| Expect meaningful operating leverage in the business as revenue begins to scale later this year. Recently, NexTech3D.ai released finalized operating results for the period ended June 30, 2024. These results were largely consistent with preliminary results reported in late July 2024. Revenue of $1.1M was largely consistent with the quarter prior. Gross margin of 74.0% represented a meaningful improvement both sequentially and year over year reflecting the company’s offshoring efforts, moving much of the business operations to India in late 2023. The company expects margins to further expand through the end of 2024 suggesting full year gross margin should exceed 50.0%. While the gross margin improvement should be a meaningful contributor in driving improved operating leverage in the business, the lack of revenue remains concerning. However, revenue growth could accelerate meaningfully in coming quarters as Amazon (AMZN; not rated) begins to promote Nextech3D.AI’s 3D modeling serves to its merchants beginning later this year. While this may take some time to scale, we believe the impact could be significant, potentially driving the business towards profitability at the current improved margin profile. In addition, the company continues to pursue enterprise contracts which could be a further source of revenue. Earlier this year, the company announced 3D modeling contracts including a $1.8M agreement signed in February 2024. As revenue begins to scale and gross margin reach the 80.0% level, which we expect later this year, we believe investors should be able to extrapolate a path to profitability. While we are long-term optimistic, we have reduced our price target to $0.25 from $0.50 as we expect the company to continue to sell new shares into the market financing current growth initiatives. We remain Buy-rated. Adjusting estimates to reflect 2Q24 results and updated commentary, price target to $0.25. We are reducing our revenue forecast for 2024 reflecting 2Q24 revenue results and updated management commentary. We are now modeling 2024 revenue of C$5.6M, a decrease from C$8.2M previously. This still assumes a revenue acceleration beginning in 2H24. However, the timing and the cadence in which this scaling occurs remains largely uncertain. On lower revenue, we are modeling an adj. EBITDA loss of C$7.4M in 2024. We are not introducing 2025 estimates currently as we expect to get greater visibility on the business when the company reports 3Q24 results in November. On the changes to our model, including a higher share count given the current capital raise expectations, we are decreasing our price target to $0.25 on NEXCF shares. Valuation. We are valuing NEXCF shares at $0.25, reflecting approximately 8.0x EV/revenue multiple on our current 2024 revenue estimate of $5.6M. Our $0.25 price target represents approximately 300.0% upside from recent trading levels. A targeted 8.0x EV/revenue multiple represents a premium to other small capitalization technology peers operating within the augmented reality, virtual reality, and metaverse space. We view this as warranted in the near term as the business should begin to ramp quickly given recent partnership announcements and anticipated revenue generation. |