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Good day, and welcome to the Tantalus Systems Third Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Deborah Honig with Investor Relations. Please go ahead.
Thank you, operator. Thank you for joining us to discuss Tantalus Systems' financial results and operating performance for the 3 and 9 months ended September 30, 2022. Tantalus issued these results in a press release yesterday, which is posted on the company's website. Joining me today on the call from Tantalus Systems Holding herein referred to as Tantalus or the company is Peter Londa, President and Chief Executive Officer; and George Reznik, Chief Financial Officer. During the call, we will make forward-looking statements about Tantalus' business. These statements are subject to certain risks and uncertainties, which could cause actual results to differ materially. Tantalus refers conference call participants either today or in the future to the company's forward-looking statements contained in the presentation and also available on our website at www.tantalus.com. Statements made on this call reflect management's analysis as of today, November 10, 2022. Management does not assume any responsibility or obligation to update forward-looking statements made during this call, unless required by law. Please note that the financial information referenced on today's call is stated in United States dollars and in accordance with IFRS, unless otherwise stated. The company is also presenting selected non-IFRS financial measures, including gross profit, gross profit margin, core business expenses, adjusted EBITDA, annual recurring revenue referred to as ARR and adjusted working capital. Tantalus believes that these non-IFRS measures provide meaningful information to investors. However, they do not have a standardized meaning and are not likely comparable to similar measures presented by other issuers. I will now turn the call over to Peter Londa, President and CEO. Please go ahead, Pete.
Thanks, Deborah. Good morning, and thank you for attending our earnings call. On behalf of our Board, our management team and employees, George and I appreciate the opportunity to provide you with an update on our business through the third quarter of 2022. We will aim to work through our presentation and provide ample time for questions during today's phone call. While there is a lot of information outlined on Slide 3 in front of you, there are several key highlights that I'll bring to your attention before we really dive into the details during today's discussion. First, we witnessed some mixed financial results during the third quarter. On the one hand, we delivered another quarter of revenue growth as compared to the prior year, but we did witness some production delays tied to supply constraints that led to a revenue profile, which fell below our expectations. On the other hand, we now stand at 12% growth year-over-year for the first 9 months of 2022 and remain in position to deliver at least 20% revenue growth for the full year of 2022. While the headline revenue number did not meet our expectations, we continue to witness strong growth of our annual recurring revenue, which is up 25% year-over-year. The growth of our ARR ties to the expansion of our user community, deploying more distributed intelligent endpoints and expanding our software and SaaS-based data analytics tools. Beyond revenue, we delivered the highest level of gross profit margin for a quarter in our company's history, which came in at 53%, despite continuing to navigate through inflationary pressures across our cost of sales, particularly with respect to logistics costs and certain component costs. Coupled with the strong gross profit performance, we implemented targeted cost reductions to make solid progress towards returning to positive adjusted EBITDA in the coming quarters. The high gross profit margin and the strides we made in the quarter to improve our EBITDA performance demonstrate that our management team is controlling what we can control in an otherwise challenging business environment. George will allocate time today to walk through the changes across our balance sheet, but to provide some initial context, we believe the balance sheet remains sufficiently strong to maintain our operations and support our near and medium-term growth trajectory. Based on our ability to maintain our trajectory with the current balance sheet and in consideration of the level of our current share price, we do not anticipate using the existing shelf prospectus to raise additional capital at this point. In terms of a few commercial highlights and milestones to draw your attention. We shipped our 3 millionth distributed intelligent endpoint across the public power and electric cooperative utility sector. This marks a tremendous milestone for our team, particularly because more connected endpoints translates into additional data, which translates into additional software and data analytics, which ultimately translates into additional recurring revenue for our business. We also continue to demonstrate an ability to scale our user community during the third quarter, and we are quickly approaching 270 utilities across the United States, Canada and the Caribbean Basin. We witnessed favorable activity across our sales pipeline and have currently closed $35 million of sales through early November, which allows us to quickly