KNRLF - Kontrol Technologies Corp. (KNRLF) Q1 2023 Earnings Call Transcript

2023-05-15 19:14:09 ET

Kontrol Technologies Corp. (KNRLF)

Q1 2023 Earnings Conference Call

May 15, 2023 4:30 PM ET

Company Participants

Paul Ghezzi - CEO

Claudio Del Vasto - CFO

Conference Call Participants

Presentation

Operator

Good afternoon and welcome to the Kontrol Technologies Q1 2023 Earnings Conference Call. I’m joined by the CEO of Kontrol Technologies, Paul Ghezzi; and CFO, Claudio Del Vasto.

Before we begin, please be reminded that certain statements and information included in the Management Discussion and Analysis and financial statements and presentations, including information related to future financial or operating performance and other statements that could or 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 and Discussion and Analysis and our financial statements. For all public information filings, please visit www.sedar.com . Thank you.

I’d now like to turn the conference over to Mr. Paul Ghezzi, CEO of Kontrol Technologies. Mr. Ghezzi, you may begin.

Paul Ghezzi

Thank you. Hello, everyone and welcome to the Kontrol Technologies Q1 2023 earnings conference call. I’m joined on the call today by our CFO, Claudio Del Vasto. Q1 2023 marks an important turnaround for Kontrol, as we completed the disposition of our loss-generating subsidiary and renewed our focus on repeat and recurring revenues with high gross margins.

In addition, we are pleased to be back to EBITDA positive operations. The team has worked tirelessly over the past six months to write the operations of Kontrol, while significantly improving the balance sheet. We’re optimistic about our existing blue-chip customer base, new customer wins, our growing solutions in the net-zero emission market and the scalable opportunities which we are working on. I’ll have more to say about that, following the presentation of our financial results.

Claudio Del Vasto

Thanks, Paul. This is Claudio Del Vasto. During the three months ended March 31, 2023, the operations of the company’s former, wholly-owned subsidiary, Global HVAC were discontinued and deconsolidated from the financial statements. As such, the consolidated income statement is presented in a manner that captures activities from continuing operations and discontinued operations.

Net income from all operations for the three months ended March 31, 2023 was $21.3 million compared to $1.6 million for the same quarter in the prior year. Following deconsolidation, the carrying amount of assets and liabilities of the subsidiary were removed from the company’s balance sheet. The effect of the disposal as at March 31 was a gain on disposal of discontinued operations of $21.9 million.

The company is rebounding after the dissolution of Global, and we are focused on driving a profitable 2023. On a continuing operations basis, revenue, gross profit and earnings, all increased in Q1 2023 over Q1 2022. The company will focus its operation on higher gross margin service and technology solutions, eliminating loss-making operations directly benefits both the gross margins and earnings.

Revenues from continuing operations for the three months ended March 31, 2023 were $4.5 million, that’s up 36% over the same quarter in the prior year. Gross profit from continuing operations for the three months ended March 31, 2023 was $2.6 million, and that’s up 46% over the same quarter in the prior year.

Adjusted EBITDA from continuing operations for the three months ended March 31, 2023 was $621,000 compared to an EBITDA loss of $250,000 for the same quarter in the prior year. During the three months ended March 31, 2023, management successfully raised $5 million before fees of equity, as the company continues to make efforts to increase its capital base, allowing the company to expand its business operations, and thereby, increase its available cash and operating results.

Cash flows from operating activities were positive in the amount of $512,000 for the three months ended March 31, 2023. During the three months ended March 31, 2023, the company paid down $3.7 million of principal towards the revolver and term loan. This was a significant reduction of debt. Debt reduction is a key priority for management and efforts made in the first quarter to decrease leverage were impactful to the company’s financial position.

I will now turn the call over to Paul to discuss further company updates.

Paul Ghezzi

Thank you, Claudio. As discussed on our last call, our primary strategic focus is to be a self-sustaining company, operating with high gross margin, repeat and recurring revenues. While we have lost a portion of our one-time revenues with the disposition of our loss-making subsidiary, we have gained in operating cash flow and EBITDA.

