Here we go. I think it says live on my screen here now. Good morning, everyone, and welcome to this webcast. My name is Peter Heuman. I'm the CEO of NEXT Biometrics , and today, we're gonna introduce the quarter two results. With me today, I've decided to bring both our CFO, Eirik Underthun, as well as with all the activities happening during quarter two, I have decided to introduce our SVP of sales and marketing, Ulf Ritsvall, to give some perspectives of all the activities and contracts that has been signed during quarter two. Ulf is also with us today. As always, we have the material that we are presenting here today available on nextbiometrics.com under Investors, and we are also gonna end the session with a Q&A.
You can send in your questions to events@nextbiometrics.com, but you can also put them here in the chat function. Without further ado, I think it's time to change slide and go to the agenda, and I will explain a little bit what, what we're gonna do today. I will just start with a short introduction, a summary of some of the important aspects that happened during quarter two. Eirik will run through the, the more financial part of the report. In the outlook and the market insight and status of where we are with many of these important contracts and some of the most important markets, I'm gonna allow Ulf to spend and provide some more insight there, we end with the Q&A session.
Having that said, before we go to the next slide, I just wanna say, if you have managed to now, this early in the morning, already view the report, I'm the first one to, of course, say that, yes, we, we are, of course, not satisfied with the short-term quarterly revenue. What I'm, on the other hand, extremely excited about is the contracts that have been signed and the activity during quarter two that we're gonna outline further today. I hope that you will have a better understanding of why you get the impression that maybe we, as management of the company, are excited about the foundation we are building for future volumes and scaling this business versus the short-term quarterly results. That's gonna be something that we- that's gonna be the theme of today's presentation.
With that, Leif, I suggest you go to the first slide. Some of the highlights, and as you can see on the right-hand of this screen, that's what we talked about when we signed the breakthrough Asian contract couple of months back, and how we're building up the revenue and how we are looking at scaling up the revenue for NEXT Biometrics. If you take a, a snapshot looking back at quarter two, there are two main important contracts that we have won. It's with our high-margin product, the FAP 20, and it's building important building blocks of the, of the foundation for scaling the company.
Of course, the first one is the breakthrough, what we call the breakthrough contract with this Asian distributor, where we have received an exclusive preferred supplier status in the contract, where there is a minimum value or volume, you can say, that the customer believes he's gonna do minimum, and where he also asked us to guarantee a higher volume, because most probably he's gonna end up somewhere in between there. It's a three-year contract with a two-year automatic renewal and extension possibility for the customer. Ulf is gonna talk more about this. We also signed an additional OEM, as we call our customer, in the important Indian market. Ulf is gonna outline more why this is important and how that complements the already existing important OEM customer we have in the India market.
The big difference is this, company, this OEM, has their own product. They, they are not depending on tenders. They are having and building their own product, a point-of-sales terminal, selling already today and historically in certain volumes. That's why they also managed to, at the same time, as they signed the commercial long-term agreement, signed an initial purchase order. Ulf will tell you much more details about this later on during the presentation today. I think these are two very important parts, and as you can see, you can refer to them to this diagram here, where the Block B is the important India market, and what we believe that can when that's up and running, how that can contribute with millions of dollars in revenue and volume.
The C and D is related to the breakthrough contract in terms of the minimum volume versus what the customer has asked us for. Like I said, Ulf will go into much more detail and explain for you what has happened during the last couple of months since those contracts have been signed. Other positive activities that happened during the quarter is that the team has managed to get our high-margin product certified by the GSA in U.S. That means that now government-related bodies are allowed to buy products that are GSA approved. It also enables, and we know that many other companies and OEMs in U.S. prefer to buy GSA-approved products, because then they know that the government has authorized these products.