approach a record for sales conversions in the calendar year. Shifting focus to our R&D initiatives. I am extremely pleased to report that we initiated our alpha version testing of the TRUSense Gateway, which marks an important milestone towards the commercialization of our new product. The alpha unit has been powered, provisioned and configured at a utilities test lab and is in operations as we speak today. The initial findings are in alignment with our expectations, and the unit is validating the value we anticipate generating for utilities. Given the amount of money we are investing in the TRUSense Gateway and the positive impact we expect the product to have on our business, we will allocate additional time later in today's presentation to provide context and further insight. We also continue to stand up pilots and are demonstrating scale of our SaaS-based data analytics capabilities. In addition to our grid reliability tool, which we have shared progress during previous earnings call discussions, we have launched a proof-of-concept for our second analytics tool, targeting the protection and management of power transformers. As highlighted in our Q3 earnings release, fortifying a utilities power transformer fleet is becoming a significant priority, as outlined by the American Public Power Association, the National World Electric Cooperative Association and the Department of Energy in the United States. In working alongside several of our customers, we are quickly learning how to leverage the power of data captured across our systems to develop a robust AI analytics tool that will provide utilities with granular insight into transformer loading and diagnostic capabilities. With respect to the acquisition of Congruitive, which was announced earlier this year, we are nearly complete with our internal integration process and are centering our attention on business development activities. While Congruitive has not met our internal expectations with respect to revenue contributions through 2022, we continue to finish strategic pilots with thought-leading utilities and believe those deployments will provide a strong set of use cases to demonstrate the value of the software tool, which we refer to as CIQ. In addition to Congruitive software, making progress at thought-leading utilities, it is also anticipated to become an integral application on our new TRUSense Gateway. As some of you may have seen last week, the CIQ software was referenced in a press release issued by a company called NUVI, which is using our software to achieve SunSpec certification as part of the IEEE 2030.5 standard. NUVI is using our CIQ software to integrate their leading vehicle to grid application referred to as V2G into an electric utilities systems. You can think of CIQ as a quasi intel-inside from a software perspective to NUVI's broader V2G platform. This recent announcement not only demonstrates the ability for Tantalus to diversify our revenue stream by integrating the CIQ software into third-party systems but also provides further validation of the strategic rationale for the transaction by placing our organization at the cutting-edge of bringing innovative solutions to the utility industry. We fully expect Congruitive to make a meaningful contribution to revenue in future reporting periods, and we look forward to continuing to provide updates accordingly. In summary, while our revenue profile was a bit lighter than we would have expected in the quarter, we believe management made solid progress towards our operating plan for 2022, and we remain optimistic about our current position. I'll now turn it over to George, our CFO, who will discuss the financial results in greater detail. Go ahead, George.
Thank you, Pete. As Pete highlighted already, we delivered $9.1 million in revenue for the quarter, representing 6% growth year-over-year. The growth of our revenue in the quarter was impacted by production delays due to supply chain constraints and lower-than-expected contributions from our recently acquired software business, Congruitive. It is important to note that the delayed revenue from production delays is not lost, rather most of the impacted customer orders from Q3 have either already been converted to revenue or are scheduled to be delivered in Q4 2022. Revenue contribution from our software and services increased to 33% in Q3 2022 as compared to 28% in the prior year. We also continue to experience increasing revenue contribution from our recurring revenue, which is comprised of SaaS subscriptions, software maintenance, technical support and hosting services. The growth in our recurring revenue stems from expanding our user community, rolling out our SaaS-based data analytics offering and the addition of Congruitive. Recurring revenue contributed 24% of total revenue in Q3 as compared to 20% in the prior year. Annualized recurring revenue increased to approximately $9.1 million in Q3 2022, another milestone number for our company. Revenue increased during the first 9 months of 2022 by 12% to $27.4 million over the prior year period. We believe that the growth through the first 3 quarters of 2022 puts us in a strong position to achieve our growth trajectory for the year of at least 20% over the prior year. As reflected on Slide 5, despite inflationary pressures on our supply chain and overall cost, our gross profit increased to $4.8 million, translating into a strong gross