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Good morning, ladies and gentlemen, and welcome to the Avante Logixx Q1 Fiscal '22 Earnings Call. [Operator Instructions]. This call is being recorded on Thursday, August 26, 2021. I would now like to turn the conference over to Craig Campbell. Please go ahead.
During today's conference call, management will be making forward-looking statements that constitute future-oriented financial information, as such term is defined in securities regulations. Listeners to this call should read the company's forward-looking disclaimers contained within the filings related to this fiscal period. We have posted an Investor Relations presentation to our website. We encourage you to review this at avantelogixx.com, under the Shareholders tab. I will now turn the call over to Craig Campbell, CEO of Avante Logixx Inc.
Thanks, Steve. Good morning, everyone, and welcome fellow shareholders to the Avante Logixx Q1 Fiscal '22 Earnings Call. I'm joined today by Steve Rotz, the company's CFO. And today, we report Avante Logixx financial results for the first quarter ended June 30, 2021. And we'll also provide an update on our strategic priorities and comment briefly on yesterday's announcement of the company's initiation of a strategic review. I am very pleased to report our financial results for the first quarter ended June 30. We delivered solid revenues of $24.1 million, representing 32% year-over-year growth. With adjusted EBITDA of $2 million during Q1, our trailing 12-month adjusted EBITDA increased this quarter by $1.4 million to a record level of $7.4 million. Our cash flow from operations were $1.4 million during the quarter and represented our fifth straight quarter of positive cash flows. I want to thank the entire team for contributing to such strong performance during these challenging times. Q1 once again shows the strength of our business, our strategy and the industry as we continue to execute. We are focused on building long-term value by investing in this growing fragmented but ever important industry that consistently proves its resiliency. We own and are managing 2 great businesses with empowered and aligned teams of owners, and we are doing it with a long-term vision and disciplined views on capital. As we have communicated before, even without acquisitions, our team is focused on and positioned for continuing to deliver growth. We have great people and teams in place. We continue to operate our business with a continuous improvement approach, driving cost out while enhancing customer experience. Since we achieved national scale, we've been delivering top and bottom line growth and remain focused on continuing this effort. Avante Logixx is a leading player in this large and growing residential and commercial security services industry. With our strong market position, trusted brand names and the refresh strategy led by an experienced management team, we are well positioned to increase market share and further develop our prospects. Our portfolio is exceptionally strong, backed by exceptional brands with a solid base of recurring and contractual revenue from high-quality customers. This is proven through our resiliency during the COVID-19 pandemic and as demonstrated by the financial results achieved during this last fiscal year and so far during Fiscal '22. Lastly, I want to remind you that our named executives and directors collectively own 16.6% of all shares in outstanding. That is we have alignment with all of you as shareholders. As noted in last night's press release, the Board of Avante has initiated a strategic review to consider a range of possible alternatives intended to increase shareholder value. Our continued focus on maximizing shareholder value has led us to this decision to explore strategic alternatives. At the same time, and as the CEO, we continue to advance our commitment to predictable, sustainable growth and profitability at Avante through continued execution of the operational transformation of the business that continues. Avante is a valuable enterprise, and I look forward to assisting the Board and the Company's Advisers as we complete this process. No final decision has been made about any strategic alternative, and there can be no assurance that our review of strategic alternatives will ultimately lead to any transaction. We do not intend to provide any further comments on the process until the Board has concluded the review and approved a specific outcome or otherwise determines that further disclosure is appropriate. Avante has engaged Canaccord Genuity Corporation as its financial advisor and Norton Rose Fulbright Canada LLP as legal adviser in connection with its exploration of strategic alternatives for the company. I'll now turn the presentation over to Steve to further detail our Q1 Fiscal '22 performance. Steve?