There is no no problems in buying them. I think this also opens up further possibilities for us in the important American market. In addition, we continue with the more smaller, medium segment of getting more products to use NEXT Biometrics sensors. An example during Q2 was a kind of point of sales, again, bringing in two FAP 20s into a terminal that's gonna be gonna be implemented by a company for all taxi companies in South Africa. That was also a good addition to the design win pool. I think, like I said, of course, we are not satisfied with the short-term quarterly revenue, but from an activity perspective and bringing large volume contracts, there was a great activity during the quarter.
I think that's my summary, and with that, I will hand over to Eirik, who will now give you the summary of the financials of the quarter. After that, we will start to introduce Ulf, who will provide more information related to this contract. With that, Leif, I suggest you go to the next slide, and then I hand over to our CFO, Eirik Underthun. Eirik, please.
Thank you, Peter. For on the revenues, Q2 was affected by the slower PC market, and the number of sensors sold were reduced compared to earlier quarters. In India, we had the L1 launched, as we communicated in quarter one report, the main growth is gonna come from quarter or quarter three, quarter four. This was a slow, little, small contribution from that segment during this quarter. From our new market in China, we're still working on the preparations of the launch there, and this is expected to provide the revenue from quarter four. Gross margin was 17% during this quarter.
As in the previous quarter, we had a high share of PC sensors in the product mix, this contributed to the lower gross margin during this quarter. As well, there was a low production volume, which provided also some scale effects in the cost of the product, which also reduced the gross margin. We had a quarter with continued cost control and delivered OpEx in line with the expectations. The inventory increased in line with the preparation of the expected ramp-up in India and China. As Peter summarized, there was a strong development of new business opportunities for the long term, while the revenue was lower than what we experienced earlier in this year. Please proceed to the next slide.
In comparison with Q2 2022, the revenues were down, and we already explained the developments there. On the gross margin, it was 70% versus 36% in Q2 2022. Operating expenses of NOK 14.4 million versus NOK 14.2 million in Q2 2022. The adjusted EBITDA was NOK 13.1 million negative, relative to - NOK 9.9 million in Q2 2022. We ended the quarter with NOK 38.6 million in cash, versus NOK 53 million Norwegian kroner at the end of Q1 2023. During this quarter, we had a cash burn or reduction of cash of NOK 14.4 million, and this was a result of lower shipments and collections of receivables, and a small increase also in inventory.
I think the main message for this quarter is that we have continued low quarterly OpEx, and the cash position has been affected by our inventory increase and our preparations for the ramp-up in China and India. With this, I will hand back to Peter.
Very good. Thank you, Eirik. Before I, I let Ulf up on the stage, yeah, you know, to summarize, like I said in the beginning there, of course, I, I do actually believe that the strategic direction that we have set out, the building blocks that I talked a little bit about, and if you look at some of our better quarterly, short-term quarterly reports, I think what the, the main thing that demonstrates is that we have almost an unheard of hardware biometric margin in our flagship product. Actually the contracts that Ulf and the team has signed during quarter two, that sets a very important building blocks in that strategic direction with that high-margin product.
Even though we are not satisfied with our short-term quarterly revenue, but on the other hand, we are, as you can probably hear, and we'll hear from Ulf, very satisfied, satisfied with the customer contracts that we have won. I think it solidifies the foundation of high-margin scaling of NEXT Biometrics in the mid to long term. I believe our high-margin product, with this foundation now in place, we are kind of on the doorstep to just generating the volume, which we have been waiting for, for a long time. I think, I think with that, I will hand over to Ulf, and he's going to explain a little bit further around this. With that, over to you, Ulf.
Thank you, Peter. You can change the slide, please, Leif. Good morning, good day, good afternoon. I always start my meetings like that because I'm a global sales and marketing manager in NEXT Biometrics, working with different regions. Thank you for having me. I will try to explain why we believe China and India are our key markets. Of course, they're large and dominant from the beginning, but if you look at where our product will fit into the market, these are the key aspects of why heading for India and China. They are two different countries, of course, but we believe that 70% of our expected target annual revenues will actually come from China and India. I will try to demonstrate a bit more insight.