profit margin of 53% for the quarter. This is yet another milestone number as we have never delivered 53% gross profit margin in a quarter previously. The strong gross profit margin helped us to offset the lower-than-expected revenue in the quarter. Gross profit margin for our hardware products increased to 41% in Q3 in 2022 compared to 32% in the prior year due to product mix, supply chain management and price increases. Gross profit margin from our software services remained strong at 76% for Q3 2022 and compared to 70% in the prior year period. For the first 9 months of 2022, gross profit increased to $13.4 million with gross profit margin of 49% as compared to 45% in the prior year. We believe the strong gross profit margins to grow across both segments of our business, validate our team's ability to navigate through a challenging business environment and demonstrate the value and differentiation of our solutions. As reflected on Slide 6, we believe the comparison of operating expenses, adjusted EBITDA and net loss are best compared to the prior quarter rather than the prior year, as our 2021 results did not include the expense profile and operations of Congruitive, which we acquired in January 2022. With that in mind, our operating expenses, which consists of sales and marketing, R&D and general and administrative items and is exclusive of share-based compensation and depreciation and amortization expenses decreased to $5.2 million in Q3 from $5.7 million in the prior quarter of this year, primarily due to prudent cost management, increased operational efficiencies and the favorable impact of the lower Canadian dollar during Q3. As a reminder, we generate revenue in U.S. dollars, while significant portion of our expenses are incurred in Canadian dollars. Despite falling below our revenue expectations in the quarter, our strong growth profit margin, coupled with prudent cost management, enabled us to make significant strides in the quarter towards returning to positive adjusted EBITDA. Adjusted EBITDA of negative $384 million in this quarter reflects a material improvement as compared to Q2 of this year, which was negative $1.5 million. Our adjusted EBITDA result is also an improvement from last year, particularly given that last year's results do not include the operations of Congruitive. The adjusted negative EBITDA is being primarily tied to management's decision to use cash on our balance sheet to make strategic R&D investments to further differentiate Tantalus Solutions for long-term growth. As our R&D investments, and in particular, with respect to the TRUSense Gateway, developed into commercial capabilities, the outflows to bring a new offering to market will subside while the inflows from new revenue will enable us to make a steady climb back to sustainable positive adjusted EBITDA. Tantalus reported a net loss of $1.2 million in the quarter, which is expressed net of significant noncash expenses, inclusive of depreciation and amortization and stock-based compensation. This reflects the marked improvement over the prior quarter of 2002 (sic) [ 2022 ] as well, as improvement over the prior year before Congruitive was factored into our financial results. As reflected on Slide 7, we implemented a number of operating expense reductions during Q3, amounting to aggregate savings of approximately $1 million on an annualized basis of run rate operating expenses. The cost reductions are primarily focused within our G&A. We believe that these cost reductions are prudent given the current business environment and are not expected to impact the long-term growth trajectory of Tantalus. Unlike other technology companies, we tend to be somewhat recession-proof as utilities are incentivized to upgrade and modernize the distribution grids to supply the delivery of electricity, water and gas. Given the near-term positive catalysts to drive growth of Tantalus, we have decided to avoid a major layoff, similar to what is unfolding with consumer-oriented technology companies. With that said, we have instituted a pause in hiring given the broader economic climate and our deliberate push towards returning to positive adjusted EBITDA. Subject to normal attrition or identifying rock star talent, we intend to keep our headcount relatively flat for the foreseeable future. As such our managers are being asked to identify additional potential operating efficiencies across their respective departments. As we turn our attention to budgeting for 2023, we will continue to prudently manage our cost structure and look for other opportunities to reduce our operating expense run rate without impacting the gross initiatives for the company. As reflected on Slide 8, the company ended the third quarter of 2022 with $5.7 million of cash compared to $9.8 million as of June 30, 2022. Given the magnitude of the change, I will address the cash position in much greater detail on the next slide. Beyond the change in our cash position, the company continues to generate positive adjusted working capital, which amounted to $4.2 million as of September 30, 2022. This balance is compared to $6.6 million as of June 30, 2022. The decrease in adjusted working capital is primarily due to the repayment of a portion of the company's outstanding senior debt facilities, reductions in our deferred revenue for ARR and non-operating costs during the quarter. We do not see the changes in adjusted working capital as