Thank you, Craig, and good morning, fellow shareholders. A reminder that our fiscal year-end is March 31. So June 30 represents our first fiscal quarter of fiscal 2022. Quarter end financial statements and MD&A are filed on SEDAR and on our website. Let's begin with a few key financial highlights for Q1. Cash flow from operations before working capital was $1.4 million. Organic revenue growth was strong within our Logixx security business on a year-over-year basis, and Avante Security also enjoyed year-over-year growth during Q1. Sequential consolidated revenues and earnings were largely flat. Direct OpEx increased during Q1 versus Q4 by $0.3 million. Adjusted EBITDA was $2 million during Q1, unchanged from Q4 with a positive swing of $1.7 million versus last year's Q1. We modernized our banking arrangements during Q1 and have strong liquidity and sources of funding for growth. Cash and senior debt balances were inflated temporarily to facilitate transition to new banking arrangements on June 30. Debt net of cash increased to fund noncash working capital requirements. Lastly, IFRS 16 lease accounting added to our assets and liabilities during Q1. Turning first to the income statement. Total revenue during Q1 was $24.1 million versus $24.7 million in Q4. This sequential decline is largely explained by a small reduction of contractual revenues during Q1. Compared to last year, Q1 revenues were stronger by 32.5%. Within Note 6 of the financial statements, we disclosed revenue by service type within each division. From this, you can see why our gross margins evolve quarter-to-quarter, depending on the relative concentration of the different business units and services provider. Our largest platform, Logixx Security represents 84% of consolidated Q1 revenue. It saw increased sequential revenues during Q1 by 0.4%. Logixx Securities protective service revenues were driven by hourly buildings, and there was one extra day during Q1 versus Q4. Logixx Securities year-over-year revenue grew by 37% during Q1 driven by organic growth in COVID-19 specials. Avante Security represented under 17% of consolidated revenue. Its revenue grew on a year-over-year basis by 8.7%. In the MD&A, we provide additional disclosure of our revenue layers by summarizing recurring monthly revenues and contractual recurring revenues. Total of these were $16.6 million during Q1 versus $17 million during Q4. This decline represents reduced hours from core protective service customers within Logixx Security that we expect will return when COVID reopening takes place. Compared to a year ago, Q1 recurring revenue increased by 16.3%, and contractual revenues grew by 17.1% during Q1 versus last year. Recurring and contractual revenues represented approximately 69% of total revenues during Q1 versus 78% during last year's fiscal quarter. The remaining revenues were from electronic services, revenues from COVID-19 Specials, along with secured transport and other revenues that are not subscription-based. Blended gross margins were stronger both year-over-year and sequentially. It was 24.4% during Q1 versus 21.7% in Q4 and 22.7% in Q1 last year. Some of this improvement relates to the closing out of an installation contract within Logixx Security at higher profits than originally anticipated. Over the last 4 quarters, gross margins have been between 21.7% to 24.4% as sales mix drives the actual percentage. During Q4 of last year and Q1 of this year, Regular Electronic Service revenues were less than we would like within Logixx Security as COVID-19 conditions continue to delay customer decision-making. Currently, our sales teams are focused on winning our share of these opportunities as they become available. Such installations are important to our long-term strategy of increasing gross margin dollars during implementation and RMR dollars after installation. In terms of direct operating expenses, we saw a sequential increase in total expense during Q1 versus Q4 of $0.3 million. The increase relates to higher insurance premiums, targeted increases to salaries and accruals for management bonuses. A slight increase in direct operating expenses, combined with flat revenues, resulted in direct OpEx as a percent of revenue, increasing sequentially to 15.9% during Q1 versus 14.3% in Q4. However, the prior year Q1 was at 19.1%. So the year-over-year improvement to this measure was solid. This explains why our adjusted EBITDA is showing significant year-over-year improvement as growing revenue and related gross margins are falling to the bottom line. We will continue our focus on controlling direct operating expenses and growing revenues. Adjusted EBITDA during Q1 was $2 million, consistent with Q4 and a significant improvement over last year's Q1 of $0.6 million. Most importantly, the company continues to generate positive cash flow from operations before working capital of $1.4 million during the first quarter. This represents 5 straight quarters of positive cash flow from operations with LTM at $6.2 million or 82% of our reported adjusted EBITDA over the last 12 months. Now looking at the balance sheet. Trade accounts receivable declined by $0.4 million during Q1. Our DSO improved during Q1 versus last year from 81.7 days down to 66.4 days. We remain focused on customer collections and remain confident in the