I think you've heard us talk about India a lot, but I will try to explain a bit more about China as well on the following slides. Please, Leif, if you proceed to the next slide. Yes, we have heard about the new L1 standard from India, a bit more secured compared to the previous generation called L0. It's finally deployed in India, and we have seen the first tenders, we have seen the first devices on the market, and also, they have given an end of life for the L0, the previous generation. That is of course, have short-term effects on our sales, which is one of the reason why the sales is low, because there's no L0 tenders out in India.
There's an estimated 4.5 million devices that needs to be migrated from L0 to L1. On top of that, of course, there's new sales. The market in general that we can address is, yeah, decent, decently large. The Indian authorities, when we see now the first initial 300,000 tenders, actually, and the majority of that came from the postal service. The Indian authorities have chosen similar way they have done in the smartphone industry and in laptop industry. They want to do Make in India. They want to have the Indian OEMs, Indian, our Indian customers, serving the market. They actually prefer to have local Indians supplying to the tenders.
That's been showed in the first tenders, where 10% actually went outside India from a non-Indian company, and the remaining third, 90% were done with an Indian OEM. One of our Indian OEMs, the ones we presented, the first Indian OEMs we presented for L1, he actually, he has a historically 20%-25% market share in a reader market. He actually won in this tender more than 30%. That shows that actually the authorities give him a higher percentage, which also demonstrates that we have chosen the right go-to-market strategy. He has supplied the 300,000 tender with his old L1 device. As soon as he's certified with the NEXT Biometrics -enabled reader, he will swap.
Because of the, the product fit, the, because of the form factor, because of the performance, and so on. As soon as that, that happens, we will see, see volumes in, in, in this region. We added in June, during Q2, we added a new Indian OEM. They, they are making point-of-sale terminals. They are also making readers and so on. They, they had a very aggressive time plan. They, they actually started integrating their our software, hardware, and actually are planning a la- launch already in Q2 2024. You can back calculate when our or, or we can back calculate when, when the orders are, are coming into us.
In, in, if you, if you look at the two, one OEMs from, from our customers, we, we have already, at this moment, above 30% market share potential in the Indian market. We, of course, our growth plan is, of course, to go after, to replace the optical, the big and bulky and very expensive optical sensors. Leif, you can change the slide, please. Moving into China, I don't think we have discussed and talked so much about this and communicated too much. There's a few market basics in this industry or in, in, in China. There's a similar regulatory certification required called China ID in China. That's handled by the Chinese authorities. Typically, you have public security, you have payment devices, you have police devices, and so on in this, in this part.
You have a non-FBI certified, non-regulatory required certification, and that's consumer goods. That can be smartphone, tablet, and so on. We are, with our go-to-market strategy, which is beyond the next slide, addressing both categories. If you look at this, of course, it's important to be mandate or to be compliant to the China ID. Under the China ID, we are with NEXT is required to work with approved algorithm providers. There's a few approved vendors in China. We are already working with two of them, and of course, we will not stop there. We will continue working with these as partners and addressing even more OEMs, so, so customers. We expect it's, it's not as lengthy testing as in India.
It's actually fairly quick, so we believe the certification will be done by October this year. You can change the slide. We have two, two go-to-market partners. As, as you heard Peter say, we have the Asian, Asian distributors. We have an exclusive contract. They are targeting the China, mostly the China ID part, so public security domain, like police. It could be a camera-based, sort of handheld device, bank. It could be a reader in the bank. A healthcare could be a medical dispenser, and these kind of things. That's, that's one, one go-to-market partner. The other one, we announced in earlier this year, and that's a strategic go-to-market partner. They are targeting consumer and commercial products.
Of course, some of them are China ID as well, but more digital wallets, USB tokens, ATMs, and so on. These will be supported by our already existing distributor, XM Holder, as a fulfillment partner in this. You can change the next slide, please, Leif. What's the latest status? We have now worked with the Asian distributor very closely. We have looked at his five, even if he have even more OEMs or customers. We have looked into the inventory levels, the expected volumes, timing of when they will change, and mass production launch dates for the five different OEMs. We believe that there will be a stocking order and initial order from the Asian distributor early Q4.