problematic. The company had total assets of approximately $34 million as of September 30, 2022. Our outstanding senior debt declined by $1.4 million during Q3 to $9.6 million as of September 30, 2022, from the prior Q2 quarter. A further note regarding the existing debt facility, we narrowly missed a debt facility covenant at the end of Q3, for which we received a waiver from our senior lender bank to ensure Tantalus remains in good standing. The company has had a decade-long relationship with our senior lender, and we anticipate the annual renewal of our debt facilities in early 2023. Given the change in our cash balance, we felt it was appropriate to include a bridge analysis during this earnings call to provide additional insights and details as reflected on Slide 9. While the aggregate change to cash may appear to be problematic upon first glance, the decrease in cash from the prior quarter is primarily due to the repayment of servicing of our senior debt facilities and non-operating items, all of which are manageable. Specifically, our debt facilities include a working capital line of prep facility and a term debt facility. The working capital facility is for $8.1 million and was fully drawn going into the start of Q3 of this year. The term debt facility of $3.3 million tied to our acquisition of Congruitive and is being amortized on a monthly basis over a 3-year term. With respect to our working capital facility of $8.1 million, the timing of our revenue profile in Q3 was impacted by production delays and corresponding supply chain constraints as well as lower-than-expected contributions from Congruitive. This led to a lower borrowing base calculation during the quarter. It's important to note that the existing borrowing base calculation does not include the cash on our balance sheet. The timing of our revenue within the quarter impacted the borrowing base calculation, which uncharacteristically dropped below the threshold to maintain the $8.1 million balance. As such, we paid down a portion of the principal balance of the working capital facility by $1.1 million, resulting in principal decreasing from $8.1 million to $7 million as of September 30, 2022, to remain in compliance. We anticipate having full access to the working capital facility of $8.1 million moving forward as the borrowing base reverts to normalized levels. Further, we also paid down approximately $300,000 of the principal balance of our term debt facility in alignment with the terms of the loan. In the aggregate, we paid down approximately $1.4 million of debt principal during Q3, in addition to paying approximately $300,000 of interest finance expense. Further impacting our cash balance at the end of the quarter, we also used approximately $700,000 of cash as collateral to secure a surety performance insurance bond to support the key customer win. Using cash as collateral for a surety bond is uncharacteristic of our approach. It was deemed to be a prudent decision by a management team to secure a strategic account within an important region of the United States. The collateral of approximately $700,000 will be reflected as restricted cash on our balance through August 2023 unless released earlier in conjunction with successfully completing the project. The current project is expected to be completed by mid-2023. In evaluating our debt facilities and the use of cash to support a surety bond during Q3, we believe it is important to note that approximately $1.8 million of the decline in cash comprised of the repayment of the portion of the working capital facility and the surety bond collateral was unexpected within our plan. Of this amount, we expect to have full access to working capital facility in Q4 of this year and anticipate recouping 100% of the cash collateral for the surety bond by mid-2023. The immediate impact of these items rippled through our quarter ended cash balance, but are manageable given the strength of our underlying balance sheet and our visibility to access the cash back onto our balance sheet over time as appropriate. Other noteworthy items that impacted the closing cash position at the end of Q3 included the accounting of our deferred revenue. Due to the timing of customer payments for the company's annual recurring revenue at the beginning of the year, we typically witness a decline in cash and adjusted working capital towards the end of Q3. Company commenced its 2023 invoicing cycle for this month for our annual recurring revenue. As such, we anticipate collecting approximately $8.5 million of cash through early 2023, particularly given our 99.4% customer retention rate over the company's history, which provides a slingshot effect on the balance sheet. This cash collection from our ARR renewal invoicing on an annual calendar basis will be in addition to our collections of accounts receivable from revenue generated in normal course, inclusive of Q4. We witnessed a number of discrete events unfold during the quarter and do not anticipate the aforementioned decline in cash and adjusted working capital to impact Q4 or our ongoing operations. Rather, we believe the collection of approximately $8.5 million of cash associated with the AR, coupled with being able to access and recoup the $1.8 million tied to our working capital facility and surety bond collateral provide ample balance sheet strength to support ongoing operations. I now turn back the call over to Pete.