high-quality nature of our receivables. Contract liabilities declined by $0.8 million since year-end. This was largely by the translation to monthly billing cycles from annual buildings within Avante Security. Senior funded debt includes bank debt and vehicle loans. The total was $9.4 million at June 30 versus $6.9 million at March 31, representing an increase of $2.5 million. $584,000 of this increase relates to security deposits held by our former bank to transition letter of credit and corporate Visa credit card obligations. We expect these to be fully returned by November. Net of cash, senior funded debt increased by $1.2 million, which approximates the negative swing from our noncash working capital during the quarter. I will note that senior funded debt of $9.4 million and $6.5 million net of cash is small in context of our trade receivables of $17 million, inventory of almost $2 million, our annual cash flows from operations and LTM adjusted EBITDA of $7.4 million. At June 30, drawings under the $8 million revolver were $3.7 million, that is $4.3 million is available. And cash balances were $2.9 million. We remain well in compliance with financial covenants of our new banking arrangements. In November 2019, we issued $8.26 million of subordinated Convertible Debentures. These notes have an interest rate of 7% and maturity date of November 27, 2024 and a conversion rate to common shares for the holder at $1.56 per share. On the balance sheet, the total liability is reported under IFRS at $8.5 million -- $8.59 million. That is the IFRS reported liability now exceeds the actual liability by $328,000. Within adjusted EBITDA, we smooth out the quarterly mark-to-market of the related conversion rate that must be included within IFRS income. The quarterly hypothetical loss or gain is reflected within EBITDA each quarter, which is why we focus on adjusted EBITDA to measure quarterly financial performance. At the end of Q1, we are in compliance with the financial covenants in respect of this debenture. During Q1, we reported a net profit on an IFRS basis of $276,000. IFRS lease accounting added to our assets and liabilities during the quarter. We extended a month-to-month premises location to a 5-year term, resulting in higher IFRS liabilities and assets of $1.1 million. We also replaced vehicles under lease to modernize our fleet, increasing IFRS 16 liabilities and assets by $0.6 million. As noted in last night's press release, COVID-19 has created challenges for our business that we are managing through. The risks related to COVID-19 are real, both in terms of us continuing to impact regular contractual revenues in terms of the return to normal which might reduce revenues and profits currently generated from COVID-19 Specials offset by reramping our regular business. However, our entire team understands these risks. We are experienced at dealing with them, and we are implementing mitigating strategies as needed. In summary, Q1 was a solid quarter, consistent with the last several quarters. We have a strong balance sheet, significant liquidity and committed credit facilities to fund organic and strategic growth. Avante has recurring and contractual revenue streams and management is committed to growing both of these. I will now turn the call back over to Craig. Craig?
Thanks, Steve. And as he mentioned, the quarter reflects that we have grown revenue and converted those earnings into cash. We have a resilient business and a resilient industry, and I want to thank and acknowledge the thousands of team members on the front line and in the back office that continue to work tirelessly in delivering our customers their security and their peace of mind. We look forward to our AGM to be conducted on -- virtually, on September 23, and we'll be speaking to you again and reporting our Q2 results later on in November. With that, operator, I'd like to conclude our formal remarks. And Steve and I would be pleased to address any questions at this time.
[Operator Instructions] Your first question comes from Nick Corcoran with Acumen Capital.
Just my first question has to do with revenue and recurring revenue being flat sequentially. With the economy reopening in Ontario and other parts of Canada, should we expect that to build through the remainder of the year?
Yes. So Nick, on top line revenue, we're experiencing this combination of the economy reopening will lead to both the -- some of the COVID benefits that we're having unwinding and then some of the negative COVID revenue impacts that we've had by customers being closed, et cetera, ramping back up. We're certainly keen and watching it while also thinking about and executing on our organic growth. So we continue to feel very good about where those trend lines are going, but they are certainly -- got a little bit more volatility in them than we've seen over the last 3 or 4 quarters, and it's a bit reminiscent of the Q1 where COVID started to take effect, and there was a little bit of, okay, how fast is this moving. And so it feels a little bit more like that, where there's a bit more uncertainty to how that equilibrium is going to cross -- the trend line is going to cross each other. But again, calling back to the 70% of the revenue being contractual, we don't see any material issue that's keeping us at night right now.