The initial product launch is expected in the beginning of next year. We are also Weisheng. We, they have facilitated and helped us, and actually, we are now on the verge of multiple design wins. Actually, yesterday, I got a stamped design win with a OEM in China. It's not anything that we will make public. It's not as significant as we need to publish it, but it's a first initial step for Wiser, which is great.
It's a, it's a, sort of ATM machine in, in, in, in the China ID part, and it will be the first OEM, and we are expecting more to come very soon, as well as we are working with new partnership agreement that is currently under negotiation. With the, with the new OEM design win, I'm expecting XM Holder to place the initial stocking order for addressing these design wins well before Q3. I hope you, you got to share that I shared a bit more information, insight. Now I hand over to Peter. Thank you very much!
Okay, now, yeah, thank you, Ulf. Very good. I, I hope you, you, you get more details around why we find China and India a key for success, that we have established a foundation. Like you heard Ulf said, if we take China, and both with the Asian distributor, so basically what Ulf told you is they have been involved now for months with, since we announced it, with this OEM, and with the Asian distributor and the different OEMs, we know when they're gonna replace and put us into their products, timelines, what they have in inventory level. I think they've done a great work, and that's what we mean, why we are on the doorstep.
The, the size of these countries, both China and India, and how they work with biometrics, I think is, is explaining the foundation that we have in place now with contracts. That doesn't generate short-term revenue. We need to do this work to get into the products before the demand is arriving, but it looks like we are on the doorstep of, of getting these. For India, it's depending on that our main partner, historic partner, gets the certification stamp, which hopefully should happen very soon, and then that volume will start to be driven. He already have proven that he has a great potential for acquiring a good market share that will drive volume for us. We have the two key markets. We have the volumes in sight with the contract, with the, with the partners.
I think we are set for mid to long-term success, even though it looks a little bit challenging in the short-term quarter. I think that's the main takeaway that we try to bring during today's call and with this report. With that, I think we should hand over for a Q&A. I think we have seen a few questions coming in. Maybe, Eirik, if you distribute to me maybe the questions, and then we see how we can do this.
Thank you, Peter. We have some questions here, the first one is about China. Peter, can you explain a little bit more about China? The question is: Interesting presentation today. You seem to be very excited about China. Could you please explain when and why the revenues will arrive?
Yeah, I think we, we just spoke quite lengthy about it. Like Ulf said, we have already established two different partners, two, two different. One, with a Asian distributor, where we have a preferred supplier contract. We now have awareness of the volumes, timelines, et cetera. In the contract with that Asian distributor, I think we, even when we signed the contract, informed you that the initial order should arrive no later than end of Q4. I think what Ulf just said is he, he expects it to be during Q4, maybe even early in Q4, with the knowledge we now have. I think that's a great way of generating volumes, being aware of what's going to happen, which gives us more confidence.
The other one is the market entry partner, Weisheng, where Ulf has provided them with an historic partner or distributor based in China, who has helped Newland, for example, and has a good relationship with us. We are actually, actually bringing them new business through all the activities that Ulf's team and the Weisheng team is generating, and where Ulf, I think, said today that the first design win is in place. I think that's also why we expect that this distributor will start to place the first stocking order. We have two a little bit different approaches of, of starting to enter a very large market, but one with a very strong volume contract, and one where we are opportunistically entering into new design wins and businesses already backed up by an existing fulfillment center.
I think that's what drives the excitement from our part, to have these kind of contracts and to enter the market in a good way.
Okay, there is a couple of questions here, relating to cash burn and, and about raising capital. First of all, we don't forecast or give detailed guidance on cash burn, nor detailed revenues forecast. Maybe you could talk a little bit about the capital situation, Peter. Some, some participants in the call, they're worried about the cash position. Is there a need for more capital going forward? Do you need to raise capital soon?