Thank you, George. As we turn our attention to the end of 2022 and commence our planning for 2023, we wanted to provide a few additional comments, particularly as it relates to the progress that our entire team is making on the exciting delivery of the TRUSense Gateway. As you'll see in front of you on Slide 10, the TRUSense Gateway is -- has been a significant source of R&D investment over the past several quarters. By initiating our Alpha testing with the utility, which marks a milestone event working towards commercialization of this product, we wanted to spend a few more minutes providing a description of what we're doing and how this device will change Tantalus. The TRUSense Gateway addresses the convergence of several critical initiatives that are unfolding across the electric utility industry. These initiatives include the need for utilities to upgrade their existing metering infrastructure through next-generation AMI technologies, leveraging power quality data from smart meters to optimize the performance of their distribution grids, prioritize capital expenditures and protect critical infrastructure, enhancing the delivery of broadband services in communities being left behind due to the broadband divide that became even more apparent during the COVID-19 pandemic and preparing for the integration of distributed energy resources located behind the meter in homes such as electric vehicle charging stations, smart inverters for rooftop solar panels and power walls as well as other smart appliances. The convergence of these 4 initiatives led several utilities within our existing user community to ask Tantalus to develop a solution that could enable their teams to prepare for the modernization of the distribution grid. In response, we formed an advisory committee of existing customers and prospective accounts to begin the design of an intelligent device capable of supporting all 4 initiatives with the goal of not only enhancing the return on investment for utilities but also building multiple paths for long-term growth of Tantalus. The byproduct of our efforts with the advisory committee of utilities has led to the development of the TRUSense Gateway. This will be offered in several variations to accommodate utilities that have or are deploying fiber all the way to the home, as well as for utilities that may not have access to fiber but are able to leverage private LTE and 5G cellular networks. The TRUSense Gateway will sit between the meter socket on the side of a home and any existing meter. The device will not only support all elements of upgrading metering infrastructure, but will also monitor power quality at a very granular level to track changes in voltage and current, both of which are indicators for utilities to pinpoint failing assets, vulnerabilities or weaknesses throughout the distribution grid. Additionally, the TRUSense Gateway will provide optical network terminals to support broadband offerings and most importantly, will enable utilities for the first time to securely go behind the meter and into the customer's premise to connect to and control EV chargers, smart inverters and smart appliances. One of the key differentiators of the TRUSense Gateway is that we will be providing utilities with access to these devices behind the meter without relying upon a customer's WiFi network. This is an important element of the solution as it will be the first product to provide utility-grade connectivity in a secure manner to devices deployed inside a customer's premise. Beyond delivering utility grade and secure connectivity to electric vehicle chargers, rooftop panels, and Powerwalls, rooftop solar panels and Powerwalls located behind the meter, the granular power quality data that will be accessed from the TRUSense Gateway will bolster our grid reliability and transformer loading data analytics offering. The TRUSense Gateway will also leverage the CIQ software application from Congruitive as an application to deliver interoperability of data from various electric vehicle chargers and inverters under the emerging IEEE 2030.5 protocol. Not only does the TRUSense Gateway support the convergence of the key drivers across the utility industry, but it also serves as the convergence of our R&D investments that have been reported over the past several quarters. This undertaking will provide Tantalus with a first-mover advantage to truly help utilities support the modernization of the distribution grid from their substations through their meters and ultimately, to devices behind the meter. It should be noted that the TRUSense Gateway will not cannibalize our existing capabilities. Rather, the delivery of the TRUSense Gateway will add yet another path for Tantalus to differentiate our business and provide an opportunity to deliver new offerings, including hardware, software and recurring services to our existing customer base, win new accounts seeking next-generation smart grid capabilities and work with utilities that may have chosen an alternative smart metering platform, thereby expanding our total addressable market opportunity. To that end, we are receiving favorable feedback, almost overwhelming feedback and expressions of interest from investor-owned utilities, public power utilities and electric cooperative utilities. Based on the insight we have today from that feedback, we anticipate that the TRUSense Gateway will represent approximately USD 1 billion of new market opportunities, which we are actively and aggressively pursuing as we make progress towards the commercialization of this device. As referenced, initiating our Alpha testing is a major milestone towards the commercialization and we'll look forward to continuing to provide updates through press releases and future earnings calls as our team continues to make progress. In terms of a broader outlook, as we plan for the end of this year and to turn our attention to 2023, I wanted to share a few comments. In terms of our revenue visibility, we remain confident in our ability to deliver our revenue growth trajectory in 2022 and currently anticipate delivering at least 20% revenue growth year-over-year. As we planned for 2023, we anticipate generating revenue from the TRUSense Gateway during the second half of the year with significant upside moving into 2024. With the economic indicators across the United States, and Canada, we believe Tantalus is well positioned to benefit from favorable drivers across utility industry, particularly as we secure new utilities and deliver cutting-edge solutions. In conjunction with witnessing downward pressure on our share price, which I believe is not in alignment with the actual results of our company or the growth prospects ahead of us, we are working to build improved investor awareness. Given current share price levels relative to the positive catalysts on the horizon, we remain confident that Tantalus represents a compelling investment opportunity. With that, operator, please open up the line, and we'll be more than happy to take questions.
