2020 quarter that ended August 31, 2019. Revenues and earnings were on target with our forecasts. Revenues were $1.5 million and EPS was a loss of $0.02 per share versus $22,544 in revenues last year when the company was in an entirely different business. Last year it had the same EPS loss of $0.02. While revenues increased, so did losses, with this quarter showing a loss of $1.3 million versus a loss of $0.6 million a year ago. This is the first full quarter with both the vacuum business and Infinite Pet Life, which was bought on April 11th. Revenues in this quarter were all from eCommerce, with only $3,005 from the AR business. We had been expecting this business to ramp sequentially however NexTech failed to deliver a number of projects that therefore could not be billed or booked as revenue. Business to date has been mostly one-time events (such as the Budweiser promotion) and revenue recognition has been lumpy. NexTech is pursuing a number of large opportunities that could significantly increase AR revenues in the next few months. With new management running the AR side of the business, and a new CFO, we expect NexTech to work through some of its growing pains and begin to show more consistent results. We also expect that greater controls on expenses will reveal opportunities to reduce operating expenses and improve margins. Gross margins improved significantly in Q1 to 45.9% versus 22.9% in Q4 as the company sorted out and streamlined its vacuum business. We expect improving margins going forward as the company optimizes its product offerings to focus on higher margin parts and accessories.

Operating expenses decline $340,000 from Q4 primarily in consulting fees being reduced $180,000. All of NexTech employees are considered consultants except for those at the vacuum cleaner store and warehouse. There are 30 people working for NexTech of combined employees and consultants. The loss increased to $1.3 million from $0.7 million last year. The EPS loss was $0.02, flat with a year ago. Share outstanding increased to 55.6 million from 39.1 million a year ago, an increase of 48%.

Balance Sheet

NexTech ended the August quarter with $1.4 million in cash and a new $1 million convertible debenture. It now has working capital of $1.7 million. During the quarter it raised $2.8 million in private placements. In the quarter, the company had negative cash flow of $1.0 million. If you include the cash payments in the quarter for the acquisition of Infinite Pet Life of $451,000, the free cash flow was a negative $1.5 million.

Pioneering the Use of AR in Online Advertising

On October 24th, 2019 NexTech announced that it expects to launch a 3D-AR-360 ad network in Q4 of 2019 or Q1 2020 opening up a major new revenue channel in 2020. All of its customers have expressed interest in running 3D ads and NexTech is working with Google and others to help facilitate this. NexTech believes it is the only company that will have an end-to-end solution—from creating the 3D assets, hosting them, and then serving up the ads. The company has found AR ads deliver consistently better click through rates than flat 2D ads, and works especially well on mobile phones. The click through rate for immersive ads has been 200-300% higher than the click through rate for standard 2D ads.

Today NexTech announced the launch of its CaptureAR technology that will allow customers to record video of their products themselves that NexTech can then turn into an AR 3D object. This will save incredible time and money. According to the company “what could take an experienced 3D modeler days of work to create a 3D version of a product, can now be done in a matter of minutes—and with the same resolution and image fidelity as if the 3D model was designed from scratch.” Customers now can record with a 4K capable phone rather than costly 3D scanning equipment. This video would be transferred to NexTech to be turned into an image that would be hosted by NexTech and used by the customer on their web site. NexTech will still make money on creating the AR image and charging a monthly hosting fee. Customers will also be able to use these images in AR ads that can be placed in the future using NexTech’s AR, 3D 360 advertising platform, discussed above.

FORECASTS

FYQ1 2020 was the first full quarter with both eCommerce businesses and this past quarter showed both higher gross margin and higher operating expenses than we had expected and we have updated our model accordingly. This resulted in an increase in forecasted losses while keeping revenue expectations the same. NexTech is burning about $120,000 a month in cash including paying off the Infinite Pet Life acquisition, which is a reduction from the previous $200,000 a month. The company’s goal is to reach cash flow breakeven on current operations, which it will probably do for the eCommerce business but investing in AR could negate that. At any rate we do not rule out the chance that the company does may come back to the public markets to raise cash. Having a new and full time CFO should help improve cash flows as he evaluates the company for cost savings.

On the revenue side, the vacuum business, which now depends solely on the Miele brand is add higher margin supplies and accessories, and plans to add additional brands such as SEBO to grow and increase profitability. The vacuum business gets two thirds of its sales through Amazon, so it is focusing on being the best distributor through Amazon for vacuums and parts. The pet business is going from two products to eight and it also expects to grow rapidly.

For the calendar year 2019 the company has stated it expects to reach US$5 million in revenues (or $6.7 million Canadian) and its goal is US$15 million (or $20 million Canadian) the year after. The gross margin target for 2020 is still between 60-70%.

For FY 2020 we are still using $8.3 million in sales but are increasing the forecasted loss for the year to $3.8 million and an EPS loss of $0.07. We are not factoring in any acquisitions, although we expect that management is actively looking for eCommerce businesses to buy.

We are maintaining our FY 2021 $14.4 million revenue estimate (up 74%) and a slightly profitable or near breakeven business.

With a nascent market projected to increase by 289% per year over the next five years, NexTech as a unique public pure play could deserve a higher valuation. It currently trades at an enterprise value of US $56 million 4.7xs projected 2020 calendar sales of US$12 million.

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