The company provides energy efficiency solutions through turnkey projects and custom equipment, serving multinational food, beverage, and pharmaceutical clients. Historically, turnkey made up about two thirds of revenue, but during the pandemic custom equipment grew to two thirds; now the mix is reverting toward turnkey with order intake already back near two thirds turnkey and one third custom. Backlog is typically recognized within 12 months, though the final 5–10% of larger turnkey projects can extend longer. Gross margins normally range 35–40%, with slight downward pressure as turnkey grows, though gross profit dollars rise. Revenues reached about $30 million, with order sizes sometimes as large as $4–5 million, creating natural lumpiness.

Growth is driven by European expansion, where stricter carbon reduction rules and higher energy costs support adoption, while North America is rebounding. The new U.K. facility, nearly triple the prior site’s capacity, enables further scaling without immediate revenue impact. Project development agreements (PDAs) show strong demand, with conversion rates historically around two-thirds. The CREST platform has nearly 100% user training completion, with impact expected over 6–24 months. Acquisitions historically occur around 1x revenue, focusing on proven, revenue-generating technologies or strong distribution channels. Staffing has grown significantly over the last 18 months, positioning the company to execute on a deep pipeline.

Catalysts & Milestones

2023 - Revenue mix flipped to one third turnkey and two thirds custom equipment

2024 - Turnkey order intake rebounded to about two thirds of new projects

2024 - New U.K. facility opened, tripling capacity versus the prior site

2025 - CREST platform adoption phase with impact expected over 6–24 months

2025 - Potential acquisition targeted within 12 months

Investment Highlights

• Revenue near $30 million, but large $4–5 million orders create natural lumpiness

• Gross margins normally 35–40%, though turnkey expansion adds slight downward pressure

• Turnkey order intake already at about two thirds of projects

• New U.K. facility offers nearly 3x prior capacity, enabling scalable growth

• PDA conversion historically around two-thirds, supporting backlog visibility
  

Future Growth Drivers

• Expansion of turnkey projects with higher revenue scale despite lower margins

• Stronger European demand due to stricter carbon reduction policies and energy prices

• New U.K. facility capacity enables scaling without near-term capex

• Acquisitions around 1x revenue to add technologies and distribution reach

• CREST digital platform adoption with expected benefits over 6–24 months
  

Risk Factors

• Tariffs of 25% could cost several hundred thousand dollars if unmitigated

• Order lumpiness from $4–5 million projects distorts quarterly results

• Founder-owned sellers hold unrealistic valuation expectations despite ~1x revenue benchmark

• Macro uncertainty or political shifts may delay projects, visible in order intake slowdown

• Sales staff require up to 3 years before reaching full productivity, delaying revenue impact

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Capital Allocation

25/04/2024 Can you discuss the M&A environment and your targets?

It is always competitive, but we look for companies that fit well with us and make strategic sense for both sides. Historically, we focused on new technologies, expanding from one technology at founding to about 10 today. We remain interested in proven, revenue-generating technologies, not pre-revenue or early-stage businesses.

Now, distribution is also a priority. Acquiring companies with strong penetration in verticals or geographies where we lack presence would be attractive. There are many companies in the sector, and we will continue to look for opportunities that can add value to our business.

25/04/2024 What multiples have you paid for acquisitions, and do you have a target range?

We do not have a target range. The main priority is that acquisitions are accretive to shareholders. Historically, we have paid around one times revenue, but valuation always depends on the specific opportunity.

19/09/2024 What are you seeing in acquisitions and current valuation expectations?

Most acquisitions we evaluate are private, founder-owned businesses. Valuation expectations from founders are usually unrealistic, which has not changed. That said, our past deals have generally been around 1x revenue, though profitability and markets always affect the final valuation. Using that as a guide, we still see good opportunities available.

30/10/2024 What opportunities are you seeing on the M&A front in terms of targets and valuations?

It is still early days. We have had some very preliminary discussions with a couple of companies, but nothing concrete yet. I have generally thought that around one times revenue is a reasonable valuation benchmark, depending on profitability. We are continuing to pursue opportunities and would like to complete an acquisition within the next 12 months, but the right fit is key.

Operations

25/04/2024 Can you give a split on turnkey versus custom equipment revenues?

Turnkey and custom equipment were about 50/50 this quarter, compared to one third turnkey and two thirds custom last quarter and last year. Before the pandemic, it was two thirds turnkey and one third custom, but the pandemic significantly impacted turnkey.
Custom equipment kept growing through the pandemic, and now turnkey is also growing. On an LTM basis, turnkey revenue is about double last year. While not quite at pre-pandemic levels, turnkey order intake is at record highs, exceeding pre-pandemic records. The share of revenue from turnkey is rising, and growth is strong.

19/09/2024 When will the new U.K. facility start operating and what is the impact?

It is already operating and has been for a few months. The team is very pleased with it, and when I visited recently, it was clear the facility is a significant upgrade. It offers much more capacity, a better location, and effectively doubles what the prior site could handle. Overall, it has been very well received.

19/09/2024 How eager are customers to engage in project development agreements (PDAs) and what is the conversion rate?

We have seen strong growth in PDAs, to the point where the team was stretched, so we slowed intake and increased pricing. The conversion rate looks good, though still early to measure precisely given the ramp-up over the past few years. Historically it has been around two-thirds, and I expect similar results this time. We are also ensuring that customers are truly engaged before moving forward, which supports both pricing and conversion quality.

30/10/2024 How are the recent staffing investments progressing, and are you confident in their contribution to revenue?

So far so good. We are very pleased with the team, which has grown aggressively over the past 18 months. At this point, we believe we are largely set for the next 12 months, perhaps adding one or two people as needed, but no significant additions. We are very happy with the group we have built and confident in their ability to deliver.

30/10/2024 Do you plan to add more staff in the next 12 months?

The emphasis is on maybe. We do not have plans right now to add anyone, but I cannot rule it out completely. At present we are very happy with the team we have built.

30/10/2024 When will the onboarding of new hires translate into revenue contributions?

It takes time because the sales process is highly technical. Salespeople generally contribute little in their first year, start to gain traction in their second year, and by the third year perform like established area managers. Engineers also require a learning curve, though shorter, to understand our technologies and execute projects. Over the last 18 months, we hired salespeople first and, more recently, engineers as we saw the pipeline build. We are investing ahead of growth to ensure we have the team ready to execute.

30/10/2024 How are operations at the new UK facility, and what revenue should we expect from it?

The new UK facility does not in itself create additional revenue. The move was necessary because revenue growth, especially in GEM traps, left us with no space in the prior facility. The new site has nearly three times the space and throughput capacity, positioning us to continue scaling revenue. It is about enabling future growth rather than directly adding revenue today.

28/01/2025 What is the current count and value of project development agreements (PDAs)?

The number of PDAs has not really changed because we have been awarded a number of contracts over the last 12 months. It was not in the deck this time, but the figure is similar to the last time we reported.

What matters is that we track both the total value of projects under development and the weighted value. The weighted value has gone up, which makes us feel fairly positive about the future.

29/04/2025 Are you seeing more interest in separating engineering contracts from equipment, and what are the pros and cons for Thermal Energy?

I'm not sure there are any pros and cons, and we are not seeing this as a trend. This is the first time it has happened. Normally, from a project development agreement, we present a fixed price with guaranteed savings, which is usually enough for customers to proceed. They do not typically want to spend $500,000 on detailed engineering unless they are certain they will go ahead with the project.

It could be the way this customer operates or simply caution since it is their first project with us. We are indifferent as long as we secure the project in the end. Engineering projects do carry higher margins, and we saw that last year when a large portion of revenue came from engineering. But overall, it does not matter to us, and we have not seen this structure become a trend.

Competition

19/09/2024 Are recent backlog orders from new or repeat customers?

Most large orders are from repeat customers, as clients typically start small with engineering work or a GEM trap order before expanding. For example, about a year ago we announced a $4 million turnkey project in the pharmaceutical sector with a new customer. Generally, however, most of our business continues to come from repeat clients.

Growth

25/04/2024 Are there any geographical sales trends to highlight?

Yes and no. For a couple of years, we expected European growth to exceed North American growth, and we are starting to see that. Last year European revenue was higher than North American, but this year North America is rebounding. Over time, we still expect European revenue to surpass North America, mainly due to higher fuel and energy prices in Europe and stricter carbon reduction goals.
A lot of the growth focus is in Europe, and many of the nine people we added over the past year are based there. We believe this will continue to drive European expansion.

30/10/2024 Are you focused on winning new customers or expanding with existing ones given the large installed base?

The bias is still with existing customers, maybe about 60%, but it is not overwhelming. Our area sales managers and head of sales in North America and Europe spend much of their time targeting both existing and new customers, and we also have a Director of Global Partnerships dedicated almost exclusively to expanding existing customer relationships across multiple sites.

Overall, it is roughly a 60/40 split, but in both cases the approach is highly focused. We carefully identify the right customers, those with the capital and a strong desire to meet carbon emission reduction targets. That was exactly the case with the recent confectionery company contract. The team identified them as a customer with aggressive sustainability goals, and our project helps them achieve those. It is never a shotgun approach, always targeted.

28/01/2025 How is CREST adoption progressing among users?

It is too early to determine how effective CREST will ultimately be, but we already have data on usage. Nearly 100% of users have completed the required training, and during recent drop-in sessions there were very few questions, which is encouraging.

We will continue to tweak the platform over time as with any app, but initial take-up has been as good as we could have hoped. The real impact will be visible over the next six, 12, and 24 months.

29/04/2025 Have you seen customers delaying projects, and how strong is your pipeline?

We do have a bit of a lull right now, but our pipeline is exceptionally strong. We are actively developing more projects with a number of customers, and we have not seen a real slowdown in market demand or project development.

As noted earlier, there has been a modest slowdown in order intake, but customer development activity remains strong. So while timing may shift slightly, we are confident in the overall strength of our pipeline.

Financials

19/09/2024 Is backlog in line with expectations and what is its composition?

Yes, it is in line with our expectations. The year has just begun, and order intake is consistent with what we projected. The mix continues shifting toward large turnkey projects, which is what we expected. They previously represented about 60% of our business before reversing to one-third, while custom equipment became two-thirds. Now it is approaching 50-50, with turnkey growing faster, and we expect that trend to continue.

30/10/2024 Should we view gross margins in the low 40s as the new normal, or will mix changes create further pressure?

As turnkey projects increase as a percentage of revenue, there will likely be a little downward pressure on gross margins. The impact is not large, but it exists. Importantly, turnkey projects generate much higher revenue, so gross profit dollars may rise even if the margin percentage falls. We are probably halfway back to the pre-pandemic revenue mix and expect to eventually return to two thirds turnkey and one third custom equipment.

28/01/2025 How did revenue mix break down this quarter and how will margins evolve in H2?

Yes, as you said, we don't disclose the exact breakdown of turnkey versus custom equipment, but turnkey represented about two thirds of our revenue in the past quarter compared to about a third the same quarter a year ago. The margins were lower than typical and lower than we would expect this quarter. Normally, margins are between 35% and 40%.

So, for this quarter they were at the lower end of that range, but we don't expect that to continue.

29/04/2025 Can you explain the gross margin impact from new projects and higher expected costs?

This is one of the challenges with heat recovery projects, as revenue and profitability are booked on a percent-complete basis. Each quarter we must estimate the percent completed and the new budget, which introduces some volatility. We also build risk and contingency amounts into the budget, but those are only booked at the end of the project.

Often, margins rise at the end when risk and contingency are recognized, since we cannot account for them until costs are fully known. If costs rise midway through, margins are affected at that time, but we often catch up later. So margins naturally vary from start to finish, and that is simply how the accounting policies work.

Outlook & Guidance

25/04/2024 How much of the backlog is scheduled for completion in the next 12 months?

Almost all of it. Generally, when we receive orders, we expect to recognize them as revenue within 12 months. Large turnkey projects can sometimes take longer for the last 5% or 10%, but typically close to 100% of backlog is completed within that timeframe.

30/10/2024 What was the revenue mix this quarter between turnkey projects and custom equipment compared to a year ago?

Pre-pandemic, turnkey was about two thirds of revenue and custom equipment was one third. The pandemic reversed that, with turnkey projects becoming very difficult to execute, while custom equipment grew at about 30% compounded annually. By 2023, it had flipped to one third turnkey and two thirds custom. In 2024, turnkey has started to come back, not yet at two thirds but moving toward that ratio. In terms of order intake, we are already back to about two thirds turnkey and one third custom equipment, and I expect the revenue mix will return to that balance this year.

30/10/2024 Order flow has picked up since August 31. Are there hurdles or headwinds, or is this just project lumpiness?

We do not see any changes in the marketplace or new headwinds. The lumpiness you noted is just the natural rhythm of the business. Some quarters are very strong and others less so, but the longer-term trend remains very positive. Q1 is usually our weakest quarter, with fewer significant orders, so this pattern is consistent with history.

Risks & Macro

28/01/2025 What risks do tariffs and political shifts pose, and are customers changing focus from emissions to energy savings?

It is early, and I do not want to speculate on what Trump may or may not do, but tariffs are a risk. We operate in both North America and Europe. GEM is manufactured in the UK and shipped to North America, while heat recovery can be made in Canada or the US. If tariffs of 25% apply and cannot be mitigated with customers, the short-term impact could be a couple hundred thousand dollars. In the longer term, we would adjust by sourcing equipment in the US. We have done this before and can do it again. GEM from the UK is less of an issue, and we could eventually manufacture in the US if needed.

On emissions, during Trump’s first term we saw no impact. Many of our top customers are multinational food, beverage, and pharmaceutical companies with publicly disclosed carbon reduction targets. It is hard to imagine them abandoning those commitments. Most initiatives are driven at the State level, not federal, and we expect that dynamic to continue. This time could be different, but I do not expect a significant change.

29/04/2025 Are you seeing macro uncertainty cause customer hesitation, or is the slowdown just business lumpiness?

It is hard to know. Looking at order intake, there has been a slowdown that started before tariffs became an issue. Some people began talking about a slowdown last fall. It could be early signs of broader weakness, or simply the lumpy nature of our business.

With $30 million in revenue, we are bigger than we used to be but still relatively small. When order sizes are $4 million to $5 million, it creates lumpiness. It might also be early signs of a slowdown or customer uncertainty due to tariffs. But we are well positioned because we have manufacturing and suppliers in all our key markets, so tariffs should not significantly impact us.

Personal Questions

19/09/2024 How satisfied are you with new hires and do you need more staff?

We are pretty happy with the team. We added three more people since year end, but that should be sufficient for now. Ramp-up of the new salespeople has been good, with a director of sales in Europe and a VP of sales in North America. The sales team is strong, and we do not plan to actively hire many more people in the near future.

Disclaimer:

The following transcript and Q&A have been generated with the assistance of Artificial Intelligence (AI). While we strive for accuracy, completeness, and clarity, the content may contain errors, inaccuracies, or misinterpretations. Neither the company featured in this document nor ValueBridge assumes any responsibility or liability for the accuracy, reliability, or completeness of the information presented.

This material is for informational purposes only and should not be construed as official company communication, financial advice, or a definitive representation of the company's views. Readers should independently verify any information before making decisions based on it.

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Sources

Earnings Calls

Ascent Industries (formerly Synalloy) is a specialty chemicals platform focused on solving technical problems for formulators in oil & gas, water, HI&I, coatings, and adjacent markets. The company develops and scales customized formulations from lab to production, increasingly emphasizing branded/proprietary offerings over low-margin tolling. It operates three U.S. plants with significant unused capacity, targeting margin-accretive volume without heavy capital needs. Management reports a portfolio mix shift (from custom toward branded), recurring multi-year contracts, and disciplined capital allocation, including share repurchases and selective bolt-on M&A. Notable transcript-cited figures include $45 million proceeds from the Bristol Metals sale, $55 million cash on hand post-divestiture, remaining tubular revenue of $27 million, expected tubular EBITDA of $4–6 million with sale multiples of 4–6×, annual run-rate CapEx of $1–3 million, a staffing base of 274 people, plant utilization of 50%, a branded contract adding $750,000 annual adjusted EBITDA (≈10% of the prior year’s EBITDA), and a TAM of $9.2 billion across key verticals. The long-term margin ambition for Specialty Chemicals is 15–20% adjusted EBITDA, with ~15% cited as typical for the industry.

Catalysts & Milestones

1945 - Company founded

2014 - Acquired seamless pipe & tube business for about $28 million

2018 - Seamless pipe expected 25% EBITDA margin, marking a performance peak

2022 - Earn-outs scheduled to end, freeing $1 million per quarter for debt reduction

2023 - Oil & gas vertical had virtually no revenue; baseline set for later wins

2023 - Business mix benchmarked at 90% custom / 10% branded products

2024 - Good Friday 2024 rapid-response win created $5–6 million new business at >20% EBITDA margin

2025 - Bristol Metals sale closed, generating ~$45 million proceeds and ~$55 million cash post-deal

2026 - Management expects upward sales momentum as the company moves into 2026

Investment Highlights

• Post-divestiture cash of $55 million supports buybacks and bolt-ons.

• Plants at 50% utilization enable growth with $1–3 million annual CapEx.

• Bristol sale delivered $45 million proceeds; remaining tubular at $4–6 million EBITDA, 4–6× sale target.

• Contract adds $750,000 annual adjusted EBITDA (≈10% of prior year’s EBITDA).

• TAM $9.2 billion across HI&I (30%), personal care (30%), oil & gas (20%).
  
  

Future Growth Drivers

• Mix shift from custom to branded/proprietary products, improving pricing power and margins.

• Fill underutilized capacity (50% utilized) with margin-accretive volume requiring minimal CapEx.

• Vertical integration via potential specialty distribution acquisition to capture 10–12× distributor economics.

• Capability add-ons (rail access, glass-lined reactors) to unlock new customer classes.

• Monetize remaining tubular asset ($4–6 million EBITDA at 4–6×) and redeploy into chemicals.

• Multi-year customer agreements (e.g., $750,000 EBITDA contract) to deepen recurring revenue.

• Process automation in batch manufacturing to lift cost, reliability, and quality.

• Domestic sourcing and reshoring tailwinds creating new onshore opportunities.
  
  

Risk Factors

• Competitive pressure from large continuous manufacturers; small-batch niche must sustain >20% product margins.

• Sales cycles can run 6–18 months, delaying revenue conversion and cash generation.

• Customer concentration at individual sites can cause volume swings; one site acted as an “anchor.”

• Import pressures in tubular markets can compress pricing despite DFARS rules.

• Buyback execution constrained by liquidity and blackout windows, limiting pace toward 1 million authorized shares.

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Capital Allocation

06/05/2018 Is the potential bolt-on acquisition in Metals or Chemicals?

I cannot disclose that yet. We expect to share more within a couple of weeks. It is a business we know well, fits strategically, and we can hit the ground running with it.

06/05/2018 Is the potential acquisition related to recent public equity purchases?

No, it is totally unrelated.

06/05/2018 Will you continue buying stainless steel puts given your outlook on nickel?

In Q4 last year we reviewed our hedging policy after two years of layering monthly puts. Since then, under the Board’s three-level decision process, we have not added new layers and have no open puts forward. As nickel prices rise, we may consider layering again, but currently we have no exposure and have not paid premiums for new hedges this year.

12/08/2018 How much CapEx is required to increase galvanized production by 45%?

Not as much as expected. We approved recent projects involving tooling and exit system work. On the galvanized side, required CapEx is under $400,000. For ornamental tubing, about $250,000 of tooling will handle different shapes. It is a fairly negligible investment to support that growth.

11/11/2018 Any thoughts on pegging acquisition share prices above market levels, like $22–$22.5, to justify value to sellers?

Charles, that makes sense. We’ve done transactions in the $5–6 million EBITDA range, including $30 million-plus with earn-outs, where the stock component was not critical. Last year we nearly closed a deal involving $17–18 million of Synalloy shares that would have been immediately accretive.

At that time, we considered whether it made sense to value our stock above its then-trading price given the contemplated transaction. So yes, that approach can be reasonable, depending on the specific deal.

03/09/2020 Can Synalloy manage its $78.6M debt with only $1.4M cash while still reinvesting?

This year we cut capital expenditures by about $2 million, but kept all high-return projects, such as Munhall, which will show benefits starting in Q4. We expect $3 million in tax refunds this year, plus typical inventory reductions in the second half, particularly Q4, which will free working capital.

We feel somewhat thin on the asset-based lending facility, where we ended Q2 at $6–7 million, versus a preferred $10–12 million. That was due to a conservative March metals inventory valuation. With nickel prices and surcharges moving up since August, we expect the October revaluation to restore some borrowing capacity. Ideally, we want $10–12 million in capacity to comfortably fund operations and critical CapEx.

09/11/2020 With market cap at $50M and debt over $70M, will that affect refinancing of the credit line expiring December 2021?

We’ve had preliminary conversations with Truist and they remain very positive about renewal. We expect both the asset-based line and the term debt to be renewed before year-end.

11/05/2021 Is 2021 capital expenditure still projected at about $4 million?

Yes, though it may come in slightly lower. We are reassessing every CapEx dollar. Approved or budgeted does not mean we will spend it; projects must be incremental to business growth. For example, a potential Munhall expansion was avoided by reorganizing existing space, which cut significant CapEx. The team is being pushed to maximize current assets, and if an investment is not revenue producing, we review it multiple times before proceeding.

09/08/2021 Are capital expenditures still expected to be $4 million or less this year?

Yes. We are tracking significantly below that number, and I anticipate we will be nowhere near the $4 million we originally projected.

09/08/2021 Could you explain the $632,000 cash expense related to the proxy contest?

That was a reimbursement for Privet and UPG from the proxy contest. We placed highly qualified directors on the Board and brought in Chris as CEO, which has proven to be a good investment for shareholders. The Board gave it some time to evaluate and determined it was worthwhile. This expense was accrued in the second quarter and will be paid in the third quarter.

09/08/2021 After the third quarter, does that close the books on the proxy contest expense?

Correct.

09/11/2021 What will Synalloy do with the 55 acres of land it now owns?

I am not a fan of sale-leasebacks. Owning the assets provides greater flexibility for capital investments and expansion without being constrained by a landlord. While ownership allows future capital flexibility, DanChem’s model of partnering with OEMs who invest capital in the facility has worked well, and we plan to replicate it.

09/11/2021 With liability earn-outs ending in January 2022, freeing about $1 million per quarter, how will that cash be used?

We plan to use it to pay down debt.

09/11/2021 Is there a preference between chemicals and metals given your market share in metals?

We remain optimistic and would give the same answer.

09/11/2021 How do you think about leverage, given this exceptional quarter may not be sustainable?

We expect to predominantly use debt in the near term, given its cost, while maintaining a prudent leverage level. The target is dynamic and considers cyclicality in certain earnings streams and near-term cash flow expectations. We feel confident in our cash generation, and our first use will be debt reduction. However, for larger opportunities outside our leverage comfort zone, we would consider equity if returns exceed the cost.

09/08/2022 How do you view the current stock price and potential buybacks?

The stock price is a complete joke. When you search Synalloy’s ticker, it shows an irrelevant peer group , comparing us to Cleveland-Cliffs makes no sense. For instance, Northwest Pipe trades around $31 despite having more net debt, lower earnings, and smaller revenue, yet a market cap above $300 million. It’s frustrating internally, but we remain focused on delivering solid results every quarter, building the right team, and making prudent, shareholder-accretive investments.

08/11/2022 What message does the share buyback send?

We believe it signals confidence in our business and value. Repurchasing shares demonstrates discipline and commitment to shareholders. We appreciate your support and feedback on that front.

09/05/2023 Do you have a target debt level in mind?

No, not specifically. We expect to pay down additional debt through free cash flow generation, but there’s no arbitrary target. Our goal is to make working capital as efficient as possible, and that will be an ongoing effort. If high-return opportunities arise, we’ll allocate capital accordingly, being mindful of our debt cost, equity position, and other potential uses of capital.

09/05/2023 Could the share buyback program become more aggressive, perhaps through a tender offer or higher volume?

Everything is on the table. Q1 activity was constrained by regulatory restrictions tied to our delayed audit filing. Now that we’re back to a regular reporting cadence, we’re freer to repurchase shares within SEC limits. We’ll continue to be as aggressive as possible under those rules.

08/08/2023 With John’s departure, how are you approaching his replacement, through recruitment, or potentially via M&A?

We’re actively searching for an individual. We have a very capable interim leader doing a great job and uncovering immediately accretive opportunities. That said, we have strong views on where we want the Specialty Chemicals segment to grow, and we won’t wait for an acquisition to fill the role. We want to recharge the team’s energy sooner rather than later.

08/08/2023 How are you assessing the residual value of the Munhall facility, and how could that influence your cost guidance for the year?

We’re exploring all options to minimize business impact and maximize residual value. That includes selling or moving equipment, liquidating assets, subleasing the facility, or even potential joint ventures. It’s classified as discontinued operations, and we want an exit that extracts the most value possible.

08/08/2023 Would the higher end of costs reflect reclaiming the least residual value from Munhall or extending the process longer than planned?

Yes. The facility has been an anchor since it was acquired, and our goal is to cut that anchor as soon as possible.

08/08/2023 What obstacles prevented the company from buying back more shares in Q2?

We were late filing our 10-Ks in Q1, which delayed putting our 10b5 plan in place during the open trading window. Although that delay didn’t carry into Q2 directly, it prevented us from utilizing the entire quarter to repurchase stock. Once the 10b5 was implemented and the window reopened after Q1 results in mid-Q2, we were able to buy back shares daily. As long as we file on time and have new 10b5 plans ready for open market purchases, we expect no legal or mechanical barriers to being in the market consistently.

08/08/2023 Does publicly signaling your intent to acquire chemical assets inflate asking prices since sellers know you need to grow that segment?

No, I don’t think so. It’s mostly a supply and demand issue. We’ve demonstrated we’re willing to walk away from deals that don’t make economic sense. Transactions happen when both buyer and seller see fair value, and that’s where we focus.

28/03/2024 Does the $72 million debt reduction provide flexibility to reinvest?

Yes. Reducing debt gives us flexibility to refocus on fundamentals across both segments and to reallocate capital toward internal and commercial growth. With a clean balance sheet, we can reinvest strategically to stabilize and strengthen the business. While M&A remains a longer-term goal, near-term priorities are improving predictability and operating performance.

28/03/2024 Could delaying acquisitions cause missed opportunities if chemical market valuations rise?

That’s a fair concern, but stabilizing the foundation first will generate a much higher return on investment when we eventually pursue M&A. If we acquired a company today, we wouldn’t capture the full benefit of potential synergies. Fixing the base business now ensures future integrations will be far more accretive.

28/03/2024 Is the $10 per share range still seen as an attractive buyback level given current conditions?

We avoid being dogmatic about valuation levels. Markets and business performance are dynamic, and we constantly reassess based on real-time data. When we initiated buybacks two years ago, shares traded around $10–$11, but we’ve since purchased at an average in the high $9s, reflecting our view of intrinsic value being well above that. We’ll continue acting opportunistically where buybacks remain a highly accretive use of capital.

28/03/2024 With no debt, does the company have financial flexibility for future actions?

Yes. With the balance sheet clean, we now have meaningful firepower and flexibility to deploy capital where it creates the most value.

28/03/2024 What level of financial capacity do you have for a larger buyback program?

That’s what we’re currently evaluating. The priority is ensuring operational strength first, since any analysis is only as good as its inputs. We’re being deliberate and prescriptive in this assessment, and it’s an active topic at the Board level. Our goal is to have confidence in the data driving those decisions and to act when conditions are right. Having no debt isn’t necessarily the most optimal position if shares trade below intrinsic value and we operate in a fragmented, value-add industry. We see strong opportunity ahead but don’t want to look back 12–18 months from now having missed our chance to allocate capital effectively.

06/08/2024 Following the $2.8 million Munhall asset sale and $3.6 million cash at June 30, will the company let cash build until a use is determined?

Yes. At the business level, we’re strategically reviewing potential reinvestments. If accretive, margin-building opportunities arise, we’ll consider them, but none have yet. Inorganic growth is closer on the horizon than before. For now, there’s no specific allocation; we’ll let cash build while focusing on cost efficiency.

We feel very good about liquidity. Having some excess cash doesn’t change our disciplined approach , every deployment must meet our thresholds. Still, it’s encouraging to see cash building and enterprise value growing.

12/11/2024 Is the specialty chemicals M&A environment currently robust, and how is pricing?

We’re just starting to open that door again. Activity levels are picking up, and we’re getting new looks at opportunities. It’s still too early to tell on pricing, but the environment appears increasingly active.

12/11/2024 Could the new credit agreement lead to larger share buybacks?

It’s possible. That wasn’t something we were initially targeting, but with improving operations and additional liquidity in the stock, we have more flexibility. We view the stock as undervalued and have been buying back shares. Market limitations are easing somewhat, giving us more options going forward.

04/03/2025 Is the planned buyback of 1 million shares over two years realistic given historical repurchase rates?

It sets parameters for what we’re aiming to do, not a strict timeline. We have authorization to purchase up to that amount, giving us flexibility to act when appropriate. Timing depends on trading volume and blackout windows that limit when we can repurchase. As long as we believe buying back our shares is a good use of capital, we’ll find ways to execute.

13/03/2025 Why do customers choose Ascent over competitors?

Purposeful agility. For example, we received a call on Good Friday from a customer with a critical problem. Over that weekend, our team developed new formulations, shipped samples, and within a week we were qualified. Field trials followed within another four weeks, and we solved the customer’s issue. As a result, we earned a new piece of business. We want to replicate that responsiveness repeatedly.

13/03/2025 What prior experience do you and Ryan share, and what lessons did you bring to Ascent?

Ryan and I have worked together for roughly ten years across several companies. Our last joint experience was at Clirion in Charleston, South Carolina, which was losing substantial amounts annually and was near bankruptcy. Within four years, we turned it around. The main lesson was that success is all about people , attracting, developing, and retaining top talent is a genuine competitive advantage. We brought that mindset to Ascent from day one, made key leadership changes, and purposefully invested in SG&A. The strong 2024 results reflect the quality and empowerment of the people we’ve added.

13/03/2025 What is Ascent’s path to profitability while maintaining a growth mindset?

We made major cost improvements in 2024, and sustaining those gains is step one. On growth, we’ve pivoted to both organic and inorganic opportunities. Organically, we have significant unused capacity that we can activate without heavy incremental cost , our team is actively pursuing margin-accretive business to fill it.

Inorganically, we’re evaluating selective M&A. We’ll be deliberate and disciplined, focusing only on acquisitions that align strategically. For example, last year we walked away from a deal late in diligence when it didn’t meet our standards. That’s the type of discipline we’ll continue to apply in creating shareholder value.

13/03/2025 Where do you want to see Ascent in three to five years, and what are the key inflection points?

We were brought in to build a Specialty Chemicals business, so our focus is on optimizing that portfolio. One major inflection point will be exploring strategic exits for the stainless steel tubular segment. It won’t be a fire sale , it’ll be done purposefully to maximize value while sharpening our focus.

Beyond that, we plan to fully utilize our existing chemical capacity, driving growth that could take the segment north of $100 million in revenue with a strong margin profile. Over time, we’ll divest non-core assets, reinvest proceeds into Specialty Chemicals, and aim for 15–20% margins. 2024 was the clean-up year, 2025 will be about portfolio streamlining and disciplined M&A, and beyond that, we’ll keep trading up into higher-margin, lower-volume businesses to build a more profitable, focused enterprise.

28/04/2025 What were the highlights from the Bristol Metals sale and how does it position Ascent going forward?

The Bristol Metals sale closed on April 4, 2025, generating approximately $45 million in proceeds. That leaves ASI as our only remaining stainless steel tubular business, which produced about $27 million in revenue last year. This divestiture advances our goal of becoming a pure-play specialty chemicals company while strengthening our balance sheet. We now hold roughly $55 million in cash and are focused on high-return capital deployment through share repurchases and selective bolt-on acquisitions.

Ascent today operates as a specialty chemicals platform centered on solving customers’ toughest technical problems. Our value lies in developing customized formulations, scaling them from lab to production, and maintaining long-term, sticky customer relationships. The sales cycle can range from one month to as long as eighteen, depending on complexity, but that investment of time yields durable, high-margin partnerships.

28/04/2025 What’s the rationale behind potentially acquiring a chemical distribution company?

When we compare trading multiples, specialty chemical manufacturers typically trade at 8–10× EBITDA, while distributors trade closer to 10–12×. Many distributors already sell products we either manufacture or have the technical capability to produce ourselves. Acquiring a distributor would therefore allow us to capture margin through vertical integration, improve asset utilization, and spread our fixed costs over a larger revenue base.

28/04/2025 What’s the plan for the remaining tubular business?

We’re actively marketing that last stainless steel asset. It currently generates roughly $4–6 million of adjusted EBITDA, and we expect it to trade in a similar 4–6× range.

05/05/2025 How do share repurchases fit into your capital allocation strategy given company size and stock liquidity?

It’s always an option. We’ve been actively buying back shares and have discussed larger programs at the board level. For now, we’re evaluating how the market reacts to our portfolio optimization before committing further.

We’re in a strong balance sheet position and want flexibility for organic growth or additional repurchases if the stock remains attractive. There’s uncertainty in the market, so we prefer to stay patient and preserve optionality. Liquidity limits how aggressively we can buy, but we’ll keep repurchasing shares opportunistically while exploring all other uses of capital.

05/05/2025 Where does M&A fit in your overall strategy? Do you see the need for a transformational deal?

What we’re not going to do is buy something just for the sake of doing a deal. We’ll stay highly disciplined in what we pursue. In the fourth quarter of last year, we had an LOI in place and reached the diligence phase but saw issues that didn’t align with our expectations. We tried to adjust valuation but couldn’t reach agreement, so we walked away rather than chase a deal for ego’s sake.

We’re going to remain selective and mindful of our current challenge , underutilized assets. The last thing we want is to acquire another property that compounds that issue. Discipline and fit remain our top priorities.

05/05/2025 What is your plan for the remaining tubular asset?

Ideally, we’d like to see it transact this year, but we’re not in a rush. The asset we sold earlier took significant time and effort from the team, so we’re being patient. The remaining asset is performing well and isn’t a distraction.

We estimate it generates about $4–6 million in adjusted EBITDA annually, and we expect it to trade at roughly four to six times that. On the high end would be ideal, but even the low end is acceptable. The business is well run, and the focus remains on shifting entirely toward specialty chemicals.

05/05/2025 What should investors expect in terms of CapEx spending going forward?

Over the past three to four years, we’ve averaged $1–3 million per year, and that’s a good range to expect going forward. That covers maintenance, safety, and compliance needs based on our current asset base.

Occasionally, we’ll have project-specific CapEx if a team proposes an initiative with a clear return on investment , for example, an additional $500,000 for a high-return project. Those are one-off opportunities, but the $1–3 million range is our steady-state expectation.

12/05/2025 Could ASTI still be sold in 2025?

Yes, we are always evaluating options to monetize the value of all our assets.

12/05/2025 Can this growth be achieved with existing capacity and minimal capital expenditures?

Absolutely. Our run-rate capital expenditure has been between $1 and $3 million annually for the past four years, and we believe that’s a reasonable assumption going forward. Current asset utilization is very low, providing ample runway for organic growth.

12/05/2025 Was the Q1 buyback limited by the Bristol transaction?

During Q1, we executed repurchases within the parameters of the existing buyback program. With the Bristol sale completed, our financial flexibility has improved, and we’ll consider expanding activity moving forward.

12/05/2025 Does the expanded February 18 buyback allow purchases at higher prices and larger amounts?

Yes, though daily limits still apply regarding the number of shares we can buy at specific price levels.

06/08/2025 Has the executive management equity compensation plan been presented to the board, and were Q2 share repurchases linked to that program?

I’ll answer in reverse. The roughly 6% share buyback was not related to any equity program. It reflected our belief that the company is undervalued and will increase in value in the near term. Regarding the equity plan, Ryan and I already participate in an existing program, and we’re finalizing a broader plan for senior leadership with support from the compensation committee. It will be updated and refreshed each year.

06/08/2025 Has this year’s equity plan tranche already been finalized by the board’s compensation committee?

Yes, that’s already been settled. The current discussion relates to the 2026 tranche.

06/08/2025 Have you adopted a more disciplined approach to acquisitions compared with prior deals like ASTI and DanChem?

Yes, that’s absolutely the plan. We’ve reviewed several properties, entered LOIs, and walked away when valuations didn’t align. We won’t pursue deals just for the sake of doing them. We want to execute the right deals for shareholders, starting small to prove we can capture growth and cost synergies before pursuing larger opportunities. Expect smaller transactions first.

06/08/2025 Will large-scale share repurchases continue, or will buybacks be smaller going forward?

We’ll continue operating under the existing buyback agreement and evaluate opportunities with the board. We have a fair amount of dry powder and intend to use that for both share repurchases and inorganic growth. It’s not an “or” decision; it’s an “and.”

06/08/2025 How do you weigh M&A opportunities versus share buybacks as you approach full utilization of existing capacity?

From an inorganic standpoint, we expect potential acquisitions to trade at roughly six to eight times EBITDA. We aim for the lower end of that range after accounting for synergies, given our current valuation and strong organic opportunities. We’ll pursue M&A deals that fit within that range while continuing opportunistic share buybacks. Early acquisitions will likely be small to ensure focus remains on organic growth. We’ve walked away from deals that didn’t make sense and will stay disciplined, targeting opportunities closer to six to seven times post-synergy.

06/08/2025 What multiples would you expect to pay pre- versus post-synergies for acquisitions?

Pre-synergy, we wouldn’t expect to pay above eight or nine times earnings. Post-synergy, we aim to bring that closer to six to seven times. We’re not in a position to overpay given our idle capacity and the returns we can achieve internally. We’d rather invest where we can deliver high certainty and strong organic performance.

26/08/2025 What are you known for in the market?

Historically, we were known for custom or toll manufacturing , the guys who’d take almost any job, even at poor margins. That lack of strategy showed up in our financials. Over the past year, we deliberately walked away from bad business below variable cost. The result is a stronger reputation, better project opportunities, and early recognition as a disciplined, selective operator. Investors remember we overpaid for DanChem in 2021, but we’ve learned from that and are committed to disciplined acquisition and integration going forward.

From a customer’s perspective, the process starts when they bring us a technical challenge. Our team evaluates how to modify or create formulations to meet their needs, typically leading to long-term manufacturing relationships. We also assist early in a product’s life cycle when clients lack capacity, or later when they outsource mature products.

On the M&A front, our strategy mirrors that thinking , identifying “orphan” product lines we can integrate efficiently. Two years ago, we did about $3–3.5 million in the scale-up space but lost focus. We plan to rebuild and excel there, supporting projects from lab work through pilot scale to ongoing production. Eventually, as customers internalize production, volume may leave us temporarily, then return when their capacity maxes out. That’s why growing our proprietary product sales matters: it stabilizes the cycle and improves margins.

03/09/2025 What M&A synergies or bolt-on capabilities are you targeting?

From a market-synergy standpoint, we remain aligned with our four key pillars: oil and gas, water, HI&I (household, industrial, and institutional), and coatings. Within those areas, we look for complementary capabilities , for instance, rail access. None of our current assets have it, and adding that would open an entirely new portfolio of opportunities.

Likewise, we currently operate primarily with stainless-steel reactors, which work well for many customers. But if we added glass-lined reactors, that would unlock another class of opportunities. It’s about adding tools to our toolbox so we can serve customers more broadly and efficiently.

16/09/2025 What milestones should investors track over the next 12 to 18 months to gauge progress toward your 50% adjusted EBITDA margin target?

First, a transaction involving the Munn Hall property would be one key milestone. Second, continued organic growth, expect to see upward sales momentum as we move into 2026. Third, watch for inorganic growth opportunities that may emerge during this period.

19/09/2025 How will you deploy the remaining $60 million in cash after repurchasing shares, and where does M&A fit?

We bought back 6% of our outstanding shares, reflecting confidence in our team and trajectory. For the remaining $60 million, priority one is internal, fence line opportunities with compelling ROI, for example customer growth that needs incremental equipment. We are also pushing plant automation in batch manufacturing to improve cost, reliability, and quality.

On M&A, we are active but disciplined. Late last year we were under LOI for a very small transaction, less than a $5 million valuation. Diligence surfaced issues, we attempted to retrade, and walked away when terms did not make sense. We pass targets through strategic filters, market fit, geographic logic, and capability enhancement. We will not buy simply to get bigger.

Competitive Advantage

11/05/2021 Could Synalloy manufacture galvanized solar torque tube like the new Kentucky mill?

Our galvanized business is a narrow niche, and most margin comes from specialty stainless pipe and tube, as well as heavy-wall products. Our focus is on areas where we can make the most money and deliver quickly, rather than broad galvanized products.

04/03/2025 Has domestic sourcing of critical ingredients positioned the company with a competitive advantage?

From a raw material sourcing standpoint, our exposure is very minimal, and our team has ensured we aren’t dependent on offshore sources that could be affected by tariffs or supply chain disruptions. Beyond that, there’s a significant opportunity to benefit from the domestic manufacturing renaissance as customers bring sourcing back onshore and streamline supply chains. These changes take time, but we’re already seeing promising new opportunities as a result.

13/03/2025 How do you maintain focus and retain key talent during the turnaround?

Maintaining focus is critical. When you try to solve every problem at once, you risk stagnation and burnout, even if the effort level is high. Our goal is to channel that energy toward the right priorities and move the business forward deliberately.

Equally important is retention. Every bit of our success comes from our people, and turnarounds demand grit and persistence. We have an incredible team that has worked tirelessly to stabilize and rebuild the company. Keeping them engaged and motivated is essential because there’s still plenty of work ahead.

28/04/2025 What has been the biggest obstacle to launching and scaling your own branded products?

Initially, the biggest hurdle was the lack of a professional sales organization. We’ve since rebuilt that function completely, adding both traditional and technical sales roles. Our technical salespeople work directly with customers to identify problems and define tailored chemical solutions, while our R&D teams validate those solutions through lab-scale testing.

This is a far more technical sale than our prior business. Previously, we sold largely commoditized products like bleach, where success was about market share and volume. Today, we sell high-value, customized chemical solutions that require collaboration and technical expertise. That’s also why we’re considering distribution acquisitions , those businesses typically have deep, sticky regional customer relationships that can accelerate our reach and product adoption.

28/04/2025 How do you monetize your customer relationships after delivering these tailored solutions?

Historically, we had very few long-term or contracted relationships. As we’ve transitioned to solving customers’ most complex problems, we’ve built recurring revenue through multi-year supply agreements. Just last week, we announced a four-year contract expected to add about $750,000 of adjusted EBITDA annually. That’s roughly 10% of last year’s total EBITDA , meaningful for a company of our size.

The commercial team has also been disciplined in pricing, ensuring we extract fair value for our products while maintaining customer satisfaction. We continue to invest in both classical and technical sales talent to deepen those relationships and expand recurring revenue streams.

26/08/2025 What technologies or products are most important to your business?

Our surfactants and foamers are used across diverse applications , water treatment, coatings, and more. Chemistry isn’t a one-trick field; a single formulation can serve multiple markets. We hold hundreds of base products that we customize to solve specific customer problems, turning commodity sales into higher-margin, stickier relationships.

Until now, our R&D was mostly “research and duplicate,” staying within IP limits. We’ve just hired an R&D leader to expand those capabilities and drive innovation. He joins next Tuesday, marking the next step in building a true development engine within Ascent.

03/09/2025 What is your customer profile and how do specialized offerings strengthen relationships?

In the first half of the year, we’ve had tremendous success partnering with small to midsize customers who need strong technical support. Larger specialty chemical manufacturers often turn them away or push them to distributors lacking the technical depth to solve their complex problems. Ascent steps in with both small- and large-scale support, which has generated strong demand.

For example, on Good Friday, a prospective customer called with an urgent issue. Over the weekend, our lab created three sample solutions, which they validated within a week and field-qualified within a month. Because we operated at their pace and solved their problem, we secured $5 million in net new business with margins above 20% EBITDA. We want to replicate that success repeatedly.

16/09/2025 In the current pricing environment for specialty chemicals, how much pricing power do you have, and are you seeing competitive pressure from larger peers?
Last year, one of the levers we pulled was price, to ensure we captured appropriate value for our products and services. In cases where we couldn’t raise price, we simply walked away, which improved overall EBITDA and gross margins. We’ve successfully passed along price increases while staying conscious of competitive pressures and remaining market-competitive.

Compared to larger peers who run continuous manufacturing plants focused purely on lowest cost per pound, we stand out by solving customer problems. When customers call saying, “I need help,” we engage directly. Those interactions often yield more margin-accretive, longer-term relationships because we address unmet needs that large producers cannot.

19/09/2025 How sticky are the dedicated, customer-specific plants and what do contracts look like?

Dedicated facilities are multi-year by design. We have multi-decade relationships with those customers and do not see that changing. Earlier this year we signed a new four-year agreement, which we disclosed in a press release. It produced a $750,000 annual price pickup. We are not just maintaining agreements, we are upgrading business quality through better contracting, market research, and understanding the relative value we create in our customers’ processes.

Operations

06/05/2018 Why did Palmer Tank revenue decline year-over-year?

No, it was not weather related. Two large customers in the Permian had been scheduled to take tanks in February and March but, due to bottlenecks mainly tied to labor, they could not take delivery. They did, however, take all of those tanks in the first week of April, which drove April sales at Palmer to just under $4 million.

06/05/2018 How much revenue was pushed from Q1 into April at Palmer?

About $1.3 million to $1.4 million in tank value was delayed from Q1 into April.

06/05/2018 How do you protect against higher raw material costs in Palmer Tank pricing?

Our bids are valid for 30 days. If we get any protection on carbon steel purchases, we extend that protection to our customers, but currently the bid window is 30 days.

12/08/2018 Is chemical segment revenue and 12–13% margin sustainable in the back half?

That’s right. We like the product mix in the pipeline and expect volumes to increase in the second half. This will drive favorable overhead absorption, especially at CRI, which still has excess capacity. Bringing more volume into that facility provides strong leverage on operating income and EBITDA.

12/08/2018 When will Bristol’s Q2 price increases show up in revenue?

That is correct. Because of backlog, those increases would not have been reflected in second quarter revenue. The benefit will begin flowing through in the back half of the year.

12/08/2018 What is happening in the specialty pipe division?

We believe you mean the seamless pipe and tube business. We acquired it in November 2014 for about $28 million. It performed well early, slowed during the oil and gas downturn, yet still delivered margins comparable to our other businesses. In the last year, performance has been the strongest in its history, with expected 2018 EBITDA margins near 25%.

This investment is yielding a significant return in 2018. The key is maintaining high inventory levels. That business is designed to turn inventory only once a year, serving distribution houses that prefer faster-turning stock. With more than $20 million of inventory supported, it is a very strong contributor to our metals segment.

11/11/2018 Despite reports of a Permian slowdown, your backlog remains strong. What activity are you seeing at Palmer?

We see no slowdown. Some E&P firms may be holding back until takeaway capacity arrives in 2019–2020, but we still have plenty of inquiries. Most orders are for larger tanks with higher selling prices, and activity remains robust.

Our main issue is labor. In 2014, most labor came from near the Andrews facility. Now about half is transient, from New Mexico and other parts of Texas. We’ve leased housing to accommodate them, but turnover is high. Productivity suffers when trained workers leave after six months, though demand remains strong.

11/11/2018 Can you pass along higher labor costs to customers next year?

Yes, we can pass on wage increases, and our backlog tank prices are higher. The larger challenge is productivity loss from turnover, which disrupts efficiency even more than wage inflation.

03/05/2019 How were Palmer’s Q1 orders with backlog at $15 million?

Order rates were good, but throughput improved after removing bottlenecks, particularly in paint blast. Pay rate adjustments also reduced turnover. Throughput was strong and April will likely set a revenue record for the storage tank business.

03/09/2020 How long do new chemical products take to impact earnings?

The process can take up to a year. We track products through four phases: Phase 1 is the idea, Phase 2 involves initial customer testing, Phase 3 is small-scale production, and Phase 4 is full production with visibility on pounds and impact. Samples are tested by both our customers and their customers, which lengthens the cycle.

Our Cleveland, Tennessee plant runs at 85% capacity, limiting new product introductions there. CRI runs at 50% capacity, leaving ample room for new reactor and blend products. These carry high contribution margins since they require no added labor. Although timing is uncertain, we like the current pipeline and cost initiatives, which supported significant EBITDA gains despite a 1% sales decline.

03/09/2020 Is hand sanitizer still shipping at two trailers per week?

Volumes have dropped from the early Q2 spike, but we have active bids with new customers who did not participate in the initial surge. We expect it to remain a solid contributor to chemicals.

09/11/2020 How is Synallow’s BioLube ECO-7 being accepted in the marketplace?

Our chemical business has long produced lubricants for the textile industry, with multiple products fitting that description. I haven’t heard specific feedback suggesting this product extends beyond one customer. Typically, such products are tailored to a specific customer, but we can look into details and provide a follow-up.

11/05/2021 Can you quantify delays in production and deliveries, and were they metals only or both segments?

Delays were across both metals and chemicals. Like chip shortages in autos or appliances, raw material inputs constrained us. We cannot provide a precise number, but delays contributed to a higher backlog that should flow through Q2, Q3, and Q4. Logistics issues, such as trucking shortages, also weighed on results.

11/05/2021 Will new VP Tim Lynch’s operational improvements show up quickly or take time?

It is a process, but Tim has already made contributions. We brought in new talent, including continuous improvement and SOP specialists to boost throughput and efficiency, and a business development leader to streamline sales. These moves set us up for long-term success, enabling the sales team to grow the right kind of business with the margins we want.

11/05/2021 Will Synalloy supply stainless pipe for a customer’s new furniture line?

We aim to sell as much pipe and tube as possible, though I cannot identify that customer. The constraint is not demand but execution: producing on time, at the right cost, with the right equipment, while maintaining positive margins. This year is about delivering reliably, pricing correctly, setting SOPs, and structuring sales incentives for the markets we want to win.

09/08/2021 In the Metals segment, is there still room for more improvement in getting product delivered on time?

Yes, there is definitely room for more improvement in flow-through and efficiency. Our supply chain team is working well, coordinating inbound customer orders with mill production and finished goods. We are probably in the sixth or seventh inning of putting a great process in place, and we are significantly further along than last quarter. On-time delivery is now at its highest level in at least one year, so we are making strong progress in delivering product on time to customers.

09/08/2021 Does that business carry a high EBITDA margin?

It has a relatively healthy EBITDA margin. We are also improving the supply chain by refining the number of SKUs, classifying items into A, B, C, D categories, and implementing a new inventory program. This has already reduced inventory days significantly and better aligned supply with demand.

09/08/2021 Beyond leveraging corporate overhead, what synergies exist between Chemicals and Metals?

There are synergies on the expense side, such as uniforms, raw material inputs, and logistics. I also like Chemicals because it should carry a healthier margin than Metals, and we are working to capture that.

09/11/2021 How will you mitigate margin compression if steel prices fall?

Margin impact in the metals business mainly comes from being in a long or short inventory position. Our goal is to transition into a true mill structure, producing welded pipe and tube directly to customer orders. Historically, the business built inventory ahead of demand, which created price risk. Producing to order will reduce commodity exposure and support more consistent margins.

09/11/2021 Does producing to order put you at a disadvantage if competitors hold more inventory and deliver faster?

That is a good question. We sell primarily to OEMs and stocking distributors. We avoid competing with distributors, which happens if we build inventory. Stocking excess inventory forces us into weak pricing with master distributors. Our throughput is aligned with customer need, not speculative stocking, which protects our relationships.

08/11/2022 Will corporate expenses remain elevated through Q4 before declining in 2023?

Yes. We’ve invested heavily in processes, procedures, and staff upgrades. We’re already seeing benefits such as reduced healthcare costs through improved negotiations. While expenses are slightly elevated now, I expect cost savings heading into 2023.

08/11/2022 Will being a supplier of choice help with larger diameter pipe demand going forward?

Yes. We’ve spent about 18 months catching up. Our on-time delivery improved from the 30% range to over 80%, addressing a major historical issue. Previously, contractors couldn’t rely on us to deliver full orders for major projects. Through open houses, we showed over 100 customers our full process, from coil to finished goods, and how we ensure quality and timely delivery. That transparency and execution are now driving significant new business wins.

08/08/2023 Did you experience similar destocking pressures in the Chemicals business, particularly in Agriculture and Personal Care, or were you insulated due to positioning or lead times?

The primary issue on the chemical side was site-specific. One customer making a product in the personal care space saw significant volume declines, which impacted us. We’re working to refill that volume. Two of our sites are performing above expectations, while one site is currently acting as an anchor on performance.

08/08/2023 When you lose demand from a large customer early in the year, how do you adjust your planning for that asset?

It becomes a commercial effort of turning over more stones. The equipment is state-of-the-art and dedicated to that customer, so we’re working with them to understand their reduced volume needs. Meanwhile, we’re negotiating contract terms that could allow us to backfill that unused capacity with other customers. We’re nearing the tail end of those discussions and expect to make progress using that volume for others.

08/08/2023 Given the volume headwinds, are you comfortable with current raw material inventory levels on a mark-to-market basis, or will there be margin impacts through year-end?

On the chemical side, I don’t foresee any issues. On the tubular side, margins are being negatively impacted as we burn through inventory purchased last year at peak prices, both nickel surcharges and raw materials. We’ve worked through most of that in the first half, with a small amount remaining in Q3. Last year, our working capital position wasn’t optimal, and we didn’t forecast the customer loss or the sharp fall in surcharges.

08/11/2023 How much self-help leverage do you have over the next few quarters assuming no market recovery?

We feel confident we can return the chemical side to prior levels of profitability within the next few quarters without relying on a strong market rebound. The environment is difficult, but many factors are within our control. Moving from a mid-single-digit EBITDA margin back to around 10% is achievable through internal initiatives, and further improvement toward the mid-teens range should come as market headwinds ease.

08/11/2023 How are you balancing efforts to secure new chemical business versus maintaining existing customer relationships during destocking?

We are pursuing both aggressively. Customer engagement is very high, though results vary across our three facilities. Some are outperforming while one is underperforming, which we are actively addressing with signs of progress. At the same time, we’ve achieved several encouraging wins elsewhere in the chemical business. After reviewing this with Brian, we’re optimistic about 2024.

08/11/2023 Has Brian provided any early perspective on procurement and inventory management or lessons from recent years?

Yes. He’s already identified opportunities and assembled a team to address them. Brian is very aggressive, well connected in the chemical sector, and has already brought in several strong hires. We’re upgrading talent weekly, and after recent meetings with Brian, Ben, Bill, and the Board, we’re all confident in what he’ll deliver.

08/11/2023 Are you still seeking key leadership hires in the steel business?

Yes. We’re always evaluating leadership needs and open to bringing in the right talent to strengthen and grow the business.

28/03/2024 How close is the tubular segment to sustainable profitability after the restructuring?

We’re focusing on two or three main areas within Tubular. The first is cost reduction, there’s still significant cost that can be eliminated and returned to net income without compromising safety or compliance. We expect benefits in the near term. The second is core product line management, where we’re analyzing which products are profitable and which are not. That review should conclude in Q2, with follow-up actions shortly thereafter.

08/05/2024 Have customer relationships been affected by recent operational changes, staffing adjustments, and product portfolio optimization?

There has been some churn, but the vast majority of our customers have been with us for decades and remain incredibly loyal. We’re deeply appreciative of those relationships and confident they’ll continue long term as we keep expanding the customer base.

12/11/2024 Was the margin improvement at Ascent Chemicals driven by self-help or new contracts?

It’s a combination. We started aggressively reducing costs across the enterprise and have done so sustainably. In addition, we’ve improved the overall quality of our book of business. So it’s really all of the above.

04/03/2025 Any updates on leasing or selling underutilized properties like the Cleveland, Palmer, or Munhall sites?

In Tennessee, at our chemicals facility, we had a smaller warehouse that we managed to sell through our leasing provider around the second or early third quarter. That’s completed. We also have an active sublease with Palmer. The real focus now is on the Mont Hall site, where we’re actively working to find a permanent solution for that asset.

13/03/2025 What have you been focusing on operationally over the past year?

We’ve been very intentional about where we spend our time, allocating much of it to fixing the company’s core foundation. You can see that through our 2024 results, where we improved significantly in both gross profit and adjusted EBITDA across both businesses.

13/03/2025 What was your approach to restructuring the company’s two segments?

There’s no natural reason for a steel business to sit next to a chemical business , the structure was confusing. Our experience is in Specialty Chemicals, so we started by reassessing both segments from the ground up. On the chemical side, we knew from our Clirion turnaround that strategic sourcing can unlock major value when executed well. It’s not just about buying raw materials; it’s about aligning sourcing strategy with planning, scheduling, and analytics.

When we arrived, it was clear we didn’t fully understand our own capabilities, customers, or end markets. That lack of visibility made improvement difficult. Operational inefficiency meant sales reps were bogged down in logistics and customer-care issues instead of selling. We rebuilt the team, refreshed talent across sourcing, planning, and analytics, and brought in external experts to help evaluate plant-level capabilities. That deeper operational understanding is now driving meaningful change.

13/03/2025 How did you integrate Ascent’s three chemical plants into a unified business?

When we arrived, each plant operated independently and inefficiently. Our priority was to centralize key functions and bring in people who could view the business holistically. That gave us better visibility and allowed more strategic conversations with customers. For example, we began tracking every dollar spent at the plant level , a basic “checkbook” exercise that revealed blind spots.

We also built an FP&A function for the first time. Previously, financials only went upward with no accountability at the plant level, so no one truly “owned” a number. By redesigning budgeting for 2025, we made it more efficient and impactful. The broader goal was cultural: shifting from a volume mindset to one centered on profitability. We brought in new talent, emphasized margin over tonnage, and prepared the company for disciplined, profitable growth.

28/04/2025 Can you describe the company’s current scale, capacity, and key performance indicators?

We were founded in 1945 and employ roughly 274 people across three manufacturing assets in Tennessee, Virginia, and South Carolina. The plants are operating at about 50% utilization, leaving substantial organic growth potential with minimal capital needs. Our specialty chemicals segment generated about $80 million of revenue and an 8% adjusted EBITDA margin last year. The goal is to lift that margin to around 15%, which is typical for the industry.

We’re filling underused capacity with higher-margin branded and proprietary products instead of low-margin contract manufacturing. In 2023, about 90% of our business was custom manufacturing and only 10% branded. That mix has already shifted meaningfully, improving both pricing and predictability. Capital intensity remains low since our production processes are non-corrosive, and we maintain strict standards for safety and reliability.

28/04/2025 Why were so many of your branded products sitting idle before 2023?

Before 2023, Ascent operated primarily as a contract manufacturer. The model was reactive, waiting for the phone to ring and producing to customer order, while a portfolio of owned formulations and intellectual property sat unused. When we came in and saw that “war chest” of underutilized products, it represented a major opportunity. That discovery drove the rapid shift from a 90/10 custom-to-proprietary mix to roughly 75/25 within one year.

28/04/2025 How did legacy assets shape your current capacity and strategy?

Over a century ago, our first chemical holding, Manufacturers Chemical, was built to serve the textile industry. Our South Carolina plant was designed around that sector, but as textiles left the U.S., it left behind substantial excess capacity. To fill the gap, prior management adopted the contract manufacturing model, renting out equipment to others. We’re now redefining those same assets with purpose-built, branded production focused on solving customer problems and generating higher-margin, recurring revenue.

26/08/2025 Are you still marketed under the same name?

We’re marketed as Ascent. There was a branding change several years ago; the old ticker is gone, it’s now just ASNT. All our external marketing collateral has been completely rebranded.

26/08/2025 Do you have branded products?

Yes, we do. For example, if you need a corrosion inhibitor for downhole oil and gas applications or a defoamer for paints and coatings, we can supply it. These are functional additives, not consumer products you’d find on a retail shelf. We’re fundamentally a specialty raw material supplier, not a consumer packaged goods company.

26/08/2025 How large is your sales team?

Not large enough. We’ve just hired a coatings technical sales representative who starts next week, and we’re close to finalizing an offer for a cleaning (HI&I) specialist. Combined with our new R&D hire, that will give us the right commercial and technical balance for the near term.

26/08/2025 Do you already have the rest of the team in place?

Yes, we’ve built a strong core team , what I call a really good band. Restructuring meant selling assets and reducing headcount, but that was necessary to reset. Now the challenge shifts to executing organic growth, which we’ve done before.

26/08/2025 How do you reach customers and manage sales channels?

We sell directly to formulators, paint manufacturers, and oil and gas service companies, not through distributors. That avoids channel conflicts and leaves room to acquire a specialty distributor if we choose. Most of our sales are direct, technical, relationship-based engagements.

03/09/2025 How does specialization factor into sales and marketing as you expand?

Specialization is central to how we go to market. It begins with understanding the customer’s technical requirements and ensuring we have the right people to collaborate directly with them in solving complex problems. We just hired a new R&D leader , his first day was today , to strengthen that capability.

We now have market-focused sales resources in oil and gas and coatings, and we’re building that same focus within HI&I. The goal is a disciplined, cross-functional team that aligns technical depth with market specialization.

19/09/2025 What does your current operating model, “chemicals as a service”, mean in practice?

Our model centers on meeting customers where they are and serving them how they need to be served. For some, that means formulation or technical support to solve complex problems; for others, differentiated supply-chain solutions or simply reliable delivery of what they need, when and how they need it.

Rather than forcing customers through a traditional, outdated value chain, we tailor solutions to their specific objectives. Whether the critical moments are in development, commercialization, or manufacturing support, our aim is to stand alongside them and create value in those moments that matter most.

19/09/2025 Can you walk through your sales process from lead generation to commercialization?

Marketing conducts market research on what we have on the shelf, matches products to applications and target customers, and hands prioritized leads to inside sales. Inside sales engages prospects to qualify need. Technical sales then works opportunities through the pipeline: pre-qualification, sampling, customer lab qualification, field testing for real-world efficacy, contracting and negotiation, then commercialization. It is a lengthy process, which is the good and bad news. Once you are in, and you perform, you are in.

19/09/2025 What sales-cycle timelines do you target for new wins?

It is opportunity dependent. For custom manufacturing, I would be delighted with six to twelve months. For proprietary products, three to six months would be ideal.

19/09/2025 What were your turnaround milestones, and where did you outperform?

The first three items were people, people, people. Get the right team in place and give them runway. A key lever was strategic sourcing. Consolidating buys and executing a sourcing strategy delivered a 20% reduction in raw material cost, better than my initial expectation.

Data and systems were next. We had two ERPs and no reporting repository, which we addressed. We have now converted to one ERP. Over this weekend, the team completed the cutover. On Monday morning we logged in and could collect cash, issue purchase orders, post production, record shipments, and create invoices.

Competition

12/08/2018 Did South Korea already reach its steel quota and what about India?

Yes, South Korea has tapped out its quota and cannot ship additional product into the US this year. Regarding India, you may recall we succeeded in dumping charges about a year and a half ago, resulting in duties from 7% to triple digits, plus the 25% tariff. Even so, there is evidence of continued dumping below cost, so we may revisit that. Bristol Metals has not yet enjoyed any major benefit from tariffs, though we expect improved volumes in the second half with Korea out of the market.

12/08/2018 What percentage of imports come from South Korea?

I do not have that number immediately available. If you call me after the meeting, I will pull it up and share it with you.

12/08/2018 Is South Korea one of the largest US exporters?

Yes. By volume they are second only to Taiwan.

03/05/2019 How were March and April BRISMET order trends?

Orders have picked up recently. In April, we booked about $9 million of stock buys, and we are quoting on several larger opportunities. Imports were strong in January, mostly from South Korea, but domestics gained share and we also picked up share.

03/05/2019 Were Korean imports back in the market until their quota?

That’s right. They shipped heavily in the first three or four months of last year and again in January. If the trend holds, they’ll be out of the market again by June.

09/11/2021 How will European tariff rollbacks on steel and aluminum affect Synalloy?

We do not expect any impact. There is not much heavy wall material coming in, and the volumes are small, about three million tons, with nothing tied directly to our end markets.

08/11/2022 Are increased imports this quarter a problem for future quarters?

It’s something we’re watching closely. We can’t control import flow, and it has increased significantly, especially in smaller diameter tubing. For large diameter tubing, approvals for infrastructure projects have slowed, but demand remains strong. The issue is getting projects through the system. Imports have surged over the past 12 months versus the prior 3–5 years, and our tubular segment head, Tim Lynch, is active on the industry import committee. If imports continue unchecked, it could become a broader challenge.

08/11/2022 Isn’t the infrastructure program meant to promote U.S.-made products?

Yes. The DFARS requires steel to be made, melted, and produced in the U.S. for large-scale projects. However, imports still flood into ornamental, mechanical, appliance, and automotive markets. Competing with extremely low-cost product from Taiwan, China, Korea, and Vietnam remains difficult.

08/08/2023 Are there any industry efforts underway to address import pressures in the current steel demand environment, and are you involved?

We’re active in the Committee for Pipe and Tube Imports, a collaboration of domestic producers assessing countries dumping material into North America. A solo trade case is costly, so the committee is surveying interest in pursuing joint actions. We’ve done this before and are exploring all options. At the same time, we’re evaluating whether importing ourselves could make sense for smaller-diameter products if we can do it cheaper than producing domestically. Imports might actually be an opportunity if we view them strategically.

13/03/2025 Who do you typically compete against in the market?

We face a broad mix of competitors. Although we’re small, we often go up against major players like Lonza and Stepan, multi-billion-dollar companies. We can compete effectively because we’ve optimized our cost base, built exceptional agility, and assembled a strong team over the past year.

28/04/2025 Can you provide examples of your specialty products and outline your competitive landscape?

Our total addressable market is about $9.2 billion, though we currently participate in a smaller slice of that. Roughly 30% is household, industrial, and institutional (HI&I); 30% is personal care; 20% is oil and gas; and the remainder includes paints, coatings, and other smaller markets. One good example is our oil and gas segment, where we manufacture corrosion inhibitors to improve flowability. In 2023 we had virtually no revenue in that vertical. After hiring an experienced technical sales lead, we were called by a major customer on Good Friday 2024 to solve a problem. Within days, our team produced and tested three formulations, and within a month they were field-tested and adopted. That resulted in roughly $5–6 million of entirely new business because we solved a critical customer issue.

05/05/2025 How do you view competition given your smaller scale and broad product range? How do you win against larger competitors?

From a toll manufacturing standpoint, competition is intense, especially on price. Unless you’re handling multi-reaction, highly complex chemistry, it’s generally a commoditized offering where customers are renting out capacity. We can win selectively, but it’s not our intellectual property, it’s theirs, so differentiation is limited.

As we shift toward branded products, our batch manufacturing model allows us to be scrappy and successful with small to mid-tier customers. We can’t match the economies of scale of large continuous manufacturers running 24/7, but when customers need smaller batch quantities or custom formulations, we win consistently.

12/05/2025 Is the ASTI business a more attractive acquisition target now than six months ago?

The demand environment remains soft, even though we saw some pickup in Q1. Market conditions are still relatively muted. Regarding tariffs, we are getting additional looks from customers, but it’s not a dramatic change in activity. The climate for an ornamental stainless domestic manufacturer has not materially shifted.

03/09/2025 How do you view the current pricing environment and your pricing power?

Historically, our pricing was inconsistent and lacked a clear rationale. Over the past year, we’ve become far more strategic about how we price and position our offerings. By deselecting poor-quality business , some even priced below variable cost , and strengthening pricing discipline elsewhere, we’ve improved margins and competitiveness.

We intend to be responsible stewards of pricing. Just because we can use price as a weapon doesn’t mean we’ll give away value. From a macro perspective, we’re not counting on a market recovery; our growth will come from disciplined execution and self-help, not external tailwinds.

Growth

06/05/2018 Are lighter Chemicals margins due to a permanent mix shift?

No, not permanent. Margins move around. We have higher-margin business in the pipeline for both MC and CRI, and expect improvement over the next few quarters. The road construction product announced recently was fast-tracked and is already generating strong orders, with major shipments scheduled for May through July.

06/05/2018 Are there start-up costs for the new road construction product?

No. We do not need additional equipment or personnel, so it will have an immediate positive impact on margins.

06/05/2018 Has last year’s new Chemicals business ramped as expected and met profitability goals?

Yes, it has performed well. Volumes are at expected levels and the customer is very happy with quality.

12/08/2018 Can you discuss the galvanized acquisition, its markets, and growth potential?

The galvanized business sells into several end markets. One is the intermediate bulk container (IBC) market, which uses galvanized steel skeletons around chemical totes. We supply tubes for those machines and have large IBC customers. We also serve the garage-door framing market and multiple road construction applications. Our IBC customers would prefer to buy domestically, and they have asked us to increase tonnage by about 45% annually above current levels.

We operated this business for over a year under the Italians, so we know the personnel and processes well. Several Bristol sales team members previously sold galvanized and ornamental stainless tube, so we are comfortable with both production and sales. It is an important organic growth initiative we will focus on in the coming months.

11/11/2018 How is the expansion opportunity with integrated bulk container customers in galvanized progressing?

We continue working with several customers to increase tonnage for their integrated bulk containers. We’re also making good progress with galvanized products in road construction.

03/05/2019 Why was Chemicals revenue and profit down year over year?

Revenue had organic growth and profits were up after adjusting for a legal payment received in Q1 2018. We are adding biocide capacity at CRI for existing and a new customer. At MC, we are bringing in additional blending business to use excess capacity.

09/11/2020 After Palmer, is about 80% of revenue from markets not tied to oil and gas?

That’s roughly correct. Our specialty pipe and tube business in Houston has exposure to midstream energy and offshore, though offshore is very slow. Bristol Metals has downstream energy exposure, mainly to infrastructure spending on LNG, petrochemical, and chemical operations, which is less volatile than upstream markets.

11/05/2021 Will Synalloy benefit from the $35 billion Safe Drinking Water Act funding?

Yes. On the chemical side, water treatment overlaps strongly with our business, and we are investing R&D there. On the pipe side, replacing aging infrastructure creates demand, as safe drinking water is universally valued. We see opportunities to develop new products and expand our share of this market.

11/05/2021 How is the strengthening of the chemicals sales team progressing?

I do not know the chemicals business as well as metals, but I believe it holds tremendous long-term value. I am directly involved in building a strategic plan to position the brands and sales effort more aggressively. There is significant opportunity, and we will find the right way to capture it.

09/08/2021 Is the backlog still growing?

Backlog is very robust.

09/08/2021 Can you discuss the specialty pipe and tube master distribution business, mainly in Houston and Ohio?

That business distributes heavy wall seamless pipe and tube. In Houston, the first half of the year was impacted by rebounding oil demand, but we are now seeing a significant pickup, especially on the Texas distribution side. The Ohio and Midwest market has been very robust, with demand from hydraulic applications, construction equipment, high-pressure uses, valves, and fittings. Overall, this business is benefiting from a rebounding economy and seeing strong tailwinds.

09/08/2021 How does backlog compare to the March quarter?

Backlog is up, particularly in the customer segments we are targeting going forward. We are shifting the mix of the end-use profile to where we want backlog delivered.

09/11/2021 With the acquisition increasing chemical segment revenue by a third, will earnings become more stable for the whole company?

We see significant margin growth potential in the chemical segment, which is less commodity driven in pricing. This gives us a longer-term growth projection and balances our overall portfolio.

09/11/2021 DanChem is performing very well this year. How sustainable is this and what were margins and revenue in 2019–2020?

I don’t know the exact figures. However, DanChem has been a growth story since its private equity ownership, which brought in new leadership to turn it around. With the processes and investments made, both top line and margins have grown over the past three years, and we believe that growth is sustainable.

09/08/2022 Can we expect chemicals to become a larger share of revenue over time?

Yes. DanChem is driving that shift in mix, and as we continue to expand our specialty chemicals business, the revenue composition will keep evolving accordingly.

08/11/2022 How is diversification into personal care and specialty chemicals progressing?

On the personal care side, we’re expanding within the household segment by applying our reaction capabilities to new opportunities in that sales funnel. Construction adhesives and sealants remain very strong areas of demand, and we’re securing large specialty chemical production contracts with customers in those sectors.

08/11/2022 What progress has been made since the DanChem acquisition?

A year in, we’re seeing meaningful expansion from that deal. We gained high-caliber customers through DanChem, and have been qualifying additional facilities in South Carolina and Tennessee to meet their needs. Each new formula and site requires customer approval, but as we complete that process, we’re expanding relationships, for example, serving customer X not just from Danville but now also from Fountain Inn and Cleveland, Tennessee. The geographic reach and customer penetration are both increasing.

08/11/2022 Chemicals represented 27% of revenue this quarter. Is that a strategic focus?

Yes, absolutely. That mix is a high watermark and reflects a deliberate focus from Ben and me. We’re pursuing both organic growth and selective strategic acquisitions to further strengthen the chemical segment.

08/11/2022 Is the goal for tubular and chemical EBITDA to be equal within two years?

Yes. Tubular will continue to have ups and downs, but chemicals are much steadier. The chemical business is highly technical and sticky, with long sales cycles and a focus on quality, lab work, and approvals. Once approved as an outsourced specialty chemical partner, relationships last for years rather than single purchase orders.

09/05/2023 With Munhall and chemical slowdowns, do you see sales growth potential in the near future?

Yes, stabilization is occurring through Q2. We saw early signs in April and expect more improvement through May and June. Growth depends on the division and comparison period. On a year-over-year basis including Munhall, growth is harder to see, but excluding Munhall and looking sequentially, some areas are expanding. We plan to disaggregate results more clearly, excluding Munhall, to provide apples-to-apples comparisons. Overall, we’re targeting stabilization and a return to growth.

08/11/2023 Hypothetically, if the tubular business had entered 2023 in ideal shape, which areas would you lean on in this macro environment, and which would you adjust?

There’s significant opportunity in tubular, but performance varies by unit. Specialty Pipe and Tube is performing exceptionally well with strong demand and growth prospects. In contrast, the Bristol operation, serving the oil and gas and large-diameter pipe markets, missed sales targets despite robust demand. We’re improving the team and processes there. It’s a solid business when run properly, but it’s not yet where it needs to be.

28/03/2024 Where is the low-hanging fruit within Ascent’s branded products portfolio?

In custom and pulp manufacturing, sales cycles typically take 6 to 18 months from prospect to commercialization. Branded product cycles are much shorter, often one to three months. Our existing portfolio spans diverse markets including water treatment, oil and gas, and textile chemicals. We’re reinvigorating these areas through increased and reallocated SG&A spending to target new opportunities. This should drive stronger margins and more predictable results as we gain control over our own branded sales.

28/03/2024 What is the easiest go-to-market path for branded products given existing customers?

It depends on the market. For our initial focus areas, there’s minimal overlap with existing customers, which avoids channel conflict. That’s where we’re concentrating first, and we expect to report favorable results from these efforts in upcoming quarters.

28/03/2024 Are branded products the same as the proprietary products developed in recent years?

Correct. They refer to the same higher-margin, company-owned product initiatives we’ve been developing.

28/03/2024 Can branded or proprietary products be expanded without significant R&D investment?

Yes. Within our current portfolio, we already have a set of branded products that can reach a wide range of markets without heavy R&D spending. These are existing products suited to existing markets and applications, allowing us to expand efficiently without major development costs.

28/03/2024 Can the current management team create lasting value using existing assets, without acquisitions?

Absolutely. Ryan and I have worked together for years, including in prior turnarounds, and I firmly believe we can build something special with the assets we have today. I’m a strong believer in organic growth and in unlocking the enterprise’s full potential by assembling top talent that challenges and improves one another. We’re building that momentum now, and it’s exciting to see the early results and what’s ahead in the near term.

06/08/2024 How are branded product sales in chemicals progressing?

Good. We’ve started to build meaningful traction and are nearing run-rate volumes on the initial two sponsoring opportunities. Based on our Q2 R&D activity, we’re heading in the right direction. There’s still work to do on the rest of the Tennessee portfolio, but we’ve got the right people and we’re hyper-focused on execution.

06/08/2024 The $10 million in new Q1 wins and additional Q2 activity , was that from increased demand or a more effective sales team?

Those were net new selling opportunities that weren’t in the pipeline prior to Q2. They continue to build month over month toward full run-rate volume, revenue, and EBITDA inside of Q3. We’re pleased with the progress and traction. There’s a lot more to do, but it’s being driven by hyperfocus and an incredible team.

12/11/2024 Could Ascent participate in Department of Defense initiatives to develop domestic chemical manufacturing?

Yes. There’s an influx of onshoring opportunities beginning to emerge, and following the most recent election cycle, I expect we’ll see even more of those.

04/03/2025 How has the newly launched $2.5 billion ingredient cleaning portfolio been received by the market?

We launched the portfolio last month and held a launch event at a cleaning conference in Florida. Not many potential customers even knew we were in the space, so awareness was the first win. The reception was very positive, and the team came away with a number of new opportunities they’re now pursuing, which we hope to convert into sales soon.

13/03/2025 What is the total addressable market for Ascent’s businesses, and how large can the company become?

Our Specialty Chemicals business operates in two main buckets. The first is custom manufacturing, where customers come to us to produce materials they don’t want to invest capital in themselves. The second is our branded products, which we both manufacture and sell directly. We saw strong traction in 2024 with these branded products. The total addressable market for our branded lines in the U.S. alone is approximately $9.2 billion. Considering our current total company revenue of about $178 million, there’s significant room for growth and market share capture ahead.

28/04/2025 Why should investors consider Ascent today?

We’ve built a strong, cohesive team that executes quickly. Ryan and I have worked together for a decade, and we’ve surrounded ourselves with capable, results-driven leaders who’ve delivered a major turnaround in a short period. We’re thinly traded and undercovered, but investor awareness is improving, and the business is well-positioned for growth. We’re still early in the journey, with significant upside ahead.

06/08/2025 How do you assess your near- to mid-term new business pipeline over the next 12–18 months?

We work on that pipeline every day. As I mentioned earlier, our selling project pipeline increased by about $25 million over the last quarter. That growth is spread across four to five different market segments and includes both product sales and high-value custom manufacturing opportunities.

06/08/2025 What catalyst could drive a higher valuation for the company given chemicals’ more stable earnings profile?

I think it’s three things: growth, growth, and growth. Beyond resolving the lingering Munhall issue, our focus after stabilizing the foundation last year has been on both organic and inorganic growth. The team has made enormous progress over the past several quarters, and the momentum this past quarter has been incredible. We’re very excited about the future, the work the team is doing, and the value proposition that continues to resonate with our customers.

26/08/2025 Have you achieved organic growth in prior roles?

