Earnings Transcript for KNRLF - Q1 Fiscal Year 2022

Operator: Good morning, and welcome to the Kontrol Technologies First Quarter 2022 Earnings Conference Call. I'm joined today by CEO of Kontrol Technologies, Paul Ghezzi; and CFO, Claudio Del Vasto. Before we begin, please be reminded that certain statements and information included in management's discussion and analysts and financial statements and presentations, including information related to future financial or operational performance and other statements that express the expectations of management or estimates of future performance constitute forward-looking statements. For more information on the company's forward-looking statements and risk factors, please reference the management discussion and analysts and our financial statements. For all public information filings, please visit the www.sedar.com. Thank you. I would now like to turn the conference call over to Mr. Paul Ghezzi, CEO of Kontrol Technologies. Please go ahead.

Paul Ghezzi: Hey, everyone. Good morning. Thanks for joining us. I'm joined on the call today by our CFO, Claudio Del Vasto. Following a breakthrough year in 2021 for Kontrol with record growth, we continue our momentum into 2022 with a record first quarter driven by strategic acquisitions, organic growth and continued financial discipline in our balance sheet and P&L. Since our inception as a public company, we have operated with the philosophy of growth at a reasonable cost. What this means practically is that we'll operate as prudent managers of capital and our cash flows, while working to grow and scale the business. We believe this is a sound approach, especially, so in a volatile market. I'll provide an update on our business initiatives shortly. But first, I'll turn the call over to Claudio for a review of our key financial metrics for Q1 2022. Claudio?

Claudio Del Vasto: Thanks, Paul. Hello, and good morning, everyone. This is Claudio Del Vasto, CFO of Kontrol Technologies. As Paul noted, we're off to a great start after achieving our highest revenue year in 2021. We are pleased to report that our revenue and earnings grew substantially in the first quarter of 2022 compared to the first quarter of 2021. Revenues for the first quarter were $26.6 million, an increase of 702% from the same quarter in the prior year. Net income for the first quarter was $1.6 million compared to a net loss of $824,000 for the same quarter in the prior year. Adjusted EBITDA for the first quarter was $2.5 million, an increase of 123% over the same quarter in the prior year. Gross profit for the first quarter was $6.7 million compared to $1.8 million over the same quarter in the prior year. Working capital increased $3.4 million over the December 31, 2021 year end balance. Cash flows used in operating activities for the first quarter were $2.5 million and in part relates to an increase in accounts receivable of $4 million in the first quarter. Following the acquisition and current integration of Global HVAC, which is a large project company, we are pleased with our current consolidated gross margins, but we'll seek to improve the margin over time through the addition of our current recurring revenues service platforms. On a consolidated basis, which includes all operations, the Q1 gross margin was 25%. Our service platforms generate gross margins in the 50% range and with growth of these platforms Kontrol's overall consolidated gross margin would be impacted favorably. We will continue to maintain discipline in our gross margin and EBITDA margin to grow earnings over time. We remain focused on strengthening the balance sheet. As at March 31 2021, working capital was $7.1 million. This balance includes the unsecured non-convertible debentures of $5.7 million which are maturing in Q4 of this year. The company has a successful track record of refinancing or paying down its debt. As we work diligently to scale the business of Kontrol, we continue to operate with discipline, in the management of our capital structure. I'll now turn it back over to Paul.