Yeah, that's a, that's an interesting question because I, I don't know how I should. I think like, you know, guys, it's a valid question, looking at this report, and we can be excited. I think I said before, you know, this is gonna be a tight race with the, with the available cash pool that we have. Having that said, now sitting here, having contracts, having much more insights, you know. It's going to be a tight race, but, you know, when we talk capital, there are different ways you can do it. With contracts and purchase orders, there are other ways how I can finance if there is just a, you know, a couple of months, a quarter or two, where more capital is needed. That might not be that I have to go out to any shareholders about that.
There are different ways of solving that. We are looking at all different ways, you know, like I said, it's, it's going to be a tight race, but having these things in place, if, if we're lucky with timing, this might not even be an issue. I don't think I should generate any more speculation or so. We are monitoring. We, we look at different alternatives. It's going to be a tight race, I said that before, but, I think that's a little bit how I would respond to that question.
Okay, another question. Recently, several Nordic biometric companies have been struggling with their business. Why is NEXT any different?
Now, that's a wonderful question. You know, on the other hand, I mean, for us, it would be great if all biometric companies succeed. I think that would be good for everyone. I feel confident that we have dared to take some tough decisions. One of them was when we said we are not going to go into payment cards. Of all the different reasons of plastics, but we are all aware of in this part of the world, that I think already many now are using their digital devices, phones. I know from my time in Africa, they are also using their phones. We don't believe in that. There are many companies, biometric companies, and in Nordic, who are still very focused on these things, have said for years that's going to drive more volumes.
We have said we, we don't believe that. That might happen, we don't believe it, we don't think our product fits that. We have an unheard-of margin potential in a, in a, in a different market segment, which can drive volumes for NEXT, which is what we are executing upon, where we have started to gain contracts. All these contracts, based on our flagship product, will generate an unheard-of margin. We have seen proof of that in some historic reports here when we had the higher volume. That's why I believe we are very well positioned. We have a clear target of who we are competing with, which are the optical sensors. They are sold very expensively. We can provide the same security, provide our customers with a much lower price, and still generate great margins for the company.
I think we feel confident we have decided and, and chosen the right strategic direction, which drives these opportunities. I can't speak for how the other ones are executing, why they have taken their decisions, but I feel confident that we are on the right path.
Right. There's another question. Can you reflect on the US market and on possible new products for the future? What do you expect for the GSA approval in the US?
Good question as well. A little bit difficult to, to, to guide any explicits. I, I think what I've heard from Ulf, maybe I should even let him respond, but it's, you know, we now have the FBI PIV-certified flagship product. The same product is now approved by the GSA. I know our Ulf has recruited a new head of sales in US. I know they are in dialogues with different OEMs who are providing products into different government bodies of United States. We cannot have dialogues with these companies, and we are not valid if we don't have a GSA-approved product. Now we have that, so these dialogues are being intensified. I do hope that we're going to see something there.
We have already signed up with a partner. Companies can already go directly and buy from this company in US, our sensors. I think it opens up, like I said, also possibilities for different OEM manufacturers who feel more confident in producing products in US, buying GSA-certified products. Let me not overpromise anything here, and I hope that Ulf will come back in the coming quarters and explain a little bit the status and if there are some, some interesting deals that can come out of that. I think it's a long-term positive thing that our flagship product is FBI-certified, GSA-certified, that we have certifications arriving in India based on our products, that we have the China ID certification. I mean, it starts to build up a very solid foundation.
There are no more questions, Peter.
Okay. I would like to, to thank everyone for joining. Like we said, we are, of course, not satisfied with the short term, but as you can probably hear from us, we are excited about, about the long term or mid to long term with the contracts that we now have at hand. Hopefully we will come back and demonstrate this during quarter three and, and the remaining part of the year during quarter four, with some larger volume orders, et cetera. I think that's something we are fighting for to make sure we can demonstrate. All right. Thank you very much.