Yes. In our previous company, revenue grew from roughly $100 million to $300 million before we sold it. The difference here is complexity , we now serve about 170 customers with hundreds of SKUs. Managing that diversity requires precision, but the team is ready. The proof will come through execution.

16/09/2025 With your specialty chemical focus now fully in place, what are the key drivers that will take you from $80 million to $120–130 million within the existing asset base?

When you look at the U.S. specialty chemical market, it’s an enormous $220 billion industry. Narrowing it to the products we manufacture, it’s about a $9 billion market. With our current top line at $80 million, there’s clearly plenty of room to grow around the fringes. Roughly 30% of that market is coatings, another 30% HI&I (household, industrial, and institutional), 20–30% oil and gas, with the balance spread across smaller segments.

Our participation strategy aligns well with those four pillars of opportunity. We’re resourcing appropriately and laser-focused on those segments, building a strong, high-quality sales pipeline. This growth does not depend on new equipment; the capabilities we already have within our asset base can support that $120–130 million target.

16/09/2025 Does most of the new business come from existing or new customers? How do you engage with new customers, and how many salespeople do you have?

The answer is both. About 75% of first-half project wins came from existing customers, while 25% were from new ones. We still have significant runway to grow share of wallet within our existing base and continue expanding with new customers.

Last year, we strengthened SG&A by rebuilding key functions like marketing and launching proprietary branded products tailored for oil and gas, HI&I, coatings, and adhesives. Our go-to-market strategy has improved significantly. We’re seeing new inquiries from inside sales outreach, digital channels, and trade shows. Our visibility in the market is higher than ever, generating opportunities we hadn’t seen before.

19/09/2025 How is Ascent progressing on its marketing and sales strategy, and what differentiates your business model?

We’re seeing strong progress in our marketing and sales strategy and are beginning to drive real growth. Unlike many chemical manufacturers, toll processors, or distributors, we provide a comprehensive suite of solutions, everything from product and process development to scale-up, blending, reactions, warehousing, logistics, and regulatory support. In essence, we are not only a manufacturer but also a service provider with the responsiveness of a specialty distributor. Over the past six months, we’ve added new customers and deepened relationships with existing ones, particularly among small and mid-sized clients that large chemical producers often overlook. Those large players run continuous processes and avoid smaller custom projects; we embrace them. This approach creates sticky customer relationships and produces demand that is more predictable, ratable, and margin accretive.

Our model is also structurally differentiated. In 2023, about 90% of sales came from toll or custom manufacturing, which meant making customers’ products in our equipment with limited pricing leverage. After reviewing our dormant product portfolio, we revitalized it, by year-end, product sales grew to 25% of revenue, improving both pricing and gross margin. We also operate a “buy, build, and operate” model, running dedicated plants for specific customers, two of our five plants already function this way. Today we have roughly 200 employees, 170 customers, and three sites across South Carolina, Tennessee, and Virginia. About 95% of raw materials are domestically sourced, insulating us and our customers from tariff volatility. Our chemicals segment currently generates around $75–80 million in annual revenue, with significant headroom to grow within our existing assets.

19/09/2025 Which markets does Ascent serve, and where are you focusing future resources?

Historically, Ascent participated in over 15 end markets without clear focus. Last year, we reassessed where we have the right to win and concentrated on five pillars: oil and gas; coatings, adhesives, sealants, and elastomers (CASE); household and industrial cleaning (HI&I); and adjacent water treatment applications. The U.S. specialty chemical market is roughly $200 billion, and through the lens of products we currently make and sell, our addressable market is about $9 billion. Roughly one-third of that lies in CASE, one-third in HI&I, and another third in oil and gas or energy-related uses, with the balance in textiles, water treatment, and pulp and paper. While we remain open to customer-driven opportunities outside these focus areas, this strategy now guides how we deploy resources and capital.

19/09/2025 Which sectors are you leaning into, and how do margins compare?

We are leaning into four pillars: coatings, adhesives, sealants, elastomers, oil and gas, HI&I, and the water adjacency. Oil and gas was available to us, but a year ago we had close to zero participation, so there is strong runway. HI&I also has runway, though momentum is earlier. We remain disciplined on resource allocation. At the core, we prioritize opportunities with compelling margin profiles.

Financials

12/08/2018 How much higher are conversion margins on specialty alloys?

It depends on the alloy. For commodity alloy products, conversion margins range from $0.95 to $1.15 per pound. For specialty alloys, depending on the type, margins can reach about $3 per pound.

12/08/2018 Are net margins expected to rise in the second half?

That’s right.

11/11/2018 Is the new 5 million-pound Chemicals customer on the tolling side, and what revenue or margin will it generate?

Yes, it is tolling. The customer is covering about $0.5 million of CapEx over time, built into the tolling price. They provide the raw materials, so we don’t earn margin on raws. It’s essentially a straight tolling deal with minimal labor required, and it will be materially profitable for CRI.

11/11/2018 Can you comment on EBITDA from the new galvanized and ornamental steel business?

We shouldn’t provide specific EBITDA given the small number of customers in that market.

11/11/2018 Was EBITDA from the galvanized and ornamental steel business positive in the quarter?

Yes.

03/05/2019 Does the $44 million BRISMET backlog include Galvanized?

It should include all of BRISMET, which includes Galvanized.

03/05/2019 What is BRISMET backlog excluding Galvanized?

I have not broken that into components. I’ll have to dig in and provide that answer after the call.

03/05/2019 Was backlog under $30 million in March excluding Galvanized?

We’ll confirm and provide the appropriate answer. I believe it has always included all of BRISMET.

03/05/2019 Did December 2018 EBITDA guidance assume a $4 million inventory loss?

We don’t forecast nickel profits or losses. On a comparable basis, 2018 EBITDA was about $28 million excluding inventory profits. The 2019 forecast was $34 million excluding inventory profits or losses.

03/05/2019 How does steel pricing, beyond surcharges, affect inventory gains or losses?

Pricing was more aggressive in Q1 due to extra product in the channel and consolidation among master distributors, plus some speculative buying late last year. Commodity stainless pipe prices are lower than last year with surcharges down, but stronger sales of special alloys offset that with better margins.

03/05/2019 What was the specialty alloy sales mix in Q1?

On a sales basis, about 21%. On a pounds basis, about 12%.

03/05/2019 Was Palmer profitability up year over year?

Yes, quite a bit.

03/05/2019 What is the Chemicals division margin target?

EBITDA margin is expected to be 10% to 11% for the full year. Gross margin figures are not handy and we can provide those later.

03/05/2019 Did ASTI have an inventory mark-to-market loss and was it adjusted in EBITDA?

Yes. There was about a $1.3 million inventory adjustment charge. Our adjusted EBITDA includes $1.35 million related to that.

13/08/2019 Why was the tax rate so high in Q2 and the first half?

With income figures being relatively low, discrete items of only a few hundred thousand dollars had a significant impact on the effective tax rate. If income and tax had been higher at the statutory rate, the impact would have been spread over a much larger base. That is essentially the explanation.

03/09/2020 Why was the 10-Q delayed and how are the issues being resolved?

The 10-Q will be filed later today after market close. Item four addresses the issues you raised. First, there was no lawsuit. The referenced investigation, conducted by an independent law firm, is complete with no evidence of intentional misconduct, bad faith, or criminal acts.

We will report a material weakness in internal controls. Four deficiencies were identified that, while not individually material, aggregate to a weakness. Details and remediation steps are in item four of the 10-Q. That section also explains the corrective actions underway.

03/09/2020 Was the investigation related to Palmer accounting?

Yes, it was categorized as a whistleblower complaint tied to Palmer accounting, but not from a Palmer employee. The investigation confirmed no wrongdoing, bad faith, or criminal acts.

03/09/2020 Has Palmer been written down fully, and could proceeds from a sale be recaptured?

Yes, this is Sally. Palmer has been written down to the value associated with ceasing operations and actively marketing the business.

03/09/2020 Will remediation actions restore good standing with accountants?

Absolutely. There has never been a question on the reported numbers. The issues were primarily internal control matters, and the remediation steps are in progress.

03/09/2020 Press release shows tangible net worth of $67.4M, or about $7.40 per share. Is that accurate?

Yes, with 9,058,000 shares outstanding, that calculation is roughly correct.

03/09/2020 What was the $1.1M gain on investment securities?

From time to time, we take small positions in public companies we view as potential acquisition targets, always under 5% to avoid filings. We’ve done this three or four times in the past 10 years. In this case, one of those companies had a substantial move in the second quarter, creating a $1.1 million mark-to-market gain. We have since sold the entire position, with net proceeds of roughly $4.4–$4.5 million.

09/11/2020 Was the October inventory revaluation completed to increase credit capacity with higher nickel prices?

The revaluation did not happen in October due to COVID-related delays. We are now in the process of getting a new valuation and expect higher inventory prices with nickel increases.

11/05/2021 Will inventory gains and surcharges start to flow through soon?

The way we look at the P&L is not about being a slave to input prices or surcharges. We need to make money in any environment and manage inventory through cycles, aligning production with end-use demand. That said, we are passing more pricing through to customers in real time, which will lift margins.

11/05/2021 Won’t the lower-cost inventory from Q3 and Q4 eventually flow through?

Yes, you will see that flow through. Some pricing arrangements create a lagging effect, with Q4 impacting Q1 results. Under certain contracts, pricing changes cannot be updated as quickly as the market moves, so you will see it reflected across quarters this year.

11/05/2021 Did the chemicals business miss its internal margin target, and what is that target?

We do not give guidance until all metrics are aligned. We do have internal gross and net margin targets, and results came in below expectations. The outcome reflects business mix, mainly tolling versus direct to manufacturers. There is growth in the market we are addressing.

11/05/2021 Was the chemicals shortfall primarily a mix issue in Q1?

Yes, it was mainly attributable to mix.

11/05/2021 Why was metals ASP down year-over-year despite higher base metal costs and surcharges?

Certain one-off projects, like pipelines or offshore wells, require specialty grades and affect average selling price. More broadly, our galvanized business is priced lower per pound than 304 or 316 alloys. In Q1, 304 volumes increased, 316 declined, and galvanized rose significantly. The change is driven by product mix, not uniform pricing.

11/05/2021 Did the [indiscernible] earnout liability end in Q1, and will that impact the bottom line?

Yes. Remaining earnouts are only ASTI and galvanized, with about a $300,000 bottom-line impact. This is a meaningful improvement compared with prior years.

09/08/2021 With material price inflation, can you continue passing increases to customers without hurting margins?

Yes. We have tested pricing elasticity more on the Metals side than Chemicals. We were initially slow to raise prices in Chemicals but have since caught up. Customers are not pushing back significantly, as their main concern is securing product to meet their own commitments. It is a unique market environment, but so far, we have successfully passed on price increases.

09/08/2021 What were BRISMET and Munhall volumes on a year-over-year basis?

For the Metals segment as a whole, pounds were up 21% year-over-year.

09/08/2021 Are you on LIFO or FIFO accounting?

Technically, we are on neither. We use standard costing for inventory.

09/11/2021 Chemicals showed 11% adjusted EBITDA margin versus DanChem’s 18%. How long until integration lifts margins closer to 18%?

We are already working on it and have identified opportunities for accelerated margin improvement. Some investment is needed in engineering and capabilities that DanChem has, and we will leverage those resources. Rather than starting from scratch, we expect a faster ramp toward higher margins.

09/11/2021 In the DanChem acquisition, did you acquire the corporate entity or just the assets?

We acquired both the assets and the entity.

09/11/2021 Did Synalloy assume any environmental liabilities in the DanChem acquisition?

We conducted full diligence on the environmental side, and no unexpected liabilities came up.

09/11/2021 Corporate expense rose by $650,000 sequentially. Why?

That was mainly severance expenses for some prior executives.

09/11/2021 Why was the provision for inventory losses $1.9 million this quarter?

It reflects scrapping aged inventory produced under the old methodology of making pipe without customer orders. This weighed on earnings as the material was unsalable.

09/05/2023 Was the $13 million debt reduction in Q1 mainly due to working capital release from Munhall or other sources?

It was a mix of factors. A large portion came from working capital, but not all from Munhall. It was a broad-based effort to align working capital with more normalized revenue levels. We’ve made good progress, but there’s still opportunity to improve, particularly with Munhall. We can continue selling and repurposing inventory there to reduce replenishment costs across the tubular business.

09/05/2023 How are you addressing BDO’s note on deficiencies in internal controls, especially for financial reporting, inventory, revenue, and technology?

We’ve been focused on timely filings, and after joining at the end of Q1, I (Bill Leary, CFO) re-engaged our previous consulting firm to develop a remediation plan. These issues take time to fix, and we’re approaching them methodically throughout this year. Some involve IT systems and procedural changes, while others require staff training and process improvements. I’ve successfully led similar remediation efforts before, and we have a clear plan to execute this one effectively.

08/08/2023 How are internal controls progressing?

A lot better now than with our prior auditor. This quarter went very smoothly. While no process is ever perfect, we now have the communication and systems in place to be far more efficient in preparing and filing reports, ensuring a systematic review process and timely feedback.

08/11/2023 What drove the goodwill impairment? Was it linked to a specific customer loss or a broader review of the environment?

It was primarily related to the Danville operation, not the loss of a specific customer. The impairment reflected a normalization of customers’ estimated annual volumes going forward.

28/03/2024 Did your proactive inventory cleanup contribute to margin pressure in Q4?

Yes. We reviewed our inventory throughout the year and made a deliberate effort to either commercially move older items or write them off. This cleanup caused some margin compression in the fourth quarter. Going forward, Brian and I will reassess inventory needs as we adjust commercial strategies, but the Q4 margin impact was directly tied to that cleanup.

28/03/2024 Was Q4 chemical segment performance driven more by price or volume?

Volume played the larger role in the fourth quarter compression. We did experience some pricing headwinds, but the primary driver was lower volumes.

08/05/2024 Chemicals operating expenses have been stable for two years , is that due to strong variable margin management, with future improvement driven mainly by fixed cost absorption and mix?

Absolutely. As volumes increase, we gain cost absorption benefits, but we’re still actively reducing raw material inputs and overhead costs. That work continues, and we’re not yet seeing the full benefit of improvements already implemented. The team remains focused on pulling every lever to enhance profitability.

08/05/2024 How did price versus volume trend in each segment, and how are prices tracking relative to raw materials?

From a tubular standpoint, prices were depressed, but we expect a slight uptick in Q2. In chemicals, there’s significant volatility due to product mix, so I’d caution against overinterpreting short-term movements. As we implement product mix changes, average selling prices should gradually rise, becoming more predictable and stable over time.

08/05/2024 Inventory stabilized around 120 days in Q1 , is that the target level, or do you expect further reduction?

We still see opportunity to right-size inventory in both the chemical and tubular segments. There’s meaningful potential to optimize levels further, and I’d say we’re really just getting started on that process.

06/08/2024 With the labor and material costs removed, will margins improve sequentially going forward?

Yes, absolutely. We’re going to see that margin improvement carry through. We’re not done yet; we’re continuing to evaluate our product portfolio and mix, and we keep finding ways to further optimize costs.

12/11/2024 Was the $5 million increase in cash mostly from Munhall asset sales or operations?

It’s a mix of both. The predominant driver of the cash build was operational efficiencies, including monetizing slow-moving inventory, and a portion came from Munhall asset sales. From a pure asset standpoint, our main focus remains on right-sizing inventory and monetizing trapped cash, but that’s largely where we’ll generate cash outside of normal sales.

04/03/2025 With the lower revenue base, can you still deliver similar gross profit or margin profiles?

Yes, we’ve been very successful in driving aggressive cost reductions and demonstrating our ability to sustain those gains. Along with the pricing and product mix optimization actions, we’re heading in the right direction.

04/03/2025 Cash increased by $7.5 million from Q3 to Q4. What drove that growth?

We continue to optimize idle and stagnant inventory, which was the largest driver of cash in Q4. Increased efforts on collections, inventory management, and payables management also improved our cash conversion cycle, pulling almost two weeks of cash back into the year. These combined efforts continue to turn that cycle faster and generate more cash each quarter.

04/03/2025 Can chemicals margins improve further or at least remain at current strong levels?

Yes, there’s potential for continued margin improvement as we grow branded product sales. Last year we implemented targeted price increases and achieved them successfully. I don’t expect much more of that in 2025; we’ll monitor what happens in the raw material markets.

13/03/2025 Ascent is still relatively small. Can you confirm your 2024 results?
Yes, for the full year 2024, we generated approximately $178 million in revenue.

13/03/2025 Can you walk through Ascent’s 2024 financial performance and key drivers?

2024 was a year of stabilization. I joined late 2023 to focus on Chemicals, then stepped into the CEO role shortly after, and Ryan joined soon after as CFO. Our top priorities were cost control and organizational stabilization across both segments. We aggressively tackled costs, strengthened strategic sourcing, and secured better raw material pricing. We also reduced labor and overhead by roughly 19–20% across the enterprise. These savings weren’t short-lived , we sustained them throughout the year and into 2025.

We also took a hard look at our product lines. In some cases, we were producing and selling at a loss, which simply isn’t sustainable. Where we could secure proper pricing, we did; where we couldn’t, we exited. That explains some of the year-over-year top-line compression. The markets were soft in 2024, but we’re not relying on a recovery , 2025 will be another year of disciplined self-help, only now we’re shifting our focus toward growth.

13/03/2025 What were the key results of these changes in 2024?

The top line compressed slightly, which we expected, but profitability improved. We were fine with that trade-off , we’d rather see better business flowing through our plants than chase unprofitable volume. By year-end, we had refreshed the organization, strengthened the team, and positioned ourselves for both organic and inorganic growth. The table is now set for 2025 to be a year of execution and expansion.

28/04/2025 What were the key operational and financial improvements in 2024?

We delivered a $19.9 million turnaround in adjusted EBITDA, significant gross margin improvement, and strong working capital management, generating $17 million in cash from operations. We also sold non-core equipment and completed four consecutive quarters of earnings growth, setting a solid foundation for 2024. Every improvement came from internal execution rather than market tailwinds.

Our assets currently operate at roughly 50% utilization across three facilities, meaning we have large untapped capacity for organic growth with minimal capital needs. Earlier this month, we closed the sale of Bristol Metals, one of our largest stainless steel holdings, for about $45 million. With roughly $50 million of cash on hand, we’re executing a share buyback program while selectively pursuing bolt-on acquisitions aligned with our goal of becoming a pure-play specialty chemicals company.

26/08/2025 What is your largest product by annual revenue?

Our largest product generates around $7 million per year, with the next closest near $4 million. We’ve worked hard over the past couple of years to reduce customer concentration risk.

16/09/2025 How much of the gross margin improvement is due to a mix shift to proprietary branded products versus better capacity utilization? What was the low point of capacity utilization, and where are you now?

Our utilization today represents a new floor; it was slightly higher during the COVID period, as it was across the industry. Despite lower utilization, we’ve proven our ability to deliver better results for shareholders. The gross margin improvement came from three main factors: a shift toward proprietary branded products, strategic pricing, and strong cost management across labor, overhead, and materials. Combined labor and overhead improvements reached roughly 20% versus the prior year, with materials efficiency improving by a similar 20%.

The experienced team we brought back knows how to execute. We gave them the autonomy to perform, and they delivered strong results, reigniting momentum across the organization.

19/09/2025 How has the shift in business mix affected profitability, and what is your current capacity for growth?

Our transition from 90% custom manufacturing to a 75%/25% mix of custom versus product sales has materially improved price realization and gross margins. We’re not abandoning custom work, there’s good business there, but we are deliberately exiting low-quality, low-margin projects. The focus is on upgrading our overall business quality.

Operationally, our three manufacturing sites are running at about 50% utilization on average, which represents both a short-term headwind for cost absorption and a significant long-term opportunity. We can expand materially within the existing footprint with minimal capital needs, roughly $1–3 million per year in maintenance and growth capex, consistent with the past several years. Safety, compliance, and reliability remain non-negotiable; we will not compromise those to chase efficiency. With our cost base already optimized, 20% reductions in labor, overhead, and raw materials in 2024, and SG&A now redeployed toward growth, we’re entering 2025 from a position of strength and scalability.

19/09/2025 What SG&A levers are you pulling now to support growth?

We will keep adding great sales talent, both technical sales and inside sales, as needed. After rounding out the R&D leader role, I feel we are in a strong position to build on our growth momentum without adding unnecessary overhead.

19/09/2025 Within chemicals, how did you improve gross margin during the turnaround?

We first mapped profitability across the entire grid. We took aggressive pricing action where appropriate and identified business priced below variable cost. Where we could not raise price, we gracefully deselected that business. We also shifted mix toward products to fill gaps left by deselection.

Today we are operating in the 25 to 30% gross margin range. In parallel, we deepened partnerships with long-standing customers to uncover new opportunities, which takes time when evolving a transactional relationship into a strategic one.

Outlook & Guidance

06/05/2018 Is the road construction product included in April 10 guidance?

No, it is not included.

06/05/2018 How will EBITDA step up from Q1 to the back half of the year?

In Q2, we expect EBITDA of $8.5 million to $9 million, including some inventory profits, likely higher than Q1. In Q3 and Q4, assuming nickel-neutral pricing and closing the acquisition by June, we expect about $8 million of EBITDA each quarter. With the acquisition, full-year EBITDA should be $32 million to $33 million. Without it, we expect about $30 million.

06/05/2018 Are current sales boosted by customer pull-in ahead of tariffs, or genuine demand?

It is very sustainable demand. Imports from dumping countries were front-loaded in Q1, but we saw no benefit from tariffs. Going forward, Taiwan faces a 25% tariff, Korea will cut shipments by 30%, and others face 25% tariffs with no exemptions expected. We believe domestic producers like us can absorb the extra work, and we have another 40 million pounds of capacity to handle it.

06/05/2018 Was April revenue $26 million?

Yes, that is correct.

06/05/2018 Is April unusually strong and should Q2 revenue exceed $75 million?

There is nothing exceptional about April beyond $1.3 million in Palmer carryover. The rest was solid demand across all business units. We expect Q2 revenue to be stronger than Q1, but $75 million is unlikely. Around $70 million is more realistic.

12/08/2018 Are chemicals, acquisitions, pricing, and reduced competition setting up a strong back half?

Right. At full run rate, the galvanized acquisition should contribute $1.25 million EBITDA per quarter, though ramping will produce under $2 million in the first six months. Chemicals could sustain $15 million revenue per quarter with margin improvements adding $750,000 EBITDA per quarter. Pricing benefits and reduced competition from Korea also support stronger results. We feel very optimistic about the back half.

12/08/2018 Closing remarks?

We thank our employees, shareholders, and customers for their support. It is always better to share good news, and we are excited about the progress this year. We remain very optimistic about the balance of 2018. Thank you.

11/11/2018 Where will Chemicals segment margins trend in Q4 and into next year before the new business ramps?

Mike, this is Dennis. With the mix of tolling and contract manufacturing, Q4 margins may be about 100 basis points better than Q3, but still down roughly 240 basis points year-over-year. The decline reflects material pass-through in pricing, lowering margin percentages. Q2 and Q3 had higher margins from material ownership. In Q4, the mix shifts slightly back, so margins should improve somewhat versus Q3.

13/08/2019 Is EBITDA guidance of $14 million for the second half correct?

Yes, that is correct.

13/08/2019 Is $25–35 million EBITDA a reasonable run rate excluding metal profits and losses?

If you exclude metal profits and losses, that is a good estimate. If nickel prices remain high and London inventory continues to fall, we will likely see some pickup and inventory profits toward the end of Q3, and more certainly into Q4.

03/09/2020 Does management still believe Synalloy can reach the $35–40M EBITDA run rate despite COVID and selling Palmer?

Charles, this is Craig. We believe we are at the bottom of the cycle, with our largest unit showing recessionary volumes like 2016. In 2018, the Company delivered $34 million of adjusted EBITDA, and since we acquired ASTI in 2019, it contributed about $6 million of EBITDA, putting us at $40+ million potential. Palmer has been a drag, marginally positive or negative on EBITDA, and consumed significant management time. Exiting that business is the right move; we do not expect it to generate acceptable returns.

We are confident in the Company’s earnings power. Projects underway, particularly in Munhall, enhance capability beyond 2018 levels. Once our end markets strengthen, we see no doubt in the business’s ability to produce those numbers.

11/05/2021 Should we expect incremental margin improvement in Q2 metals versus Q1?

I will not guarantee, but given tailwinds and backlog, you can expect improvement from Q1 into Q2.

11/05/2021 Was backlog higher at the end of March versus year-end?

Yes, metals backlog has increased month over month since August. This growth is on a per-pound basis, not just nickel price increases.

11/05/2021 Will corporate expense as a percentage of sales decrease over time?

Yes. If sales grow rapidly, corporate expense as a percentage will decline further. Current reductions come from lower interest, insurance savings, and eliminating the airplane. These benefits will flow through the rest of this year and into 2022. Every cost is under review.

11/05/2021 Will there be a roadshow and strategic plan presentation in the second half of 2021?

If it happens, it would be late in the second half. My focus is the back-to-basics model, running operations as efficiently as possible. Once we execute better and stabilize performance, the board, management team, and I will feel comfortable laying out short- and long-term growth and strategic goals to share with stakeholders.

09/08/2021 Is the team getting closer to putting out a strategic plan?

Yes. We are working on a strategic plan aligned with our vision and mission. We are closer in Metals than Chemicals, but our goal is to announce a complete, holistic strategic road map for shareholders within the next few quarters.

09/08/2021 Do you expect the strong cycle to extend into 2022 and beyond, especially if infrastructure spending passes?

Yes, I would echo that. Still, Synalloy is a small component of the global market, and we see opportunities to gain market share in any cycle. We are building a team and culture focused on capturing market share regardless of macro conditions. As Ben mentioned, we have the will to win, and we are determined to be the authors of our success based on the metrics we set, not on pricing or the market environment.

09/08/2021 When will the Chemicals business return to more normalized EBITDA margins?

Hopefully sooner than the fourth quarter. Dave is building a team, driving operational excellence, and understanding the book of business. We provide highly value-added processes and products to many Fortune 500 customers, but historically we have not charged enough relative to the value delivered. Pricing changes began at the end of Q2, and customers have fully accepted the new strategy.

09/11/2021 How sustainable are earnings at this quarter’s level?

Looking at the underperformance of Synalloy chemicals, there is a roadmap to sustain earnings at a similar level to this quarter.

08/08/2023 How much more debt reduction do you expect for 2023?

We don’t have specific guidance, but we believe we can continue making progress on debt reduction through the rest of the year.

08/08/2023 As Tubular becomes more predictable and Chemicals more stable, could the company begin providing earnings guidance?

It’s possible. For now, our guidance will remain directional rather than tied to specific numbers. That’s less about industry volatility and more about company size, sub-$1 billion businesses find it hard to give precise quarterly or annual guidance. Still, we’ll continue to share directional views and help investors understand how we’re thinking about the future.

08/11/2023 Have larger chemical customers in areas like agriculture or personal care shared any visibility into next year?

We’re having those discussions, but customers also face uncertainty. Their forecasts carry much wider ranges than usual, whether in personal care, oil and gas, or CASE markets. Historically, we might expect 1–1.5 million pounds in volume variance, but current ranges are broader. We’re working to supplement that variability by adding new demand from other customers.

28/03/2024 Are customer feedback and order visibility improving in chemicals as 2024 begins?

Yes. From a market perspective, we’re seeing favorable improvement in agriculture and water treatment, with overall demand stabilizing compared to Q4. Looking into the first half of 2024, visibility appears better and markets seem to be trending positively.

28/03/2024 When might investors expect formal or directional guidance?

From the Board’s perspective, we aim to provide clearer directional guidance as the business stabilizes. Volatility in earnings has made quantitative forecasts less reliable, so rather than publishing precise ranges, we’ll focus on greater transparency about what we see and what we expect to achieve over time. You’ll see that evolution in the coming quarters as Brian and Ryan settle into their roles.

28/03/2024 What is the margin opportunity for the Chemical segment once normalized?

It’s still early, but we know margins are currently compressed. Near-term actions include right-sizing costs, improving purchasing, and optimizing pricing. The focus now is on executing those fundamentals rather than setting explicit margin targets. Longer term, we see substantial upside from cost-down initiatives across raw materials, packaging, overhead, and labor. High double-digit EBITDA margins are achievable as these improvements take hold.

08/05/2024 Ben previously referenced a representative double-digit EBITDA margin target , is that still the right goal, or is this year more of a transition?

It’s more of a transitionary period in the near term. However, the two new pieces of business we discussed earlier are squarely within that double-digit EBITDA range, which supports our path toward sustained margin improvement.

12/11/2024 Do you think the tubular segment is near a bottom given improving industrial trends?

We’re cautiously optimistic. We’re starting to see an increase in inbound quotation opportunities across several different markets. We’ll touch base on this again next quarter, but all indications are improving.

12/11/2024 Can you provide any margin or cash flow targets for 2025?

We’re in the process of finalizing our 2025 budget. We plan for continued cash build and sequential growth quarter over quarter. We’ve made good progress stabilizing the enterprise, but we’re not done, there’s no ticker-tape parade yet. We’re just getting started and expect continuous improvements going forward.

04/03/2025 With the strengthening balance sheet, new products, and better margins, do you expect top line growth as early as Q1 2025?

Hey David, appreciate the question. In terms of top line growth, I’d say that’s more of a second-half opportunity. The markets have not yet come back, and we reset the base in both tubular and chemicals during the second half of last year. I don’t expect anything material to change in the first half of 2025. Any uptick we see won’t be due to the markets improving but rather from us gaining share.

13/03/2025 What are the most common questions you hear from investors?

Most of the confusion stems from the company’s dual structure , a steel business sitting beside a chemical business. Our long-time shareholders understand the legacy story, but new investors often ask, “What exactly is Ascent?” and “How do these two pieces fit?” We’re working to clarify that narrative as we evolve into a pure-play Specialty Chemicals company. Many investors also want to understand our history, the changes we’ve made, and where we’re headed. The goal is to earn and maintain their confidence through consistent execution and transparent communication.

28/04/2025 How do you plan to reach your target 15% EBITDA margin and sustain long-term growth?

Our improvement from roughly 4% to 8% EBITDA margin in 2024 came primarily from self-help and the transition toward branded products. The next leg is continuing that shift while leveraging existing, underutilized product lines that have sat idle for years. We’re debt-free and well-capitalized, so we can complement organic growth with disciplined inorganic expansion.

Over the next five years, we’re targeting roughly 15% EBITDA margins through organic growth, portfolio mix optimization, and selective acquisitions. With strong free cash flow generation, about $14 million last year, and the Bristol proceeds, we have the flexibility to invest where returns are highest. We’re not seeking more manufacturing capacity; instead, we see opportunity in distribution-adjacent businesses where customer intimacy and technical service are key. The market there is fragmented and offers meaningful acquisition potential, allowing us to scale efficiently while keeping capital requirements low.

28/04/2025 Do you expect oil and gas to become your largest market exposure?

No. Oil and gas is still one of our smaller segments, but it’s growing. We prefer depth over breadth, focusing on markets where we have strong technical knowledge and can add value. Our main verticals today are pulp and paper, water treatment, oil and gas, and HI&I. We have broad capabilities, but being deep and credible in each target market is more important than participating everywhere.

28/04/2025 Can you provide any color on future financial targets or growth expectations?

With our current specialty chemical base of roughly $80 million in annual revenue, we believe we can reach about $120 million by 2030 within our existing asset footprint. That growth will come primarily from better asset utilization and portfolio optimization, not heavy capital spending. Our facilities already have the installed capacity to support that scale.

For 2025, our focus is less on top-line expansion and more on profitability. The market remains soft, and we’re intentionally reshaping the business to prioritize margin improvement. We’ve already moved gross margins from the low teens toward the mid-teens, and our long-term goal is to reach around 30%. This is not a “growth at all costs” strategy , we’ve deliberately reduced revenue in some areas to improve mix, quality, and sustainability of earnings.

05/05/2025 What visibility do you have toward reaching $120–130 million in sales and higher margins by 2030? How much depends on the macro environment?

We were north of $100 million in 2022, so the goal is realistic. We intentionally reduced revenue to about $80 million to optimize our book of business. From an organic growth standpoint, we expect to reach $120–130 million by 2030.

We currently have over $40 million in active, actionable projects that fit our existing asset base, both in product sales and custom manufacturing. Execution will take time , custom manufacturing sales cycles can run 12–18 months, while branded products close faster, often within six to twelve months or even sooner if customer demand is urgent.

12/05/2025 With chemicals now focused on profitability, can investors expect formal guidance soon?

I don’t think that will happen in 2025. While we stabilized significantly in 2024, there is still some ongoing stabilization in 2025. It’s a little early to issue guidance.

As Ryan mentioned, we are continuing to reevaluate the portfolio, customers, and product mix. Until we have a more stable base and complete the transition to a higher-margin business model, we’ll continue withholding forward guidance.

12/05/2025 Will chemicals grow from $80 million to $120 million by 2030 using the current asset base, and when will growth begin?

We expect some growth to start in the second half of the year. The team has built a strong project pipeline, but sales cycles, especially for branded products, take time. We anticipate a ramp in the second half of 2025 leading into a stronger top line in 2026.

12/05/2025 Is the chemical segment mix moving from 75/25 in 2024 toward 65/35 in 2025 and eventually to a 50/50 split?

Yes. In 2024, we ended with a 75/25 split between custom manufacturing and branded product sales, and Q1 2025 remains in that same range. Our goal is to reach a 65/35 mix by year-end.

06/08/2025 What revenue supports the 2030 adjusted EBITDA margin target of 15%, and can it be achieved with current capacity or will acquisitions be needed?

Within our existing asset base, we’re confident we can reach $120–130 million in revenue. As shown in the MicroCap deck, that translates to gross margins of roughly 30–35% and SG&A around 15%, leading to adjusted EBITDA margins near 15%. We believe we can achieve this within the current footprint, depending on mix.

06/08/2025 Is a return to profitability expected by the third or fourth quarter of 2025?

That’s what we’re driving toward. As Ryan mentioned earlier, excluding the Munhall impact, we’re effectively there. That said, the current profitability levels are small, and we’re not satisfied. We have much larger aspirations that we’re actively working toward.

06/08/2025 After joining the Russell Index, do you expect to maintain inclusion next year given past removals for market cap limits?

I hope that with improved stability, we’ll remain in the index, but I can’t guarantee that.

26/08/2025 What is your revenue goal?

Our target is between $120–130 million within our existing asset base. By 2030, we aim to reach $500 million in revenue, supported by 35% gross margins, 15% SG&A, and 15% EBITDA margins. The first leg of growth will be organic; the rest will come from acquisitions or installing new capacity to pursue business we currently can’t serve due to equipment limitations. Ultimately, profitability matters more than size, but we see a clear path to those metrics.

03/09/2025 What’s the plan to reach $120–130 million in organic revenue?

It’s about focus and execution. We’re putting the right people in place and ensuring they have the tools and processes to win in our core markets. Rather than chasing every opportunity, we’re prioritizing the ones where our capabilities give us the greatest advantage. That disciplined focus is how we’ll reach the $120–130 million revenue target.

19/09/2025 Can you provide some historical context for Ascent and its evolution?

The company’s been around for about 75 years, starting as a specialty chemical business called Blackman in 1945. Around two decades later, it diversified by acquiring stainless-steel tubular manufacturing assets, and for decades operated in both specialty chemicals and tubular products, two segments with no real synergies.

When I joined in early 2024, the board and I decided to optimize the portfolio and refocus on chemicals. Today, Ascent is a pure-play specialty chemical company without the distractions of unrelated segments. Our CFO Ryan Cavalosquez and I reunited much of the turnaround team from our prior company, bringing in experienced operators and giving them the freedom to execute. In 2024, we achieved a $20 million turnaround in EBITDA, generated $17 million in operating cash flow, and materially improved gross margins. That first year was about stabilizing and fixing the foundation, improving business quality in chemicals and preparing the stainless-steel division for sale, setting the stage for 2025.

19/09/2025 What were the key highlights from the first half of the year and what are the main growth catalysts ahead?

In the first half, we reduced cost of goods sold by 24% versus the prior year and delivered solid adjusted EBITDA growth. We also generated roughly $60 million in proceeds from the sale of our stainless steel tubular assets, all while keeping tight control of working capital. The foundation is now set, it’s about growth, growth, and growth.

On catalysts, we have one remaining legacy tubular asset, an empty plant that’s been idle since August 2023. We sold the related equipment in 2024 for about $2.8 million but still pay roughly $2.1 million annually in rent, utilities, and insurance. We expect to resolve this through a transaction with the property owner by year-end. Operationally, we’re seeing strong momentum: over 50 new projects secured in the first half, with 77% coming from existing customers and 23% from new ones, both generating EBIT margins above 25%. Our sales cycle averaged 2.7 months, down from the typical 3–12 months. The sales pipeline grew 45% from Q1 to Q2, from $45 million to $70 million, consisting of actionable projects supported by clear customer demand. This isn’t market tailwind, it’s pure self-help and disciplined execution.

19/09/2025 What are your medium-term financial targets and how are you positioned for growth?

We’re building toward 35% gross margins, 15% SG&A, and 15% EBIT margins, consistent with top-quartile specialty chemical peers. The turnaround work in 2024 established the base; now we’re focused on scaling. Within our existing assets, we can take the top line from $75–80 million to $120–130 million, fully risk-adjusted for downtime and maintenance. With operational excellence, we can go even higher.

We also have ample capital flexibility, $60 million of cash on hand at Q2 close, plus debt capacity if needed. In the first half, we repurchased about 6% of outstanding shares, and we’re evaluating both organic investments and selective M&A. For nondistressed assets, we target up to ~8x pre-synergy multiples, translating to ~6x post-synergies. We also like turnarounds but will only pursue them once utilization rises from the current 50% level toward 75%, ensuring we add capacity without compounding underutilization. The strategy is clear: disciplined capital deployment, clean balance sheet, and strong execution to compound value.

19/09/2025 How will you unlock operating leverage from underutilized capacity, and what is the timeline?

It starts with the selling project pipeline. We had $45 million in the pipeline at the end of Q1 and added $25 million in Q2. We will not win all of it, so the size and quality of the pipeline matter. Some opportunities we have been efforting for three, six, nine, even twelve months are starting to pop. For example, a foreign company localizing supply in the U.S. moved from development to its first commercial-scale run last week, representing four to six hundred metric tons a year of net new business, a couple million dollars, with strong gross margins.

I do not expect a material change in the back half or final quarter of this year. I expect new wins to reach full run rate in 2026. Reaching $120 to $130 million inside the existing asset base is conservatively 2030. Internally, I would be disappointed if we are not there by 2028.

19/09/2025 What will the mix be between custom manufacturing and proprietary products?

Near term, expect 65 to 75% custom manufacturing and 25 to 35% proprietary products. We like proprietary products because demand is more ratable, more predictable, and generally more margin accretive. Custom manufacturing can also be an excellent business when the opportunity quality is high and it dovetails with our assets, and it is typically very sticky over years.

On proprietary products, off-the-shelf materials are less sticky due to competition on service and price. When we customize those bases to solve a customer-specific problem, stickiness increases and looks more like custom manufacturing.

19/09/2025 Where do you want Ascent to be five to ten years from now?

By 2030, I’d like Ascent to be at least a $500 million top-line company, but more importantly, to have materially improved the quality of the business, delivering around 15% EBIT margins. With that growth comes opportunity for our employees, opportunities many can’t even imagine today. My goal is to build a company that continues to lean into its strategy, delivers exceptional results, and creates lasting value for our shareholders, customers, and the communities where we operate.

Risks & Macro

12/08/2018 Is Palmer Tank performing well despite Permian takeaway constraints?

Yes. While companies like EOG and Noble Energy shifted some drilling from the Permian to other basins due to takeaway capacity issues, our backlog remains strong. We cannot produce more than we currently are without emissions changes, which are underway. Even with some shifting, our backlog is sufficient, and we view the takeaway issue as short-lived. The Permian remains one of the lowest-cost basins globally, so drilling activity will continue once capacity expands.

13/08/2019 What impact could new Chinese tariffs have on steel imports?

The tariff increase you are referencing would not affect any steel products.

03/09/2020 Stainless steel pricing rose 27% in Q2. What drove that?

Nickel prices began rising in August, with surcharges moving accordingly, despite a global nickel surplus. Factors include China’s ore shortfall and reduced output in the Philippines, which pushed nickel above $7 per pound. The 27% increase noted in the release related specifically to special alloys tied to project activity.

09/11/2020 Do you see political changes creating catalysts for companies supporting manufacturing and construction?

There is a water and wastewater initiative in the Senate, but it hasn’t advanced. Stimulus spending could include infrastructure, though the outcome is uncertain given Senate control. Typically, infrastructure spending runs in cycles of two and a half years strong followed by two and a half years weak. Demand has been very low in 2019 and 2020, so stimulus could help turn that around. We expect improvement in the second half of next year, consistent with what our customers are telling us.

09/08/2022 Does the $55 billion water infrastructure bill support backlog strength into 2023?

Our backlog remains very strong. The only change we see is a shift in our route to market: distributors tend to fluctuate with surcharges and pricing, while we’re increasingly targeting end-user projects where we control demand. Over the last six months, that segment has grown substantially. These “batch projects” can range from $100,000 to several million dollars for infrastructure, water, or utility work , and they carry a different, more attractive margin profile, which we intend to keep pursuing.

13/03/2025 How would you describe Ascent Industries in one sentence?

Ascent Industries is a 75-year-old industrial manufacturing company with two divisions: Specialty Chemicals and stainless steel tubular products.

13/03/2025 What was the original thesis for Ascent’s founding, and how has the company evolved?

Ascent was founded roughly 65–75 years ago as a Specialty Chemical Company. At one point, the board decided to diversify by adding stainless steel tubular assets. Over time the business evolved, but today we are hyper-focused on rebuilding our Specialty Chemicals platform , effectively returning to our roots.

13/03/2025 What is Ascent’s current mission and what drives the team today?

What excites Ryan and me is making good businesses great. At our previous company, we turned around a failing Specialty Chemical business and successfully exited. We were then presented with the opportunity to join Ascent and apply the same playbook. We had a strong first year fixing the foundation and are very excited about what 2025 holds.

13/03/2025 Can you describe Ascent’s main business segments and what makes its products unique?

We’re evenly split between Specialty Chemicals and stainless steel tubular products. Our Specialty Chemicals capabilities are particularly unique because over time we’ve combined three distinct assets, each with diverse capabilities. We serve a wide range of markets , from paints and coatings, personal care, and high-end industrial uses to oil and gas and pulp and paper. These multifunctional assets let us compete across many applications, and over the past year we’ve been very purposeful in strengthening how we deploy them.

13/03/2025 Beyond execution risk, what are the main downside risks for Ascent?

Focus. When we joined, the company wasn’t failing, but it wasn’t steering its own destiny , it was largely at the mercy of market conditions. With broad capabilities, we can compete across many markets, but that breadth can dilute focus. The challenge is to prioritize, avoid chasing every opportunity, and maintain discipline. For us, the biggest risk is losing that focus as we continue scaling.

28/04/2025 Are tariffs or supply chain reshoring trends benefiting Ascent?

Yes. About 95% of our top line is supported by domestically sourced raw materials, so we’re well insulated from tariff volatility. More importantly, we’re seeing increased inbound interest from customers seeking to localize supply chains within the U.S. Many companies that previously relied on imports from China or other regions are now reaching out to us for domestic solutions, which is opening up incremental growth opportunities.

19/09/2025 Do you rely on industry demand improving to achieve your goals?

No. If our strategy depended on assumed market growth, we should fold up and walk away. The market across segments has been soft. A recent American Chemistry Council publication, within the past one to two months, forecasts broad market contraction into 2026, less than 1%. We plan for aggressive self help. If a tailwind comes, great, but we do not rely on it.

Personal Questions

09/11/2020 With your departure, the Board goes from eight to seven members. Will it return to eight with a new CEO?

The Board has not yet discussed how they will address that situation.

09/11/2021 Chris has been interim CEO for almost a year. Can you address this?

We discuss this frequently at the Board level. We are pleased with team performance and overall functioning, and the Board is actively considering the matter.

08/08/2023 After three challenging quarters with turnover and destocking, what message would you share with investors watching from the sidelines?

We need to execute better, plain and simple. We manage the business for current shareholders, of which we are the largest, and we owe them improved execution and returns. For those on the sidelines, it’s up to them to weigh the risk and reward, but at today’s share prices, given our view of the company’s potential and the progress already underway, we believe it’s a compelling investment. We’re putting both our personal and corporate capital behind that belief.

06/08/2024 After six months with the management team, do you see greater potential than you did initially?

Yes, absolutely. I’m incredibly bullish about our company’s prospects. We’ve got foundational capabilities that are only beginning to be unlocked, and there’s much more we can achieve within our existing assets.

I completely agree. There’s a ton of efficiency to extract and margin to drive through self-help. Commercially, we have areas to fix, but within operations there’s more upside than we anticipated. It’ll take time to identify and pull the biggest levers, but we remain extremely optimistic , even more so than when we started.

04/03/2025 After leading the company for over a year, where do you see it a year from now?

We’re pivoting toward growth, both organically and inorganically. We have underutilized assets that need to be filled with high-quality, high-value applications, and we’re actively working to make that happen.

28/04/2025 Can you start by introducing yourself and giving context on Ascent’s background and your experience leading up to today?

I’m Brian Kitchen, president and CEO of Ascent, joined by our CFO, Ryan Cavalowskis. We’ve worked together for about ten years, starting in the chemical industry at Dow and later turning around a struggling company called Clearon. When we joined Clearon, it was losing about $8 million of adjusted EBITDA annually and was close to bankruptcy. After roughly four and a half years, we sold it with trailing-twelve-month adjusted EBITDA around $36 million. That experience taught us valuable lessons we’re now applying at Ascent.

Ascent itself has a 75-year history, beginning as a specialty chemical company before diversifying into stainless steel tubular assets in the 1960s. I joined in late 2023 to build out the specialty chemicals segment but was soon asked to lead the whole company. Ryan joined shortly after, and together we focused on stabilizing operations. 2023 was a terrible year financially, but by year-end 2024 we achieved a $19 million turnaround through disciplined execution and a cultural shift toward self-help and accountability.

28/04/2025 Can you clarify the comment regarding compensation structure?

That question caught us a bit off guard during the session. The company hasn’t publicly discussed specific executive compensation breakdowns, so there’s no further detail to add beyond what’s already disclosed in filings.

28/04/2025 How is executive compensation being structured to align with performance?

The compensation committee has begun reassessing how Ryan and I are paid, moving toward a structure more explicitly tied to performance metrics. Last year was our first full year leading Ascent, and the committee is using that as a baseline for evaluating future alignment between results and compensation.

05/05/2025 How does this opportunity compare to your past experiences, and what excites you most about it?

We learned a lot at our previous company. One of the first lessons was in strategic sourcing , the tremendous value that skilled sourcing professionals can unlock for a business. Another major takeaway was “hire fast, fire faster.”

At the prior company, we didn’t always have the cash to make those tough but necessary personnel decisions. Here, we’re in a much stronger financial position, which allows us to apply that discipline from day one. Those lessons, combined with a stronger foundation and better resources, make this opportunity both exciting and rewarding for us.

12/05/2025 Do you believe the stock remains undervalued?

In my personal opinion, yes.

06/08/2025 Would adding board members with chemical industry experience be advantageous now that the company is primarily chemical-focused?

Our board has been incredibly supportive of Ryan, me, and the team over the past year. We do recognize that there’s currently no chemical industry representation on the board, and that’s being addressed.

26/08/2025 Who is on the board and what’s next for governance?

Chris remains one of our largest shareholders and sits on the board, but neither he nor Ben are involved in day-to-day operations. Our current board was instrumental in supporting the turnaround, but as we evolve into a pure-play specialty chemicals company, we’re reimagining the board’s composition. Expect to see changes ahead.

19/09/2025 What brought you to Ascent and what attracted you to the opportunity?

I’ve been in the specialty chemical industry for roughly 25 years. Before joining Ascent, our CFO, Ryan Cavalosquez, and I worked for a smaller specialty chemical company in West Virginia, where we cut our teeth on turnarounds. That business was losing about $8 million in adjusted EBITDA when we joined; four and a half years later, we had turned it into roughly $36 million of adjusted EBITDA on a trailing-twelve-month basis. It was an intense experience, but it taught us a lot about cash management and disciplined execution.

After that sale, we paused to reflect on what we’d do differently if we could start over. That’s when the Ascent opportunity surfaced. I had never heard of Sinco Alloy or Ascent, but after some diligence I saw a company with good bones that just needed a strategy. I joined to run the specialty chemicals segment, and a few months later the board asked me to take over the entire company.

19/09/2025 After becoming CEO, what key hires did you make, and how have they shaped the business?

One of the first priorities was building a cohesive leadership team. Outside of bringing in Ryan as CFO, our first major hire was a head of strategic sourcing. Previously, our three plants operated almost as standalone businesses with no shared procurement strategy. Consolidating those buys delivered a 20% reduction in raw material costs, a major early win.

We also added a VP of Sales with extensive experience across multinational and regional chemical companies, a general counsel who also leads regulatory affairs, and a VP of Business Operations overseeing customer care, planning, and scheduling, the foundational back-office processes that support scale. He actually started as my intern years ago at Dow Chemical. Collectively, this cross-functional team has deep turnaround experience and chemistry industry knowledge, forming a strong operational backbone for Ascent’s next phase of growth.

19/09/2025 How did employees react to your arrival, and how is culture changing?

At first, the sentiment was we do not like you, we do not know you, and we do not believe what you say. A year to a year and a half later, while some may not like me, they trust me and believe what we say because we back words with action.
There was no defined employee bonus program before. There is today, and every single employee is impacted by it.

19/09/2025 How have employees responded to the reinvestment in people and the renewed company focus?

We said we were going to reinvest in people, and we’ve done exactly that. Employees can see the quality of talent we’ve been able to identify, attract, and retain, and they’re seeing the results of those hires. People are leaning into Ascent now. They love that we’re a pure-play specialty chemical company, that when they wake up, they know exactly what business they’re in. That clarity has created real momentum.

In town halls, I talk about the “three loves”: love your job, love the company you work for, and love the people you work with. When those are in balance, everything else falls into place. I think we’re getting there. There’s visible passion and excitement that customers can feel when they visit our plants. This quarter alone, we’ve hosted 11 customer visits, serious engagements, not field trips. They come because they see opportunity and want to partner with Ascent, and our employees’ enthusiasm reinforces that.

Other

03/09/2020 Any plans for analyst coverage or investor conferences?

We usually participate in at least one conference per year, but none this year due to COVID. In the past, two analysts covered us after our 2013 follow-on offering, but those firms exited research. We’ve been approached by paid-research groups charging $30,000–$50,000 annually, but that raises concerns about objectivity.

At this point, no analysts cover us. We would welcome organic coverage from a small firm, but we are not pursuing capital raises, which often go hand-in-hand with attracting analyst coverage.

09/08/2022 Are the benefits of rebranding worth the costs?

Absolutely. The costs were not significant. The Revant brand has been needed for years. Previously, the organization felt divided , employees identified with separate parts of the business and many didn’t even know what Synalloy was. Now, we are one team under one name. The internal response has been extremely positive.

09/05/2023 How many market makers are in your stock?

I don’t have that information right now, but we’ll flag it as a follow-up.

09/05/2023 Why are most trades in small odd lots, with round lots under 10%?

I don’t have that data available at the moment. It’s not something we analyze closely, but we can take that offline and explore it further.

09/05/2023 Are there any analysts or brokerage firms currently covering the company?

That’s a great question. We’ve been working on that over the past few months, and I’m hopeful we’ll have positive developments soon regarding new brokerage coverage. As of now, there are none actively following us, but that should improve over time.

Disclaimer:

The following transcript and Q&A have been generated with the assistance of Artificial Intelligence (AI). While we strive for accuracy, completeness, and clarity, the content may contain errors, inaccuracies, or misinterpretations. Neither the company featured in this document nor ValueBridge assumes any responsibility or liability for the accuracy, reliability, or completeness of the information presented.

This material is for informational purposes only and should not be construed as official company communication, financial advice, or a definitive representation of the company’s views. Readers should independently verify any information before making decisions based on it.

EnWave Corporation commercializes its Radiant Energy Vacuum (REV) technology for dehydration applications across food, cannabis, and pharmaceutical sectors. The company licenses its technology to partners, sells commercial-scale machines, and earns recurring royalties. Installed REV capacity exceeded 2,800 kilowatts by late 2024, with utilization ranging between 50% and 100% depending on the partner. Large partners like Dole and GEA report near full utilization, while others are still ramping. EnWave maintains manufacturing capacity of up to 10 large-scale machines per year, with outsourcing agreements in Mexico and Turkey for additional demand. License terms extend to at least 2043, with potential extension to 2045 if new patents are filed. Machines have lifespans exceeding 12 years, with magnetron replacements every 5,000 hours at a cost of about $60,000 per unit. EnWave has monetized assets like NutraDried, resold returned machines at margins, and secured tax credits such as USD1.2 million under the Employee Retention Tax Credit program. Partners include global CPG firms, cannabis operators, and pharmaceutical companies evaluating scale-up opportunities with GEA.

Catalysts & Milestones

2013 - First large-scale REV machine installed, still operational after 12 years

2019 - Arla launched cheese snacks under Explorers brand; Ashgrove Cheese added second unit in Australia

2020 - EnWave announced joint development with GEA Lyophil for pharmaceutical dehydration; U.S. Army developed REV-based rations with pilot machines

2021 - PiP International trialed REV for pea protein isolates in Alberta; Calbee began scaling snack projects in Japan

2022 - Dole purchased a 10-kilowatt unit to trial snack and upcycling applications; AstraZeneca engaged in proof-of-concept work with GEA Lyophil

2023 - Bridgford Foods prepared installation of a 120-kilowatt unit for U.S. Army cheesecake rations; REVworx secured SQF Level 2 certification with 98% pass rate

2024 - Total installed REV capacity surpassed 2,800 kilowatts; multiple cannabis machines scheduled for Australia; U.S. Army funded additional machinery for rations

2025 - Licenses confirmed to run until 2043, with potential extension to 2045 via new patent filings; pharmaceutical pilot-scale projects advancing in Germany and U.S.

Investment Highlights

• Installed base above 2,800 kilowatts, with utilization between 50% and 100%

• Large-scale machine capacity of 10 units annually, scalable via outsourcing

• Each large-scale unit generates CAD100,000–300,000 royalties annually

• Dole and GEA operating near 100% utilization on installed machines

• Tax credits of USD1.2 million confirmed, with USD0.5 million received
  
  

Future Growth Drivers

• Repeat machine purchases from partners exceeding existing manufacturing capacity

• Dole scaling snack and ingredient projects with potential for multiple large units

• GEA partnership advancing toward GMP-certified pharmaceutical dryers

• U.S. Army rations pipeline with funded machinery and partner collaborations

• Cannabis adoption in Australia and North America through 10- and 120-kilowatt units
  
  

Risk Factors

• Quarterly volatility due to lumpiness in large-scale machine sales

• Cannabis sector partners facing financial distress delaying installations

• Pharmaceutical commercialization dependent on CapEx and regulatory approvals

• Royalty revenue concentration among three to four large partners

• Heavy reliance on critical European microwave components despite North American sourcing

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Capital Allocation

21/12/2020 What is the optimal capital position for EnWave given the $18 million cash balance?

We are well capitalized today, which is why we are considering the Normal Course Issuer Bid (NCIB). If our share price does not reflect the progress and value we have created, we will repurchase shares. We are also investing $1.5 million into REVworx. Having balance sheet strength reassures prospective licensees that we are a stable partner capable of growing with them. We believe we have sufficient capital to execute our growth plans and will be opportunistic with the NCIB.

21/12/2020 What cash cushion is needed to keep counterparties comfortable?

A $10 million balance would be sufficient.

21/12/2020 Why did you not buy shares under the NCIB when the stock dropped to CAD0.56?

We agree that would have been an attractive entry point. However, the NCIB was not yet implemented at that time. It was approved in October and has now been in place for a little over two months. Going forward, if our share price does not reflect the company’s value and growth prospects, we will use the NCIB in those situations.

01/03/2021 When can shareholders expect a dividend?

Only after several quarters of consistent positive cash flow. Having both business units profitable is the ideal scenario before considering a dividend program or share buybacks. The goal is to generate sufficient royalties to cover overhead, with excess royalties and machine sale margins flowing to the bottom line. At that point, we can evaluate the best way to reward shareholders.

01/03/2021 What is the status of the share repurchase program (NCIB), and what are your Asia business development efforts?

We placed bids on several occasions outside blackout periods. Only last week was an order filled, with about CAD3,500 of stock repurchased in the CAD1.30–1.40 range. We will continue to be opportunistic, especially when the stock price weakens, given the strength of our pipeline.

In Asia, we continue our partnership with Calbee, which now operates three 10-kilowatt units and plans to scale up to large machinery this year. We are also active in Thailand, Singapore, Indonesia, Australia, and New Zealand.

27/08/2021 Will you consider adding another unit at NutraDried?

Yes, if growth opportunities in co-manufacturing materialize, a third machine could be required. We will install additional capacity when justified by distribution wins and bulk channel expansion.

It is contingent on growth, but we are prepared to invest in capacity as demand supports it.

23/08/2022 Do you need to raise cash through a private placement?

No, we have ample cash on our balance sheet and no immediate need to raise capital. EnWave is trending toward breakeven for the year, while NutraDried has been losing cash. We are undertaking expense reduction to bring NutraDried back to breakeven.

16/12/2022 With strong interest in REVworx, will you increase capacity in 2024?

First, we must secure contracts in the near term. Second, we want to encourage companies to invest in their own internal capacity. If a partner is committed to using EnWave as a long-term toll service provider and it is profitable for us with clear returns, then yes, we would consider increasing capacity beyond 2023 into 2024.

23/02/2023 Do you forecast additional cannabis install buybacks and resells?

Past buybacks were opportunistic, driven by mismanagement at certain partners, and we resold those assets at healthy margins. Looking forward, I do not expect further buyback and resale opportunities on large-scale equipment, apart from the planned resale of NutraDried’s assets to new partners.

26/05/2023 Do you still plan on buying back shares, and if so, when?

At this point, we have no imminent plans to repurchase shares. Our current capital is being directed to growing our royalty-generating business. If in the future management believes there is value in executing a buyback, we will take into account the circumstances at that time and make the decision accordingly.

24/05/2024 Are you buying back shares?

Currently, we are not employing a buyback program and have not executed any buybacks. All current buying is through a third party. However, we maintain the right to use the plan already in place at an appropriate time when we see fit.

Competitive Advantage

11/12/2019 Are consumer packaged goods companies showing interest in partnerships or acquisitions?

Our strategy is focused on growing the branded Moon Cheese product. While some companies have approached us to use Moon Cheese as an ingredient in their own snacks, that is not aligned with our strategy. Building Moon Cheese as a unique brand will ultimately create more shareholder value.

27/05/2021 Is the bulk cheese being used commercially or just in trials?

It is being used commercially in keto-friendly, high-protein trail mixes that combine nuts, seeds, and cheese. These mixes have gained strong U.S. distribution. While not under our brand, the volumes are meaningful and provide exposure for our proprietary cheese process, which has a strong moat. We expect to grow alongside these partners.

27/08/2021 What are the expectations from ongoing litigation?

We cannot comment beyond prior disclosures. Updates will be provided publicly as appropriate. Importantly, we pursue legal action to protect our intellectual property, which underpins our royalty model and is central to our business.

16/12/2022 Update on past trials with AstraZeneca or other pharmaceutical companies?

We have been working closely with GEA Lyophil, our joint partner in developing vacuum-microwave technology for large pharmaceutical companies. They acquired one of our machines for their German facility and hosted dozens of major pharmaceutical companies to test vacuum-microwave against lyophilization, the industry incumbent. Feedback has been positive, and we are in discussions with GEA about commercialization in the coming years.

Our strategy is to monetize through this partnership, where GEA delivers large-scale machinery and EnWave receives a percentage of revenue derived from those future sales.

23/02/2023 Why do some clients not want to keep exclusivity in their licenses?

Exclusivity is granted by product type and geographic region, with minimum annual royalties to ensure partners make genuine commercialization efforts. Some companies have chosen to forgo exclusivity after weighing costs against expected benefits, particularly when growth has been slower than anticipated.

Even without exclusivity, partners can sell products globally, but the machinery must remain within the licensed geographic region. This structure aims to provide local competitive advantages, such as lower raw material or labor costs.

23/04/2025 When do the licenses expire?

The licenses last until the final patent in the portfolio expires. Currently that is 2043, but if we successfully file another patent this year, it would extend to 2045.

23/04/2025 What is the lifespan of the machinery?

The first machine installed in 2013 is still working well, so we know the lifespan is at least 12 years. The machines are primarily stainless steel, and the consumable parts are the magnetrons that generate microwave energy. These have a finite life of 5,000 hours but are easily replaced during cleaning at a cost of about $60,000 for all magnetrons in a large-scale machine.

Operations

11/12/2019 How are you planning for NutraDried’s capacity expansion?

We are prospecting new facilities since the current site cannot hold additional REV lines. The new facility will accommodate a third line initially and have room for a fourth and fifth. Fully built out, this could support about EUR100 million in top line revenue. Expansion will be incremental, starting with the third line, then adding more as demand requires at lower incremental cost.

11/12/2019 Do you have a timeline for the fourth machine?

No, we have no specific timing. We will first reach capacity on the third line and then plan accordingly.

11/12/2019 Will NutraDried’s new facility support up to five large REV machines and $100 million capacity?

Yes. The facility will be built to house up to five large machines. We currently operate two and will install a third upon moving. Additional lines will be added as demand requires, eventually supporting around $100 million in revenue.

11/12/2019 Can you share more about the Moon Cheese rebranding?

We launched new packaging informed by consumer testing to maximize shelf appeal and purchase intent. The design highlights nutritional benefits such as high protein, low to no carbs, and no sugars. We are also marketing these claims digitally and through PR campaigns.

11/12/2019 What new flavors are being introduced?

Based on consumer testing, we are launching Cheddar Bacon and Garlic Parmesan, ranked just below Cheddar. These choices reflect our data-driven approach to product development and strategy execution.

21/12/2020 What defines an anchor client for REVworx and how many customers are you targeting?

Our REVworx tolling facility will operate a continuous 60-kilowatt quantaREV unit and three 10-kilowatt batch units. We define an anchor customer as one using at least 25% of the line’s capacity. When modeling REVworx, we are conservatively targeting profitability in 2022.

21/12/2020 Do you plan to expand REVworx into a larger toll manufacturing business?

The goal is not to become a large toll manufacturer. REVworx is meant to compel companies to become long-term royalty partners of EnWave. Pricing is structured to encourage users that start at REVworx to eventually invest in their own line. Often, companies hesitate to deploy $2.5 million for a large-scale line or invest heavily in facility upgrades. REVworx allows them to prove their business case upfront and later commit to internal manufacturing.

21/12/2020 Will COVID-driven changes to operations and trade shows remain permanent?

Yes, many changes will remain. We now conduct 10-kilowatt remote installations without sending personnel internationally, supported by training collateral for new licensees. We will reduce trade show attendance, since we see more realistic licensing opportunities through our sales and referral network and have been effective using virtual engagement tools. We do not expect to spend hundreds of thousands on trade shows again.

21/12/2020 Could REVworx grow into a major business line and handle NutraDried overflow?

We hope REVworx grows significantly, driven by companies seeking to launch new products. Some clients we are targeting could confirm new product launches by March. REVworx projects may also evolve into NutraDried opportunities, though that is still uncertain. As for capacity overflow, not currently. REVworx uses a 60-kilowatt quantaREV system, while NutraDried employs nutraREV systems. However, if we install a nutraREV system at REVworx in the future, it could support NutraDried overflow.

01/03/2021 How do you balance private label capacity with branded Moon Cheese growth?

At this point, all customers are good customers, whether private label or distributors for Moon Cheese. We will take opportunities until NutraDried’s capacity is fully utilized. Previously, we turned down private label and co-packing opportunities to prioritize brand building, but that has changed.

I anticipate new business will come not only from the NutraDried sales team but also through EnWave’s sales force. Together, they will bring opportunities for NutraDried to capitalize on in the coming quarters.

01/03/2021 How many REVworx customers can you serve with initial capacity?

Some companies we are in discussions with could take the entire capacity of REVworx with a single project. Others, such as SunRhize, only require up to 15% of capacity to launch a new product.
Realistically, REVworx could have as many as eight clients or as few as two to maximize capacity. Of course, we also have to consider rapid expansion.

01/03/2021 Can you increase Moon Cheese selling prices to offset cheese price volatility?

We are not in a position to change sales prices rapidly. There is enough margin in Moon Cheese that minor fluctuations in cheese pricing will not materially impact margins.

For co-manufacturing and private label, we build in mechanisms to account for cheese price swings. We also employ forward buying to lock in favorable prices when available.

01/03/2021 Where will cost savings from NutraDried restructuring appear in the P&L?

The majority will come out of SG&A. While some reductions apply to fixed manufacturing costs, most savings are in sales, marketing, and G&A. We are pulling back on paid marketing that was not delivering expected results and reallocating those dollars.

01/03/2021 Beyond cost cuts, has NutraDried’s sales and marketing strategy changed?

Yes. Moon Cheese is no longer the sole focus. We are now pursuing co-manufacturing and private label opportunities, which require different selling approaches, channels, and customers. Infrastructure is being built to support this strategy.

01/03/2021 Does NutraDried’s strategy mean no further expansion of branded products?

No. We are pursuing both branded and private label strategies. The objective is to utilize capacity fully, absorb fixed overhead, and drive profitability. NutraDried also serves as a pseudo-REVworx, allowing other companies to bring products to market, which benefits EnWave long term.

01/03/2021 Do you still view EnWave as a three-legged revenue model?

Yes. Machine sales and royalties remain core, but NutraDried continues to be important. While Moon Cheese is no longer the sole focus, private and white label opportunities will complement branded sales going forward.

01/03/2021 How large is the private label opportunity, and can it fill capacity over 18 months?

It is a large opportunity. Many companies have sought bulk supply of REV-dried products, and we now have the capacity to meet that demand. The product has diverse applications beyond Moon Cheese, including ingredient blends, salad toppers, and other uses. We will pursue bulk opportunities that complement, not harm, Moon Cheese distribution.

Additionally, we are exploring dairy snack applications such as yogurt snacks. These should create complementary opportunities alongside Moon Cheese.

27/05/2021 Why was the REVworx startup delayed to August or September?

The delay was due to a construction permit from the City of Delta. Our contractors began immediately once the permit was granted, but the approval process took much longer than expected.

27/08/2021 What is the timeline and capacity outlook for REVworx startup and commissioning?

The project was delayed slightly while we secured permits in Delta. We now have everything except one final permit related to flooring modifications. Once received, we can install the machine in mid to late September. After curing and setup, commissioning should be completed in October.

Revenue from REVworx should begin in Q1 2022. It will start modestly as customers are onboarded, but interest is already strong. We have not signed binding contracts yet, as we want to avoid overpromising before certifications are complete. Our sales and business development teams are actively building a pipeline, and we expect REVworx to contribute revenue in 2022.

16/12/2021 Will Whole Foods have exclusivity for the launch?

We will launch as broadly as possible. Whole Foods committed first and will have one exclusive flavor profile for a limited time. The other core flavors in the five-flavor portfolio will be available for wider distribution.

16/12/2021 Will Cheese Sticks complement or replace Moon Cheese in stores?

The new lineup is complementary to Moon Cheese. Whole Foods taking three stick items nationally is a major win, and it does not displace existing Moon Cheese distribution. Historically, Moon Cheese has been shelved in crackers or deli, not always in snacks. Sticks belong in salty snacks, and we will be the first to offer a 100% cheese puff format. Whole Foods was the first to commit, and we are confident this will be incremental. They even displaced another brand to carry three SKUs of sticks, showing their conviction.

16/12/2021 Are bulk sales still excess inventory or now longer-term contracts?

We are pursuing longer-term opportunities. The sales cycle is longer than a typical CPG sale because we are working with partners to create new snack combinations that include Moon Cheese. We had a large Q3 bulk order from a customer supplying Costco, though that did not repeat in Q4. That customer remains important, and we are developing additional opportunities to expand bulk sales in 2022.

16/12/2021 What is NutraDried’s current capacity and room for expansion?

We currently run two large-scale machines. With leasehold improvements, we could install a third by rearranging finished goods warehousing. That is our expansion plan when we are ready to scale further.

16/12/2021 How do you view the Costco Canada promotion and sustainability of presence there?

We recently announced national distribution with Costco Canada, with a 10-ounce Gouda product on shelves in January. It is fewer warehouses than the U.S., making it manageable, but still a strong opportunity. We are glad to be back after last year’s April distribution. Costco remains an important channel for brand awareness, and we are already pursuing opportunities to place the new sticks there. Execution depends on whether they require national scale immediately, which would mean ramping up production quickly, but it is worth pursuing given the exposure.

25/02/2022 Does producing the new stick product require major equipment changes?

No. It uses the same 200-kilowatt lines already installed in Ferndale. The main adjustments are minor, such as reconfiguring the pre-drying and cutting step from cubes to sticks. We may add small equipment, but no major overhaul is needed.
The expected cost for modifications is in the CAD60,000 to CAD100,000 range.

25/02/2022 Can your equipment be used for drying grains like corn?

Our Vacuum-Microwave equipment can dry any product, but it is not economical for commoditized grains like corn, where hot-air drying is cheaper despite reducing nutritional quality.
Where we see value is in high-value crops and proteins. For example, we are working with PIP International in Alberta on pea protein isolates, an application well suited to our technology. We look forward to advancing that project toward scale-up this fiscal year.

25/02/2022 Will you move entirely to U.S. or Canadian suppliers to reduce foreign dependency?

For many components, yes, we already source from North America. However, critical microwave componentry is not available here and must still be procured from key European suppliers. That reliance will not change.

25/02/2022 Are inventory buffers sufficient amid supplier lead-time challenges?

Supply chain issues are not universal, but we are seeing delays with electrical components and longer backlogs from third-party manufacturing partners. What once took eight weeks can now take sixteen. To get ahead, we place purchase orders early for sub-assemblies and secure electrical components in advance. These parts have no shelf life, so stocking them longer is not an issue.

We are comfortable with current buffers and confident in our pipeline. Deploying some extra working capital to build machines on spec is not a major risk under these conditions.

23/08/2022 What is the status of signing an anchor REVworx customer?

Line trials are critical for long-term commitment to continuous production. It is not enough to show success on our 10-kilowatt units; consistency must be proven at scale. Over the past month, we have run trials with several prospects. One likely customer could represent up to one-third of plant capacity.
We currently have eight viable companies running trials, most of them large and financially capable. We hope to confirm several as customers in the coming quarters.

23/08/2022 Is the yogurt product still in the pipeline for NutraDried?

Yes, the yogurt product is still in the pipeline. However, the immediate focus is reducing expenses and achieving breakeven. Once stable, we can allocate resources to new innovation, recognizing the risk that comes with launching new products.

16/12/2022 What is the outlook for REVworx capacity utilization?

Several companies are close to signing toll service contracts. If successful, utilization could range from 25% to 100%, depending on how many deals close. That represents the business on the table for us to win.

16/12/2022 Any update on NutraDried distribution with Costco?

Costco remains a potential rotation or multiple rotations in different regions, but nothing has been contracted for fiscal 2023. We continue working toward securing opportunities with Costco.

16/12/2022 Update on U.S. Army ration program?

The Army received approval for funding additional machinery to implement components into their ration program. Their fiscal year started in October, so we expect word in the coming months on the release of that funding.

Meanwhile, we are negotiating potential licenses with industry partners where that machine would be placed. We remain optimistic about advancing the Army relationship in fiscal 2023.

16/12/2022 How broad is NutraDried’s bulk business pipeline?

We are targeting a broad range of customers, but a handful would be especially meaningful. We have visibility into when those could materialize in fiscal 2023 and included them in our internal budget.

Currently, we are close to confirming business with two or three customers. No purchase orders yet, as audits are required before engagement, but prospects are promising. If confirmed, we will update shareholders.

16/12/2022 If the U.S. Army buys a large-scale machine, how fast can you deliver?

Typical lead time is six to seven months from purchase order. However, we have invested in long-lead inventory for two large-scale machines in fiscal 2023, which should allow faster delivery.

If a purchase order comes in December or January, delivery could occur in the summer of next year.

16/12/2022 Why wasn’t the Dole machine installed in Q4?

Delays were due to Dole’s own operational timing, not our ability to deliver. Sometimes partners need longer to be ready to receive equipment.

16/12/2022 What does REVworx capacity utilization translate into in revenue?

At industry-acceptable margins, full utilization equates to about CAD 2.5 million in anticipated revenue, tied to throughputs at the facility.

23/02/2023 Do R&D costs include trial runs for new candidate clients, or is the technology fully mature?

Yes, R&D costs include trial runs for new candidate clients.

25/08/2023 Can you describe the evolution and utilization rate of REVworx between Q2 and Q3?

Brent Charleton: Through Q2 and Q3, REVworx was primarily used for line trials to validate throughputs for specific product applications, ensuring costing models for fiscal 2024 supply contracts are accurate. The results were positive. We are now in the final stages of negotiating material contracts that could take up the majority of our capacity next year. Packaging is being designed and ordered by these customers, and we are eager to disclose details once possible.

Brent Charleton: In the meantime, we have completed smaller commercial production runs for Western Canada snack companies, processing fruits, vegetables, and confectionery products. These orders are in the tens of thousands of dollars, while we anticipate upcoming contracts to bring hundreds of thousands of dollars in revenue.

25/08/2023 What is the utilization rate of the installed base generating royalties?

Brent Charleton: It varies significantly across partners. Internally, we are building a register to better monitor performance and validate the accuracy of reporting. This will strengthen our quarterly reporting on utilization rates. At present, three to four companies dominate our royalty payments.

25/08/2023 How is REVworx functioning, including certifications?

Brent Charleton: In addition to Bart’s question on capacity utilization, we recently passed our Safe Quality Food (SQF) Level 2 certification for the second consecutive year with a 98% pass rate. This is critical for servicing larger consumer packaged goods companies and will be put to good use in fiscal 2024 with material manufacturers.

15/12/2023 How are you managing production personnel while waiting for machine orders?

Despite volatility in machine orders, our team remains busy with process innovations, machinery refinements, and installations. We currently have staff in Japan completing a large-scale installation, and several more international visits are scheduled for paid preventative maintenance work.

15/12/2023 What is the update on Bridgford Foods and the U.S. Army project?

The 120-kilowatt machine is scheduled for installation in Q2 fiscal 2024 in North Carolina, where we will train staff for U.S. Army cheesecake ration production. Bridgford is also collaborating with other commercial partners aiming to enter the Army ecosystem.

23/02/2024 Clarify number of machines in production and inventory

Dylan Murray: BranchOut Foods has a machine contracted to begin fabrication in summer 2024, but fabrication has not yet started. Regarding inventory, we still have one large-scale machine that was repatriated from NutraDried.

Brent Charleton: The number of small machines is around 10, either returned from rental agreements or held in inventory. Several near-term projects with 10-kilowatt units should reduce this number to below four machines. Multiple 10-kilowatt units are expected to be needed by royalty partners before transitioning to large-scale machines. Ideally, we want immediate deployment of the 10-kilowatt units to bridge the period between purchase, fabrication, delivery, and commissioning of larger machines. Several opportunities like this are in our near-term pipeline.

24/05/2024 When will pending cannabis industry machines be installed?

We recently completed commissioning of the 120 kilowatt machine at Bridgford Foods, funded by the U.S. Army. It is now commercially running for both military rations and line trial work with other businesses, which should help drive royalty growth over the next 12 months. A second 120 kilowatt machine purchased by a U.S. cannabis partner has not yet been installed, as their facility remains incomplete. The ultimate destination of that unit is still to be determined.

Some 10 kilowatt cannabis units are scheduled for Australia. One has installation timing confirmed for this year, while the other remains undetermined. As you can imagine, some of these companies are struggling financially. I believe that covers the main machines, but if you want details on a specific unit, we can provide additional context.

23/08/2024 What is the total installed capacity with clients in kilowatts and the average utilization rate?

Hi Bart. Right now we have three active 10-kilowatt machines at foreign facilities for product development and potential commercialization. We have also seen more collaboration at our Vancouver innovation center, where potential adopters can test pilot, lab, and full commercial scale equipment while working closely with our food science team. Many companies prefer this approach instead of bringing machines in-house for evaluation.

As for total installed REV capacity, we disclosed 2,800 kilowatts as of September 30 in our year-end statements. The figure is now higher with new installations. Utilization varies widely, generally between 50% and 100%. Dole, for example, is near 100% on its first large-scale machine, as is GEA Ly in Canada for cheese snacks. Others, like Orto Al Sole in Italy, are still ramping up. We provide a chart in our corporate presentation tracking installed capacity, which we update as more machines come online.

23/08/2024 How many machines were under construction at the end of Q3?

At the end of Q3, we were working on three machines. Two units, either 120 or 100 kilowatts, are for BranchOut, where some design changes were required. A third, a 120-kilowatt machine, was sold to an unnamed current royalty partner to support co-manufacturing demands in consumer packaged goods.

We also keep 10-kilowatt machines in inventory for rapid deployment, but we are not building new ones at the moment. Looking forward, we aim to close new pharmaceutical pilot-scale opportunities and fulfill purchase orders to expand manufacturing capacity for brands that have provided forecasts for 2025 and 2026.

24/02/2025 How many 120-kilowatt machines are currently available in inventory?

Currently, the one machine under construction is the only unit available for immediate deployment. Once that machine is sold, which we expect very soon, we will immediately begin construction of another. Given our strong pipeline, we expect to sell several of these large-scale units within this fiscal year.

24/02/2025 Is there an update on the vaccine front?

Yes, collaboration with GEA continues. They purchased a lab-scale unit from EnWave to showcase our technology to their wide pharmaceutical customer base. Testing is ongoing, and we have received positive results with several projects. We hope to share more details later this fiscal year.

We also have a third-party pharmaceutical co-manufacturer in the United States working directly with a large pharmaceutical company. This project could lead to another sale of a pilot-scale pharmaceutical-grade unit sometime this year.

23/04/2025 From a machine sales perspective, what is your manufacturing capacity?

Our current manufacturing capacity for large scale machines is 10 per year. If demand surpasses that, we already have relationships in Mexico and Turkey to leverage outsourced manufacturing, so there are no concerns. If a large company prefers not to manufacture and only wants the product, we can connect them with our royalty partner who focuses on co-manufacturing. That would also push companies like Microdried Melny to buy additional machines to support partners such as Kraft Heinz. This is how we see growth developing.