In the current market environment, we are optimistic about our future. We have worked diligently to reduce discretionary expenses and are running as lean as possible, while targeting organic growth opportunities with scaled potential. I would like to share a number of those opportunities.

Since Q4 of 2022, we have taken our leadership position in the net-zero emission market through our operating subsidiary, Efficiency Engineering. Since that time, we have won six RFPs with various municipalities and cities. This puts us on the leading edge of helping to shape and develop what the buildings of the future will look like and how they operate.

Notably, we have won these RFPs against much larger organizations, many with global operations. What typically begins as a feasibility and a design plan will then move into a more detailed design and integration plan, allows us to provide additional solutions and revenues, generating beyond the initial RFP. We continue to look forward to adding new RFPs and new customer wins to the roster. What started as a municipal market opportunity is now quickly transitioning to a broader market initiative.

Private and public REITs are experiencing the impacts of the gas tax on their operations and in some cases, the cost of natural gas to operate a building has doubled in the past three to four years, while REITs are lightening behind municipalities in terms of net-zero emission strategy and solutions. We see this market growing in 2023 and into 2024 significantly. This also benefits our HVAC service and maintenance business with the growth of high efficiency solutions and the equipment required and the ongoing service and maintenance which is recurring in nature.

On March 28, 2023, we announced that Kontrol Technologies were selected by Fortune 100 Customer for energy monitoring and facility optimization, spanning 1.6 million square feet of built environment. Following the press release, our technology has been deployed and we are working closely with the customer to monitor and optimize the facility. We will seek to scale this opportunity with the customer, both in North America and outside.

With respect to our emission business opportunities, on February 6th, Kontrol announced that its operating subsidiary, CEM Specialties, Inc. was selected by a new USA customer for multiple integration projects entering a new emission market. CEM has a long history of integrating complex monitoring systems and industrial facilities across North America.

This new revenue and growth opportunity is directly related to CEM’s core competencies and includes the integration of various hardware and software with the software developed by CEM and licensed to the customer. This new opportunity and its growth potential ties to the recent Environmental Protection Agency rules around the measurement and quantification of ethylene oxide.

Ethylene oxide is used primarily to sterilize equipment and plastic devices that cannot be sterilized by steam, such as medical equipment. We’re very bullish on this opportunity and the good work performed by the CEM and the emissions team.

Our emissions team continues to innovate and we’re also optimistic about scaling beyond this customer with distribution partnerships in the works, we’ll have more to say on that in the coming months. The emissions market is a regulated market with many blue-chip customers and a regulatory environment, which is more stringent on emissions every year. We continue to explore new opportunities that have scaled potential.

In conclusion, typically Q1 and Q2 are lower than our Q3 and Q4 quarters, due to seasonality and timing around emission testing and integration of systems and industrial facilities. We will seek to improve the run rate from Q1, and continue to demonstrate our financial and fiscal discipline as we look to scale the business of Kontrol.

I’ll now turn the call over to the operator for the Q&A portion of the call.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we’ll now conduct the question-and-answer session. [Operator Instructions]

Paul Ghezzi

We did receive a question via web. So, maybe I’ll share that while we wait. The question was around BioCloud patents and was any patents terminated? So what we can say is, we’ve received the first patent. There’s another two that we’re working on, no patents have been terminated.

However, there is always back and forth with an examiner and we’re very confident that the next two patents will be issued following that back and forth, one, we anticipate maybe in the next 30 to 45 days, and one maybe 60 to 90. So we’re working on those. We’re quite excited about having that patent technology as part of our IP, and there has been no patents that have been terminated. Thank you.

Operator

Okay, and there are currently no questions over the phone. I’ll turn it back to you, Paul.

Paul Ghezzi

Okay. Well we appreciate you joining and we are excited about our future. You know, I want to recognize the efforts of the team. The last six months have not been easy. It’s been quite challenging. But you know, we’ve got a good team here. The management team are also stakeholders in the business and we care about the future. You know, we want this to be a large, profitable business. That we’re going to do everything it takes to get there. So, again, I appreciate your time as that shareholders joining the call. We look forward to connecting with you and have a great evening.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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