Operator: Good afternoon. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Kontrol Technologies Q1 2021 Financial Results Report. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, we will conduct question-and-answer that were forwarded to us beforehand by shareholders and analysts.

The CEO of Kontrol Technologies, Paul Ghezzi; and the CFO, Claudio Del Vasto are your host for today’s conference call and will provide a management comments. 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 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 Analysis and our financial statement for Q1 2021. For all public information filings, please visit sedar.com. Thank you.

And I would like to turn the conference over to Mr. Paul Ghezzi, CEO of Kontrol Technologies. Paul, you may begin.

Paul Ghezzi: Thank you. Hi, everyone.

And welcome to the Kontrol Technologies Q1 2021 financial statement call. I’m joined on the call by our CFO, Claudio Del Vasto, who will summarize our financial results for Q1. Following that I’ll provide an update and we’ll have time for Q&A. Q1 was another successful quarter of positive operating cash flow and positive adjusted EBITDA in a challenging operating environment. In addition to the positive operating results, we were able to significantly improve the balance sheet, while transitioning from commercial development to manufacturing of the BioCloud technology.

I’ll now pass it over to Claudio to present our financial statements in more detail. Claudio

Del Vasto: Thanks, Paul. Hello, everyone. This is Claudio Del Vasto, CFO of Kontrol Energy. I’m pleased to provide you with a short briefing on our Q1 financial results.

As Paul noted, Kontrol has continued to deliver positive operating cash flow and positive adjusted EBITDA, while investing in our operating platform. Revenues for the three months ended March 31, 2021, were $3.3 million, up 20% over the same quarter in the prior year. Q1 is typically the quarter most impacted by seasonality and timing of projects. In Q1 approximately $500,000 in projects were impacted due to timing issues dealing with on-site restrictions during lockdown periods in Ontario. Those projects will be delivered in Q3 and Q4.

Adjusted EBITDA was $1.1 million in Q1, up from $241,000 over the same quarter in the prior year. Cash flows from operating activities were $593,000 for the three months ended March 31, 2021, which was an improvement of $610,000 over the same quarter in the prior year. In respect of the balance sheet, capital management initiatives and transactions occurring during the 2020 fiscal year and into 2021 have strengthened our financial position. The company has invested approximately $4 million up to the end of $q1 in the development of BioCloud. Conversions of convertible debentures to common shares totaled $631,000 during the first quarter of 2021.

Proceeds from options and warrants exercise were $710,000 during the first quarter of 2021. Subsequent to the first quarter, the majority of the debentures classified as a current liability in the amount of $921,750 and were maturing April 20 -- April 25, 2021. Those debentures will be extended into 2022. So they will mature October 31, 2022. Subsequent to the first quarter the company announced on May 27, 2021, an $8.5 million private placement with institutional investors.

Closing date expected to occur on or about June 1, 2021. I’ll now turn it back over to Paul.

Paul Ghezzi: Thank you, Claudio. I’d like to review three important recent announcements made including the $8.5 million private placement, the shipment of two BioCloud units to Health Canada and the addition of the Royal Health Group as an exclusive distributor in the UAE. In terms of the private placement, the recent private placement was conducted exclusively with U.S.

institutional equity investors. Strategically this represents our first institutional raise since our public listing. There are many reasons why we believe the timing was right for the raise and those include our stated objectives for a senior listing in the U.S., the importance of adding institutional investors into our capital structure, the ongoing improvement of the balance sheet and the need to improve the overall supply chains that we are managing with our manufacturing partners. We are in position where we don’t need to raise capital to run operations and we’ve maintained strong financial discipline across our operating portfolio. Like every other company, we must continue to adapt to the current market conditions and determine what is the best use of capital to grow the business and accelerate the scaling of our technology, part of the capital raise will be deployed into securing supply chain components of BioCloud and working with our manufacturing partners to reduce lead times.

The two units to Health Canada announced today. In aggregate, while we would have preferred a large BioCloud order from the government at this point, we’re not in control of that timing. Certainly the number one priority for the government has been vaccines and other technologies have not experienced mass adoption in the very short-term. However, our view is that early viral detection has a very important role to play and getting back to normal across the global economy. We remain in contact with various levels of government and are pleased to report that in May we delivered two BioCloud units to a Health Canada level for laboratory.