23/04/2025 Do you monitor machines and is there room for growth in installed capacity?

Yes, we remotely monitor all machines, tracking hours of use, baskets, and trays processed. We then audit quarterly royalty payments. There is definitely room for growth because some companies are operating at full capacity while others are at 50–70%. Incremental royalty growth is possible depending on how each partner executes its business case.

Competition

11/12/2019 What percentage of NutraDried sales came from Costco?

We are not commenting on specifics regarding Costco. Some details are available in our Management Discussion and Analysis.

11/12/2019 Will Costco continue distribution and coupon programs in 2020?

We cannot predict Costco’s future plans. What we can say is that product velocity consistently exceeds expectations at Costco and other retailers. The pace of adding new stores is greater than losing them, so we expect sales to continue growing. Future promotions and rotations remain to be determined.

21/12/2020 Does termination of the Tilray license also end the sub-license?

Yes. The original Tilray agreement provided proof-of-concept for cannabis applications. We expected minimal long-term royalty revenue because Tilray’s sub-licenses were structured as net zero for EnWave. Tilray faced internal challenges, ordering non-GMP machines while building GMP facilities, and did not consult us before committing. This was a business relationship issue, not a technology problem.

27/05/2021 How should we think about Costco’s future orders and visibility?

We have always sold to Costco on a rotational basis, with the occasional national promotion. Relationships with buyers remain strong, though competition in all-natural cheese snacks has intensified. Forecasting future orders is difficult, but Costco still likes our products, and we expect to generate more rotations. The timing and size are hard to predict.

25/02/2022 Why have some cannabis sales campaigns failed, and what pushback do you face?

When we first entered cannabis, we knew our technology had value but lacked proof of its impact. Early Canadian customers allowed us to refine protocols and gather data showing higher quality product with faster processing, lower cost, and more terpene and cannabinoid retention. Before that, campaigns often failed because we could not prove results. Now, we have evidence and can demonstrate outcomes directly.

Remaining pushback comes from traditionalists unwilling to change. For those open to testing, placing 10-kilowatt units in their facilities has yielded a 100% success rate. We have demos underway across California and other states, supported by third-party testimonials and visits to large-scale operations. We believe this will address concerns and convert more prospects into royalty partners this year.

27/05/2022 Is pricing driven more by market dynamics than contractual obligations?

Yes. Every time we raise prices, retailers pass them through to the shelf. If you step out of line within the category, it directly impacts consumption. So we must strike a delicate balance.

23/02/2023 Why hasn’t cannabis drying been a bigger focus and priority?

We have consistently pursued cannabis drying by engaging with every known cannabis company in North America. We offered smaller units at no cost to reduce barriers and prove our value proposition. Despite ongoing discussions with major players in the U.S. and Canada, they continue to delay evaluations. For now, the sector seems disorganized, but we will continue to push aggressively.

Growth

11/12/2019 What drove higher NutraDried expenses and Costco sales percentage?

NutraDried experienced rapid growth, which required increased expenses to support scaling. We hired a full-time CEO, three regional sales directors, and additional staff in sales planning, HR, accounting, and finance. We also rebranded and relaunched Moon Cheese with new packaging, a marketing agency, and digital campaigns. These investments are aimed at sustaining revenue growth.

11/12/2019 How do you expect NutraDried sales to grow toward CAD40 million?

We see strong growth prospects in both retail grocery and big box channels such as Costco. Retail grocery distribution is typically stickier, so we are focused on expanding there while pragmatically pursuing additional big box opportunities.

11/12/2019 Is NutraDried growth from deeper penetration or new retail channels?

It is both. We are expanding with existing retailers like Whole Foods and Publix, while also entering new channels. However, we avoid disclosing detailed strategy publicly to prevent competitors from replicating it.

11/12/2019 Will royalty growth outside NutraDried come mainly from cannabis machines?

Growth will come from both cannabis and food. Several food licenses are ramping up, so royalties are not solely dependent on cannabis. Large cannabis machines will contribute significantly in 2020, but food partners will also drive growth.

11/12/2019 Are global dairy partners starting to show momentum?

Yes, we see immense potential with large license partners. Many are still in small market trials, but feedback has been very positive. With added capacity, royalty potential from international dairy companies could eventually surpass NutraDried’s U.S. contribution.

11/12/2019 Which partners are most advanced?

Arla launched snacks under their Explorers brand in Denmark and is progressing well. Ashgrove Cheese in Australia has gained strong distribution, purchased a second 10-kilowatt unit, and is considering larger machinery. Patatas Fritas has not yet received its 10-kilowatt unit. Friesland Campina has done solid development work, and we plan collaboration with them early next year.

11/12/2019 Where does the Calbee partnership stand?

We are very excited about Calbee. Their 10-kilowatt machine is fully operational in Japan, and we have clear visibility on their product rollout and testing over the next 12 months. While I cannot disclose exact timing, Calbee has a thoughtful scale-up project that should become meaningful to their business through 2020–2021.

11/12/2019 Will Calbee sales focus only on Japan or also international markets?

The initial focus is on Japan, but longer-term plans include international distribution.

21/12/2020 What is your approach to alternative protein products?

We see strong growth in alternative proteins that mimic traditional fresh protein formats. We engaged with several market leaders, acquired their raw materials, and ran proof-of-concept tests at our pilot plant. These trials have led to deeper discussions, and we expect some companies to enter formal evaluation agreements soon. We aim to secure our first North American licensees in this space in 2021.

21/12/2020 How much additional Moon Cheese distribution can you achieve with current and new customers?

There is significant opportunity to expand distribution. For example, Safeway Albertsons took both 2-ounce and 1-ounce formats, but only about 30–40% of stores carry the 2-ounce, while the 1-ounce has enterprise-wide distribution. That leaves room for growth. Beyond that, we have identified 14,000 additional grocery locations that can add Moon Cheese. Growth depends on individual buyers and whether they bring on multiple SKUs per store.

21/12/2020 Are you continuing to expect Costco rotations despite avoiding inventory liquidation?

Yes, Costco remains part of our core business. Rotations are lumpy and unpredictable since we deal with individual buyers in each region. Sometimes they cluster at certain times, while at other times there may be a pause. We will continue targeting rotations at Costco but are also expanding into meaningful retail grocery and c-store channels. Costco remains an important customer. With new product formats and flavors like protein blitz mix, we will also offer unique items to Costco and others, sometimes on a semi-exclusive basis.

21/12/2020 What are your prospects in the U.S. cannabis market following the new subsidiary launch?

We are very encouraged by inbound interest from U.S. cannabis producers. The MORE Act passed in Congress is positive, and if Senate results in Georgia favor Democrats, broader legalization could follow in late 2021. We have completed legal due diligence and are comfortable selling machines in states where cannabis is legal. We expect U.S. cannabis to become a core part of business development in 2021.

01/03/2021 What does the U.S. cannabis pipeline look like this year?

In the U.S., we have five to six qualified potential licensees considering both large-scale and 10 kilowatt units. We are confident that new commercial relationships will be established this year. Internationally, we have representation in Australasia and another five qualified leads there.

With Terpene Max data available and early adopters like Tigard willing to speak publicly about their success, we now have credibility. Traditionalists once insisted on room or rack drying, but our technology is proving itself as a global game changer as the industry matures.

01/03/2021 What revenue potential do you see from the CAD1.5 million REVworx investment?

We expect to begin generating revenue in the spring and summer, scaling as new contracts are secured. The facility has potential to generate high single-digit millions in revenue at capacity.

Importantly, while margins from REVworx revenue matter, the bigger goal is product incubation. Additional capacity allows us to service new, smaller opportunities that can grow into larger ones and eventually drive machine orders.

27/05/2021 Should Costco revenues be viewed as incremental on top of core programs?

Yes, Costco is opportunistic and not part of our long-term strategy. To replace missed volume there, we began selling bulk cheese to consumer packaged goods companies for use in ingredients and inclusions. That channel has already generated more than 1.5 million orders and will ramp up in Q3.

27/05/2021 Will the new CEO continue focusing on grocery, checkout, and convenience store expansion?

Correct, we remain focused on expanding Moon Cheese distribution in grocery, which is the largest opportunity. We also launched Protein Blitz Mix, which sits in the trail mix section instead of crackers or chips. We believe this provides incremental distribution opportunities.

27/05/2021 How does the REVworx pipeline look for filling capacity?

We are balancing several larger projects that want REVworx as their first manufacturing step before eventually moving in-house with their own equipment in 2022. SunRhize Tempeh is progressing well and should be an anchor tenant, and we are also in discussions with a very large fruit company and several others. These groups are working through costing so they can commit as soon as operations begin. The pipeline has only strengthened since we last discussed it.

27/05/2021 Are you using REVworx to re-engage past prospects that avoided upfront costs?

Yes, our sales team has reconnected with companies that previously declined due to high capital costs and product launch risks. REVworx reduces that barrier by enabling product trials and early market entry before moving manufacturing in-house to improve margins. Several companies are lined up, and we will actively revisit more prospects once the facility launches.

27/05/2021 Was NutraDried product revenue, excluding Costco, down year-over-year?

No, excluding Costco, NutraDried product sales showed a modest year-over-year increase. Growth came mainly from grocery channels, and we are pursuing new distribution opportunities with key customers that could further move the needle.

27/08/2021 What is catalyzing cannabis sales growth near-term?

Seeing is believing. Prospects visiting our license partners, watching machines in operation, and running trials on our 10-kilowatt units has been critical. They can collect data themselves that verifies our claims.

When we say drying with our technology results in 30% to 50% more terpene retention, higher THC and CBD levels, and equal or better smoke quality compared to room or rack drying, it sounds almost too good to be true. Demonstrating this first-hand builds credibility. That is why we are confident that once a few more dominoes fall, adoption in the U.S. will accelerate, especially with the companies we are in active discussions with.

27/08/2021 What is the current and future store count with Walmart, and does this include Sam’s Club?

We have two one-ounce items placed in about 400 Walmart stores, located in checkout lanes. If successful, we have been told this could expand into 1,300 stores in the U.S. We already received orders, and products should be on shelves in six to eight weeks.

This initial placement is a valuable entry point. Our longer-term goal is to move into the snack aisle at Walmart. We see this as the first step toward deeper distribution with that retailer.

27/08/2021 Is the Dole relationship dependent on new products or can it be applied to existing ones?

To clarify, Elea Pulsed Electric Field Technology is not part of the Dole applications. Their focus is expanding into shelf-stable dried snacks, which is new for them compared to canned or juice-based formats. That is one part of the project. The second part involves early engagement with their ingredients division, using our technology to process off-cuts and B or C grade materials into powders for functional ingredients.

This is not just about selling one 10-kilowatt unit. We are deeply integrated with Dole’s leadership in marketing, product development, and strategy. We have weekly calls with senior executives, and they are committing near-term capital to move quickly. They may initially use existing royalty licensees to produce early-stage product, but the long-term plan is to bring manufacturing in-house to control costs.

27/08/2021 What are the benefits of the bulk sales model at NutraDried?

When we produce Moon Cheese, it is first packed into bulk boxes before seasoning and packaging. Some customers buy the dried cheese in bulk for use in snacks, trail mixes, and similar products. This B2B model generates clean margin since we avoid freight, commissions, and trade spending.

We are now in discussions with several major snack companies about incorporating our cheese format into their innovation pipelines. Early interest is strong, and we expect the channel to grow.

27/05/2022 How much lumpiness should be expected in NutraDried sales across partners?

In grocery channels like Kroger, sales are consistent. The growth we achieved at Kroger this quarter should repeat next quarter, and we expect that account to remain strong. The lumpiness always comes through Costco, as you know. We had a large Costco Canada program in Q2, but nothing confirmed for Q3. So that creates volatility. Our main focus remains growing grocery channels, since wins at Kroger and Whole Foods create durable value.

Also, Moon Cheese has outperformed competitors. Compared with ParmCrisps and Whisps, Moon Cheese achieved the best year-over-year growth in the category over the past six months, while Whisps declined and ParmCrisps underperformed us. Importantly, Moon Cheese buyers are incremental to the category: only 10.4% also buy ParmCrisps, and 17.5% buy Whisps. This means new distribution gains are not significantly cannibalizing other products.

23/08/2022 Will bulk sales rebound, or should we expect continued lumpiness?

Bulk sales will not be particularly lumpy, but growth is taking time. We are building a customer base using our product as an ingredient. We are attending ingredient shows and developing that channel. The one major customer from last year does not seem to be continuing, so we are working to build new relationships.

23/02/2023 When will EnWave machines be sold in India and what is the local pipeline?

Our strategy is to work with third-party resellers to expand in new regions. In India, we partnered with Ken Kanchan Metals, which helped us participate in trade shows and build a pipeline of six to eight projects we hope to close within 12 to 18 months. Additionally, LD Food, an announced partner, operates a 10-kilowatt unit for product development and may scale within this fiscal year. They have also hosted other companies to conduct market trials using our technology.

26/05/2023 Are new products being developed with or for the US armed forces?

Yes. We are working with a prominent egg manufacturer on three ration inclusions already presented to the US Army, which received favorable feedback. We are now collaborating with both parties to establish a CRADA research agreement to secure funding for this manufacturer and improve the likelihood of new product introductions into the ration ecosystem.

25/08/2023 Can you provide more information about the Dole partnership?

Brent Charleton: The Good Crunch snack line, using our machinery, is performing well. Dole wants to diversify its snack portfolio beyond bananas and pineapples. We are discussing additional manufacturing capacity requirements in the near term. Certain license partners may provide co-manufacturing capacity in North America, which would be strategically advantageous versus Southeast Asia for new product rollouts. We look forward to this partnership evolving in the coming quarters.

15/12/2023 How much utilization time does REV Works see with potential customers?

Most utilization is tied to developing new contracts and progressing the sales pipeline for customers transitioning to in-house manufacturing. We are pursuing several material REV Works contracts for fiscal 2024, which could add up to CAD1.5 million in revenue. While not materially significant for top line growth, REV Works serves as a critical sales tool to de-risk product launches and encourage long-term licensing royalty agreements.

23/08/2024 How are you handling medical cannabis research in the U.S. and Canada, and what are expansion plans in other countries?

We collaborate closely with our royalty partners on process protocol improvements in both the U.S. and Canada. We will continue similar efforts in Europe, Australia, and New Zealand.

On expansion, we are open to partnering with any cannabis companies operating legally in their jurisdiction. That said, the cannabis industry remains in consolidation and cost-reduction mode. Currently, our pipeline is about 90% food opportunities, with the balance split between pharmaceutical and cannabis projects.

23/04/2025 How do royalties vary by product?

It depends on the product being produced. Moisture levels affect throughput, and market value also matters. For example, cheese snacks may sell for $5 per package versus dried pineapple at $3 per package. With a 3% royalty, cheese snacks generate more royalties due to both higher throughput and higher market value.

Financials

11/12/2019 Can you quantify NutraDried’s expenses in millions?

For the full year, these investments totaled about CAD3 million. We expect to make similar investments in 2020 as we continue building the brand and creating consumer demand for our snacks.

21/12/2020 How much Costco cash is still outstanding from the BOGO promotion?

We have collected all cash related to the September Costco BOGO promotion. While Costco remains a customer with ongoing receivables, the Q4 promotional balance has been fully collected.

27/05/2021 Are expense reductions mainly in sales and marketing and worth about CAD 2 million annually?

The majority of reductions are in sales and marketing, with some in general and administrative costs. We are also cutting manufacturing expenses to improve margins. Most savings come from reducing costly agencies, consultants, and fees that did not generate returns. These actions took effect in March and April, so full benefits will be reflected in Q3 and Q4.

27/05/2021 Have we only seen partial benefits of cost cuts so far?

Yes, only about one-third of a quarter’s benefit was visible, as it took time to unwind contracts. By April, we had already realized the full benefit, which will flow through starting in Q3.

27/05/2021 How will the CAD 1.5 million bulk orders impact financials and cadence?

The 1.5 million orders will be reflected in Q3, with most shipped in May and more expected in June. We already have several large customers buying bulk, and we expect growth into July, August, and the fall. We have shifted to proactively pursuing these opportunities rather than waiting for inbound demand.

27/05/2021 Will declining cheese prices provide a benefit?

Yes, benefits should appear in Q4. We forward-bought through early summer, so lower prices will start helping later in the year. Futures have ticked up as the U.S. economy reopened and food service demand returned, but we do not expect the volatility of 2020.

27/05/2021 Are all 44 royalty partners paying, and how many are material contributors?

Of the 44 license agreements, about five or six are dormant and not paying. Roughly 10 are large contributors with commercial-scale production and steady growth, including cannabis partners who recently added a 60-kilowatt machine. The remainder are smaller but expected to grow as their products gain traction. Some also use capacity from larger licensed partners, showing collaboration across the ecosystem.

27/08/2021 What is your finished goods inventory position given the sales cycle and installation delays?

For large machine orders, we recognize revenue over time using percentage of completion. Once we receive an order and progress begins, revenue flows into cost of goods in our P&L. For 10-kilowatt machines, revenue is recognized only after installation and training are complete.

This means delays in installation or facility readiness can push revenue recognition back by one or two quarters. Until then, those machines remain in finished goods inventory. Once installed and operators are trained, the revenue is booked.

27/08/2021 Why will SG&A not rise despite activity ramping up?

We will attend tradeshows where possible, such as Expo East in September, but we do not expect significant near-term travel. Many U.S. buyers are still holding meetings remotely, which keeps costs lower.

We have already streamlined expenses and do not plan to add them back. The current platform is sufficient to support growth without materially increasing SG&A.

27/05/2022 Do profitability differences exist between Moon Cheese and Sticks?

It is less about puffiness and more about the cheese’s moisture content before drying. Yield varies by cheese variety. Cheddar, with lower moisture, gives a better yield than Mozzarella. Sticks yield is slightly below Cheddar. From a pure cheese perspective, Sticks are slightly less profitable.

That said, the difference between Cheddar and Mozzarella is not significant enough to matter at scale. With enough volume, Sticks still have the opportunity to be very profitable. It ultimately comes down to the moisture content of the incoming cheese.

23/08/2022 How will higher cheese costs affect Q4?

At the end of Q3, we held cheese bought at peak June prices. That higher-cost cheese will work its way through in Q4. The cheese we are buying now is at more reasonable levels, so the price pressure should abate going forward.

23/08/2022 Will Dole’s 120-kilowatt machine generate CAD2 million in royalties per year?

No, a single 120-kilowatt machine will not generate CAD2 million. Year-to-date, we have collected CAD1.1 million in third-party royalties, which is up significantly year-over-year. From experience, each large-scale unit can generate between CAD100,000 and CAD300,000 annually, depending on product and utilization.

To reach CAD2 million, we need to close additional large-scale purchase orders and bring machines in Peru and Italy online.

23/02/2023 Does the 15-year low stock price reflect the company’s financial reality?

I believe our stock is undervalued, even considering the NutraDried wind down. At current prices, I see this as a buy-in opportunity given the strong prospects of our technology business.

26/05/2023 Will REVworx financial reporting be consolidated or shown separately?

It continues to be consolidated until it becomes a material individual line item.

25/08/2023 Does the USD1 million from NutraDried include the USD1.5 million tax credits?

Dylan Murray: To clarify, it was a USD1.2 million Employee Retention Tax Credit (ERTC) and this is new for this quarter. USD0.5 million has been confirmed by the IRS, which we expect to receive in Q4 2023. As of this call, we have not received any further correspondence from the IRS about the remaining credit.

Brent Charleton: That said, receiving confirmation on just under half is a good leading indicator for us, suggesting a high potential of receiving the rest.

25/08/2023 Is the tax credit included in the USD1 million still due from NutraDried?

Dylan Murray: Correct, it is not included. The USD1 million is still due from Creations.

25/08/2023 What were this quarter’s royalties from cannabis?

Dylan Murray: I do not have the number on hand, but it is a minority compared to our overall royalty portfolio, which is largely food-focused.

15/12/2023 Do you break out royalties on your income statements?

Not on the face of the income statements, but in revenue note 18 we segment revenue streams, and royalties are discussed further in the MD&A.

24/05/2024 Do you still expect money from NutraDried sales or the U.S. government?

From Creations, related to the repatriated 100 kilowatt machine, about US$500,000 remains outstanding. Regarding IRS checks, there is still another half a million to US$700,000 outstanding. We have not received or recognized that amount for reporting purposes until we get direct confirmation from the IRS.

23/04/2025 Why has the stock price stayed stable despite growth?

It is a “show me” state right now, where we need to demonstrate more than two quarters of strong performance. Last year we had an ongoing legal dispute with a former executive who stole confidential information. We successfully sued, settled, and secured an IP transfer, closing that issue.

The lumpy nature of large-scale machine sales also impacts results. One quarter we may sell two or three machines, and the next quarter none, depending on the percentage of completion at that time. Revenue therefore has quarter-to-quarter fluctuations. As long as we show fiscal year improvement, the market will recognize that we are not a bankruptcy risk, but a consistently growing business with a well-managed balance sheet.

Outlook & Guidance

11/12/2019 Did you provide royalty targets for NutraDried and non-NutraDried next year?

Yes, we set approximate targets. We hope to grow our royalty base by at least 50% next year. The split between NutraDried and non-NutraDried is pro forma but represents our general expectations.

11/12/2019 Should royalty revenue roughly double as new machines come online?

Yes, that is the safe assumption. We have nine large machines in fabrication now versus eight contributing in fiscal 2019. As these staggered installations become operational through fiscal 2020, we expect by fiscal 2021 to have doubled royalty capacity.

11/12/2019 Is NutraDried’s topline revenue capacity $60 million once the third machine is running?

Yes. With three lines, NutraDried’s capacity will be up to $60 million in sales next year.

11/12/2019 What is the 2024 target for REV machine sales?

Our target is 10 large-scale machines and 10 small-scale machines.

21/12/2020 How confident are you in NutraDried’s diversification and what is the expected timing?

During the pandemic, it was difficult for NutraDried’s sales team to secure meetings, but in the fall we had several important discussions with major U.S. retailers in grocery and convenience channels. We expect commitments early in the New Year, with growth weighted toward the second half of 2021. Some distribution will begin in Q2, but Q3 and Q4 will be more meaningful. By late January or mid-February, we will have clear visibility on NutraDried’s second-half opportunities.

21/12/2020 Have there been recent pharma discussions, including vaccines, using your technology?

We announced a joint development agreement in January 2020 with GEA Lyophil of Germany, the largest pharmaceutical equipment manufacturer globally. Despite a brief pause early in the pandemic, inbound inquiries increased in late summer regarding vaccine dehydration and shelf stabilization. GEA has purchased a pilot-scale machine, now in build and scheduled to arrive in Germany in spring 2021, to demonstrate REV technology to pharmaceutical companies. Activity has picked up, and we see pharma as part of EnWave’s long-term vision.

Additionally, Merck remains an active partner. They own an R&D license and REV equipment for vaccine dehydration, and that project is ongoing.

21/12/2020 What progress is being made with the U.S. Army on rations?

Progress is strong. The Army owns two pilot-scale REV machines to develop shelf-stable rations for close-combat soldiers. These rations have received internal approval, and the Army is now exploring partnerships with U.S. industry players who could take additional REV equipment to process at scale. Those partners would then sell to one of four or five approved ration pack vendors, such as AmeriQual or Wornick. We are in discussions about licensing structures, and the Army is pursuing funding to expand capacity. We remain bullish on long-term prospects with the U.S. Armed Forces, though timing is the key variable.

01/03/2021 Should the forecast of five large and 12 small machine sales be increased after Q1 sales?

As of this call, two large and seven small machines have already been sold. There is certainly upside, but conservative expectations are appropriate. Walk before you run.

There is strong potential to exceed targets, but we will reassess at the next quarterly call before upgrading guidance.

27/05/2021 Could machine orders exceed guidance this year?

Yes, we are confident in hitting and potentially exceeding targets. U.S. cannabis companies are considering 60- to 120-kilowatt machines, larger than our typical 10-kilowatt units. Several royalty partners that started with smaller machines are now scaling up, so we expect large repeat orders within the fiscal year. Five to twelve orders would be profitable, but we are aiming higher.

27/05/2021 When will Aurora Cannabis machines be operational?

We built and delivered the 220-kilowatt machines as specified, but Aurora has delayed facility expansion. Meanwhile, Tigard produces about 90% of its cannabis with REV technology, and U.S. partners are also scaling. We believe Aurora should bring its equipment online soon, and if not, it reflects poor management given the value our technology is delivering elsewhere.

27/05/2021 How do you expect royalty margins to develop, and how do you ensure partners pay accurately?

We expect royalties to grow materially over the next few years. Three large machines are scheduled for installation by year-end, which will significantly expand the royalty base. The pipeline of machine orders and licenses is growing, and while royalties lag license signings by a few quarters, we see this compounding into a high-margin revenue stream. Our mission is to build a diversified royalty portfolio, with REVworx serving as a tool to accelerate adoption.

All machines are internet-connected, allowing us to track uptime, power use, and throughput. Agreements also permit audits if misreporting occurs. We have rarely faced issues, as most partners are strong, long-term relationships. With technology monitoring and audit rights, we are comfortable royalty reporting is accurate.

27/08/2021 Are you expecting machine sales to double this year and can you clarify comments on the cannabis opportunity?

Yes, Steve. For Q4, we not only have one but several large-scale sales opportunities. Our fiscal 2021 guidance was five large-scale machines and ten 10-kilowatt units. We already exceeded the 10-kilowatt target and are on track to meet or exceed the large-scale target. Looking ahead to fiscal 2022, our realistic goal is ten large-scale machines, driven by upscaling from current royalty licensees and new partners in both cannabis and food. On the smaller scale, based on the cadence of sales so far, we expect to increase that internal target to fifteen.

In the U.S. cannabis space, we have signed NDAs with companies operating more than 70 facilities. Meeting full demand there would require over 20 large-scale 120-kilowatt machines. While that assumes 100% saturation, it does factor into our fiscal 2022 guidance.

27/08/2021 What milestones do you expect in the Dole relationship to drive machine sales?

I need to keep details high level due to confidentiality, but I believe this partnership could become significantly material for EnWave within 12 months. Dole purchased a 10-kilowatt machine for production trials in several countries.

The goal is to gain confidence that leads to multiple large-scale lines for manufacturing capacity as they enter new markets. Dole is pushing hard to diversify into shelf-stable, better-for-you snacks. Beyond snacks, they are interested in ingredient processing, such as drying B- and C-grade produce or offcuts into functional ingredients. We see massive potential in both snack and ingredient markets through this relationship.

27/08/2021 Can positive EBITDA and net income continue given growth and added investment?

We had a very strong Q3, benefiting fully from cost reductions at NutraDried. We eliminated non-essential expenses and do not plan to add them back, which should sustain strong consolidated performance.

NutraDried also expanded sales channels by selling products in bulk for use as ingredients in snacks and trail mixes. New wins in this channel continue to support the turnaround. While there is still some work to do, we are about 80% through the turnaround, and we expect performance to keep improving without requiring higher spending.

27/08/2021 Can you comment on NutraDried’s performance, Moon Cheese velocity, and margin improvement?

We do not break down results by percentage, but velocities in regular grocery distribution are improving as conditions normalize. Shoppers are returning to multiple stores, which is driving higher units per store per week, back toward pre-COVID levels. The bulk sales channel also contributed, but even excluding that, velocities are trending positively.

Gross margin improved from Q2 to Q3 to about 20%. As operations normalize and capacity increases modestly, we expect margins to reach 30% to 35%. We also secured our first order from Lidl for 10-ounce cheddar, which is encouraging for club-style distribution. The only caveat is the potential impact of another COVID wave, but otherwise we are very optimistic about NutraDried’s continued turnaround.

27/08/2021 Will bulk cheese sales be broken out separately, and is this a stable business or lumpy?

Bulk cheese will remain a permanent channel. Quarterly results may fluctuate depending on order volumes from major customers. In this quarter, four customers accounted for most of the buying, so shifts in their orders can create quarter-to-quarter lumpiness.

Over time, as we add customers, the channel will stabilize and grow. There is significant interest in healthier snack inclusions, as innovation in trail mixes and similar categories has been stagnant. Bulk is just beginning to gain traction and we expect it to expand, even if individual quarters vary.

27/08/2021 How many of the 48 active licenses are paying royalties, and what is the outlook?

Roughly 10 licensees are slow to commercialize, using smaller machinery and still searching for their niche. Another 10 to 11 larger partners are accelerating royalty payments, while the remainder are growing modestly.

We expect three large-scale machines to be commissioned within the next two to three months, which should significantly increase royalty potential. We also aim to secure new large-scale orders before the end of Q4, with deliveries potentially boosting fiscal 2022 royalty revenue further.

27/08/2021 Are Q3 results indicative of performance in Q4 and fiscal 2022?

Our cost structure is stable, and we are optimistic about converting the pipeline into commercial success. If that occurs, results should remain positive and trending upward.

We have reduced expenses at NutraDried and built the tools needed to scale. The task now is execution, but everything is pointing in the right direction.

27/08/2021 When will AstraZeneca proof-of-concept work be completed?

That work is underway this week. We expect it to finish before year-end, though AstraZeneca may request multiple trial iterations.
If successful, we hope they will either acquire their own testing equipment or continue testing with us and our pharma partner GEA Lyophil.

27/08/2021 What is the potential size of the U.S. Army opportunity?

If funding is released as communicated for late fiscal 2022, we expect at least one large-scale machine, possibly two, to support two ration pack components already developed and approved.

Further application development is ongoing at Natick, which could expand opportunities across additional ration pack components. Multiple industry partners may ultimately produce these inclusions, but for now, we can only confirm a minimum of one large-scale machine next year.

16/12/2021 When will consistent positive EBITDA begin, Q1 or later?

Q1 machine sales are lining up more for Q2, Q3, and into Q4, so positive EBITDA should shape up in the second half. The NutraDried turnaround is still underway, and retailer commitments come three to four months before products ship, so that timing also points to the second half. Additionally, we have a fully fabricated 120-kilowatt machine with four suitors close to deciding, plus several partially fabricated machines. Revenue from those sales could be recognized in Q1 or Q2, which would help support results earlier in the year.

16/12/2021 What is the timeline and revenue impact for Crunchy Cheese Sticks?

We expect a 4 million to 6 million lift in revenue from retail growth tied to both Crunchy Cheese Sticks and our baseline snacks. This excludes larger club channel opportunities still in progress. Launch of Crunchy Cheese Sticks is scheduled for spring 2022, with the first marquee distribution at Whole Foods nationally in the U.S. The feedback so far has been stronger than prior Moon Cheese launches since the puff format is familiar to consumers and resonates with buyers.

16/12/2021 Can more than three large machines be sold to new customers outside the base?

Yes, we believe that is feasible, particularly with momentum in the U.S. cannabis industry. Our large-scale line in Illinois is operational, and prospects have seen it firsthand. A second installation will be completed early in Q2, with that partner also endorsing our technology. These references have led to new material engagements, many tied to facilities under construction for next fiscal year. We expect these prospects to move forward in Q2 and Q3.

16/12/2021 When might NutraDried need a third machine?

We expect feedback on larger opportunities by mid-fiscal year, which will guide a decision on capacity needs in the latter half. This ties to both our branded business and bulk opportunities with major dairy companies that would require co-manufacturing capacity at NutraDried or with partners like Gailey Foods.

16/12/2021 Can you provide details on the Dole partnership and upcycling projects?

Dole’s “Sunshine for All” plan targets significant waste reduction by 2025, and they see REV as a key platform to achieve this. We expect several large purchase orders tied to two projects within the next three to four months. The first involves healthier snack products, which we hope will hit the market in fiscal 2022 and generate royalties. The second focuses on upcycling waste material in Southeast Asia. The scale of these opportunities exceeds what we have seen with other CPG partners, and we are helping Dole prepare manufacturing capacity in collaboration with additional service providers. We expect royalties from Dole commercialization this year.

16/12/2021 Will royalties exit fiscal 2022 at materially higher levels?

Yes. Royalties in Q4 were 245,000, up 28% from Q3, driven by additional commissioning and partner ramp-ups. One large-scale machine is already commissioned in U.S. cannabis, and another will be commissioned in six to eight weeks. With more deals closing, we anticipate substantial quarter-to-quarter growth in royalties through next year.

16/12/2021 What is the guidance for machine sales and royalty ramp-up?

Guidance remains unchanged from Q3. We target 10 large-scale purchase orders of 60 kilowatts or greater and 15 sales of 10-kilowatt entry units in fiscal 2022. Most purchase decisions should occur in Q2 and Q3. From a royalty perspective, all 540 kilowatts of machinery purchased in fiscal 2021 should be installed by Q3, leading to a material uptick in royalties compared to fiscal 2021 on a quarter-by-quarter basis.

16/12/2021 What is the background on the PiP International evaluation agreement?

This opportunity came inbound. PiP wanted to reduce drying temperatures to limit protein denaturation in products made via wet fractionation. Initial trials at our Vancouver innovation center produced favorable results, leading to a 10-kilowatt evaluation unit at their Lethbridge facility. They will decide in Q2 or Q3 whether to commit to large-scale machinery after further trials. We are dedicating resources to this project and will only pursue additional business development once PiP proves this is a game changer for the industry.

16/12/2021 Is NutraDried developing non-cheese products and are any ready to launch quickly?

Yes, we have several internally developed products with positive economic analysis. These are being shopped to potential royalty partners, some already engaged outside North America. If no partner steps up, we expect to launch additional products through NutraDried in fiscal 2022, potentially beyond dairy. One example is a yogurt snack previously tested by Ultima before Agroper chose not to invest in large-scale production. We now have capacity at REVworx and NutraDried to produce it, and will run a line trial in Q2. If successful, a launch could follow in the second half of next fiscal year.

16/12/2021 Why shop new product concepts to partners instead of keeping them in-house?

If a larger brand can establish distribution and sell significant volumes of REV-dried products, that accelerates royalty growth, which is our main objective. Building out a brand internally requires more resources, so where possible we prefer to leverage established players. That said, NutraDried still provides us with a platform to launch select new products directly when the opportunity is compelling.

25/02/2022 What is the expected magnitude of inventory build on machines and products in Q3 with larger programs?

We will not build inventory on the Moon Cheese side, as current levels are sufficient until Costco programs require product buildup. That can take a couple of months of production to prepare for shipments. On the EnWave side, global supply chain challenges and delays from key suppliers have led us to build ahead. We have already started building 220-kilowatt REV systems on spec and ordering components. We expect to sell these systems before they are finished, but in preparation we are committing about $1 million to $1.5 million in additional working capital. The order pipeline is robust, so we anticipate deploying capital efficiently.

In terms of prospects, we have clear sightlines on where these machines will be needed, which is why we are starting to build inventory now.

25/02/2022 How many cannabis machines could be deployed to existing versus new customers?

In cannabis, we could potentially deploy another four machines to our two existing licensees as they expand across multiple states. Regarding our goal of ten large machine purchase orders this year, five to six are likely repeat orders, and in fact, the mix could easily shift toward 100% repeat. It is too early to know for certain, so while the target is aspirational, repeat orders will likely form a significant part of our growth.

25/02/2022 What milestones are needed before Dole can commit to larger machine purchase orders and what is the expected timing?

Dole is actively evaluating the business case for producing several products in a key region and then shipping globally. Their business case analysis should conclude within one to two months. From our perspective, the key milestone is commitment to a first large-scale purchase order. They currently own two 10-kilowatt units, which are being used to accelerate production and conduct market trials.

If we receive their first large machine order, the expectation is that many more will follow to meet the volumes needed for multiple identified markets. A go/no-go decision is likely within the next quarter or two, though final timing will depend on market outcomes.

25/02/2022 How quickly can REVworx capacity be filled and what visibility exists on utilization?

It is still uncertain. Some large supply deals with current royalty partners could alone consume nearly 50% of capacity. Internally, our target is at least 60% utilization by fiscal year-end, with upside possible if deals close sooner.

The facility is only now coming online, and customers need to audit it and confirm quality standards before negotiating pricing. We are optimistic about building meaningful business and using the facility as a key sales tool to sell more machines and drive royalty growth. That said, we must be realistic and take a gradual approach with REVworx.

I am disappointed, of course, it is not economically
applicable, but it's corn. I mean, it's -- even smaller farmers with small amounts of land, employ
natural gas and furnaces to cool or heat to dry that corn.

25/02/2022 Has your REVworx approach changed between targeting new customers and servicing existing ones?

It remains a hybrid approach. REVworx is available to both current and prospective royalty partners. Our sales team is courting new users that may lack capital to buy equipment upfront, but we also see growing opportunities to service current partners. Initially, we focused on new customers, but proximity to raw materials in North America has created opportunities with existing partners that make more sense than processing in regions like Southeast Asia.

25/02/2022 How are royalty top-up payments evolving, and do they indicate stronger client commitment?

Some licensees consistently pay top-ups to preserve exclusivity after investing heavily in their brands. Others experiment with products, then conclude exclusivity is less critical, leading to a mixed outcome. Each year, a few partners repeatedly pay to stay exclusive, while others shift between exclusive and non-exclusive status. All licenses include performance thresholds, with royalty and machine purchase requirements tied to exclusivity. As our license portfolio grows, the number of partners making these decisions increases, so the volume of top-up payments should rise, though trends vary by partner strategy.

25/02/2022 Has the sales cycle changed and can you build a regular production flow despite customization?

For 10-kilowatt units, we already target building one to two machines per month to meet anticipated demand. These units are primarily for new licensees to validate applications and test minimum viable products before scaling. Larger food-industry units follow the same path, with scale-up happening over a longer timeline.

In cannabis, the 120-kilowatt model is most in demand, and we are currently building two units on spec. These systems are not highly customized, allowing us to create repeatable builds and stay ahead of supply chain delays. With clarity on partner decisions in the next one to two quarters, we expect greater predictability in scaling additional 120-kilowatt units.

25/02/2022 What is your maximum production capacity for large units in the next 12 months?

We can scale production as orders come in. Building eight to twelve large-scale machines annually is achievable. Our third-party suppliers can expand with us, and we have access to skilled labor through contractors or full-time hires to meet demand.

25/02/2022 How prepared are you to meet a potential surge in demand from cannabis and Dole?

We maintain transparent discussions with key executives, giving us clarity on their plans and timelines. With Dole, we have strong visibility into when decisions will be made, allowing us to prepare internally. In cannabis, we have good visibility with existing partners, while with new partners the focus is on closing the first large deal. Once the first machines are commissioned and proven at scale, we anticipate follow-on orders.

25/02/2022 Can you disclose how many units Dole may seek in the next 12–24 months?

I cannot share that, as it is confidential and would require Dole’s consent.

25/02/2022 What is the royalty ramp outlook for 2022 and timing of growth?

We had strong royalty growth in Q1 and expect it to continue into Q2, as we will commission two, possibly three large-scale machines in the coming months. Each new installation adds to our royalty portfolio. In the latter half of the year, we see line of sight on up to eight more large-scale machines, with at least a few deployed before year-end. This will drive a clear ramp into the second half, particularly Q4.

Our guidance remains royalties of CAD1.5 million to CAD2 million for 2022, with most growth in the back half as cannabis machines come online. Cannabis generates royalties faster than food because products are proven and markets already exist. It is a matter of integrating our technology to deliver premium flower quickly, without the market build-out required for food.

25/02/2022 What is the update on the U.S. Army Ration Project?

The last communication from the U.S. Armed Forces confirmed that funding for additional machinery was approved last year. They anticipate releasing funds during this calendar year. We are waiting for confirmation to proceed and are ready to deliver more machines, given the internal progress they have made with applications for their warfighters.

25/02/2022 What is the progress on pharmaceutical applications?

We entered a joint development agreement with Gaya Alpha, a leading freeze dryer equipment provider. This collaboration is bearing fruit, with most of the top ten pharmaceutical companies either scheduling or already conducting trials in Germany on equipment purchased from EnWave.

The next step is more robust trials with the possibility of Gaya delivering larger-scale continuous Vacuum-Microwave GMP equipment. If that occurs, EnWave will earn a percentage of revenues from those machines. This represents a way to monetize our technology in pharmaceuticals with minimal investment, and the current pipeline of interest looks very strong.

27/05/2022 How is revised revenue guidance affected by existing versus new customers?

Thank you for the question, Neil. The large-scale purchases we expected in fiscal 2022 that shifted into fiscal 2023 are mainly tied to existing cannabis partners. Earlier this year, they told us they needed to expand manufacturing capacity. However, more recently, in just the past few weeks, they have communicated delays in constructing new facilities that would house the new units.

Hence the reduction in the number of large-scale machines targeted for this year. That is the primary reason.

23/08/2022 Can you update on Costco, Walmart, and other cheese customers, including inventory builds and sales timing?

So starting with Costco, it is always inherently lumpy. We are working to earn new Costco business, but in Q3 we did not have any sales. There are proposals out that could materialize, more likely in fiscal 2023. The largest stock-up I mentioned came mostly from distributors, not retail customers. They bought ahead of our May price increase since they can carry higher inventory and buy on deal.

That stock-up hurt subsequent month sales, but based on what we know we believe we are through the worst of it. It should shape up better into the fall and is not a permanent effect. We know distributors stocked heavily in April and May, and that will not last forever.

23/08/2022 Should we expect lumpy Walmart orders in Q4 or Q1, and what about Kroger and Whole Foods rollout timing?

We launched into Kroger in the spring, which was Q3, and sticks into Whole Foods also in Q3. In Q4, there are not many new rollouts, so results should look largely comparable to Q3. Looking to the new year, Walmart has confirmed sticks going into 300 stores. We also have a couple of private label opportunities that should start delivery in fiscal Q1.

There is a list of additional distributors that the team is working to secure, but until they are confirmed we cannot disclose details.

23/08/2022 Can you update on REV unit rollouts and key customers like Dole?

The U.S. cannabis market is contracting, similar to Canada, and higher dairy prices have delayed scale-up decisions by international dairy partners. These delays should ease as prices normalize, hopefully leading to conversions in fiscal 2023.

As the fiscal year ends, we have tangible leads on both large and small machines to hopefully confirm soon. Dole bought a 120-kilowatt machine for its snack program, with potential opportunities in the ingredient division. Their traction in the market could drive increased manufacturing capacity. Dole, along with partners like Calbee, could scale quickly if demand builds. We are committed to supporting their R&D group to bring new products to market in the coming quarters.

23/08/2022 Will you announce new deals before fiscal year end to meet guidance?

We aim to close large deals with current royalty partners who have smaller scale machines already in market. As their products gain data and traction, they can commit to larger scale machinery, making these partnerships more material.

23/08/2022 Has there been any change to U.S. Army Rations machinery purchases, and what is causing delays?

We have been told that funding was approved to introduce a cheesecake ration in 2023 and should be released this calendar year. The U.S. government operates on its own timelines, so we are waiting for release before moving forward.

Concurrently, we are working with other U.S. Army industry partners to develop additional ration inclusions. These could represent the next wave of products and support further funding opportunities.

16/12/2022 What is the 2023 sales pipeline guidance for REV?

We are not providing formal guidance this year, other than to say we intend to do better than last year. As I mentioned earlier, two macroeconomic factors affected our ability to meet guidance last year.

Our pipeline remains robust, and we will work to close as many deals as possible under current circumstances.

26/05/2023 When could EnWave realistically reach 60 commercial licensees tied to future royalty growth?

We believe that within this fiscal year there is a possibility of adding multiple additional commercial license partners and reaching the 60 mark. We are not holding ourselves to a specific number, but focusing on the quality of the companies we partner with and the scale of machinery deployed, including repeat orders from established partners. These relationships are most likely to succeed, as their products are already in the market and consumer uptake has been positive.

26/05/2023 Is there any news on pharmaceutical prospects or partners?

Yes, but this is being managed through our joint partnership with GEA Lyophil, a leading OEM in pharmaceutical freeze-drying equipment. Together we have positioned a microwave-assisted lyophilization process and built a pilot plant in Germany, where several top-tier global pharmaceutical companies have conducted trials. The goal is to progress this into a meaningful commercial project, though there are no further details to share at this time.

15/12/2023 Do you have internal measures for defining material royalty growth, and should investors expect single or double-digit growth?

We still forecast double-digit royalty growth in the coming periods. Our last quarter had about CAD400,000 in royalties, which we view as a baseline for 2024.

In terms of products already going to market, there is no lag in volumes from business-to-consumer channels. Distribution is filling quickly, and we should see immediate royalty growth from partners like Dole and others.

15/12/2023 How predictable is royalty growth given partnerships and machine commissioning?

It is always difficult to predict royalty growth because it depends on machine commissioning and partner success. That said, we continue to project strong royalty growth as more machines come online.

15/12/2023 Do you emphasize the royalty portfolio and growth potential when communicating with capital markets?

Absolutely. We highlight the royalty portfolio, intellectual property strength, and projected royalty growth from blue chip partners in all our communications. With the divestiture of our loss-making subsidiary earlier this year, EnWave is in a stronger position, and we want to ensure markets recognize that as we deliver operationally.

23/02/2024 Overview of U.S. cannabis market outlook

Brent Charleton: The opportunity for us in the U.S. cannabis market is not just about favorable federal legislation. More importantly, it depends on engaging with competent operators who have the capital to conduct trials and test work. We shifted strategy by offering 10-kilowatt units to major multi-state operators, but many were too focused on stabilizing their businesses and cutting expenses.

Brent Charleton: In the past three to four months, we have seen more feedback and interest. Recently, we announced Aurora, a U.S.-based cannabis company, will trial our product. We anticipate additional projects this fiscal year, including with larger companies, as the industry begins to stabilize and operators see calmer waters ahead.

23/08/2024 What is the targeted royalty rate for next year?

It would be premature to provide guidance for next year. Timing depends on when purchase orders are received and when customer facilities are ready to accept machines. Even if we can build a unit in six months, installation and product development can delay royalty growth.

In a best-case scenario, if products are already in market and the machine simply adds capacity, royalty ramp-up can be faster. For now, we are only providing guidance for the current fiscal year and will reevaluate after next quarter.

24/02/2025 When do you expect EnWave to breakeven?

We expect to reach breakeven or better this fiscal year. Results vary quarter to quarter. If we close multiple large-scale sales, we can generate significant profitability, as opposed to a slower quarter like Q1. Based on current opportunities, profitability could return within the next couple of months.

22/05/2025 Why were there no exclusivity-related royalties paid for Q2?

The majority of our exclusivity top-up royalty payments, which occur when a company pays a minimum royalty to retain exclusive rights over the technology for a product in a certain geography, are typically paid in Q1 at the end of the calendar year. That is why we usually see the top-up then. Last year, one of our royalty partners signed a contract for exclusivity in a separate country, and that payment was made in Q3.
We expect a similar timing this year, with a payment in Q4 as well as in Q1, consistent with past exclusivity payments.

22/05/2025 What is the status on the pharmaceutical front?

We continue to operate our joint partnership with GEA Lyophil in Germany, who purchased a pilot-scale unit from us to showcase to their large pharmaceutical company partners. Several evaluations are ongoing with the goal of attracting a consortium or a single pharmaceutical company to invest in scaling up a continuous GMP-certified vacuum microwave dryer to displace lyophilization. This requires both CapEx and a commitment by a pharmaceutical company to select a drug under development for the process.

In parallel, we announced a master service agreement with Bio Technique. They visited our facilities last week to conduct trials using a derivative of a flu vaccination, and initial results were favorable. These results will now be shared with Bio Technique’s client, and if they move forward, the next likely step would be for Bio Technique to purchase their own pilot-scale equipment for ongoing trials. This is the current status of our pharmaceutical efforts.

22/08/2025 Can we expect an acceleration in REV machine sales from existing or new customers?

Yes, I expect acceleration in REV machine sales through the rest of this quarter and into fiscal 2026, given the strength of our sales pipeline. About 50% of opportunities appear to come from existing royalty partners purchasing additional machines because they have exceeded current manufacturing capacity due to growing demand. These repeat orders are important because, once machines are operational, they tend to accelerate royalty growth faster than new projects where adopters still need to build marketing, distribution, and product integration. This puts the company in an exciting position.

22/08/2025 What is the biggest obstacle to faster growth for EnWave, and how is it being addressed?

The technology is mature, and the economic models are attractive enough to commercialize products across multiple verticals. There is not one single obstacle, but rather a range of challenges that arise at different points in projects, such as management turnover, counterparty restructuring, or decisions on product strategy, whether commoditized goods or premium offerings. These discoveries happen during dialogue, and success depends on addressing each issue quickly to convert projects into growth faster.

Risks & Macro

11/12/2019 Are cannabis partner delays affecting royalties or manufacturing?

Some machine installations tied to cannabis partners have been delayed due to infrastructure build-outs, which will slow royalty uptick. However, all partners intend to use the equipment they purchased. While the Canadian cannabis market has slowed, international opportunities remain strong. For example, we signed a new license in New Zealand this morning.

11/12/2019 Are delays limited to one partner and relatively minor overall?

Yes. With Aurora, we continue building machines around expected timelines. For TGOD, given financing challenges, we are prudently managing builds and cash collection, having collected more cash than spent on their three machines. Their 60-kilowatt unit for Ancaster has already been delivered and should start up in Q2.

01/03/2021 How is COVID still impacting your business, and what should ease in the next six months?

We believe travel restrictions will continue to ease, making it much easier to send employees for commissioning and training. We recently had staff in Peru and Costa Rica, but access to Europe and Australasia is critical for near-term purchase order opportunities.

Other than that, the pipeline sentiment is very positive. Companies are becoming more comfortable operating in these circumstances. Unlike mid-2020, we are now very bullish on the next year of growth for EnWave.

01/03/2021 Could your technology improve vaccine production during the pandemic?

It is too early to target such a goal. We are collaborating with Merck and GEA on scaling machinery used for vaccine testing. Merck will provide robustness test results later this year, and if successful, we will work with GEA to deliver a larger unit for potential Phase 1 clinical trials.

16/12/2021 Did recent severe storms in Vancouver impact operations?

The storms did not affect our company’s core functions. Some suppliers experienced delays in providing basic components, but we relied on backup suppliers to cover needs. We remain focused on building more robust redundancy in our supply chain, since extreme weather events like this can occur at any time.

25/02/2022 What is the status of litigation against former employees?

The injunction hearing took place about five weeks ago, with submissions presented to Justice Bazrin. He has not yet ruled on whether to uphold the injunction. As of today, the injunction remains firmly in place, preventing defendants from pursuing their efforts further.

27/05/2022 Are cheese prices stabilizing or inflating, and can you pass increases to partners?

Yes, we monitor cheese prices constantly since it is NutraDried’s number one input cost. Compared to last year, prices are up 30% to 35% in many cases. Futures are lower than today’s spot prices, which gives us hope that prices will decline toward year end. Of course, the world is changing quickly, and any shock could reverse that trend. But based on current futures, we expect relief later this year, even though spot prices remain high today.

In terms of passing pricing through, the consumer packaged goods industry only allows limited increases, otherwise consumption suffers if you fall out of line with competitors. We implemented a 6% increase this month, which we feel is appropriate for now. We will continue watching pricing and competitors, and we will take further action if necessary. If futures align, we should be in a better place.

16/12/2022 Are energy prices a problem for customers?

In some parts of Europe, rising energy prices add cost since electricity is a major input. However, electricity typically accounts for less than 7% to 8% of the cost of goods sold for primary food products. It is a consideration, but not materially significant in most cases.

23/02/2023 What is the cost of the legal challenge with former directors and how much is budgeted?

We budgeted several hundred thousand dollars but expect to spend less based on current developments. The defendants recently changed counsel after multiple setbacks. We remain confident in defending EnWave’s business, protecting our intellectual property, and holding these individuals accountable.

25/08/2023 Any news on the lawsuit against former employees?

Brent Charleton: There has been progress in settlement discussions. Some agreements will soon become public, though not with all parties. Through these settlements, we will gain access to communications that will further strengthen our position.

15/12/2023 Any updates on the civil litigation with former management employees?

We have settled with two primary defendants not tied to EnWave and received substantial new evidence to support our case. The primary defendants, former EnWave employees, remain under injunction and recently changed counsel, delaying the court date to 2025. We are continuing preparations and remain committed to pursuing justice.

24/02/2025 What is the potential impact of tariffs, especially with U.S. partners?

Thanks for the question, Donangelo. Potential tariffs would not directly impact the imminent machine sales in our pipeline, as the two companies involved are domiciled outside of the United States. What could be more impactful is how our royalty partners manage their ability to import snacks and ingredients into the U.S. for their customers. That remains to be determined depending on the scope of any future tariffs the U.S. may or may not implement.

23/04/2025 What tariffs apply to your machinery?

Our machinery falls under the United States-Mexico-Canada Agreement (USMCA), so tariffs are 0%. Our most recent large-scale sale was into the U.S. without any penalty to the buyer.

Personal Questions

23/04/2025 What is insider ownership?

Insider ownership is just under 2%. I grew up in this business, joined 15 years ago as a marketing coordinator, worked in capital markets, began selling machines, and was promoted to CEO in 2018. I am heavily compensated through adoption programs. Our chairman also invested significantly during developmental years and holds about 2.5 million shares. We would like to own more, but Vancouver is expensive, and raising a young family while buying more stock is challenging.

Other

27/08/2021 Do you plan to improve access for U.S. retail shareholders to trade EnWave stock?

Yes. We are conducting due diligence on the best option to improve access for U.S. retail investors beyond the current over-the-counter structure. Updates will follow in the coming months.

23/08/2022 Do you have any closing comments for the audience?

I want to thank everyone who joined our Q3 conference call. If there are questions that were not addressed today, please reach out to Dan or me in the coming days. Thanks very much.

23/02/2023 Will you provide ongoing updates on NutraDried’s wind down or only quarterly?
We will announce all material developments as they occur. I referenced some of these earlier in the presentation and expect more near-term updates during this process.

Disclaimer:

The following transcript and Q&A have been generated with the assistance of Artificial Intelligence (AI). While we strive for accuracy, completeness, and clarity, the content may contain errors, inaccuracies, or misinterpretations. Neither the company featured in this document nor ValueBridge assumes any responsibility or liability for the accuracy, reliability, or completeness of the information presented.

This material is for informational purposes only and should not be construed as official company communication, financial advice, or a definitive representation of the company's views. Readers should independently verify any information before making decisions based on it.

Sources

Earnings Calls

Kits Eyecare is a vertically integrated, digital-first optical company founded in 2018 and listed on the TSX in 2021. It manufactures its own glasses at a Vancouver lab and sells eyeglasses and contact lenses across North America. The company leverages a recurring customer base, with over 60% of revenue from repeat buyers, and has scaled from zero to a $140 million run rate within six years . Eyeglasses are the largest growth driver, a market roughly 10x the size of contact lenses, and glasses revenue has grown over 40% year-on-year . Contact lenses remain profitable, with Kits-branded dailies achieving 50% year-on-year growth and roughly 50% gross margins . Marketing is kept at 12–14% of revenue, supported by word-of-mouth, influencer marketing, and referral programs. The optical lab has capacity for over 4,000 pairs per day, currently operating at about one-third utilization . Internally, Kits targets $200 million revenue, 40% gross margins, and 10–15% EBITDA within two years , with a longer-term goal of $500 million revenue and 15–20% EBITDA within five years .

Catalysts & Milestones

2021 - Listed on the Toronto Stock Exchange

2022 - Revenue run rate near $100 million; adjusted strategy toward EBITDA and cash flow

2023 - Consecutive quarters of 38% growth and adjusted EBITDA profitability

2024 - Revenue run rate at $140 million with positive adjusted EBITDA

2025 - Internal target: $250 million revenue run rate with 10% EBITDA

2030 - Internal target: $500 million revenue run rate with 15–20% EBITDA

Investment Highlights

• Over 60% of revenue from repeat customers ensures strong retention

• Eyeglasses market is 10x larger than contacts, fueling long-term growth

• Branded contact lenses in “50-50 club” with 50% growth and 50% margin

• Optical lab capacity supports $200 million+ revenue without major CapEx

• Internal goal of $500 million revenue run rate with 15–20% EBITDA
  
  

Future Growth Drivers

• Expansion of glasses franchise, including digital progressives and premium lenses

• Kits-branded daily contact lenses scaling rapidly with strong profitability

• Insurance integrations with Sun Life, Green Shield, and U.S. expansion in 2025

• “Own This Town” hyperlocal marketing model boosting brand awareness

• Smart glasses and other product innovations broadening category reach
  
  

Risk Factors

• Reliance on promotions like “First Pair Free” may compress near-term margins

• Capacity ramp requires sustaining demand; current utilization only 10–15%

• Insurance integration timelines can take over a year, slowing adoption

• Competitive discounting from peers like Warby Parker and LVMH entering glasses【8†Documento sem nome (6).pdf】

• Marketing discipline crit–35%** of revenue vs. Kits’ 13–14%

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Capital Allocation

11/08/2022 Do you plan to increase marketing or promotional spending?

We reached an inflection point in the glasses business this quarter, growing significantly while marketing spend decreased 23% year over year. Word of mouth has been the strongest driver of growth, with customers sharing their experiences. We will continue to invest in that dynamic. Marketing investment will remain consistent as a percent of sales in the back half of the year.

13/12/2022 How will you use your $20 million in cash?

Over the past six months, we have focused on funding our own growth through operations. Now, with two consecutive quarters at this level, we are excited about further growth, particularly in glasses. Most capital expenditures for our lab are already complete, and capacity remains for expansion. We will continue to keep a healthy balance sheet so we can be opportunistic when growth opportunities arise.

13/12/2022 You’ve been a significant buyer of your stock. What are your thoughts on price and what should investors focus on?

The category is compelling, and with so much uncertainty in the world, I like to focus on what I know. We are growing faster than the category and faster than competitors, with accelerating growth. Our team continues to deliver, and I am impressed by their progress. That gives me confidence to keep buying. I know what I sold Coastal for in 2014, and valuations have only increased since then. I believe we can build another $200 million revenue business and sell for more than half a billion.

I have no hesitation buying at $2.50 or $2.60 and will continue to do so. With strong recurring revenue, a seasoned team, and $20 million in cash, the business is undervalued. Management and insiders hold about 76 percent of the stock, and I expect even more insider participation going forward. We are heavily invested alongside shareholders, and we believe strongly in what we are building.

29/02/2024 Will growth be funded from cash flow, or do you expect to raise more capital?

We expect to fund growth from cash flow. Insider ownership is high, close to 80%, which aligns us with shareholders but results in a small float and limited liquidity. Our IPO issue price was $8.50, and we are approaching that level again. We believe once the stock sustains above the IPO price, liquidity will improve naturally, creating future opportunities.

Our capital structure is intentionally simple, with only one equity raise at the IPO in January 2021. As of the last quarter, we had $18–19 million in cash, a small debt balance with the BDC, and no other significant liabilities. We are comfortable continuing to grow organically without additional capital raises.

29/02/2024 You have held about $20 million in cash for six quarters. How do you plan to invest it?

Maintaining a strong cash balance was important, particularly over the last 18 months, to show the market that we could fund growth from cash flow. Our focus now is on building out our glasses selection, seeding the next wave of customers, and introducing our glasses line to our active contact lens base.

06/03/2024 How do private multiples for optical labs look and is international expansion planned?

We continually evaluate opportunities but remain focused on the $76 billion North American market, which provides ample growth. Nothing is imminent on M&A. We have reviewed many opportunities, but private market valuations have not corrected to levels we would find attractive. Any deal would need to be highly accretive. For now, the best return comes from investing in Kits itself.

03/06/2024 How are you managing your growing cash position?

We’ve consistently ended each quarter with $18–20 million in cash, maintaining a strong balance sheet that gives us flexibility as we grow. The one area we won’t deploy cash is into marketing without a clear path to revenue generation.

Instead, we are exploring ways to expand our product selection, particularly within eyeglasses, and evaluating adjacent opportunities such as integrating hearing aids into eyewear. We receive frequent inbound requests in these areas, and we see them as promising avenues for long-term growth.

03/06/2024 How are you addressing concerns about low stock liquidity?

Our team and employees own about 78% of the float, which creates tight liquidity. A year ago, we considered raising equity once the stock reached $8.50 or $9.00 to address this. However, our thinking has shifted. With organic growth of 25–30% compared to industry growth of 3–5%, positive adjusted EBITDA, and deployed capex, we see no reason to raise equity at today’s valuations.

We believe this is a $15–20 stock opportunity and prefer to maintain a tight float while continuing to execute. Our focus is on rewarding existing shareholders through consistent performance rather than diluting equity for liquidity’s sake.

03/06/2024 Do you see opportunities for mergers and acquisitions?

Yes, we see many opportunities and receive frequent inbound interest. Our previous company, Coastal Contacts, made several acquisitions, so we understand the process well. For now, most opportunities are private companies whose valuations are still adjusting, so timing is important.

Any deal must be accretive on day one. At our current run rate, we trade at about 1.2–1.3 times revenue, so we would only consider acquisitions at lower multiples. We also need confidence that we can increase customer basket size and take significant G&A savings to the bottom line. Until those conditions align, we remain patient and focused on organic growth.

07/08/2024 Is there a prepayment penalty on the BDC loan and will you consider refinancing before 2026?

Currently, there is no prepayment penalty on the BDC loans. From a capital allocation perspective, we always look to maximize value for stakeholders and shareholders. While there is nothing firm on the table right now, we are consistently evaluating opportunities, including refinancing, if they create value.

06/11/2024 Was recent CapEx spend for capacity expansion?

Yes. We were pleased with premium lens growth, including digital progressives and SunRx, both growing above 60%. To support demand, we invested in expanding our surfacing and coating line. The new machinery requires 30% less labor and significantly expands capacity.

This investment has already yielded results, but going forward CapEx will remain stable at or below 1% of total revenue, consistent with 2023 levels.

10/02/2025 In October we saw sales from several senior managers near all-time highs, any reason?

We have only done one equity raise, which was our IPO in January 2021. That left insider ownership at about 79%. There was constant market feedback on that, so as a release valve the team did a minor secondary of just over $10 million. This modestly reduced insider ownership to around 75%. The team still feels very strong about the opportunities ahead and we remain very happy shareholders.

10/02/2025 With an NCIB in place, will you continue share buybacks?

We have had a normal course issuer bid for several years but rarely acted on it. In hindsight, we missed opportunities when the stock was at two or three dollars. We will not make that mistake again. Recently we did a small buy of about 25,000 shares. If we see the company trading at a significant discount, we will act again. We are not afraid to use the NCIB when it makes sense.

05/03/2025 With cash accumulating and debt declining, what are your capital deployment priorities, M&A, dividends, or buybacks?

Capital is building, and we want to be productive with it. We have looked at potential M&A but do not see opportunities that excite us at current pricing. For any deal, it must be accretive, which is difficult since few businesses are growing at 30% to 40% with expanding gross profit and EBITDA. Most acquisitions would be a drag unless strong synergies exist.

Given that, our best use of capital is likely our own stock. We repurchased shares last quarter under the NCIB and may continue. Phase one is finishing debt repayment, now under $5,000,000. Once that is done, we will consider further buybacks or other productive uses.

13/03/2025 How will Kits use future cash flow, and what about M&A?

We see multiple options. On M&A, we apply strict criteria: any deal must deliver a block of vision-corrected customers at lower cost than acquiring them directly, allow us to expand basket size, improve adjusted EBITDA by taking G&A to the bottom line, and not distract from our core business. To date, we haven’t found one that meets those standards, though we may in the future.

For now, our focus is on whether the best investment is Kits itself or something external, and so far the answer has been Kits. That has led us to pursue initiatives like buybacks while keeping strict discipline on growth investments, always balancing opportunity with shareholder returns.

13/03/2025 How will you deploy capital going forward, and what is your stance on share buybacks?

Our approach has overwhelmingly been to reinvest in the business. With 35% growth, $13 million in cash flow from operations, and 4% adjusted EBITDA last year, we see strong returns by expanding selection and investing in quality. We could cut frame costs, but we prioritize delivering a perfect product, strong hinges, flawless lenses, and durability. We are also continuing to scale the “own this town” rollout, eventually moving to two or three cities at once, though we will do so patiently.

On share buybacks, if opportunities arise, we will act. We missed one when the stock was $3 a couple of years ago, and we will not make that mistake again. If we see the stock below a certain threshold, we will allocate capital to repurchases, balancing that with growth investments.

06/08/2025 How are you able to expand to 12,000 styles without burdening cash flow?

We are delighted to increase selection for customers. Unlike legacy brick-and-mortar chains with hundreds of stores, our digital-first model allows us to go wide on selection but shallow on inventory, led by customer demand and browsing behavior. This flexibility means we can expand variety without tying up cash in large stockpiles.

Each quarter we get better and more efficient at managing inventory. As an example, in Q1 levels were higher, but in Q2 we reduced inventory by about CAD 4,000,000 quarter over quarter, delivering on our commitment to lower working capital burden while still expanding choice.

Competitive Advantage

13/12/2022 Do you focus on profit or growth at this stage?

The category remains very compelling, and our original hypothesis was that health care and technology needed innovation here. By placing ourselves at the center of that, we created a differentiated model where we manufacture ourselves and control quality at every step. That creates a strong customer experience and organic growth. We are also looking for opportunities to consolidate other players at the right price, with cash on the balance sheet and the business producing cash.

Our model has been more efficient than peers and has outperformed the sector, consumer, and e-commerce benchmarks. Growth has been accelerating since Q3, after a temporary slowdown earlier in the year tied to COVID variants. We feel good about the run rate and the long-term opportunity.

13/12/2022 Are there product segments you do not offer compared to brick-and-mortar?

The main difference is we do not invest millions into physical stores. Our view is the category will shift further online, as customers already know the frames and sizes they want without waiting in-store. Instead, we invest in customer experience, offering selection, savings, convenience, and delivery within a day or two. Vision is non-discretionary, so speed and reliability matter most. This model has driven us to outperform both the category and competitors like Warby Parker.

10/05/2023 What dynamics are driving your outperformance versus the optical category?

We see a secular shift of customers moving online from brick and mortar, which accelerated during the pandemic and continues today. Customers want the industry to be easier, fair pricing, faster delivery, and better product quality. When orders arrive within one or two days at a fair price and fit perfectly, customers are impressed. We have invested to scale that experience, aiming to double revenue within existing infrastructure, and we remain encouraged by the number of customers adopting online.

08/11/2023 How should investors think about next steps toward long-term adjusted EBITDA targets?

We feel strong momentum in taking share and running the business without legacy infrastructure or costs. We are pleased with sustaining single-digit adjusted EBITDA as we grow. There is significant leverage in the model, and you have seen efficiencies begin to flow through to EBITDA and net income. Our focus is on serving customers and making eye care easy. As more people experience our brand, they become advocates, creating a network effect that supports growth.

Over the next several quarters, we expect continued growth and efficiency. Our operations can at least double with limited capital expenditure, so the bottom line should scale alongside revenue. We have built this model from the ground up for this moment, and we believe it is the best in the category. We are reinvesting cash flow from organic growth and maintaining a strong cash balance, which remains our priority going forward.

08/11/2023 Will glasses revenue continue incremental growth or reach an inflection point?

We believe it is still very early for the glasses business. As critical mass builds in certain markets, customer referrals begin to take effect, marketing spend decreases, and network effects emerge. We are seeing this in only a couple of markets so far, but once established, we can replicate it in many others.

The opportunity is very large, with many markets to penetrate. It remains early, but we expect compounding growth as network effects take hold.

29/02/2024 What is Kits’ competitive advantage beyond price?

Our focus is on maintaining the lowest cost infrastructure and manufacturing high-quality products ourselves. We avoid the heavy cost burden of 45,000 brick-and-mortar optical stores across North America, own our manufacturing instead of outsourcing, and are building scale in fulfillment to deliver within one to two days. Repeat customers, who represent over 60% of revenue, reduce marketing expense and allow us to run promotions like $28 prescription glasses or even first-pair-free campaigns. Serving a customer costs us about $30, which we’d rather invest in the customer than pay to social media platforms. Combined with decades of experience in this category, this model keeps customers coming back multiple times.

29/02/2024 What percentage of revenue comes from repeat customers?

In the last reported quarter, 64% of revenue came from repeat customers. Our benchmark is 60%, which we view as a test of the strength of our model. If a business in this category relies too heavily on new customer acquisition, it becomes less efficient. Alongside this, we track net promoter score, which measures how likely customers are to recommend Kits. Our benchmark is 85 or higher, compared with Amazon’s 82, and we focus on maintaining the lowest cost infrastructure and highest customer satisfaction to drive repeat behavior.

08/05/2024 How effective is the virtual try-on tool in driving purchases and reducing returns?

The virtual try-on excites us because it helps customers explore more of our selection. A typical retail store offers 150–300 frames, but in Q1 alone we added 384 new styles online, giving customers over 2,100 options. Virtual try-on allows them to quickly test multiple frames, find the right fit, and benefit from our perfect fit guarantee. This not only improves first-time purchases but also reduces return rates when customers come back for repeat purchases.

We’ve had more than one million try-ons, which shows the scale of engagement. Conversion rates are still low, but even small improvements will have a meaningful impact. The tool provides valuable data on demand trends, style preferences, and lead generation. Importantly, customers use it wherever they are, on commutes, at home, or at the office, making it highly convenient. We will continue investing in more online vision tools given these strong results.

03/06/2024 Can China compete with your prices?

Labor in Vancouver costs $3–4 per pair, versus about $1–1.50 in mainland China, saving roughly $2. However, shipping glasses overseas by air negates this advantage and delays delivery by 7–14 days. Our model focuses on fast fulfillment, over 50% of orders are shipped the same day and delivered within two days in North America.

Competitors like Zenni operate low-cost super labs in China and sell $8–10 glasses, but the trade-off is slower shipping and lower-quality materials. Our strategy emphasizes both speed and quality.

07/08/2024 How are customer acquisition costs evolving and do trends differ between Canada and the U.S.?

We don’t disclose detailed breakdowns, but the key is that our marketing and customer service teams have done an outstanding job finding more effective ways to spread the Kits message. A critical driver is our network effect, with nearly one million existing customers sharing their experience with friends and family.

That word-of-mouth growth is starting to show up in the numbers in certain markets. We’re excited to see this expand further and will update as it continues to build.

13/03/2025 What is Kits’ advantage over other online eyewear retailers?

There are only a handful of pure online competitors, and we think they generally do a good job. In fact, we would welcome more because moving this $70 billion category online should not rest on only three or four players. That said, our advantage comes from being purpose-built as an online-first company, not adapting from brick-and-mortar. Incumbents cannot easily reorganize their infrastructure, systems, and profit base around digital.

Our moat lies in our lab, which would take years and enormous capital to replicate, plus the technology and data infrastructure that processes over 10 million unique data points daily. This allows us to continuously refine quality, efficiency, and customer experience. Add to that our base of nearly one million loyal vision-corrected customers, with 60%+ repeat revenue, and it would take a new entrant a decade and hundreds of millions to replicate. The moat is not just cost and speed, it’s the whole infrastructure and daily operational improvements that extend our lead.

13/03/2025 What progress have you made with insurance partnerships, and what are the challenges?

We began experimenting in Canada, where we built API connections with major insurers. This integration addresses two pain points: customers not knowing what is covered and the burden of paperwork. With our system, customers log in, see their exact benefit balance, and apply it instantly at checkout. The insurer handles reimbursement directly with us, creating a seamless process. Net promoter scores on this experience have been outstanding.

The main challenge is the tech build. Our team can move quickly, but insurers move more slowly, so integration can take a year or more. The U.S. market is more fragmented, but we see strong engagement and are now targeting U.S. partnerships for 2025. We believe this creates a durable moat, combining a superior customer experience with operational efficiency for insurers and Kits.

Operations

11/08/2022 Where do you expect inventory levels and days of inventory on hand to normalize?

Inventory was stable and down marginally quarter over quarter. Our direct-to-consumer model provides excellent visibility into traffic and purchasing trends, and we do not need to stock hundreds of retail stores, which is an advantage. Strong vendor partnerships also help with planning and delivery.

On contacts, inventory management continues to improve with tighter controls. On glasses, we occasionally build marginally higher inventory positions if raw material deliveries are expected to be delayed. Overall, we have seen stability and improvement in the last quarter.

13/12/2022 Do you sell high-index lenses, and are they more expensive?

Yes, we sell high-index lenses, including options like 1.67 for thinner profiles. They should not be materially more expensive. Because we manufacture ourselves and source lens materials directly, we can offer the full range without the significant markups often charged by brick-and-mortar providers.

13/12/2022 Do high-index lenses cost significantly more for customers?

We pass on 70 to 90 percent or more in savings compared to other providers. Traditionally, customers with strong prescriptions are charged more, which we have always felt was unfair. By breaking down costs and leveraging our high volume and in-house manufacturing, we avoid penalizing those who need us most. Our onshore facility includes advanced labs capable of producing digital progressives quickly, ensuring high quality, fast delivery, and lower prices.

10/05/2023 What is the current throughput and nameplate capacity of the manufacturing facility?

We are operating at about one third of the capacity of our fully automated optical lab. Run rate is 800 to 1,000 pairs of glasses per day, with potential to reach at least 4,000 per day using our existing machines, conveyors, and automation. This world-class facility will support growth to at least $200 million and likely just above that without new CapEx.

09/08/2023 Can you maintain lower fulfillment costs going forward?

Yes, Luke. On fulfillment, particularly carrier costs, we feel confident in the momentum we have built and the partnerships we maintain across Canada and the U.S. These relationships, combined with our scale and data capabilities, allow us to predict where orders originate and need to be delivered, aligning partners efficiently.

Despite ongoing volatility in the U.S. carrier market, we have seen stable to declining costs. We intend to hold that line on behalf of customers while continuing to improve delivery speed.

09/08/2023 What is current plant capacity utilization and potential operating leverage?

We agree there is significant expansion potential if we continue executing on glasses. Gross margin remains a major driver, with plenty of headroom to grow while still delivering strong value to customers. On capacity, our glasses line is currently just over one-third utilized.

From an overall revenue perspective, we believe the company can double with only minimal additional capital investment. This supports our expectation of continued profitable growth in both glasses and contact lenses in future years.

08/11/2023 How do holiday ordering patterns compare with last year and pre-pandemic?

Typically, the eyeglasses industry has seen a repeat cycle of 18 to 24 months, not because prescriptions always change then, but because vision insurance of $300 to $400 renews every two years, which historically matched the cost of a pair of prescription glasses. With the kits model, our vertically integrated process and reduced system waste allows us to offer prescription eyeglasses, even progressives, for under $100.

This affordability has shortened the repeat cycle to under 12 months, sometimes even sooner. While I cannot speak for broader industry trends, our business has seen repeat glasses sales cycles speeding up.

29/02/2024 How does a new customer buy glasses from Kits?

Most customers already have a prescription or can update one with an eye test. On kits.ca, they can enter measurements from their current glasses or use our Perfect Fit guarantee and virtual try-on tool directly in the browser. After selecting frames and lenses, glasses are delivered within a day or two. The process is simple, eliminates the hassle of traditional optical stores, and offers a seamless online experience.

29/02/2024 Is your expanded production capacity fully operational? What benefits do you see from it?

Yes, we invested in capacity ahead of demand. It gives us confidence in scaling from $125 million to $250 million in revenue with only minimal additional capex, likely just $1–2 million for repairs or an extra machine. It also allows us to handle fluctuating demand , for example, Mondays are always heavy order days , while maintaining consistent service and producing glasses within 24 hours of ordering.

29/02/2024 Do you offer multifocal contact lenses and glasses, and are they more profitable?

Yes, we carry multifocal contact lenses in the U.S. and Canada, along with torics for astigmatism, colored lenses, and one of the largest inventories in North America. Multifocals typically command a higher price point due to more technology and carry a higher gross margin profile.

06/03/2024 What is your order fulfillment cycle time and outlook?

Traditional brick-and-mortar averages 1–2 weeks for delivery, while our goal is 1–2 days. At our lab, we often start making an order within 2–3 hours of receipt, with almost all glasses completed and shipped the same day.

This speed, combined with high product quality at a $28 price point, delights customers and drives strong word-of-mouth. It is also a key factor behind more than 60% of revenue consistently coming from repeat customers each quarter.

03/06/2024 Do you face supply issues or high input costs for glasses?

The average frame costs about $10, lenses $3–4, and labor and consumables another $3–4. Shipping adds the rest, so a high-quality prescription pair totals about $25 in cost. Frames are the largest input. We source acetate mainly from Italy, metals from Italy, Germany, or Asia, and hinges from Germany. These are long-standing, carefully curated partnerships that ensure quality across materials.

What drives retail prices far higher is inefficiency. Brick-and-mortar stores average only 5–10 pairs sold per day, so customers absorb $150 per pair in overhead. Many stores also outsource lab work at about $100 per pair. Together that adds $250 to the customer’s bill. At Kits, where all glasses are made in Vancouver, we price every pair at $28.

03/06/2024 Do you do any white-label or contract manufacturing?

Yes, through Fulfillment by Kits, modeled after Fulfillment by Amazon. It lets partners use our infrastructure while we grow into our scale. This business is small but margin accretive and productive, though never our core focus. Our priority is direct customer relationships built over decades.

We have partnered selectively with West Coast chains for their lab work, but only with like-minded partners who won’t mark up prices excessively. The goal is to reinforce our mission of making eye care easy, not dilute it.

03/06/2024 What percentage of your business is fulfillment?

We don’t break it out because it is not a sizable share of revenue. By design, it remains a small contributor. It helps us utilize capacity efficiently, but our growth opportunity is direct-to-customer.

03/06/2024 In the UK, lenses are often more expensive than frames. Is that the same for you?

Raw lens materials cost us only $3–5, while frames average $10. But for consumers globally, lenses are often the most expensive because retailers outsource to labs that charge high prices. Multifocal or digital progressive lenses are a prime example, often $800–1,000 in-store.

At Kits, we do the lens work ourselves, pricing progressives at $98. That segment grew 55% year over year last quarter and remains our fastest-growing category. We also offer upgrades like super-thin lenses, photochromatic tints, and blue-light blocking options, all at affordable prices.

06/06/2024 What is your view on showrooms versus large-scale brick and mortar stores?

I think it is an important question and I appreciate the way you framed it. There is a big difference between having two to five select showrooms across North America versus building out 100 brick and mortar stores. Showrooms can be very effective awareness boosters. You only need a couple per country for them to be successful. We currently have one showroom in Vancouver on Kits Beach. We sell coffee and food there too, so customers can have a coffee and try on glasses, which has been a great concept.

The danger is becoming too reliant on this quick injection of revenue that comes with a heavy burden. Each store can cost around $2,000,000 of capital, plus ongoing maintenance and labor. That cost usually falls on the customer, who ends up paying an extra $100 to $200 per pair compared to an online-only purchase. Our view is that shareholders benefit more from a leaner structure with higher returns on invested capital over time, though we still see an opportunity for a limited number of showrooms.

