Nov 14, 2023
Good afternoon, and welcome to the Kontrol Technologies Third Quarter 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 the future financial or operating 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 to the management discussion and analysis and our financial statements.
For all public information filings, please visit www.sedar.com. Thank you.
I would now like to turn the conference to Mr. Paul Ghezzi, CEO of Kontrol Technologies.
Mr., Ghezzi, you may begin.
Hello, everyone, and welcome to the Kontrol Technologies Q3 2023 earnings conference call. I'm joined on the call today by our CFO, Claudio Del Vasto.
We are pleased with our progress and continued execution on our key strategic objectives for 2023, ongoing cost reductions, combined with organic growth, have brought us to positive net income from continued operations ahead of schedule. We continue to make good progress in deleveraging and rightsizing the balance sheet.
The company has entered new growth markets in our emission analyzer business and we will continue to scale into these markets as we head into 2024. I'll have more to say on operations and business developments, following our CFO's comments on the Q3 results.
Claudio, over to you.
Claudio Del Vasto
Thanks, Paul. The third quarter performance demonstrates the company's focus on executing its strategic objectives and driving to profitability.
On a continuing operations basis, revenue, gross profit, earnings and positive cash flow from operations increased for the nine months ended September 30, 2023, compared to the same period in the prior year. Further, we have reduced debt levels in 2023, as the company continues to deleverage the business.
The consolidated income statement is presented in a manner that captures activities from continuing operations and discontinued operations. We're pleased with the company's cash flow generation and profitability.
Cash flows from operating activities were $2.2 million year-to-date, and net income was positive in the third quarter and year-to-date. Revenues from continuing operations for the three months ended September 30, 2023, were $4.5 million, up 32% over the same quarter in the prior year.
Revenues from continuing operations for the nine months ended September 30, 2023, were $13.7 million, up 28% over the same period in the prior year. Gross margin from continuing operations for the nine months was 64% compared to 55% for the same period in the prior year.
Adjusted EBITDA from continuing operations for the nine months was $2.8 million, compared to $1.5 million for the same period in the prior year. Net income, including gain on disposal of discontinued operations for the nine months ended September 30, 2023, was $22.1 million, compared to a net loss of $2.4 million for the same period in the prior year.
Net income from continuing operations for the three months and nine months ended September 30, 2023, was $665,000 and $295,000, respectively. During the nine months, the company paid down $4 million of principal toward the revolver and term loan.
Debt reduction is a key priority and efforts to decrease leverage were impactful to the company's financial position. During the nine months ended September 30, 2023, the operations of the company's former wholly-owned subsidiary, Global HVAC and Automation, were discontinued.
The vendor take back liability of $3.5 million has remained on Kontrol's balance sheet. The VTB is enforceable against Global and of course, Global is bankrupt.
Kontrol itself, has not provided any security to the holder of the VTB and as such, control is currently reviewing with its auditor and its legal advisers, whether it is still appropriate to retain the liability on Kontrol's balance sheet. I will now turn the call over to Paul, to discuss further company updates.
Thank you, Claudio. As discussed on our last call, our primary strategic objectives are to be so sustaining company, operating with high gross margin, repeat and recurring revenues and delivering positive net income.
On a comparative basis, removing discontinued operations, we've demonstrated solid organic growth and improvement across our key financial metrics. Ongoing cost reductions combined with continued organic growth have brought us to positive net income ahead of schedule.
And we continue to make good progress, as we right-size the balance sheet. I'm now going to be discussing some key business updates.
Consolidation re-branding to Kontrol Building Solutions, the company's operations in the commercial building sector will be consolidated and rebranded into Kontrol buildings as of January 2024, as part of the consolidation, a unified platform delivering HVAC, air quality and real-time energy monitoring will be established. Under the rebranding, the company will continue to execute, on successful cost rationalizations as well as integrate all of the company's building solutions and technologies under one brand.
This will also provide a platform for future acquisitions at the right time both in Canada and the US, as we seek to expand our regional and national footprint and customer base. On the emissions business, the company will seek to expand its regulated emissions business, and we'll continue to operate under the well-recognized brand of CEM Specialties.
The company's emission platform has been expanding its offerings to include the regulated Ethylene Oxide market. Ethylene Oxide is widely used across various industries for the production of solvents, detergents, adhesives, antifreezes, textiles and pharmaceuticals.
Ethylene Oxide is also present in sterility for cosmetics, fumigants and hospitals for sterility of surgical equipment. We are optimistic about the growth of this new market, as these new regulations take hold across the US.