So given the puts and takes, should we expect revenue to build in Q2? Or is it too early to tell?
I'd say it's too early to tell. As you know, we're not in the business of giving guidance, but just would ask our investors and followers to look at our trends, look at the base of recurring revenue and know that overall, we've been a net winner in COVID. But certainly, as the rest of the year ramps up, we're just -- my comment was really like -- There's the Delta variant, is the border reopening, what's happening with the vaccine policies at some of our big enterprise customers getting back to work. So just a little bit more uncertainty than we've experienced since the beginning of the pandemic.
That's fair. And then switching gears to Avante. Sales were down or top line revenue was down to 13% sequentially. What was the driver of that? And should we expect that to improve going forward?
Yes. As you know, as you can drill down further within the MDA -- or MD&A is the portion of electronic services, which is the implementation revenues has always and historically been a little bit choppy as it relates to winter projects onboarded and offboarded. So that the decline is attributable to the implementation revenues, and you can see that the recurring revenue remains growing and consistent. So we expect, and as you've seen in previous quarters, there is some lumpiness in that implementation revenue. So I would say, I do not expect it to continue, but understand the quarterly puts and takes on that.
And then moving on to gross margin. You had quite a strong performance in the quarter. Is that stable going forward? And with the COVID situation coming off, how should we conclude that?
Yes. So I think the -- it was an exceptionally strong quarter. We speak to that in our remarks today about delivering on and closing out a large electronic security project at higher gross margins than originally anticipated. We didn't -- that's the bump. I think the consistency of the 8-quarter trend that's reported in our MD&A on gross profit should lead you to think about how the next quarters are looking. And certainly, as the COVID work -- to the other part of your question, as the COVID work unwind. As you know, overall, over the last 4 or 5 quarters, we've been a net winner and it's been a generally positive event for us. So again, as I referred to in my last remark, this wind down of COVID and ramp up and return is something that we just can't accurately predict and forecast with all of the external, sort of, variables that are going on. In consistent with the last 4 calls that I've talked about, my longer-term experience in the industry when these large macro events happen, and I've referred to 9/11 and 2008 and Y2K is that there is typically a rush to implement new security procedures and protocols. Some of that unwinds. But generally, the industry remains better for it and some of the temporary becomes the new normal. So overall, as an industry and as a company, we continue to appreciate the long-term and consistent growth patterns of both industry and company.
Great. And then switching gears, all your commentary in the quarter seems really positive. So thinking of the strategic review. Can you give any color on what the catalyst for that was?
The catalyst is purely and simply the Board's focus on maximizing shareholder value. As you know, we're -- I mean, number one, it's the Board's responsibility, but we're also a Board and an executive team that I think is also a very aligned and significant shareholders of the corporation. So it is strictly to make sure that the Board has a view of all the alternatives available and all in the pursuit of shareholder value.
And have there been any change in the M&A environment or risks that the Board has seen that might have prompted them to do a strategic review?
Certainly, I'm not going to speak, or sort of, speak to what or who are on the Board. Sort of, what drives it. But to your question about what are the industry trends going on, there has been a -- this is an industry that has always been a industry with lots of activity from both M&A perspective, from capital and strategic sort of transactions taking place. I would generally say the industry remains a highly active marketplace. There has been some very large and global transactions taking place in the guarding space, some mega consolidations. There's also a lot of activity that continues to happen in the private equity backed space. And in the reoccurring revenue space, they remain very attractive assets to a wide array of capital allocators.
There are no further questions at this time. Mr. Campbell, you may proceed.
Great. Well, once again, thank you to all of our investors, all of our shareholders, all of our employees and the team. And as mentioned, I look forward to welcoming you all and taking questions at our upcoming Annual General Meeting. And until then, be safe and be well.
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.