07/08/2024 What drove fulfillment expenses lower as a percentage of revenue, and will this continue?

Fulfillment leverage came from two areas. First, efficiency and scale with carrier partners are lowering cost per order while improving delivery speed. Strong data insights also help us predict order flows and optimize logistics. Second, we’re achieving labor leverage in our Vancouver facility as volumes grow, making each order more efficient.

Going forward, we expect fulfillment as a percentage of revenue to stabilize around 11% to 11.5%. We’ll continue prioritizing speed, often delivering next day in Canada and within one to two days across North America.

04/09/2024 What progress have you made with insurance partnerships?

Roughly 50% of vision-corrected customers in North America use insurance, but most face two frustrations: not knowing what is covered and paying upfront with no clarity. We solved this by partnering with insurers in Canada and are expanding to the U.S. Customers log in on kits.ca, enter their plan number, and instantly see their coverage, for example, $400 expiring in December.

At checkout, they can apply the coverage directly, with no out-of-pocket payment, paperwork, or guessing. We handle reimbursement in the background. This launched only a few months ago but has already been very productive, and we are rolling it out further.

10/02/2025 Will you need to expand manufacturing capacity, and when?

On our busiest days, without full 24-hour shifts, the Vancouver lab shows potential capacity of at least $500 million in revenue. We expect to reach that in four and a half to six years. Phase two would likely be a micro lab focused on high-velocity items, probably on the U.S. east coast. It would not replicate all capabilities of Vancouver but provide additional throughput. This is several years away unless volume growth accelerates or other needs emerge. We have the expertise to scale labs responsibly as demand requires.

13/03/2025 How many storefronts do you operate, and will Kits expand physical presence?

We have one store in Vancouver, right on Kitsilano Beach where the business plan was first drafted. It used to be a Starbucks, and we saw it as too good to pass up, a Kits store on Kits Beach. It functions as a coffee shop, a community meeting place, a showroom, and an optometry office. It sells about ten times the number of glasses of the average optical store in North America.

That said, we view it as a marketing exercise, not a core infrastructure strategy. Over time, we might add a handful of similar showrooms, perhaps two or three in Canada and a few in the U.S., but no more. They would serve brand and customer experience goals, while the backbone of the business remains digital and vertically integrated.

13/03/2025 What role do promotions and shipping times play in your strategy?

Promotions, especially for first-time customers, let us invest directly in them instead of in platforms like Instagram or Facebook. We’d rather give a customer a $17 pair of glasses at cost than spend heavily on advertising. Each promotion is tailored by region, and digital infrastructure makes that possible. The goal is to respect the risk customers take in trying Kits, betting on our experience to bring them back repeatedly.

On shipping, it’s an under-promise, over-deliver approach. Over 95% of single-vision prescription glasses are made and shipped the same day they are ordered. The faster we deliver, the higher the net promoter score and the stronger the likelihood of repeat purchases. Our aim is to get every order to customers within two days or less.

07/05/2025 What are your expansion plans as you scale the Vancouver lab?

Our product team has done an outstanding job improving frame quality, selection, and freshness, which strengthens the brand and keeps customers coming back. Newness supports repeat visits, marketing campaigns, and social engagement. As we scale, one initiative is “optician AI,” which helps surface the right product for the right customer at the right moment. We expect to launch and refine this over the next few quarters.

We are also seeing strong traction at our Vancouver retail store, with customers lining up to experience Kits in person. Looking forward, we may explore additional flagship opportunities to replicate that success in other towns, though these are longer-term plans.

Competition

13/12/2022 How do you compete against Warby Parker?

One of the best tests is customer comments. Our reviews are the highest in the category despite being only four years old, while Warby has been around since 2008. In Canada, searches for Warby Parker are down 24 percent year on year, while our brand searches are up 64 percent. We believe that reflects the experience not living up to expectations for them, while our model consistently delivers.

When an order is placed at Kits, manufacturing begins within a minute. Glasses are produced, quality-checked, and shipped within 15 minutes, reaching customers the next day or within a few days. That speed, combined with savings, convenience, and selection, drives strong word-of-mouth growth. We are now the fastest-growing brand in the country, powered by customer experience rather than advertising spend.

09/03/2023 What trends are you seeing in the competitive environment, and how are you responding?

The team has been disciplined. Vision care is non-discretionary, and despite the macro environment, demand remains resilient. Unlike legacy brick-and-mortar models, we don’t carry large overhead, and our value proposition resonates strongly with both new and returning customers. We are also seeing more existing customers returning for multiple pairs within a year, which is encouraging.

Competitive discounting exists in the market, but we focus on serving customers rather than reacting to others. We held firm on promotions in Q4, which supported margins. As brand strength grows, we see less need for promotion, marketing spend declines, and word-of-mouth increases. This dynamic is now showing up in our results.

10/05/2023 Competitors are pursuing different strategies, any comments on their approach?

We won’t comment on others’ strategies, but it is clear our offering resonates with customers. Eyeglasses launched just over two years ago and already show strong traction, with unusually high retention rates at 18 and 24 months. This demonstrates that our fulfillment and service model is wowing customers and retaining them better than anyone else in the category.

Our focus remains on disciplined and intentional growth. We want to ensure every new customer has a great experience that inspires them to return and share with friends and family. The team is continuously working on fulfillment and product improvements. The glasses category is five times larger than contacts, with significant margin potential, so we remain very focused on serving customers and growing this business.

08/11/2023 Any comments on LVMH entering the glasses category as a fashion accessory?

We are already seeing a cohort of customers breaking the trend of buying one pair every 18 months. Many are purchasing multiple pairs from us, and our lower price points make that possible.

As eyewear becomes more of a fashion item, our model of making eye care easy and affordable supports increased consumption. That has been our focus, and it continues to resonate with customers.

06/03/2024 What underpins your recent glasses pricing strategy?

Our focus is less on competitors and more on building fulfillment and manufacturing capabilities that impress consumers. Early on, we used heavily promoted offers to gain traction and gather feedback, refining the product over time. As customers return and word-of-mouth spreads, we find they are less price-sensitive. From time to time, we will adjust promotions like the first-pair-free offer, but we are increasingly positioning around quality, fulfillment, and delivery rather than price.

We are especially excited about new product launches arriving later this year, with strong consumer referrals expected in the back half of Q2. With world-class fulfillment and product quality, we believe momentum in glasses will continue to accelerate.

06/03/2024 How do you view competition, particularly from online peers like Warby Parker?

Our focus is delivering the highest quality product with the fastest fulfillment times. Customers can compare reviews and see our quality and service resonate. Pricing and speed of delivery continue to stand out.

We also built a subscription business that creates the most loyal customers in the category. Compared with peers, we see stronger repeat behavior, which supports long-term growth. We are confident in these pillars as we scale.

08/05/2024 How is the competitive landscape evolving in Canada and the U.S.?

Promotional intensity was higher in Q4 2023, particularly around Black Friday and Cyber Monday, but outside those periods we’ve seen less pressure. In Q1 and into Q2, this trend has continued. For legacy players with heavy brick-and-mortar costs, outsourced design, or large headquarters, competing online has been more challenging.

Our focus remains on delivering category-leading value, expanding selection each quarter, and ensuring one-to-two day delivery. These strengths make it harder for incumbents to compete. Our marketing spend yields more because our offering cuts through the noise. As weaker competitors struggle, some have already fallen out of the leading group, and more could follow. We believe our model is only just beginning, and there is significant opportunity ahead.

07/08/2024 Can you give more detail on competitor decline in Canada and the U.S.?

We’re seeing traditional players reduce marketing spend and pull back from certain channels, which lowers acquisition costs for us. Traditional optical consumers are spending less and visiting less, so their marketing dollars are less effective compared to ours.

Our momentum has increased over the last couple of quarters, reflecting both our share gains and the ineffectiveness of competitors. The impact is already visible in our Canadian results, where our dollars are stretching further as competitors weaken.

06/11/2024 Are you gaining share against other online competitors, not just brick-and-mortar?

Morning, Martijn. Based on U.S. market and Vision Council data, the overall market is growing around 3% to 4%, while online is growing 10% to 15%. We're growing about 10 times the industry rate, so yes, it suggests we're taking share both online and overall.

The millennial demographic, now 28 to 43 years old, is the largest in the U.S. and Canada and will drive the optical market for the next 10 to 20 years. This consumer wants value, selection, and convenience, and is choosing to shop online. Traffic was up substantially in the quarter, ahead of revenue, with virtual try-on remaining the top-used feature.

07/05/2025 Why lean more aggressively into marketing now, and is competition shifting?

We are seeing strong growth indicators: traffic is building, CAC is improving, and Virtual Try-On usage is rising. Customers are exploring more and appear more open to switching than before, likely due to macro conditions and our improved offering and speed of delivery. These signals give us confidence to lean into acquisition now.

The competitive landscape online has only a few dominant players, and we believe we are the fastest-growing. Barriers to entry are high, with digital infrastructure, manufacturing, and nearly 1 million active vision customers that take 5–10 years to build. Traditional players are burdened by brick-and-mortar costs, which can add hundreds of dollars to customer prices. At the same time, U.S. insurance often underwrites $200–$400 for two-thirds of customers, creating a strong value proposition for online players like us. We also see pressure on traditional chains, including one of Canada’s largest filing for bankruptcy. These shifts reinforce our confidence in the opportunity.

Growth

09/11/2022 How should we think about growth in glasses versus contacts into 2023?

Glasses have been growing aggressively and are now a more meaningful part of the business. We expect high double-digit growth in glasses and low double-digit growth in contacts, outpacing the category in both. Street estimates for Q4 look reasonable to us, and we are confident in delivering a strong finish to the year with sequential growth continuing.

09/11/2022 How are your larger partnerships like Sun Life performing so far?

In Q3, we launched a new partnership with GreenShield Insurance in Canada, which allows customers to see their coverage directly and avoid out-of-pocket costs. While still early, unit economics are strong, and we expect both Sun Life and GreenShield to become meaningful contributors to growth in 2023.

09/11/2022 Is the average transaction size larger for customers from insurance partnerships?

Yes, compared to our broad base outside of insurance, these customers are coming in with even more favorable economics, including higher average order values.

09/11/2022 How is consumer behavior evolving given the macro backdrop, and are customers trading down to KITS-branded frames?

Vision is non-discretionary, so customers need to see regardless of macro conditions. This makes our category compelling, especially as people look for better value. We do not view KITS frames as a trade-down; the quality, service, savings, and convenience create a “Wow” factor that drives adoption. Word-of-mouth has fueled glasses growth, while in contacts, customers continue to move online for better value compared to retail stores. Both trends are strong tailwinds for us.

13/12/2022 Can you remind us what Kits is and provide Q3 highlights?

Thanks Paul, great to be here. Kits is an eye care company focused on building a modern brand. We manufacture all glasses ourselves onshore and provide glasses and contact lenses throughout North America. Roger, Sabrina, and I launched Kits in 2018, and the business has grown rapidly to nearly $100 million in sales run rate within four years. We listed on the Toronto Stock Exchange in 2021 and have been actively building our vertically integrated eyeglasses business, always pursuing the highest net promoter score in the optical category.

We are fortunate to have an experienced leadership team with over 100 years of combined industry experience. Roger previously built and scaled Coastal Contacts, a NASDAQ-listed company sold for about $450 million. Sabrina joined from Goldman Sachs, where she led a growth portfolio for 14 years. My background includes Procter & Gamble and Amazon, and our other leaders bring deep optical experience, including partnerships with LD Vision.
For Q3, revenue grew about 18 to 20 percent year over year, reaching $23.5 million, and was up over eight percent sequentially. Importantly, gross profit grew about 38 percent year over year to a record $7.2 million and was also up sequentially. Active customers reached more than 765,000, up nearly 20 percent year over year. Cash flow from operations was $3.9 million, bringing our cash balance to just over $20 million. Awareness of the Kits brand continues to increase, with organic Google brand searches up 64 percent while the broader market is flat or declining.

Our glasses business is driving much of the growth, more than doubling versus last year, even as marketing as a percentage of revenue remains flat to declining. This reflects strong word of mouth and industry-leading customer acquisition costs of about $21. Over 90 percent of our glasses sales come from Kits’ own brands, though we also sell Tom Ford, Gucci, and Ray-Ban. At the heart of our success is our vertically integrated model, with an automated high-capacity lab on the West Coast that produces prescription glasses in 10–20 minutes and delivers across North America in one to two days. This allows us to provide significant value at strong margins while keeping costs far below the industry norm.

13/12/2022 How do you encourage word-of-mouth growth?

Our focus is on net promoter scores and taking great care of customers. When someone orders from Kits.com or Kits.ca and is delighted by the selection, price, and speed of delivery, often one or two days, they feel great, look great, and receive compliments. That experience makes them return and recommend us. Our secret sauce is delivering great selection, great value, and unmatched convenience.

13/12/2022 Where do you expect to innovate next?

There is much more to do in this category. Virtual try-on is one of our most popular features, letting customers try frames from their computer or iPhone. We are also expanding technology for renewing prescriptions virtually, which customers can do in 5–10 minutes without visiting an optometrist. We believe this is just the beginning of technology adoption in optical.

13/12/2022 Are customers proving sticky in this environment?

Yes, our customers are very loyal, repeating at close to a 100 percent rate within 24 months. This creates a strong annuity stream. Net promoter scores support this retention, and we have seen our performance exceed the broader optical category and even some high-growth peers.

13/12/2022 What impact has Green Shield had on growth?

While we do not break out individual insurance partners, our Green Shield partnership has been very exciting. Through a direct API connection, Green Shield members can log into Kits, see their available coverage, and purchase glasses without any out-of-pocket expense. Families can often cover multiple pairs within their plan. Feedback and net promoter scores have been fantastic. It is still early, but the unit economics are strong, and we plan to keep investing in this partnership.

13/12/2022 Do you plan to expand beyond North America?

Not yet. We still represent less than one percent of the North American category, which is a $40 billion-plus market. Our focus is on owning Canada and then expanding more directly into the U.S. The opportunity is massive: customers who once bought glasses every three years now buy multiple pairs for different uses, alongside contact lenses for sports or evenings. Prices are lower, but consumption is higher, making the total addressable market very compelling here before looking abroad.

13/12/2022 Contact lens revenues have been flat year to date. Why?

At IPO, our focus shifted to eyeglasses. While we maintained a contact lens business, proceeds were directed to building out our lab and marketing to accelerate our entry into eyeglasses. We view this category as larger, more disruptive, and one where we can take material share. As a result, lenses have been stable while eyeglasses have become the primary growth engine.

09/03/2023 How should we think about glasses mix in 2023 compared to 2022?

In Q2 and Q3 of 2022, we added a significant number of new glasses customers, and in Q4, repeat customers were the biggest driver of growth. These repeat buyers typically return at a higher gross margin and without the marketing costs tied to new customer acquisition.

This high repeat rate reinforces our model and gives us confidence to invest further in glasses growth in 2023. In Q1, we continue to see this trend, supported by ample capacity in our lab and fulfillment network. Glasses remain a key growth driver, with a larger share of growth from repeat customers compared to 2022.

09/03/2023 How do insurance partners impact order size and customer behavior?

We continue to onboard more insurance partners, and we like the economics. Average order size is higher, and customers are tied to plans that renew annually. This builds gradually, rather than switching on overnight, but we are investing in it and are excited about the growth potential.

09/03/2023 How is the expansion into progressive lenses progressing, and what should we expect?

Progressives are the next major growth focus. We are building a holistic eye care solution that includes contact lenses, single-vision prescription glasses, and now progressives. The retail price for digital progressive glasses can range from $800 to $1,200 per pair, and we are offering our branded progressive glasses at about $100.

We see significant opportunity here and are continuing to invest in manufacturing. Expect to see increasing activity in both Canada and the U.S. We are very bullish on this market.

10/05/2023 How are partnerships with GreenShield and Sun Life progressing?

Both partnerships are ramping well and we like the economics. Insurance customers typically have higher average order value, better gross margin, and concentrate more on digital progressive lenses, which excites us. We do not break out insurance revenue separately, but growth is strong and we expect to extend similar partnerships in the U.S. in the future.

10/05/2023 How are average order value and product mix trends developing, especially with digital progressives?

Digital progressives are driving higher average order size, though still a relatively small share. Growth this past quarter was largely from repeat customers, who have higher average order values and stronger economics than first-time buyers. These are the customers we invested in during the second half of 2022, and their behavior supports continued investment in new customer acquisition, particularly in glasses throughout 2023.

10/05/2023 Where are you directing marketing spend and what is the focus?

Marketing spend has been in the 13% to 14% of revenue range, with some quarter-to-quarter seasonality. Given growth well ahead of the market and competitors, we are comfortable at this level. Investment is mainly directed at onboarding new customers as the online optical shift continues, with about 27% of the category already online. Retention has remained strong in both contact lenses and eyeglasses, and scale continues to improve fulfillment and G&A leverage. We expect marketing to remain in the 12% to 14% range, with some seasonal variation, and are pleased with the growth it has delivered.

10/05/2023 Can you confirm 67,000 glasses delivered, 37,000 to repeat customers, and discuss revenue cadence ahead?

Yes, that is correct. We are encouraged by growth in both contacts and glasses. The contact lens business continues to benefit from strong customer care, high net promoter scores, and retention. With the end of the pandemic, we are seeing more growth in the category, and we will continue to invest in that area. The larger growth driver, however, remains glasses. We are expanding by offering prescription glasses to existing contact lens customers, which has been an exciting part of our story and will continue in future quarters.

The millennial consumer is now entering the prescription glasses category, representing the largest consumer group in North America, highly comfortable with online purchasing. They are surprised they can find every option online without driving to a store, waiting weeks, and paying $300–$500 for single-vision or progressive glasses. With our asset-light model, we eliminate waste and pass savings and quality to customers, which should fuel growth for many quarters ahead.

09/08/2023 Are you seeing any changes in consumer behavior or demographics?

Good morning, Luke. Thanks for the question. We continue to be encouraged by the trends we see from our customers. The optical category, both glasses and contact lenses, continues to move online, and we believe our business model positions us well to benefit. Millennials remain a key focus for us. This group, now aged 26 to 42, is the largest customer segment in North America by people and dollars. They are entering the optical category at the single-vision level for glasses and contacts and are also beginning to adopt digital progressives and readers.

In recent quarters, we have seen strong growth in contact lenses as customers return to work and social activities post-pandemic. The millennial tailwind continues to drive adoption in single vision, contacts, and increasingly in progressives and readers.

09/08/2023 How are you allocating marketing spend between new and existing customers?

While we do not disclose detailed marketing breakdowns, we are very encouraged by our repeat profile. We believe we have the highest repeat rates in the category for both contacts and glasses, which gives us confidence to continue investing in new customer acquisition. Most of our spend is directed toward new customers.

On the contact lens side, we lean on more traditional channels. For glasses, we invest in the customer experience, knowing word-of-mouth drives growth. When customers receive glasses online within 1 to 2 business days, with great value and perfect prescriptions, they share that experience widely. That combination of convenience, value, and repeat business has been our focus over the past couple of quarters.

09/08/2023 What drove the 22% growth in glasses and how do units compare to AOV?

In the MD&A, we noted 22% growth in glasses while meaningfully reducing marketing spend. A key highlight was the repeat profile. In Q2, we sold roughly 72,000 units totaling $3.5 million in sales, with a record 39,000 glasses going to repeat customers. This builds on the strong repeat trends we see in contact lenses.

We also experienced over 50% year-over-year growth in premium lens orders. Looking forward, we are expanding our product range with a rimless line, new progressives and readers, and an exclusive lens called Spectra. We believe we are still in the early innings of this growth opportunity.

08/11/2023 What percentage of revenue comes from progressives and what is the long-term target?

Hi, Luke. Thanks for the question. The digital progressive market represents about 40% of dollars in the category, while we are below that but growing rapidly. We have upgraded our manufacturing to prepare for further growth, though it is too early to predict the ultimate level. We are very pleased with the progress and believe we are changing the value equation in this category.

Typically, digital progressives cost $800 to $1,000 or more, while customers on kits.com or kits.ca can buy them for under $200, and in some cases under $100. We think this value equation will disrupt the digital progressive market. It is still early, but we are very excited about the momentum in the last quarter.

08/11/2023 What are you seeing in the current promotional environment given macro softness?

There are two trends impacting our business. First, the percentage of revenue moving online continues to grow. Pre-pandemic, less than 20% of contact lenses and less than 10% of glasses were sold online. Now, contact lenses are approaching 40% online and glasses about 20%, with no signs of slowing. This growth vector has helped insulate us from the macro pullback and reduced our reliance on promotions compared with prior quarters.

Second, the optical market is anchored by vision insurance, which provides hundreds of dollars of coverage per person. This gives optical an advantage compared to many categories. Our focus remains on providing a selection that allows customers to meet their needs within coverage or budget, and our business model and infrastructure are well-positioned to capitalize on both trends.

08/11/2023 Will you continue outgrowing the industry at the same pace?

We do not see anything suggesting a slowdown. Macro trends remain in our favor, and we are happy with our operations and team, which delivered consistent growth in 2022 and 2023. Each quarter differs, so growth levels may fluctuate, but we have no plans to slow down.

You should expect continued growth focus as we work toward our next target of $200,000,000 in revenue and beyond.

08/11/2023 Most recent growth has been in Canada, is that by design?

Our focus has been on building network effects in a few markets. Canada’s growth is partly due to our presence in Vancouver and historical underrepresentation there. The market has simply been receptive to the offering.

There has not been a special push beyond that. Both Canada and the U.S. have responded well, but growth in Canada reflects catching up from being underpenetrated historically.

29/02/2024 Can you explain Kits Eyecare’s business model and benefits for customers?

Thanks, Paul and Trevor. We started Kits a little over five years ago to make eyecare simple. The optical market is massive at about $770 billion, with 8 out of 10 adults needing glasses or contact lenses. Yet customers often ask why the process is still complicated, expensive, and slow. We built Kits to remove waste, simplify, and provide better selection, value, and convenience.

We launched in November 2018. Our last reported quarter was Q3 2023, with a run rate of just over $125 million in revenue, up over 30%. We consistently generate more than 60% of revenue from repeat customers, and we’re approaching one million active customers. Growth is funded by our own cash flow, and we were profitable throughout 2023. Scale is critical in this industry , to make an impact you need $100–200 million in revenue, which we are well on our way toward. My co-founder Roger previously scaled Coastal Contacts, sold for about $450 million in 2014, and I bring Amazon e-commerce experience.

We’ve followed two core strategies. First, start with contact lenses, a smaller but recurring category with 35–40% gross margins, to build a profitable base of vision-corrected customers. Second, when entering glasses, begin with manufacturing by building our own optical lab. This allows us to control quality and cost rather than outsourcing profit to third-party labs, which forces higher prices. Before selling our first pair of glasses, we invested several million of our own capital into our lab. That foundation has enabled us to grow while delivering high quality and lower cost to customers. We went public on the TSX in January 2021, and we remain as excited about the next few years as we have been about the journey so far.

29/02/2024 How do you expect to allocate growing cash flow?

Our focus is on expanding the eyeglasses market, which remains our biggest growth opportunity. We already have strong businesses in contact lenses, glasses, the U.S., and Canada, but glasses represent the largest upside. In November 2023, we launched prescription glasses at $28, inclusive of frame and lens, a price point designed to invite new customers into the category.

A major driver of growth has been the accelerating migration of eyeglasses sales online, especially among millennials, now the largest customer group in North America. They are highly comfortable shopping online, and our $28 offering serves as a compelling entry point to capture this demand. Over the past two years, we have been seeding the market with affordable glasses and building long-term customer relationships to fuel sustained growth.

29/02/2024 How are you seeing repeat customer behavior and market growth by region?

This industry is built on repeat customers and lifetime value. In Q3, the share of revenue from repeat customers was actually higher than from new customers, giving us confidence to secure the next waves of growth. Canada has been a strong growth market, up about 45% in Q3, even though the U.S. remains two-thirds of our revenue and Canada about one-third. Canada has fewer retailers, and we are outperforming them.

29/02/2024 What benefits are you seeing from partnerships with insurers like Green Shield and Sun Life?

These partnerships have been very positive. Customers with vision benefits that renew every two years can log in through their insurance portal, link directly to our site, and instantly see their available coverage. The integration eliminates paperwork, uncertainty, and delays. Customers can apply the benefit at checkout with no out-of-pocket cost. This model allows us to serve Canadians nationwide, regardless of whether they live near a store. Uptake has been gradual rather than immediate, but we are seeing a steady increase in orders and expect more partnerships to come.

29/02/2024 Beyond word of mouth, what marketing channels are working best?

The influencer ecosystem is powerful, especially with millennials, who have now surpassed baby boomers as the largest demographic in North America. Customers value referrals from people they trust, including influencers at all levels. We are still early in this channel but seeing success. We also launched a referral program called Share a Pair, which rewards customers for sharing their positive experience by giving a free pair of glasses to someone they know. We prefer investing $30 in new customers through this program rather than spending more on social platforms.

29/02/2024 What challenges keep you up at night?

We are growing quickly but remain a smaller player in the overall industry, so staying focused on growth and controlling our own destiny is key. Marketing costs are a particular area of attention. Many growth companies let marketing creep up to 20–35% of revenue, eroding gross margin gains. We have kept marketing around 13–14% while still growing, but we watch this closely to ensure discipline.

29/02/2024 What key metrics or catalysts should investors watch?

The biggest one is online penetration of the optical category. It is a $70 billion market, and even a 1–2% annual shift online represents enormous growth. Investors should also watch the percentage of revenue from repeat customers, as that is the truest test of whether we are serving customers well and building long-term relationships.

06/03/2024 How do you identify and reach higher lifetime value customers?

We segment by geography and initial purchase patterns, allowing us to direct marketing toward customers who fit our profile. Subscription customers are especially important since they carry longer and higher lifetime values. Some targeted segments also show higher-value orders, and while we are not breaking them out yet, early signs are encouraging. We look forward to sharing more detail as results develop.

06/03/2024 How is the eye care category growing in 2024 and how do you compare?

The category is growing at around 3–5% annually, and we are well ahead of that pace. A key driver is the expansion of online penetration in optical. Pre-pandemic, it was roughly half of what it is today. Kits is well positioned to capture this wave in both contact lenses and glasses, which has been a major factor in our growth.

06/03/2024 How are contacts and glasses contributing to Q1 growth?

We are seeing positive indicators across the business in Q1, including strong traffic and growth across both categories. The Q4 brand investments are paying off, and customers continue to seek value. Word-of-mouth is especially strong in glasses, driven by our $28 entry price point and frame quality. These factors are fueling momentum across both contacts and glasses as the quarter progresses.

08/05/2024 What is your influencer marketing strategy for Q2 and beyond?

Influencers have been our fastest growing channel with the lowest cost per acquisition. We like channels where we must work to find the right partners and iterate quickly, and that has been our experience here. This has been building over the last year and a half. We started with micro influencers, expanded within that segment, and are now moving up the chain. Overall, it is our highest growth channel and has the lowest cost per acquisition, which is a strong combination. The category itself is very topical since about 8 out of 10 adults require corrective optical products.

We’ve also had success with local market activations and city-by-city takeovers. These help create momentum at the community level. So we are very excited about the team’s progress and expect to do much more in this channel.

08/05/2024 How successful were targeted promotions for customer acquisition in Q1?

We added about 74,000 new customers in Q1, bringing our 2-year active customer base to 870,000. The influencer and affiliate channels continue to be the most productive with the lowest acquisition costs. Local market activations, or city-by-city takeovers, also proved successful. We tested this in Vancouver with strong results and see 15 to 20 core metro areas where we can expand efficiently.

We want to remain at 12% to 14% marketing spend as a percentage of revenue in the short term, even while growing at industry-leading levels, and expect that percentage to come down further over time. Customers are our best advocates, and we prefer giving marketing dollars back to them in value and service rather than relying solely on platforms like Facebook or Instagram.

08/05/2024 What is driving growth in glasses average order value (AUR)?

Glasses AUR rose 22% in Q1. Much of this came from onboarding premium customers with lens upgrades and digital progressives, which were up 55% versus last year. Repeat customers are also a driver as they return to make upgrades or multiple purchases. This behavior, consistent with contacts, is now emerging in glasses. We expect this trend to continue through 2024.

08/05/2024 Will glasses growth accelerate relative to contacts in Q2 and beyond?

We saw glasses revenue grow 36% in Q1 with 75,000 units, including 33,000 new customers. While we won’t break out guidance by quarter, we are bullish on eyeglasses through 2024. Our long-term goal is a $100 million run rate glasses business in 3 to 5 years.
Drivers include rising AUR, strong repeat customer behavior, and increased exploration on our site. Over 1.3 million frames were virtually tried on in the quarter. Influencers and our perfect fit guarantee further support growth. These give us confidence that glasses will remain a growth engine.

08/05/2024 How quickly do new glasses customers typically return to buy again?

Industry averages are 18–24 months, largely tied to $300 insurance coverage every 2 years. We set a higher bar, targeting repeats within 12 months. Customers who have a great first experience often return for prescription sunglasses or a second pair of glasses.

In many cases, we are seeing repeats within 6 months. While we don’t disclose specifics, trends have been improving quarter on quarter and year on year.

16/05/2024 How do you view the store versus online debate in eyewear?

It is an important debate and one we are actively considering. Some customers prefer shopping in store, and there are about 45,000 brick-and-mortar optical shops across North America, making it a very over-retail category. The category is shifting online, and a recent Boston Consulting Group report suggested that 41% of all U.S. commerce will be online by 2027. Specialty categories like optical take longer to build the infrastructure for online, but once the shift begins, it never reverses.

With no physical stores, we pass on $150 to $250 in savings per pair to customers. Millennials, who will dominate this category for the next 10–30 years, have no interest in paying $350 to $400 at a store and waiting two weeks. They prefer browsing online, saving hundreds of dollars, and receiving their glasses within one or two days. This aligns with their purchasing habits and gives us confidence in the online model.

16/05/2024 How do you view influencers as a customer acquisition channel?

Influencers have been a pleasant surprise, especially given our $28 price point for prescription glasses including lenses. This model works very well for influencers eager to share with their networks. Micro-influencers will likely continue driving growth, and as we attract more, we will graduate into larger influencers. One example was an unpaid influencer in Los Angeles who posted an unboxing on TikTok, leading to a record day and week for glasses sales. This shows how early but promising the channel is.

In Q1, influencers were our largest customer acquisition channel with the lowest acquisition cost, which is a powerful combination. We plan to invest much more in this channel going forward.

16/05/2024 How does influencer marketing compare to spending on Google or performance marketing?

It is extremely efficient. A customer may be drawn in by the $28 message, roughly the price of an Uber, and then discover our selection of over 2,000 styles. Their first purchase may include upgrades totaling $40 to $50. Returning customers typically buy two pairs, often using the $300 to $400 of vision care benefits they have over two years. If their initial experience is strong, quality lenses, durable frames, and great service, they return for more, perhaps even prescription sunglasses or bolder styles.

Word-of-mouth, referrals, influencers, and affiliate channels give us confidence. We already operate at the lowest cost of manufacturing, shipping, and service with our online model. The next frontier is achieving the lowest acquisition cost, which we can earn through thousands, and soon millions, of satisfied customers spreading the word.

16/05/2024 What are the drivers of strong repeat purchase behavior?

We are fortunate to have strong businesses in both Canada and the U.S. and across contact lenses and glasses. For contact lenses, customers value low prices and extremely fast delivery. Many reorder when they have only two to four days of supply left, so waiting two weeks is not an option. Meeting that need with one- to two-day delivery at unbeatable prices and with a few clicks on their phone makes them customers we believe we can retain for decades.

For glasses, the historical repeat cycle is 18–24 months, not because prescriptions change that often, but because insurance typically covers $300–$400 every two years. Legacy pricing has matched that benefit, limiting customers to one pair. Now we see customers coming back in three to six months, treating it like a treasure hunt, since they can get multiple pairs. We expect to consistently generate 60%+ of revenue from repeat customers, making this a true annuity category when executed well.

16/05/2024 What were the biggest positive and negative surprises last quarter?

The biggest positive surprise was the strength of word-of-mouth. Traditional channels like Google, Facebook, and Instagram cost $100–$200 per eyeglass customer, which erodes economics. By contrast, influencers and organic word-of-mouth stretch dollars much further. With no heavy retail footprint, we can run city-by-city takeovers, concentrating spend in one market for a few weeks. This sparks awareness that spreads naturally within communities and workplaces. Early results in Vancouver were encouraging, and we plan 15–20 more markets over the next few years.

On the downside, consumers remain financially pressured. Our Canadian survey showed one in two Canadians postponing necessary optical purchases due to cost and insurance limitations. Given that 70% of our business is U.S. and 30% Canadian, with Canada growing over 40% last quarter, we see it as our mission to remove cost and complexity. Offering $28 prescription glasses that meet everyday needs is how we help customers avoid delaying critical purchases.

16/05/2024 Why target premium consumers, and what results did you see?

In Q1, one of our biggest surprises was the success with premium customers. We defined these as daily contact lens users and glasses customers seeking digital progressives, photochromatic, or thinner lenses. Our strategy was to offer an incremental discount to new customers in this tier, and the response exceeded expectations, with new acquisition and revenue growth faster than forecast.

We invested some gross margin dollars on a one-time basis rather than raising marketing spend. For example, digital progressive glasses often cost $800–$1,000 at U.S. retailers, but on our site they are $98. We see significant opportunity in this segment. While the initiative had a small impact on gross margin percentage, it was a deliberate trade-off to grow our premium cohort without inflating marketing expense.

16/05/2024 How is the optical industry performing post-pandemic?

Industry growth has been modest, around 3% to 4% last year and similar this year. It is a stable, non-discretionary category, but within that, legacy brick-and-mortar growth is coming mostly from price premiums charged to consumers. That is not the type of growth we aim for. We focus on expanding both new and active customers without burdening them with higher prices.

The biggest structural shift in this 500-year-old industry is from brick-and-mortar to online. While traditional players are flat to plus or minus 3% to 5%, pure-play online models like ours are growing about five times faster. More like-minded competitors would accelerate the transition, but even with only a few of us, the shift is clearly underway.

16/05/2024 What is driving average order value growth?

In the latest quarter, average order value grew 10% in contact lenses and 22% in glasses. This was largely driven by premium customers buying digital progressives and other higher-value upgrades. We see continued room for growth in this segment.

At the same time, we balance new customer growth with repeat purchases. In fiscal 2023, revenue grew 32% while over 60% came from repeat customers. Our goal remains expanding the active customer base, growing in premium categories, and passing cost savings, rather than cost increases, on to customers.

03/06/2024 Can you give us a business summary for new listeners?

Thanks Paul and Trevor, great to be back on behalf of the Kits team. The optical category, glasses, contact lenses, and eye exams, is about an $80 billion market in North America, with nearly 8 out of 10 adults needing vision correction. We started Kits in 2018 to make eye care easy, not by adding more stores but by eliminating waste and passing on savings, quality, and convenience to customers.

In Q1 we reported $35 million in revenue, up 26% year over year, putting us at a $140 million revenue run rate. Based on our data, we are the fastest-growing company in Optical to scale from zero to this size. That’s six consecutive quarters of 25%+ revenue growth, along with six quarters of positive adjusted EBITDA, so we’re generating cash flow while funding growth. Importantly, vision correction is a recurring category, and when you take care of customers, they come back. Over 60% of our revenue has consistently come from repeat customers, with Q1 at 64%.

03/06/2024 How did you grow this quickly?

We leveraged two industry “secrets.” First, start with the smaller but highly recurring contact lens category, which provides profitable vision-corrected customers who also need glasses. Then use that profit base to launch into eyeglasses. Second, begin with manufacturing, building our own lab from the start. Since most profit and cost in eyeglasses sits in the lab, this gave us structural advantages. Others might sell glasses first and then back into manufacturing, but that makes you a retail or marketing company, not a true optical platform.

We grew faster than expected because millennials accelerated the move online. This cohort, now the largest demographic in the U.S. and Canada, is 28 to 43 years old, prime optical age. They want selection, value, and the convenience of buying from home. If you deliver a great experience, they spread the word. That word-of-mouth dynamic lets us scale while reducing marketing reliance. Marketing spend dropped from 14.5% of revenue in Q1 last year to 13.3% this year. With guidance of $36 to $38 million in Q2 revenue and 3% to 5% adjusted EBITDA, we expect a seventh consecutive quarter of 20–25% growth and positive cash generation.

03/06/2024 What impact did influencer marketing have on your growth?

We offered an influencer free prescription glasses, and she shared her unboxing on TikTok. The video received over 200,000 likes, and we had a record week for glasses sales that hasn’t slowed since. This reinforced our belief that we need to lean further into this channel while keeping customers at the center of the model.

Looking ahead, our internal target, not formal guidance, is to reach a $200 million revenue run rate within two years, with gross margins approaching 40% and adjusted EBITDA of 10–15%. Our optical lab in Vancouver is central to this. It can produce over 4,000 pairs daily, often shipping within 24 hours, giving customers delivery in one to two days across North America. With capex already deployed, we do not expect additional major capex until we exceed $250–300 million in revenue.

03/06/2024 What challenges are you currently facing?

Growth companies often overspend on marketing, but we are disciplined in resisting that temptation. Many peers invest heavily upfront, hoping to find efficiency later, but we aim to maintain efficiency while scaling. Another challenge is our relatively small size, we believe reaching $200 million in revenue will be an important milestone for scale and stability.

While the category is moving online with limited pure-play competition, we remain cautious about balancing growth and profitability. These are the issues that keep us most focused.

03/06/2024 How much of your business is outside North America?

About 70% of revenue is in the U.S. and 30% in Canada, with Canada growing faster off a smaller base. We receive occasional European orders, but our focus is North America.

Expansion to Europe is possible, most likely through M&A. Coastal Contacts built a strong European business, and we believe the Kits model will travel well internationally, though our priority is building deeper in North America.

07/08/2024 What led you to introduce smart glasses and how big is the category today compared to optical?

It's early days, just a couple of weeks into our smart glasses launch, but there are several things we already like. The category benefits from our existing infrastructure with the addition of audio and camera components. Companies like Meta and Google are building technology in this space, and Meta has said demand is outpacing supply. Customers prefer ordering this product online, which supports growth in the online glasses market. Most importantly, the biggest friction customers face is getting prescription lenses with smart glasses in a convenient and cost-effective way, something we believe we can uniquely deliver.

As for revenue contribution, it is still very small. We'll monitor it closely and scale as demand grows. The economics look favorable because customers are seeking innovation in a category that hasn’t seen much. They are willing to pay a higher average order value, so while it’s early days, we are very bullish on the category.

07/08/2024 Why is growth stronger in Canada versus the U.S. and how does brand awareness compare to industry averages?

We believe our brand awareness is still very small, in the low single-digit percentages, which excites us as there is significant room to grow. We have strong pockets of awareness in Vancouver and a building presence in Toronto, and we see this model working across more than 2,000 metro areas in North America.

Canada is growing because our value proposition resonates strongly, and we benefit from word-of-mouth. Our market-by-market approach has been successful in Vancouver, and we’re relaunching it in other areas such as Toronto, Montreal, and U.S. metros. We’re confident Canada will continue to grow well.

07/08/2024 How much of your 20%+ organic growth is from gaining market share versus attracting new customers?

We believe customers in this category are steadily moving online, and Kits is benefiting from that transition. The online market is not easily built, so we do feel we are gaining share. Importantly, we create more value when customers return. While the industry standard is for eyeglasses customers to return every 18 to 24 months due to insurance cycles, we see customers coming back in as little as 3 to 6 months because of the value we provide.

These repeat customers treat it as a treasure hunt, exploring more products as they grow familiar with Kits. A contact lens buyer may discover eyeglasses, or an eyeglass customer may try color contacts. This cross-category expansion, supported by our low-cost infrastructure, allows us to keep gaining share while creating significant value for customers.

07/08/2024 Is Canada’s 40% growth helped by the TELUS Health partnership and how are early results?

We’re delighted with the early results, though it is still early days since the partnership launched in Q2. We don’t break down specifics of our insurance business, but in Q2 insurance revenue saw significant quarter-over-quarter growth. It contributed to Canada’s growth, glasses growth, and new customer growth. The economics are favorable, and from what we see in net promoter scores and customer feedback, it has been a great experience.

07/08/2024 What percentage of contacts and glasses are still offline, and how is penetration trending?

Pre-pandemic, about 6% to 8% of eyeglasses revenue was online. Today, U.S. data shows eyeglass penetration approaching 20%, around 18% to 19%. Contact lenses were 16% to 18% online pre-pandemic, and the latest Vision Council numbers show 42% now transacted online in the U.S. So both categories are growing rapidly, even if the data isn’t perfect.

07/08/2024 Could contact lens penetration rise to 60–80% since it’s largely a reorder business?

Yes, we share that optimism. Once a category reaches 30% online penetration, it often accelerates quickly, and we think contacts will follow this pattern. Millennials, now the largest consumer group in North America, consistently tell us they don’t want to travel to a brick-and-mortar location. They prefer ordering online. So we believe the sky is the limit for contact lenses online.

07/08/2024 How is the launch of your own branded contact lenses progressing?

We had a fantastic launch of our Kits silicone hydrogel daily lenses in Q2, and they’re off to a very strong start. Customers are getting the latest hydrogel technology at a fraction of industry cost, which is resonating. We plan to expand this line with an exciting new product coming later in Q3. It’s still a smaller percentage of our contact lens business but growing quickly.

From a financial standpoint, we expect gross margins of 65% to 70% over time for our own brand. Beyond clear lenses, we also see a big opportunity with younger customers in color lenses, and we’ll be launching a color product in Q3.

07/08/2024 What is driving glasses growth and higher average order revenue?

The last two quarters have been our best in the glasses business. AOV growth has been a major driver, with digital progressives up over 50% in Q2. We’ve reshaped value in this segment, and customers are responding. Glasses revenue grew 42% this quarter to over $5 million, with higher AOV, stronger gross margins, and high repeat rates.

We also have the most robust product pipeline we’ve ever seen, supported by CapEx already in place, setting us up for more profitable growth in glasses. These ingredients give us strong confidence in the outlook.

07/08/2024 Do you have any new promotions or launches planned for Q3?

The team is excited to expand across multiple areas. Expect the glasses release cadence to continue and even accelerate in Q3 and Q4. On the contact lens side, we’re expanding our Kits daily modality lineup in Q3.

We also see strong momentum in our auto-ship business, which grew over 20% year on year in the past quarter. It’s valuable for customers and for us, and we’re testing additional membership offerings with encouraging results. Expect more expansion in this area in Q3 and Q4.

04/09/2024 How are you acquiring customers, and what are your customer acquisition costs and lifetime value?

We focus on keeping marketing at 12% to 14% of revenue, supported by 60% to 65% of revenue coming from repeat customers. This allows us to invest heavily in that first customer interaction. Our cost of goods sold advantage and lower general and administrative expenses let us give more value upfront, because the industry only works if customers return, and they tend to return for decades.

When we launched glasses, we ran a “first pair free” promotion, which brought in hundreds of thousands of skeptical but delighted customers. That taught us our customers are our best marketing channel. We prefer investing $20 in a pair of glasses rather than $100 in Facebook ads. From there, we evolved to “city by city” campaigns. If two or three people in one workplace buy, word-of-mouth quickly spreads to 20 more. This lowers our acquisition cost to about half the industry average. While we do not disclose lifetime value, the consistent repeat profile keeps us confident in long-term returns.

06/11/2024 What is driving expansion of designer glasses offerings in Q4?

We've had strong performance on the Kits line, adding over 190 new SKUs. As our glasses business expands and segments like insurance grow, we've broadened the branded frame offering. Regardless of brand, customers still get the same quick delivery within a day or two.

Our goal is to make eye care easy by providing the widest selection in the market, and that includes branded frames. Starting in Q4, we've expanded substantially and expect to build to thousands of new SKUs throughout the quarter.

06/11/2024 What is driving recent success in glasses, up 43% to $5.7 million?

Each quarter is different, but in glasses we've seen growth with less reliance on promotions and higher average order values. We've also seen an encouraging repeat profile. Customers are coming back after being delighted with their first purchase, often with insurance dollars still available. This leads to discovery purchases such as prescription sunglasses or a second pair of glasses.

We're pleased with this repeat dynamic and the growth in premium lenses like digital progressives and specialty lenses. These trends give us confidence in further growth for 2025.

06/11/2024 How is your own branded new contact lens line performing?

Thanks, Doug. We're pleased with how the new line has started. A couple of quarters in, it's up to about 5% of revenue. While it brings down average order value slightly, it is quite margin accretive. We're excited by the traction so far.

We now have more than 890,000 customers, approaching one million active customers, with many repeating. The goal for the next few quarters is to keep introducing products that excite customers, support margins, and deliver excellent care.

06/11/2024 Customer acquisition costs appear up 20% year over year. Where do you see CAC evolving?

You're right that CAC increased in absolute dollars, but this quarter also delivered a record level of new customer revenue, up over 40% year on year. Growth of new customers has far outpaced the increase in CAC. With two strong businesses in the U.S. and Canada, glasses and contacts, our model remains nimble, allowing us to pivot toward acquiring premium customers with high lifetime value potential.

Looking ahead, CAC has been consistent between Q2 and Q3. Our focus is on growing 5 to 10 times faster than the market. While we could spend more, we maintain a high threshold for return and are comfortable with our cash position. We’re also paying down debt, with $4.6 million due by Q2 2026. Marketing spend as a percent of sales has been measured and even declining. Some longer-term brand initiatives and market-by-market strategies are included in CAC, so not every dollar is attributable to the same quarter. Overall, the team has executed well, keeping efficiency high even as CAC shows some increases.

06/11/2024 What percentage of customers use insurance, and how is that business trending?

We don’t break out exact percentages, but Q3 insurance revenue saw significant growth quarter over quarter and year over year. It contributed to glasses growth, average order value expansion of over 50%, and more than 60% new customer growth. We expect insurance to steadily build each quarter with favorable economics.

Industry data suggests about half of U.S. customers and just over half of Canadian customers use vision insurance, and what we’ve seen in our base is comparable. This is part of why we’re expanding branded frame offerings in Q4, and we’ll continue updating as the insurance business grows.

06/11/2024 Are you seeing any uplift in AOV from the TELUS Health channel?

Good morning, Gianluca. The insurance category, including TELUS Health, continues to perform strongly with significant quarter-on-quarter and year-on-year growth. We don’t break it out specifically, but the impact is evident in the numbers: glasses growth up over 40%, average order value on glasses up over 60%, and strong new customer revenue.

This won’t be a one-time boost; it will be a steady stream of new customers with favorable economics. We remain bullish and look forward to updating you each quarter.

06/11/2024 What drove the record week during customer appreciation month, and is it replicable?

Matt, the strength really came from recurring customers returning at higher average order values. We now have a cohort of more than 10,000 customers who have each spent over $10,000 with us in the past six years. That kind of loyal customer base fuels growth and gives us flexibility in acquisition strategies.

Word-of-mouth continues to be a strong driver. So the record week was less about short-term tactics and more about the strength of returning customers spending at healthy levels.

06/11/2024 Any update on the “Own This Town” strategy rollout?

Yes, it remains an important part of our expansion plan. Our next market will activate and go live in the near term, and we’ll provide an update when it happens. There’s no change to our rollout strategy.

06/11/2024 What drove strong U.S. growth in Q3? Any special promotions?

Good morning, Devin. Each quarter is different, and our nimble model lets us flex. The U.S. saw particularly strong responses to marketing, and we allocated dollars accordingly. Canada also delivered over 10% quarter-on-quarter growth for two consecutive quarters, though off a strong prior-year base.

Overall, both markets are strong, but Q3 saw more growth than expected in the U.S. As always, we allocate capital where we see the best results, across both glasses and contact lenses.

10/02/2025 Can you discuss new products and innovation, including smart glasses?

We are now able to plant a number of seeds and watch them grow. One example is smart glasses. While still a small category, we see significant momentum with large players like Meta, Google, and Apple building into this form factor. Our role is to provide prescription lenses and our own smart frames. Our assemblers are trained to handle the complexity of prescription lenses in smart frames, which positions us well as this market expands. We are not investing heavy capital at this stage, but we expect to capture commerce as adoption grows.

We are also expanding our private-label Kits contact lenses, which have passed 5% market share and are on the way to 10%. We launched color contacts as well. Beyond that, we are innovating in insurance integration, with TELUS Health proving a valuable tailwind, and we plan to expand into the U.S. insurance market in 2025. Less visible but equally important is infrastructure, such as building a regional carrier network to reduce dependence on Canada Post or FedEx. These efforts improve flexibility, speed, and cost. We will continue innovating both on the customer-facing and operational sides.

10/02/2025 Can you explain the role of influencers and the “Own This Town” model?

We were slower to adopt influencers, but after “first pair free” we saw their impact, especially in concentrated local markets. That success led us to launch “Own This Town,” which became a game changer. We started in Vancouver by saturating the city with advertising for two to three months. People felt surrounded by Kits, pop-up stores, metro ads, local buzz. This approach mirrors how companies like Uber and DoorDash grew city by city. It allows us to hyper-invest locally, win customers with a great product and experience, then return to sustainable levels. We could reduce marketing spend if necessary, but given our growth we plan to maintain spend and focus it on awareness and expanding glasses.

10/02/2025 What key message should investors take away today?

One takeaway is that while we have revenue across Canada and the U.S., our glasses business density is really concentrated in Vancouver and British Columbia. Awareness and revenue there have grown sharply, and our “Own This Town” model has been executed to great effect. We have a showroom on Kits Beach that now draws lines out the door on weekends, with demand so strong we may need crowd control.

Institutional investors have told us that if we can replicate this model in 5, 10, or 20 markets, it could drive significant growth. Glasses revenue grew 60% last quarter, and we see continued gross margin and profit expansion as we build leverage. That story may be overlooked when people view us as spread evenly across markets, but the opportunity is in replicating a proven local model.

05/03/2025 What is the uptake of Kits-branded contact lenses, and will you expand this category?

It was a great quarter for Kits contact lenses, with strong performance in dailies and colors. We added a dedicated teammate to manage the business, who has already shown good success. The brand surpassed its first milestone of 5% category share, with the next milestone set at 10%. Focus areas include delivering value, ensuring retention at or above the category, and innovating new products. While still a small part of the business, it is expected to be a future driver of revenue and margin growth.

The product itself is a next-generation silicone hydrogel lens with high oxygen transmissibility and high water content, providing healthier and more comfortable wear than legacy products. As a daily lens, it also increases average order value and is margin-accretive from the first order.

05/03/2025 What percentage of contact lens revenue is from Kits-branded products?

We have not disclosed a specific figure yet. It is not over 10% of contact lens revenue. Around that level, we will begin to break it out separately.

05/03/2025 On glasses, does the diversified pricing structure include features beyond lens upgrades?

Yes, we continue to expand products while maintaining our $28 entry model, which includes prescription lenses at roughly 90% less than the market average of $350. We have also introduced $38 and $48 tiers, including titanium rimless glasses that compare to $600–$700 retail pairs. Selection will continue to widen while inventory stays shallow until styles gain traction.

Lens upgrades were up over 60% year on year in Q4. Customers are choosing thinner lenses, blue-blocking options, and digital progressives, all of which are contributing to higher average order values.

13/03/2025 Can you share the history of Kits and what led you to the business?

Sure. I was at Amazon in Seattle, and we were looking for categories that had not yet had their online or mobile moment. Optical stood out because it is such a large, broken category. Seven out of ten adults need glasses or contacts, yet costs remain inexplicably high. Through that process I got to know Roger and the business he built with Coastal, which sold for around $450 million after raising $40 million. It was a great exit, but my view was that if Coastal had remained independent, it would be a $2 to $5 billion company today. There is still so much work to be done.

Roger and I took six months to build the plan carefully, knowing this is not a category where you can be small. You need significant capital and scale; you cannot just be a $10 million or $50 million player. Our goal was to go from zero to $200 million quickly while staying profitable. Since then, it has been a great run and we are moving even faster than the numbers in your introduction.

13/03/2025 What is the mission behind Kits, and how are you executing on it?

We started Kits just over six years ago with a mission to make eyewear easy. This category is large and essential to people’s daily lives, yet full of unnecessary steps and middle layers. From this mission flows every decision and metric. Specifically, the U.S. and Canadian market is about $70 billion, and more than seven in ten adults need glasses or contacts. We hypothesized we could take 90% of the cost and waste out of prescription glasses and pass those savings to customers. Average prices in the U.S. are around $350 per pair; our price point is $38 to $48, including prescription lenses.

Online allows us to offer ten times the selection and much greater convenience. Instead of multiple store visits and two weeks of waiting, we can make glasses the same day and deliver them within one to two days anywhere in North America. Our goal is to deliver a net promoter score of 80% to 85% in a category where customer satisfaction has historically been very low, like the taxi industry before disruption. We also benefit from a structural advantage: the industry is evolving toward us, driven by millennial consumers who want affordability, convenience, and choice.

13/03/2025 How do Millennials shape demand for Kits, and what results have you achieved?

Millennials are now the largest U.S. demographic, about 80 million in the U.S. and Canada, ages 28 to 43, which is prime optical age. They demand convenience on mobile, fast delivery, and flawless experiences. They will not tolerate outdated models like visiting a LensCrafters, waiting weeks, and paying hundreds of dollars for limited selection. The bar is high, but if we meet it, this category will define the next 10 to 20 years, with Gen Z right behind them.

Since our IPO in early 2021, we launched glasses on top of our profitable contact lens business and invested in our next-generation lab. Growth accelerated, and in Q4 2024 we closed our ninth consecutive quarter of about 35% organic growth, with a five-year CAGR of 35%. That is roughly ten times the category’s 3% growth rate. Fiscal 2024 revenue reached $160 million, with positive adjusted EBITDA in every quarter. Q4 EBITDA margin was 6.5%, and full-year 2024 was about 4%, just over $6 million. We generated $13 million in cash flow from operations, funding growth internally. Even with 32% revenue growth, 63% of total revenue came from repeat customers, highlighting the category’s annuity-like profile. We remain on track to hit a $200 million run rate in under seven years.

13/03/2025 What are the core building blocks and strategy for Kits’ growth?

We focus on three areas, starting with foundation. Unlike incumbents built around store networks, our central nervous system is vertically integrated, automated, onshore infrastructure. Our optical lab is designed to scale to $500 million in revenue with the capex already deployed. It combines advanced machines, data infrastructure processing 10 million data points daily, and a technology stack that routes an order from the website to the lab in under 10 minutes, often completed within two hours. This requires category expertise and capital, which we’ve built without the trial-and-error phase that consumes enormous venture funding.

From this foundation, we drive growth through marketing discipline. We set aggressive growth targets of 25% to 30% but cap marketing spend below 15% of revenue, forcing creativity. A key initiative is leveraging our cost of goods sold advantage, such as the “first pair free” program with influencers. New customers can order prescription glasses at no cost, which creates buzz and skepticism at first, but hundreds of thousands have taken the offer. This builds trust, converts first-time buyers, and fuels repeat revenue, while demonstrating the power of our model.

13/03/2025 How does the “first pair free” program and influencer marketing support customer growth?

When customers see a free pair offer, they often assume there’s a catch. But once they order, the glasses are produced within hours, shipped the same day, and typically delivered the next day. Many are stunned, what normally costs $300 to $400 and requires multiple store visits arrives free, fast, and accurate. We explain that our cost of goods sold is under $20 per pair, while acquiring customers through traditional channels like Facebook or Instagram costs $100 to $200. We’d rather take that $20 risk upfront because we believe the experience will convert them into lifelong customers.

From there, every customer becomes an influencer in our model. We provide referral codes so they can share with friends. Influencer-led surges have shown strong results, sometimes creating record order volume in a single city. That led to our “own this town” program, where we concentrate marketing in one market for several months, then sustain and measure results before expanding. With nearly one million active vision-corrected customers across North America, we can enter cities where we already have tens of thousands of contact lens buyers and activate them into glasses customers. This localized rollout has parallels to Uber and DoorDash, and it keeps marketing spend efficient while building long-term profitable retention.

13/03/2025 What are Kits’ priorities in building shareholder value?

We emphasize organic growth as the primary driver, over the past nine to ten quarters, that has been 30% to 35% consistently. Our philosophy is to do the hard work first, such as starting with profitable contact lenses, building an optical lab before selling glasses, and going public early to develop the discipline of a listed company. We also limit dilution, having completed only one equity raise since inception, the 2021 IPO.

Financial discipline is equally important. We monitor working capital closely so growth does not consume all cash. In 2024, capex was 1.5% of revenue, and we intend to keep it at or below that level. We are reducing debt, with our Business Development Bank facility now under $4 million and set to be repaid within three to four quarters, while maintaining around $20 million in cash. Marketing remains capped under 15% of revenue, and we drive efficiency in fulfillment, G&A, and operations. Analysts now cover us broadly, with recent target prices ranging from $14.50 to $18. Overall, our goal is steady growth in revenue, adjusted EBITDA, and working capital efficiency, ensuring both customers and shareholders benefit as we scale.

13/03/2025 Where do consumer businesses often go wrong, and how does Kits avoid those pitfalls?

From the feedback we hear, many companies lose discipline as they grow, especially on marketing spend and capex decisions. Stores, for example, provide a short-term boost but create legacy infrastructure that either customers or shareholders end up paying for. From the outset, we’ve tried to be humble students of the market, learning from where others have succeeded or failed, and setting a high bar for ourselves.

We also believe in earning the right to scale. For example, when big offers came in for expensive celebrity influencers, we passed because we hadn’t proven the model at that scale. Instead, we started with micro-influencers, giving them product for free and asking for honest feedback. This approach gave us authentic signals and small wins we could build on, rather than overextending prematurely.

13/03/2025 How has influencer marketing evolved for Kits?

We found micro-influencers to be especially powerful because they have deep engagement in their city or state and are open to partnerships. I was initially skeptical, thinking influencer marketing had run its course, but through trial and error we saw that our “first pair free” promotion performed best when promoted by influencers. That success led us to build a dedicated team, and influencer marketing has since become our largest channel.

07/05/2025 What are the key drivers of contact lens growth and the role of branded dailies?

Our aspiration at Kits has always been to make eye care easy for customers everywhere, and we believe there is a secular change continuing. The category has been resilient; people need to see in good times and bad. Customers look for value, savings, and convenience, and we think Kits is delivering on all of them.

The key drivers remain consistent. This contact lens market is almost software-like in its annuity stream. Customers continue to return if you take great care of them, and we saw that again in Q1 with over 60% of revenue from repeat customers. Our Kits Daily contact lens business is also growing rapidly, offering great value to customers and strong margins to Kits. It is now part of our 50-50 club, with about 50% growth year-on-year and around 50% gross margin.

07/05/2025 How will higher Q2 marketing spend affect EBITDA and customer growth?

In Q2, we are accelerating new customer growth at Kits. In Q1, new customer growth was up 28% to $95,000. Customer acquisition cost was flat year-on-year and down quarter-on-quarter by about 18% to 20%. Gross margin percentage and gross margin dollars are growing, led by repeat customers. We believe customers are more open than ever to switching to Kits in this environment.

Given our strong history of converting new customers to repeat and the profitability of these repeat customers, we see Q2 as an opportunity to invest in growth. Marketing and fulfillment will rise slightly as a percentage of revenue, and some customers may come in at a slightly lower gross margin. But this does not change our view of building toward 15% to 20% EBITDA in the next 5 years. Q1 showed we can flex up EBITDA while still growing 34%. We are confident that the return on investment from new customers comes back in spades.

07/05/2025 Does Kits’ growth trajectory parallel Coastal’s acquisition by Essilor?

At Kits, our aspiration is to become the largest eye care provider in North America, making it easy for people everywhere to see. It is no time to hold back. We are leaning into Q2 growth with confidence, seeing upticks across many initiatives. Job one for us is to deliver for customers and make eye care easy.

We continue to deliver value for shareholders and keep our focus on serving customers. It is still very early, and we see many positive developments. Our progressive business is growing more than 50% with more than 50% gross margins, delivering great customer value. Kits branded lenses are showing the same results, and other products are performing similarly. As those continue to grow, we could not be more excited. We spend no time thinking about anything but delivering for customers.

07/05/2025 How is the Own This Town initiative performing and has the strategy changed?

We are achieving growth across all segments in both glasses and contact lenses. Glasses revenue grew 46%, contact lenses 32%. Geographies are also thriving, with Canada up 35% and the U.S. up 33%. Growth is broad-based, showing strong execution by the marketing team.

As we drill down into different segments and markets, the program has started well, and we are seeing good early results. Joe can provide further details, but overall we are pleased with the trajectory.

07/05/2025 How is traffic trending and what role does Virtual Try-On play?

Traffic is a leading indicator for us. In Q4, traffic was up significantly, and in Q1 sessions were up around 70%, with even higher growth on our Virtual Try-On tool. This shows strong leading indicators for future growth.

We are seeing a lot of exploration on the site, customers trying out frames, sharing with friends, and a strong correlation between Virtual Try-On usage and conversion rates. Marketing results in Q1 speak for themselves: customer acquisition cost flat year-on-year, down 18%–20% quarter-on-quarter, new customer growth up 28%, and marketing as a percentage of revenue down. Tactics such as first pair free and influencer promotions are scaling, reflected in 46% growth in glasses revenue, with more to come in future quarters.

07/05/2025 Can you provide data on flow-through and glasses mix impact?

In Q1, we added almost $3 million of EBITDA year-on-year on nearly $12 million of revenue growth, about 24% incremental flow-through. This gives us confidence that we can flex EBITDA up or down depending on growth investment. Q2 is an opportunity to lean into customer acquisition at the right time.

One modeling point is that glasses average order size is lower, and our investment is going toward acquiring a larger number of first-time glasses customers. Over time, the glasses business will exceed contacts, as the eyeglasses market is 10x the size of contact lenses. This category shift is disruptive and strategically important, even if it temporarily lowers average order size.

07/05/2025 How are you achieving lower customer acquisition costs, and are they sustainable?

The influencer and referral model has real momentum. Once it gains traction, it is harder to slow down than speed up because influencers and customers market the story in their own words, using the channels that work for them. That requires us to put our full offering on display, but we are confident in the value, quality, and convenience we provide. This has been the big driver, led by Rob and our terrific marketing team.

We also saw channels like Reddit pop up organically as customers shared experiences. These offshoots give us confidence that the unit economics are highly favorable. Customers acquired this way convert into repeat buyers at increasing levels, which is why we are leaning in further during Q2.

07/05/2025 Should we expect customer acquisition costs to rise again in Q2?

In Q1, we added 95,000 new customers, up 28%. In Q2, we expect even higher new customer growth, both in percentage and absolute terms. Marketing as a percentage of revenue may rise slightly quarter-on-quarter but will remain within our long-term plan to stay below 15%.

The investment strategy remains the same: use our cost-of-goods-sold advantage as a marketing tool. For first-time customers, we may see a moderate pullback in gross margin, but this is part of our strategy to drive long-term repeat behavior.

07/05/2025 Why did eyeglasses revenue per unit decline sequentially in Q1?

The sequential dip comes from new customers using promotions like first pair free, which lowers average order value (AOV) for those transactions. However, overall AOV for glasses is up about 30% year-on-year, and contact lens AOV continues to rise.

The strength of the repeat customer base is significant, giving us confidence to invest more in acquiring new customers. The quarter-on-quarter moderation in AOV is a natural result of this mix shift.

07/05/2025 How confident are you in the conversion and repeat rates from first pair free promotions?

We track cohorts by region and customer, and the data shows consistently strong repeat behavior. In Q1, we added 95,000 new customers while marketing as a percentage of revenue declined and gross margin increased. New customers may come in at slightly lower margin, but repeat customers more than offset this, as the numbers clearly show.

For customers, first pair free often feels too good to be true. They order skeptically, and when glasses arrive the next day or two, perfectly made and free, they are amazed. They compare that to paying $400, waiting two weeks, and making multiple store trips. Our only “catch” is that they tell everyone they know. Months later, those customers return, often using insurance dollars to buy multiple pairs. This builds lifetime customers in a category where vision correction is needed for decades.

07/05/2025 What are your expectations for the Own This Town playbook this year?

Own This Town remains an important part of our marketing plans, alongside initiatives like first pair free, digital progressives, and premium lens offerings. While we don’t break it out in detail, you can see its impact in results like 46% growth in glasses. We have more activation planned for Q2 and will share additional updates later, but it remains one of several tools helping us grow at 8x to 10x the category rate.

07/05/2025 Can you update us on U.S. insurance partnerships and expected contribution?

Insurance is foundational, on par with digital progressives, premium lenses, and Kits contacts. This quarter, we launched a broad U.S. partnership and extended another in Canada. These customers arrive efficiently and tend to return at higher rates, with strong average order value and margin profiles.

The biggest frustrations with insurance are unclear coverage and paperwork for reimbursement. Our platform addresses both by showing coverage clearly and in some cases applying it directly in the cart. These initiatives, built over three years, are generating strong Net Promoter Scores. Expect a steady drip of growth rather than one-off jumps, with more foundation and innovation coming.

06/08/2025 Are your Canadian revenues concentrated in a few regions, and are there white space opportunities ahead?

Yes, thanks Martin. We have seen strong double-digit growth across both frames and lens categories in Canada, with accelerating word-of-mouth in some geographies. We have targeted a few regions more specifically and are seeing higher order flow and more returning customers. But it is still very early, and our market share remains very small despite these growth numbers.

Only a couple of geographies are even aware of KITS at this point. Canada is a large category with significant opportunity ahead. We believe the future of eye care will be fast, personalized, and digital first without sacrificing trust or quality. KITS is building that first vertically integrated platform, and it is resonating with customers.

06/08/2025 Excluding 60,000 free glasses, were volumes still up year over year?

We were thrilled with glasses performance this quarter, with revenue up 44% and unit growth from new customers up over 50%. Regarding the approximately 60,000 first pair free units, we also had that promotion in the market a year ago, so it is in the base. Net of first pair free, volumes were still an increase in new customers year over year.

This year we also had more tools in our arsenal within the glasses franchise. Digital progressives are now playing a bigger role, growing even faster than the overall glasses business, along with other categories that contributed to growth.

06/08/2025 To confirm, excluding free glasses, were volumes up year over year?

That is correct, Martin.

06/08/2025 How do you measure ROI on the First Pair Free program compared with earlier iterations?

Hi Luke, good morning. First Pair Free is one tool in our arsenal that customers love. It is an investment in product, an invitation to try us out, and typically customers make a purchase alongside the free pair. So average order value is not zero. The economics come from lower cost of acquisition, which in prescription glasses can run $100 to $200 in the category. Our cost is far lower thanks to promotions like First Pair Free.

We measure ROI by looking at conversion to repeat customers. Where the market sees repeat in 18 to 24 months, our target is six to twelve months or less. The team works against that goal, and we have been very happy with the results, which is why we continue to invest in this program.

06/08/2025 What learnings from Own This Town could guide future expansion into the U.S.?

Yes Luke, testing, iterating, and rolling out is our approach, both for Own This Town and First Pair Free. Each quarter the execution improves, and the economics get better. Awareness campaigns like these drive traffic, which we see as a strong indicator of demand. In Q2, traffic was up ahead of our growth rate, over 100%, fueled by curiosity and word-of-mouth around these promotions.

While many consumer companies see marketing as a rising cost, in Q2 our average order value increased 1% year over year and cost of acquisition declined 9% to 10%, even more in glasses. The larger mission remains building lifetime customer relationships. We are pleased with short-term results, but the long-term value of these customers is what matters most.

06/08/2025 Are you directing more growth spend toward eyeglasses than contact lenses?

We do talk a lot about glasses, and performance there was strong. But contact lenses also continue to onboard new customers and remain a workhorse for us. Customers in contacts seek more value through online channels, and we continue to invest there. You are right that glasses get more airtime in remarks and Q&A, but both categories are receiving investment and growing.

Financials

11/08/2022 How are inflationary pressures affecting gross margin targets?

Gross margin improvement is coming from stronger pricing discipline and higher service levels, supported by over 179,000 five-star ratings and an NPS above 80. Glasses units grew 72%, with more customers choosing premium upgrades and repeats at higher gross margin levels. Our investment in onshore infrastructure allows us to serve customers more efficiently than the market. Longstanding vendor relationships, along with scale benefits from glasses growth, have offset potential cost increases.

09/11/2022 Should we expect margins to stay in the low 30% range before moving toward 35%–40%?

There are many moving parts in that margin number. We are balancing growth with profitability, so maintaining margins around 30% is the near-term expectation. As glasses become a larger share of revenue, particularly with returning customers, we expect margins to improve. Longer term, our consolidated margin target remains 35% to 40%.

09/11/2022 Are marketing expenses expected to remain around 14% of sales, and how is spending shifting toward glasses?

Yes, marketing expense decreased slightly in the quarter, and we expect this trend to continue, staying around 14%. Importantly, organic search and word-of-mouth are rising sharply, with brand searches up 64% year over year. This contributed to about 80% growth in glasses revenue while holding marketing spend flat, showing the positive impact of brand momentum.

13/12/2022 What is driving margin improvement?

Margins are improving in both contact lenses and glasses. Scale benefits help, but importantly, glasses customers are coming back for second and third pairs, often adding more lens options. Growth in our digital progressive lenses also expands margins.

10/05/2023 How are you thinking about inventory position and free cash flow growth this year?

Yes, we saw moderation in inventory, around $2 million quarter on quarter. There is seasonality, particularly at fiscal year-end. We stock more in December to ensure strong customer service over the holiday period when suppliers are closed. Historically, inventory rises at year-end and then moderates, as it did again this year.

08/11/2023 What drove average order value higher this quarter and how sustainable is it?

Average order value rose to about $156 per transaction, up 15% year on year, with growth across both contact lenses and eyeglasses. Repeat customers have been a strong driver since they often purchase more after a good first experience.

Another driver has been digital progressives and specialty lenses, which have grown above expectations. Average order value may fluctuate quarter to quarter, but this past quarter benefited from a strong mix of repeat customers and specialty products.

08/11/2023 Is the 60% repeat revenue figure consolidated across contacts and glasses?

Yes, Doug. That percentage reflects the combined revenue from both glasses and contact lenses that comes from repeat customers.

08/11/2023 Is repeat revenue split equally between contacts and glasses?

We do not break out those specifics. The contact lens business has been around longer and is more mature, while the glasses business is newer.

06/03/2024 What drove gross margin expansion in 2023 versus 2022?

In 2022, gross margin was 31.9%, rising to 33.8% in 2023, a 190 basis-point increase. This was driven by a higher percentage of repeat customers, who return at stronger margins since we use initial promotions to attract new customers. In Q4, we also improved pricing and reduced promotions in glasses, which lifted margins further.

Longer term, as glasses become a larger share of the mix, we expect margins to keep improving. We see gross margin potential of 45% to 50% over the next 2–3 years as that business matures.

06/03/2024 How did customer acquisition costs evolve in 2023 versus 2022?

Marketing expense increased slightly in 2023 both as a percentage of revenue and on a per-customer basis. This reflects our strategy of spending more to acquire better-fit customers. With five years of data, we are more targeted in finding customers who bring higher initial and long-term value. That is not always the cheapest customer, but the one best aligned with our products.

In Q4, marketing as a percent of revenue rose due to branded marketing tests that help awareness but do not always pay back within the quarter. We expect marketing expense to normalize around 13–14% of revenue in early 2024.

06/03/2024 How do margins compare between new and returning glasses customers?

Margins are subtly better today, with returning customers having a stronger profile. Over time, based on our experience, we expect margins to continue to improve.

06/03/2024 What was the revenue split between contacts and glasses in Q4?

Glasses revenue was $4.1 million, and contacts revenue was $27.6 million.

06/03/2024 What was average revenue per pair of glasses in Q4?

Average revenue per pair was $68 in Q4 2023, up 26% compared to $56 in Q4 2022.

08/05/2024 How does Q1’s 74,000 new customers compare to Q4, and what explains gross margin pressure?

In Q4 2023 we added 69,000 new customers, so Q1 represents an uptick. The mix in Q1 leaned more heavily toward Canada, where incentives supported growth. That drove some seasonality and a temporary gross margin impact. On a normalized basis, Q1 2024 gross margin was essentially flat compared with last year, with some noise from vendor rebates and purchase incentives.

We expect a lift in gross margin in Q2 as we finalize incentive agreements. Overall, sequential new customer growth from 69,000 in Q4 to 74,000 in Q1, along with mix dynamics and incentives, explains the margin impact.

16/05/2024 Should we expect similar gross margin headwinds going forward?

We issued Q2 guidance for both top line and bottom line, which we had not done before. The outlook reflects continued growth into Q2, and we felt it was important to provide that visibility to the market.

07/08/2024 Are you seeing changes in consumer health or demand over the last 30–60 days?

We have not seen a slowdown. In uncertain times, customers look for value, and optical has structural benefits, it’s non-discretionary since people need to see, and roughly half of customers are covered by insurance premiums. We also benefit from the category moving online in both contacts and glasses across the U.S. and Canada, which shelters us from broader consumer headwinds.

Traffic was up over 30% year on year and also up quarter on quarter. Site traffic grew faster than revenue, showing more exploration on our website. Revenue strength is particularly visible in premium subcategories like daily contact lenses and digital progressive eyeglasses, which grew over 50%. This drove average order value up more than 20% in the quarter, so overall we’re seeing very positive signals.

07/08/2024 Why are margins steady despite higher revenue run rate, and where are you reinvesting?

In Q2, faster growth in new customer revenue slightly diluted gross margins, but it boosted revenue and EBITDA and will build a long-term active base. Looking ahead, we see a clear path to 40% gross margins and 10%+ EBITDA. Drivers include our own-brand contacts, branded frames with Kits prescription lenses, digital progressives, insurance, and new categories like smart glasses.

We will keep prioritizing revenue growth at industry-leading rates while scaling toward higher margins. Marketing and customer acquisition investments remain key areas, alongside strategies like influencers and top-of-funnel expansion, to sustain momentum.

06/11/2024 Are new customers showing higher average order value, and what is resonating with them?

You're right to notice the AOV increase, up about 22% in the quarter. We've seen strong success with the premium segment, including daily modality contact lenses and premium eyeglass lenses like Digital Progressive. We're continuing to invest there, as the online value delta is more meaningful in absolute dollars for these products and the convenience is unmatched.

So yes, the new customers are resonating with premium offerings, and you should expect us to continue to invest in that area.

10/02/2025 Can we expect marketing expenses to decrease as a percentage of the business?

Marketing is where we enjoy inventing the most. Many believe the only way to grow revenue is by scaling marketing spend, but we disagree. Since our launch in 2018, we have believed that scarcity fuels creativity. Instead of paying ever-increasing amounts into the same crowded channels, we focus on novel approaches that create enduring value for customers.

When we launched glasses, our “first pair free” strategy was born from this mindset. It costs us about $25 fully landed to deliver a high-quality prescription pair in one day, which we view as a better investment than paying $100–$150 to traditional advertising channels. It requires a leap of faith, but customers return and spread the word. This approach allows us to keep marketing expenses flat as a percentage of revenue while still driving growth.

05/03/2025 What drove gross margin improvement in Q4, and what levers remain?

Gross margin benefited from scale efficiency in fulfillment and general and administrative expenses, which continue to decline as the business grows. We are comfortable guiding 4% to 6% EBITDA with no additional CapEx. Efficiency leverage improves as volume increases. Marketing efficiency also improves with customer density, particularly in markets where brand awareness has grown. Even during an election quarter with elevated costs, marketing was efficient, and we expect continued leverage.

07/05/2025 What caused the uptick in inventory and when will it normalize?

Typically, inventory increases in Q4 and moderates in Q1. This year, out of caution given macroeconomic and supply chain volatility, we held higher inventory levels longer. As a result, Q1 inventory was higher than last year even adjusted for growth, and inventory days on hand increased.

We have worked with the team and expect levels to moderate down in Q2 and be back in line with historical norms by Q3. This should generate $2 million to $3 million of incremental operating cash flow.

06/08/2025 Does the 60,000 free pairs impact the average order value calculation?

Martin, the 60,000 pairs were new customers, not purely free customers. So while a portion were first pair free, they should not be assumed as zero value. Adjusted average order value is not exactly $237 as in your math. We can follow up with the precise adjusted figure. The key point is that net new customers generally have a lower average order size, but not zero.

06/08/2025 Is there a revenue mix shift toward third-party branded frames, and what is the margin impact?

The mix has shifted slightly toward branded frames from a low base. For the first few years we focused almost exclusively on KITS-branded frames, which still account for over 80% of total frames. We do not expect dramatic change. Each designer frame still comes with a KITS prescription lens and is delivered in a KITS box.

Gross margin percentages on branded frames are comparable to KITS frames. However, higher average order values on branded frames mean gross margin dollars are higher. So while the mix shift is modest, it can lift overall gross margin dollars.

Outlook & Guidance

11/08/2022 Why was revenue guidance removed and how do you view growth in the second half?

The shift in strategy was about moving from a revenue target to an EBITDA and cash flow positive target for the rest of the year. With current uncertainty across industries, we are prioritizing profitability and generating cash flow internally to fund operations. That said, we do expect growth, which will be a function of execution in the second half.

11/08/2022 Do you expect second half growth compared to the first half?

Yes, we do.

11/08/2022 How will you stabilize and grow the contact lens business?

We have been focused on expanding gross margin, which required triaging out customers that were not profitable long-term. That contributed to the decline you saw in the contact lens business. The outlook is positive and the business did grow sequentially quarter on quarter. We expect that trajectory to continue through the back half.

11/08/2022 Will EBITDA remain positive and will marketing investment increase?

Yes, we expect to continue expanding EBITDA and remain EBITDA positive in the back half of the year. We do not expect the ratio of marketing expense to increase materially, if at all. Growth is primarily being fueled by repeat customers and word-of-mouth.

11/08/2022 What drove the decline in conversion, and was it lower traffic or stable conversions?

Sequentially, the contact lens business improved. Year on year, we shifted some marketing spend from contacts into glasses, which gave us more efficient use of capital. Q1 saw a decline in contacts, but the business recovered in Q2 and we expect sequential growth to continue for the rest of the year.

In many cases, we converted contact lens customers, who typically have higher average order values, into glasses customers, which carry lower average order values. This explains why the top line hasn’t moved as much despite impressive glasses growth. Going forward, glasses will become a bigger part of the mix, driving top-line growth and higher margins. We’re pleased with contacts staying consistent while glasses growth accelerates.

13/12/2022 What challenges do you see going forward?