We feel very confident that we’re going to come out of there with a successful result, but that’s to be determined upon final testing. In our discussions with provincial governments, there is a requirement for Health Canada testing, while we’re not a medical device and this has always been clearly communicated. We are a technology which plays a role in over health -- overall health and safer spaces. Provincial government agencies will typically defer to Health Canada for new technologies. We have shipped the units to Health Canada, testing has commenced and we expect -- anticipate completion in July.

We’ll provide an update when we have the results. The Royal Health Group, following a successful pilot, we are pleased to be onboarding the Royal Health Group as an exclusive distributor in the UAE. We are now working with the Royal Health Group to share the BioCloud solution in both the private and public sector. A bit on the BioCloud sales process, because I think this is important and it really relates to the Health Canada testing. BioCloud is a technical sale.

And what we mean by that is we typically end up in a discussion with the Chief Medical Officer of the organization, that’s both in the private and the public sector. So we have our own, of course, independent testing. We have the NRC, the importance of Health Canada and accelerating those sales subject to final conclusive results. That may be a catalyst for us and so while we recognize the importance of the sales process, we also recognize that BioCloud is a new technology, it is a technical sale and having more validation can always help the process. In terms of consumables, our previously announced antibody supplier is delivering on time and on budget, and we will have sufficient antibody supply for all manufacturing.

With the new supply costs of the consumables, we’ve seen a 50% reduction in overall costing, which helps in terms of lowering operating costs. From a financing perspective, we’re pleased to report that following our engagement with our cap leasing for Canadian leasing solutions for customers and distributors, we’re now able to offer a U.S. base leasing solution through a subsidiary of RBC Bank. This program gives us the opportunity to convert a CapEx to a monthly payment for our customers. Prior to moving to Q&A, we want to confirm, we will not be taking any questions on our U.S.

uplisting process, and in addition, we’re maintaining the overall sales view for BioCloud that we previously announced. So let’s get, I think, the Operator can help us here. We’re moving to a Q&A. We’ve received numerous questions. We’ve consolidated those questions.

And I think we have about 10 to 12 that we’re going to go through. A -

Paul Ghezzi: I just want to repeat something that I’ve already said and add something to that. The recent private placement was conducted exclusively with U.S. institutional investors. Strategically this represents our first institutional raise and the reasons that we think the timing was right were previously stated.

In addition, we believe, based on information that we have available right now in terms of lead times for sourcing of BioCloud materials, we need to be working in advance in terms of the global supply chain and working with our manufacturing partners. As most of you are likely aware, the entire manufacturing chain from automobiles to cell phones is facing various levels of shortages and we’ve been impacted specifically on processors and chips that run the BioCloud. We believe by advancing with our manufacturing partners on deposits on those particular materials, we can start to shorten those lead times. Why are you testing with Health Canada, if you’ve already done the work with your independent labs and the National Research Council of Canada? I think that’s a good question. Our independent labs represent a body of scientists that we work with and we pay for their time.

They’re independent of the company. They have no interest in the company and have no vested interest in any ownership. However, because they’re working for us some question their independence, we don’t, but I understand that point of view. So in terms of our independent labs, we continue to test with them to evolve the technology, to improve for the next version, we call this ongoing and routine testing. Separate from this the NRC, their work related to the funding of the commercialization in pre-manufacturing.

So I think that’s an important distinction. With the Health Canada testing and sending this list to Health Canada, we’re dealing with post-manufacturing and units and operation. And we appreciate the opportunity share the BioCloud technology for this type of testing. The engagement with Health Canada was primarily driven through our relationship with NRC and so we’re thankful for the government support. Similar to vaccines, PPE and rapid testing, provinces are mostly funded federally, with approved technology.

The Health Canada testing may be an important catalyst in this regard. Next question, do you have an update on the Ontario Together Fund? Yes, we will have our formal final submission, which includes an independent audit of expenses. Following that we anticipate the funding shortly thereafter. However, the government has their process, which we don’t control and we’ll provide an update on that process in the coming months. Question, you stated previously, you’re on track for $23 million in your core business revenues.

How does that break down with Q1? Typically, Q1 is a low quarter and Q4 tends to be the high, that’s based on the nature of how we deliver projects. We anticipate roughly $4 million in Q2, $6 million in Q3 and $8 million in $q4 based on project delivery. Q1 was also impacted by the most recent Ontario lockdown, while we can say, it is less severe than the lockdown from 2020. There has been some site access restrictions which have impacted project timing question. Question, the CEO of Honeywell recently said something like they are no longer an industrial conglomerate, but a software and data company.