We have entered into a letter of intent to sell one of our operating subsidiaries. All of Kontrol's operating subsidiaries are operating profitably through a combination of organic growth and operating on a lean cost structure, we have delivered solid financial performance across each operating subsidiary.
However, as part of our strategic review and growth plans, we will be laser-focused on those operating subsidiaries with higher equipment and software sales. In this regard, the company has entered into a letter of intent, to sell its wholly owned operating subsidiary or tech consulting for approximately CAD 6.6 million.
The acquirer is a large USA integrator of Environmental Consulting companies. The transaction is anticipated to close prior to December 31st and is subject to customary approvals and documentation, which includes the completion of an asset purchase agreement.
Proceeds from the proposed sale would have an immediate impact in further accelerating the rightsizing of the company's balance sheet. Following the completion of the proposed sale, the company will provide more information on its growth plans as it relates to scaling its operating subsidiaries with higher equipment and software revenues.
While the past year has been very challenging, we've taken all the right steps and the team has worked diligently to get back to profitability. We are comfortable that we will continue to pay down the debt, continue to deleverage, and operate profitably.
I'll point out that the long-term debt -- or sorry, that the term debt is classified as a current obligation on the balance sheet, and this has concerned many investors. This is the accounting treatment required on the balance sheet under a forbearance agreement.
Our view as management is that we've been able to manage this debt to-date, and we'll continue to do so. From a normalization perspective, a debt to adjusted EBITDA ratio in the three times range is a reasonable target.
While we have more work to do, we are certainly on the right path. This market continues to be one of the most difficult environments for Microcap and Smallcap public companies.
Microcap and small-cap stocks, primarily trade-off sentiment and liquidity. The sentiment has been more than negative and the market liquidity has mirrored that sentiment.
On that front, we'll continue to demonstrate in our financial performance that we are executing and further as the largest shareholders in the business, our equity position is a significant incentive to continue to grow, derisk the balance sheet, and continue to scale the business profitably. I'll now turn it over to the operator for the Q&A portion of the meeting.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.
[Operator Instructions] Your first question comes from Mike Mazarakis [ph], Private Investor. Your line is already open.
Hey Paul, can you hear me?
I can hear you.
Just -- congrats on a great quarter, by the way. Just a question.
Great to see the positive EBITDA, especially the positive net income, any other color or commentary you can add on the balance sheet and future growth prospects?
For sure. So, I think we have to admit that the balance sheet has been a challenge for the past year.
As we've said on the previous two calls, we are grinding down on net debt, and there's really two sides to that. Can we build our cash?
Can we build our EBITDA? Get to net income?
Which I think we demonstrated with a solid Q3 net income of around $665,000. And then how does that relate to the size of the debt?
And I think we're getting into that spot where the EBITDA and the net income start to line-up with the debt levels, and of course, we want to reduce that debt. We've got the letter of intent to sell one of our subs.
That's a strategic decision, but that also helps us improve the balance sheet. So, I think if you look at where we started the year and the concerns investors had, which I think some of those were warranted, maybe overdone, but warranted.
And you look at where we are today, I think you can see the path of growing profitability, a balance sheet that's getting better, high gross margins and I think we're well on our way to the next stage of our growth. So I appreciate the question, and from our perspective, we remain the largest shareholder.
So we want this improved faster than anyone else, I think. So we're definitely aligned with our shareholders.
Anything else you can comment on where you're seeing the most growth in ethylene oxide into that?
Yes. So the highest organic growth is coming from our analyzer group being driven by new US customers being driven by ethylene oxide as well as integrating emission systems.
And what we really like about that business and why we're excited to really laser-focus scale there is it's a regulated industry. Customers have to buy a certain level of equipment in their facilities.
It's monitored at the state and federal level, and we think we can grow into that market. That's primarily a US market, and we've certainly enjoyed US customer growth, and we anticipate doing more business in the US in the coming quarters.
That it for me. I'll pass on to someone else.
I did receive an e-mail question, which I'll address. I'm not going to talk about the metrics of the ORTECH subsidiary because we don't report each subsidiary, we report consolidated revenues.
I can say that we've had a gain on that proposed sale, which we're pleased with. And I can say that we are focused strategically on growing our equipment, hardware and software business.
I can provide more comments at year-end, but for now, that's what we're going to say on that letter of intent. Thank you.
There are no further questions at this time. I would hand over the call to Mr.
Ghezzi for closing comments. Please proceed.
All right. Thank you.
So in conclusion, we want to thank you for joining the call. We appreciate you spending time with us.
We look forward to continuing to work toward operational excellence and driving value for our shareholders as we enter the next stage of our growth. Anyone that has questions can reach us at [email protected].
I'll now turn it back to the operator.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.