[Operator Instructions] And our first question comes from Jesse Pytlak from Cormark Securities.
Just to start, in terms of Congruitive running little bit below internal expectations, can you maybe just address what's kind of going on there?
Yes, Jesse. So first off, thanks for joining and asking the question. Congruitive, when we acquired the company, I'd say it was in a bit of a transitionary state from its traditional core competencies focused on substation automation, for which it continues to generate strong recurring revenue, and into this new software application referred to as a software gateway to really help utilities normalize and convert data from a variety of different devices in the field into a standard secure protocol that can come through the firewall of the utility and into mission-critical applications. I think what we're fundamentally finding is that the demonstration of the software tool has been centered around a number of deployments with investor-owned utilities, very, very large organizations. And those pilots are just fundamentally taking longer than I think the Congruitive team and Tantalus initially anticipated. With that said, the pilots are demonstrating the value and the capabilities of the software tool. I'd say in specific circumstances, some of those pilots are just taking longer because of the nature of activity at the utility itself. When we're trying to define and describe a new offering like the CIQ software gateway, having codified use cases from those pilots and witnessing expansion within the utilities from pilot to commercial deployment, it's really important, Jesse. And so I'd say what's catching us a little bit flat-footed is just the time it's taking to get some of those utilities to move in order of magnitude that we anticipated. That's the first element to it. The second element is that Congruitive, when we acquired it, had a strong working relationship with one of our metering partners, but also one of our competitors. And I'd say it's taken a little bit longer than we anticipated to really map out rules of engagement between 2 companies that not only partner but also compete head-to-head. So it's the second element. The third is, as we've been working with companies like NUVI, where we're really excited, it's just taking their organizations or third- party organizations a little bit longer to demonstrate their capabilities through pilots and migrate to commercial scale. So the net of it is timing and just taking some more time. But as we continue to learn more as we continue to integrate the business and certainly as we plot out the prioritized road map for the Congruitive team, I think we remain very optimistic about the contributions that the software tool will have independently on its own as well as part of the TRUSense Gateway as we get closer and closer to commercialization. That TRUSense Gateway what we talked about today is really the melting pot and the point of technology integration for our respective teams.
And that's actually a great segue to my next question, which is on the TRUSense Gateway. Can you maybe just elaborate a little bit on the kind of the revenue model for the product? Is it mostly going to be upfront hardware sale and then kind of the recurring maintenance and services? Or will utilities also have to buy kind of the analytics software package and get some SaaS revenue off that as well?
Yes. So it's the latter. So we'll get to -- I'll flip back just so we have something to look at. There will be the upfront sale of the physical device which is effectively referred to it as a collar that sits between a meter socket and a meter that plugs into the front. Then in addition to the upfront cost of the device that we'll get paid, there will absolutely be software licenses for the CIQ application and for other components of Tantalus' existing enterprise software. On top of -- and the software licenses and those application licenses will then lead to ongoing recurring revenue through annual maintenance on the software license. Incrementally to that, Jesse, this device is effectively the equivalent of a power quality measurement bellwether meter in the utility industry. Order of magnitude, a bellwether meter is something utilities deploy strategically, typically on either side of a feeder to gauge voltage and current, 250 samples per cycle. In utilities speak, that's a lot of data and a lot of granularity. This device not only supports AMI and the integration of distributed energy resources in broadband, but it will also have advanced voltage power quality measurement capability at 1/6 the price of a bellwether meter. So we see a lot of adoption as it relates to power quality measurement. And from there, the analytics tools around TGRA, grid reliability and our now proof-of-concept transformer loading SaaS-based analytics. So the net of that is upfront sale of the hardware, software, licenses for the applications that sit on the device, ongoing software maintenance thereafter and SaaS-based revenue through our analytics application. This is bringing everything that we're working on and already deliver together in one nice package.
And our next question comes from Gabriel Leung from Beacon Securities.
Peter, just as it relates to TRUSense, can you walk through some of the milestones we should expect to hear from leading up to commercialization as it relates to testing and certification. What are some of the key milestones we should be watching out for?