How does that relate to Kontrol? That’s an interesting question. Industrial conglomerates typically trade at lower valuations. Honeywell’s market cap is roughly 3 times to 4 times forward sales. They’ve invested heavily in their software and data. And the vision of taking an industrial set of solutions to software and data resonates with the Kontrol business model.

I see many similarities, of course, but they’re operating as a mega cap and we’re in the early growth stages of our business. Question, what portion of your revenues are recurring or repeat across the overall business? Currently, approximately 40% of our revenues are recurring or repeat. This include software and service. Our software typically runs at 80% gross margin and service around 60%. This gives us a sticky platform with our customers.

It’s an area that we continue to focus on growing. Question, you’ve said you’ve manufactured hundreds of units and have experienced supply chain challenges. How are you addressing those? As part of the funding that we received from the Ontario Together Fund, we partnered with manufacturing firms that can deliver significant manufacturing capacity. That capacity is subject to the overall global supply chain, which has been strained in the areas of processors, chips and some other components. We’re working hard with our partners to reduce lead times and our recent financing will assist in that.

We’ve manufactured hundreds of BioClouds in Q1. BioCloud sales represented approximately 4% overall revenues and sales are primarily to distributors. Question, your balance sheet appears to be in better shape but the convertible seemed to have been an issue in terms of conversion and impact on the share price. How many convertibles are left? We don’t like to comment on share price but we recognize the overall market for small caps have been volatile. There’s approximately 575,000 left in it convertible debentures and it’s likely that those will be converted by the end of the year.

Questions, do you see any value acquisitions you can help you can make in Canada or the U.S.? We’re constantly looking at opportunities for potential acquisitions. Ideally, we are buying low tech companies with great customers, solid cash flows and some recurring revenues. We’re finding multiples of EBITDA valuations in Canada to be around 5 and the U.S. around 7. There are many private opportunities, but we like to focus on those where we can find the best value at the best price.

Question, what gives you confidence in BioCloud sales targets for 2021 and could you do better? We are in -- constantly communicating with our distributors and potential direct customers. Based on the available information we make a reasonable estimate at a point in time based on the data that we receive, estimates can be updated accordingly as required. Question, how does the overall move to net zero and sustainability impact your growth prospects? Certainly the requirement for organizations to reduce the GHG emissions and footprint is a driver for growth. Buildings contribute up to 40% of GHG emissions and it’s an important area where we can provide value. Many of our customers have sustainability objectives around energy and emissions, which form part of their corporate governance.

Question, fundamental research recently wrote that the market is not placing any value on BioCloud in your share price. Why do you think the market is under estimating BioCloud’s potential? It’s an interesting question and I’ll try and address it without talking about share value. We think BioCloud represents a new technology, which borders both in the smart building technology and health technology realm. In this regard, there are not many comparables. In addition, we may be in a market that is more short-term centric around COVID-19 technology.

What I can say is that the move from commercialization to manufacturing to initial sales and distribution was not easy, and we have done that by maintaining positive operating cash flows, while investing heavily in the technology. Taking all that into account, I think, it’s really a question of can we scale the technology and demonstrating that are proving that which is fine. We have a longer term view of what we’re building. We don’t operate the business based on the day-to-day short term noise that may exist around BioCloud evaluation. Question, your financial statements show a low marketing expense.

Are you planning to invest more in the marketing of BioCloud? That’s a good question. Yes, we’ve been conservative to this point following the initial marketing and lobbying efforts late last year. We’re now in the process of engaging PR and marketing firms to further share the Kontrol and BioCloud story. I’m not sure if we have any call in questions. That wraps up the web portion of the questions.

If not, we can wrap up here. So I’ll turn back to the operator.

Operator: We have no question, sir.

Paul Ghezzi: Thank you. Thank you, Sylvie.

Operator: Thank you, sir. Ladies and gentlemen…

Paul Ghezzi: Okay. Thank you so much.

Operator: Go ahead.

Paul Ghezzi: Yeah.

Thank you.

Operator: You are welcome, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again thank you for attending, and at this time, we do ask that you please disconnect your lines.