Like many, we have faced supply chain impacts. Lead times that were two to three weeks pre-pandemic stretched to eight to ten weeks. Fortunately, our onshore manufacturing allows us to deliver in one to two days, reducing reliance on overseas shipping. On inflation, the benefits of scale and growth in optical largely offset pressures, though we remain cautious. Supply chain conditions appear to be improving, and we are well positioned with our facility to continue serving customers reliably.

13/12/2022 Are you sticking with 2022 revenue guidance of $110–120 million?

We are a bit behind the original guidance, but our current run rate is just under $100 million. Analysts model us at over $100 million for Q4, and we are comfortable finishing the year in that range. While we are about two quarters behind the initial timeline, the growth trend is accelerating post-COVID, and we feel confident in the trajectory.

09/03/2023 What are the key drivers to reach margin targets, and when will they be achieved?

Hi, Mike. The gross margin targets discussed are in the 3 to 5 year range. We remain very excited about the long-term potential and profitability of this business based on the progress in Q4.

In the short to medium term, we are aiming for a 40% gross margin and EBITDA in the 5% to 10% range. We haven’t defined a specific quarter to achieve this, but Q4 results show steady progress. Drivers of gross margin expansion include glasses growth, which carries a higher margin profile, along with insurance customers, digital progressives, and lens upgrades. As volume increases, scale benefits will also contribute.

10/05/2023 What are your gross margin expectations going forward?

We improved by about 250 basis points in Q1 versus the prior year, though quarter-to-quarter seasonality exists. We compare margins year over year. Key drivers remain growth in repeat customers, who already represent over 60% of revenue, particularly in glasses, along with more digital progressive adoption. These factors position us on a path toward 40% gross margin.

10/05/2023 Any update on timing and outlook for reaching 40% gross margins?

We see margin expansion continuing over time, with some quarter-to-quarter seasonality. Year on year, progress has been steady, and growth in returning glasses customers supports further improvement. We are not seeing significant pricing pressure, and the contact lens market remains rational, which is positive for margins.

Customers are becoming less price sensitive as the brand grows. Glasses, particularly return customers, progressives, and specialty lenses, carry higher margins than our core business. As these segments expand, margins should systematically increase. Our outlook remains unchanged, and we expect margins to rise as glasses become a larger share of revenue.

09/08/2023 Can you update us on revenue growth expectations for the second half of the year?

Thanks, Matt. We are very pleased with 38% growth in two consecutive quarters, about 10 times the industry rate. This has been driven by strong repeat customers and accelerating online penetration, which has doubled from pre-pandemic levels. With millennials continuing to enter the category, we feel confident in maintaining momentum.

While we have not issued formal guidance, the high teens to low 20s growth rates you suggested are comfortable for us. Contacts have outperformed expectations this year, while glasses grew 22% in a category expanding only 3% to 4%, even as we reduced marketing spend. Our focus remains on profitable growth with momentum continuing into Q3.

09/08/2023 What are the drivers to reach mid to high 30% gross margins and timing?

We remain committed to our 3 to 5 year target of 40%+ gross margins. In Q2, we achieved an 80 basis point improvement while delivering 38% growth. The main drivers ahead will be the mix shift to glasses, particularly progressives and readers, which are gross margin accretive. Premium single-vision lens offerings also contribute positively.

We see significant room for expansion in glasses gross margins. Combined with five straight quarters of growth and multiple quarters of adjusted EBITDA profitability, we expect continued leverage on operating expenses. Investors can anticipate steady progress toward higher margins in the coming quarters.

09/08/2023 When do you expect a breakout quarter for glasses as a percentage of revenue?

Thanks, Doug. We love to talk about glasses, and it remains a major focus for our team. We are closely monitoring two things: first, ensuring the rate of online penetration for glasses continues, which we believe it has; second, making sure repeat trends for glasses mirror the strong retention we see in contacts. This quarter, we were delighted to deliver 39,000 glasses to repeat customers, more than half of total units.

The last piece has been building out our lens and product offering. The lens lineup is nearly complete, and the product range will expand meaningfully over the next one to two quarters. All this progress has come while keeping marketing spend efficient, supported by repeat purchases. While we have not pinpointed a specific breakout quarter, we are very encouraged by the momentum and expect notable advances in the near term.

29/02/2024 What does the expense outlook look like for capex and opex? Any big spends ahead?

We built capacity well ahead of demand. Our Vancouver optical lab can handle just over 4,000 pairs of glasses a day, while we currently produce 1,200–1,500. The machines are made to order in Europe, take about a year to deliver, and require integration with our technology, so we invested early. We believe the capex already deployed supports roughly a doubling of revenue from our $125 million run rate.

The machines are highly automated, with one technician able to operate four industrial edgers per shift. Glasses still require some hand assembly and QA, but total production time is 20–25 minutes per pair. It took about four years to grow from zero to $100 million, which was roughly break-even at about 1% EBITDA and 30–33% gross margin. With the lab and brand now established, we expect to reach $200 million in revenue within 18–24 months. At that scale, we target gross margins around 40%, fulfillment costs reduced from 14.5% of revenue a year ago to about 11.5%, G&A down to 5–6%, and marketing steady at 12–14%. Internally, our goal is to reach $200 million in revenue, 40% gross margins, and 10–15% EBITDA within about two years.

29/02/2024 Why no guidance for Q4?

As we have grown, we have occasionally issued pre-releases to address investor questions about growth. Over time, we have built a consistent record of delivering quarters at or above expectations. We feel confident in our results and are excited to report them in a couple of weeks, but we are considering whether pre-releases should continue or whether we will simply report earnings each quarter going forward.

29/02/2024 Why did you hold back on Q4 pre-release guidance this quarter? Who covers Kits now?

We decided to wait until earnings on March 6 to share our full fiscal year and Q4 results. We’re very excited to report. Analyst coverage has expanded to five firms: Doug Cooper at Beacon Securities, Derek and Luke at Canaccord, Jason at Pi Financial, Matt Krenda at Roth Capital, and most recently John Luca at Haywood, who published a thoughtful initiation. We expect one more initiation soon, which will bring us to six analysts.

06/03/2024 Should we expect more margin expansion in 2024?

We will balance growth with margins. New glasses customers arrive at lower gross margin while returning customers are higher. So it depends on how aggressively we choose to grow. For larger expansion, we are thinking in terms of a couple of years. In the near term, the focus is growth while maintaining positive adjusted EBITDA. We want to capture as much share as possible during this secular shift while staying profitable at the adjusted EBITDA level.

06/03/2024 What is driving strength in Q1 despite seasonal softness?

Momentum from Q4 brand investments carried into Q1, with strength across both contacts and glasses. Demand is supported by the non-discretionary nature of the category, customers need to refresh prescriptions, contacts, and glasses. In addition, consumers are seeking value, and our proposition is resonating. We believe Q4 had more noise in the category, but investments in brand spend are now showing benefits. All in all, 2024 is off to a good start.

06/03/2024 Has the mix between new and repeat customers shifted in Q1?

No major change. The mix remains relatively stable in the mid-60s percentage range for repeat customers, consistent with historical levels.

06/03/2024 Why wouldn’t Q1’s high growth rate be sustainable through year-end?

We are confident in the offering, especially the subscription business, which is scaling consistently, and the contact lens business, which remains strong in both Canada and the U.S. Customers are seeking better value, and our eyeglasses offer is unmatched. As awareness spreads, we expect that business to strengthen significantly, particularly starting in the back half of Q2.

Overall, 2024 growth looks consistent with a high-growth business in the 20–30% range. We expect glasses to accelerate and margins to improve over time. Looking 2–3 years out, our goal is less about competitive reactions and more about wowing customers with experience, fulfillment, and quality, allowing organic pull through customer referrals.

06/03/2024 What are your long-term gross margin and EBITDA targets at scale?

Q4 was a strong margin quarter, but the annual level is more representative. Margins will not increase by 100 basis points each quarter; instead, we expect step changes as glasses grow in the mix. Near term, gross margins should be modeled more moderately, with continued focus on growth and positive adjusted EBITDA.

Longer term, our facility can support eyeglass margins in the 50% range. As glasses expand and marketing efficiency improves, more of this benefit will flow through. Fulfillment is faster and more efficient, G&A has remained flat for six quarters, and the team is delivering faster than competitors by air freighting. Over time, higher glasses mix will push gross margins into the 50s.

06/03/2024 When will we see a breakout quarter in glasses and what is current facility utilization?

Glasses capacity utilization today is low, about 10–15% on a unit basis and lower on a dollar basis. Average order size will rise over time. We expect momentum to build in the back half of Q2, with Q1 already strong. By Q4, we anticipate meaningful acceleration in glasses, potentially surprising even our internal team.

At that point, marketing as a percent of sales should become less material, with growth driven more by word-of-mouth and repeat customers. We view this as reaching “escape velocity” in glasses.

08/05/2024 How should we think about gross margin and EBITDA cadence this year?

On an annualized basis, both gross margin and EBITDA have improved significantly over the last year, and we see those gains as durable. We remain confident in building a business with 40%+ gross margins and 10%+ EBITDA. Our Q2 outlook is EBITDA in the 3% to 5% range while continuing industry-leading growth. EBITDA expansion will come from scale in revenue and leverage on operating lines.

Each quarter is unique. In Q1 we invested in acquiring optical customers in premium categories, which lowered gross margin percentage on first orders but was offset by lower marketing spend. We are excited to continue expanding EBITDA and progressing toward our 40%+ gross margin target in the coming quarters and years.

08/05/2024 Did your revenue and EBITDA guidance of $36–38M and 3%–5% margins apply to Q4?

No, that guidance was for Q2.

08/05/2024 What are your expectations for Q2 2024 and what is driving momentum?

We are finishing Q1 and expect strong momentum in Q2 2024. We are not quite halfway through the quarter, but spring has been strong. The value proposition is cutting through with success despite declining marketing spend as a percent of revenue.

We have focused on three things: quality of the product, speed of delivery, and selection. Those are resonating with customers and showing up in new customer traction as well as returning customer strength.

08/05/2024 Has your outlook for marketing spend as a percentage of revenue changed?

Yes, in Q1 yields went up while marketing expense went down to 13%, a leverage of about 150 basis points year on year. For the balance of 2024, we want to keep marketing spend in the 12% to 14% of revenue range. Longer term, we see that percentage declining further.

08/05/2024 How should we think about growth for the second half of 2024?

We remain comfortable with our annual revenue growth target of 20% to 30%. Q1 and Q2 have both shown strong growth, about 5 times the rate of the industry, which is growing only 3% to 5%. We are staying focused on delivering value for customers.

For Q2 specifically, we guided to $36–38 million in revenue and 3% to 5% EBITDA margins. We will update on the balance of the year in the next call, but there is no change to the 20% to 30% annual outlook.

16/05/2024 What is your Q2 outlook and medium-term financial target?

We expect revenue to grow 23% to 25%, reaching $36 million to $38 million in Q2. Adjusted EBITDA should come in at 3% to 5%. The puts and takes are marketing and fulfillment leverage versus gross margin expansion, which vary by quarter, but over six quarters we have made meaningful progress on both.

Looking ahead, our internal two-year target is a $200 million revenue run rate, gross margin approaching 40%, and EBITDA in the 10% to 15% range. Right now, our focus is Q2, delivering 3% to 5% EBITDA while maintaining growth.

03/06/2024 What is the long-term end game for Kits?

There will certainly be opportunities for acquisition, but our mindset is different. Coastal Contacts, our previous company, could have been a multi-billion-dollar business had it continued independently. While that sale was a great outcome, we believe the current opportunity is larger, with the market now rapidly moving online.

Our view is that Kits can capture this moment. The focus is not on selling but on building a lasting business that thrives as the optical category shifts online.

03/06/2024 What is your long-term vision for Kits?

Our capex is already deployed and organic growth opportunities remain significant. We may also use M&A to expand further in North America or beyond. There is no reason to stop at a $450 million outcome like Coastal Contacts. We see Kits as a business we could hand down to our children and continue to grow for decades.

03/06/2024 What milestones should investors look for in the next year?

The main catalysts are continued organic growth and consistent cash flow generation. Every quarter we meet or exceed top- and bottom-line expectations, it builds confidence. We now have six sell-side analysts covering us, and their reports reinforce that progress.

We also have minimal debt, only about $6 million with the BDC, due in Q2 2026, while many U.S. microcaps face heavy refinancing. Kits is asset-light, profitable, and positioned in a non-discretionary category with the market moving online. Investors should expect steady execution and leadership among TSX consumer stocks, as we were the top performer in 2023.

07/08/2024 With average order value at $182, is this unusually high and where could it trend?

We were very pleased to see average order value around $180, with both glasses and contacts contributing, and growth coming from Canada and the U.S. We haven’t set public targets for later 2024 or 2025, but we do expect continued appreciation, largely from the eyeglasses category. Digital progressives and lens upgrades are major drivers.

Smart glasses could also become a tailwind, though they remain very small today. Overall, we expect average order value to continue edging up quarter on quarter over the next 4 to 6 quarters.

07/08/2024 Does Q3 guidance imply accelerating growth and operating leverage?

We’ve guided to $39 million to $41 million in revenue and 3% to 5% EBITDA margin for Q3. Growth has been consistent, and our forecasting is improving, which is why we set that range. While guidance suggests acceleration, we view it as steady growth with continued operating leverage.

07/08/2024 Can you break down Q3 guidance between contacts and glasses, and how do smart glasses impact AOV?

For now, we’re providing blended guidance. Both contacts and glasses are showing momentum. Smart glasses are very early, a small part of the business, and not something we’ve modeled extensively yet. We are seeing encouraging traction, but we expect any material contribution to AOV to build gradually over the next three to four quarters rather than in Q3.

07/08/2024 How should we think about long-term growth, margins, and customer basket size?

Over the last three years, we’ve doubled the size of the business, and that’s how we think about our targets, continuing to grow the top line while steadily building gross margins and the bottom line, all while serving customers exceptionally well. We focus on long-term value creation rather than optimizing margins for the next quarter. Gross margins become more attractive as our own products and specialty lenses expand in the mix.

There is no real cap on average order size. As customers age, they tend to buy multiple pairs of glasses, progressives, transitions, sunglasses, and fashion pairs, while also using contact lenses for sport or fashion. Over the next three to four years, we could see basket sizes double. Alongside that, we continue to add new customers through existing channels and strong word-of-mouth.

04/09/2024 How do you convince reluctant new customers, and when will gross margins reach 35%–40% with scale?

On margins, we expect to approach 40% in the short to medium term as glasses become a larger part of our mix. Industry glasses margins are often north of 50%, so scale and glasses growth will drive expansion to 40%, then 45% and beyond. Premium lenses are another margin driver.

As for converting new customers, millennials are our strongest cohort, driven by influencers and unboxing experiences. For those who hesitate, like your mom, the key is the value delta. Digital Progressive lenses in a brick-and-mortar store start at around $1,000 in the U.S., while on kits.com they cost about $128. The same or better quality comes from automated precision machines. Once customers see they can save $800 or more without sacrificing quality, they return and rarely go back to brick and mortar.

06/11/2024 What is driving Q4 guidance ahead of consensus expectations?

Good morning and thanks, Luke. We're proud of the team and the results this quarter. The team has delivered strong acquisition and retention, and word-of-mouth from happy customers sharing their experience has been a major driver. We are seeing the strengths of the model really help us grow.

You may have seen our note at the start of the quarter about another record week in October. Typically, Q4 builds gradually, but this time we saw strength right out of the gate. With momentum from the last eight quarters, we feel the wind at our backs. We want to be transparent when we have news, so we're happy to share the strength in October and excited about the plans for November and December.

06/11/2024 With 39% year-over-year growth at the midpoint, do you see momentum continuing into 2025?

Thanks, Doug. We have good visibility into Q4 thanks to a strong recurring revenue base, and the team is executing well across functions. We feel confident in the Q4 guidance, but we're not looking too far into 2025 yet. Our focus is on executing this quarter.

That said, the model has been gaining momentum, driven by both new and returning customers, and supported by execution across marketing, fulfillment, customer service, and manufacturing. We're producing high-quality products quickly, often in less than a day, and customers are responding well. There's still a lot of flexibility in the model, and we're optimistic about what 2025 and beyond will bring.

06/11/2024 What is driving the large increase in glasses AUR, and how should we think about it going forward?

Each quarter is a little different, but this quarter saw strong premium lens growth and less need for promotions. Glasses AUR was up over 60% year on year. Digital Progressives were up over 60%, SunRx was strong, and overall promotional activity was lower.

Going forward, we expect premium mix and continued strong adoption of higher-value lenses to support healthy AUR levels.

06/11/2024 Why maintain EBITDA margin guidance flat despite higher Q4 revenue guidance?

We expect to stay consistent with prior periods, focusing on marketing efficiency, fulfillment efficiency, and keeping SG&A tight. Investments will be consistent with past quarters, rather than ramped significantly.

06/11/2024 Was more marketing spent in the U.S., or just timing?

Marketing spend as a percent of revenue remained consistent at 12% to 14%. We saw strong responses in both Canada and the U.S., with outsized growth in the U.S. The model remains focused on category-leading growth while staying adjusted EBITDA positive, and marketing efficiency will remain a consistent theme.

10/02/2025 As the shareholder base matures from retail to more institutional, what has changed in investor relations strategy?

The best investor relations is strong execution. Many institutions have been following us for years, judging us on consistency of results. With nine straight quarters of 30%+ average organic growth and disciplined costs, they are now investing. Our first investor day in September helped as well. Olivia coordinated an excellent event where over 50 investors attended. We highlighted that the hard work of building infrastructure is done, capital is deployed, and now we focus on growth, adjusted EBITDA, and free cash flow with minimal capital required.

We began that day with a lab tour to show how glasses are made, underscoring why $400 prescription glasses are unnecessary when technology, automation, and skilled technicians are applied. That transparency reinforced our story. The event generated momentum and confidence. While share price growth is welcome, we believe continued execution positions this as more than a $10 per share story, with significant upside ahead.

10/02/2025 What are the greatest challenges moving forward?

Our biggest challenge is holding on to what works, our low-cost model and infrastructure that give us flexibility. We must not let costs get away from us. Because of our lean setup, the gap between adjusted EBITDA and net income is around 1%, compared to about 5% at peers like Warby Parker. That 400 basis point advantage drives free cash flow and efficiency.

The temptations are real: overspending on stores, bloated marketing, or losing control of working capital. Our focus is to resist those and stay disciplined. We are comfortable growing a little slower if it means doing the hard work first. As we reach a $300–350 million market cap and a $200 million revenue run rate, we want to be students of companies that scaled to $1 billion. We study both successes and failures to guide our next steps.

10/02/2025 What catalysts or milestones should investors watch?

As expectations rise with execution, we will remain conservative in forecasts and focus on consistent top- and bottom-line delivery. Key milestones include steady revenue growth, margin expansion, and quarter-by-quarter progress toward stronger adjusted EBITDA and free cash flow. Our priority is disciplined execution, which we believe will drive sustainable value creation.

10/02/2025 What internal targets are you working toward over the next few years?

These are not formal guidance, but we shared them at our investor day. If you walk our halls, you’ll hear people discussing them openly. Near term, the focus is quarter by quarter, continuing to exceed on both top and bottom line. Over the next two years, we aim to grow into a $250 million revenue run rate business with 10% EBITDA. Looking further out, our five-year internal target is a $500 million revenue run rate with 15–20% EBITDA. The roadmap is clear, and the challenge is disciplined execution, avoiding overinvestment, maintaining cost advantages, and being good students of the market.

05/03/2025 Are you seeing changes in KPIs, churn, acquisition costs, or upgrades given weak Canadian consumer confidence?

We had a phenomenal fourth quarter and strong year, with record new and returning customers. Operating expenses were tightly controlled, though marketing ticked up slightly due to election noise. As for consumer confidence, customers are trading into value and innovation without sacrificing quality. Kits is being chosen for both quality and value, and the message is resonating. The vision care category remains resilient because it is non-discretionary, and we are not seeing changes in consumer behavior at year-end. Customers still need contact lenses quickly and that demand has not shifted.

05/03/2025 How do you see 2025 evolving, any large investments or costly marketing campaigns that could impair profitability?

For Q1, we guided $46,000,000 to $48,000,000 revenue and 4% to 6% EBITDA, which is solid progress. Historically we aimed for 3% to 5%, so moving up reflects our confidence. We expect no reversal, with record returning customers fueling higher average order values, gross margins, and EBITDA. No new catalysts are needed beyond continuing this trajectory.

On CapEx, we do not expect a change as a percentage of revenue. In 2024 it was 1.9%, and 2025 will be similar. The investments are largely deployed and we will grow into them. In Q4, adjusted EBITDA was 6.5%, up 380 basis points, and Q1 is on track for 4% to 6%, compared with 1.8% last year. We will continue to make steady progress quarter by quarter.

05/03/2025 Can you expand on Q1 growth guidance in terms of AOVs, units, product mix, and customer segments?

We are not breaking out all components, but expect consistent growth across contact lenses, glasses, and return customers. We continue to acquire the most valuable customers, those with fast returns and best margins. Innovation initiatives remain a potential catalyst for further growth, though we are not detailing them today.

05/03/2025 Did glasses unit volumes improve in Q4, and what is the trend?

Yes, unit volumes improved in Q4 and we expect that to continue into Q1. We have a strong engine for acquiring new customers, driven by influencers and organic word-of-mouth, and that steady growth in glasses customers should persist.

05/03/2025 How does the Own This Town strategy roll out in 2025, and what impact will it have on marketing?

We are excited about the next iteration, though it is too early to share details. The strategy allows us to expand market by market based on customer data, not tied to legacy brick-and-mortar locations. In Q4, new customer revenue rose 50% with only a modest marketing increase, despite elevated seasonal and election costs. Going forward, we expect marketing costs to moderate as word-of-mouth and influencers further improve efficiency.

05/03/2025 Are you optimizing marketing efficiency, and can ROI hold or expand in 2025?

Our web store saw same-store sales up over 40% in Q4, and our physical store presence was up more than 60%. We are transacting in a single day what typical retail optical stores do in a week. This shows strong resonance with our strategy, whether in permanent or pop-up formats. The focus is not just efficiency of spend but acquiring the right customers and letting them amplify the brand.

We remain equally focused on retention, ensuring customers return for second and third purchases, which drives lifetime value. Vision correction is a decades-long need, so the fulfillment team’s ability to deliver orders quickly and accurately is central to retention. Influencers continue to lift new customer growth, while retention sustains long-term performance.

05/03/2025 How is the TELUS Health partnership performing, and is it generating meaningful revenue?

Insurance has been a strong driver of average order value, retention, and marketing efficiency. In the most recent period, insurance customers grew over 200%. Most partnerships to date have focused on Canada, and we expect to expand this success into the U.S. during 2025.

13/03/2025 What are Kits’ long-term profitability targets?

Thanks for the question. These are internal targets, not formal guidance, but I’m happy to share them. In 2024 we delivered $160 million in revenue with 4% adjusted EBITDA, accelerating to 42% growth and 6.5% adjusted EBITDA in Q4. Looking ahead two years, our target is a $250 million revenue business with adjusted EBITDA of around 10% or slightly above. Over five years, we aim for $500 million in revenue with 15% to 20% adjusted EBITDA, ideally above that.

We recognize growth requires reinvestment, but these targets reflect our confidence in scaling profitably while maintaining customer and shareholder alignment.

07/05/2025 What underpins Kits’ strong Q2 outlook despite the macro environment?

Marketing and growth are coming from existing customers, word of mouth, and traditional channels. The best way to build the business is to wow customers, so we focus on Net Promoter Score relentlessly. Customers love the selection, service, speed, and how easy insurance connections make billing. They value our branded selection of over 6,700 styles, including Ray-Ban and Oakley.

High-value products like progressive eyeglasses, which typically retail for $800–$1,000, are priced at around $200 with Kits. These factors drive word of mouth and growth outpacing the market 8x–10x. Customers are leaving traditional optical due to confusing pricing and high-pressure sales. The category is resilient, and our goal is to exceed expectations. We are leaning into growth with confidence as we head into Q2.

07/05/2025 Why is Q2 EBITDA margin guidance 3%–5% despite strong Q1 performance?

Our original Q1 forecast was 3%–5% EBITDA, but the team outperformed with traction across progressives, Kits contacts, branded products, and insurance. Marketing also ticked down in Q1, which helped margins. For the first half of the year, we have always guided around 3%–5% normalized EBITDA. In the back half, we expect this to move higher, and we will provide updated guidance at the end of Q2 and into Q3.

Some fast-growing segments, like progressives, carry higher gross margins and will play a larger role over time. We continue to target 15% or more normalized EBITDA longer term. Today, we are investing to secure high-value customers, so maintaining 3%–5% in Q2 is appropriate. Our focus is on attracting the right customers, making the right investments, and wowing customers, while margins and EBITDA trend higher over time.

We continue to invest in Own This Town with no change in strategy, and results in Q2 were encouraging. Seeds planted earlier are paying off with higher awareness in key markets, visible in Canadian revenue up 44%. The team is now focused on converting these initial customers and planning subsequent markets. It remains an important tool in our playbook.

On marketing, Q2 spend was about 15.2% of revenue. With Q3 EBITDA guidance of 5% to 7%, we expect marketing as a percentage of revenue to moderate by 50 to 100 basis points quarter over quarter. We also expect gross margin to show some favorability sequentially.

06/08/2025 What are your short and long-term gross margin targets as glasses scale?

No change to strategy. As the glasses business grows, it contributes to higher gross margin. A year ago margins were in the low 30s, now they are approaching the high 30s. The destination remains 45% and above within three to five years.
This will be driven by franchises like digital progressives and other fifty-fifty club members that help lift margins. So the plan is steady progress toward 45% over that timeframe.

06/08/2025 How will you balance growth versus margin expansion into 2026?

Thanks Kyle. In Q2 we wanted to show that we do control the dials between growth and profitability. Some quarters we prioritize EBITDA levels, others we lean more into growth. For Q3, guidance is for adjusted EBITDA margin of 5% to 7%, which would be our third or fourth quarter at that level. In Q4 we expect some favorability in marketing and gross margin, and we will share more then.

Our next milestone is adjusted EBITDA above 10% in the next few years and 15% to 20% within five years. Glasses growth, premium lenses, Sun Rx, kids brand contacts, kids colors, and digital progressives will continue to drive that trajectory.

Ridks & Macro

11/08/2022 Have you seen changes in consumer behavior given inflation?

We continue to see customers demand great quality products at fair prices. We now offer over 800 styles across multiple brands and price points. Customers want convenience and selection, and our vertically integrated model enables efficient manufacturing, which allows us to pass savings along. This is fueling growth in the glasses segment.

06/11/2024 What are your thoughts on potential tariffs affecting the eyeglass industry?

We source raw materials globally, including Asia, with some component assembly. We cannot predict government action, but for every source and component we buy, we have identified clear alternatives and can shift within a single quarter with minimal cost impact.

Importantly, we benefit from our onshore manufacturing facility where every pair of glasses is made locally. Most of the industry still outsources manufacturing overseas, so we believe this is an advantage. We also hold months of inventory on hand. Expect us to stay ahead of any changes and be well positioned versus the market.

13/03/2025 What is your view on potential tariffs and their impact on Kits?

We are watching developments very closely, refreshing news feeds daily. Currently, our contact lens products are manufactured in the U.S. or outside the countries identified for tariffs, so we see little disruption there. On the glasses side, the Canadian market is unaffected, and the country of origin is defined as the raw material lens puck, which we source primarily from Europe, Taiwan, and Israel. None of these are currently implicated.

If U.S. rules change, our plan is to quickly set up a micro-lab in Washington State, using equipment from our existing lab. We could have that operational within one to two months, with no increase in capex as a percentage of revenue. While 73% of U.S. prescription glasses are still manufactured in China, large incumbents will face costly supply chain reorganizations. Our vertically integrated model, with direct sourcing and redundancies, positions us to maintain and even expand our cost advantage. As we see it, disruption in the industry only sharpens our competitive edge.

07/05/2025 How are tariffs affecting Kits and what is the competitive impact?

To date, there has been no impact on our business. Our lightweight infrastructure and lean approach let us move fast and expand the value delta between us and competitors. According to The Vision Council, 75% of U.S. glasses sold last year were made in China, which means longer adjustment cycles for larger players.

Once definitions are clarified, we expect to adjust within weeks or at most a couple of months. Any one-time costs should be manageable and completed within a quarter. In any scenario evaluated, 2025 CapEx as a percentage of revenue should be in line with or below 2024 levels, around 1.8%–1.9%. We remain confident in our ability to adapt quickly and maintain our cost advantage.

Personal Questions

03/06/2024 Where did the name “Kits” come from?

The company is named after Kitsilano, a Vancouver neighborhood and its well-known Kits Beach, often called the city’s heartbeat. Roger and I met daily at a coffee shop there in early 2018 to brainstorm the business. Initially we wanted to use “Kitsilano,” but realized it was hard to spell and recognize, so we shortened it to Kits.

When that same coffee shop later closed, we opened our one and only Kits store in the location. It now serves as a retail store, event space, and community hub right on the beach.

Other

11/08/2022 Any closing remarks?

It was an impressive quarter of execution by the team. We managed the fast-growing glasses business while improving gross margins and reducing marketing, manufacturing, and fulfillment expenses despite a volatile cost environment. We became a cash-generating company with positive EBITDA, demonstrating the predictable and recurring nature of our revenues. We look forward to updating shareholders on upcoming developments.

03/06/2024 What key message do you want investors to take away today?

We’re grateful for the chance to share our story. Kits is a small, focused team with a clear mission to make eye care easy. While we may not broadcast as often as other small caps, we are consistently building a strong, recurring business with cash flow, scale advantages, and a market that is moving online.

03/06/2024 What final message would you like to leave investors with?

We love this business and industry, and it’s fun to work on every day. We’re grateful for the chance to share our story at conferences and in forums like this. But more than listening to our story, investors can best understand Kits by becoming customers. If you’re considering investing, try us first, order from kits.ca in Canada or kits.com in the U.S. and experience our products and service directly.

That experience should demonstrate the quality and opportunity in front of us. Just over five years ago, we couldn’t have imagined people wanting to hear about our vision. Today, our customer-first model speaks for itself, and we believe it is the foundation for long-term growth and shareholder value.

Disclaimer:

The following transcript and Q&A have been generated with the assistance of Artificial Intelligence (AI). While we strive for accuracy, completeness, and clarity, the content may contain errors, inaccuracies, or misinterpretations. Neither the company featured in this document nor ValueBridge assumes any responsibility or liability for the accuracy, reliability, or completeness of the information presented.

This material is for informational purposes only and should not be construed as official company communication, financial advice, or a definitive representation of the company's views. Readers should independently verify any information before making decisions based on it.

Sources

Cipher Pharmaceuticals is a North American specialty pharma company focused on dermatology and niche therapeutics. Its Canadian business is anchored by Epuris, which holds about 60% of the severe acne market, generating $18–20 million annually. In the U.S., growth is centered on Natroba, with a current 23–25% share of the $165 million anti-parasitic market (1.1 million prescriptions annually), primarily competing against permethrin, which still controls about 71–75% of prescriptions. Cipher operates with lean infrastructure, deploying roughly 36 U.S. field reps and using targeted commercial partnerships. Margins are strong, historically around 50% EBITDA, with tax loss carry-forwards of $154–211 million shielding cash flow. The company maintains a $65 million revolving credit facility, with recent deleveraging positioning it near net debt–free. Its strategy balances organic growth, licensing, and disciplined M&A, with recent emphasis on U.S. tuck-in acquisitions and cross-pollination of Canadian assets into the U.S. market.

Catalysts & Milestones

2023 - Execution of CAD 6 million Substantial Issuer Bid, repurchasing over 1 million shares

2024 - Expected U.S. Phase 3 readout for MOB-015 with potential Canadian launch preparation

2024 - Acquisition of Natroba business from ParaPRO, expanding U.S. anti-parasitic portfolio

2025 - Targeted launch of MOB-015 in Canada pending favorable trial outcomes

2025 - Anticipated licensing deals for Natroba in Europe, Asia, and Middle East

2025 - Scabies market penetration opportunity, with ~500,000–600,000 prescriptions addressable

2026 - Expiry of Sun Pharma’s Absorica U.S. contract; Cipher regains rights and evaluates in-house marketing

2026 - Potential Canadian launch of Can-Fite psoriasis drug (market size $45–46 million)

Investment Highlights

• Natroba holds 23–25% share of a $165 million U.S. anti-parasitic market

• Epuris captures 60% of Canadian acne market with $18–20 million annual sales

• Cash reserves of $40–45 million plus a $65 million revolver provide ample M&A capacity

• EBITDA margins around 50%, with over $150 million in tax loss carry-forwards

• Acquisition pipeline includes assets with revenue above $30 million annually
  
  

Future Growth Drivers

• Expansion of Natroba in scabies, the largest sub-segment (~500,000–600,000 prescriptions)

• U.S. Medicaid and Medicare access gains following Illinois preferred status precedent

• Cross-border licensing of Natroba into Europe, Asia, and Latin America

• Canadian MOB-015 nail fungus launch with market potential of $90 million

• Pipeline expansion via U.S. tuck-in acquisitions and potential Epuris in-licensing for the U.S.
  
  

Risk Factors

• Heavy reliance on Natroba, with only 23–25% share versus permethrin’s 71–75% dominance

• MOB-015 Phase 3 uncertainty; negative outcomes would stall a $90 million Canadian market entry

• M&A risk of overpaying or failed integration despite $65 million facility access

• Medicaid wins vary by state; coverage renewals only annual or biannual

• Expiry of tax loss carry-forwards starting 2026, reducing free cash flow shield

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Capital Allocation

09/08/2019 When will the company’s debt be fully paid off?

Our debt is due in November 2020 and should be paid in full by then. We also expect to accelerate repayment of that loan.

09/08/2019 Are there corporate development options such as divestments on the table?

We are reviewing a number of products from Galephar and hold first right of refusal on four, one in particular that we have serious interest in. We intend to build a stronger collaboration with Galephar, given our long history with them and their substantial resources and pipeline.

08/05/2020 Have you considered paying a dividend, and were there offers for Epuris during the strategic review?

At present, our strategy is to generate income from our products, reduce debt, and retain cash to pursue opportunities. We do not anticipate paying a dividend in the near term.

Regarding Epuris, we did sign confidentiality agreements with interested parties and cannot disclose details of any offers. What I can say is that Epuris is highly valuable to the company, and that was reinforced through the review process.

13/11/2020 What was the average purchase price of shares under the normal course issuer bid?

I am not sure of the exact price, but Cipher cannot purchase stock at any price greater than the last traded price.

13/11/2020 How many shares were purchased under the issuer bid after September 30?

We were under a blackout for much of that period, so we were restricted from buying. Going forward, we intend to be an active buyer of our stock, subject to regulatory requirements. The stock is very thinly traded, and we would like to purchase as much as possible.

17/03/2023 What are Cipher’s cash obligations to partners (Can-Fite, Moberg) over the next 24–36 months?

For MOB-015, the nail fungus product, milestone payments are scheduled based on results. The next milestone will be triggered if trial results show superiority over the leading product. Future milestones are tied to net revenue. We view these obligations positively, as a product performing better than Jublia would justify the payments.

17/03/2023 Can you quantify those milestone obligations?

These figures are disclosed in our financial statements, Note 17, under development milestones for both Moberg and Can-Fite.

17/03/2023 What are the contingencies and interest rates on your new line of credit?

I cannot disclose exact contractual rates, but they are either fixed fee or fixed to SOFR in the U.S. and CDOR loans in Canada. The spread ranges based on leverage and is between 1% and 3%.

12/05/2023 Are M&A opportunities focused on the U.S. or Canada?

We are looking at both. Much of our focus has been on the U.S., given its larger market size and greater potential opportunities. That said, Canadian opportunities have also emerged, and we are actively reviewing potential product or company acquisitions, as well as royalty arrangements.

We continue to spend relatively more time on U.S. prospects given the scale of growth possible, but both sides of the border remain active areas of interest.

12/05/2023 What is the status of the normal course issuer bid (NCIB)?

During Q1, we were largely in blackout due to annual results, which limited our ability to repurchase shares. The program is selective rather than automated, unlike prior years. As we exit blackout, we intend to restart the NCIB, as we view our share price as undervalued and believe it is an effective way to return value to shareholders.

26/05/2023 How should investors view your $68 million in growth capital, and what types of deals are you pursuing?

We are looking at both opportunistic and strategic opportunities. Opportunistic cases involve companies under financial stress, where we can provide capital or restructure. Our primary focus is U.S. companies, often NASDAQ-listed, with strong products but excessive overheads or oversized sales forces. In such situations, we could replicate what we did at Cipher: right-size expenses, move the business to positive EBITDA, and leverage the listing to create value.

We are also evaluating individual product acquisitions, particularly legacy assets that are stable, have passed their peak competitive phase, and generate steady revenue without large commercial efforts. Dermatology is our preferred category because Cipher’s portfolio is already dermatology-focused and these products often carry inherent protection, such as topical formulations. We are also interested in central nervous system (CNS) products, which tend to resist generic substitution because physicians avoid switching stable patients. It is very much a buyer’s market right now, and we have the capital and infrastructure, including external advisors for medical and market analysis, to act on the best opportunities.

26/05/2023 What challenges are you facing, and what keeps you up at night?

The biggest risk is doing the wrong deal. Our business itself is very stable, unlike many debt-laden competitors. Our pipeline includes MOB-015, a nail fungus treatment that could capture most of the Canadian market, worth about 80 million dollars. Currently, one product, Jublia from Bausch, holds 90 percent of that market, but exclusivity is ending within two months. We expect a mid-2025 launch, and if results meet expectations, we could dominate that category. We also hold Canadian rights to a psoriasis drug licensed from Can-Fite, with a 46 million dollar market. If the phase three trial succeeds, we could see launch in late 2025 or early 2026.

On capital, we believe there is never enough cash, especially in this environment. That is why we secured the revolving credit facility. We have been patient, avoiding overpriced acquisitions, but are now focused on deploying capital into the right opportunities. Once we complete a transaction and add new products, our cash generation will increase further. Longer term, we intend to return Cipher to a royalty-style company, generate steady dividends, and pursue a NASDAQ listing.

11/08/2023 I'm wondering if you could just provide a brief update on the status of the NCIB.

Yes. Thanks, Peter. So our NCIB, it's been open. Recall that we had in last September when we renewed the program, we moved from an automated program to one which is on our option where we can kind of turn it on and off. What I can say is during the second quarter, we weren't choosing any optionality. We were choosing to buy back the max amount that we could on an ongoing basis, but it's limited based on the trade volume of our shares.

And one area that we would say is sometimes the volume of shares that's traded on a daily basis doesn't give us the opportunity to buy back as much as the max amount would allow. So those factors are giving us some consideration when we're going to get our renewal point coming up in September. Considering we weren't able to buy back quite as much as we had hoped, we may choose to move to another buyback plan. But those are the things at our disposal that we'll consider for the September timeframe.

10/11/2023 How should we think about growth opportunities with your cash position, and how does the Substantial Issuer Bid fit into capital allocation?

From a business development perspective, the market is very competitive, with many pharmaceutical companies pursuing acquisitions. Access to capital is tightening, but there is still capital on the sidelines. We have numerous opportunities in our pipeline, and we are actively pursuing them with the help of advisors. It is much more than just turning over stones, and we hope to provide further announcements as we move into 2024.

Regarding the Substantial Issuer Bid, the Board earmarked CAD 6 million as a catch-up to prior years, when we had bought back over 1 million shares. Because of restrictions under the NCIB last year, we could not match prior volumes. The SIB allowed us to catch up, and we executed it exactly as planned. It was a strong return on capital and demonstrated share buybacks as a valid tool in our capital allocation strategy, so you can be confident we’ll consider it again in the future.

15/03/2024 Can you describe your M&A pipeline, therapeutic areas, deal size, and target multiples?

We are looking at both product and company acquisitions in Canada and the U.S. The focus is on legacy products with stable cash flow and some form of moat, whether safety programs, patents, or API restrictions. Our preference is to continue in dermatology, though we are also exploring CNS, where physicians are reluctant to switch prescribing patterns.

We have $40 million in cash and a $35 million line with RBC. That gives us capacity for at least a $75 million deal, and we could comfortably go higher, potentially up to twice that size. We do not need to stretch much further to execute the right transaction.

15/03/2024 Could an acquisition be executed in 2024?

Yes, that would be fair.

10/05/2024 How do you balance share buybacks, M&A, and internal sales investment?

Craig J. Mull: Organic growth comes from our pipeline products, where our role is mainly in preparing for submission and launch. M&A is likely the most significant growth driver. Investment in commercial expansion should be self-funding, as earnings from new salespeople or efforts will pay back immediately through market share gains.

28/08/2024 How does the acquisition affect your M&A strategy?

We remain aggressive in pursuing opportunities. Even before this acquisition, we were well along in evaluating several complementary products. This deal gives us a stronger base, but we still need to grow. Our focus is on adding products that can build significantly more revenue on top of that base.

28/08/2024 How would you describe your M&A pipeline?

We have a couple of U.S. products that align well with Natroba. They are acute treatments, aimed at pediatricians and dermatologists, fitting the same call points. In Canada, MOB-015 excites us greatly. We can’t share specifics, but the pipeline looks strong and well aligned with our core focus.

28/08/2024 How does higher share price and more capital markets attention affect you?

It gives us another option for raising capital if needed, but our view is still that the stock is undervalued. We recently negotiated attractive debt financing with National Bank, giving us flexibility to use debt as well as equity. We can draw another $25 million U.S. under the revolver and have an accordion feature for another $25 million. This dry powder allows us to keep growing without changing our disciplined approach.

28/08/2024 Are you considering a NASDAQ listing?

Yes. With our share price higher and the business more robust, a NASDAQ listing is in our near-term plans. It would give us access to a larger pool of life science investors and aligns with the transition to a more U.S.-based business.

08/11/2024 Can you update on U.S. M&A pipeline, deal sizes, and multiples?

Justin, Craig here. We have two to three serious opportunities that we are currently working on. I am not sure any will close given where we are in negotiations, but I am optimistic. Beyond that, we looked at six to eight other opportunities and narrowed to these three that would fit well with our sales force and their call points. It is too early to comment on multiples.

These are likely licensing deals with royalty payments rather than large capital requirements. If acquisitions occur, they must be complementary to Natroba and fit well with our U.S. geographic distribution.

08/11/2024 What potential revenue or EBITDA could the acquisitions add?

We are looking at assets generating over $30,000,000 a year in revenue. EBITDA figures are still being modeled as part of our current work on these deals.

09/05/2025 Does the $15 million credit facility repayment signal limited near-term M&A?

We evaluated how best to use our cash and determined paying down debt was better than leaving it idle. Our $65 million facility with National Bank can be redrawn at any time without cost. Since no deal is expected to close in the next couple of months, we reduced debt and interest expense. The funds remain available for future use.

09/05/2025 How is the pipeline and have deal multiples changed?

We haven’t seen major pricing changes. We are pursuing a number of targets after screening at least a dozen opportunities that did not fit. Our approach remains disciplined, but I am optimistic about finding deals at the right price that align with our strategy.

09/05/2025 Would these assets be dermatology or cross-border?

Our top priority is the US, where we already have infrastructure and 36 reps. At least two current opportunities would be North American products, allowing us to launch in the US and then expand into Canada.

09/05/2025 What explains Absorica’s decline and could you acquire rights to market it?

We are disappointed in Sun’s performance. Absorica’s issue is largely pricing in a generic-heavy segment. We have been pressuring Sun to adopt more aggressive pricing and marketing to reverse the decline.

The contract with Sun expires in December 2026. At that time, we are evaluating several options, including taking the product in-house and managing its distribution and pricing ourselves. At minimum, we regain full rights at the end of 2026.

08/08/2025 With strong deleveraging, what are current capital allocation priorities across M&A, buybacks, or debt repayment?

We are generating a lot of cash and have a $65 million revolver available. Without a near-term acquisition, we chose to pay down debt and reduce interest while retaining access to the revolver. Our top priority remains acquisitions, including in-licensing. Beyond that, we maintain a balanced approach of buying back stock through the NCIB or bulk purchases and further debt repayment. When the right acquisition arises, we will use the revolver and seek additional financing if required.

09/08/2025 When could we see licensing deals for Natroba outside the U.S.?

We believe licensing agreements could materialize within the next 12 months.

09/08/2025 For rest-of-world licensing, should we benchmark royalty rates at 15% like Absorica or Lipofen agreements?

Yes, 15% is a reasonable benchmark. We would also seek milestone payments in addition to royalties. The rest-of-world market is significant, and the key is how much value can be captured from it.
Fifteen percent is middle of the road and common across the industry. Other opportunities we are pursuing now also fall in the low to mid-teens range, so that estimate is fair for modeling purposes.

12/08/2025 How will you allocate ongoing cash flow going forward?

We are generating strong cash flow, and I’d remind people we also have a $65 million revolver with National Bank available to us at any time. We have used capital for share buybacks, acquisitions, and debt repayment, and those remain our priorities. We are not changing direction; rather, we intend to continue balancing organic growth with acquisitions that expand our U.S. platform while maintaining prudent capital allocation.

12/08/2025 How are you approaching debt repayment versus other uses of capital?

My view is why carry debt when we can access capital at any time. If we do not have an imminent acquisition, we prefer to pay debt down and save on interest, then draw from the $65 million line with National Bank when needed. Alongside that, we are running a normal course issuer bid and bought the maximum allowed last quarter, about $2 million US in stock. It’s been a balanced approach of debt reduction and equity buybacks. I expect we will be close to net debt free by year-end, at which point another substantial issuer bid is possible. The one we executed in late 2023 was very successful, and I only wish we had bought more stock back.

Competitive Advantage

26/05/2023 Why would physicians switch from Jublia to MOB-015?

Jublia requires daily application, while MOB-015 is applied once a week. More importantly, MOB-015 has a significantly higher mycological cure rate, meaning it clears the fungus more effectively. The current trial focuses on nail appearance, since patients and dermatologists care not only about eliminating the fungus but also about how the nail looks. With MOB-015, the nail is initially left white until it grows out, but we believe reducing the dosing will improve cosmetic results compared with Jublia. If we deliver both higher cure rates and better nail appearance, we expect strong physician and patient adoption.

12/08/2025 Can you update us on MOB-015?

I am not optimistic about this product anymore, which is a disappointment. The second Phase 3 trial results were damaging, and I believe the study design was flawed. Moberg missed the mark, and launching against Jublia, which controls 90% of the market, would offer no competitive advantage. Jublia is well established despite weak efficacy, and it will likely face generic competition in 12 to 18 months. That would lower prices, leaving us with an inferior product at a higher cost, which is not a viable equation.

Operations

09/08/2019 What is the strategy for Absorica and new isotretinoin formulations?

We have a product life extension agreement with Sun, so we expect continued royalty streams from the existing formulation. We are exploring reformulations that could extend the product’s life, such as by reducing side effects. At this point, we cannot disclose specific details, but it is a top priority.

13/08/2020 What is your ideal profile for in-licensing a new product?

Ideally, it would resemble Absorica: a late-stage development product with large unmet market potential. Absorica offered no food effect and strong absorption, adding clear treatment value. A product with those characteristics, preferably in dermatology, would be ideal.

13/08/2020 Can you provide details on the Galephar product under development?

The lead product is alitretinoin, targeting severe hand eczema. It belongs to the isotretinoin family, and Galephar brings extensive experience with this molecule, which supports our development efforts.

18/03/2022 When is the Canadian launch of MOB-015 and expected revenues?

MOB-015 was developed by Moberg, and we hold the Canadian licensing and distribution rights. Phase three trials showed excellent cure rates but also nail discoloration. Moberg decided to run another phase three trial in the U.S. at a lower dose to improve results. We are working with them and expect the new trial will produce stronger outcomes. Until those results are available, we will not move forward with commercialization in Canada.

18/03/2022 Update on Epuris launch in Mexico by Italmex?

Through Galephar, we partnered with a major Latin American firm in Mexico. Regulatory approval has been granted, and initial stocking orders have been placed. We expect royalties, but at lower levels than in Canada or the U.S. given pricing is significantly lower in Mexico.

18/03/2022 What initiatives are being pursued in South America, particularly Brazil?

We have a distribution agreement with Sun Pharma for Brazil, which is a very large market. However, the regulatory regime makes product approvals difficult. We are pressing Sun to move the project forward, but the challenge is that Brazil generally only wants to buy products manufactured locally. We are exploring ways to accommodate that requirement, but it is a complicated and intentionally difficult process.

17/03/2023 Any update on expanding the Galephar relationship to use the Lidose platform for other hydrophobic drugs?

We are working with Galephar on a number of potential products, though we are not ready to provide detail at this stage. Galephar has been our development partner for a long time, and we hold weekly calls with them regarding products under development. There is potential in this collaboration.

17/03/2023 Are the Galephar products later-stage or early-stage in development?

The products are likely to take a 505(b)(2) path, focusing on improvements to existing approved products. This has been our strategy with Galephar from the start. These are later-stage opportunities rather than early Phase 1 products.

26/05/2023 What happened in Q1, given revenues were down but EBITDA improved?

Licensing revenue was lower because we renegotiated our contract with Sun Pharma, which manages our largest U.S. product. With legacy assets, renegotiations typically involve lower royalty rates, so the decline reflects that adjustment rather than weakness in the product. Sequentially we were not trending far behind on licensing revenue, and product revenue held relatively flat, only slightly down.

15/03/2024 How many sales reps will be required for the MOB-015 launch?

Those plans are still in process. We are looking at a specialized sales force dedicated to this product. Currently, we use Impres, a contract sales group that launched Epuris in 2012 and Jublia for Bausch, so they know the market well. We expect to start with eight to ten sales reps.

We do have requirements under our license with MOB, but they are well within that level. As we get closer to launch, we will finalize a clear plan.

10/05/2024 Are you still working with Galephar on research projects, and are any advancing?

Craig J. Mull: We continue to work with Galephar on new products, including possible modifications to existing ones. They have been an excellent partner since the origins of Cipher, having developed three products that still remain in our portfolio. We maintain a close relationship and are always in communication about opportunities they are involved in.

28/08/2024 What is the status of your Canadian pipeline, especially MOB-015?

In Canada, our business is solid and continues to grow, led by Epuris. In our pipeline, we have MOB-015, a nail fungus treatment. We are awaiting the readout from the U.S. phase three trial currently underway. That data is expected in January of the coming year, and we remain optimistic about its potential contribution.

28/08/2024 How has MOB-015 performed in Sweden, and what lessons apply to Canada?

Early indications show rapid onset and high mycological cure, which encourages compliance since patients see improvement early in a year-long treatment. Many competing products fail to cure fungus, so MOB-015 fulfills an unmet need. That explains its rapid uptake in Sweden. The North American phase three trial uses the same formulation but with reduced dosing, moving to once a week after the initial period. This should improve compliance and strengthen the launch profile. Within three months of launch, MOB-015 became the market leader in Sweden and grew the market by 52%, showing pent-up demand for an effective product. We expect similar success in Canada.

28/08/2024 If U.S. phase three results for MOB-015 are negative, will Cipher still launch in Canada?

That is something we debate internally. The key measure is the mycological cure rate, which was very strong in the first phase three trial and we expect similar results in the second. The issue was complete cure rate, which also includes cosmetic appearance of the nail. We believe excessive dosing affected cosmetic outcomes, so dosing has been reduced to once a week after the first eight weeks. If complete cure is still below Jubila’s, we are considering our options.

28/08/2024 How many new U.S. salespeople will you add?

We currently have 35 field reps and 16 inside reps. Adding complementary products will require more coverage in certain areas, but we won’t simply hire an army. Our approach is tactical: if we secure favorable reimbursement in a state, we might place a direct rep there. The total team is about 50 people today, and we will make adjustments where it makes business sense, not by adding unnecessary layers of cost.

08/11/2024 Any insight from Moberg on Phase 3 study issues, and updates on Can-Fite’s piclodenosine?

We have not received much detail on Moberg’s Phase 3 results, which seemed miscommunicated for a subset of patients. The concern is lower cosmetic cure rates affecting overall complete cure results. Physicians emphasize the mycological cure rate as more important, particularly for elderly and diabetic patients who struggle with existing treatments. Doctors are segmenting patients this way, and we see a compelling case for Moberg’s product in Canada given its strong performance in Sweden. We are still analyzing how and whether to launch in Canada.

On Can-Fite’s piclodenosine, we understand they are raising funds for a second pivotal Phase 3 trial in the U.S. It is a small company, but they have had past success, and we believe they intend to continue development with new funding.

19/03/2025 How many sales reps and MSLs do you currently have after the Natroba co-promotion?

After we completed the co-promotion transition, we had 30 external reps, 12 inside sales reps, and about five management employees at the end of the year.

19/03/2025 What feedback has your sales force received on Natroba from high permethrin prescribers?

The reception has been very strong because Natroba essentially sells itself. Permethrin was released 40 years ago, and physicians have had no new alternatives for scabies until now. With Natroba designated as a complete cure in one treatment, the response from physicians has been positive.

Doctors are well aware of resistance issues with permethrin and are looking for something more effective. Natroba is already established in the head lice market, but its potential in scabies is less known. Since Natroba has the only FDA designation of complete cure for scabies, we see this as a significant opportunity and a current area of focus.

19/03/2025 How is licensing of Natroba progressing and what is the timing?

We are on schedule and currently in discussions with at least eight parties across eight regions. Discussions with a potential partner in China are more advanced than most, and we also have strong interest from a Middle Eastern company that spans multiple countries, with talks well beyond confidentiality agreements.

Both of these discussions are advanced, and we are optimistic that we will secure a deal there, which could be the first of several.

09/05/2025 How many US sales reps do you currently have?

Hey, Andre. Our current field rep complement is about 36 reps.

09/05/2025 Have you hired medical science liaisons (MSLs)?

We use consultants rather than full-time MSLs. These are long-time key opinion leaders, mostly dermatologists and nurse practitioners, who help us at conferences. They are very supportive of the product and value it because it works. They effectively fill that liaison role for us.

09/05/2025 What US regions is your sales force focused on?

Looking at total prescriptions in the antiparasitic market, the largest states are Texas, California, Florida, and New York, which together represent about 40% of total prescriptions. The remaining 60% is spread across other states.

09/05/2025 What therapeutic areas make sense for portfolio expansion beyond derm?

Our reps primarily engage with nurse practitioners and physician assistants who treat lice and scabies. We are focused on products complementary to those call points. These do not need to be strictly dermatology; adjacent indications prescribed by those professionals are suitable.

12/08/2025 What new initiatives are you most excited about?

We’ve retooled the U.S. sales infrastructure and see strong potential in digital marketing. This product lends itself to awareness campaigns, and we’re launching a new website within months and pursuing partnerships with telemedicine platforms. Our goal is to raise awareness that Natroba is a one-use, complete cure, unlike competitors. Given reps cost over $200,000 each, supplementing with digital approaches could increase reach at lower cost.

We are also working with electronic medical record providers so that when a doctor codes for scabies, a prompt highlights Natroba as a treatment. This keeps it top of mind at the point of care. Overall, shifting toward direct-to-consumer and prescriber-focused marketing could lower costs, increase awareness, and drive sales, following the broader trend of greater drug advertising.

Competiton

10/11/2019 What are your market size and share assumptions in Canada for TRULANCE out-licensing?

I don't think we are in a position to discuss that at the moment, given the negotiations we are having with potential distribution partners.

08/05/2020 How does Absorica compare to Epuris in market share and performance?

You are correct that Sun has responsibility for marketing and sales of Absorica. It is in our interest to support them, and we share experiences from Canada where appropriate. We expect the marketing approach to evolve, and we are looking at ways to reach prescribing physicians more directly.

Some of the new approaches include telemedicine and virtual portals where we can discuss products with physicians. These channels may also be used more for patient consultations, so we are investing time in innovative ways to bring our products into the marketplace and gain more visibility in what we expect will be a changing environment.

13/11/2020 Any update on Absorica pricing strategy and generic launch timing?

The potential launch of a generic is something we are watching closely. We are gathering as much information as possible, but we have not seen any generic entries yet. We are in communication with Sun about pricing strategies, and we are preparing to launch an authorized generic to maintain significant market share if a generic comes to market.

This is a day-to-day monitoring effort. We stay in regular contact with Sun and conduct our own reconnaissance to assess any potential launch activity.

19/03/2021 Have you and Sun considered Epuris-like pricing in the U.S. to capture more Absorica market share given generics on the horizon?

We've had many conversations with Sun about the Absorica strategy. Both they and we believe that a reduction in price would not necessarily increase product volume. The product is known as a premium product, and if you start reducing the price, that premium image could disappear. We are constantly looking at this, but at this point in time we believe a price reduction would not necessarily yield increased volume.

19/03/2021 What were Absorica versus ABSORICA LD numbers in the quarter?

ABSORICA LD was launched in February 2020. Due to COVID and perhaps other issues, it hasn't gained the expected market share. It is growing and currently represents about a 25% share of the Absorica market. It has not gained traction as expected.

14/05/2021 What impact will Teva’s generic Absorica launch and revised pricing have on Absorica’s royalties and market share?

I agree with that. We are monitoring the situation closely and have had numerous calls with Sun. There is potential that with the reduced price, the product could expand into other acne market segments, including the Accutane market. Because it is a superior product now offered at a lower price, the market may broaden.

We are hopeful this will lead to increased volumes, although at a reduced price.

18/03/2022 Why did Epuris market share drop from 43% to 41%?

It is simply a normal variation. We monitor performance over longer periods, and Epuris continues to grow strongly. One quarter’s result does not change our positive outlook.

13/05/2022 Epuris market share declined from 43% to 41%. Is this meaningful?

We view this as normal variation. We monitor growth over longer periods, and the product continues to show strong performance. I do not take anything from a single quarter’s result.

11/11/2022 How will Sun address Absorica’s U.S. market share and strategy given strong Epuris performance in Canada?

Doug, thanks for your question. Sun is our commercial partner for Absorica in the U.S., and they ultimately make the pricing decisions. That said, we are in regular contact with them about their strategy. We are expecting to receive their upcoming business plan within the next few days, and we intend to review it closely and meet with Sun to discuss their marketing efforts and how best to highlight Absorica’s advantages compared to other products.

It is a valid point you raise, and we agree that further collaboration with Sun on marketing and promotion may create opportunities to strengthen Absorica’s position in the market.

17/03/2023 Can you confirm the Absorica market share figures from Q3 and Q4 MD&A?

Yes, that’s confirmed.

17/03/2023 Why is Absorica’s 1.5% overall isotretinoin market share so low and what strategies could raise it?

We are in discussions with Sun about their distribution channels. We also believe market share is low given the quality of the product. We are working with them to expand distribution channels, and we think there is work to be done at the wholesale level to ensure our product is in the right places at the right prices. This process is ongoing with Sun.

12/05/2023 What lessons from fenofibrate stability can be applied to Absorica marketing, and which non-Epuris Canadian products drove growth?

On Absorica, your observation about royalty revenue is correct. We have been in discussions with Sun Pharma, who noted their market share has been declining with both brand and authorized generics competing in the U.S. They have since taken tactical steps with channel partners to prevent further erosion. Symphony Health data shows these moves are beginning to work, and we expect improvements in coming quarters. We believe Sun is on the right track and continue to meet with them regularly. In the U.S., our fenofibrate royalties have improved after changing commercial partners to one with stronger wholesale connections, which has helped maintain stability.

In Canada, two key contributors stood out. We moved to sell Durela directly, which has driven year-over-year growth since Q3 of last year. Additionally, Aggrastat sales contributed $0.5 million in the quarter, up from $0.1 million previously, after a competitor exited and faced supply issues. We see continued opportunity for Aggrastat as we work with Verity, our hospital partner, focusing on 45 cath labs across Canada. This should support ongoing growth.

26/05/2023 What drove Q1 revenue and EBITDA trends, and how is Epuris performing?

The revenue decline was mainly timing-related, not a trend. Epuris, our core product, continues to perform well. We are raising brand awareness among dermatologists, many of whom were unaware that Epuris has the same efficacy as Accutane but with a better food effect. Unlike Accutane, it does not require a fatty meal, which is a significant advantage for teenagers with severe acne. We expect continued growth from Epuris as awareness improves.

While licensing revenues declined due to renegotiated royalty rates, our earnings did not fall off because we tightly manage expenses. Our cash balances continue to grow, reflecting our strong cash generation. Many investors forget that the “I” in EBITDA, interest, matters. We carry no debt, and we use tax loss carry-forwards, so there are no cash tax payments. This means our EBITDA converts cleanly to free cash flow, underscoring the strength of our financial profile.

11/08/2023 Maybe just some commentary on what the existing market size is now in comparison to data that you put in the public domain?

Well, again, typically, we would try to access results through IQVIA or Symphony as they may call themselves. They don't have that type of service in the Latin American countries that we're aware of. So it's more of what the commercial partner, in this case Italmex, would estimate as the market. And I don't think they were in a position to share their forecast with you at this point in time. But we think it's in excess of what was earlier quoted from the 2018 press release.

11/08/2023 You indicated in the MD&A that the U.S. isotretinoin market experienced a bit of contraction in recent quarters that you said is down 3% year-over-year. Just wondering if you had any insight as to what that was attributable to? Is that like discontinuation of the competitive brand, or are there other competitive medical therapies that are sort of rivaling isotretinoin as a [indiscernible] therapy, just any thoughts that you had on that would be interesting?

Well, there is some new products for acne in the U.S. But they're targeted more towards mild acne, mild to moderate acne. And we think that perhaps some dermatologists are trying them on some of their patients to see how effective they are, because it would allow them not to have to move into a severe acne indication. So we think that there may be a step that dermatologists are taking with a less complicated drug to cure the moderate acne as part of their treatment steps, I'll call it. And that may have had some effect.

The market may have been just down a little bit. And it's not a severe drop in our view. And some of it may even be some seasonality of some type.

11/08/2023 The Epuris as a new competitive product, I guess, Sun Pharma introduced a generic just recently. I was wondering if you can comment on that.

I think that you're referring to Sun’s approval of a product that they call Absorica LD, which is not a generic. It's a branded product. And at this point, they've received Health Canada approval. And there are several issues that we have with what has gone on there. And we're in discussions with Health Canada about that. But turning the attention to the product itself, this product is just basically a copy of Epuris at a slightly lower dosage point.

So instead of a 10 milligram, they'd have a 7 milligram; instead of a 20 milligram, they'd have an 18 milligram. And their idea is that they would go to dermatologists and tell them that it's safer because it's slightly lower dose. And we don't believe that. It isn't significant enough of a difference. The doctors are very familiar with Epuris. They don't know anything about Absorica. And they're going to be selling a product that is likely no better than Epuris.

And as a result of the difference in dosing, the dermatologists will have to go through a complicated calculation in order to administer a dose to a patient or prescribe a dose to a patient. And in our discussions with physicians, there are very few that will be doing that. They do not need to go through an education about how to dose this product when it doesn't provide any real benefits. So we know that it's there.

The product has been sold in the U.S. for at least four years now. And it has been an absolute disaster in the U.S. They once obtained I believe a 10% market share of the isotretinoin market, and now it's practically at zero. So it has been a flop in the U.S. and we expect it will be a flop in Canada as well.

What I would add to that is just that we're very data-driven as an organization, I think as many are. Please feel free to look at the data for Absorica LD in the U.S., as Craig described. The product has not performed. It's not a generic to Epuris. We don't believe it poses any significant risk.

10/11/2023 What drove Epuris and Absorica AG growth this quarter despite seasonal weakness?

Andre, it's Craig here. I'll break it down into two questions. For Epuris, we started with our contract sales organization in March and it took time for them to fully engage. What you’re seeing now is the impact of that marketing, specifically to nonusers of Epuris. We’ve been targeting long-term Accutane users and demonstrating the benefits of Epuris over Accutane, which has driven significant success.

Much of Epuris’ performance, which we expect to continue, relates to the full engagement of the sales force and innovative marketing methods such as conferences and lectures. The product has gained better attention, and we expect that growth to continue. In the U.S., we’ve been working with Sun on clear distribution through the supply chains. Sun has adopted different marketing and pricing methods that have driven growth in Absorica AG.

10/11/2023 What is the size of the Canadian Accutane market and were there U.S. price changes?

In the U.S., Sun has been more aggressive with its pricing, and that has had a significant impact on business growth. In Canada, Epuris has 44.4% of the market, which is up almost 2% from last year and continues to grow. Based on that market share, you can work out the total market size.

15/03/2024 Are there any major changes in U.S. Absorica pricing or competition?

We are seeing a stable market now. The product has gone through the genericization process, and we still hold significant share. We do not see much switching taking place, and we believe the market has stabilized.

Our distribution partner has also made tactical moves to gain share, as disclosed. Different generic players take steps to drive volumes, but overall Absorica remains a stable product and royalty stream for us.

15/03/2024 Has Absorica pricing stabilized?

Pricing does not change much except when our distribution partner runs promotional programs, such as those in mid-2023. Most volumes are on the authorized generic, and both our price and competitors’ pricing remain relatively stable.

15/03/2024 Has Sun’s launch of Absorica LD in Canada impacted Epuris?

No, we have not seen any impact so far. Sun is promoting Absorica LD as the same as Epuris, but it is a lower-dose product. They imply it is safer, which is not true. Physicians in Canada are unfamiliar with the Absorica brand, so awareness is low.

Our focus remains on converting Accutane users while defending against Absorica LD. It offers no added value over Epuris and requires physicians to recalculate dosing, which reduces incentive to switch. We believe very few will convert.

10/05/2024 Can you elaborate on business development activity and competition for assets?

Craig J. Mull: André, it's Craig. This is more our feel than data, but we sense less competition and more reasonable pricing. Deal flow is very strong, especially in Canada, and we are also seeing increasing opportunities from the U.S.

10/05/2024 Do any non-Epuris hospital products, like Aggrastat, have growth potential?

Craig J. Mull: Aggrastat has potential because the main competing product was discontinued, and we gained sales as a result. A group is trying to make a generic equivalent, so growth will be modest. The Buenaveza non-approval in the U.S. was disappointing and has not helped sales in Canada. Still, this remains an area we will continue in for reasons beyond just revenue growth.

28/08/2024 What made the recent acquisition attractive, and how does the product fit Cipher?

Craig, the board, and I spent significant time looking at over 100 opportunities in Canada and the U.S. We landed on the Natroba business acquired from ParaPRO. It was essentially a family-run operation, tightly managed, with strong sales growth and earnings. Unlike many specialty pharma businesses that chase growth with expensive infrastructure, this one grew steadily and profitably.

The main product, Natroba, is an authorized generic of spinosad indicated for head lice and scabies. This was a go-to-market strategy to gain state-level payer access. Currently, Natroba has less than 25% market share. The majority of the market is controlled by generic permethrin, a product that parasites have built resistance against. Parents often report repeated, ineffective treatments. We see substantial room to grow by educating physicians, improving reimbursement, and positioning Natroba as the product that truly works.

28/08/2024 How large is the Canadian market for anti-parasitics compared to the U.S.?

The Canadian market is smaller, about one-tenth the size of the U.S. We estimate $15–20 million for anti-parasitics in Canada compared to roughly $150 million in the U.S. Because we already have the infrastructure here, Canada makes sense, but it is not our primary focus relative to U.S. growth.

28/08/2024 Do you have current sales data from Sun Pharma on Absorica?

For competitive reasons, we do not disclose exact figures. We do receive some data from Sun, but it is confidential. Investors can reverse-engineer estimates by looking at our reported royalty income. Put simply, our earnings from Absorica royalties are lower than Sun’s share.

08/11/2024 What feedback have you received from Sun Pharma on Absorica outlook?

Doug, Craig here. Q3 2023 was particularly strong for Absorica because Sun ordered a lot of product after being short in prior periods. That quarter was an outlier, and we expect stability going forward.

We are in discussions with Sun about their pricing strategy in the U.S. generic market. It is a typical generic product and not likely to grow, but we hope the slowdown stabilizes from here.

19/03/2025 With Natroba at 23% market share versus the 75% incumbent, is there a target share level for this year or next?

Our current market share is 23% and holding steady. We are commercializing, gaining physician demand, and promoting in a way that a 40-year-old product like permethrin is not. We expect script growth in the low to mid double-digit range annually.

We already hold significant share in the head lice market, but scabies is lower. The 23% you referenced covers the full anti-parasitic market. Our clear focus is gaining share in the scabies segment, where the opportunity is larger.

19/03/2025 Can you quantify the relative size of the scabies market?

The total anti-parasitic market is about 1.1 million prescriptions. The scabies portion is roughly 500,000 to 600,000 prescriptions, and the overall market size is around $165 million.

09/05/2025 How should we interpret Illinois’ preferred Medicaid status and is it financially impactful?

On a state basis, Medicaid formulary wins are meaningful. When Natroba becomes preferred and the incumbent, such as 5% Permethrin, is non-preferred, we typically capture the full Medicaid business in that state.

Each state’s incremental share depends on how it structures its program. Illinois sets a precedent because pharmacy directors can see the clear value of Natroba. Medicaid contracts renew annually or biannually, and we now approach renewals with the Illinois model in mind. This gives states an option for preferred pricing in exchange for preferred status. We believe more states will replicate this, though timing and location are uncertain.

08/08/2025 Outside Illinois, how are Medicaid preferred step-through discussions for Natroba going?

Andre, each state Medicaid program operates differently, so our best opportunity is when contracts come up for renewal, usually annually or biannually. At that time, we submit proposals. If there is strong demand in a state, we can negotiate either a regular renewal price or a price tied to making our product the single preferred formulary option, as we did in Illinois. This strategy is best executed during the renewal process, not by cold outreach.

08/08/2025 Has Natroba market share changed from 25% versus incumbent 75%, and how should we view next year?

It's been steady, Justin. We integrated the business, focused on renewing state Medicaid, and negotiated pricing. We gained some price benefits and see further opportunity since the product had no historical price increases. Some contracts limit us, but we plan to grow share from a volume perspective. Single-digit market share gains are achievable, along with price adjustments. Unlike many acquisitions where sellers raise prices before selling, that did not happen here, so we still have that lever.

08/08/2025 Have you analyzed increasing sales and marketing to drive market share, and what could ROI look like?

Yes, we are rethinking the model. Traditionally, we rely on outside and inside reps for business development, but we see potential in direct-to-consumer channels. Competing products often sit in the pharmacy aisle, so a consumer-focused platform could be highly measurable for ROI. For example, online distribution lets us track click-throughs and conversion, providing tight ROI measurement. This aligns with the urgent, acute nature of the product where families need immediate access.

Craig: To add, overall Natroba has 25% of the antiparasitic market. Within that, we hold a much higher head lice share but low scabies share. Increasing scabies penetration is a focus, supported by improving Medicare coverage, which could open a relatively new market for Natroba.

09/08/2025 Is Jublia approved in Sweden, and is MOB-015 capturing market share from it?

I do not yet know Jublia’s exact market share in Sweden, but will confirm. In Sweden and other Scandinavian countries, MOB-015 is considered an over-the-counter product. I am unsure whether Jublia has that same designation. What is clear is that MOB-015 has been very effective, expanding the Swedish market by 52%, which demonstrates its impact.

12/08/2025 Will more states follow Illinois in preferring Natroba, and what is the TAM there?

We are working to replicate the Illinois model, where Natroba is the preferred product and must be tried first. It demonstrates the strength of the product, and we are targeting other states that may follow suit. I don’t have the exact total addressable market for Illinois at the moment, though it is a large state by population. Success there gives us a template to pursue in other jurisdictions.

Growth

08/05/2020 What is driving growth in Epuris and is the $2.4 million run rate sustainable?

We believe the revenue level is sustainable. Epuris is recognized as a very high-quality product in this therapeutic area, and more prescribers are shifting their habits toward it. Based on current dynamics, we expect this revenue to be maintained in the near term, if not longer.

12/05/2023 Can you update on South American distribution rights?

Through our partnership with Galephar, we hold rights across Latin and South America. Absorica was recently launched in Mexico, where Galephar supplies the product and pays us royalties on sales. The launch is being executed by Telemax, and we expect to begin collecting royalties in the near term.

26/05/2023 Can you remind us what Cipher is all about?

Thanks for having us back. Cipher has been reshaped into a cost-generating specialty pharma company. Over the past three years, we achieved average EBITDA margins of 50 percent and generated about 2 million U.S. dollars in cash annually. In Q1 2023 we reported adjusted EBITDA of 3.1 million U.S. dollars, and cash increased by 4.6 million U.S. dollars. This performance reflects our model of using commercial partners rather than maintaining costly sales forces, and avoiding direct spending on clinical trials, which can burn cash when unsuccessful. Instead, we pursue a balanced approach that minimizes risk while sustaining growth.

We ended Q1 with over 33 million U.S. dollars in cash. Earlier this year we also secured a revolving credit facility of up to 35 million U.S. dollars with RBC, giving us close to 70 million U.S. dollars in capital. Our focus is acquiring U.S. products because of the larger market, though we will consider other opportunities. Craig and I are spending nearly half our time on the next stage of inorganic growth, while also advancing pipeline products expected in 2025 and 2026. Cipher now generates about 1 million U.S. dollars per month after tax, holds a strong balance sheet, and sees many opportunities as other specialty pharma firms struggle with debt and weak cash flow. We are well positioned to act when the right deal emerges.

11/08/2023 Can you just discuss the market opportunity in Mexico for Epuris? And secondly, are there any key areas in Latin America that you can launch any of your legacy Galephar assets? Are there any other regions?

Hi, Andre. It’s Craig here. We have started to study the Mexico market in some detail as to the potential. We've just received approval down there. Obviously, it's a very large market. We're trying to work our way around how the government participates in any funding of the drugs and the formularies that need to be communicated with to make sure that we're on the correct formularies for any public reimbursement that there may be.

But we're going to have to see how it goes. We haven't been able to receive good data. There is very little competition in the severe acne indication in Mexico, so we believe that if the product is adopted, it could quickly become a market leader for severe acne. We'll keep monitoring the situation. And we'll keep shareholders and analysts updated on how we're doing on that. Andre, would you just remind me of your second question?

Sure. Just in terms of looking at your other legacy assets, like you brought in from Galephar, were there any other key areas in Latin America that you haven't launched yet?

We're in discussions with a number of commercial players, including in Mexico, for our other products and those discussions are advancing. Obviously, the Mexican market is one of the most attractive. Brazil, given its size, would also be attractive, although Brazil has quite rigorous regulatory requirements that we've seen and experienced already. So I think those are the two biggest countries. And I think that will be our initial focus.

And we’re looking and dealing with a partner that has operations in most, if not all, Latin American countries. So with their assistance, I think that there's a much better chance of getting approval.

10/11/2023 What is your development strategy for DTR-001?

The plan is to complete formulation work and establish proof of concept. From there, we think it would be best to partner with a larger pharmaceutical company to advance development. We have already had discussions with several large pharma players who are active in these markets and interested in potential development agreements. But first, we need to complete the proof of concept studies before moving forward.

15/03/2024 Any updates on the Epuris launch in Mexico?

Italmex has gotten off to a good start. Sales are progressing more slowly than expected, but overall we never had great expectations for that market. It will serve as a nice add-on business, and we are supporting Italmex to help them gain more traction.

10/05/2024 Is it worth investing more in sales?

Craig J. Mull: That is under analysis now. We are getting good traction with our sales team and solid penetration, especially in the Accutane market. I am reviewing proposals from our commercial team.

28/08/2024 Can you give a quick overview of Cipher and its current position?

Thanks for having me today. With me are Brian Jacobs, our president of U.S. operations, and Ryan Mailing, our new CFO. Cipher is a specialty pharmaceutical company operating in North America with a dermatology focus. Our lead acne drug is called Epuris in Canada and Absorica in the U.S. We generate significant ongoing cash flow from our dermatology portfolio, which includes products beyond acne. In Canada, growth is mainly driven by Epuris. In the U.S., we have products approved in the early 2000s that are still selling today through royalty-based arrangements with commercial partners. Over the last four years, we improved margins, produced strong EBITDA, and eliminated all debt. Before our recent acquisition, we held roughly $45 million U.S. in cash.

That acquisition involves a U.S.-based company focused on the anti-parasitic market with a long history of sales and growth. It has shifted our balance sheet, but strategically it brings us meaningful growth opportunities. I’ll let Brian describe the acquisition in more detail.

28/08/2024 How do you plan to grow following this acquisition?

Natroba currently holds about 22% of the U.S. anti-parasitic market, while permethrin dominates with roughly 75%. Because resistance to permethrin is well known, our first priority is to capture more share in the U.S., where we already have infrastructure to accelerate growth.

Beyond this, the acquisition allows us to cross-pollinate products between our Canadian and U.S. portfolios. Today, three products are sold in the U.S. through commercial partners, but we are evaluating whether we should market them directly to capture higher earnings. Another avenue is adding complementary products with similar call points among pediatricians, dermatologists, and family doctors. Natroba’s sales force is currently underutilized, giving us capacity to expand their bag.

Finally, we own worldwide rights to Natroba for scabies and lice. These are global problems, not just North American ones. We are in discussions with commercial partners in Europe and Asia to out-license the product. Such deals typically involve royalties and milestones, which would flow directly to the bottom line. Collectively, these initiatives provide us with multiple growth levers in both the U.S. and internationally.

28/08/2024 What is the potential of MOB-015 in Canada, and how does it compare to Jubila?

Because of changes in the dosing regimen, we expect a complete cure rate higher than Jubila, which holds about 90% of the Canadian nail fungus market, worth roughly $90 million. This represents a significant opportunity for us and will further drive Canadian growth. With these initiatives, Cipher could look like a much different company in two to three years than it does today.

28/08/2024 What is the Canadian market potential for Cipher’s portfolio?

Epuris is our lead product with roughly 60% of its market, generating $18–20 million in annual sales, which demonstrates the market’s size. The Canadian nail fungus market is about $90 million and could grow with an effective product. In the U.S., Natroba for scabies and head lice targets a $150 million market, where patients are often forced to rely on ineffective over-the-counter treatments. Europe and Asia also represent large opportunities, though exact sizes are harder to calculate. Population is a reasonable proxy for potential demand.

28/08/2024 Will Cipher in-license Epuris for the U.S. market?

Yes, this is under active consideration. It falls under what we call cross-pollination, evaluating whether it is more lucrative to take the product in-house and sell directly in the U.S. rather than through partners. This is high on our list of strategic options.

28/08/2024 Can Cipher use its Canadian license for rare-disease products like low syndrome if trials succeed?

We are hopeful. The indication is for psoriasis, with the Canadian market estimated at about $45 million. There are competing biologics, but this product looks promising and addresses an unmet need. We need results from the Japanese trial first, but if successful it would be an excellent complement to our dermatology portfolio.

08/08/2025 What revenue lift could Natroba see from expanding preferred listings beyond Illinois?

Doug, I would not approach it on a state-by-state basis. Roughly 30% of the market is Medicaid. The 5% permethrin market share comes from within that 30%, and that applies nationwide. As we convert states from nonpreferred to preferred, the impact depends on the relative size of each state. That is the way I would quantify the revenue lift. We have already provided comparisons of our market share versus 5% permethrin’s share.

09/08/2025 What is the global opportunity for Natroba outside the U.S., and would Europe require a Phase 3 trial?

Andre, before the acquisition closed, the company had already received many inquiries from potential licensors and licensees. They lacked the bandwidth to pursue those while the 6–9 month acquisition process was underway, but those conversations are resuming. We have already had inquiries from potential partners in Europe and believe the FDA data for Natroba will likely be sufficient for European applications. It is early, but clear there is meaningful interest.

Natroba’s biggest opportunities are in warm climates where these conditions are more prevalent. Many smaller countries accept FDA approval as sufficient for their own health authorities. With its proven safety and efficacy, we see strong international potential.

09/08/2025 Have you estimated market size in Europe and other large regions?

It is too early for us to provide specific market size figures, but population can serve as one indicator. Resistance to permethrin, where lice and scabies have genetically adapted, is a worldwide issue. Information on this problem is widely available and suggests strong demand for alternatives like Natroba.

We are working to determine market size and potential pricing. That analysis is underway.

09/08/2025 Are genetic mutations resistant to permethrin already impacting revenue and creating growth opportunities for Natroba?

Yes, resistance is real and widely documented in the medical literature. Genetic mutations reducing permethrin’s effectiveness are occurring worldwide. This is not just theoretical; it has tangible implications.

We believe this resistance trend will drive stronger demand for Natroba, as physicians and patients seek proven alternatives where existing treatments are failing.

09/08/2025 How do patients perceive Natroba compared to permethrin, and what is your strategy to educate the market?

We spoke with a family directly impacted by lice. They shared that when lice spread through their household, permethrin failed to fully resolve the issue and it returned, disrupting sleep and daily life. They researched treatments and discovered Natroba was the only one that worked. They went to their doctor and specifically requested it. This story illustrates how critical it is for patients to know an effective solution exists. Our goal is to ensure both physicians and patients recognize Natroba as the one-shot cure, using digital and other outreach to drive awareness. As a parent myself, I would insist on the treatment that eliminates the problem completely so my family can move on.

Beyond patients, we see a huge opportunity to educate physicians who may still default to permethrin. By combining patient demand with physician education, we can expand Natroba’s adoption significantly.

09/08/2025 What is your immediate commercial focus relative to global opportunities?

Our first priority is the 71% of the U.S. market that still relies on permethrin. That is the lowest-hanging fruit and the most profitable near-term opportunity. Many doctors may be prescribing permethrin simply because they are unaware of effective alternatives. With the right marketing and sales execution, we can directly target that 71% share and shift prescribing behavior toward Natroba.

12/08/2025 Do you see any bottlenecks limiting growth?

In the U.S., the challenge is payer access. We have strong Medicaid coverage, which helps in the pediatric head lice segment, but Medicare access is weaker. Expanding Medicare coverage is key to driving growth in scabies treatment, as that market skews toward adults and older patients.

12/08/2025 What are your main priorities to drive growth?

We need to improve payer access and ensure product availability. If a pharmacy is stocked out, the sale is lost, so we are working with wholesalers and exploring telemedicine channels to deliver directly to patients’ homes. Our top priority is to increase Natroba sales, as it offers the best return. Beyond that, we want to add complementary products to the U.S. platform, secure Health Canada approval, and establish global out-licensing partnerships. Those four pillars define our growth strategy.

12/08/2025 What key message should investors take away about Cipher?

We really operate two businesses. First is the legacy Cipher business, which is a stable, highly profitable cash generator. In Canada, Epuris remains the leading acne product, widely prescribed by dermatologists, and continues to grow share. While the U.S. royalty stream is stable to slightly declining, the Canadian operations make the legacy platform low-growth but consistently profitable.

Second is the U.S. growth business, where Natroba holds only 23 to 24 percent share of the antiparasitic market and has a long runway. With our $65 million revolver, we have the capacity for smaller tuck-in acquisitions or larger strategic deals. That combination of cash generation and growth opportunity defines the company today.

Financials

09/08/2019 What is the SG&A run rate for the rest of the year?

If you adjust for the restructuring costs incurred in Q2, then the operating expense run rate will approximate what we expect for the remainder of the year.

09/08/2019 Will you remain cash flow positive if you invest in Galephar products?

Yes, we intend to remain cash flow positive. If an investment is beyond our means, we would look for other royalty partners to join the project.

13/08/2020 What caused the income tax impact on cash flow, and how do Correvio tax losses affect timing?

You are correct, the valuation issue related to the patent rights for the product portfolio. There were also disallowed expenses tied to three products. Regarding Cardiome, we are still assessing when we can take advantage of those tax losses and expect to have more information in Q3.

13/11/2020 Progress on utilizing tax losses?

Yes, we’ve made significant progress. We are in serious discussions, including drafting agreements with a partner to co-promote our hospital products. With that, we believe we will be able to access the Cardiome losses since we are conducting an active business in the areas Cardiome had participated in. We expect to begin utilizing those losses as soon as the end of 2020.

13/11/2020 Can you provide more detail on working capital changes this quarter?

Specifically, we had a reduction in accounts receivable and an increase in payables year-to-date, which drove the working capital change. The increase in receivables was due to a large payment from one licensed partner that arrived shortly after quarter-end. That timing created a temporary use of working capital, but it should reverse itself in Q4.

18/03/2022 What is the level and expiry of unused non-capital loss carry-forwards?

Unused non-capital loss carry-forwards total about $211 million, expiring between 2026 and 2039. We have already applied losses in 2020 and 2021. While auditors required us to accrue taxes in financial statements, in our tax filings we utilized the losses, resulting in virtually no Canadian federal income taxes paid in those years.

18/03/2022 How do tax loss carry-forwards impact cash flow?

They significantly enhance retained cash flow, and we expect that benefit to continue for some time.

13/05/2022 Do partners plan to increase product prices in line with inflation?

Each year, we and our distributors submit for price increases. Depending on the product and market, we generally seek increases at least in line with inflation.

13/05/2022 What is the level of unused non-capital loss carry-forwards and when is the nearest expiry?

Non-capital losses total $211 million, with expiries ranging from 2026 to 2039. The earliest expiry begins in 2026.

13/05/2022 Will these losses be used before expiry?

Yes, we have already applied losses through 2020 and 2021. We continue to use them when filing tax returns, which has resulted in virtually no federal income taxes being paid in Canada during that period. While auditors require us to accrue taxes in the financial statements, in our filings we utilize these losses. This enhances cash flow and retained cash, and we expect this benefit to continue for some time.

10/11/2023 Can you provide guidance on the increase in deferred tax assets and its impact on net income?

Yes, we saw an increase in deferred tax assets, which is an accounting mechanism reflecting the company’s future profitability. With several products in our pipeline, and Moberg getting closer to commercialization, the accounting rules required recognition of deferred tax assets tied to that future profitability. That was the driver this quarter.

I cannot provide guidance on whether we will see similar increases in future quarters, but the recognition was directly related to Moberg’s expected progress toward market entry rather than recent profits.

15/03/2024 Do you see Absorica royalties remaining stable despite the 30% year-on-year decline in the quarter?

We are seeing volatility, but overall the trend is strong. Year-over-year, royalties were higher, though Q4 was a bit lower. Q3 was sequentially much higher, which drove sales. Our distribution partner, being a large pharmaceutical organization, can leverage its scale to drive volumes. That has been beneficial for us, and we expect Absorica to remain a solid cash contributor.

10/05/2024 What are your total available tax loss carry-forwards?

Bryan Jacobs: We have been chipping away at them. Currently, we are sitting at about 170 to 175.

10/05/2024 Licensing revenue rose substantially year-on-year. Was anything unusual, like seasonality?

Craig J. Mull: Licensing revenue has two parts: net sales royalty and royalty on product shipments. Shipments can be lumpy, while net sales are steadier. This quarter, we had higher year-over-year shipments, which boosted results. Similar benefits appeared in Q3 last year.

10/05/2024 Is there a good licensing revenue level to assume for the rest of the year?

Bryan Jacobs: Look at the trend and run rate. Where shipments create lumpiness, average it out. We break down the split between the two in our financials.

28/08/2024 What margins do you expect on MOB-015 in Canada?

Margins will be slightly lower than our existing portfolio due to import costs, but still strong overall. It is too early to disclose specifics for competitive reasons. One clarification: in Canada we will not collect a royalty. We will sell the product directly through our sales infrastructure and only pay a royalty back to Moberg.

08/11/2024 Should Q4 show normalized results for Natroba including net income and tax loss credits to free cash flow?

Hey, Justin, it's Brian Jacobs here. On Natroba, we will continue to have some transition from that co-promotion partner we inherited with the business. The run rate you are seeing in 2024 should continue, and it will not be until Q1 2025 that we are fully transitioned off. That is the way to think about the Natroba business.

On utilization of tax losses, that remains unchanged from what we previously disclosed. We believe we structured the transaction in a tax-efficient manner and should be able to utilize tax losses efficiently from the combined business.

08/11/2024 Were there elements in Q3 where tax losses were not utilized?

Nothing in particular. We continue to utilize those losses in the quarter. Nothing has changed from prior quarters.

19/03/2025 Will M&A fees and the fair value inventory adjustment roll off next quarter?

Yes, both items will roll off, though there will still be some impact in Q1 2025. However, the amounts will be far reduced compared with the past two quarters.

19/03/2025 Can you quantify the one-time items expected?

We cannot provide a precise figure right now, but they will be lower than what we have seen in recent quarters.

19/03/2025 Can you break out cash generation between organic operations and use of tax loss credits, and what remains available?

Remaining tax losses going forward are $154 million in U.S. dollars before any tax effect. In the quarter, about $11 million was utilized. The way we have structured the businesses allows us to apply those losses across both the Canadian and U.S. operations.

09/05/2025 Can you quantify Natroba seasonality in Q2 and Q3?

Historic financials from ParaPRO, which we reference in bar reporting, are the best guide. They clearly show seasonality in peak periods.

We expect stronger performance in the US, with revenues stepping up in Q2 and Q3. The magnitude should be in the high single to low double-digit percentage range.

08/08/2025 What are annual sales of permethrin in Canada?

Andre, it's Bryan. We have not done a formal analysis on permethrin because it's a generic product, and its sales level would not necessarily indicate what we could achieve with Natroba in Canada.

08/08/2025 What is the size of the Canadian permethrin market?

Andre, in Canada both 1% and 5% permethrin are over-the-counter products, making data hard to obtain. Our estimate is that the market is about CAD 10 million.

12/08/2025 For new listeners, can you remind us what Cipher is about?

Yes, we had a very good quarter, but let me step back. Cipher is a specialty pharma company originally spun out of CML Healthcare in 2003, and since 2004 it has developed several drugs with three FDA and Health Canada approvals. I rejoined the business in 2020, and since then we’ve made the company lean, profitable, and highly cash-generative. About a year ago, we acquired a U.S. business for roughly $90 million, fully transitioned it, and in the last 12 months more than doubled our sales and EBITDA.

Cipher’s base dermatology portfolio includes Acturel, Vanica, and our lead acne product, Epuris in Canada and Absorica in the U.S. Our U.S. growth is centered on Natroba, a treatment for head lice and scabies, where we hold 23% market share despite having what we believe is the best product. We have over 40 U.S. sales reps, and adding complementary products to their bag is a key priority. We are also seeking approval to launch Natroba in Canada and are pursuing out-licensing opportunities globally, with discussions underway but no signed agreements yet. Financially, we generate over $2 million per month in U.S. cash flow, reduced acquisition debt from $45 million to $18 million in 12 months, and remain focused on U.S.-oriented business development.

12/08/2025 What margins do you earn on Natroba?

Our overall gross margin is about 82 to 84 percent, and our EBITDA margin is above 50 percent. Thanks to a large pool of tax losses from prior management acquisitions, we do not currently pay tax and will not for some time. That means our EBITDA margins effectively translate to cash flow.

Outloook & Guidance

09/08/2019 What R&D expenses should we expect if Galephar products require pivotal trials?

It is difficult to estimate at this point because we are still in the process of selecting which products to invest in. We will provide updates as we move through that process.

09/08/2019 Are peak sales estimates for pipeline products still valid?

We do not have updated revenue estimates at this time, as they relate to assets we are currently seeking distribution partners for. The prior estimates are still under review.

10/11/2019 Any updates on Absorica life cycle management and prescription outlook for 2020?

We continue to work with Sun, our U.S. distribution partner, on extensions of the current product. We are positioning Absorica as a prestige product in its category, and we believe that through marketing we can retain a certain market share. The life cycle management project is ongoing, and we expect to reach an agreement with Sun on a potential adjustment to the product that would extend its life.

08/05/2020 What is the expected timeline for data on MOB-015 and CF101?

We are continuing to move through the regulatory process with these drugs. We believe value is created by validating the products and enhancing their credibility through this process. We also have other projects, such as the tattoo project, which is longer-term but progressing, and we continue to confirm the quality of results.

Under our partnership with Galephar, we are working on several products, including one for hand eczema. Overall, we are advancing through regulatory pathways and believe this strengthens the value of our pipeline.

13/08/2020 Any updates on Absorica royalties and licensed U.S. products like Can-Fite and Moberg?

The Moberg product is still in clinical trials. Results were weaker than expected compared to existing products, mainly due to whitening of the nail during treatment. They are reformulating, which pushes commercialization further out. As for Can-Fite’s adenosine analog in psoriasis, development has slowed. We need to get an update and will provide it when available.

13/08/2020 Update on Canadian portfolio out-licensing plans?

We are in advanced discussions with a marketing partner and expect to finalize a definitive agreement by the end of September. The process was deliberately delayed because sales reps cannot access physician offices during COVID-19, and we want to avoid unnecessary costs. As conditions improve, we will be ready to move forward. We are also exploring virtual engagement methods, such as online meetings and digital diagnostic platforms.

13/08/2020 Any update on potential Absorica generic launch at year-end?

Actavis has not registered the product with the FDA. That could mean delays or possible manufacturing issues, though at this point that is speculation.

13/11/2020 Update on Can-Fite psoriasis Phase 3 program status and timelines?

We are working to set up discussions with Can-Fite to better understand their process and overall schedule. The product shows potential with positive early signals, but we need more details on their results and plans. Those conversations are ongoing, and we expect to gain a clearer view of timelines for Phase 3 conclusion and regulatory milestones.

13/11/2020 What are the company’s next 12-month goals and Trulance arbitration timeline?

For the next 12 months, we will focus on continuing to grow our Canadian commercial business, managing cost structure, and advancing development programs such as the Tattoo program, the Moberg nail fungus program, and new projects with Galephar, particularly Alitretinoin for hand eczema. For Absorica, once a generic is launched, we will launch our own authorized generic with Sun to maintain significant market share.

Regarding arbitration with Bausch, the process is ongoing. We expect a decision from the arbitrator no later than the end of January 2021, unless the matter is settled before then.

13/05/2022 When do you expect MOB-15 to launch in Canada, and what revenues could it generate?

MOB-15 is developed by Moberg, and we hold the Canadian licensing and distribution rights. Phase III trials showed excellent cure rates but raised issues with nail discoloration. Moberg has decided to conduct a second Phase III trial in the U.S. at a lower dose to enhance results. While we do not yet know the timeframe for completion, it is in our best interest to wait for those results, which should be stronger than the first trial, before moving ahead with commercialization in Canada.

13/05/2022 Do you expect to change reporting currency to Canadian dollars?

There is a possibility of switching from U.S. to Canadian reporting. The decision will depend on business development activity. If we make a large U.S. acquisition, reporting will likely remain in U.S. dollars. If a large Canadian acquisition occurs, we may move to Canadian-dollar reporting. Timing and choice of currency are tied to future business development opportunities.

13/05/2022 Can you update us on Epuris in the Mexican market and 2022 expectations?

Through Galephar, we partnered with Telemax, a large Latin American distributor. The product received regulatory approval in Mexico, and Telemax has placed initial stocking orders. We expect meaningful royalties from this market, but not at the scale of Canada or the U.S. given significantly lower pricing in Mexico.

13/05/2022 What initiatives are being pursued in South America, specifically Brazil, for the isotretinoin portfolio?

We have a distribution agreement with Sun Pharma for Brazil, which is a large market. However, the regulatory regime makes product approval very difficult. We are pressing Sun to move the project forward, but challenges remain with regulatory authorities. Brazil generally prefers to purchase products manufactured domestically, so we are exploring ways to accommodate this requirement. It is a complicated process and intentionally challenging due to Brazil’s preference for local manufacturing.

17/03/2023 When should Phase 3 data on MOB-015 be available?

We expect data within the next nine months. Enrollment of 350 patients is complete, and investigators are now going through protocols. Based on what we have heard from Moberg, we should see results in that timeframe.

17/03/2023 If Phase 3 MOB-015 data is positive, when will the Canadian NDS be filed?

It would be filed immediately. Health Canada has a six-month period to review the file.

17/03/2023 When could the Can-Fite psoriasis product NDS be filed in Canada?

Can-Fite must complete its ongoing study first. That filing is likely about 12 months out, compared with nine months for MOB-015.

17/03/2023 Can you raise U.S. drug prices in line with 7% inflationary increases?

It is possible, but the FDA has pushed back on some increases around 7%. We believe we can achieve price increases in the 4% to 6% range for our U.S. portfolio.

17/03/2023 Do you expect year-over-year top-line growth from 2022 to 2023?

For our Canadian assets, we are budgeting growth on most products. In the U.S., Absorica genericization has slowed growth, but we expect price increases and some top-line growth in other products. Foreign exchange is a headwind, as the strong U.S. dollar compared with last year will impact reported results despite Canadian portfolio growth.

12/05/2023 Can you quantify expected Aggrastat growth in coming quarters?

What you saw in Q1 is a good indication of expectations going forward, and we hope to build on that. We intend to report stronger outcomes in future calls.
We are working closely with Verity and targeting 45 cath labs across Canada that require Aggrastat. Progress has been solid, and we expect momentum to continue into the future.

12/05/2023 What updates can you share on your pipeline with Galephar?

We are in discussions with Galephar on several potential products in their development pipeline. While nothing is ready to announce, we are hopeful of securing another successful product, similar to Absorica and fenofibrate. Galephar excels at improving existing products, often through the 505(b)(2) pathway. We expect to report progress on these discussions in coming quarters.

26/05/2023 What should investors focus on as key catalysts or metrics?

Cipher trades at roughly three times EBITDA, holds nearly half its share price in cash, has no debt, and generates strong free cash flow. For investors, this represents a very stable and undervalued business with meaningful upside. Our discipline means we will not rush into deals, but in today’s buyer’s market, sellers are motivated. Our strong balance sheet allows us to move quickly when the right opportunity appears, often with fewer competing bidders.

Investors should track our pipeline closely, particularly progress on MOB-015 with our partner Moberg. They are confident in the product, already preparing for European launch, and running an additional U.S. study. Positive updates there, combined with our acquisition strategy, are the most important signals that we are on the right path.

26/05/2023 What is the key takeaway message for investors today?

Cipher has transformed over the past two and a half years by focusing on profitability, eliminating debt, and stabilizing the business. We now generate about 1 million U.S. dollars in free cash each month and will continue to do so until the right acquisition comes along. We are disciplined, patient, and prepared to strike when the right opportunity presents itself.

Our balance sheet is strong, our capital structure is solid, and our track record proves we can execute. Investors see that we trade at a low valuation relative to cash and earnings, while competitors in specialty pharma are struggling. This is the right time and place for Cipher. We are positioned to grow through opportunistic acquisitions, expand our pipeline, and continue building shareholder value.

10/11/2023 Will EU approval of MOB-015 support an earlier Canadian filing before U.S. Phase 3 data?

Yes, we could file in Canada now, but we are waiting for the enhanced indication that we believe will come out of the North American trial in the U.S. We also have milestone payments tied to the clinical trial results, and we want to wait until those are achieved before filing in Canada.

10/05/2024 Assuming Moberg Phase 3 results are positive in January 2025, when would Cipher file an NDS?

Bryan Jacobs: Good question, André. We are already preparing our Canadian dossier, which is based on European approval. Health Canada has a more streamlined process with the EMA than with the FDA. Since the formulation does not change with the Phase 3 trial, we can move quickly. Once results are in during Q1 2025, it will take us another quarter to file. With Health Canada’s one-year window, approval would be expected in Q2 2026, targeting a launch in the second half of 2026.

10/05/2024 Why not file an NDS now based on EMA data instead of waiting for U.S. Phase 3?

Craig J. Mull: Doug, it's Craig. We are getting a head start on our submission, but we want to secure the claim that our complete cure rate is superior to the current market product. That requires the Phase 3 data, so we are holding for that before filing.

10/05/2024 Can product revenue still grow for the remainder of the year?

Craig J. Mull: Yes. We see a positive trend and expect further growth.

10/05/2024 Does confidence in executing one or more M&A deals in 2024 remain?

Craig J. Mull: Yes, I feel confident and optimistic. That said, Cipher has made mistakes in the past, and we will make sure those are not repeated.

28/08/2024 How aggressively will Cipher pursue U.S. rights to MOB-015?

Aggressively.

28/08/2024 What key metrics or catalysts should investors watch?
First, U.S. market share gains with Natroba. Second, continued sales growth of Epuris in Canada. Third, the phase three readout for MOB-015 in January, which will be pivotal.

28/08/2024 What is the main takeaway about Cipher today?

Cipher’s base business was already a strong, cash-flowing platform. With the Natroba acquisition and U.S. infrastructure, we now have multiple growth levers that didn’t exist before. In the near future, Cipher will be a much larger revenue company, with steady earnings growth as we have delivered for the last several years. We believe the stock remains very cheap relative to our trajectory.

08/11/2024 What is the timing for potential execution of transactions?

Yes, I believe 2025. These deals often take longer than expected.

08/08/2025 How are out-licensing discussions for Natroba progressing and could agreements arrive in 2026?

That's possible, Andre. We have many interested parties, and the key issue is pricing in other jurisdictions. We are closely watching the Trump administration's discussions on most favored nation pricing to avoid selling at lower prices abroad that could later affect U.S. pricing. Things are going well, with significant interest from multiple countries and specialized pharmaceutical companies. It is likely we will have an agreement in place by the end of 2026.

08/08/2025 What is the status of Can-Fite’s Phase III trial with piclidenoson for plaque psoriasis?

We do not have much recent information but have a call scheduled next week. We believe the trial is going well. We were surprised to see Can-Fite raise about $75 million, which should fund the work required. We expect to get a more detailed update during our upcoming call.

12/08/2025 What is the timeline you expect for out-licensing deals?

Within the next six months, we would like to have at least a couple of out-licensing agreements finalized. This effort is independent of our Health Canada submission, which we will handle ourselves given our infrastructure.

12/08/2025 Is the growth from this past quarter sustainable?

The second quarter is always strong for the U.S. business, and I expect the third quarter will be even stronger. There is some seasonality: warmer weather tends to bring more head lice and scabies cases, while December sees fewer. Overall, the growth trend is intact, though it naturally fluctuates with seasonality.

12/08/2025 Where should investors focus when evaluating Cipher right now?

Investors should monitor our continued execution. I expect acquisitions in the not-too-distant future, though many opportunities fall away during diligence. We discard the vast majority, which is the right choice in hindsight. Bad acquisitions consume time and value, and historically the company made missteps I do not want to repeat.

12/08/2025 Where do potential deals usually break down?

Most often, sellers overvalue their products, assuming stronger growth than is realistic, which translates to asking for too high a price. Everyone tries to put lipstick on what they are selling. We prefer to be patient, and passing on many of the deals we’ve reviewed has proven to be the right call.

12/08/2025 What is your long-term vision for Cipher?

My goal is to double the size of the business in sales and earnings within the next five to ten years, primarily through U.S.-based acquisitions of products or companies. Once we achieve that scale, I’d like to secure a NASDAQ listing, ideally within three years or less. That would broaden our investor base and mark the next stage in Cipher’s growth.

Risks & Macro

13/08/2020 What is your position versus the CRA in the tax dispute, and what is the expected resolution timeline?

We will file a notice of objection in September, mainly focused on differing views of valuation. Resolution speed is uncertain given the pandemic, but based on current conditions, six months seems likely. We expect ongoing dialogue with Revenue Canada and hope to reach agreement sooner.

13/11/2020 Has the Trulance arbitration process concluded and is it now with the arbitrator?

At this point, the matter is in the arbitrator’s hands, though there could still be further discussions among the parties. The pandemic has slowed legal processes, including this arbitration, which has extended timelines beyond what they would normally be.

19/03/2021 What is your market analysis for Brinavess adoption in Canada despite U.S. regulatory risk?

We believe the product is a strong candidate for the hospital sector. Verity, who has a background with these products through Cardiome, will do a good job of increasing the number of hospitals on our roster. They will have feet on the ground and will be promoting those products, particularly Brinavess.

10/11/2023 Any insight on Moberg’s capital needs or partnership activities for psoriasis development?

We are expecting to meet with them in the coming 10 days. We have a few questions on those lines ourselves and hope to get clarity. We’d be happy to come back to you afterward with more information.

15/03/2024 Does Health Canada’s review of benzene in acne products have implications for Epuris?

These are a different category of products. If physicians grow concerned about over-the-counter acne products, they may prefer prescribing a safe option like Epuris. This could provide a slight boost, though I believe the probability is low.

28/08/2024 What challenges keep you up at night?

Our biggest challenge was finding the right new growth leg, and we’re confident we’ve solved that with the acquisition. The U.S. payer market is always changing and requires vigilance. The risk of generics is always present, though not pressing right now. Beyond that, execution is our main focus. We finally have the base to grow meaningfully, and that is exciting.

12/08/2025 What issues or risks concern you most right now?

The pace of our global out-licensing is slower than I would like. Two key challenges are achieving acceptable pricing in other jurisdictions and uncertainty around potential U.S. “most favored nation” pricing rules. Entering into agreements at lower prices could backfire if such rules take effect. For now, we remain patient. We are not desperate to do deals, and I prefer to wait for the right opportunity as we did with Natroba.

12/08/2025 Do you expect tariffs to affect your business?

Very little.

12/08/2025 How significant are tariffs for your business?

Very, very little. We import one component of the product that already carries tariffs, but with gross margins of 82 percent, the cost impact is minimal. It is just a small part of the total product cost. At this point, tariffs are not material, though with policy changing daily, we prefer to stay out of the spotlight.

Other

18/03/2022 Will you switch reporting currency to Canadian dollars?

There is a possibility of moving from U.S. to Canadian reporting, but it depends on business development. If a major acquisition occurs in the U.S., we would likely stay with U.S. dollars. If a significant Canadian acquisition occurs, we may move to Canadian reporting. Timing will be driven by future opportunities.

18/03/2022 Do partners plan to increase prices of licensed products?

Each year we apply for price increases and so do our distributors, depending on product and market. In general, we aim for increases at least in line with inflation.

18/03/2022 Closing remarks?

Thank you for joining us today. We look forward to updating you on our progress throughout 2022 as we execute on the priorities discussed. Thanks again, and have a great day.

Disclaimer:

The following transcript and Q&A have been generated with the assistance of Artificial Intelligence (AI). While we strive for accuracy, completeness, and clarity, the content may contain errors, inaccuracies, or misinterpretations. Neither the company featured in this document nor ValueBridge assumes any responsibility or liability for the accuracy, reliability, or completeness of the information presented.

This material is for informational purposes only and should not be construed as official company communication, financial advice, or a definitive representation of the company's views. Readers should independently verify any information before making decisions based on it.

Sources

Omda AS (formerly CSAM) is a Nordic-based healthcare software consolidator specializing in highly niche medical and emergency solutions. Since 2005, it has built a portfolio of long-lived, mission-critical systems with <2% churn over 10 years, serving hospitals, blood banks, and emergency services. Growth comes from both organic expansion at 5–10% annually and disciplined M&A, with 17 acquisitions completed to date. Typical acquisition multiples have been 1–2x EV/sales, focusing on recurring revenues. Revenue has grown tenfold since 2015 to nearly NOK 500 million, with a 30% EBITDA margin ambition supported by decentralization, cost efficiencies, and AI-driven productivity gains. The company finances acquisitions primarily through bonds (currently €500 million outstanding, with capacity to double via tap issues) and cash, explicitly avoiding equity issuance at current valuations.

Catalysts & Milestones

2005 - Began building proprietary M&A target database in Nordic healthcare systems

2015 - Revenue base from which company has grown tenfold to nearly NOK 500m by 2025

2016 - Public safety revenue at NOK 15m, later scaled above NOK 150m via acquisitions

2017 - Acquired Saab ambulance software, reinforcing emergency care capabilities

2018 - Closed acquisition after discussions dating back to 2008, showing long-cycle M&A approach

2020 - IPO and €150m Carmenta acquisition; raised funds via equity and bonds to finance M&A

2021 - Acquired MedSciNet and Optima; Health Analytics unit expanded via M&A

2022 - Acquired additional analytics provider; 15 acquisitions reached since inception

2023 - Delivered national blood management system in Denmark; ProSang in full production

2025 - Sales near NOK 500m with 5–10% organic growth plus targeted M&A; bond capacity available to double

Investment Highlights

• Revenue grew tenfold since 2015 to nearly NOK 500m

• Completed 17 acquisitions, typically at 1–2x EV/sales multiples

• Churn below 2% over the past decade across mission-critical software

• Ambition for 30% EBITDA margins by 2026–2027 supported by decentralization

• Current bond financing at €500m, with tap issue capacity to double
  
  

Future Growth Drivers

• Continued M&A pipeline of ~300 projects, with 20–30 in active dialogue

• Cross-selling within emergency care, e.g., triage, acute care, and ambulance modules

• Expansion of Health Analytics and public safety through targeted acquisitions

• AI deployment for customer-side modules and internal code/productivity gains

• Strong recurring revenue base enabling leverage of up to 5x EBITDA for acquisitions
  
  

Risk Factors

• Heavy reliance on bond refinancing with €500m outstanding; margin subject to markets

• Integration complexity from 17 acquisitions, requiring cultural and technical alignment

• Margin drag from long-cycle projects such as LIMS (contracted until 2027)

• Personnel restructuring (e.g., Philippines divestment of ~50 FTEs) may disrupt operations

• Customer concentration risk, e.g., Carmenta’s >50% sales with SOS Alarm in 2020

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Capital Allocation

27/11/2020 Can you achieve NOK 240 million this year and how is the M&A market?

We are focused on improving sales and guiding based on Q4 effects and currency impacts, which influence results. Adjustments in CSM’s currency exposure provide the options investors look for. The M&A market remains highly fragmented, and we are the leading consolidator in our chosen niche of specialized components. Many Nordic and Northern European companies want to join us because of our structured approach to certification and industrialization. We see positive trends and clear opportunities over the next five years.

27/11/2020 What multiples do you pay for M&A targets?

We focus on EV/sales multiples because not all targets have strong EBITDA. Recurring revenue strength matters, but so far our acquisitions have been in the 1x to 2x EV/sales range.

27/11/2020 Are you in advanced acquisition discussions?

Any material developments must be reported under Stock Exchange rules. That said, we have completed seven acquisitions in the past five years and will continue to pursue similar opportunities. This is a constant part of our strategy.

26/02/2021 Why pay €150,000,000 upfront for Carmenta instead of partly in shares with lockup? Will management and employees stay on, and what incentives do they have?

We have already integrated Carmenta’s people, who are excellent and motivated to stay with us, so we do not see retention as a major risk. The structure of each deal depends on negotiations with the seller. We have used various methods in the past, including seller credit, vendor notes, cash, and shares. For Carmenta, cash was appropriate. Remember, we raised funds through our IPO and bond issue specifically to finance acquisitions, so deploying cash was the right approach here.

26/02/2021 How many acquisitions are you screening simultaneously, and what size companies do you typically consider?

Since our founding in 2005, we have tracked specialized clinical solution providers, first in the Nordics and later across Europe. We maintain a database managed by our Strategy Director, who continuously evaluates relevant targets. Out of tens of thousands of potential companies worldwide, about 200 are relevant to us, and we have engaged with many for years. For example, one acquisition completed in 2018 began discussions as far back as 2008. This long-term approach supports our 40% growth plan.

26/02/2021 Can you describe your M&A integration process, including sales and cost synergies and cultural aspects?

Our profitability stems from integration. We do not acquire companies to leave them standalone; instead, we build one CSAM by sharing resources and competencies and creating a unified culture. This approach works because our acquisitions are highly specialized components that align with our focus. The people behind these solutions are essential, and by developing these niches together over time, the culture naturally integrates.

26/02/2021 How many acquisitions can you manage per year, and what is your annual target?

CSAM is built as an M&A machine, with the entire organization continuously working on acquisitions and integrations. Because these solutions are long-lived and stable, growth primarily comes from add-on components and acquisitions. We have the resources and methodology to manage this, and depending on size, we can handle around 2 to 4 acquisitions per year, which aligns with our growth targets.

26/02/2021 Why was there a long gap between previous large acquisitions, and should we expect this frequency going forward?

Yes, we are now speeding up. The IPO, bond issue, and related preparations in 2020 required significant management attention, which delayed acquisitions. With those processes completed successfully, we are fully resourced and prepared to accelerate activity. We will not be slowing down.

26/02/2021 What is the payment structure in Carmenta? Is it annual upfront, and how much of 2020 sales were software and recurring revenue?

In the DE Health business, much of the payment structure is front-loaded, often invoiced upfront. Service and maintenance contracts, which are recurring, are typically invoiced in advance, annually, semi-annually, or quarterly. Professional services are usually invoiced at completion. Carmenta has the same basic working capital profile as CSAM, though there is always room for optimization. Regarding the revenue mix, recurring income comes from long-term contracts. Historically, these businesses begin with consulting, then move into product, services, and software. The software share is lower than our norm, but increasing it is part of our buy, integrate, and build model.

26/05/2021 Do you plan to keep CapEx around 9–10% of sales, or will it change?

We have guided CapEx at around 10%, and that remains the expectation. One quarter it may be 9%, another 11%, but roughly 10% is the level. It is important to remember what CapEx represents for hospitals: business cases where we create components that customers buy to add recurring revenue. It adds value for them and future recurring revenue for us. We do not want CapEx to be too low since it represents growth potential and is not only about financials.

26/05/2021 What are the main challenges in accelerating acquisitions?

The challenge is to secure an accelerated pace of acquisitions. We already have a conservative plan that we can reach, but I work constantly to see how we can accelerate. This requires making the right decisions at the right time, selecting the right niches, and targeting the right geographies. It is always a challenge to do the right thing every time, but we view it as part of the game rather than a problem.

26/05/2021 What were M&A transaction costs and other nonrecurring items in Q1?

We do not report M&A or one-off costs separately; all are included in reported numbers. Naturally, a large transaction like Carmenta and high M&A activity in general impacted Q1 results. Audit costs, which were booked in Q2 last year, were fully booked in Q1 this year. For a fair comparison, you could add €1–1.5 million to this year’s Q1 EBITDA, since it was burdened by costs recognized in Q2 last year. That means EBITDA this quarter is actually a little stronger than it appears. We choose not to adjust EBITDA because M&A is a constant part of our business.

30/06/2021 Why is R1 RCM divesting the Optima business now?

In my view, this is not a strategic fit for them. Most of R1’s operations focus on managing administrative and economic software for healthcare organizations. They acquired Optima through another transaction, and it never aligned closely with their core strategy. We have been in dialogue with them for some time, much like when we acquired ambulance software from Saab in 2017. In both cases, the seller had more than 90% of its business in other areas. Optima fits better with us than with R1, though ultimately R1 must speak for itself.

I see this as a homecoming for the Optima employees. We will take care of them, and divestment is not in our DNA. I am confident this transaction will be well received.

30/06/2021 How is the acquisition of Optima similar to and different from MedSciNet?

The similarity is that both are niche businesses with long-term recurring revenues and an emphasis on analytics. That is the common thread.

The difference is that MedSciNet allowed us to create generic national register components and then add analytics. Optima, by contrast, is tightly focused within public safety. It has built a strong and viable position in that specific niche over many years. While its components could be applied more broadly, its main strength is in this dedicated domain.

30/06/2021 How much room do you have to acquire companies without raising capital?

It depends on the purchase price and settlement structure. Historically, we have done transactions at EV/sales multiples around 1–2, using various combinations of cash, seller debt, seller credit, and shares. If everything were settled purely in cash, we still have capacity. Earlier this year we raised NOK 200 million in a bond tap issue and have only used a small fraction of it, which will carry us at least through this year and likely well into next year.

30/06/2021 How will acquisitions be financed to reach NOK 1 billion revenue by 2025?

We believe CSAM should maintain a mix of debt and equity. With our stable recurring revenues from public customers, it is fair and efficient to apply some debt to the capital structure. A leverage ratio of up to 5x EBITDA would not be uncomfortable. The exact mix will depend on shareholder decisions and risk appetite, but it will be a blend of debt and equity.

19/05/2022 How has the M&A pipeline and private market valuations developed lately?

It is easy to see what is happening with valuations in listed companies, and many are now sobering up. Valuations in private markets are beginning to harmonize with those of listed peers. As a result, there are more targets available, and in my view at better prices.

Looking at our own position, if you compare the balance sheet at the end of Q1 with the end of last year, despite acquiring a company and paying cash, our cash position is nearly identical. That gives us a lot of flexibility. It feels like a tidewater effect, many growth and tech companies face low tide, but our ship is loaded with cash.

19/05/2022 How large is the relevant M&A space for you?

We started building a database in 2005, categorizing hospital systems in Norway. That work has since expanded to cover vendors in the Nordics, Europe, and beyond. In the Nordics, the specialized healthcare market is about NOK 3 billion. Based on our Q1 sales, we have roughly a 10% share, so there is ample room for further acquisitions. The EU market is about ten times larger, meaning the volume of potential targets is not the problem.

The key is selecting the right targets. For example, public safety grew from NOK 15 million in 2016 to more than NOK 150 million in annual sales, built systematically through targeted M&A. Health Analytics followed the same pattern, with one acquisition in 2021 and another in 2022. For us, the priority is acquiring the right recurring revenue streams and sticky businesses rather than chasing volume. That strategy has worked with the 15 acquisitions we have done, and it supports our goal of reaching SEK 1 billion in 2025.

19/05/2022 How will new acquisitions be funded? Will you use bonds, bank financing, or issue shares?

There are many ways to structure funding, and it depends on the situation, whether the seller is a financial investor, an entrepreneur, or a family succession case. Each case calls for a different approach.

We currently have a strong cash position, sufficient to support 40% annual growth without additional funding. That said, the bond market remains open to us because of our strong recurring software revenue, low churn, and high-quality counterparties. Other tools include seller credits and earn-outs. Overall, we believe cash and financing options will be available without issuing new shares at today’s price level.

19/05/2022 Why does it take the same time to integrate small and large acquisitions in your buy–integrate–build model?

Customers behave the same way regardless of contract size. Almost all hospitals in the Nordics, and an increasing number abroad, handle vendors through long processes. Whether the contract is small or large, you must negotiate, deliver, adjust payment terms, and sell add-on modules. These steps always take time.

Our model reflects the reality inside hospitals, not just a PowerPoint plan. For example, if you need to reduce staff, you cannot do it in a single quarter. These processes are specific and time-consuming, which is why both small and large acquisitions require the same integration timeline.

30/08/2022 Are you too selective with acquisitions, and how do you convince owners to sell?

We are picky, but not excessively. Stability and predictability in recurring revenue streams are critical for both bondholders and shareholders. Many companies lack the income quality we want, so we pass. Strategic fit is also essential. While we could grow faster by acquiring less specialized businesses, our strength lies in highly specialized components that sustain recurring revenue and keep churn near zero.

We aim for €1 billion in revenue, but only with the right targets at the right time and price. Over the years, we have positioned CSAM as a good home for these solutions, which strengthens our brand and builds trust with sellers. That long-term dialogue has gotten us where we are, and we believe it will take us to our SEK 1 billion goal in the next couple of years.

30/08/2022 How do you plan to finance new acquisitions?

We have several options. Our balance sheet shows €260 million in cash, which gives us flexibility. We can also use seller credits, vendor notes, and earn-outs.
For short- to medium-term acquisitions of similar size to those we have recently completed, we have both the ability and capacity to finance them without issue.

30/08/2022 What acquisition multiple is too high to pay?

There is no exact answer, but historically CSAM has paid between 1 and 2 times sales on an enterprise value-to-sales basis. Many of our acquisitions were loss-making or break-even, so we do not use EBITDA multiples as the primary reference.
Exceptions may exist where a company justifies a higher multiple, but we have been prudent in the past and intend to remain so going forward.

30/08/2022 What was the worst deal you made in the company’s history?

I once hired a CFO that did not work out, and that was probably the worst decision. More importantly, we have looked at five or six acquisitions that we dropped very quickly once we saw how unstructured they were. In other cases, we were further along in the process before realizing issues such as unclear ownership of intellectual property or third-party dependencies.

Avoiding those deals protected our model, which depends on controlling our own IP and maintaining gross margins above 90%. Looking back, I do not regret any of the acquisitions we actually completed and integrated. The only real regret remains that CFO hire.

30/11/2022 How should we think about M&A pace and size to reach 2025 revenue target?

We are working on about 300 projects of varying size, mostly small and mid-sized like those we have done before, though some are larger. We always compare targets to our current size, and discussions are ongoing with companies as large as half our size as well as with smaller ones we have known for years. To reach the SEK 1 billion pro forma goal by 2025, we estimate needing SEK 100–150 million in additional sales over 2023–2025.

Our project pipeline gives us confidence we can reach this through a mix of larger and smaller acquisitions. 2022 was a slower year, but dialogues are returning and valuations are normalizing. We expect to continue acquiring both small and larger businesses relative to our size.

30/11/2022 With valuations more reasonable, are you seeing more competition for M&A targets?

On larger deals, yes, we compete with excellent acquirers like VTech and Constellation Software. But most of our 300 database targets are highly specialized, often underperforming, and not attractive to private equity or larger industrial buyers. These niche businesses may focus on a single discipline in one country, which makes them less relevant for others. So while competition exists on bigger targets, smaller opportunities remain less contested.

30/11/2022 How is your M&A pipeline divided between Nordic and non-Nordic companies?

We do not publish exact statistics, but the pipeline is broad. In the Nordics, where we have roughly 10% market share in specialized healthcare, there are still many targets, enough that we could theoretically reach SEK 1 billion there alone. However, we aim for balance.

Carmenta strengthened us in the Nordics while also opening opportunities in Spain, Moldova, and Greece. Optima, acquired from the U.S., gave us exposure to the U.K., U.S., and New Zealand while also serving Nordic customers. Going forward, we expect a mix, perhaps 50/50 or 70/30, between Nordic and non-Nordic deals. The volume of opportunities gives us confidence we can reach €1 billion regardless of geographic split.

30/11/2022 Have you lost any deals to competitors due to valuation or other reasons?

No, we have not lost deals because we were outbid. We have walked away from some transactions for strategic or valuation reasons, and others we have paused with plans to revisit discussions later.

30/11/2022 Why are you buying back shares?

We repurchase shares to have flexibility in settling acquisitions partly or fully with shares. At current share levels, buying back stock makes more sense than issuing new shares. It is simply another tool in our M&A toolbox.

28/02/2023 How likely is it that no acquisitions will be done in 2023?

It is very hard to guide on that. It is like asking how likely it is that there will be no sunny day this summer. There is always a chance, but I would bet there will be at least one day of sunshine.

28/02/2023 How would you use cash from a divestment?

It is quite simple. A divestment is just the reverse of an acquisition. First, you will see the effect in the P&L in the quarter when it was divested. Second, whatever proceeds go into the bank, we typically use for new acquisitions. The priority for cash from a divestment would be to reinvest in something more strategic through M&A.

01/03/2023 How do you allocate capital between investments, M&A, and share buybacks?

CapEx for internal development is guided at about 10% of revenue. For M&A, we aim for 10% organic growth plus 25–30% through acquisitions annually. Share buybacks are linked to M&A, since repurchased shares can be used for partial or full settlement in transactions. Our bond agreements prevent us from canceling shares or paying dividends with them.

01/03/2023 Do you use hurdle rates when allocating capital?

Yes, we apply a weighted average cost of capital of 12%. Prioritization between CapEx, M&A, and buybacks follows the framework I described, with M&A and buybacks considered together.

01/03/2023 Did the 2020–2021 acquisitions meet your hurdle rates and goals?

Yes. Using our “buy, integrate, and build” methodology, the Health Analytics acquisition is still within its two-year margin expansion framework and should complete in the first half of this year. Other acquisitions are now run as decentralized, organic businesses with no further integration needs. This should provide predictability going forward.

01/03/2023 What have you learned from M&A deals since the IPO, and would you change your approach?

We should have decentralized earlier, as the buy, integrate, and build methodology within one business area is easier to manage, scale, and measure without disturbing others. That was the most important lesson, reinforced by insights from American shareholders familiar with acquisitive companies. We also see that some activities can be done faster, supported by digital tools developed over the last two years, such as automated invoicing. This positions us to extract more value from acquisitions more quickly going forward.

01/03/2023 Do you expect near-term M&A, and in which segments?

It always takes two to tango, so timing depends on negotiations with sellers. Our proprietary database, built since 2005, gives us an overview of targets and long-standing dialogues across all business areas. While no deals closed in 2023, discussions were active, and I expect us to achieve 25–30% annual M&A-driven growth. The exact area depends on negotiations, but we are well prepared and confident.

01/03/2023 How has refinancing the bonds affected your M&A capacity, and what are seller expectations?

We now have cash available and a bond framework capped at 500 million, with flexibility for earn-outs and seller credits. This gives us a war chest to execute deals of various sizes, up to about half our own size. Our target lists include attractive opportunities, both small and large, that can accelerate progress toward our growth goals. Seller expectations remain a factor, but financially we are well positioned to pursue the right deals at the right time.

01/03/2023 Do you see buybacks as a better use of capital than M&A?

It makes sense to buy back shares when the price is below intrinsic value. Under the new bondholder agreement, we can repurchase up to $50 million of shares on a revolving basis. The next AGM will likely address this. However, compelling acquisition opportunities often compete with buybacks, so capital allocation decisions balance both options.

12/05/2023 How do you enforce capital discipline in business areas, and what is your hurdle rate for M&A and internal investments?

Capital discipline means allocating CapEx only to solid business cases, not spreading funds evenly. If a business area has a good case, it receives investment, otherwise not. Business area managers also improve working capital by invoicing customers upfront and extending supplier payment terms from 14 days toward 30, 60, or 90 days.

For both M&A projects and internal investments, we apply the same hurdle rate. We view acquisitions and internal growth initiatives under the same cost of capital lens, essentially “buy or build.” Currently, the hurdle rate is around 12%, reassessed regularly based on our weighted average cost of capital, bond trading levels, and base rates. M&A remains a core growth strategy, as it has been for the past 15 years.

25/08/2023 Why are there still no new acquisitions?

It is difficult to discuss acquisitions before they are signed, but we have many processes ongoing. Most of our acquired targets have been in dialogue with us for years, so we know them well.

Our database of potential targets is growing, both in current and new markets. We will continue our M&A focus, and you will see acquisitions and eventually acceleration. Still, we must buy the right target at the right time and the right price, since we can only use the money once.

25/08/2023 Liquidity reserves decreased by NOK100 million since the IPO. Where was this spent?

Funds were spent on four acquisitions since the IPO, as well as on software investments recorded under CapEx and on reorganizing operating activities.
For detailed breakdowns, the quarterly and annual reports provide full cash flow analysis.

25/08/2023 What is your CapEx guidance in the short to medium term?

We generally expect CapEx to be around 10% of sales. As sales increase, it may be somewhat above or below that, but roughly 10% remains our guiding level.

25/08/2023 What about the bond loan and its renewal?

That is correct, financing costs have increased and the loan market is tougher. The total terms depend on the market, including the VIX and iTraxx, the base rate, and last but not least CSAM’s performance, which explains the margin. We expect to refinance and probably expand the current bond loan, backed by strong EBITDA results.

We are in dialogue with bondholders and investment banks. No specific steps have been taken yet, but our focus is on what we can control, namely our performance, while continuing to monitor the market.

25/08/2023 What is a prudent expectation for refinancing the 2024 bond, and what debt type will replace it?

It depends on the market’s confidence, interest rates, and CSAM’s performance. Our preference is to refinance and possibly expand the bond, supported by EBITDA strength.

We are working with market participants and investment banks. While we cannot control the market, we can ensure strong results, which is our main priority.

08/11/2023 How many M&A targets fit your business areas, are you in due diligence, and what sizes are they?

I cannot discuss ongoing unpublished processes, but in general, we have maintained high activity even if deal flow has been slower the past couple of years. We started one deal this year that will close in Q4, but we also have multiple ongoing discussions with both small and larger targets. For example, the company we just announced had been in discussions with us for more than five years. Overall, I am confident that the funnel is strong enough to reach the targets set at IPO, even if we are behind the original timeline.

08/11/2023 How many newly issued shares will be bought back, how much dilution is expected, and what are your acquisition advantages versus other acquirers?

We have repurchased approximately NOK 30 million of shares, as detailed in the report. Buybacks cause no dilution. Dilution only occurs if we issue new shares as acquisition compensation. Our competitive advantage lies in being the best home for certain solutions. For example, the acquisition we announced recently involved a triage solution with 20 years of proven value. Combined with our contracts and processes, it creates strong synergies that benefit customers and employees, making us attractive to sellers.

08/11/2023 What is the size of the seller’s credit?

Currently, there is no seller credit, so nothing off balance sheet. Our bond agreement has a carve-out allowing up to NOK 100 million in seller credit, but at present the amount is zero.

10/11/2023 What can you say about M&A activity and valuations?

We had very high activity in 2023 in terms of acquisition dialogues, though not many transactions were completed. The market is moving in our favor, and many ongoing discussions are progressing well. The pipeline includes targets that can be added without hurting profitability, which is an important consideration for us. Since our IPO, we have doubled in size, so the impact of acquisitions is smaller relative to the whole company. We are happy with the pipeline and expect more to come.

On valuations, we have been cautious. In 2021, some entrepreneurs had expectations that were too high, reflecting what Warren Buffett called irrational exuberance. Now, sellers are becoming more realistic, and valuations are reaching more sober levels. This creates opportunities where we can bridge gaps and find workable solutions, so we see more potential on the valuation side as well.

10/11/2023 How do you look at different levers of financing potential M&A deals?

There are several options. We can pay cash upfront, settle in shares, or use our share buyback program to settle wholly or partially in kind. We can also use earnouts and seller credits. We have all these tools available, and it comes down to using the right one for the right situation.

10/11/2023 Could you give an update on the bond refinancing process?

As announced in the press release this morning, alongside Q3 results, we mandated Carnegie and DNB to help refinance the current €500 million bond. The coupon is 3-month LIBOR plus 500 basis points. We are launching a roadshow next week, meeting existing and new investors, with the goal of rolling current exposure into the next stage of our journey. Once results are in, we will share them immediately.

10/11/2023 Are you aiming for the same bond size, and what margin do you expect?

Yes, initially we aim to refinance the same €500 million size. The current margin is 3-month LIBOR plus 500 basis points. Whether we can keep roughly the same margin will depend on the process. The bond is trading slightly above par, which is a positive indicator, but final terms will be determined in the market.

10/11/2023 Going forward, will you target M&A deals with higher EBITDA margins to avoid dips after acquisitions?

Historically, we created value by acquiring underperforming companies with valuable recurring revenue, which we could restore to 30%+ EBITDA margins. That was the focus rather than the starting profitability. However, the current pipeline includes many targets performing better than those we acquired in 2022.

In 2024 and 2025, I expect average targets to be performing at or above normal levels, so we will likely see fluctuations rather than heavy dips after acquisitions. This should provide a smoother earnings profile compared to the turnaround-heavy acquisitions of the past.

10/11/2023 Can you comment on the share buyback program?

We are buying back shares, but there are limitations. Bondholder agreements restrict us, and EU MAR regulations limit how much of the free liquidity we can buy each day. These rules mean we cannot operate entirely freely in the market, so the program has boundaries we must follow.

14/05/2024 Can you comment on M&A market dynamics, multiples, and how Onda can benefit?

Activity has increased, partly triggered by MDR requirements. A year ago, multiples were higher, but dialogues today are more rational and within our range. We will act when the right business case appears, and I expect acquired growth to return to earlier levels. Multiples have come down, which is positive.

Multiples are only proxies for valuation; what matters is analyzing cash flows and remaining disciplined. Many targets are rejected because they lack strategic fit, strong financials, or quality of earnings. Saying “no” is also activity. We benefit by broadening our candidate list, initiating more dialogues, and staying active while remaining selective.

14/05/2024 Are the share buyback plans still in place?

Yes. At the recent general meeting it was confirmed we can buy back up to NOK 50 million of our own shares at any time, within bondholder limits. Currently NOK 20 million has been repurchased, leaving capacity for NOK 30 million more. The program is active and can be replenished if shares are used for acquisitions.

23/08/2024 In which business areas are acquisitions most likely?

It is difficult to be specific since it takes two parties to sign a deal. I cannot say which business area will close first, but all areas have relevant prospects. We have dialogues that sometimes last more than 10 years, and currently discussions are ongoing across all areas.

We will continue to acquire, and there are many interesting targets with strong business cases and growth potential. I cannot reveal which one will happen first, but it will happen soon.

23/08/2024 Why did you distribute a dividend instead of using the capital elsewhere?

In Norway, there is a wealth tax and a high dividend tax for individuals. This small maintenance dividend allows Norwegian shareholders to cover those taxes.

We believe this is better than shareholders, including myself, having to sell shares to pay the wealth tax. It is not ideal, but it is a fact of our environment.

23/08/2024 When will CapEx investments show more effect given slowing software revenue growth?

We have always guided CapEx at 10% of sales, and this quarter was slightly lower than the same quarter last year. On organic growth, we guide 5% to 10%. This quarter was 5.5%, and the last four quarters averaged about 7.5%. So we are on track, with normal quarterly fluctuations, not a downward trend.

When we launch a CapEx project, an idea becomes a simple project calculation: identify development costs, then estimate income from hospitals or emergency institutions. We isolate cash flows, discount them over seven years, add terminal value, and use a 12% weighted average cost of capital. It is like an M&A case since both compete for funding. CapEx is negative at first, then income arrives over time. That is how we have always done it, and will continue to.

23/08/2024 How many M&A targets are in your database, and how many are active?

There are thousands of companies in the database. We have built an M&A platform over 15 years, and around 100 companies are in ongoing dialogue. In total, there are about 20–30 dialogues active at any given time.

The definition of a “lead” varies, but between calculating business cases, negotiating, and selecting the right targets at the right time, we have many opportunities, enough to meet our original targets.

23/08/2024 What remains to be determined in the Philippines divestment project?

The term sheet is signed, but details are still being worked out. It will close later this or next quarter. Once finalized, we will publish the facts.

The purpose is replacement: inshoring combined with new tools like AI for efficient development. It is not an overnight transition, but the outcome is certain, like a pregnancy, you know the result nine months ahead.

20/12/2024 How does the cash position affect acquisitions?

The improved cash position and stronger performance from Q4 onward give us confidence to continue acquisitions. Smaller, smart deals are definitely on the table, and we will also pursue larger ones case by case with appropriate funding. The business platform into 2025 is solid, with organic growth and profitability supporting our ambitions. Decentralizing the emergency sector was delayed due to sensitive contract negotiations in several countries. This hurt results in 2024, especially in Q2–Q3, but it was a deliberate decision and we believe it was the right call.

20/12/2024 What is your CapEx guidance for 2025 and beyond?

We maintain the same CapEx guidance, historically around 10% of revenue. If anything, it may trend toward 8%–10% rather than 10%–12%. With about 15% cash EBITDA translating into roughly 25% EBITDA, this range is consistent.

26/02/2025 Will future M&A deals use less stock and more cash, and what are your biggest worries?

We do not plan to settle transactions in shares at current levels, as the stock trades well below our view of intrinsic value. Cash, seller credit, and earn-outs are more attractive options, and we have used them in recent deals. Shares are not the preferred option today.

As for worries, I am optimistic. Our organic business is stable, predictable, and strong. The M&A market has shifted in our favor compared to years after the IPO when valuations were high. Now opportunities look better. So to be precise, I am not worried.

14/05/2025 Have valuations of acquisition targets decreased?

Yes, the hype we saw a couple of years ago is gone. Valuations are now more sober and realistic. Of course, sellers still want higher prices, while buyers seek reasonable levels, but as we saw last year, expectations can meet. All the targets we are currently discussing should allow for agreements to be reached.

14/05/2025 What lessons have you learned from past acquisitions and integrations?

We have completed 17 acquisitions and learned a lot. Our buy, integrate, and build model usually follows a two-year plan, but in many cases we can accelerate integration. We now look more closely at each target’s contracts and customer relations, ensuring recurring revenue is secured through invoicing and CPI or price adjustments. The key lesson is to avoid being too standardized and instead focus on the unique characteristics of each acquisition.

14/05/2025 What are your profitability requirements when evaluating acquisitions?

We do not mind if a target is unprofitable or a turnaround candidate; some of our best acquisitions fit that profile. What matters is the current business and cash flow, plus the synergies we can create on costs or income. We buy for the future, not the past, so we assess how the business and cash flow will develop once improved. Generally, we identify cash flows, discount them over seven years, add a terminal value if reasonable, and apply a weighted average cost of capital of 12%. This is the same approach we use for CapEx projects.

14/05/2025 Are there cross-selling opportunities from past acquisitions?

Our M&A strategy focuses on value chains. For example, in emergency care we added Predicare, which provides decision support and triaging, and Averia, which supports acute hospital care. These acquisitions extended our scope from planning and call-taking to acute treatment. Cross-selling in OMDA means that customers using one component, such as acute care, may also adopt complementary components, like ambulance modules, and vice versa. It is always within the same value chain. Cross-selling is not, for instance, a cancer software customer suddenly adopting maternity software.

14/05/2025 How do you plan to finance ambitious growth plans?

Since 2015, sales have grown tenfold to nearly NOK 500 million through 5–10% annual organic growth and acquisitions. For acquisitions, we use a mix of upfront payments, leverage, and creative structures like earn-outs, seller credits, and vendor notes. These are especially relevant when dealing with entrepreneurs who remain involved, less so with industrial sellers. We currently have NOK 500 million outstanding on our bond with capacity to double through a tap issue, contingent on meeting criteria. With the results we are showing, that should be achievable. Importantly, we have no plans for equity issuance.

29/08/2025 How do you balance inorganic growth with liquidity, and how can you reach 10%–20% inorganic growth?

Several factors. First, organic growth of 5%–10% adds to our cash position. Second, while we historically paid one to two times sales, every acquisition is based on discounted cash flow, not just multiples, so the actual multiples vary.

Third, we are not always paying fully upfront in cash. We use seller credits, earn-outs, or other structures. Fourth, we have bond market access, so we can borrow when needed. Taken together, reaching 10%–20% inorganic growth is fully manageable with our cash position and financing flexibility.

29/08/2025 Why are recent M&A deals closing at lower multiples and with less cash upfront, is this due to your philosophy or market conditions?

A few years ago the market went crazy, and we withdrew because people were paying too much. For us, it must make sense both strategically and financially. Today, sellers and the market overall are more prudent. Many of our discussions with targets have been ongoing for years, allowing trust to build.
We also structure deals differently, not always paying full cash upfront. Seller credits and earn-outs can align incentives, letting both parties share the upside. These earn-outs often create the best business cases for OMDA as well as the sellers. The market has simply become more sensible, and we are disciplined in taking advantage of that.

29/08/2025 How do acquisition targets screen on valuation relative to buybacks?

We always run discounted cash flow analyses, though multiples may be used as translation. Depending on whether you look at past, present, or future projections, targets can screen very differently. Some sellers present hockey-stick forecasts, but we evaluate carefully.

If it doesn’t make sense financially, we will not do it. When it does, acquisitions can be highly attractive relative to buybacks.

Competitive Advantage

26/05/2021 What is your view on competition for your 2030 ambition to be number one?

We are not alone, but we have been unique in creating a Nordic portfolio of highly specialized solutions. No competitor has built exactly this kind of portfolio. Competitors exist within each niche, but many are also acquisition targets. Broader competitors like Constellation Software or Nexus will also be active acquirers in this market. Still, by focusing narrowly on specialized niches and building our pipeline database since 2005, we are confident we can dominate in Europe and expand globally. After 10 years of training our acquisition model, we are in a strong competitive position.

30/06/2021 When acquiring a business like Optima, how do you increase margins so dramatically? Is it by raising prices or cutting costs?

Looking back at our 2015 and 2016 acquisitions, the same pattern applies. These types of software come with strong recurring revenue streams because customers rely on them daily. Our advantage is scale: we can integrate common functions such as quality management systems and test centers, making operations far more efficient.

Even more important, we can provide additional functionality that customers need. That has consistently delivered 5% to 10% growth from existing customers over the long term, sometimes more. So while cost savings play a role, the principal driver here is income growth through added value and cross-sales. Integrating Optima into our eHealth and public safety domains will make the business stronger and more focused.

30/06/2021 Are data analytics more prone to cloud disruption?

Yes, analytics are easier to migrate to the cloud compared to operational systems in acute care. That makes them more open to competition. However, once customers have invested time and effort to configure systems and integrate data into workflows, the switching cost is very high. The real cost is organizational change, not the software itself, which makes churn unlikely even in cloud environments.

30/08/2022 How does CSAM retain an entrepreneurial ethos and avoid bureaucratic paralysis as it grows?

That is an excellent and vital question. In my 40 years in eHealthcare, I have seen that small, specialized entities succeed only when they stay close to customers. Our new business-area structure is the only scalable way to preserve that. Traditional matrix models are too rigid and risk cultural stagnation.

Each business area maintains its own culture, while CSAM as a whole has one overarching culture. Top management’s role is to provide service and support to these teams rather than impose bureaucracy. This way, we nurture a strong portfolio of entrepreneurial teams that can deliver sustainable growth.

25/08/2023 How do differences in acquired technical platforms affect integration and economies of scale?

Our customers pay for systems already in production, often for decades, and typically integrated with legacy platforms like EPIC, DIPS, or Tieto in Scandinavia. So platform differences are not the main issue.

Economies of scale come from CapEx projects, where each business case creates components that integrate across multiple platforms. For example, we run two types of maternity software in different countries. New components are designed to work with both, reducing the need for big platform shifts. Over 10 to 20 years, products will converge, creating a common platform while we maintain CapEx at around 10% or just below.

25/08/2023 How will you stay relevant with a diverse product portfolio and higher CapEx for an aging project portfolio?

CapEx is not used for maintenance, it is for new development. Maintenance CapEx does not exist at CSAM. It is important to clarify that point.

The technology is not “ancient.” The real value comes from the patients, healthcare workers, and the outcomes our software enables. We add new technology over time, which customers are buying, as shown by the 16% recurring revenue increase this quarter. This demonstrates strong demand for add-on components and ensures future development opportunities.

25/08/2023 Why is EBITDA margin only 10% for recurring software with 91% gross margin, and are there synergies between business areas?

The 10% figure is not a claim but a calculation. Synergies are not the primary lens through which we view business areas, but there are some. For example, integration components in Connected Healthcare can be used across other areas.

The focus is on long-term production systems where customers pay for user value. We continue to leverage both existing and new technology to secure that value, and we also use artificial intelligence initiatives internally to increase efficiency in development and delivery.

08/11/2023 How many newly issued shares will be bought back, how much dilution is expected, and what are your acquisition advantages versus other acquirers?

We have repurchased approximately NOK 30 million of shares, as detailed in the report. Buybacks cause no dilution. Dilution only occurs if we issue new shares as acquisition compensation. Our competitive advantage lies in being the best home for certain solutions. For example, the acquisition we announced recently involved a triage solution with 20 years of proven value. Combined with our contracts and processes, it creates strong synergies that benefit customers and employees, making us attractive to sellers.

14/05/2024 What is MDR, why did you do it, and what are the costs?

The European medical device directive was replaced with the stricter medical device regulation (MDR). Over the last two years, we transformed processes, documentation, and quality controls to comply. This has been a huge turnaround and very costly. It involved auditors, consultants, training, and disruptive surprise audits by notified bodies. Costs run into many millions.

This investment strengthens our position with existing customers who value MDR-certified vendors, and gives us an advantage versus acquisition targets struggling with high MDR costs. Certification also helps explain why professional services revenue is lower, but once secured, it will open opportunities for increased services and customer business in 2024.

26/02/2025 How will you compete with larger European VMS acquirers outside Norway and Sweden?

Our recent acquisitions show our strength: small but highly specialized companies that fit our model with strong synergies and shared customer components. These are often too small, complex, or niche for private equity or generic serial acquirers.

We maintain dialogues across Europe and globally, and we believe we are seen as a good long-term home for these businesses. Our specialized approach makes us competitive in this landscape, and I am confident we can continue to win attractive deals.

29/08/2025 Who were you competing against for the Prosang contract extension with Karolinska, and what factors led to Omda winning?

It lies in our generic strategy within specialized areas like the blood establishment business. The history goes back to 1965, and we have maintained continuous dialogues with Nordic blood establishment managers ever since. Working together for decades, we ensured that every detail, quality element, and procedure complied with regulations.

This long process allowed us to build what is probably one of the best products in the world. Institutions like Karolinska, the Austrian University Hospital, and others in Denmark see our strong position and trust built over forty years. Competitors coming in from the outside cannot easily replace that history of detailed software development.

Operations

27/11/2020 How modern is your software stack and what needs improvement?

Hospital software changes are large, slow processes. We modernize continuously by adding requested functionality and reusing technologies, such as single sign-on, across niches. Over time, our technology stack improves gradually. What matters most is functionality in complex medical processes, not the technology itself.

26/02/2021 Carmenta reported 32 employees in 2019, but your release states about 50. Has headcount grown that quickly, and why?

Yes, it has. The acute sector’s demand for digital tools has grown rapidly, and COVID-19 accelerated this trend. Carmenta needed to scale up to meet contract obligations. The result has been real growth in both income and employee numbers.

26/05/2021 How do Q2 results usually compare to Q1, and is there any seasonality in Carmenta?

With Carmenta, as with our other niches, recurring revenue has no seasonality. Seasonality mainly comes from new projects, services, or smaller license deliveries. That makes results fairly predictable. For this year and previous years, there was no major difference between Q1 and Q2. Q2 is normally an ordinary and robust quarter, neither especially weak nor strong. We have no indications this year will be any different. Carmenta just tags along, so nothing special there.

30/06/2021 Where is Optima’s organization based, and how many employees does it have?

Optima has about 25 employees. Most are based in Auckland, New Zealand, where the company originated and its development department remains. The rest are mainly in Reading, United Kingdom, with a few in the United States.

30/06/2021 Will you keep Optima’s software development in New Zealand?

Absolutely. The team has built a fantastic capability by focusing on one complex problem and solving it effectively over time. In larger organizations, they may not have been prioritized, but our strategy is to develop this as a niche within a niche. We intend to keep and further strengthen the New Zealand team, which will benefit both us and our customers.

We admire what they have accomplished and will build together with them. I am confident we will achieve a 30% margin within two years.

30/06/2021 How are Optima’s customer contracts structured?

They are a combination of short-term project revenues and recurring revenue streams. Contracts may be annual or longer. However, the real driver is the specialized nature of the solutions. Once installed, they remain in place for years regardless of contract length, so contract management is more important than contract duration.

30/06/2021 Does Optima sell directly or through distributors?

It is a mix, but primarily direct sales to customers. That model helps us stay close to users and continuously improve the product. We expect to continue with direct sales as the main channel.

19/05/2022 Personnel costs rose as a percent of sales, unrelated to M&A. How do you expect this to evolve?

The observation is correct. Compared with Q1 2021, most cost items were unchanged or down, including COGS, but salaries increased. Part of this relates to M&A. Another factor is the need to add or replace competence as we scale. Additionally, a higher order backlog requires more staff.

We faced a choice between delaying projects or hiring temporary staff. We chose to hire, and will gradually replace temporary personnel with permanent staff. That shift will reduce costs, and in the long run we expect personnel costs to return to historic levels.

30/08/2022 Do you now have the organization in place for the SEK 1 billion target, and can admin functions scale?

Yes. That is why we secured key management roles such as HR and Marketing and Communication Director, which we previously lacked. This setup is critical for our growth plan.

We do not expect further structural changes on the journey to SEK 1 billion. Our organizational model will scale, allowing us to acquire and integrate enough companies to reach that goal.

28/02/2023 Are there plans to grow headcount or add support staff?

Yes. Behind each business manager there is support staff, though not uniform across areas. As CFO, I have a team of accountants, business controllers, and a finance manager. Operational services like internal IT are also staffed. These are among the larger groups. We try to be lean and focused, but necessary support is in place. What can be done in the business areas will be done there.

28/02/2023 What functions will see downsizing besides consultants, R&D, and marketing?

It is twofold. First, in corporate services we have slimmed down and focus only on what absolutely has to be done, leaving more to business areas, which often handle tasks more efficiently. Second, in R&D and development, we now prioritize what needs to be developed and is paid for. Developers, sales resources, and non-strategic projects are being reduced.

We have also used many consultants for sudden delivery projects that required immediate action without people on board. It was costly, but the alternative would have been worse. You should see consultant use start to decline from Q2.

01/03/2023 How will you use internal resources for large projects going forward?

The main example was our Denmark contract, delivering national blood management software. Without external consultants, EBITDA in the second half of 2023 would likely have been 30% higher. That project is now finalized, with only ongoing functionality and version updates, all handled internally. From Q2 2023 onward, there are no similar large projects requiring external consultants, so I am confident our employees can manage the business without major consultant use, aside from smaller items.

01/03/2023 Are cost controls and salary focus risking talent retention or recruitment?

This is not about cutting employees or salaries but reducing reliance on external consultants. We are confident in maintaining our current business without resorting to margin-improvement projects that reduce headcount. We actively track employee feedback and will act if needed, but our focus is consultants, not employees, so I am not concerned about losing key talent.

01/03/2023 When will the LIMS and emergency projects end?

The emergency project is smaller, focused on an AI engine to support 911 operators, developed with the University of Valencia. The larger LIMS project runs until 2027. Major milestones were achieved in 2023, with Denmark’s capital regions using our blood management software in production and receiving positive feedback. Going forward, work will involve adding versions and components, leading into decades of recurring revenues and add-ons typical after such a major delivery.

01/03/2023 How do tenders and bidding processes work in your markets, and do price increases cause churn?

Tenders are rare because our systems typically run in production for decades. We prefer acquisitions and organic growth from existing customers rather than tenders, which can take years without results. For example, some Nordic tenders lasted decades without installation. Our Denmark project is an exception, with installations already in place before a tender invitation. A typical tender involves two years of planning, two years of execution, and 5–10 years of implementation, reaching ordinary operations after 15 years. This is why tenders are not central to our strategy or budgets. Our 5–10% organic growth target is based on existing customer contracts, not tenders.

12/05/2023 How did FirdSoft, Carmona, MedSinet, and Carmenta costs contribute to profit decline from 2020 to 2022?

The reported business area EBITDA includes corporate overheads, as all common services are distributed across business areas. The Q1 figures you saw do not yet reflect the effects of Project Riginto, our cost reduction program. We chose to allocate costs across areas rather than show marginal contributions, which makes the margins appear weaker. The underlying contributions are much better. The reorganization was necessary because we had grown too large under a centralized structure, which is why Project Riginto was initiated.

12/05/2023 How does closing the sales force in Q1 affect your ability to grow organically?

It is actually the opposite of a closure. The reorganization created a stronger and more focused sales force. With a customer-centric model, business area managers and their teams are now directly responsible for sales, allowing closer relationships and faster follow-up with customers. Since close to 90% of sales are to existing customers, this new model makes the sales force more effective and stronger than ever.

12/05/2023 Did workforce reductions land at the low or high end of the 25–35 range?

We are roughly in the middle. Headcount declined from 317 in Q4 to 297 entering Q2, with further reductions ongoing in Q2. Including consultants, the reduction aligns with the 25–35 range previously communicated.

25/08/2023 How is the blood management delivery in Denmark progressing?

The project is going well. All of Denmark is now using CSAM ProSang in production, which was the most critical milestone. There are other functional and technology milestones still in progress, but the main delivery was completed in Q2, though a bit later than planned.

The delay increased certain costs, such as external consultants, which had an impact on profit. However, considering the 40-year life cycle of ProSang and the importance of the Danish installation, this quarter is a success despite what the numbers might suggest.

25/08/2023 What is causing the EBITDA margin delay, and how many consultants are still needed?

A specific team of project managers and test managers has been kept full time for a couple of extra months. That adds costs of about NOK1 million, not NOK100,000. This temporary use of consultants has delayed margin improvement.

08/11/2023 What is the problem with emergency and what are you doing to address it?

The fundamental issue is that emergency has not been decentralized. It is complex software, involving several different types of solutions. To create synergies and achieve strong performance across all business areas, clarity and responsibility are crucial. We are appointing four leaders who will take responsibility, and from 1 January the business will operate in a decentralized structure. That shift will solve the problem. Overall, we are satisfied with the development.

08/11/2023 What is the status of Professional Services, what has been done, and what are the effects so far?

Every business area has reviewed performance in detail, assessing how each individual is contributing. All employees, including myself and Einar, log hours to maintain complete company-wide statistics. Based on that, managers have conducted thorough reviews. Most areas are performing well and showing positive effects compared to last year in Q3. The exception is emergency, where progress has been slower than expected. Decentralization, transparency, and stronger accountability will address this.

10/11/2023 Can you deliver according to customer demand given headcount reduction?

Yes, we can. The successful rebranding and decentralization made it easier to work closer to customers. We recently upgraded major solutions with them, and we are operating with the right number of employees compared to our income. This is a healthy combination of staffing levels and recurring revenues, supported by an efficient central organization.

It is now more transparent, as reflected in our business area reporting, where you can clearly see developments in each segment. Overall, the model is working better than before.

10/11/2023 Are your software developers dedicated, and how similar is the technology across acquisitions?

Yes, developers are tied to business areas because they need deep domain knowledge. For example, algorithms for cancer treatment require specialized expertise beyond coding. Key people stay within their areas, but we also use shared consulting resources to scale projects, add testers, and accelerate development when needed.

As a serial acquirer, we inherit diverse technologies, but this is not a problem. These systems remain in production for decades, and the focus is on the value they deliver, not the underlying technology. Platform migrations occur gradually, often over 5 to 10 years, to satisfy customers. In practice, we apply common methodologies and certifications so that, regardless of technology, our software looks and functions consistently under the Onda brand.

14/05/2024 How much higher would you have wanted professional services to be?

Many millions more would have been natural. But you never fully control professional services bookings since income depends on milestones. If milestones are not reached, revenue cannot be booked in that quarter. We expected some projects to contribute millions more than what is shown this quarter.

14/05/2024 Are part-time consultants affecting EBITDA margin, and are they related to LIMS?

No, they are mainly linked to Emergency. The AI project with University of Barcelona requires external personnel, but this is temporary and will end after H1. It is strategically important software to improve operator efficiency in critical situations. LIMS, on the other hand, is trending positively and showing high growth, as reflected in the report.

The certification project is also nearing completion, a milestone that shifts focus back to customers. MDR-certified products increase value for customers and support pricing power. Historic costs were high, but the certificate strengthens competitiveness going forward.

23/08/2024 What will be the impact of cost-cutting and divestment actions?

The combination of reducing developers, working closer to customers, and using AI tools like CoPilot creates immediate efficiency gains of 20% to 30% when migrating legacy systems. Remote sourcing has worked well for 20 years, but going forward, home sourcing with smaller teams near customers will be much more efficient.

This quarter already showed millions in personnel savings. For the quarters and years ahead, the math is simple: fewer people will be needed to accomplish the same tasks, resulting in significant cost savings.

23/08/2024 How much cost will be reduced from the Philippines divestment and reshoring?

We have signed an agreement to divest, though it is not yet formalized. We will publish details when completed in the second half. What matters is that there will be a significant reduction in employees at Omdar. Around 50 employees are there, and since we will work more efficiently, it is not a one-to-one replacement. You can make your own calculations on the savings.

23/08/2024 How will divesting low-cost Philippines resources improve margins, and why do it now?

This may sound counterintuitive, but it is important to understand the history. About 20 years ago, we began cooperating with the Philippines for development of one product, and for two decades that worked well.

However, the shift now is about efficiency and alignment with how we want to operate. By reshoring and changing how teams are structured, we believe we can improve margins even if costs per head are higher. The focus is on smaller, more effective teams closer to customers, supported by new tools, rather than on maintaining low-cost development resources abroad.

23/08/2024 Why divest the Philippines subsidiary now, and was this tied to Q2 performance?

This is not about Q2. When we decentralized after the IPO, we gained transparency in each business area and saw that remote development was too complex. Some areas had already shifted, and now it is time to act company-wide. We have worked on this for years, including with the original founders in the Philippines, who remain available while we reduce remote resources.

At the same time, modernization and AI tools give us new productivity possibilities. With legacy code, AI creates significant efficiency, but effectiveness requires close customer collaboration on functionality, quality, security, and regulation. Smaller, roundtable-style teams near our main offices are far more efficient. The first step will be executed this year, then gradually in 2025 and onward. Ultimately, we will run the same operations with fewer people, and the Philippines is no longer that low-cost either, so the net value is higher than it may appear.

23/08/2024 Were developers in the Philippines less efficient due to communication or time zones?

Yes. Complex development tasks are more efficient when solved around a table together. Sending descriptions to someone on the other side of the world, who may be asleep, slows problem-solving. That makes remote work harder when the tasks are highly complex, which is the real reason for the divestment.

23/08/2024 What will be the cost impact from Nordic inshoring, and why is this decision being made?

We are confident costs will be lower. With migrations, modern tools, and close collaboration with large customers, we see much greater efficiency. Please do not think of this as a very low-cost part of the company, because it carries costs to maintain that entity as well. Overall, the business case is strong.

In addition to visible costs, there are invisible ones such as productivity, speed of development, code quality, delivery pace, and faster cash flow. These factors strengthen the case for inshoring.

23/08/2024 What is the average salary in the Philippines on an FTE basis?

We have not disclosed that figure. It will become more visible once the divestment is completed and we begin reporting accounts without those operations. Until then, we will have to wait and see.

23/08/2024 Will the use of external consultants remain high in the second half of 2024, and why is it higher than expected?

Most consulting relates to emergency projects, including the AI project I mentioned. We also have CapEx projects underway within emergency that use consultants. The usage will gradually decline as those projects finish, though not disappear entirely.

We have kept consultants because once a project is finalized, we also have products to sell to customers, which drives recurring revenue. Even if we pay, for example, the University of Barcelona for AI components, it remains a good operational investment.

23/08/2024 When will results from the Professional Services overhaul be visible?

Every hour is logged, including mine and Einar’s. Since Q1 this year, we have complete statistics. By May, we knew exactly what to do, and actions taken in Q2 already showed improvements in June compared to April.

The results will gradually strengthen through the second half of the year.

20/12/2024 How many employees will you have after acquisitions?

That is a very good question. All new employees from Predicare and the two signed acquisitions are included in the 2025 numbers. The exact figure, whether 263 or 266, is less important than the trend. Completed actions already bring the number down, and the new hires linked to phasing out outsourcing are included. This creates a sustainable platform for our business. With current staff handling customers and products plus the new acquisitions, we expect performance to align with the EBITA margin interval shown. This supports our outlook for 2026–2027, when 30% EBITDA should be the ordinary level, with 5%–10% organic growth.

20/12/2024 What are your expectations for FTEs and personnel expenses entering 2025?

We have not published a specific run rate, but the presentation shows about 270 FTEs at the end of 2024, including new acquisitions. As consulting agreements, including the Filipino contract, expire, the number will fall below 265 during the first half of 2025. This level is expected to support 20% EBITA in the first half and about 30% EBITDA in the second half of 2025. Exact personnel expense figures are not disclosed, but the trend reflects completed efficiency measures and reduced reliance on consultants.

20/12/2024 Will you report revenue and cash EBITDA for each emergency business unit in 2024?

No, we will not. While we are splitting the emergency area internally, we do not plan to report results per unit in the annual report. We will, however, provide sufficient information for investors to make informed decisions.

26/02/2025 Can you quantify planned headcount reductions in 2025, especially external consultants?

We had just below 50 employees in the Philippines, of which 20 were released at the end of Q3. We entered Q4 with 30 employees, and by June they will also exit. This is part of ordinary phasing out of resources tied to ongoing projects.

At the same time, we have included necessary new employees to fully insource operations. The net effect is reflected in our guidance. The cost effect is about NOK 30 million, plus a few additional consultants being phased out in H1. This gives us good cost predictability for H2 2025.

29/08/2025 How do you leverage existing platforms and infrastructure when acquiring in new geographies, and which cost base elements are affected?

When entering a new geography, it must be within specialties where we already have competence and solutions, or we add new specialties, but not both at once. We do not generate profits by integrating platforms, but rather by delivering software, not platforms.

Hospitals’ IT organizations usually handle on-premises strategy, so our focus is on medical procedures and routines. Acquisitions increase our value chain components, which we integrate into our offering and sell as software. The key synergies come on the income side, not from cost structures like R&D or hosting.

29/08/2025 Are you using AI beyond development, and is it central to achieving 50% employee cost targets?

There are two areas. First, AI on the customer side. We are embedding AI and machine learning in our solutions, such as with the University of Valencia to help emergency operators make faster decisions. These modules create customer value and increase our recurring revenues. This market is slow moving, but nearly all our customers include AI in their roadmaps.

Second, internal efficiency. We phased out many full-time equivalents in the Philippines, replacing processes with tools like ChatGPT and Copilot. For example, in Finland, code conversion estimated at thousands of hours was done with only 10% of that time using AI. Some areas show huge potential, while others remain more complex and require safeguarding our intellectual property. AI supports cost efficiency today and offers even greater potential in development, testing, and documentation in the years ahead.

29/08/2025 How many FTEs from recent acquisitions are in the February base, and what efficiency opportunities exist?

Of the three latest acquisitions, around $20,000,000 worth of employees are included in the February base. Efficiency gains are possible on both cost and income sides. While there are opportunities in FTEs and other costs, the most important gains come from revenue synergies in existing contracts.

29/08/2025 What is the contribution of Filipino consultants to employee costs?

Filipino consultants make up about 10% of the employee base but less than 10% of employee costs, probably between 3% and 5%. Efficiency gains are not only about reducing external consultants but also improving development productivity. The math goes beyond headcount, it is about overall efficiency in processes.

29/08/2025 Are organic CapEx modules based on explicit customer demand, and do customers co-fund development?

It always starts with a business case. Typically, several customers request a module before we begin developing it. Sometimes a single customer funds development, but even then we build a product we can replicate and sell broadly. We never create pure bespoke solutions.

Many components and even acquisitions originate from customer demand to extend their value chain. Co-funding is a common and ordinary way of cooperating with customers, ensuring developments are both useful and commercially viable.

Competition

26/02/2021 How much of Carmenta Public Safety’s €81,000,000 in 2020 sales did SOS Alarm represent?

SOS Alarm was by far Carmenta’s largest customer, representing more than half of sales in 2020. This is not seen as a problem but as a mutual collaboration that benefits both sides going forward.

30/06/2021 With customer concentration falling in Norway and Sweden, do customers gain more leverage?

In this type of software, the market behaves differently. Our systems typically stay in place for years, often decades. There are very few tenders, unlike larger systems where organizational overhauls are common. For our niche solutions, mergers of regions, whether 19, 5, or 1, make little difference.

The decisive factor is not political or organizational structure, but the life-and-death importance of the solutions. This protects us as long as we stay focused on specialized systems. Our track record shows only about 1% churn over five years, which proves the resilience of this model.

30/06/2021 Which other market consolidators do you admire?

Locally, Visma is a Nordic company that has executed a highly successful M&A strategy. We learn from such examples, including AdTech and Constellation Software, but remain focused on specialized niches, which differentiates us from them.

30/11/2022 Have you seen company valuations change during the year?

Yes, we have. Many private company owners came from a period of rising valuations and did not fully grasp the correction in global tech markets. Through Q2, Q3, and even Q4, the adjustment has been difficult for some to accept. That said, the trend is positive. Dialogues that were paused are now returning, and processes are getting back to normal.

01/03/2023 What private market multiples are you seeing in Nordic software?

The gap between entrepreneur expectations and actual private market transactions is significant. Entrepreneurs often see emotional value, while we negotiate on enterprise value. Historically, our acquisitions have been at 1 to 2 times enterprise value-to-sales, and I believe transactions will continue in that range, even though seller expectations are often higher.

08/11/2023 Can you expand on slower growth in emergency, competition, and last year’s strong growth? Did we lose customers?

No, we have not lost any customers. The slower growth is tied to a large implementation project that included significant professional services, which now stands as a separate business area. Within emergency, we see the same pattern as in other areas, where growth depends on the balance between ongoing projects and available staff. When we look at decentralization, factors like income efficiency and invoiced hours matter, as well as the number of full-time employees (FTEs). The actions I presented earlier are designed to address these challenges in emergency.

29/08/2025 Why do a few customers churn, and what typically causes it?

While everyone wants 0% churn, it is not possible. Sometimes a customer with one of our specialized components merges with another entity using a different system, and the larger or stronger one prevails. In other cases, legacy systems that include bespoke development become unviable over decades and are phased out, sometimes by us deliberately.

Over the last ten years, churn has been below 2%. We expect similar rare cases to occur in the future, but churn will remain below that level.

Growth

27/11/2020 How much of organic growth comes from price increases?

Very little this year is due to pricing. Annual recurring revenue, which is growing 16% and faster than total sales, includes inflation adjustments, but inflation has been low. Most growth comes from cross-selling modules and extensions to existing customers.

27/11/2020 Why did the Q3 growth chart in the September 26 presentation show a 10% decline from Q2?

I do not have that graph in front of me, but nothing unusual occurred in the last weeks of the quarter. On the contrary, results are highly predictable.

26/02/2021 What was Carmenta’s organic growth historically, and what synergies do you see with the deal?

Over half of Carmenta’s sales are tied to SOS Alarm, which can be viewed as a risk or an opportunity. We see it as an opportunity because of synergies in competencies and complementary components within emergency and acute care. Growth has historically come from adding new digital solutions and projects, especially with SOS Alarm in Sweden and also in regions like Valencia. Since specialized solutions have very long lifespans, growth comes from adding functionality to existing installations.

26/02/2021 In which parts of Europe are most of Carmenta’s customers, and what opportunities exist for expansion?

Spain is the largest market, with Valencia as the biggest customer, roughly comparable in size to Norway in terms of target citizens. Other Spanish customers are showing interest, and we see significant opportunities there. Carmenta’s software is mission-critical, with 20 years of reliable operation, and we aim to accelerate growth by supporting current demand and working with international partners. Many past deliveries have come through large industrial partners, and we plan to continue that model to expand further.

26/05/2021 How is growth split between organic, M&A, and FX effects?

Organic growth in our niches is normally 5%–10%, almost entirely from current customer sales. Hiring more salespeople does not change this, as the niches are predictable and stable. For Q1 2021, growth included contributions from acquisitions like FirdSoft and Carmenta, which added incremental revenue. FX also played a role, with the Norwegian kroner strengthening versus trading currencies, the opposite effect of last year. As a rule, we do not report FX effects specifically. Overall, value creation relies far more on acquisitions and building recurring revenue streams than on organic growth.

26/05/2021 Recurring software revenues in Q1 were 25%. How should investors view this versus total sales?

This is essentially a variation of the organic versus acquired growth question. Recurring revenue composition often changes after acquisitions. During the first 24 months post-acquisition, we typically renegotiate contracts to improve income composition. That is why recurring revenue growth can look different from total revenue growth. There is room for improvement, and we expect to improve recurring revenue shares as integration progresses.

26/05/2021 Organic growth in Q1 looked above 10%. What explains this strong growth?

Q1 was indeed strong, above 10% organic growth, but we see this as natural quarterly variation. Market growth is 5%–10%, and we aim to grow along with it, sometimes a little more. Nothing unusual explains Q1 beyond normal fluctuation. Investors should focus on the long-term picture, where we grow 5%–10% organically and the rest through acquisitions to reach the NOK 1 billion target. Management’s priority is acquisitions that can secure 50% growth, rather than pushing organic growth from 6% to 7%.

30/06/2021 Are Optima’s product features relevant for other customers beyond SOS Alarm?

We cannot speak for SOS Alarm or for R1, but this is relevant across our customer base. All of our clients handle millions of critical medical transactions, and the only way they can improve performance is by gaining better analytics and control over the data. This supports planning and dispatch functions more effectively.

So yes, this capability is on the priority list for most of our customers. It is clearly relevant in a broader perspective, not limited to any single client.

30/06/2021 What growth do you expect for Optima, and what CapEx is required to support it?

We expect Optima to grow in line with the market, about 5% to 10% annually, which has been its historical growth rate. There may be fluctuations with larger installations, but on average that is the story. It is a highly specialized niche, consistent across markets.

On CapEx, we maintain the same guidance as for the rest of CSAM, around 10% of total sales. Optima’s business and software are no different in this respect.

30/06/2021 What has Optima’s historical growth been?

As mentioned, Optima’s growth has been similar to CSAM’s overall history, averaging 5% to 10% annually with some ups and downs. This reflects the steady nature of its niche market, where no major shifts occur from one year to the next.

30/06/2021 What is driving the 5% to 10% market growth?

Growth comes from niche-specific developments. For example, in maternity software, thousands of database fields feed national registers and algorithms that guide decisions. As processes evolve, customers need add-ons, such as an abortion module to ensure proper registration or a digital whiteboard in maternity wards to display critical data. These add-ons create recurring revenue, are good for patients, and provide efficiency for customers.
In addition, growth comes from more users and built-in inflation adjustments. Because niche organizations plan years ahead, this makes our organic growth predictable and transparent.

30/06/2021 You said the shift to the cloud will be a long process. Can this further grow the business?

Specialized healthcare software often handles life-or-death processes, such as cancer treatment, and most of these remain on-premise for security reasons. Hospitals and institutions are reluctant to take risks, which is why I have said cloud migration will take a long time.

However, outside-facing processes, such as patient collaboration or certain analytics functions, are well-suited for cloud. For example, MedSciNet is cloud-based and its growth has been easier to accelerate. So we see two tracks: gradual migration of core systems, and immediate growth opportunities in analytics and external collaboration.

30/06/2021 Why has Optima, founded in 1998, reached only USD 2.8 million in sales by 2020?

This is typical for our niches. Growth is slow because large institutions take years, sometimes a decade, to adopt new systems. For example, our cancer application Cytodose took eight years from initial discussions to implementation. Once installed, the lifespan is often 10 years or more.

Optima follows the same pattern. Customers move slowly, even in the U.S., because adopting new systems requires changing how they work. The opportunity lies in expanding functionality for existing customers and building recurring revenues. Organic growth above 10% is rare in this industry, but predictability is high. MedSciNet, founded in 1995, reached about USD 15 million by 2020. That is the reality of this sector.

19/05/2022 Revenue per product group seemed down year on year. How does that reconcile with 5–10% annual organic growth?

Before Q1 2022, we had not measured or reported organic growth. We said we would start from Q1 2022, which we have now done. So previously we could not comment, but going forward we will report consistently and build a track record for you to follow.
To clarify, the 10.5% organic growth noted in the annual report is year-over-year, measured quarter by quarter. Specifically, it is Q1 2022 versus Q1 2021. Sorry for any confusion in the wording.

19/05/2022 Why were almost all revenue lines per group down year on year in 2021, including LIMS, despite 5–10% organic growth?

This is essentially a repetition of a previous question. We did not calculate or publish organic growth for 2021. From 2022 onward, we are reporting organic growth, and Q1 2022 versus Q1 2021 shows the measure. Historical figures were not provided.

30/08/2022 Why were there no new license sales this quarter, and when will organic growth pick up?

License sales are tied to milestones in large projects, often spanning 12 to 18 months. For example, in the blood management area, about 20 customers require upgrades, but deliveries occur at different times. Some may land in one quarter, others in three quarters. This makes results lumpy. If we had a few milestones in Q2, it could have meant SEK 7 million in licenses, similar to Q1.

Historically, license sales average 5–10% of revenue, and we expect that to continue. We also see stronger demand after COVID as customers return to offices. Q2 was at the lower end, but we believe growth will strengthen going forward.

28/02/2023 What are the main levers for organic growth in 2023?

I would say three things. First, we are pushing for a more sales-oriented and sales-driven organization through decentralization into business areas. What we focus on and measure is what gets done, so we now measure business area managers the same way as we measure ourselves, on organic growth and EBITDA. That ensures focus on growth.

Second, we will get some tailwind from high inflation. Most of our contracts are linked to some type of inflation index, not always the consumer price index, but always something, and that has been higher recently than in past years. Third, there may be some FX effect. We cannot budget for it, but currently we are experiencing tailwind from FX as well, with the Norwegian kroner weakening against almost all trading currencies.

01/03/2023 What is driving your strong organic growth guidance for 2024?

We continue to guide 5–10% growth, as we have for the past five years. Recently, results have been at the upper end, even above 10% in the last three quarters. This reflects increased volume, added components, and integrations that continue to grow. I therefore believe growth will remain closer to the upper part of the interval rather than declining.

12/05/2023 How much of the 6% organic growth comes from repricing existing customers versus new business?

Organic growth is calculated from license sales, recurring revenue, and professional services, measured in local currency. The 6% growth in Q1 2023 is partly masked by unusually high license sales in Q1 2022. As for the split, we have not reported exact figures, but roughly 90% of growth typically comes from existing customers. With more than 750 contracts, customer demand continues to drive 5% to 10% stable growth over time. New business contributes as well, especially in areas like emergency solutions outside the Nordics, but the majority remains current customers.

12/05/2023 Can you elaborate on organic growth and margins per business segment going forward?

Results are lumpy due to the timing of delivery projects. For example, LIMS looks negative now but has a strong pipeline, and projects may span over a year, so quarterly results are not indicative. Historically, organic growth averages 5%–10%, and we expect that to continue, alongside acquisitions. Some quarters will show extra license sales or professional services that lift recurring revenue, creating lumpiness, but the long-term trend remains intact.

Our largest area, public safety and emergency response, shows strong organic growth, so the biggest segment is also the strongest performer. Stripping out license sales would show a smoother picture, but overall, we expect 5%–10% organic growth on average, with quarterly lumpiness continuing.

25/08/2023 How much of organic growth comes from price indexation?

About 4% to 5% comes from CPI-linked price increases. The rest is driven by higher user numbers and volumes, so it is real underlying growth.

25/08/2023 Where will CSAM be in five years?

We have evolved from a Norwegian company to a Nordic leader, with 17% of revenue now outside the Nordics. We aim to become a notable European player and eventually a preferred niche software provider worldwide.

Our strategy is to focus on smarter ways of delivering value with specialized products, rather than pursuing large “big bang” projects that often fail. We are confident that this approach positions us for sustainable global growth.

10/11/2023 How do you see 2024 shaping up in terms of organic pipeline opportunities?

Many dialogues have been ongoing for years and have increased in recent quarters. Entering 2024, I am confident we can close several of them. These are targets of the right size, big enough to matter but not too large to disrupt us, with some performing well already. Closing a handful could put us back on track to grow 40% annually, which was our original plan.

The number of targets in our database is increasing, including many outside the Nordics and in emergency response organizations. Adding them strengthens our value chain. So beyond M&A for turnover and profitability, this strategy supports our long-term positioning. We see 2024 as an acquisition year and are optimistic about the opportunities ahead.

14/05/2024 How much of Q1 organic growth came from price escalators versus new contracts?

Roughly half came from price escalators. The other half is real growth, mainly from strong new license sales, higher than in many past quarters. Not all price escalator potential has been realized yet, but it will be in Q2 and later. We remain confident in our 5% to 10% growth ambition.

26/02/2025 What happened to organic growth in Emergency?

It is quite simple. In one year, we had many implementation projects that generated significant invoicing. The following year, those projects were not there, and the large, non-decentralized organization could not adjust its cost base quickly enough. Meanwhile, the software side is still growing.

So overall, the issue was related to consulting services. It is statistical noise, not a structural problem.

Financials

27/11/2020 What was organic growth in Q3 excluding currency effects?

Organic growth would have been stronger. Adding the SEK 6 million currency effect to the top line would also have improved EBITDA. The already strong results would have looked even better if adjusted in this way.

27/11/2020 What are the pros and cons of switching from NGAAP to IFRS?

The pros are easier comparability for international investors and eligibility for listing on the Oslo Stock Exchange main list. The cons are cost and time requirements, as we would still maintain local GAAP and add IFRS consolidation on top. Overall, IFRS would open important opportunities.

26/02/2021 Adjusted for currency effects, what were Q4 net sales, and why did professional services more than double versus Q3? Was this seasonality?

The hospitals and regions in the Nordics were affected by COVID-19, which impacted the composition of income. Many customers postponed projects that would have initiated license sales and instead asked us to provide other services, such as creating new fields in systems to support COVID-19 needs. As a result, professional services increased while license sales were lower.

26/02/2021 What would Q4 net sales have been adjusted for currency effects, and can you explain the one-off costs reported in Q4?

Net sales would have been approximately 2.34, give or take. The one-off costs totaled SEK 9,000,000, which included salary and personnel-related items, other costs, and one-time adjustments of government grants. We also adjusted the amortization schedule of software and government grants. These had minimal cash effect but impacted income recognition.

26/02/2021 What was adjusted EBITDA in Q4 net of one-offs?

Adjusted EBITDA was approximately 30%, versus reported EBITDA of 16%. Even including all one-offs, EBITDA improved from 11% last year to 16% this year.

26/05/2021 How do you manage working capital, and has anything changed recently?

We have an active view on working capital and maintain a negative level, which is positive. Our target is minus 10 or better, and today it is better. Typically, customers pay annually, quarterly, or semiannually in advance, so we are cash rich at the beginning of the year and then deplete reserves through operations. This has been consistent since the IPO, and nothing has changed. We do not report working capital specifically, but we continue to manage it actively.

26/05/2021 Can you explain EBIT adjusted for goodwill depreciation, PPA amortization, and other intangibles?

On a last-twelve-month basis, PPA effects from tangible assets are almost nothing. The balance sheet is dominated by intangibles, mainly from acquisitions. In each acquisition, we analyze what is purchased: intellectual property (IP), customer contracts, or goodwill. Goodwill and contracts are amortized over 10 years, IP over 5 years. The current Q1 level is fairly representative, but amortizations have increased from prior periods. As acquisitions such as Carmenta (€150 million) are made, amortizations rise further. Any new acquisitions will again increase amortizations, which directly affect EBIT.

26/05/2021 Do you plan to move to another stock exchange or adopt IFRS accounting?

Currently, there are no plans to move away from Euronext Growth. A move to the main list in Oslo or Stockholm would require switching to IFRS, but at present we remain under NGAAP and local GAAP across countries. The differences compared with IFRS are not extreme, mainly amortization and office leases. While it may change in the future, there are no current plans, and you would be the first to know.

30/06/2021 Is the 5x net debt/EBITDA covenant linked to the bond?

The covenant was a condition for the tap issue, but there are no running covenants on the outstanding bond.

30/06/2021 How are Optima’s revenues distributed by products and regions?

We do not usually provide detailed breakdowns, but Optima’s products are used in more than 10 countries across Asia, North America, Europe, and the Nordics. The portfolio is split between two main product groups, Predict and Live. Revenue is well distributed, with no high customer concentration.

19/05/2022 Can you explain license sales in more detail and how they relate to recurring software revenue?

Normally, a license sale is a one-time event where you sell the right to use software. But in the contracts, customers also pay an annual fee of about 25%. It differs slightly, but on average 25% of a license sale becomes recurring revenue. So if we sell licenses, that percentage normally converts into recurring revenues in addition.

In Q1, for example, we sold several license objects, including ProSang Blood Management in Denmark, along with maternity and medication management systems. They are different products, but the contract structure is the same: a one-time license plus 25% recurring revenue.

19/05/2022 With significant amortizations and interest, when will you show a positive net profit?

Amortizations are linked to intangible assets such as IP, goodwill, or customer contracts, typically amortized over 5 to 10 years. Since booked equity value is close to zero, almost the entire acquisition price appears as intangibles, which are then amortized. These are non-cash costs; the cash left the company when the acquisitions were settled. Current amortization is a little above SEK 20 million per quarter.

Interest expense, which is cash-based, is around SEK 7 million per quarter. As long as we continue to grow quickly through acquisitions, we will have large amortizations, but again they do not affect cash flow. The transactions have been sensible, with enterprise value to sales multiples around 1–2x, so while reported profit is affected, operational cash remains strong.

19/05/2022 Do your customer contracts include CPI-based adjustments?

Yes. Since our contracts come from 15 different acquisitions, terms vary slightly across countries. However, more than 90% include an inflation adjustment, most commonly linked to the consumer price index (CPI). This provides ordinary inflation protection.

19/05/2022 Why do you disclose revenue per product group, such as LIMS, in the annual report?

It is required by accounting standards under NRS and NGAAP. We simply comply with regulation by disclosing revenue per product group in the annual report.

30/11/2022 Why did you change auditor mid-season in autumn 2022?

We hired the previous auditor from RSM, which meant RSM could no longer serve as our auditor due to independence rules. After 17 years with them, it was likely time for a change anyway. We appointed PricewaterhouseCoopers, and there was no other reason or drama behind the decision.

30/11/2022 When will finance operations be fully up and running?

Our finance operations are already up and running; otherwise, we could not report our numbers. They will continue to improve over time. Reporting by business area will start with Q1 2023, as presented earlier.

28/02/2023 How are you preparing for upcoming bond loan repayments?

This relates to profitability and prioritizing organic growth. The bond matures in Q3 2024. We aim to demonstrate over 30% margin in Q3 2023, about one year before maturity. With decent EBITDA and cash flow, plus CapEx discipline, say 30% EBITDA and 20% cash EBITDA, we can give bond investors comfort that we are bankable. Profitability and sufficient free cash flow are what will unlock further bond financing.

28/02/2023 Could you elaborate on one-off costs not related to restructuring?

These include travel, legal, and accruals for extraordinary consultancy work above the annual average. On the cost side, examples are marketing or branding projects. These are not recurring but tied to specific projects. As you know, we normally do not present adjusted numbers. The only prior case was our IPO, where it was fair to adjust for IPO costs since that is not recurring.

This is the second time since we went public that we adjusted numbers, and we believe it is fair given the special project. In the report, each item is specified for transparency so you can analyze whether you agree it is a one-off. We want to make it clear and detailed for investors, but the math is yours to do.

01/03/2023 Why did you not have better visibility on Q4 salary costs by Q3?

I do not agree there was a lack of visibility. Under Swiss GAAP, we accrue holiday pay throughout the year, and when employees take vacation, their salary is drawn from these accruals rather than current payroll. This has always been our method. Some may argue for an average method more in line with IFRS, but we prefer consistency and transparency, as changing practices would confuse rather than clarify. There is nothing new in how we account for salaries or holiday pay.

01/03/2023 Why was Q4 OpEx and CapEx higher, and what are Q1 cost expectations?

Most employees are in Norway and Sweden, where holiday pay accruals dominate accounting. Under Swiss GAAP, we accrue holiday pay during the year, which is then used when employees take time off. This explains recurring Q4 effects. CapEx is also higher in Q4 because fewer holidays mean more coding and output. Last year Q4 CapEx was 12%, this year 30%. Our annual CapEx guidance remains 10%, not quarterly. Sales timing can also shift between quarters. For Q1, we have not guided specifically; instead, we emphasize annual ambitions and priorities. Progress on organic growth and costs shows we are on track, even if not perfect.

01/03/2023 At what revenue level will 30% EBITDA margins be easily achievable?

We do not need significant cost base scaling to achieve 30%. COGS and OpEx are already lean, and heavy investment in digitization has improved efficiency in accounting, IT, and other support areas. Personnel levels are appropriate, and reductions during the cost-saving program affected mostly administrative roles. With these measures, we are positioned to scale and sustain 30% EBITDA margins as revenues grow.

01/03/2023 Do counterparties worry about your leverage, given mission-critical systems?

If we achieve our 2024 ambitions, net debt to EBITDA will be around 3.0x and net debt to recurring revenue 1.3x. While this could be considered high, it is well within bondholder agreements. Counterparties have not expressed concerns about our leverage.

12/05/2023 What was the impact of FX on price increases and organic revenue growth in Q1?

Organic growth is measured from license sales, recurring revenues, and professional services. License sales in Q1 2023 were lower, but when you average 2022 license sales across four quarters, the result is around 3 million per quarter, which aligns with Q1 2023. This makes growth appear flat but masks the underlying trend. The main FX effect is visible in recurring revenue. We have previously guided that contract price escalators provide about 5% uplift, though this varies widely across contracts. That 5% applies to recurring revenue growth, not total organic growth.

12/05/2023 How has high inflation impacted results?

On revenue, inflation helps through price escalators built into most customer contracts. On costs, inflation raises expenses such as housing and supplier contracts, though disciplined cost control and reducing full-time employees are more important factors. Most customer contracts are Consumer Price Index (CPI) adjusted, though terms differ across hundreds of contracts acquired over time and across geographies. Escalators range from about 1% to 11%, with an average near 5%. These escalators roughly balance higher salary costs.

12/05/2023 Were there any restructuring costs or severance packages this quarter not adjusted for?

No, everything is included. We have not presented any adjusted numbers, so all Q1 costs are fully visible in the P&L. What you see are the true numbers. We could have made adjustments, but we are not a company that favors recurring one-offs.

12/05/2023 What share of personnel expenses in Q1 related to external consultants?

We have not disclosed exact figures. As guidance, Project Riginto aimed to save NOK 60 million, mostly from salary and personnel, roughly split between employees and consultants. Most consultants remained in Q1 and will be phased out during Q2. Rather than counting consultants, note they were tied to delivery projects expected to generate recurring revenue once live. Their use will fall in Q2, with minimal reliance expected in Q3.

12/05/2023 How many external consultants did you have in Q1 versus expected in Q3?

We had consultants in Q4 and Q1 connected to delivery projects. These projects will start generating recurring revenue once live. Consultants will gradually be phased out in Q2, with minimal use assumed in Q3.

12/05/2023 Were there one-offs this quarter not adjusted for, and how large were they?

We have not calculated or disclosed exact amounts. Some costs fell in Q1, others in Q2, as noted in our commentary. These are not enormous figures. Most costs from Project Riginto and severance were already booked in Q4 last year, so little remains beyond minor adjustments.

12/05/2023 What was recurring revenue growth in Q1 year on year in constant currencies?

We have not calculated or presented that number, but you can estimate it. Reported growth year over year was 18%. Assuming a 5% effect from currency and price escalators, the underlying organic recurring revenue growth is somewhat above our previous guidance.

25/08/2023 How is Aygo performing financially, and why was it removed from reports?

It was never removed. From the beginning, we said Aygo was in a build-up and transitional phase through Q1 and Q2, so it was not included in reporting. Starting in Q3 this year, Aygo will be reported.

The business has been building up as planned, and formal reporting will begin with Q3 results.

25/08/2023 How connected are hardware sales with future software sales?

Hardware is sometimes included, for example in ambulances where pre-installed systems are required. However, most large customers handle hardware procurement themselves, so hardware will play a smaller role over time.

We still expect some hardware and cost of goods sold, but overall gross margin should move from about 91% closer to 95% as hardware declines in importance.

25/08/2023 Why was cash flow from operations minus €22,000,000, and prepayments from customers minus €20,000,000?

This is explained in the cash flow statement and quarterly report. It mainly reflects natural variations and the dissolution of Traginta accruals. Prepayments from customers are also linked to total sales.

25/08/2023 Why is your accounting function larger than comparable companies?

It is actually smaller than comparable companies. That is the fact.

08/11/2023 What will the effect from FTE reductions be on personnel expenses in Q4, and what cost effects are expected in emergency?

We have not published specific numbers this quarter. However, the personnel trends are available in the presentation, which you can download and use for your own calculations. Decentralization shows there are reductions in emergency as well. The combined effect of ramping down remote sourcing and implementing decentralization in emergency will bring us back to the cost level we are targeting, which is the most important thing.

08/11/2023 Did headcount reduction affect OpEx in Q3? What was the timing, and when will the additional 30 FTE reductions occur in 2025?

The 30 FTEs left on the last day of Q3, so there was no impact in that quarter. The effect will be seen in Q4. For the additional 30 employees, the three business areas using them have plans to ensure a complete ramp down within the first six months of next year. Decentralization will add further reductions in emergency.

08/11/2023 How do Philippines OpEx and FTE costs compare with group levels?

When we first acquired Cebu operations in 2008, the cost difference was substantial. Over time, salary increases in the Philippines have been higher than in the Nordics, inflation has been higher, new pension schemes have been introduced, and the Norwegian krona has weakened against the peso. The large cost advantage has therefore diminished. It still exists, especially for lower-paid employees, but higher-paid staff are approaching Nordic salary levels.

08/11/2023 What explains the increase in personnel expenses from Q3 last year to this year?

The increase comes from several factors. One is the annual salary increase. Another is simply having more people. A third factor is the use of consultants, most of whom are within emergency. Altogether, it is a cocktail of these elements.

08/11/2023 What is the seasonality effect on salaries?

There is a clear effect in Q3 tied to holiday pay arrangements and accounting under GAAP, SGAP, and NGAAP. This effect amounts to roughly NOK 10 million when comparing Q2 to Q3.

10/11/2023 Please explain the drag on cash flow from working capital prepayment, and when you will collect.

When we accrued expenses last year for releasing personnel, this included salaries, severance, holiday pay, taxes, and public duties. These were recorded as debt in one quarter’s P&L but paid out later, when cash left the bank. That timing difference caused working capital to deteriorate.

10/11/2023 What specific actions are you taking to improve working capital, and how is the organization incentivized?

Operationally, we work to extend supplier credit days while collecting cash from customers as quickly as possible. Business area managers are responsible for this, and it is part of their KPIs. They are measured directly on these outcomes. Accrual-timing issues resolve themselves, but operational discipline can always improve, and we pursue continuous improvement.

14/05/2024 Is there a negative Easter effect in Q1 growth or cash flow numbers?

Yes, in cash flow. A couple of large invoices were due late March but paid on 3rd or 4th April due to the Easter period. Had cutoff been 15th April, net working capital would have been significantly higher.

14/05/2024 How do you think about interest cost, amortization, and net profitability?

We have a NOK 500 million bond loan running at 3-month NIBOR plus 600 bps, currently around 10%, which is about €12 million per quarter. On amortization, we focus more on cash metrics than accounting net profit. Cash EBITDA minus interest costs is our main measure.

Last year we revised the amortization schedule with support from BDO to better reflect the actual asset lifespan. We plan no further changes. This approach gives us limited tax exposure, which we expect to continue. Yes, we aim for net profitability, but cash focus comes first.

23/08/2024 Why is unearned revenue not shown separately on the balance sheet, and how is net working capital calculated?

Unearned revenue is included in other short-term liabilities. For example, when a customer is invoiced annually upfront, we record all the money as a liability, then recognize one-twelfth of it each month, reducing the liability.

Net working capital is calculated according to textbook methods, the same as any other company.

23/08/2024 What about interest expenses?

I would like them to be lower. They are linked to 3-month NIBOR plus 600 basis points under the OMDO 2 Pro bond. While it trades higher than that, recent trades suggest room for lower rates. Still, with floating rates, the expense is currently high.

20/12/2024 How are you managing cash and working capital?

We rarely present adjusted EBITDA, but this time it is useful since cost reductions and personnel changes include severance and other nonrecurring items. Isolating these shows the real run rate. In Q4, we focused heavily on cash management, improving aged receivables, tightening invoicing practices, accelerating annual recurring revenue invoicing, and renegotiating supplier terms. These actions, along with lower salary and operating costs, should leave us with a year-end cash position close to last year’s, despite paying CHF 10 million in dividends, CHF 12 million for Predicare, and another CHF 10 million in dividends. This is a strong underlying improvement, provided customers pay on time.

20/12/2024 Does Avaria’s negative cash EBITDA make profitability harder to achieve?

Avaria does not have 12 employees, but 6, as stated in the press release. The business may run at a limited negative cash EBITDA, perhaps between SEK 0 and SEK 2.5 million. That is essentially what we are paying upfront for the company. We would not have acquired it without seeing strong upside potential.

Avaria’s contracts align well with large Nordic regions that want this type of software, which is hard to sell standalone due to tendering requirements. Since it is integrated with our Rett methodology and ambulance software, we can package it with pricing and add-on modules, creating a full value chain. This gives us confidence we can turn it positive quickly. Together with Predicare, Avaria strengthens our offering and is expected to be very beneficial for us.

26/02/2025 Was Q4 net working capital performance structural or timing-related?

It was mainly discipline and structure. In Q3, we flagged delayed invoicing and high receivables. We tightened focus, which explains much of the Q4 improvement. There is always some timing, whether invoices fall in Q4 or Q1. Minus 31% is strong, but we have been close before, for example minus 26% in Q1 2020.

That said, minus 31% is not sustainable every quarter. We guide for minus 10% or better. Seasonal fluctuations will remain, but the overall trend is better discipline and structure, and we will keep focusing on that.

14/05/2025 Where do the cost cuts come from, and are they sustainable?

None of the actions were taken in the first quarter. They are sustainable and based on a long-term plan, starting in 2022 when we decentralized specialized health care within OMDA, followed in 2024 by decentralizing the emergency part. This combination forms a sustainable platform with further potential for margin improvement, as some consulting costs will still be removed. Overall, the cuts are sustainable and provide additional margin potential going forward.

14/05/2025 How do you expect net working capital to develop in the coming quarters?

We will continue to focus on net working capital, especially with upfront annual invoicing, which should improve results in acquired businesses. There is seasonality: we invoice heavily before Christmas in the fourth quarter, leading to high cash reserves, which then deplete through the year, usually bottoming in the third quarter. This pattern will remain, but overall we expect net working capital to improve this year compared with last year.

14/05/2025 What do you expect the free cash flow conversion rate to be?

If you start with EBITDA and deduct roughly 10% for CapEx, that gives you cash flow from operations. Then subtract financing and interest costs. As we approach one billion in sales, and with bond interest at three-month LIBOR plus 600 basis points, around 10%, another 10% is deducted. The remainder is effectively free cash flow.

29/08/2025 Why was there a difference between 2024 reported results and the Q4 report last year?

The difference stems from a reassessment of the tax refund arrangement in Sweden. This was explained in the Q4 report and detailed again in the annual report. It reflects only the status assessment, nothing structural.

Outlook & Guidance

27/11/2020 Is the NOK 1 billion 2025 goal with 30% annual growth still realistic?

Yes, it is still realistic. Over the last five years we have achieved similar growth, mainly through acquisitions. Our current plan continues to combine organic performance with add-on M&A processes. Organic growth is stable, but acquisitions are what allow us to grow beyond what is possible organically.

26/02/2021 What are the main risks regarding the Carmenta acquisition?

The positive side is that most of Carmenta’s budget is already contracted, and highly specialized solutions tend to stay in place for many years, providing predictability. The main risk, as always with software, is delivery. We are accustomed to managing this and will continue to do so.

26/02/2021 What growth rate do you expect Carmenta Public Safety to generate in the coming years, closer to 5% or 10%?

Carmenta’s business is similar to ours in other niches. The main growth driver is the recurring revenue base that comes with the acquisition. Beyond that, we expect growth between 5% and 10%, consistent with our broader recurring revenue trends. Our focus is not on small percentage differences but on accelerating growth through further acquisitions.

26/02/2021 When can Carmenta reach a 30% EBITDA margin under your buy-integrate-build model? Closer to 1 year or 2 years?

It is closer to 2 years. Carmenta is a large acquisition with important customers, and our priority is ensuring they remain satisfied while we improve profitability. We will support Carmenta with resources and methodology to raise margins to our 30% target, but this takes time. The business is critical in acute situations, so integration must be handled carefully. As with past acquisitions, the same model will apply, and while it may seem “boring,” the consistent results speak for themselves.

26/05/2021 Based on Q1, will you exceed the NOK 1 billion sales target faster than planned?

Yes. If you look at the Q1 sales bubble from Einar’s presentation, pro forma including Carmenta and Firdsa, growth is already more than 50%. Midway through Q2, we are not slowing down and feel ahead of plan. The market is there, and we are continuing as before. We are comfortable saying we are on track and likely ahead of schedule.

26/05/2021 When will you reach your sales target?

We will not give a specific quarter or year, but based on Q1 results and the pro forma model showing 50% growth, we feel ahead of plan. As long as we stick to our acquisition strategy and execute consistently, we are comfortable we will deliver on our 2025 targets. At minimum, we will keep that promise, and our intention is to perform even better.

30/06/2021 When do you expect Optima margins to reach breakeven and align with group targets?

We follow our buy, integrate, and build model. Typically, we acquire companies with unrealized potential and work to unlock it. We have three defined milestones: after 3 months, 12 months, and 24 months. By following this recipe, we gradually improve margins and operations, and within two years we expect margins to reach the group average of around 30%.

30/06/2021 Do you plan to move to the Oslo main list in the near term?

We are very comfortable on Euronext Growth, where we have attracted high-quality investors. If circumstances change and it is to the benefit of the company and all stakeholders, we will consider it. For now, there are no plans, but we evaluate listing options from time to time.

30/08/2022 Do you still target 30% EBITDA margins within 24 months of acquisitions, or has this been abandoned?

Not at all. The ambition and ability to reach 30% margins remain. Previously, with a centralized integration portfolio, it was harder to measure progress. We now use a seven-business-area split with simpler KPIs: turnover growth of 5–10% and headcount development. The buy, integrate, and build process remains the same but distributed, which makes responsibility and measurement clearer.

We believe this model makes it easier to both track and achieve the 30% margin target. It is not a reduction in ambition, but rather an improvement in transparency and accountability.

30/08/2022 How will you increase EBITDA margins when acquisitions often come with lower margins?

When companies reach milestone M3 after about two years, our current operations should achieve 30% EBITDA margins. Acquiring a company with zero margin dilutes that, but the effect diminishes as we grow larger. The mix of smaller and bigger targets also matters, and the overall dilution impact decreases with scale.

Going forward, we will show results in two steps: the performance of existing operations and the contribution of acquired businesses. Once fully integrated, they are measured together. For example, MedSinet (2021) and Carmona (2022) will be reported as a single business area that is expected to reach 30% margins over time.

30/08/2022 What should normalized EBITDA margins be at NOK 1 billion in revenue, given ongoing acquisitions?

We expect to gradually reach 30%. As the company grows, each new acquisition has less dilutive impact. At the same time, maturing businesses can exceed 30% margins due to economies of scale, cost trimming, and insourcing of services currently provided by third parties.

The 30% level is not a ceiling. With size and efficiency gains, we can go beyond it while continuing to focus strategically on our core business.

30/11/2022 Why does it take so long to improve EBITDA margins, and what could speed it up?

Healthcare processes are stable and predictable, but that also means change takes time. Reaching 30% EBITDA margins requires renegotiating contracts or cross-selling add-ons, which often depends on customers’ annual budget cycles. This creates a natural 12–24 month timeline for improvements.

We manage this through a two-year integration process. With five projects underway and acquisitions scaling up, it is not realistic or wise to try to force margin improvements in a single quarter. Our approach ensures we reach 30% margins in a controlled and sustainable way.

30/11/2022 How will you reach 30% EBITDA margins in the next 12 months if you acquire new companies?

The 30% target refers to our current business. Acquired companies, often turnaround cases, may dilute overall margins temporarily. For example, if we acquire a company with SEK 100 million in sales and zero margin, we still expect 30% margins on our existing operations.

With the new business area structure, it is easier to monitor integration and profitability separately. From Q1 2023, investors will see clearer reporting by segment, making it easier to track both integration progress and margin restoration.

30/11/2022 How feasible is refinancing your bond given changed market conditions?

The NOK 500 million bond was issued in 2020 and matures in 2024. It is callable at 102.5 in fall 2022 and 101 in fall 2023. Refinancing depends primarily on CSAM’s performance. Delivering strong results will allow us to refinance at competitive terms when market windows open. Market conditions, measured by indicators like iTraxx and the VIX, fluctuate constantly. Our focus is on executing well so we are ready to act when opportunities arise.

30/11/2022 Why have margins declined sharply despite stable management?

Several factors are at play. First, we are building the structure to grow from SEK 400 million to SEK 1 billion in revenues. Second, we are running parallel delivery projects that add cost without immediate income. These weigh on EBITDA margins, and cannot be changed quickly.

We expect recovery through Project Triginta, which coordinates both integration and delivery efforts. Our target remains 30% EBITDA margins in current business by Q3. The investments in delivery projects are necessary to keep customers satisfied, even if quarterly results look weaker in the short term.

30/11/2022 Will you keep the same quarterly reporting structure in the medium term?

Yes, we will. Starting in Q1 2023, we will expand reporting to show development by business area, but the overall structure will remain the same.

28/02/2023 When do you expect EBITDA margins to improve?

You should expect maybe slight signs of improvement in Q1, but real improvements will come in Q2. We aim to reach target margins in Q3. Expect to see initial signs in Q1 and then the proof of the pudding in Q2. That is what you should expect.

01/03/2023 With decentralization, what do your duties look like now?

We focus on growth initiatives while ensuring each business area executes effectively to sustain 30% EBITDA margins. In 2024, we will devote more attention to acquisitions, as we see significant opportunities. At the same time, oversight of decentralized business areas remains critical. The balance is driving profitable growth while maintaining discipline.

12/05/2023 Can margins reach 30% after reducing external consultants?

Our use of consultants is tied to specific delivery projects, mainly in LIMS (Laboratory Information Management Systems), Blood Management, Public Safety, and partly Connected Health. These projects start and stop, so consultants are not permanent staff. Because several projects are scheduled to finish in Q2, consultant use will decrease, but Q1 still showed high levels. We prioritize retaining employees for long-term competence in software and development. Based on this structure, we are confident consultant reductions will progress as planned and margins should improve toward 30% by Q3.

12/05/2023 Do you expect LIMS to remain a negative contributor to margins in Q3?

Not all segments will be at 30% margins, some will be higher, some lower. LIMS has decades of recurring revenue but is in a technology transition, releasing a new version this year. That requires higher CapEx, customer-related costs, and carries a long project pipeline, including a large national project in Denmark. These factors weigh on near-term margins, but the long-term outlook is unchanged, and LIMS should eventually reach 30%. On average, across segments, we still expect margins around 30% in Q3.

25/08/2023 Do you still guide for 30% EBITDA margin in Q3?

Yes, that remains our target. We have strong visibility for 25% or higher, but we will see where we end up.

25/08/2023 Why was Q2 EBITDA margin lower than expected compared to Q1 guidance?

Several one-offs affected Q2, including costs related to the earthquake in Trojinta, consultancy, legal, and travel expenses. Delays in deliveries also added costs, especially the LINZ project, which slipped from April to June. That required large consultant teams for two extra months at high burn rates, hitting margins.

The 30% margin target is meant as a sustainable long-term goal, not a one-off. We still aim to reach it in Q3, but the key is achieving 30% margins consistently in coming years.

25/08/2023 Can you explain the bridge from 10% to 30% EBITDA margin?

There are three main cost elements: cost of goods sold, other operating expenses, and salaries. Our target mix is 5%, 15%, and 50% of sales respectively. On the other side, growth in income is equally important. The bridge is therefore a combination of cost efficiency and revenue growth.

25/08/2023 Do you expect EBITDA margin expansion in Q4 compared to Q3?

It is difficult to forecast Q4 precisely. Q3 benefits from holiday pay, but lower professional services activity during vacations offsets that. Q4 typically has stronger sales. With NOK206 million in first-half sales, matching or growing that in the second half supports our target of €400 million for the year.

The 30% margin goal is not meant as a single quarter achievement. It is a long-term margin ambition, and we remain focused on both cost and income drivers to sustain it.

08/11/2023 What will be the effect of the Philippines divestment, and what results will we see in Q4, Q1, and Q2 next year?

We have not published specific breakdowns, but the simple calculation is this: the reduction in Q4 comes from decentralizing emergency, and the first two quarters of next year will finalize the ramp down in the Philippines. The combined effect brings us back to the level we are targeting, which is the essence of my calculation.

08/11/2023 How will ongoing initiatives bridge to your 30% EBITDA margin target, and what is the timing?

If you use the graph in today’s presentation, you can calculate the bridge yourself. The key drivers are strong growth in recurring revenue and the reduction of FTEs. To think about timing: we launched the deramping in Cebu, sold part of that operation, and about half of those employees left at the end of Q3. They will not be in Q4, and the rest will be phased out by Q2 next year. At the same time, the decentralization of emergency will be completed in Q4. These steps combined take us toward our 30% margin goal.

10/11/2023 Can you comment on growth and profitability by segment, and why performance differs? How long do you expect LIMS to outperform?

Each segment is at a different stage of maturity. LIMS has a 40-year history of recurring revenue and decades of potential ahead. Short-term fluctuations do not change the long-term outlook. We are shifting technology to make add-on components, licenses, and recurring revenue easier and faster to deliver. This is a multi-quarter process, but with contracts like the national deal in Denmark, we expect LIMS to return to a 30% margin and higher growth. Medication Management and Woman and Child, which have been with us for 15 years, perform very well, above the 30% EBITDA margin, with strong potential. Health Analytics is still being integrated after its 2022 acquisition, and that will be completed by mid-2024, so some volatility is expected. Public Safety is performing extremely well, but large customer deliveries create quarterly fluctuations.

Connected Healthcare and Medical Imaging are combined into one entity due to customer overlap. They are transitioning products into a single platform, which requires investment, but customers remain engaged, with tens of thousands of users. New platforms launch in 2024, with income and profitability to follow. These fluctuations are not like the deep dive we faced during reorganization and the Triginta project. Overall, the portfolio is stable, with recurring revenue and strong long-term customers.

14/05/2024 What can we expect in Q2 and beyond regarding MDR?

The certification process will demand less work than the two years of preparation. With standardized processes in place, we expect greater efficiency in development and delivery. While structures can feel bureaucratic, they will also raise software and delivery quality. This milestone allows us to focus more on income growth rather than internal restructuring.

14/05/2024 Can you share details on OpEx levels and 2024 margin expectations?

OpEx is not elevated. Other costs are down compared with both Q1 last year and Q4, even more so when adjusted for inflation. Personnel costs are stable when adjusted for CapEx and average salary increases of about 4%. In constant currency, total costs are down SEK 10 million.

We continue to target a 30% margin. That guidance remains unchanged, and we see room for further efficiency.

14/05/2024 What are your expectations for 2024 given the 30% EBITDA margin target?

Our target remains intact. The focus is on revenue growth, especially recurring revenue, new contracts, and Professional Services, where ambitions are higher. While cost ratios may shift slightly between COGS, personnel, and other costs, the 30% margin target absolutely remains.

23/08/2024 Is the 2025 goal of NOK 1,000,000,000 in sales and high EBITDA margin still realistic?

I do not think it is a remote dream. On the SEK 1,000,000,000 sales target, we may be slightly delayed, but with both large and small targets in hand, we still have the ability to close them within 24 months. We are just below €500,000,000 now, and I believe the growth is possible.

On EBITDA, I also do not think it is far-fetched. After the recent divestment of 50 people, we are on €295,000,000. That transition provides a significant boost to achieving a stable margin at a higher level. I remain optimistic despite the disappointing numbers this quarter.

23/08/2024 When will the company become cash flow positive?

It is hard to say if it will be in the third or fourth quarter. A 10% EBITDA margin means we still burn cash, while 20% means stability. We are not far away, and the initiatives on both income and cost sides should make it achievable. It will not be easy, but it is not mission impossible either.

23/08/2024 What is happening with the LIMS business after heavy 2023 investment and negative margins?

I agree the numbers look weak now, with minus 18% EBITDA margin, but LIMS is a very long-term business. National projects have costs upfront for years before revenue flows. The final delivery on the current contract will likely be in 2028, after which recurring revenue and add-on sales will last decades.

Quarterly results can look poor because costs and income vary by delivery milestones. Over 40 years, this business has proven strong and will continue to be, but it will not improve quickly on a quarter-to-quarter view.

23/08/2024 When will EBITDA margin reach the 30% target?

That is the big question. Fundamentally, with our recurring revenue model and contract structures, the business should deliver 30% EBITDA over time. We are delayed, but I expect you will already see signs of improvement this quarter.

However, we are focused on securing a stable, long-term margin rather than rushing to show a quick gain. The 30% target remains intact, and you will see traces of progress soon, though it will not happen overnight.

23/08/2024 Is 50% of revenue still a realistic target for salary and personnel costs?

Yes, the level is too high now, but 50% remains the target. It will not happen overnight, but with improved development processes and growing productivity in professional services, we will move closer to that level. That is why we initiated a company-wide approach to development productivity.

Keep in mind that under GAAP, the holiday pay effect is pronounced in Q3. So 50% on average does not mean 50% each quarter. The cost base is currently too high relative to income, but with recurring revenue and professional services potential, there is room to improve.

23/08/2024 How poor is your cost visibility given rising costs after Project Riginta?

The higher personnel cost this quarter is part of transitioning to a more efficient model. We cannot just divest in one area and immediately recruit in another. It is a planned transition, more important than the specific quarterly number.

Costs are not sticky, and we have control. The process is taking longer than expected, but we will reach the goal with only a slight delay.

20/12/2024 Why not reach 30% EBITDA in the first half of 2025?

That is a good question. We must remember the seasonality effect in Omdur. Because we account under GAAP and most employees are in Norway and Sweden, we have the so-called holiday pay effect. Salary cost is recognized lower in Q3 compared to other quarters, making the second half more profitable. On average, the full year must be considered. Profitability will always be lower in the first half and stronger in the second half due to this effect. As long as most employees are in Norway and Sweden, the holiday pay impact will remain very visible in the accounts.

20/12/2024 Why is 2025 EBITDA guidance 23–25% instead of 30%?

We have reduced FTEs, phased out outsourcing agreements, and decentralized emergency, giving us a stronger run rate into 2025. This supports reaching close to 20% EBITA in the first half of 2025 and about 30% in the second half once consulting agreements expire in June. The full year will average 23%–25%. Stable recurring revenue, predictable growth, and lower churn make this possible. The reason we guide below 30% for the full year is simply the holiday pay seasonality in the first half. By the second half of 2025, we expect to hit 30%, and from 2026 onwards we see this margin level as sustainable.

26/02/2025 Why does organic growth fluctuate, and can guidance change?

If you look at Medication Management, it is a useful case study. We acquired it in 2008 and it has stayed within Omdur without further acquisitions, so it reflects pure organic growth. Between 2020 and 2023, it shrank by 16%, an annual decline of 4%. Some investors even suggested divesting it. But from 2009 to 2024, the business quadrupled in size with nearly 9.4% annual growth. The lesson is that growth is lumpy, just like missing the best days in the stock market impacts long-term returns.

Quarterly or annual numbers often deviate significantly from the long-term trend, so the signal can be obscured by noise. That is why we maintain our 5% to 10% organic growth guidance. We remain focused on specialized healthcare for emergency and clinical disciplines, serving a stable public-sector-oriented customer base with recurring revenue and low churn. We will continue to target 5% to 10% long-term organic growth, complemented by acquisitions when opportunities arise. We are not in a hurry to do poor deals but will act decisively when the right ones appear. Entering 2025, our income and cost run rate is strong, restructuring is complete, and we are prepared to integrate acquisitions efficiently while pursuing further M&A opportunities.

26/02/2025 Will the 26% margin target require further cost cuts or restructuring, or only operating leverage?

It is the latter. The margin improvement will come through ordinary budgeting and operations, not new restructuring. The only ongoing measure is the phase-out of external consultants, which will conclude in June. That is why we guide for 20% margin in the first half of 2025 and 30% in the second. By 2026, each business unit leader will be operating under normal budgeting without additional restructuring.

Of course, if we acquire something substantial, we would reassess. But for current operations, including recent acquisitions, we expect to operate in an ordinary mode. In effect, the restructuring is complete, and our twentieth anniversary gift to ourselves is moving forward with regular operations.

26/02/2025 Why was organic growth slower in 2024, and what are the drivers for 2025?

You are right, 2024 showed low organic growth. The main reason was weak performance in Emergency, especially early in the year. This was about large projects not repeating from 2023. Our software and recurring revenue continue to grow, but when you lose big projects without reducing related costs, the top line suffers. That was the main driver in 2024, but it will not repeat in 2025.

There is no negative trend in our software business or customer markets, quite the opposite. Based on our run rate and current operations, growth in 2025 and 2026 looks healthy and predictable. The restructuring also makes it easier to measure cost growth in our decentralized model.

14/05/2025 What is your net debt to EBITDA guidance for the next 12–24 months?

For the first half of 2025, EBITDA margin guidance is 18–22%, rising to 25–35% in the second half. If we reach 30% on NOK 500 million in sales, that equals NOK 150 million EBITDA. With net debt around NOK 400 million, the ratio would be below 3x. At the current run rate, we are rapidly deleveraging the company.

14/05/2025 Do you have debt repayment or refinancing needs in the coming years?

No. Our OMDA bond matures in December 2028, and until then we only service interest. Seller credits are self-financing, always linked to sales and cash EBITDA. Therefore, we have no refinancing or repayment needs before maturity.

29/08/2025 If you had a magic wand to remove one problem today, what would it be?

I would not get rid of you first. The business is very resilient. Crises like the financial downturn or political changes have not affected us. Recurring revenues are now approaching the same level as our fixed costs, and combined with low churn, this gives us a very strong position.

So no, we do not really need a magic wand. That is the honest answer.

29/08/2025 What should investors understand better about OMDA that has been poorly communicated?

Two points. First, the difference between target margin and guidance. Our first formal guidance to reach target margin was given in December 2024, but earlier statements created misunderstandings and impatience. Some investors did not see the underlying value creation.

Second, we have a unique strategy: highly specialized components within healthcare and emergency response. This gives us organic growth potential, profitability, and many relevant acquisition targets. We are not just a serial acquirer. Our role in society motivates employees, provides resilience, and explains the stability of recurring revenues. Finally, it is important to understand we are now guiding with crystal clarity for 2025 and 2026.

29/08/2025 What net debt to EBITDA ratios do you expect for 2025 and 2026 year-end?

At 500,000,000 in sales, which is our 2026 guidance, and a 30% EBITDA margin, we would generate about 150,000,000 in EBITDA. With gross debt of 500,000,000 and around 100,000,000 or slightly more in cash, net debt would be about 400,000,000. That gives a net debt to EBITDA ratio based on those figures.

29/08/2025 Could you double current revenue within existing countries of operation?

Yes, it is absolutely possible, though not overnight. In 2015, when we IPOed, sales were around NOK200 million, almost entirely Nordic. Today we are approaching NOK500 million with more than 100,000,000 from the Nordics alone, meaning we already doubled in that region since IPO.

With the same focus and time, doubling again within our current geographies is realistic, though it will take steady execution.

Risks & Macro

27/11/2020 Do you expect sales impact from recurring coronavirus in Q4?

Our financials have not been negatively affected. Instead, income has shifted: hospitals prioritize COVID-related system adjustments over implementing new versions or add-ons. It is more a change in income composition than a reduction in sales.

19/05/2022 How do you view liquidity under current market conditions, as cost of capital has increased and share price declined?

Liquidity is always an issue. We are fortunate to have a shareholder base made up largely of long-term institutional investors who buy and hold, which limits trading liquidity. That is the trade-off.

As long as we do not need to issue new shares, the current share price does not change our strategy. As Warren Buffett said, in the short run the market is a voting machine, in the long run it is a weighing machine. Our job is to continue executing operationally, and over time we believe the share price will reflect that.

26/02/2025 Is artificial intelligence an opportunity or a threat for Onda?

AI is very important, and we see three main action points. First, in administration, we have already been using AI tools to increase efficiency. Second, in coding, AI helps create and maintain code, which supports our insourcing project and reduces the cost base. This combines centralized competence with input from business areas.

Most importantly, we are developing AI functionality for customers. We are cooperating with the University of Barcelona to deliver AI within emergency, and the Dermicus acquisition added an AI-based imaging component to our stack. So overall, we see AI as a positive driver for Onda going forward.

29/08/2025 What challenges do you face running OMDA given global uncertainties?

Running a business always brings challenges, but it is important to reflect that in a world with war, tariffs, customs, and shipping constraints, OMDA’s underlying demand does not really change. Macro issues do not affect the number of accidents, births, or cancer cases. The demand for our software and services remains untouched by these events.

Personal Questions

28/02/2023 What is your personal opinion about stock-based compensation?

If it is compensation or about being a shareholder, I think it is a very good idea. Any initiative that aligns interests is positive in my opinion. If part of a bonus scheme is settled in shares, I personally think that is a good idea. All is good when you have skin in the game.

08/11/2023 Would you sell the company at 4–5 times sales, and what is your succession plan?

Any bid for the company would be handled under laws, regulations, and good corporate governance. The board would evaluate an offer, make a recommendation, and shareholders would decide. Regarding succession, our plan is to continue leading the company until we reach our goals. We enjoy what we are doing and believe we are on the right track, so you will not get rid of us easily.

10/11/2023 How are business area managers incentivized?

Their incentives reflect our consolidated KPIs: organic growth, profitability, capital discipline including CapEx, and the speed of integrating new acquisitions. They are measured on these few KPIs, with integration being particularly important for driving faster growth.

Other

30/06/2021 Are you seeing growing interest from non-Nordic institutions to become CSAM owners?

Yes. CSAM is increasingly regarded as an international company with Nordic roots. We already have strong interest and commitments from European and American investors, and as we grow outside the Nordics, we expect that interest to continue.

30/06/2021 What is Optima’s churn rate?

Churn is negligible, the same as the rest of CSAM. Once software is installed, it becomes deeply embedded in operations, improving logistics and quality. Customers have little business case to replace it. Annual fees are relatively small, but they are stable and recurring.

25/08/2023 Were there mistakes in past acquisitions that proved harder to restore to profitability?

The main regret is that we did not reorganize into business areas earlier. The decentralized model is far more efficient for integration than the central portfolio matrix we used before.

We do not view the acquisitions themselves as mistakes. The products, recurring revenue streams, and people brought in are all strong. The learning was about structure. Moving faster into decentralization would have been better, but now we are there, and overall we are happy with the situation.

10/11/2023 Do you have any views on the share price? Why is it weak, and are you cheap compared to peers?

Whether we are cheap depends on perspective. As a shareholder, I suggest comparing our performance, cash flow, and growth trajectory against peers, both listed and private. That analysis will show where we stand. We are buying back shares, which may itself be an indication.

The share price is what it is. Management is focused on improving the business, and I believe a strong business will ultimately be reflected in the share price. As Warren Buffett said, in the short run the market is a voting machine, but in the long run it is a weighing machine.

14/05/2024 Any final remarks?

Quarterly variations are natural in our business. What matters most is the annual run rate, now above €300 million, supported by strong license sales and recurring revenue. Do not focus too heavily on single-quarter fluctuations. We look forward to presenting Q2 results on August 23. Until then, enjoy summer and stay safe.

Disclaimer:

The following transcript and Q&A have been generated with the assistance of Artificial Intelligence (AI). While we strive for accuracy, completeness, and clarity, the content may contain errors, inaccuracies, or misinterpretations. Neither the company featured in this document nor ValueBridge assumes any responsibility or liability for the accuracy, reliability, or completeness of the information presented.

This material is for informational purposes only and should not be construed as official company communication, financial advice, or a definitive representation of the company’s views. Readers should independently verify any information before making decisions based on it.

The company operates a fleet of natural gas microturbine systems in Canada, displacing diesel as the primary fuel for remote and mobile power. It currently manages about 30 natural gas systems, expected to rise to 45 by 2025, and following a recent acquisition, close to 60 systems are deployable. Its turbines, sourced through an exclusive partnership with Flex, achieve near 99.5% uptime in extreme conditions and are ruggedized for Canadian climates. Customers increasingly replace diesel with natural gas due to cost advantages—up to 86% fuel savings, equal to $3,000–$5,000 per site daily.

Growth has been driven by CapEx outlays consistently exceeding budget: $6 million planned versus $15 million spent in 2023, and $10 million planned versus $15 million in 2024. For 2025, Evolution Power’s 10 turbines alone required $10 million. Of this, about $2–2.5 million is earmarked annually for maintenance. Payback on equipment is targeted within 2–3 years. The business is funded mostly from strong cash flow, supported by a Tier 1 banking facility for incremental debt if needed. M&A remains disciplined, historically at 1–3x EBITDA, while organic growth from long-term MSAs (12–24 months) and near-100% client retention provides stability. Evolution Power has grown from 5% to 45% of company revenue over five years, now the largest and most profitable division.

Catalysts & Milestones

2023 - CapEx reached $15 million vs $6 million budget, driven by customer demand

2023 - $2 million land purchase included in CapEx

2024 - CapEx again hit $15 million vs $10 million budget

2024 - Evolution Power contributed 45% of gross revenue, up from 5% five years earlier

2024 - M&A pipeline identified 50-unit opportunity with Alberta manufacturer

2025 - Fleet expected to grow to about 45 natural gas systems, with 24–25 Flex units

2025 - Flex acquisition expanded operations to nearly 60 power systems deployable in Canada

Investment Highlights

• Flex turbines achieve 99.5% uptime, unmatched in rugged mobile deployment

• Fleet expansion from 30 systems today to 45–60 by 2025

• CapEx overspending highlights demand: $15 million vs planned $6–10 million

• Evolution Power grew from 5% to 45% of revenue in five years

• Clients realize up to 86% fuel cost savings (~$3,000–$5,000 daily per site)
  
  

Future Growth Drivers

• Expansion of Flex turbine fleet across Canada, scaling to 45–60 systems by 2025

• Diversification into mining, CNG supply chains, and CHP applications beyond energy

• Modular power plants replacing diesel as clients scale from 160 kW to 330 kW+ turbines

• Repeat orders from Tier 1 customers driving organic growth and higher utilization

• Ongoing partnership with Flex for larger 2 MW turbines to meet rising energy demand
  
  

Risk Factors

• CapEx consistently overshoots budgets ($15 million vs planned $6–10 million)

• Customer concentration remains high, with top 2 clients at 45% of revenue in 2024

• Geographic focus limited to Canada; U.S. expansion ruled out near term

• Wildfires disrupted 2023 operations and continue to defer projects in Alberta and BC

• Dependence on Flex turbines may create supply or competitive risk if exclusivity shifts

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Capital Allocation

28/05/2024 What are the capital requirements for your business, and how do you split growth versus maintenance CapEx?

We are in a growth cycle, so we expect CapEx to remain around $10 million through this period. Out of that, approximately $2 million to $2.5 million is allocated for maintenance, with the balance used for growth initiatives.

28/05/2024 What is the average duration of your leases and the payback period on equipment?

Lease terms vary by equipment class, but in general, higher-cost units such as turbines have longer payback periods while smaller items like mobile structures and walkways recover costs much faster. For example, a turbine package can cost about $1 million, while mobile structures are closer to $250,000.

Our target is to achieve payback across the fleet within three years. Some assets are quicker, others a bit longer, but we do not stray far from that benchmark. Payback expectations are a critical factor in our CapEx decisions, as they determine how we allocate capital across equipment classes.

28/05/2024 How many natural gas microturbines are in the fleet, and how is that changing?

We currently have more than 25 natural gas systems, with two additional units arriving this week. Customer demand has been driving significant CapEx growth. In 2023, we budgeted $6 million but spent $15 million, including $2 million for land. Excluding land, that is $13 million versus the original $6 million budget, almost entirely customer-driven.

For 2024, CapEx is set at $10 million, and we are already $6 million into it. Demand continues to grow as clients adopt electrification across their sites. They typically start with a smaller generator, confirm reliability and cost benefits, then scale to larger or multiple units. Sites that once ran 160-kilowatt units now require 330-kilowatt turbines, often linked together into modular power plants. Remote monitoring gives our technicians real-time visibility on gas quality, pressures, and turbine performance, allowing us to address issues proactively and minimize downtime. This makes the technology both reliable and scalable as adoption accelerates.

28/05/2024 What does your M&A pipeline look like, and what is your strategy?

During the seven-year downturn, many well site shack manufacturers exited or shifted to modular housing, creating a shortage. We could use another 50 units in our operations and are in discussions with a small Alberta-based manufacturer. Since we are already one of his largest customers, an acquisition would be highly accretive and a natural fit. We hope to advance a deal this year.

Beyond that, there are larger opportunities we continue to evaluate. Our mandate has always been to pursue transactions that are profitable, accretive, and strategically aligned, while maintaining discipline.

28/05/2024 What multiples do you pay for acquisitions?

We have never paid more than 3x EBITDA, even in strong markets. In downturns, we have paid as low as 1x EBITDA for smaller companies. Our approach is not only about valuation multiples but also about integrating companies into our family of businesses.

In all past acquisitions, employees, management, and owners stayed on for five years under non-competes, and most remained for seven to nine years. This continuity has been critical to maintaining culture, knowledge, and long-term success.

21/11/2024 Is M&A still a priority, and what multiples do you target?

We continually evaluate M&A opportunities but remain disciplined. In the past, we have never paid more than 3.1x EBITDA. In select cases, asset values may justify paying slightly more, but our standard is strict.

For now, organic growth is the focus. CapEx investments generate strong returns, so reinvesting in our fleet takes priority while we keep watch for accretive deals where one plus one equals three.

21/11/2024 How should investors view your cash position and CapEx needs for 2025 and beyond?

We cannot forecast five years out, but to give perspective, CapEx for Evolution Power’s 10 turbines is about $10 million. Historically, we have overspent relative to plan, 2023 CapEx was budgeted at $6 million, but we spent $15 million. In 2024, the plan was $10 million, and again we spent $15 million. It is driven by customer demand, and we put equipment out to meet it. Cash flow is strong, and we are heading into our three strongest quarters with confidence.

We have established a relationship with a Tier 1 bank to support expansion. If acquisitions or excess CapEx arise, those would be funded by debt. We are not heavy users of debt, but we now have that option.

21/11/2024 If the industry fully converted to your gas platform, how large could the business be, and can you fund growth without raising capital?

Our natural gas power systems displace diesel, which remains the number one fuel for mobile or remote power. There are hundreds of sites where diesel can be replaced, though we have not quantified the total precisely. Currently, we estimate serving about 15% to 18% of the energy sector segment, so we are still at the early stage of a large opportunity. We are the only company in the energy sector offering this kind of comprehensive mobile power system, which gives us a strong growth position.

Operational cash flow has covered most of our CapEx, and we can continue to grow organically without raising external capital. We also have ample debt availability through our banking partners if needed, so we have no concerns about funding growth.

20/08/2025 What are the typical payback periods for deploying a new turbine on long-term contracts?

We don’t share specifics on individual turbines or contracts, but as a rule of thumb we want payback in less than three years. This varies depending on the type of equipment, since we often deploy turbines as part of a full package that includes distribution panels, cabling, light towers, and other supporting gear. Each piece has its own payback period.

Overall, we are comfortable saying that payback generally falls in the two- to three-year range.

20/08/2025 What is your capital deployment strategy, and how do you balance acquisitions, fleet modernization, buybacks, debt, or dividends?

There is no discussion of a dividend at this time. Most of our capital is going to CapEx to support robust demand and growth opportunities. We are not heavy users of debt, so you should not expect us to lever up or return to the capital markets. Growth is being funded through CapEx, and our focus is firmly on moving the company forward.

Competitive Advantage

28/05/2024 How are you the sole provider of low-emission site electrification systems, and what protects this position?

In the microturbine space, there are very few global manufacturers. Over the past five years, we have built a close partnership with a North American supplier, adapting their unit for mobile use and ruggedizing it for extreme conditions down to minus 40. Traditionally, microturbines were stationary for decades, but we engineered ours to be reliable in a mobile setting. That has given us a moat with proprietary know-how for cold-weather and mobile deployment.

We also shifted our workforce: about 45% of our employees are electricians, supported by journeyman and apprentice programs, to manage 480-volt systems. This transition from mechanical to electrical expertise further differentiates us. Competitors still rely on diesel, and none have matched our gas-to-microgrid systems. While competition may appear eventually, we have not seen any signs yet.

28/05/2024 How did you secure exclusivity with the proprietary microturbine technology?

Exclusivity is not formalized, but we are effectively first up and best dressed. The volume of orders and business we’ve generated with the manufacturer has made us a key partner. They see us as leaders in mobile operations for this technology, which is traditionally used only in stationary installations.

By proving the reliability of their equipment in mobile settings, particularly under harsh conditions, we’ve earned strong alignment and support from the manufacturer. They continue to back us closely as we expand.

21/11/2024 What percentage of customers use compressed natural gas (CNG) versus field gas, and how much treatment is required?

About 85% of sites use client-supplied gas, either directly from the field or through local gathering systems with one level of refinement. The remaining 15% rely on CNG.

Our exclusive Flex units are key here. They tolerate fuel imperfections up to 6,500 parts per million of H2S, handle wet gas, and operate reliably even at minus 40. Competing turbines often fail below minus 20 or when fuel quality is inconsistent. With our exclusive Flex agreement, we alone can deploy these units in the industry, ensuring near 100% uptime and securing a moat around this technology.

21/11/2024 What is your contract renewal rate, and what drives retention?

Our contracts are typically annual or two-year master service agreements. Retention has been essentially 100%. If issues existed, they would surface at renewal, but historically we have gained work from clients when competitors failed to deliver high-quality products or service.

Pricing is adjusted to ensure equipment payback within 1 to 3 years. Clients evaluate providers on safety, ESG compliance, and operational standards as part of a serious approval process. Our top-tier safety systems and performance records keep us in strong standing, and customers want to continue working with trusted suppliers like Enterprise.

21/11/2024 Given reliance on Flex, why not combine with them?

We are focused on taking one step at a time rather than pursuing that option at this stage.

20/08/2025 What is proprietary about your turbines, and why can’t larger competitors replicate them?

These turbines were purpose-built for combined heat and power applications. In the world of microturbines under half a megawatt, only three recognized manufacturers exist. We tested U.S.-built units and have six in our fleet, but they fail in the extreme conditions we operate in. The Flex unit, which achieves 99.5% uptime, outperforms others. A European competitor has only 10 units installed, none in North or South America, and their turbines are heavy, overbuilt, and unsuitable for extreme conditions. Flex is well-matched for commercial and industrial needs, and units can be paired to match power loads from one to multiple megawatts. Larger turbines from GE, Siemens, or Pratt & Whitney are a different class and not comparable.

Beyond the turbine itself, infrastructure is crucial. Clients need a full package, light towers, heaters, generators, and buildings, not just a turbine dropped at the door. Our mobile power systems come with delivery, setup, and guaranteed uptime service, which rental providers like United Rentals do not offer. This service model is as important as the technology itself.

Operations

28/05/2024 Do some of your customers contract across multiple business divisions or only one unit?

That can happen, but most of our business is through complete packages. All our subsidiaries cross-sell across divisions. For example, our heating division sells into every business line during winter operations, especially in Arctic conditions where heat is always required. Hart and Westar are good examples of full-service packages.

When clients adopt our gas-to-microgrid technology, those power systems are often bundled with the entire site package. It is common for customers to utilize the full range of our services rather than a single division.

28/05/2024 What is the lifespan, age, and utilization rate of your equipment?

Utilization rates vary by equipment class. Mobile structures and power systems are running at very high utilization due to demand, while other categories like lighting have lower rates. Some asset classes are overloaded, which is why we are adding more through CapEx. Overall, we operate in an expanding Canadian energy market with no slowdown in sight.

From an accounting perspective, large infrastructure assets such as turbines and mobile structures are depreciated over seven to ten years. Microturbines, with a major overhaul, can last up to two decades, similar to stationary installations. This provides a long useful life across our fleet.

21/11/2024 What internal metrics or KPIs do you use for customer contracts?

Our agreements are structured as master service agreements with clients, who then apply pricing to individual equipment. We target payback on all invested equipment within 2 to 3 years. Some items deliver returns as quickly as 90 days, but overall we ensure full recovery within that cycle. We do not apply a fixed percentage per item, but rather focus on achieving return within the 2 to 3 year timeframe.

21/11/2024 What is the length of contracts, and how recurring are revenues?

Clients often have drilling and completion programs lasting 2 to 3 years, moving from pad to pad. We may stay on a client program for several months or multiple years. Contracts are based on master service agreements, with all terms defined, and we are called to support client programs as needed. Some programs last longer depending on the client.

21/11/2024 Do longer-term contracts include organic growth provisions?

Customer growth is not explicitly built into agreements. If clients increase their development activity, we scale alongside them, but it is not contractually embedded.

MSAs typically last 12 to 24 months with defined pricing. At renewal, pricing is adjusted for market conditions and equipment updates. When new or significantly different equipment is added, we update the MSA accordingly.

21/11/2024 How is development of larger turbines progressing?

Flex has a 2 megawatt platform, which is a natural extension for us. We are discussing costs and lead times with them, and several clients have already expressed interest in larger power solutions. We are working with those clients on development plans for increased energy needs.

21/11/2024 What progress have you made with clients in industries like mining or data centers?

It is preliminary but promising. We have had discussions with compressed natural gas suppliers and a few mining companies about adapting our systems. Instead of natural gas wells, these applications would use CNG.

We have also received inquiries from small data centers that want independent power setups. These represent exciting new opportunities outside of natural gas, but our immediate focus remains on our core Canadian markets in Duvernay, Montney, and Port St. John, where demand from LNG Canada pipeline activity is strong.

21/11/2024 What is Flex’s manufacturing capacity, and how fast can they ramp up supply?

We recently met with Flex and discussed their production pipeline. They are currently delivering six 2 megawatt units, building 20 more of the 333 models for their own use, and fulfilling our order for 10 additional units. Their capacity is strong, and if we required 30 units, they could produce them, though sourcing specialized parts from around the world is a logistical challenge.

21/11/2024 How many units do you expect to have by the end of 2025?

Today we have about 30 complete natural gas systems. By the end of 2025, we expect to have around 45 natural gas systems in operation. For Flex units specifically, we anticipate being in the range of 24 to 25 units.

20/08/2025 How many turbines are now in service after the most recent acquisition?

We view our operations as complete power systems rather than individual turbines. With the acquisition, we are close to 60 natural-gas-based power systems that can be deployed. Each includes turbines and generators configured for specific applications.

20/08/2025 How many of your turbines are rented versus owned?

All of the units we acquired, plus our existing fleet, are rented to clients on varying terms. Some companies have purchased units outright, and for those we provide long-term maintenance through our FlexCare agreements. We do not disclose the exact number of individually owned units, but everything in our fleet is rented.

20/08/2025 What does your salesforce look like today, and how must it grow to meet demand?

Before acquiring Flex Canada, we had a VP of business development in Calgary and a seasoned field business development team. With the acquisition, we added a leader who has nearly a decade of experience with Flex Canada. He will continue driving energy sector opportunities and expand into build-and-design firm interfaces for CHP applications.

We are also broadening our regional presence, with Eastern Canada soon to have its own dedicated business development representation. This expanded team positions us to capture demand nationwide.

Growth

28/05/2024 Does your business generate recurring revenue, and how is it structured?

We sign two- to three-year master services agreements (MSAs) with clients, which ensure ongoing work. Projects typically last from one to fifteen months, and once one site is completed, we often move directly to another for the same client. As a rental company, we bill daily, and these contracts provide consistent revenue streams.

MSAs are highly valued by our customers and involve detailed reviews covering safety, ESG standards, and compliance. Securing an MSA signals a strong relationship. While project volumes vary by season and client activity, we work with many repeat customers annually, which provides a recurring revenue base.

28/05/2024 Do you currently operate in the U.S., and do you plan to expand there?

Our operations are concentrated in Western Canada, where our yards and shops are within two to three hours of project sites. We see ample runway in the Canadian energy sector and related industries, so we are staying disciplined and avoiding distraction from the U.S. market. It operates differently, and we do not claim the expertise to navigate it

The low-hanging fruit is here in Canada, particularly around the LNG Canada pipeline, which is behind schedule and driving urgent drilling activity. Our clients are doubling rigs and expanding electrical adoption to meet obligations. Expansion into the U.S. may be considered in the long term, but our focus is firmly on Canadian growth.

28/05/2024 What is the total addressable market for natural gas microgrid turbines, and can they serve industries beyond energy?

The opportunity is massive. Our core runway is in the energy sector, where we have a 20-year reputation and strong client demand. We are focused on staying disciplined and not losing sight of that core market.

That said, we are actively analyzing adjacent industries such as mining at both development and operations stages, remote construction projects, and even large-scale electrification of fracking operations. These can require 8 to 15 megawatts of power, and our manufacturer also produces 2.5-megawatt units that expand our capabilities. The technology has clear applications for industries like mining and construction, with potential to extend further in the future.

21/11/2024 Which subsidiary contributes most to earnings and future revenue growth?

Five years ago, we redirected focus into Evolution Power. At that time, it was 5% of gross revenue. Today, it represents more than 45% of our gross revenue, with extremely high margins and profitability.

21/11/2024 What challenges have you faced convincing traditional energy producers to adopt natural gas systems, and how did you address them?

Adoption is usually faster when we present to decision makers at the engineering or C-suite level, as they see the benefits of moving from diesel to natural gas quickly. At the field level, particularly with third-party site superintendents, there is sometimes more hesitation to change. To address this, we increased field sales exposure and recently hired a VP of Business Development in Calgary to target C-suites directly. This has already led to successes, such as a new flare gas opportunity.

For years, Evolution grew by word-of-mouth alone. Our first dedicated salesperson started just two months ago with a mandate to reach C-suite executives. The economics and ESG benefits sell themselves, and regardless of field resistance, decisions at the top drive adoption. That is the source of organic growth ahead.

21/11/2024 Are you seeing more growth from existing Tier 1 clients or new customers?

It is a mix. We regularly add new clients, but many Tier 1 clients we have worked with for over a decade are now converting from diesel to natural gas. That shift has been a significant driver.

Revenue growth is split between new and existing clients. Larger Tier 1 customers adapt more easily to turbine systems, while smaller clients may face project duration or location challenges. Organic growth within existing Tier 1s is strong, with some sites running multiple turbines for different purposes. At the same time, our new sales effort is expected to bring more mid-tier clients, particularly as ESG pressures mount.

21/11/2024 Do you plan to expand into the U.S. market?

No. Our focus is on Canada, where we have decades of reputational strength and significant opportunities in front of us. The U.S. market is not the same as Canada, and it would be a distraction from the opportunities we already have here.

We expect U.S. players will eventually come to us, because our assets are the best in the market. That may happen within the next year or two.

20/08/2025 Was the FlexPower acquisition only for Canada, and can you also sell or lease in the U.S.?

Yes, the acquisition covers Canada only. We are the OEM representative and took over Flex’s Canadian business. Flex USA continues operating their robust U.S. market, while we focus on Canada. This partnership works because Flex recognized Canada needed more dedicated attention than they could provide. Enterprise is well funded, operationally advanced, and enthusiastic, making us the natural choice to grow the Canadian market while Flex maintains global and U.S. opportunities.

Historically, Flex Canada pursued only the energy sector, which adopted the turbines well over 15 years. They did not expand into combined heat and power or broader industrial and commercial applications. Now, under Enterprise, our opportunity is to expand across the entire Canadian market and unlock applications far beyond energy.

20/08/2025 Which industries are you diversifying into, and what stage are those efforts at?

Mining is a strong fit, similar to the energy sector, because diesel is still widely used during initial mine buildouts. Gas turbines and microgrid solutions can displace diesel in these projects, and we are in discussions regarding opportunities in Northern BC and Northwestern Ontario. We are also developing synergies with compressed natural gas suppliers, with more details to come.

Beyond mining, combined heat and power (CHP) applications create further potential. For example, a recreation center in Grand Prairie installed two units as primary power and CHP four years ago. We are now working with engineering and design firms so they understand CHP’s cost and emissions savings and can incorporate it into future municipal and industrial projects. These opportunities have longer sales cycles, but our business development team is actively expanding in this direction.

20/08/2025 What challenges do you face in growing your customer base and driving adoption of natural gas turbines?

Currently our operations and infrastructure are based in Western Canada, so expanding nationwide requires building out more offices, yards, and business development resources. That is less a roadblock than a natural step in scaling the business.

Education and adoption are also challenges. Natural gas is one of the cheapest power sources globally, but our process is still new to many customers. We regularly host site visits to demonstrate performance, and while executives often buy in quickly, field-level staff can take more convincing. Still, after two or three months most new customers commit, and we expect significant progress over the next three months.

Financials

28/05/2024 How much of 2023 and Q1 revenue came from natural gas to power services?

That is not information we break down publicly. For competitive reasons, we do not disclose revenue by division or product line.

28/05/2024 What percentage of sales comes from your top five customers?

At March 31, 2024, two customers represented 45% of revenue for that quarter. In the prior year, three customers made up 37%. No other customers accounted for more than 10%.

Customer concentration shifts quarter to quarter depending on project timing, so while these figures are accurate, the specific clients vary over time.

28/05/2024 Is there seasonality in your business results?

Yes, seasonality is a consistent factor. Historically, Q1 and Q4 are our strongest quarters, with Q3 close behind. Q2 tends to be weaker due to spring road bans and weather-related slowdowns in the energy sector. This pattern has held true over the past several years.

28/05/2024 What savings do customers realize from electrification versus diesel?

The savings are substantial. Replacing a 350-kilowatt diesel unit with an equivalent microturbine using natural gas yields dramatic fuel cost reductions. With natural gas trading around $2 per MMBtu on Henry Hub versus oil at $78 per barrel, the cost advantage is clear. Even when third parties supply gas at $7 per MCF, the differential is significant.

The result can be up to an 86% fuel cost saving. On a per-site basis, this translates to $3,000 to $5,000 in daily savings, and in some cases even more depending on project scale.

21/11/2024 What is your internal return on capital for every $1 million invested?

We are not prepared to disclose that figure.

20/08/2025 What is your customer concentration, and how has the acquisition affected it?

We disclose customer concentration in our MD&A and financials as required. Our top customers remain in the energy sector, though the acquisition has introduced some diversification. Going forward, we expect growth to come increasingly from the power sector. This transition has already started and will continue as we expand.

Outlook & Guidance

28/05/2024 Closing remarks from management

We greatly appreciate everyone’s time and interest. We welcome one-on-one discussions to provide additional detail, and we thank our shareholders for their continued support.

We are excited about the opportunities ahead, confident in our disciplined growth strategy, and committed to building long-term value for both our customers and investors.

21/11/2024 How far in advance do you book customers, and what visibility do you have into 2025 and beyond?

Our industry typically lacks long-term visibility. We usually see 6 to 9 months out based on client program discussions. It is rare for clients to commit to solid 2 or 3 year programs in advance.

During MSA negotiations or renewals, clients provide heads-up on expected needs for a season or calendar cycle, allowing us to plan equipment availability. We are investing in both infrastructure and equipment aligned with customer demand, based on what they communicate to us.

21/11/2024 What are the main operational risks ahead, and will the next two quarters be stronger than Q3?

We operate in remote areas where heavy equipment can only be moved when the ground is frozen. As a result, activity is always more robust in the frozen quarters, making Q1 and Q4 the strongest periods. This seasonality is inherent to the Canadian energy sector.

From a financial perspective, Q1 has historically been the highest quarter, and we expect the same pattern going into 2025. Activity levels are currently increasing, and we see that trend continuing.

20/08/2025 Have you considered blending hydrogen with natural gas?

Yes. Our turbines can operate on a blend of hydrogen and natural gas. The limiting factor is the absence of a mature hydrogen economy. If the hydrogen sector develops further, we will be able to integrate it into our fleet.

Risks & Macro

28/05/2024 What caused the industry downturn, and what is driving today’s upturn?

The downturn was largely caused by underinvestment in oil and gas globally. Environmental pressure on banks, insurers, and funds led to limited capital for reserves and production, even as demand continued rising. As a result, supply was constrained at a time when consumption, outside of COVID, only grew. Very few new field discoveries have been made in the last decade, worsening the gap.

On the upturn side, long-term contracts for liquefied natural gas (LNG) are being signed for 27 to 30 years, reflecting confidence in demand. Canada is well positioned to play a role in meeting this global energy need. While cycles will remain volatile, the structural outlook is bullish, and we see significant long-term growth potential.

21/11/2024 Do wildfires create seasonality in Q3 results?

In recent years, wildfires have disrupted operations, especially across Alberta and Northern BC. In 2023, we even lost equipment at a site, and industry peers reported similar impacts. Entering 2024, the dry winter heightened client caution, leading some to defer projects later in the year.

We also expanded our fleet of fire suppression units, which are in demand and billed daily, adding another dozen units this season. Fires again affected Northern BC and oil sands areas. Fire season is now taken very seriously, and we expect some level of deferrals to continue.

21/11/2024 Do you gain carbon credits from your work?

No. Fuel expense and related carbon credits are the client’s responsibility. Any credits are earned by the operator, not by us.

20/08/2025 What impact do you foresee from tariffs south of the border?

We monitor both U.S. actions and Canada’s retaliatory responses. The initial Canadian tariff list, released earlier this year, has been updated, but heavy-duty equipment such as turbines has not been included. U.S. manufacturers like Caterpillar and John Deere remain unaffected so far. Importantly, any equipment compliant with USMCA still qualifies for exemption.

The tariff landscape can change quickly, but at this time, none of the equipment we source from U.S. manufacturers has been impacted.

20/08/2025 How do you measure emissions data presented in your materials?

Emissions data is gathered in compliance with regulatory standards by certified third-party providers. They conduct onsite sampling of exhaust and ambient air, and the results are reported under strict governance in both Canada and the U.S. While we own equipment to conduct our own checks, any published results must come from third-party certified providers.

This process is highly regulated, much like financial audits, and ensures that all emissions data is independently verified and credible.

Personal Questions

28/05/2024 How would you describe your corporate culture and employee incentives?

Good people are central to our success. We emphasize top-quality equipment, service, and staff, and provide competitive compensation to attract and retain talent. Many employees have grown within the company, starting in trades or operations and moving into management. This creates loyalty and long-term tenure, making it easier to build and maintain strong teams.

We truly operate like a family. Many employees have been with us for decades, including senior leaders who rose from frontline roles. We reward staff through stock options, bonuses, and tailored incentives. Ultimately, we focus on keeping people happy, motivated, and moving forward in their careers.

Disclaimer:

The following transcript and Q&A have been generated with the assistance of Artificial Intelligence (AI). While we strive for accuracy, completeness, and clarity, the content may contain errors, inaccuracies, or misinterpretations. Neither the company featured in this document nor ValueBridge assumes any responsibility or liability for the accuracy, reliability, or completeness of the information presented.

This material is for informational purposes only and should not be construed as official company communication, financial advice, or a definitive representation of the company’s views. Readers should independently verify any information before making decisions based on it.

Sources

Earnings Calls

Valaris is the world’s largest offshore drilling contractor, with a diversified fleet of seventh-generation drillships, jackups, and semisubmersibles. The company has prioritized capital discipline and fleet quality, reactivating rigs only when economics justify. Reactivation costs for drillships average $120–125 million, typically funded or reimbursed through customer mobilization fees and contract value. Operational efficiency is strong, with 97% revenue efficiency reported across the fleet. Valaris benefits from its 50/50 ARO Drilling JV with Saudi Aramco, which operates 15 rigs today and will expand to 19 rigs as newbuilds are delivered under 16-year contracts with six-year EBITDA paybacks. Shareholder returns remain a clear focus: the company repurchased $171 million of shares in 2023 toward a $200 million target and has a $600 million open-ended authorization for 2024–2025. Asset sales, including a $64 million divestiture of an older rig and a $100 million+ sale of V-247, further strengthen liquidity. With day rates moving from the low-200s to mid-400s (and selectively over $600k/day), Valaris is positioned to capture rising cash flows as market tightening continues.

Catalysts & Milestones

2022 - $64 million rig sale highlighted strengthening jackup market

2023 - Four floater reactivations delivered on time and budget with 97% revenue efficiency

2023 - Share repurchases reached $171 million (3.5% of shares) toward $200 million target

2024 - $600 million share repurchase authorization launched, covering 2024–2025

2025 - Valaris 247 sale expected to generate more than $100 million in proceeds

2025 - Majority of 2025 floater opportunities expected to favor 7th generation drillships

2026 - Strong demand expected for DS-11, DS-13, and DS-14 deployments in tightening market

2027 - One ARO Drilling leased rig rolls off contract

2030 - Six ARO Drilling rigs contracted through end of decade

Investment Highlights

• Average reactivation cost of $120–125m, consistently executed on budget

• 97% revenue efficiency across fleet underlines operational strength

• $600m share repurchase authorization supports shareholder value creation

• ARO JV expanding to 19 rigs with 16-year contracts and six-year EBITDA payback

• Day rates climbed from $200k lows to mid-400k+, with select fixtures above $600k
  

Future Growth Drivers

• Long-term Saudi ARO newbuild program delivering fleet expansion and stable cash flows

• Deployment of DS-11, DS-13, and DS-14 into rising day rate environment

• Exploration and development demand growth in Africa, Mediterranean, and Brazil

• Increasing customer preference for 7th generation rigs with dual BOPs and MPD systems

• Opportunistic M&A or partnerships to strengthen fleet and capture synergies
  

Risk Factors

• Reactivation projects cost $120–125m, with inflation risk on labor and supply chains

• Jackup suspensions in Saudi could reduce EBITDA by ~$10m (1% of backlog)

• Shareholder return execution may vary despite $600m authorization

• Dependence on FPSO deliveries may delay deepwater programs by 1–2 years

• High concentration in ARO JV ties cash flow to Saudi market dynamics

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Capital Allocation

02/11/2021 What rate levels justify reactivations, and how do you approach bidding and mobilization fees?

The market has improved significantly since the start of the year, and each job must justify reactivation. Our stacked rigs have been in preservation for less than two years, compared with about three and a half to four years for the average fleet, making reactivations easier. We stand by our reactivation costs, which must be reimbursed or largely covered by customers through mobilization payments, contract value, or a mix of both. Current spot day rates are well ahead of earlier levels, and our hurdle rates for future reactivations will move accordingly.

At the start of the year, only 4 of our 11 drillships were active. We have since added capacity, improving floater fleet backlog from around eight months to about 20 months. We still have three high-quality floaters that we can bring back when economics make sense, and we will remain disciplined in selecting opportunities.

02/11/2021 Are idle rigs ready for Saudi work, or do they require upgrades?

Saudi Aramco requires very specific configurations, API-monogrammed equipment, and strict well-control standards. They frequently upgrade their requirements. Therefore, rigs entering Saudi Arabia, including ours, generally need significant CapEx upgrades. This creates a barrier to entry but also supports stable work once rigs are operating in the Kingdom.

03/05/2022 Are there penalties for retiring $550 million debt early?

Yes, the indenture includes typical reinvestment rights. We still have 11 stacked rigs that may be reactivated, requiring investment. The note has a non-call period ending in April next year, after which there is a step-up. We can buy back notes in the open market, but until then we prefer to maintain liquidity given the potential returns from redeploying rigs. We will decide based on market conditions.

01/11/2022 What are short-term investments, and was the $64 million rig sale at arm’s length?

This is Chris. Short-term investments were simply a time deposit over 90 days to earn extra yield on cash, nothing more.

Yes, the $64 million rig sale was an arm’s-length transaction. Our fleet focuses on high-spec rigs, mostly in the top quartile. The asset sold was 40 years old and required significant capital. For us, reinvesting elsewhere is more attractive, but for another operator in a different market it can make sense. The sale highlights how the jackup market has strengthened significantly over the last six to nine months.

21/02/2023 Will stacked jackups return to work, or is focus only on floaters?

There has been an improvement in the benign jackup market, driven by rigs moving to Saudi Arabia. Opportunities exist for jackups, but our decisions hinge on capital allocation and investment returns. Floater day rates have doubled from the 200s to 400s, while jackups improved from the 70s to above 100, with some contracts above 125.

On a capital allocation basis, drillship reactivations offer superior economics compared to jackups today. That does not mean jackup opportunities are off the table. If we see an attractive case, we will act, but our priority remains allocating capital where returns are strongest.

21/02/2023 Is the CARES Act refund a catalyst for opportunistic returns?

Chris Weber: From a CARES Act refund perspective, we received $55 million in Q4, $45 million in January, and $19 million remains. These were expected and built into our planning models, so we do not view them as catalysts or unexpected windfalls.

Anton Dibowitz: As I mentioned earlier, our focus is disciplined capital allocation to create long-term shareholder value. Including the CARES Act refund, we prioritize reactivations of drillships with attractive economics. We also want cash available for potential M&A, but excess cash should ultimately be returned to shareholders. This could happen through opportunistic buybacks during price dislocations or through rig sales. The CARES Act proceeds are part of our base numbers, not a separate catalyst.

21/02/2023 Do you envision an IPO or divestment for ARO, and what happens to leased rigs?

Absolutely, Fredrik. The value of ARO to Valaris is underappreciated since we do not consolidate it. It is a 50-50 venture with the largest jackup user in the world, in a market where some say the last well will be drilled. Today there are 15 rigs operating, with two contracts for rigs transitioning and two newbuilds this year, taking the fleet to 19 rigs.

The natural timing to evaluate strategic options would be after the first two newbuilds are delivered, contracted, and performing under the model, an eight-year contract with six-year EBITDA payback, while committing to additional newbuilds. That milestone would be a logical point for value realization discussions, but I will not comment further.

02/05/2023 How do you market stacked drillships compared to DS-13 and DS-14?

Anton Dibowitz: Ideally, we would secure longer-term contracts for the DS-13 and DS-14. Our priority is to keep active rigs continuously utilized, then consider high-spec preservation stacked assets, and then the options. We also differentiate between purchase price, reactivation costs, and putting rigs to work.

Anton Dibowitz: Stranded assets have traded in the low to mid-200s, and both the DS-13 and DS-14 have two BOPs, which many stranded assets lack, representing an additional $50 million in value. On a pure steel price basis, the DS-13 is less than half of where assets are trading, making it very attractive and a likely option to exercise. The DS-14 is closer to current trading values, so we will continue to evaluate it against other capital uses.

02/08/2023 Are you considering M&A, or focusing on organic growth with DS-11, DS-13, and DS-14?

We have been clear this industry needs consolidation. We continuously evaluate M&A opportunities. Our high-specification fleet provides a competitive advantage we do not want to dilute. If an M&A opportunity creates real synergies, we would consider it.

At the same time, we have plenty of organic growth ahead. Three reactivations will earn day rates before mid-next year, and we must roll three legacy contracts to market rates within 12 months. Taking DS-13 and DS-14 to market also creates growth. We are comfortable with organic expansion, but we will pursue M&A if opportunities make sense.

05/09/2023 Will you return free cash flow to shareholders or pursue fleet growth?

We intend to return cash to shareholders unless a clearly more attractive use arises. Near term, reactivating rigs like DS-7 generates strong returns. Beyond that, we will not build new rigs. Some investment may go to technology or fleet upkeep, but the priority is shareholder returns. M&A is possible if it maintains fleet quality and adds value through overlap or synergies, but most deals would likely be equity-funded. We want to keep a conservative balance sheet while ensuring clarity on cash returns to shareholders.

07/11/2023 What is your share repurchase outlook for 2024 following the $200 million 2023 target?

We are demonstrating strong commitment to returning capital to shareholders. Year-to-date we have repurchased $171 million of shares, about 3.5% of our outstanding stock, and we are on track to meet the $200 million 2023 target. We will provide more detail on 2024 return plans in the fourth-quarter call.

Our philosophy is simple: when the business generates meaningful and sustained free cash flow, we will return it all to shareholders unless there is a clearly superior value-creative use. That includes dividends, ongoing repurchases, and potentially special dividends after significant liquidity events. The board and management are laser-focused on ensuring excess cash is returned to shareholders.

22/02/2024 How will you pace the $600 million share repurchase authorization?

We remain committed to returning capital to shareholders. Last year we returned $200 million of capital on a $300 million authorization, and our Board has now doubled that to $600 million. This is an open-ended authorization that gives us the ability to opportunistically repurchase shares in 2024 and into 2025.

We believe our stock trades at a discount to intrinsic value. We increased the authorization for a purpose, we intend to use it, and we will be opportunistic about it.

22/02/2024 Is there a limit to pursuing value before distributing all free cash flow?

We expect significant earnings and cash flow growth as we move deeper into an upcycle, and our intention is to return it all to shareholders. It is never wise to make absolute statements, which is why we leave the caveat that if there is clearly a better value-accretive use, we may pursue it. Examples could be additional managed pressure drilling systems or an attractive asset purchase.

That said, our policy is clear. When we generate significant cash, we intend to return it all to shareholders unless a superior value-accretive opportunity emerges.

22/02/2024 Will you scrap or sell stacked jackups and semis, or keep them for optionality?

We prioritize getting ships back to work because that is the capital allocation decision that delivers returns. As mentioned earlier, reactivation costs compared to leading-edge day rates support attractive returns on drillships with long-term contracts. For international jackups, the smaller numbers and shorter durations make reactivations less attractive.

That said, jackup durations are increasing, which could create opportunities for some of those assets. For now, with positive market momentum, our stacked assets, including the three, the six and our jackups, remain valuable options to hold.

22/02/2024 Did you consider a JV like Total’s with Vantage, and how do you view such opportunities?

It is a positive sign that operators are contracting rigs beyond approved programs, which shows confidence in a tightening market and rising day rates. Having scale allows us to take a portfolio approach, and with 10 ships working or preparing to work, we would absolutely look at opportunities to secure long-term backlog while remaining opportunistic with other assets.

Each opportunity is assessed on its own merits. If a JV or similar arrangement is commercially attractive, value accretive to shareholders, and fits our portfolio, we would consider it. It all depends on the economics of the opportunity.

22/02/2024 Can you still demand upfront payments for rig activations and contract prep?

Yes. As the market tightens, opportunities for upfront payments are as strong as ever. We led the charge in seeking them, as they are not subject to operational downtime risk, improve cash flow, and strengthen project economics.

Our cost of capital differs from our customers. Some operators even prefer to pay upfront and secure a lower day rate. We evaluate each case, but overall, opportunities for significant upfront payments remain very strong.

22/02/2024 How do you balance share repurchases with potential dividends long term?

Once we generate sustained and meaningful free cash flow, we believe both dividends and share repurchases should be part of our capital return policy. A dividend would be set at a sustainable level through the cycle, while buybacks allow us to capitalize on undervaluation.

Both tools make sense, and we do not think we are far from reaching the stage where they can work together.

02/05/2024 Are there plans to reactivate other stacked assets like DPS-3, DPS-6, or jackups?

Customer preference is firmly for high-specification assets. Our capital allocation has been directed toward drillships, particularly the DS-11, DS-13, and DS-14. While only about ten high-spec reactivation candidates remain globally, tightening supply could create future opportunities for semis, but our current focus remains on drillships.

02/05/2024 What is the likelihood of DS-11, 13, or 14 securing contracts this year, and could a JV be used?

We will consider traditional and nontraditional ventures if they are accretive and make economic sense for shareholders. With critical mass already working and three attractive assets in a rising demand market, we are focused on securing the right contracts with the right customers. We are in active discussions for all three rigs, and if terms deliver meaningful returns on reactivation costs, we will execute. Otherwise, we are willing to wait, as these are the best assets available on the sidelines. Our criteria remain unchanged, initial contracts must provide a strong return on reactivation investment.

01/08/2024 How are you thinking about capital allocation and potential returns to shareholders given idle rigs and deferred reactivations?

We have been clear about our capital return philosophy and already returned capital last year. In the first half of this year, we spent significant cash bringing the DS-7 to work, and we expect to generate more as legacy contracts roll onto new ones. 2025 will be an inflection point for the company. We still see strong opportunities for the DS-13 and DS-14 as we move into late 2025 and 2026, with high-specification rigs in demand.

Our commitment remains to return all generated cash to shareholders. We have authorization capacity in place, though execution will not necessarily be linear. We will act opportunistically while honoring our philosophy of returning capital.

01/08/2024 What is your target free cash flow conversion on expected EBITDA?

We do not have a specific conversion target, but we remain committed to returning capital to shareholders. We have significant authorization capacity and intend to use it opportunistically rather than linearly. We expect free cash flow to improve in the second half of this year. Looking to 2025 and beyond, we anticipate generating meaningful and sustained free cash flow, which we intend to return to shareholders unless a better, more value-accretive use arises.

01/08/2024 Do you expect another round of offshore drilling M&A before year-end?

Timing of M&A is difficult to predict, but we believe there is room for additional consolidation. Some recent deals occurred because companies lacked high-spec rigs and needed to acquire capacity. Valaris is in a strong position, with 12 of 13 ships being seventh generation and additional organic capacity available. We are pro-M&A and will evaluate opportunities. If they are value-accretive and beneficial for shareholders, we will absolutely pursue them.

03/09/2024 Does Valaris plan to pursue another large M&A transaction?

We already have the largest fleet and highest-spec assets on the water, plus organic growth capacity with DS-11, 13, and 14. Consolidation has shaped who we are, and we remain open to strategic combinations if they create value, improve fleet profile, and do not compromise the balance sheet. That said, we do not need acquisitions to maintain a growth story. If a deal is accretive for shareholders, we will consider it, but we are not compelled to pursue M&A to remain a leading player.

03/09/2024 How should we think about your share buyback program?

We intend to be opportunistic rather than steady state at this stage. We recently completed two reactivations and are now focused on generating cash flow through 2024 and into 2025, while managing the balance sheet carefully. Currently, share repurchases are funded directly from the balance sheet. Given confidence in the market, we will act aggressively when dislocations create opportunities. As we transition into steady, sustained earnings and cash flow, the program could evolve into a more regular buyback cadence, but until then, it will remain opportunistic.

31/10/2024 What is Valaris’ view on M&A opportunities and consolidation?

We still believe there is room for additional consolidation in offshore drilling. Much of the M&A so far has involved contractors high-grading fleets or chasing high-spec capacity to gain scale. We already have the largest fleet on water, with 12 of 13 ships being seventh generation, which are preferred by customers.

We feel very good about our fleet position and are not compelled to pursue M&A for scale or high-grading. That said, if an opportunity is accretive and value-creative for shareholders, we will absolutely engage.

20/02/2025 Will ARO Drilling need capital from Valaris to fund Kingdom Three newbuild?

No, neither we nor Aramco expect to inject capital. These newbuilds are backed by 16-year contracts, with an expected six-year EBITDA payback on the initial eight years. They will be funded by ARO cash flow and readily available financing.

For example, Kingdom One and Two had down payments funded by ARO cash and delivery payments financed externally. This is a highly financeable model, and no capital contribution from Valaris or Aramco is anticipated.

01/05/2025 How many 2025 floater opportunities may require rig upgrades?

It is difficult to provide specifics on individual opportunities. What we are seeing, which aligns well with our fleet, is demand from customers who want maximum flexibility to design wells and adapt as they go. Many opportunities now have managed pressure drilling (MPD) as the base, so contractors like us with MPD and dual blowout preventers already on rigs are advantaged. As those systems evolve, we continue to advance our technology.

Often, before starting a new contract, customers request upgrades. This benefits us because they typically cover the capital expenditure, and we end up with a stronger rig. Significant CapEx upgrades are not the norm. Our high-spec 7th gen fleet can handle many programs without major modifications, but it depends on the market and customer. Commercially, we aim to ensure reimbursement for any required upgrades.

31/07/2025 Are there any unusual CapEx requirements for preparing rigs for new contracts?

No, nothing out of the ordinary. Most contracts have some form of capital expenditure requirement, as customers typically request adjustments. However, among the contracts we have signed, none of the CapEx requirements stand out as exceptional.

31/07/2025 What are your plans for share buybacks given strong liquidity and free cash flow?

We remain committed to returning capital to shareholders. The path may not be perfectly linear, but our operational and financial performance this year has been strong, and commercial progress continues. Importantly, the V-247 rig sale expected to close later this year will generate more than $100 million in proceeds, enhancing our flexibility.

Our philosophy on capital returns has not changed. While the timing may vary, the strength of the business gives us confidence in our ability to return capital going forward.

02/09/2025 How do you view Valaris’s positioning and strategy for corporate M&A?

Valaris supports industry consolidation, which strengthens counterparties for customers, enables technology deployment at scale, and benefits investors. We already have the scale needed to capture synergies, share overhead, and deploy technology, so we are not compelled to pursue M&A purely for growth capacity. Our fleet is strong, with 12 of 13 ships being seventh-generation and growth opportunities already built in through the DS-11, DS-13, and DS-14.

That said, we will pursue M&A if it creates value for shareholders without degrading fleet quality. The key test is whether potential deals enhance synergies, maintain high fleet standards, and are accretive. We do not need M&A for growth, but we remain open to opportunities that make strategic and financial sense.

02/09/2025 Should investors expect shareholder returns this year or more in 2026?

Our capital return philosophy is clear: once the business sustains cash generation, we aim to return it all to shareholders unless a more value-creative use exists. Early this year, we prioritized reducing uncertainty and booking contracts before committing capital returns. Operational performance and contracting progress were key milestones for us.

In the first half of the year, we generated significant EBITDA and cash flow. The sale of the Valaris 247 for more than $100 million further increases flexibility. While returns may not be linear, these positive markers give us greater ability to return capital to shareholders, either later this year or in 2026.

Competitive Advantage

05/09/2023 What makes Valaris’ reactivation economics unique compared to peers?

Different drillers took different strategies at the bottom of the cycle. Valaris chose to stack rigs rather than burn cash, which proved right for creditors. We stacked rigs thoughtfully, removing fluids from equipment, keeping people on board from day one, and maintaining a clear idea of reactivation needs. That allowed us to hit budgets and schedules consistently, unlike industry peers that often went 1x or 2x over budget. We have reactivated six rigs while our largest peers combined reactivated eight. The DS-7 contract is an example where our demonstrated track record gave customers confidence. Not all rigs were stacked equally, but we are confident we can reactivate our rigs around the $100 million range, with DS-11, DS-13, and DS-14 expected at similar cost and timeline.

02/05/2024 Will high-spec rigs command premium rates versus lower-spec rigs as supply tightens?

Our philosophy is to maximize economics on our highest-specification rigs. Twelve of our thirteen ships are seventh generation, including DS-11, DS-13, and DS-14, which are sidelined but ready for deployment. We see strong customer demand into 2025 and 2026, and expect to work these rigs at strong rates as opportunities materialize.

01/08/2024 What enabled the DS-17 to secure an attractive standby rate for several quarters?

The DS-17 is a high-specification rig, and Equinor is a valued partner. Our crews did excellent work on the Bakala development, and Equinor invested significant capital in innovative technology on the rig, including thematic robotic arms and automation. This gave them confidence in the rig’s ability to deliver.

This arrangement reflects both the quality of our customer relationships and the market outlook. Operators recognize tightening supply in 2025 and 2026 and are willing to invest to secure the right assets ahead of time. It is a strong signal of where the market is headed.

01/08/2024 Are other operators investing in reactivated rigs like Equinor did with the DS-17?

Equinor is particularly forward-leaning on technology, with much of the innovation coming out of Norway. They invested heavily in automation such as AtharTXs. Timing also played a role, as their program lines up with a strong pipeline of opportunities. Matt noted in his prepared remarks that there are 30 opportunities, with 20 potentially awarded in the next 12 months.

As high-spec assets like the DS-17 are contracted, there will be increasing demand for other assets such as the DS-11, DS-13, and DS-14. Reactivations take about a year, and we continue customer discussions on those rigs. We are not in a rush and will wait for the right opportunities, which we expect to become more attractive as we approach late 2025 and into 2026.

01/05/2025 What percentage of 2025 floater opportunities require 7th gen drillships, and how do operators value 7th vs 6th gen pricing?

Absolutely. Part of it depends on where 7th gens are preferred or required, but we clearly see higher utilization compared to 6th gens. They provide efficiency, especially in long-term development programs with multiple wells. The benefit comes from their ability to deliver complex drilling solutions, such as managed pressure drilling, which gives them an advantage.

Not all 6th gens are the same, but hook load is a key differentiator, allowing customers to design wells with fewer or longer casing strings, which lowers costs. Features like dual blowout preventers are far more common on 7th gens. Ultimately, unless the market is completely under supplied, customers will choose the highest-spec asset for more efficiency and optionality. The overwhelming majority of 2025 floater opportunities are drillship related, and within those, customers tend to prefer 7th gen assets.

31/07/2025 What opportunities exist for DS-10, DS-15 and DS-18 in early 2026 short-term contracts?

The average duration varies depending on whether it is one or two wells, and locations are scattered across the Golden Triangle. We have rigs with available time that can be positioned in these areas, and the specifications of our fleet, such as managed pressure drilling (MPD), allow us to provide services that customers may struggle to source elsewhere. This gives us a competitive advantage, but it remains a competitive environment.

Our strategy is clear. We prioritize contracting our rigs into long-term programs and then use short-term work as gap fillers to reduce idle costs. The fact that we are now seeing more short-term opportunities emerging, even if from a low base, is a positive sign for market strength. Whether we pursue them depends on fit and economics, but their emergence is encouraging.

Operations

02/11/2021 Are there active discussions for unreactivated floaters and jackups?

We bid rigs beyond those already active when attractive opportunities arise, but the economics must be justified. Additional work is available in the Gulf of Mexico, Brazil, and West Africa, where tenders are increasing. We see rising opportunities and will pursue them selectively.

02/11/2021 How should we think about the ARO leased fleet evolution with newbuilds arriving?

Saudi Aramco is expanding its drilling program and even bringing in rigs from abroad. ARO has seven owned rigs and seven leased rigs, and we are in discussions to extend several leases. It is fair to expect these rigs to remain under ARO, with additional capacity possible given Saudi Aramco’s growth plans.

Two legacy jackups at ARO, if not extended, are likely retirement candidates. Beyond those, we continue to tender both stacked and working assets for opportunities in the Kingdom, and outcomes will depend on contract developments.

22/02/2022 How should we think about average floater OpEx over the next 12–24 months as rigs reactivate and crew demand rises?

During the downturn, industry OpEx reached very low levels. We are now seeing inflationary pressures as activity picks up, especially on the floater side and in certain regions. Our guidance already incorporates these effects, and while we do not expect to return to the peak OpEx levels of 2012–2013, costs will be higher than the absolute lows of the downturn.

Inflation is linked to activity and varies by region. Shorter-term contracts allow us to re-price in a constructive floater market, and day rate increases more than offset inflationary pressures. For long-term contracts, we seek protective clauses. Inflation remains a challenge, but our best estimates are reflected in current guidance.

02/08/2022 Have customer discussions started on long-term contracts tied to 2024 reactivations?

Yes, we are discussing term contracts that include reactivations. Last year’s four reactivations were planned for nine months and delivered on time and on budget, despite the industry’s poor track record. This shows our operational strength.

Currently, we plan on 12-month lead times due to supply chain challenges, such as for DS-17. Some short-term rigs roll off in 2023, but many tenders extend through late 2023 into 2024, including Petrobras. Customers understand the lead times needed to bring capacity back, and they are planning accordingly.

02/08/2022 How do you prioritize stacked assets and the two newbuilds in Brazil?

Our first priority is to maintain high utilization on the active fleet to avoid gaps. After that, we consider stacked rigs like TSV, DS-8, and DS-11, which we have proven we can bring back. DS-13 and DS-14, the newbuilds, come later. We have until the end of 2023 to decide, and timing is similar to reactivating a cold-stacked rig.

Some customers want newbuilds with specific requirements, but we remain disciplined. We will only bring rigs out when opportunities are attractive and generate strong cash flow. DS-13, with a remaining purchase price just over $119 million, is “in the money,” and DS-14 could be viewed similarly. Still, newbuilds are later in the sequence after active and stacked rigs.

01/11/2022 Is relocating a jackup to the UK about potential work or just lowering stack costs?

Yes, we have been clear about Norway. Historically the market supported up to 15 rigs, but today it is down almost a third. We have already relocated one of the end-class rigs to a UK contract and do not see near-term demand in Norway. Norway’s contracting process has long lead times, often 9 to 12 months, and current visibility shows limited demand.

These rigs are mobile and can work in the UK or the wider North Sea as easily as in Norway. If demand does not materialize in Norway, we will pursue other opportunities. The rigs remain capable of Norwegian operations and will return when the market strengthens.

01/11/2022 Can end-class jackups work outside the North Sea, and what are idle costs?

Yes. The end-class can work outside the North Sea, although it is designed for harsh environments. Ideally, we would keep it closer to the North Sea, but if the right contract appears elsewhere, we would deploy it.
Stacking costs are relatively small, in the range of $3,000 to $5,000 per day, and are not materially different from other jackups.

01/11/2022 How are you sourcing and training new employees, and is it expense or capitalized?

As activity has increased, competition for people has risen. Our Gulf of Mexico training facility focuses on entry-level recruits, many of whom have never worked offshore. We lost a lot of talent in the downturn, so this program helps bring in new people, immerse them in the offshore environment, and ensure they are comfortable before going offshore. They live on a rig for a few weeks, train with real equipment, and learn our culture and safety systems.

This is part of normal business training and recorded as expense. It provides a pipeline of new hires for active rigs, ensures safety and cultural alignment, and helps identify early if someone is not a fit. We view it as a cost-effective way to manage turnover and future crew needs.

21/02/2023 What hinders rig reactivations, and can newbuilds be delivered quickly?

Good question, Greg. One of our strengths is effectively reactivating rigs. We reactivated four last year, on time and on budget, while delivering 97% revenue efficiency across the fleet. For us, it is not only about reactivating but also ensuring rigs perform at the same level as the active fleet when they return. We have extended the timeline for reactivations, such as the 17 project now taking a year instead of nine months.

This organization has strong control of operational delivery. The real focus is on discipline and timing, finding the right opportunities in a constructive market and bringing rigs back at a measured pace. We are in advanced discussions on at least one more drillship, and I am optimistic about 2023 offering more opportunities. It is not a constraint issue, but about being disciplined and choosing the right moments.

21/02/2023 Can you reactivate a cold stacked drillship within 12 months, and what is the cost?

This organization has a strong track record: four reactivations last year and the DS-17 project, on time and on budget. I am confident our team can execute within the timeframe expected by the customer. We are in advanced discussions and constructive about finalizing the contract soon.

For costs, we guided $65–75 million for DS-17. For additional reactivations, you should expect toward the top end of that range. Once finalized, we will update the market with the contract details and related adjustments.

21/02/2023 What day rates justify reactivating Korean newbuild drillships, and when might this occur?

There are ongoing discussions, and demand growth is making these rigs more realistic. I expect they will ultimately come to market with established, prudent drillers. The clearing price for these rigs is above $200 million today, plus $80–100 million in reactivation and mobilization costs.

To justify those economics, contracts must have robust terms and day rates, at or above current market levels in the mid-400s. Our priority is maximizing utilization of the active fleet, then reactivating cold stacked rigs, and only afterward considering newbuild options. Most of the industry views it the same way.

21/02/2023 Are customers contributing more capital upfront to rig reactivations?

Not all customers are the same. Some are more willing to pay capital upfront, while others, like national oil companies, operate under prescribed contract structures with limited upfront flexibility. The trade-off is recouping costs through higher day rates over the term of the contract.

With current day rates above $400,000 and three-year tenures, the economics are attractive regardless of the structure, provided we generate cash during the initial contract. Our discipline means avoiding contracts that fail to deliver returns over the first term. Liquidity planning is about aligning these contracts with our cash and balance sheet needs.

02/08/2023 Could DS-13 or DS-14 secure contracts and begin reactivation this year, or will reactivations be in 2024?

Hi Eddie, thanks. You have it right. We see compelling value in DS-13 and DS-14, which are very similar to DS-11, our only stacked drillship currently marketed. These rigs are almost sister ships with similar specifications. Which rig goes to work first depends on customer needs. Given the investments in DS-13 and DS-14, we would like to put one of them to work earlier, but it depends on the opportunities and customer discussions.

We have already had customers visit the rigs, and they are in excellent condition. I inspected them myself recently. We will see how opportunities develop.

02/08/2023 With DS-11, DS-13, and DS-14 still stacked, can you now be more selective on reactivation terms?

From the start, we have insisted on covering reactivation costs before bringing rigs back. As day rates have risen and more rigs are active, we have raised our hurdle rates, seeking higher returns on each successive contract. This has made us more selective and patient in pursuing opportunities, which is reflected in our actions to date.

Now, with only DS-11 left from our stacked fleet, we are prepared to wait for the right opportunities. We see attractive long-term prospects and strong customer interest. Our discipline requires generating meaningful returns over the initial firm contract before reactivation, so we will only bring rigs back when those criteria are met. As the market strengthens, our expectations rise, ensuring we maintain discipline and maximize returns.

07/11/2023 What caused the unplanned Q3 downtime for several floaters and what lessons were learned?

Downtime in the quarter was below expectations. Three events occurred on three floaters, largely subsea-related. In this business, if a blowout preventer fails, bringing it to surface, repairing it, and redeploying takes about two weeks, which explains the impact.

Although this quarter fell short, our year-to-date revenue efficiency is 97% across the fleet. We remain focused on safe and efficient operations and will ensure corrective actions are taken so we continue to deliver at the high levels customers expect.

07/11/2023 With jackup rates rising above $150,000, are you considering reactivating cold-stacked rigs?

We are starting to see encouraging signs, particularly in Asia, where opportunities are longer in duration and lead times are extending. This supports potential reactivations. We are bidding our stacked rigs more frequently for opportunities where we can guarantee availability, although they remain secondary to maximizing our active fleet. Limited availability in 2024 and improving utilization increase the likelihood of stacked rig reactivations.

Reactivating a jackup requires lead time and involves a $20–30 million investment depending on the rig. Historically, floaters offered more attractive paybacks, but rising jackup day rates and longer contract durations improve the economics. We like the stacked assets we hold, and they remain strong options to capitalize on the jackup upcycle.

22/02/2024 How do you weigh reactivating a drillship versus keeping the active fleet utilized?

Our first priority is to keep our active fleet highly utilized, and there are great opportunities for that. For stacked capacity, the 13, 14 and 11, we expect to get a meaningful return on reactivation costs, around $100 million, maybe higher with inflation. With leading-edge day rates now, you can generate about $100 million in EBITDA as long as there is a term contract, and we see some opportunities for that.

We have interest in all three rigs, but we remain focused on attractive contracts for the active fleet first. With 10 rigs and the seven going to work midyear, this is a far cry from a few years ago when only four ships were working. We are willing to be patient given the market momentum and will wait for the right opportunity to put those rigs to work.

02/05/2024 What were the costs and timing around the 144 jackup contract, including mobilization and Saudi market noise?

The discussions were ongoing in late 2023, and the contract was signed in March 2024 after Saudi Aramco announced plans to suspend 22 rigs in January. We cannot disclose the day rate, but mobilization costs are slightly under $10 million. Based on the total contract value we provided, you can make assumptions for the program.

The Saudi fixtures are not representative of the broader jackup market. This is a strong contract, and we are excited to move the 144 to West Africa and start operations.

02/05/2024 If Mexico work falls through for DPS-5, could it pivot to U.S. Gulf well intervention and P&A?

The DPS-5 is both moored and dynamically positioned, offering flexibility for U.S. and Mexican Gulf opportunities. It is currently drilling one moored well and one DP well for ENI, showing versatility. There are active opportunities in well intervention, plug-and-abandonment, and traditional drilling.

Last year we successfully kept the rig active through short-term work. Beyond 2024, there are attractive longer-term programs in the Gulf of Mexico and internationally, providing potential for sustainable utilization and revenue visibility.

02/05/2024 Which of DS-11, 13, or 14 could go first, and how many reactivations are feasible in a year given labor and supply chain limits?

All three rigs are interchangeable, and the customer typically decides whether they want a proven unit like the DS-11 or newer rigs like the DS-13 or DS-14. We aim to put all three to work. We have previously completed four floater reactivations in parallel, demonstrating our ability to execute complex projects. The organization has a strong track record, such as with the DS-8, and we expect similar results with the DS-7. We are confident in reactivating these rigs effectively, whether sequentially or in parallel, once the right opportunities arise.

01/08/2024 Can you provide more insight on the suspension notices for Valaris 147 and 148, and the expected total of 7 suspended jackups in Saudi?

ARO, our joint venture, received notices for the Valaris 147 and 148 last week. We are in constructive discussions with ARO and Aramco and may instead suspend a different leased or ARO-owned rig. Which rigs will be suspended and the timing are still to be determined.

As for the broader context, we do expect around five rigs to be suspended based on market discussions. If it were the 147 and 148, that would represent about $10 million of EBITDA, or $35 million of backlog, against Valaris’ total backlog of $4.3 billion. This equals about 1% of global marketed jackups in a market with 93% utilization. Many rigs from the earlier 22 suspensions this year have already transitioned into international markets, where leading-edge day rates remain north of $150,000 per day. We see no fundamental change in the jackup market and remain confident in its strength.

01/08/2024 Was the Trinidad jackup rate agreed before April or does it confirm minimal impact from Saudi suspensions?

It is the latter. Discussions continued until the contract was finalized recently, after the first round of Saudi suspensions. The rate reflects that some markets and customers remain focused on securing top-tier assets for future developments, regardless of Saudi-driven dynamics.

31/10/2024 How do you manage costs during warm stacking and what are the catch-up costs when reactivating rigs?

Warm stacking involves reducing manning to the class minimum, handling some maintenance and projects, and, if possible, moving rigs quayside to cut fuel costs. Over about 90 days, costs can ramp down to around $60,000 per day. Bringing a rig back requires ramping up crews and catching up on deferred maintenance, typically costing $5 million to $10 million depending on stack duration.

For example, the DS-10 is expected to exit the year at a $60,000 daily OpEx run rate, while the DPS-5 should reach about $50,000 per day by year-end. Contracting cycles give us time to ramp rigs back for opportunities.

31/10/2024 How do you evaluate whether to preservation stack a rig and how does this vary by asset class?

Preservation stacking costs mid-single-digit millions, and reactivation takes longer than warm stacking. We would only preservation stack if there were no line of sight to opportunities within about two years. Given today’s robust pipeline, we favor warm stacking to prudently manage cash and capital while retaining line of sight to accretive opportunities into 2026.

For rigs like the DPS-5, which operate in markets with shorter-term contracts, we aim to secure EBITDA-positive programs in 2025. If we believe short-term work cannot be secured without high in-between costs, preservation stacking may be considered. Ultimately, the decision depends on visibility into near-term opportunities.

31/10/2024 Are you using warm stack periods for rig upgrades ahead of 2026 demand?

Yes. As we ramp rigs down, we minimize costs and cash spend while allowing for a 90-day ramp-up to return to work. That downtime provides an opportunity to complete upgrades without later interruptions. For example, we may install hard piping for managed pressure drilling (MPD) systems so rigs are ready to operate in MPD mode.

We are also pursuing environmental, health, safety, and emissions (EHSE) upgrades to lower fuel usage and emissions by running with fewer engines. These prudent investments during warm stack periods strengthen our fleet as projects pick up in 2026 and beyond.

20/02/2025 How do you manage operating costs when floaters are idle or warm stacked?

For a drillship like the DS-10, costs can be reduced to about $60k per day through minimum safe manning, reduced maintenance, and avoiding fuel burn at quayside. For a semi, we have reduced costs closer to $50k per day. These compare with average OpEx of about $150k per day when operating.

It typically takes about three months to ramp costs down from operating levels to warm-stack levels, and three months to ramp back up when reactivating.

01/05/2025 Are you seeing interest in performance-based contract incentives, and how do you balance the risks and rewards?

Yes. Performance bonuses are already part of our contracts, though not at the same scale as some recent awards. They usually target drilling ahead of the customer’s authorized expenditure or reducing days. We are open to these arrangements, but they can be complex since drilling involves multiple services beyond our control. While we consistently deliver over 96% uptime, bonus outcomes are not always directly tied to our work.

These schemes work best in long-term development programs where efficiency improves as more wells are drilled. Not all customers favor them, but some are interested. I do not expect them to become the industry norm. For customers who want them, we are open to structuring incentives where they make sense.

31/07/2025 How do you weigh stacking costs versus taking short-term contracts?

Our strategy has not changed. We will not carry high operating costs during idle periods just to chase short-term work. We only consider gap-fill opportunities that align with the end of a current contract or the start of a new one.

Doing otherwise would create poor economics and operational inefficiencies. If we find a contract that starts shortly before a long-term program and it makes sense financially and operationally, we will consider it. But keeping rigs active solely for short-term contracts is not part of our approach.

02/09/2025 What is your latest estimate for all-in reactivation costs?

I don’t think there has been a large change in reactivation costs. There has been a little oil field inflation, but we have a strong track record, having done this six times with a great project team. We have consistently delivered rigs successfully, and because we stacked our own rigs, we fully understand what it takes to bring them back. We have typically been on the lower end of the industry range due to our technical and engineering capabilities. I believe $120 million to $125 million on average still holds for our assets.

The timing would still be about a year to complete a reactivation project.

Competition

02/08/2022 Is demand growth shifting toward more direct negotiations versus tenders?

Yes, we are seeing more discussions around direct negotiations, but it depends heavily on geography. In regulated environments like Brazil and West Africa, tender processes are required. In the Gulf of Mexico, direct negotiations are more common due to less regulation and shorter-term visibility.

As demand grows and rig availability tightens, more direct negotiations are occurring alongside tenders. This trend has historical precedent and reflects the geographic differences in contracting practices.

02/08/2023 How would you characterize leading-edge jackup rates for standard and heavy-duty fleets?

You are right. The North Sea, particularly the UK side, continues to disappoint. But our high-spec fleet can find opportunities elsewhere, and leading-edge jackup rates vary by geography. We are pleased to see the 247 working in Australia on a CCS project at a leading-edge rate of 180. We also have contracts in Australia at 150 and above. Southeast Asia is improving, and rates there are well into the hundreds.

Not every contract will be signed at those levels. Rates vary by market, local operating costs, and supply-demand balance. But overall, jackup rates are well into the hundreds and much stronger than last year.

02/08/2023 How should we think about ARO jackup leases expiring in 2024–2025 compared with leading-edge rates?

Saudi Arabia is a long-term sustainable market with plenty of work. Rates there, like elsewhere, have been rising. While it is early to discuss those leases, we see attractive opportunities in Saudi. It is the largest high-spec jackup market globally and is often described as the last place that will drill oil wells.

Our strong position with ARO includes owned rigs, leased rigs, and the 20-rig newbuild program. This platform allows us to continue securing attractive work.

02/08/2023 How do you think about pricing strategy for drillships as day rates move higher?

On average, our fleet is high-spec, with about half in the top quartile, and DS-13 and DS-14 will strengthen that. Floater and drillship markets are moving higher. The DS-7 demonstrates this. It is a high-spec rig requiring no major upgrades, operating in low-cost West Africa on a long-duration contract. When bid in January, it was a leading-edge rate, and day rates have since risen into the mid to high 400s.

Rates have progressed from the 300s into the 400s, and we now see bids in the mid to high 400s. We expect them to continue rising as supply and demand tighten.

02/08/2023 Are you seeing new inquiries for North Sea projects given semi shortages, and where else could North Sea jackups find work?

We have been clear the North Sea is challenging through late 2024. In the UK, regulators are considering changes to the tax regime, but so far these have not been enough to spur activity. That said, rigs 92, 120, and 122 are contracted well into 2025, and there is work available, though mostly short term. CCS work is growing, with projects like Northern Endurance, Acorn, and Viking creating longer-term opportunities. Sometimes when rigs leave the region, it spurs regulators and operators to act to retain assets.

Outside the North Sea, opportunities exist in Australia, the Middle East, and Southeast Asia. High-spec rigs can operate across harsh and benign environments if customers compensate for mobilization. Southeast Asia is recovering with longer durations and higher day rates. There is also potential crossover between jackups and semi-subs in shallower harsh environments, though this has not yet significantly impacted jackup demand. Moves like relocating the 247 to Australia provide both opportunity and downside protection if the North Sea recovers.

02/05/2024 Will suspended Saudi jackups pressure day rates, possibly down to $130K–$140K?

Of the 22 suspended rigs, only about half are competitive internationally. High-spec utilization is 95%, which should absorb rigs in an orderly way. Some near-term pressure may occur for contractors fixing rates quickly, but we do not view this as a long-term trend.

We operate 19 rigs outside Saudi, with most in the North Sea, Trinidad, and Australia. Only four are potentially affected, three of which are on long-term contracts. We expect rigs leaving Saudi to be absorbed globally or return to home markets like China or Egypt. We remain patient and confident in opportunities for our fleet.

02/05/2024 Will sidelined rigs face discounts compared to hot rigs for 2–3 year floater contracts?

We do not expect discounts for sidelined rigs. The DS-11, 13, and 14 are among the highest-specification seventh-generation rigs with dual BOPs, and demand for such rigs remains strong. Leading-edge rates for 2–3 year contracts are in the mid- to high-$400,000 range, with potential to rise further.

Average floater day rates have already moved from the mid-$400,000s to $480,000 in the first four months of the year. We expect rates to continue climbing as supply tightens and demand increases. We look forward to placing our rigs in the right long-term opportunities.

02/05/2024 Could DS-10 and DPS-5 see materially lower short-term rates versus leading-edge?

Term contracts of two to three years are in the mid- to high-$400,000s and can reach into the $500,000s. For gap-filling work, we focus on securing the right long-term program first, then evaluate short-term bridge economics. This means short-term rates may vary but are managed strategically.

Growth

03/05/2022 What is IOC appetite for rigs in Brazil, and benefits of having rigs already in-country?

Brazil currently offers the best of both worlds, with strong IOC interest alongside Petrobras, which aims to double production by 2030. Some rigs will roll over, but we also expect incremental demand from Petrobras and IOCs. Entering Brazil requires capital expenditure to meet Petrobras’ specifications. Once established, incumbency provides a significant marketing advantage. That is why we focused on taking DS-4 there last year. Building a critical mass in priority basins is a core strategy, and we intend to expand our presence further.

02/08/2022 Is increased floater demand driving longer contracts, or are operators locking rigs due to shrinking availability?

We see higher activity levels and a strong tender pipeline, but not a broad increase in contract duration. Customers remain thoughtful about making long-term commitments, even though they see work in their pipelines. Other than Petrobras’ current tender for four-year contracts, most deepwater or ultradeep programs are around two years plus options, or three years.

Caution stems from the industry’s tough past seven years, so customers are avoiding very long-term commitments. Still, fundamentals are strong. Of roughly 90 ultra-deepwater floaters in the market, about 30 are on exploration or step-out programs. Exploration activity is a good sign for demand, but contract lengths remain shorter than in prior cycles.

01/11/2022 Do Brazil tenders at $500,000 rates justify bringing DS-7 and DS-8 back, or are other markets possible?

Good observations. I cannot share specifics on our bidding strategy, but I can say economics are attractive for reactivation. Some of the figures you mention include customer contributions to reactivation costs, which were not common a year ago. Those additions are now part of the day rates.

We see opportunities to reactivate assets given demand growth of 7% to 8% annually in deepwater floaters. Discipline is critical. Day rate matters, but so do basin location, customer quality, and contract structure. We concentrate rigs in the Golden Triangle to maximize scale and efficiency. We will be patient and disciplined, bringing rigs like DS-7, DS-8, and DS-11 back only in the right basin, with the right customer, and under the right terms.

02/08/2023 How many idle assets will incremental demand of 12–15% absorb?

We see continuing demand growth. Some rigs may shift regions, but generally rigs under contract are extended. Like peers, we aim to avoid idle time because moving rigs carries economic cost, even with partial compensation.

Demand has risen from 15–20 to 25–30 opportunities we are tracking, and that number keeps growing. The market is tightening, and we expect all attractive high-spec rigs, including DS-11, DS-13, and DS-14, plus some economically viable reactivations, will be needed to meet customer demand.

02/05/2024 What is the outlook for 30 rig opportunities in Africa and the Med, including durations and East Africa?

The 30-plus opportunities across Africa and the Mediterranean are based on contracts longer than one year, starting in 2025 and 2026. About half of these are in Africa, showing strong potential growth in the region. Using Rystad CapEx data, we see a 26% increase in spend from 2022–2030 compared to prior estimates, with Africa showing up to a 52% increase, evenly split between shallow and deepwater.

This supports the 144’s move to West Africa and broader opportunities, including East Africa, particularly Mozambique. Overall, Africa could need seven incremental rigs, making it a bright spot in the market.

03/09/2024 Are customers shifting from near-field to frontier exploration?

Yes. The first step is usually near-field expansion in existing basins, but we are also seeing frontier exploration, such as the complex work in Namibia. We drilled Bacalhau with Equinor in Brazil, and after that program, the rig drilled a rank exploration well in Argentina. Our customers know they need to replace reserves to meet long-term supply targets, so exploration must be part of the plan. The fact that operators are returning to rank and frontier exploration is a very positive sign for the market.

31/07/2025 What is the mix between development and exploration work in contracting opportunities?

As a rule of thumb, longer-term contracts are typically development programs, while exploration tends to fall within shorter-term or option-based work. Customers often build exploration wells into programs to secure rig capacity ahead of market tightening expected in 2027 and 2028.

Exploration opportunities have been growing and generally result in shorter contracts due to their multi-country nature. These shorter programs often serve as a slot for exploration before development begins, whereas longer-term projects are usually focused on development. Thus, opportunistic short-term work is more weighted toward exploration.

Financials

21/02/2023 When could a new capital structure with a revolver and high yield be achieved?

Chris Weber: We have been clear about our desire for a regular capital structure, including a revolver, which requires refinancing our note. We would like to execute this in 2023 and see potential opportunities, and we are already in discussions with our banks.

Importantly, we are not forced to do this. If terms, size, or pricing are unattractive, we will not move forward. For us, this is opportunistic. We want to act if we can secure favorable terms that make sense strategically and operationally without imposing undue restrictions.

02/08/2023 What day rate and duration are needed for strong economic returns on DS-13 and DS-14?

We manage the fleet as a portfolio. Some rigs secure long-term contracts to build a stable backlog, while others are kept available to capture leading-edge rates. With our scale, we can balance both approaches.

Today’s long-term contracts generate north of $90 million in EBITDA per rig annually. We will continue to balance backlog stability with opportunistic exposure to rising rates. DS-11, DS-13, and DS-14 give us three new opportunities alongside rigs rolling off legacy contracts.

02/05/2024 Does 97% revenue underwritten refer to the low end or midpoint of guidance?

It refers to the midpoint of the $2.3 billion revenue guidance.

31/07/2025 Has the dual activity arbitration now been fully resolved?

There is technically a right to appeal, but the bar is very high and limited to procedural issues, not the facts or findings of the arbitration. We are very pleased with the favorable outcome. While we will monitor how it develops, the matter is effectively resolved in our favor.

Outlook & Guidance

22/02/2022 What is the status of DS-11 after TotalEnergies’ exit from North Platte?

TotalEnergies has stepped back and is transferring the project to Equinor, but we have not received a termination notice. If we did, compensation would exceed our commitments. Equinor has indicated its intention to proceed, and we are in constructive discussions on the transition. DS-11 was scheduled to work after upgrades in mid-2024. It is a high-spec rig with strong demand potential, and we remain confident in its future regardless of contract adjustments.

22/02/2022 Could the DS-11 contract transfer directly from Total to Equinor, or require renegotiation?

We will not comment on contract details, but the agreement includes provisions for transferring operatorship along with the drilling contract. The contract remains in full force and effect, and we will see how the process develops.

22/02/2022 Could floater day rates reach $500k in 2023 given current utilization?

Floater market momentum has been strong, with day rates moving from the high-100s last year to much higher levels now. Each contract depends on timing, location, start-up needs, and duration. Drillship availability for late 2022 and early 2023 is extremely limited, which supports a price premium.

We are optimistic about the market and our position. We have re-contracted stacked ships successfully, with only two drillships left that have been stacked less than two years. We established a base load and are disciplined in adding capacity as the market develops. Overall, we feel positive about future opportunities.

02/08/2022 Do rigs rolling off in spring 2023 have options, and what are prospects in West Africa and Brazil?

DS-15 in Brazil has options, and we expect it to continue with Total given strong activity there. In West Africa, there is a solid pipeline of tenders. Our priority is to find the right opportunities for rigs to roll onto.

There is plenty of work, and it is an attractive time to have rigs available. Recent fixtures are generally 18 months to 2 years, with some in Brazil stretching to 3–4 years. We may use short-term work to bridge into longer-term programs. The rigs are attractive, have strong track records, and customers like them. DS-10 and DS-15 options are now disclosed in our fleet status report.

01/11/2022 Are customers starting to seek longer contracts as day rates rise?

Hi, Greg, I think that is a fair observation. Leading-edge day rates for drillships have doubled from about $200,000 in 2020 to $400,000 in 2022. In the last down cycle, many customers were caught holding long contracts and spent heavily on terminations. That has created reluctance to commit longer than their immediate programs require. Exploration programs are shorter, trending toward one year as rig availability tightens. Development programs are typically one to three years, and I expect this pattern to persist.

Even so, reactivation economics can work well. For example, on the DS-17 we secured an 18-month to two-year contract at rates in the high 300s to low 400s, which is attractive. While some stacked rigs and stranded assets remain that can re-enter the market at these levels, it is still a market where we can make good business.

01/11/2022 How do you avoid cannibalizing the active fleet given weaker backlog than past cycles?

You are exactly right. Our first priority is to keep the active fleet fully utilized. We will only bring back stacked rigs when opportunities justify it. Unlike prior cycles, we do not yet see long-term four to five year contracts across the floater fleet, which means we must be careful in fleet management.

Still, when the initial reactivation program delivers meaningful returns, we do see incremental demand that allows additional reactivations. The key is balancing timing with discipline so that we grow without undermining our existing fleet.

01/11/2022 Outside of ARO, could there be another jackup newbuild cycle?

In the medium-term, no. Building jackups is less costly than floaters and more yards are capable of building them, so the chance of a newbuild cycle is higher for jackups than floaters. That said, we are still a long way from seeing that happen.

01/11/2022 How do you decide where to reactivate cold-stacked floaters across the Golden Triangle?

We currently have three high-spec drillships in each part of the Golden Triangle. Ideally, we would add one more in each corner, but we will deploy based on the most attractive opportunities. Each basin has specific requirements, particularly Brazil and Petrobras, which demand certain equipment setups and limit upfront mobilization payments to around 70 days of day rate. That means day rates must reflect additional CapEx and mobilization.

There are also opportunities in Africa, both West and North, that could support reactivations. Recent tenders show a difference between operators already active in Brazil, who bid to maintain operations, and those bringing rigs from outside, who need compensation for upgrades and mobilization. With scale positions in each basin, we have flexibility to act where the economics are strongest.

21/02/2023 Is North Sea recovery in 2024 driven by customers or your own forecasts?

Matt Lyne: In 2022 we were optimistic about 2023 demand, but the windfall tax created headwinds, causing operators to pause and reassess project economics. This led to short-term delays rather than cancellations.

We now see projects rescheduled into late 2023 and 2024, providing a stronger outlook. This view is largely driven by customer discussions in the North Sea. Anton Dibowitz: It is mainly about timing. Projects have shifted to the back half of 2023 and into 2024 as operators adjust their capital allocation.

02/05/2023 What costs are involved in reactivating a drillship and how could that impact EBITDA guidance?

Chris Weber: From a cost perspective, we’ve guided $65 million to $75 million for reactivation, and we are at the top end around $75 million. About two-thirds of that would be expensed and one-third capitalized, so there would be an EBITDA hit in the year if another project starts.

Anton Dibowitz: On opportunities, many rigs are being recontracted by the same customers in the same basin, but we also see incremental opportunities for reactivated rigs, stacked drillships, or stranded assets. With day rates in the low to mid-400s and potential to go higher, we remain clear that we seek to recover reactivation costs and earn a meaningful return under the initial firm contract, which is achievable given current market conditions.

02/05/2023 Will leading-edge day rates exceed $500,000 per day by year-end?

Chris Weber: Day rates have more than doubled over the last two years from the low 200s to the mid-400s, with the general clearing range today in the low to mid-400s. Some contracts fall outside that band, either lower or significantly higher. For example, we signed one last year that averaged over $600,000 per day. Overall, day rates continue to grind higher despite occasional fixtures that are not sequentially higher.

Chris Weber: It is possible we will see rates above $500,000 a day as the market tightens, but it depends on the type of contract, market, and rig positioning. Rolling an existing rig may favor contract duration and cash flow, while reactivating requires discipline and higher day rates to cover costs. Effective rates vary depending on circumstances, but the upward trend continues.

02/05/2023 At what oil price would customers pull back activity given recession concerns?

Anton Dibowitz: Customers are focused on long-term pricing, not short-term spikes. Even when Ukraine drove prices higher, we did not see a major shift. As long as oil is above $60 to $70 per barrel, customers remain committed to replacing reserves after years of underinvestment. Demand continues to grow and customers, making record profits, see a strong need to maintain production.

Anton Dibowitz: We are now discussing contracts beyond sanctioned projects, as customers want long-term access to drillships. That shows confidence in the market and industry outlook. Offshore remains attractive with meaningful production potential and lower carbon intensity compared to U.S. land barrels, which are in decline. The market is volatile, which is why we maintain a disciplined capital structure, low leverage, and ample liquidity to stay focused and value-driven for the long term.

02/05/2023 If you purchase the DS-13, how long until it could begin a contract?

Anton Dibowitz: Timing for the DS-13 and DS-14 would be similar to reactivating one of our preservation stacked assets. We now expect reactivations to take about 12 months, versus six to nine months a year ago. That is the plan for the DS-17 and DS-8, which are currently on schedule. I would think of the 13 and 14 in the same timeframe.

05/09/2023 What payback period do you expect for DS-11?

The DS-7 contract was bid in January, and since then the market has improved. With 10 of 11 rigs working and supply dwindling, we have raised our hurdle rates. We will be thoughtful and opportunistic on DS-11, expecting a higher hurdle and not necessarily the same one-year payback as DS-7.

05/09/2023 Could leading-edge day rates reach $600,000 next year?

Yes, newbuild parity is the limiting point. Building a rig today would cost north of $1 billion, so day rates could theoretically reach very high levels. Practically, there are reasons they may not, but limited supply will pressure rates. Only a few stranded assets remain, and opportunities outnumber rigs. This imbalance should tighten the market further. Customers may also favor high-spec semis as an alternative, creating some balance. Still, $450,000 to $600,000 day rates with $150,000 OpEx are highly attractive economics.

05/09/2023 Do you expect another newbuild cycle?

No. To justify building, costs in Korea would exceed $1 billion, requiring day rates near $900,000 with 90% utilization for 30 years. That math is unrealistic. We do not expect another newbuild cycle.

05/09/2023 How many contracted floater rigs do you expect by end of next year?

Today there are about 125 to 130 rigs. By the end of next year, most high-spec stacked and newbuild rigs will be needed in the market. Lead times mean not all will be working immediately, but we expect to be well on our way toward a much tighter market.

07/11/2023 How many five-year opportunities exist and are they region-specific or broad-based?

Good question, Eddie. We know of at least two international oil companies considering long-term jobs beyond the typical two to three years. That is a strong sign, as demand is projected to grow around 8% annually, and customers want to secure attractive rates in advance.

There is always a trade-off with longer contracts. You may take a slightly lower rate for longer earnings visibility, but not at any price. We are comfortable with current mid-400s rates and expect them to increase. We have walked away from unattractive opportunities before and will continue to do so. If a long-term contract is sensible and the trade-off manageable, we will take it; otherwise, we let others pursue it.

07/11/2023 How much stacked and stranded new-build drill ship capacity could realistically join the active fleet?

On stranded new-builds, we see about five rigs as credible entrants, including the DS-13 and DS-14, which are the highest-spec seventh-generation units and the only ones with two blowout preventers. On stacked drill ships, you could argue up to 10, but realistically closer to four seventh-generation rigs are most likely, depending on age, stacking duration, and special periodic survey cycles. Reactivation costs will also factor heavily.

Overall, the pool of attractive stacked and shipyard assets is shrinking. Our priority remains utilizing the active fleet first, with reactivations tied to incremental demand. Drill ship utilization has been around 90% for a significant period, and we expect new demand to absorb the remaining attractive assets over the coming years.

07/11/2023 How do operators view rising day rates given constrained supply and project needs for 2024–2025?

We feel very good about the market today and the longevity of the cycle. Lead times for tenders are increasing, and customers are extending contract durations by connecting programs. This shows they recognize tightening supply and want to secure rigs for longer. Utilization is rising, supply is decreasing, and these supply-side dynamics point to continued improvement in day rates.

No operator wants to pay more than necessary, and we do not want to put rigs to work for less than we can achieve. It comes down to simple supply and demand. Day rates do not move in a clean curve, but as the market tightens further and incremental demand enters, we gain more leverage. As long as demand continues to grow into a sustained cycle, rates will keep moving upward regardless of personal opinions on where they “should” be.

22/02/2024 How do you view the trend in floater day rates through year-end?

Over the last 12 to 18 months, lead times for tenders have increased and contracting durations are lengthening, which supports the longevity of the market. Majors are even picking up rigs on what could be called speculative demand, as seen in a recent joint venture, securing rigs before all programs are approved to lock in favorable rates. That shows the strength of the market.

We are cautious about predicting exact milestones, but leading-edge day rates have continued to grind higher on average. The market is tightening with fewer idle assets and growing demand, which will drive rates higher over time. There may be gaps due to lead times, repositioning, or upgrades, but overall we remain positive on the trend.

22/02/2024 If demand is tight, why do oil companies retain leverage to cap pricing?

Leading-edge day rates are generating about $100 million annually of EBITDA, which reflects a strong market. Incremental demand continues to emerge while attractive stacked capacity has dwindled to around 10 rigs. This tightening balance will keep pressure on day rates to move higher over time.

We see this as a long-duration cycle. The key is to stay patient and disciplined as we reintroduce capacity like the 11, 13, and 14 into the market at the right time.

02/05/2024 Is 2024 EBITDA guidance of $500–$600 million maintained, and what is needed from DS-10 and DPS-5 to hit midpoint?

Yes, we are maintaining guidance at $500 million to $600 million. To reach the midpoint, we need incremental work on the DS-10 and DPS-5. The organization is focused on securing that work, and discussions with customers are active.

At present, 97% of 2024 revenue is underwritten. We modeled some idle time for these rigs, but as last year showed with the DPS-5, we can fill gaps with opportunistic work. We must see pieces fall into place to deliver the midpoint of guidance.

02/05/2024 Can you quantify the expected increase in contracting pace in 2H 2024?

We cannot assign a precise percentage, but tendering activity for 2024 is very solid. Seasonal fluctuations may shift awards between quarters, particularly as long-term, multi-jurisdictional programs require extended approvals. Based on active tenders, we expect an acceleration in contracting pace and awards over the remainder of the year.

02/05/2024 Is strong revenue efficiency continuing in Q2, and what underpins guidance?

Revenue efficiency remains solid in Q2, and EBITDA guidance is consistent with expectations set earlier in the year. Some may model a linear progression, but we see more of a ramp into Q3 and Q4 due to rigs transitioning, special surveys, and relocations. For example, the DS-247 is moving to Australia, and the DS-7 starts in midyear.

Compared to Q1, Q2 growth is driven by more operating days in the floater fleet, including contributions from DPS-5 and DS-12, plus rigs rolling to higher rates. Jackups that were idle or in preparation in Q1 are returning to work in Q2. We expect EBITDA to increase almost 80% from Q1, with further growth in the second half as DS-7 begins, DS-16 contributes, and North Sea and Australian jackups add higher-rate work.

01/08/2024 What is your outlook for net incremental seventh-generation deepwater demand through 2026?

From our prepared remarks, we see around 30 opportunities with durations averaging 2.5 years. Of those, about 10 could provide incremental opportunities by region. Customers generally prefer seventh-generation rigs, and 12 of our 13 drillships fall into that category. Not all of those 10 will necessarily be filled by sideline capacity, but our sidelined rigs , the DS-11, DS-13, and DS-14 , are the highest-spec available and well-positioned for those opportunities.

01/08/2024 Are you seeing shrinking lead times for floater contracts like in other regions, and should we worry about slower contracting pace in 2025?

We are not concerned about the pace of contracting, which is not linear through the year. Data can be influenced by geography and mix. Formal Petrobras or West Africa negotiations may have longer processes compared to more direct negotiations elsewhere. Overall, we see lead times increasing as demand and supply dynamics tighten into late 2025. Contract durations are extending, and day rates continue to climb, with six fixtures above $500,000 a day so far this year versus only two last year. These trends support a constructive outlook for the floater market.

03/09/2024 What is the status of DS-10 in Nigeria and near-term work outlook?

The DS-10 has been drilling in Nigeria since 2018 with excellent performance and a strong crew. Customers are satisfied, but the client is pausing activity, leaving the rig without immediate work. We expect incremental demand in Nigeria over the next few years, so the goal is to find short-term work until long-term programs begin in late 2024 or 2025. The DS-12 is also rolling off next year, creating short-term dislocations. Our commercial team has historically kept rigs working continuously, though I cannot promise the same outcome this year. Some programs we were pursuing slipped into 2025 or were split, so for now we are chasing Q4 work, which led us to adjust guidance.

03/09/2024 Do you expect near-term day rates to remain in the high 400s to low 500s?

We have never projected a sudden hockey-stick move in day rates. This is a structural upcycle where rates continue to grind higher, though not every contract is higher than the last. Comparing second-half 2023 with 2024, average floater day rates moved from 450 to 480, with several contracts above 500 already this year. That shows the trend is upward. Near-term, rates may show more variability as we focus on keeping crews together and rigs working, but customers are willing to pay for the right rig. One client is paying a significant portion of day rate just to hold a rig for six months. Increasing contract durations and higher average rates confirm the market’s positive direction.

03/09/2024 Where will leading-edge deepwater contract day rates likely be by 2026?

I try to be realistic, not overly bullish. By late 2025 and into 2026, contracts will reflect new demand visibility, including 30 identified opportunities, West Africa growth, and potential sidelined capacity. This should tighten the market and support higher day rates. We openly acknowledge 2024–2025 as a period to manage through, but by this time next year, I expect day rates to be solid or higher versus today.

03/09/2024 Could day rates reach the inflation-adjusted $800,000 peak of 2011–2014?

We do not expect to reach $800,000, nor do we need to. Economics of new builds do not support that level. At current day rates in the high 400s to low 500s, a rig can generate around $100 million in EBITDA, which is a very strong position for the company and industry. Customers are not pushing back on rates, and there remains headroom. While the absolute peak is uncertain, the economics clearly allow for further upside without needing to return to historic extremes.

03/09/2024 What is the expected cadence for reactivating DS-11, 13, and 14?

Three years ago we had four ships working; now we have ten, and the three best assets still sidelined. These are dual BOP, 7th generation rigs, and we have ongoing discussions with interested customers. We have declined deals that lacked attractive economics, focusing instead on maintaining high utilization of the active fleet. Based on demand trends, bringing back about one rig per year over three years is reasonable. None of the rigs reactivated so far displaced incumbents; all came back for incremental demand. With demand expected in late 2025–2026, we will be patient and deploy these rigs only under the right opportunities.

03/09/2024 Update on ARO rig suspensions and Aramco pricing requests?

We have not received any pricing reduction requests at ARO, though I know others in the industry have. For the suspensions, rigs 147 and 148 will handle those. Earlier this year, 22 rigs were released, about half of which can compete internationally. We’ve seen them transition in an orderly fashion into the market, with leading-edge jackup day rates still around 150. Internationally, we see good opportunities, particularly in Trinidad and Australia, where premium rates are paid for super high-spec jackups. While the release of rigs in Saudi creates challenges, utilization remains above 90% and leading-edge rates around 150, so this is a manageable transition.

03/09/2024 Are leading-edge jackup rates higher than 150 in some regions?

Yes. In markets like Trinidad and Australia, rates can reach the high 100s. Australia is a higher-cost area, but customers are willing to pay for the right rig, especially for specialized work such as carbon capture and storage. Rates vary, as some contractors bid lower to enter markets. We will continue to be patient and disciplined, as with rigs 143, 147, and 148, avoiding desperation to force entry. We see incremental demand and will wait for the right opportunities.

31/10/2024 What is your outlook for day rates over the next 12–18 months?

It is gratifying to see day rates increase quarter-over-quarter this year. We expect some variety next year with whitespace, but customers remain willing to pay mid- to high-400s and into the 500s for high-specification assets in the right markets. Recent contracts, like the 2017, demonstrate this.

Rates will depend on asset quality and the market, with some variety as customers chase bridge work or shorter programs before longer-term projects. Overall, we see the outlook for day rates as solid.

31/10/2024 Are demand deferrals affecting both deepwater and shallow water, and when might FPSO bottlenecks ease?

It is mainly a deepwater phenomenon tied to large, long-term developments. Yards are very busy, FPSOs are taking longer to complete, and delays have occurred. Customers are prudently aligning drilling schedules with when FPSOs and production equipment will be ready.

We see this as a transitory issue rather than a structural one. Even if FPSO deliveries are delayed a year or two, the supply chain ultimately stabilizes, much like what we have seen with oilfield equipment deliveries.

31/10/2024 What is the updated outlook for DS-11, 13 and 14 and potential scrapping of older assets?

Our fleet has organic growth potential with DS-11, 13 and 14, all high-spec seventh generation rigs. We acquired 13 and 14 at attractive prices and expect them to be accretive as opportunities materialize in 2026 and beyond. For now, our priority is keeping the active fleet highly utilized. These rigs will return when the right opportunities arise, but the timeline is slightly later than expected six to nine months ago. Warm stacking remains prudent cash and fleet management.

It is also possible we will see less capable sixth generation assets leave the market. Preservation stacking or maintaining lower-spec rigs for long periods does not make sense, so some capacity could come out of the market over the next year.

31/10/2024 How do you prioritize strategy for idle assets during current market softness?

We feel good about fundamentals and the pipeline of opportunities into 2026 and beyond. Scale allows us to manage our fleet as a portfolio, lowering costs and warm stacking rigs during near-term headwinds while waiting for the right opportunities.

Our focus is on long-term accretive programs that support earnings and cash flow growth. If meaningful bridge programs exist, we will put rigs to work. What we will not do is incur full operating costs chasing low-value, non-accretive opportunities. We are willing to warm stack rigs until attractive long-term contracts emerge, while relying on our scaled fleet and rigs on long-term contracts to carry us through.

31/10/2024 Why does the stock trade as if the cycle is ending when fundamentals remain strong?

Markets can be fickle, but global hydrocarbon demand continues to grow. Offshore production, especially deepwater, is set to remain a solid and increasing source due to compelling program economics and the need for secure, affordable energy. Our customers must replace reserves as depletion continues, which supports strong demand.

We feel confident about the strength and duration of this cycle. Our focus is on managing effectively through the upcycle. While we cannot speculate on stock movements, we remain positive about the long-term fundamentals driving our business.

31/10/2024 At $70 oil, what portion of offshore projects remain profitable, and where do deepwater projects stand?

The $70 figure applies to all offshore. Our investor deck shows production cost bands by price level, with the majority of offshore production well clear of $70, in the $20 to $40 range. