XRG xReality Group

I’ve just started to investigate this company after seeing a few Strawpeople take interest in it. I’ve listed to Wini and Claude talk about it on the Small Cap Wrap investing podcast and it was enough to pique my interest. I really like the idea of using virtual reality for training and have seen it in a variety of fields – technical training for trades i.e. electrical, hospitality etc., sports like golf and baseball, etc. I’ve put together a post to go over my initial thoughts and questions I have on this investment below (I answer a lot of these myself by the end. This feels like when you would ask Mum to find your missing shoes, only for them to seemingly appear before your eyes when she enters the room):

With the rapid advancement of technology we’re seeing, I’m curious to know what the capex will be on hardware, and how long today’s VR equipment will last before it’s considered obsolete. Obsolete is probably a too harsh a word, so I suppose I mean how long will it last before it’s outdated/ not top of their class? Will XRG be required to replace these, or will their clients own the products and need to upgrade by purchasing new units?

I’m also curious on how the business model works. The Texas DoD contract reads that XRG will supply the software, equipment and support, with potential for ongoing support over the next couple of years. Does this mean Texas DoD lease it for this period, or do they own the hardware/lease the software? I had wondered if it was similar to Zero Latency – a VR entertainment company in QLD (potentially other states) where you arrive at a warehouse, pay the session fee, and put their gear on for a set time. I could see XRG potentially doing the same thing, that way they have military and other armed forces traveling to the location to partake in training at a XRG Facility. This could be opened to the public seeing as America has relaxed gun laws compared to Australia – of course there are many implications of offering tactical training to everyday citizens which I won’t go into, it’s just another potential source of revenue that may work very well in the U.S. In saying that, I don’t believe this is how they do it(?).

XRG were also awarded a 2.1 million dollar grant from the Australian government a few years ago which they planned to use on implementing AI into their products. I feel like this is a company that will really benefit from advancements in AI – I imagine it will allow them to continuously create new, improved training simulations and scenarios for their clients at an accelerated pace, while keeping overheads to a minimum. I would like to understand this better; have they seen success yet, what is AI doing for them now and what is planned?

The other elephant in the room is the iFly component which they are actively looking to sell. I agree with many of the comments around this; it’s the right move and if done correctly, will clear their debt and raise their cash reserves. I love a company with little to no debt, so this would be a big tick for me. Is there any way for investors to see the current progress on this shy of announcements stating that they are attempting to sell it?

I was a bit underwhelmed with their socials. I had a look through YouTube as I was interested in seeing their product in action and found a few channels in their name. The most content I found was 6 videos posted all over 12 months ago. The majority of them went for less than 30 seconds, where the best one was a 2-3 minute clip from Nine News doing a story on the company with a little more glimpse inside the clients and what the simulations look like. Their Facebook’s latest post was from 2024. Maybe they need to ramp up the PR department?

I’ve just realized that I forgot to watch a meeting with CEO Wayne Jones on our forum – I’ll do that right now!

~an hour later..

Right so that was February 2025 – around 15 months ago. And it was brilliant. Andrew and Wayne went right through and answered a bunch of my questions, even ones I didn’t know I had!

·        Subscription model (most paid for 3 years up front) transitioning into monthly receipts

·        Hardware has 3 year expected life cycle.

·        Advantages over competitors – these guys are military (I also like the fact that they utilise real weaponry)

·        Excellent culture within the dev team

·        XR is/was (now exceeding?) as profitable as the entertainment leg

I am impressed with Wayne and his strategic and clinical approach to planned growth. I also really appreciated what I felt was an honest conversation about the business. The only potential issue I currently have is the sale of FREAK and iFly, and the debt levels. It was being discussed back during this meeting at the start of 2025. It’s currently mid 2026 and there still hasn’t been a sale. I have seen that Wayne featured on The Briefing Room podcast last month, so I have added that to my listen list for tomorrow to see if any more has been said on where this is at.

I'm just getting my thoughts down on paper (well, the screen?) as I look into this. It's mostly for reflection in the future, but I suppose I'm also interested to hear others thoughts on XRG. Thanks to @Strawman for initially meeting with Wayne last year, to @Tom73, @Wini and others that have done deep dives into XRG thus far and brought it onto my radar.

p.s. CEO and COO have enough skin in the game too, roughly 4-6x their salary. Would be good to see others buying.