Paul Ghezzi: Thanks Claudio. I think it's fair to say that the current market conditions for small cap public companies are not favorable, maybe that's being kind. Like most CEOs, I'm continually being asked to comment on the share price. I don't think it's the role of the CEO, to comment on the movement of share prices. But what I can say is there are times in market cycles where share prices become disconnected from the business performance. In those times we focus on, what we can control, which is working to scale the business while maintaining discipline in our financials. Small caps have been hit much larger than large caps or much harder than large caps and the impact has been across all market sectors. While short-term volatility is the primary focus of the market, the decisions we make to grow the business are significant shareholders and managers with a long-term focus. I'm going to touch on some industry outlooks and some key points for the business and then, we'll transition to a Q&A session. Buildings will consume more than half the world's energy in the next decade and contribute more than 40% of GHG emissions. To solve these challenges asset managers and owners will need to adopt more technology in their buildings, specifically technology and solutions which can assist in the following, the need for deep energy savings and operational savings, the ability to meet corporate sustainability targets which may also include regulatory reporting, avoiding punitive carbon taxes, dealing with increased shareholder activism and taking advantage of government investment in green infrastructure. Across our customer base, as we continue to expand and grow revenue we are having meaningful and important conversations, about how to better operate buildings with additional technology, services and solutions. Higher energy costs and higher interest rates are having a direct impact on the profitability of operations and the value of all buildings. For the past 20 years asset managers and owners have been able to rely on lower interest rates and lower cap rates to drive increases in property valuations. Those days for now are over. Now they are required to make choices to improve operations and valuation through an upgrade cycle, which Morgan Stanley has recently referred to in their research report as the commercial building and modernization super cycle. I'm going to touch on supply chains. Like most other companies, Kontrol has been impacted by supply chain issues which are well documented across the global economy. Specifically, we continue to experience delays in material shipments and technology components. To-date those delays have created additional lumpiness, in the timing of project delivery but have not had a material impact on the overall business of Kontrol. We work diligently with our customers to manage schedules and expectations as well as our suppliers. At this time it's difficult to predict, when supply chains will be at their pre-COVID pandemic functioning. Inflation and interest rates. Inflation higher interest rates are impacting the overall economy and specifically for Kontrol, there is an impact to higher input costs into projects. In the case of our project business, we've been able to pass on a significant portion of those costs to our customers in the form of higher prices. In our service platforms and software platforms we can pass on the majority of those price increases. We will seek to continue to work with our suppliers and customers, as the macro environment remains very fluid. BioCloud. BioCloud remains an important internal innovation for Kontrol and has given us a global platform, new partnerships and opportunities to scale our technology platform. Most recently, Kontrol has been working to add to the BioCloud product line to the development of Kontrol BioWater. Early viral detection is in its infancy, as a new strategy and a new industry for dealing with future pandemics. We continue to invest in BioCloud development research and expansion. Kontrol carbon. As publicly announced, the company has created a new branded solution for the carbon and emission markets which we define as Kontrol Carbon. The intent of Kontrol Carbon is to provide a unified solution across our operating platform. In the industrial market, we will be selling monitoring technology and solutions targeting higher emitters in the oil, gas, cement and fabrication sectors where we have an established and strong customer base. In the commercial building sector, we'll be targeting energy improvement and GHG reductions. In the carbon offset markets, we will seek to both generate offsets and provide solutions to our diversified customer base. We anticipate that we'll have 10 GHG emission verifiers on the team shortly, as we seek to expand these services and solutions. I'm going to touch briefly on the at-the-market offering as there was some confusion and I did receive a number of calls on this from shareholders. Kontrol has recently announced the filing of an ATM or an at-the-market offering. The ATM provides the company with flexibility and control over its capital structure. The company does not require new capital to operate its current business, but is continually exploring potentially accretive and synergistic opportunities. An ATM can be a tool to raise capital for such accretive opportunities based on the prevailing available common share price. More specifically, Kontrol is able to raise capital on an as-needed basis with the option to refrain from offering shares via the ATM, if the available price is on a particular day or unsatisfactory. Unlike private placements, which regularly require deep market discounts and associated warrants, we believe this is a more opportunistic, strategic and less dilutive capital tool in our arsenal. ATM offerings can be started and stopped at any point. And to date, we have not raised any capital with the ATM. Overall outlook. The company has previously provided its outlook for 2022 revenues and EBITDA. And at this time there is no change to that outlook. I will now turn it over to our operator for Q&A.

Operator: [Operator Instructions] There appear to be no questions at this time. Please proceed.

Paul Ghezzi: Okay. Maybe we'll give anyone who wants to jump in a chance and give it a minute. And then, if there's no questions, we'll wrap up.

Operator: [Operator Instructions] Your first question comes from Todd Powell [ph] with Ontario Limited. Please go ahead.

Unidentified Analyst: Good morning, Paul. How are you?

Paul Ghezzi: Well. How are you?

Unidentified Analyst: Not too bad. I have a question in regards to BioCloud. Are you able to speak about the provisional patents that you have with BioCloud? And have you taken a position to file PCT yet on those patents, or are you just leaving them as they for a while? Can you talk about that?

Paul Ghezzi: Sure. So the patents are filed and we're leaving them for a while just to see what happens in the market. As we expand the technology we anticipate filing more patents for other applications. Currently, we have not received any feedback in terms of anyone infringing on those patents or in terms of the patent process, I think we're about halfway through where we need to be in terms of time lines. So, we'll take a wait-and-see approach.

Unidentified Analyst: Okay. Just one last question. There's quite a gray area here with the technology of detecting the virus prior to where it will move into humans. The question I have, there's been talk that Health Canada has looked at it. And I'm wondering have you filed another provisional, so that you could use it as a medical device? Is that something that you've looked at? I know that you don't want to be a medical device. You don't want to go through all that. But at the end of the day, you kind of have a medical device. So, it would seem to me like why not file a provisional to cover that off as well? So, is that something that's come up or no?

Paul Ghezzi: So, I think it's a fair question. I think you have to remember, this was a pre-vaccine technology initiative. So, they're really -- it's easy to forget, but there was no time. And so, had we taken the approach that this is a medical device and we're not an ambient air monitoring system, people would have said, well, you're going to miss it. It takes two years, et cetera, et cetera. So, I think in hindsight you have to look at the amount of time that we had to execute, which was a very short window and then the vaccines came in. And so I would say, you have a valid point and it's a long-term perspective, which we take with the technology. And it is something that we are considering internally but then you have to look at what's the benefit of that from a technology and consumer perspective. So I'd say, it's a good point something we're considering internally and very fluid. Thank you.

Unidentified Analyst: Yes. Just lastly, I think the gray area in having viral detection is something that you get the FDA and you get Health Canada, they've never had to deal with something like that. You are the first. So now, it's like -- I think there's quite a confusion with the understanding out there that it's -- you could file a provisional with your technology. And down the road, you could license that off to somebody that wants to create a medical device. So, any…

Paul Ghezzi: Yes. No, it's a fair point, and I appreciate it. It's something we are considering for the future. So yes, it's a fair point.

Unidentified Analyst: Absolutely. Okay. Well, thank you. I think you're doing great. And I'm surprised I'm the only question this morning.

Paul Ghezzi: All right. Thank you. Take care.

Unidentified Analyst: Take care. Bye.

Paul Ghezzi: All right, everyone, thanks for your time and we appreciate you joining us. So, we're going to conclude the presentation. I think operator, if you want to close off.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines. Have a great day.