Yes. So Gabriel, thanks for joining and the question. I'll disaggregate this into 2 buckets. From an engineering perspective, what you should be -- what we're looking forward to providing updates on and what to look for is additional activations of testing our Alpha units. This is already at one utility. And through the next several weeks, we'll get this installed at several other utilities to really start to gather and stress -- gather information and stress test the device. From there, initiating regulatory certification for UL certification. We have applications submitted at this point. That is a process that takes several months. We've done a lot of upfront work through our engineering team to try to prepare as best as possible. But I think the initiation of the UL certification process will be key. As we run through UL certification verification, that will enable us to prepare for beta testing, which I would expect in the first half of next year. As a point of reference, the alpha units we're giving to utilities, not many of them, but we're giving them at no cost. The beta units that will actually go into the field and utilities will get paid for. So there'll be small revenue contribution as we migrate into the beta testing, which is really field trials. And from those field trials then, right, getting to a point where we codify design applications on the device and migrate to commercialization for production. That's the engineering side. And I think we're in a pretty good position to accomplish an awful lot of that through the first 6, 7 months of 2023. Incremental to that, as it relates to the commercial side, we're starting to present this and submit RFIs or RFPs to utilities. And so we're very hopeful that we will make good progress on the commercial side to begin sharing news about the selection of this device by an increasing number of utilities. And some of that will tie to the commercial -- I'm sorry, the engineering efforts. As we get closer and closer to commercialization, we would expect more and more interest and more and more confirmation. But Gabriel, I'm hoping that within the first -- certainly next several months, if not first half of the year, we make significant progress and can share some really watershed moments, I think, for Tantalus from an engineering and commercial perspective.
My second question, I guess either Peter or George can answer this. So you hit the -- so your full year guidance would sort of imply Q4 would be, I believe, a record quarterly revenue quarter. I'm curious how much visibility you have into hitting that sort of -- hitting those numbers for Q4? And that's the first question. The second part of my question is, gross margins obviously had a big improvement in Q3, especially on the hardware side. How much of that is sort of sustainable going into Q4 and into calendar '23?
George, you want to take that one?
Yes. Yes, sure. Well, Gabe, thanks for the question. So in terms of the revenue, we have the revenue forecast covered by backlog and really the big push, and as we've highlighted in the conference call, is the revenue $9.1 million in Q3 was below our expectations due to supply chain challenges outside of control. That pushed significant revenue that we've identified. Some of that we shipped already being the midpoint in the quarter, others identified and scheduled to be shipped this quarter. So very good revenue visibility regarding what the significant quarter we anticipate this quarter and really exceeding that minimum 20% of revenue growth over the prior year guidance that we provide. So I feel very confident in that and working team. There are some things that we need to manage, some outside our control. But based on current visibility, that looks good. In terms of margin, we had very strong revenue, particularly in our hardware. We had 41% this quarter, and that was really due to favorable product mix. In certain of our products, we had very strong contribution, and that gave us some good tailwinds into this quarter. Next quarter and going forward, it might be more normalized with our product mix. But on the other side, we will have the benefit of the price increases that we implemented earlier in 2022. So we've seen blended margins. Probably, I mean, 53 points is a high mark for the company in its history. We see next quarter, given there would be a lot of hardware revenue contribution relative to our software and services, so overall margin will probably come down a few points on that. Hardware revenue will probably normalize to the high 30s. And then going into 2023, we see that going in. And over time, as we continue to increase our recurring revenue from software and services and SaaS offerings, we see that continuing to enhance our overall margin profile really to longer term 50% and growing over beyond -- into 2023 and beyond.
Yes. Gabriel, I'd say that your back-of-the-envelope calculation very much is accurate if assuming the backlog is delivered through production and through our metering partners, it will mark a record for the company.
[Operator Instructions] And our next question is coming from Daniel Rosenberg from Paradigm Capital.
My first question is along the backlog. So given the strength you anticipate in Q4, do you think the backlog will normalize post Q4? Or do you still see kind of that elevated level from past supply chain and COVID-related issues and whatnot?
Yes, Daniel, I think it will start to normalize if the orders that our sales team are tracking to between now and the end of the year materialize as expected. The order conversions will exceed revenue in the calendar year. So we'll see some growth in backlog going into next year. And then I think as we make progress with the TRUSense Gateway, that number will get catapulted very quickly. But I think for the most part, what -- some of the revenue that slipped from last year into this year is notwithstanding sort of timing of conversion in a given quarter like we saw in Q3. We're catching up on a lot of what otherwise slipped from last year at this point.
And then on the TRUSense front, as you approach commercialization, at one point do these contracts get put in the backlog, do you have to meet, I guess, it would be just a full deployment? Or would you even start doing maybe some pilot projects and include those in the backlog?
So I think Daniel, a function of that question is a TBD based on ongoing discussions with utilities. Keep in mind, we have an advisory committee made up of both existing and prospective customers that are helping design and now test this device. I think as they crystallize their plans, we'll be able to provide more granularity over time to your question. And based on sort of where we stand today, I could envision potentially securing some contracts in alignment with field trials. And then depending on the nature of the contract, if it's a codified dollar amount, it would a backlog. If it's more of a commitment to roll out these devices on a sort of with invoices that tie to annual plans, we would only capture contract value in backlog, if that makes sense. So sometimes we get a blanket purchase order in a contract. And then each year, we actually issue an invoice for whatever product is going to be shipped in the calendar year. And so that -- I could see that unfolding here on some circumstances versus other utilities that might just say here's full contract value for defined deployment would define milestones over a defined period of time at which point all of that would factor into backlog. So as we learn more, we'll obviously be able to provide more granularity to your question. But I do think this will be a force multiplier within backlog and visibility for years to come.
And lastly for me, just on the political dynamic and what's the elections in the U.S., is there any shift in -- or any impacts to the deployment of funds that you guys are seeing on the front lines? And may this be kind of a -- once the decisions are out, does that provide some stability where funds can -- or people can make more effective decisions if there's any impact at all? Any color there would be helpful.
Yes. So predicting, I think, what's going to unfold in 3 or 4 states to determine which way that the Senate falls, I'm -- I don't know if I'm smart enough to figure that one out. But what I'd say, Daniel, is we are seeing urgency. And depending on specific location of utility, is it a red state or a blue state, there's sometimes different perspective on what drives that urgency. But fundamentally, I don't think we are susceptible to risk associated with political risk as events unfold here in the United States over the next several days, if not weeks, to the extent that there are additional runoff elections. The reason for that is if -- within the press release we highlighted this, there is a massive issue unfolding in terms of power transformer inventory across the U.S. and Canada. To that end, the hurricane that hit Florida several weeks ago, Hurricane Ian, not the one that's about to hit or currently hitting the East Coast of Florida, that storm is devastating, and so through shared services and shared resources, utilities sort of partner up and send inventory to rebuild systems. And so that put further constraints on what otherwise was a constrained inventory of transformers. That constraint is a positive catalyst for Tantalus because a lot of what we're doing today and a lot of what we are working towards to the TRUSense Gateway and our expansion of our data analytics is all geared to accessing data and from that data, providing improved visibility as to what's happening and then command and control to protect assets. And so I -- regardless of whether we have a mixed house and Senate relative to the White House, I don't see any change in pattern or any change in urgency that we're witnessing. Lastly, I'd say, I don't think changes will impact stimulus dollars that are already in legislation and already approved. And I think what we're witnessing is dollars within the Infrastructure and Jobs Act are being allocated to states and from states to cities, and we're actively pursuing with -- in partnership with utilities. And then the Inflation Recovery Act, those funds are still currently getting organized, and we're not anticipated to start flowing really until 2023 for a 5-year period. I don't think a change in Washington, D.C. is going to impact those dollars and the need to modernize the grid. I think all politicians agree from a national security perspective, the United States has to fortify and improve the performance of the distribution grid in particular. So I think regardless of how it falls, we're still in a very good position.
Great to hear and that continued demand is nice to see given the macro backdrop.
And this concludes our question-and-answer session. I would like to turn the conference back over to Peter Londa for any closing remarks.
I'd just say, given that we're at the top of the hour, truly appreciate everybody dialing in to receive an update on the company. As I think we've articulated notwithstanding having lower-than-expected revenue this quarter there are a significant number of positive indicators that will propel Tantalus forward, and it allow us at the management level and across the organization to remain optimistic about where we sit and the types of things that we're able to accomplish. So we look forward to continuing to provide updates, especially as our team makes significant progress with the TRUSense Gateway and our analytics capabilities, and we look forward to circling up for next quarter. Thank you very much.
And the conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.