$0.55 Valuation detail

Key Assumptions:

• Entertainment is ignored (sales excluded and cash on sale is upside)
• Based on FY30 Sales and NPAT% estimates (with matrix of value at different NPAT% & PE also shown)
• High margins (80%) are maintained and with scale an NPAT% of 21% can be achieved (workings below). This includes margin impacts of distributors where I assume the ~20% commission (thanks @Wini) is matched by SG&A savings for the associated sales.
• ARR estimates the company supplied are used as revenue estimates based on level of market penetration into the different market and region segments.
• Assumed that by FY27 the company has 1% of the US Law Enforcement (LE) market and hence has taken 6 years to achieve this, after which I assume an increase by 0.25% each year (same for other market segments).
• ROW LE market penetration is assumed to be accelerated to 4 years to reach 1% due to already established product and with a start in FY26.
• Military US and ROW starts in FY27 and grows at the slower rate of 6 years to reach 1% similar to the initial LE market. Note I realise the company had military sales well before this in Australia, but the first sale to the US and a NATO country in H2 FY26 as well as the introduction of the MR-1 product are a more substantive step in this market.

By FY30 sales of A$151.7m result from a market penetration of just 1.75% in US LE, 1.25% ROW LE and 0.37% for both US and ROW Military. We should see quicker take up in the new markets as the tech and company is more established than when it first started in FY22 with OP-1, a new product in a new category. As such I see these market penetration rates as modest, none the less the value can be recalibrated over time to real rates.

Below are the workings, I have picked FY30 as the valuation point, balancing where sales start to approach scale and we don’t have to look out too far. Values increase with later valuation points due to the large growth headroom on offer, adding some margin of safety.

If you add in the cash generated through to FY30 to this valuation then it is over 10x the current price which is a very big call, I realised. However, XRG is a clear leader in a new market that is only just being tapped, and they have a tiny fraction so far. Their market and product range is expanding in response to customer demand which are unmet. At well under 1% penetration of the market this is a $500m company currently trading at $45m.

The risks centre on competitors and the companies ability to continue to innovate and deliver on it’s customer needs. Their strong relationship and involvement with their customers, love of the problem not the solution and cultural fit to their customer give me confidence they can succussed. We will continually receive feedback on their ability to success based on rates of sales growth and additions of new regions, which may be lumpy for large customers but should small customers should provide more consistent data.

I welcome comments and feedback from all on the valuation and acknowledge this is a high level and ballpark valuation that is lacking compared to a solid DCF. However, like my initial valuation it’s purpose is more to identify the direction of value relative to the current price and provide this is significantly higher it indicates a good chance of an asymmetric investment outcome.

Disc: I own RL+SM

Hot on the heals of the US DoD contract update with the first sale of the MR1 product, xReality has another first with the sale of the OP-2 system to the Swedish Military. The value of the contract at ~A$450k is welcome but not significant, it’s the fact this is the first sale via a distribution parter (PROMOTEQ) in Europe and to a NATO country.

We are seeing the distribution model for APAC and Europe finally getting a foot in the door. Q3 had the first sale in Japan and now in Q4 the first in Europe, the first sale is the hardest, so it is starting to look promising. 

Seeing sales via distributors in FY26 ticks another item on my watch list for xReality to achieve in FY26, which was:

• DoD contract outcome – ACHIEVED (successfully)
• Exit Entertainment - WIP
• Distributors Ex-USA: ACHIEVED (Japan + Sweden)
• Product Development: ACHIEVED (MR-1)
• Debt: WIP (net debt now down to ~$2m)

What is yet to be explained is the economics of the distributor sales. I expect this is for a couple of reasons, mainly to do with commercial confidence and the fact they are still working through this model, so a standard approach may be some time off. We can expect lower gross margins (below current 80%), but once distributor sales add scale and lower average operating cost they may help improve net margins.

It is interesting that the first sale in Europe is to a military customer rather than law enforcement and probably reflects the spending focus of governments in Europe currently (aka Ukraine & Trump trashing NATO). This may be replicated in other countries in the European market so it’s good that XRG now also has the MR-1 product available which increases use cases for military.

The momentum of this business just keeps building.

Disc: I own RL+SM

As expected a strong q2 quarterly update from XRG .continuing to grow pipine and ARR.

no new large contract wins i ln Q2 and that is what i will be watching for going forwards- happy to hold currently

Investing for future growth- can revenue growth continue apace?

disc- held in RL (5%)

A notice today for the issue of 1m options to an NED is interesting for the fact that the exercise price is $0.065 and the expire is 23/1/26. I am not sure which director this is for but given today’s close of $0.043 and a 52-week high of $0.067, this shows some confidence or bravado on the price over the next 12 months. 

I don’t think I have ever seen options issues where the share price needs to go up more than 50% in 12 months for them to be in the money at the time of issue…

That said, I wouldn’t be at all surprised if there well in the money by then!

Disc: I own RL+SM

Market Cap of $24.766m

Management Bio's

John Diddams 

Chairman – Non-Executive 

Appointed 24 January 2022 

John is a professional, highly experienced and strategic public company director with over forty years of financial and management experience in Australia and overseas. 

He has extensive knowledge and experience in the practical application of ASX Listing Rules, Australian corporations’ law, international accounting standards and corporate governance principles, and a strong track record in driving business performance, mergers & acquisition, due diligence and corporate governance. 

John is also a Non-executive Director for Aroa Biosurgery Limited (ASX:ARX). 

He holds a Bachelor of Commerce from University of NSW, is a Fellow of the Australian Society of CPAs and a Fellow of the Australian Institute of Company Directors. 

Wayne Jones 

Director & Chief Executive Officer 

Appointed 4 November 2011 

Wayne Jones is the CEO of XRG and was appointed to the role on the foundation of the company in November 2011. As Chief Executive, Wayne has developed and managed multiple business ventures and projects within Australia, APAC, China and the US. 

Prior to establishing the company, Wayne was a commander in the Special Air Service Regiment (SASR) and responsible for the development and performance of teams in complex and challenging environments. His goal focused approach and strategic vision resulted in Wayne being highly decorated throughout his military career. 

Wayne holds formal qualifications in Project Management, Business, Security and Risk Management and Management (Financial Management) and is a Member of the Australian Institute of Company Directors. He has over 25 years’ experience in leading teams and delivering results. 

Wayne maintains his involvement with the Australian Military and the Special Forces community as Chairman of the Special Air Service Association (NSW Branch) 

Danny Hogan MG 

Director – Non-Executive 

Appointed 4 November 2011 

Danny enlisted in the Australian Regular Army in 1991, and in 1997 was selected for further service within the Special Air Service Regiment. He has been recognised and awarded for his actions and leadership during his 21-year military career including receiving the Medal for Gallantry. He was selected and completed a two-year military exchange in the USA with two of the USA’s elite Special Forces Commands. While in the USA he gained his freefall parachuting qualifications and developed a very strong background in the use of vertical wind tunnel simulation training. Danny was a highly qualified senior dive instructor within the Special Air Service Regiment. Danny served as an executive director and the Chief Operations Officer from the foundation of the company until November 2019 at which time he became a non- executive director. Danny is a member of the Australian Institute of Company Directors. 

Kim Hopwood 

Chief Product & Technology Officer 

Appointed 26 May 2021 

Kim Hopwood brings over 20 years of experience across technology, media, management and operations. Kim started his career as a network engineer at Cisco Systems where he achieved his CCIE. Kim then co- founded digital agency Pusher in 2004 as Managing Director, which he sold to global communications group Publicis in 2014. Kim remained as Publicis Australia’s Managing Director of Digital until late 2017. 

Kim started working with XRG in 2012 as a supplier, then freelance consultant before joining full time in 2019. Kim holds the position of Chief Product and Technology Officer, overseeing XRG’s corporate strategy, technology, current and future products. 

Mark Smethurst 

Director – Non-Executive 

Appointed 15 November 2021 

Mark’s significant Defence experience spans over 35 years in the Australian Army, with 27 years as a Senior Special Forces Officer commanding at all levels including the Deputy Commander of the Australian Special Forces. Mark Commanded the NATO Special Forces in Afghanistan during 2011/12 and was the Deputy Chief of Operations for the US Special Operations Command in 2013/14. 

He currently holds a variety of board and advisory roles with several private and public companies and is an Advisor to the Global Special Operations Foundation and the Chairman of the Commando Welfare Trust. Through his experience and other business interests, Mark is well positioned to support XRG in Australia and International markets. 

Mark is a Non-executive Director for Highcom Limited (ASX:HCL). 

Philip Copeland 

Director – Non-Executive 

Appointed 23 January 2023 

Philip Copeland is an experienced senior leader in the enterprise software-as-a-service (SaaS) sector with a successful track record scaling enterprise SaaS businesses into global markets across highly regulated industries including government and financial services. Philip’s extensive experience includes being former CEO and co-founder of Avoka Technologies, a digital business enablement platform. Founded in Australia, Avoka rapidly expanded to the global markets with a core focus on the US. Avoka was acquired by Temenos in 2018 for $US245M. Phil currently resides in Colorado, USA and will be assisting XRG to break into the US Government markets and guiding the company as it executes it’s international growth strategy through Enterprise Software. 

XRG has exactly what I am looking for in an investment, an imminent and evident unrecognised pivot in performance (well until today maybe). The type of thing that stopped quality SAAS business being recognised in the early days is in play, namely a delayed and hidden profitability from growth investment, high margins and sticky revenue commitments.

Interview of CEO Wayne Jones by Alan Kohler provides a lot of insight (I will try and get a print copy for those who don’t have access): xReality Group: All Geared Up - Intelligent Investor (released Friday so weekend listeners were buying today it seems)

Forbes article for a bit of history: xReality Group going from SAS to SaaS

The business has been investing the profits and cash flows of it’s core business into a new business that is now achieving strong commercial success to the point that it should generate more income than the core business by the end of FY25. The core Entertainment business has performed reasonably well over the last 2 years but the costs to develop the new Enterprise business (6m+) have made XRG unprofitable and unattractive to investors.

In addition, debt has been built up and dilution from capital raises has been needed to fund the development of the Enterprise business. This I expect to see change in the next 4C due to the working capital positive nature of the Enterprise business and quite frankly astonishing growth rate from market acceptance in the US.

Operator XR is the Enterprise product and investment case for XRG. The equipment, licence and systems are sold on a 3 year agreement with payment up front in most cases. So in the first year 1/6^th of revenue is recognised, 1/3^rd in the next two and 1/6^th in the final year on average, but the current high growth rate will sku this as the weight of new contracts in a year occur later. 

To measure success we can look at Revenue Vs Revenue + change in Deferred Revenue as graphed below, which shows a leading indicator for how revenue will move. Looking at FY25 based on YTD information (DoD contract + customer additions), the lead indicator is streaking ahead of revenue as the Enterprise business scales and goes from a rounding error Vs the Entertainment business to the dominant business by the end of FY25.

The DoD contract: US$5.6m over 20 months Development of augmented reality (Vs VR), which is not the final product but XRG will own all the IP at the end of the project.

The upside opportunity is exceptional given it is currently only a $20m cap (EV $28m) company and my expectations that operating cash flows likely to be well over $4m for FY25 (FCF of $2m+) however NPAT is unlikely to be positive due to delayed revenue recognition and cost build to support growth. Profitability I would expect H1 FY26.

LA SWAT is using their equipment + 40 other PD’s

70-75% GM for Enterprise

US$150-200k current deal size average for customers

Expectations for 4C Q2 FY25: I expect positive Operating CF to exceed IP costs to provide positive FCF due to Q2 usually being a strong quarter for Entertainment (Est 2-2.5m up from under 2m) but increasing Enterprise contributions (Est 3-4m up from 2.3m) driving total receipts in the range of 5-6.5m. 

As such I believe Wayne Jones statement in the interview with Alan Kohler that additional capital raise is not likely due to expecting positive CF in Q2 and the additional 500k debt facility to allow for inventory build to provide any required buffer on the $1.5m closing balance from Q1.

I have a lot more analysis to finalise and add, so will publish as complete, but my general conclusion that this is an asymmetric investment with massive upside and clear evidence of likely success is basically locked in!

Disc: I own as of today and looking to buy more.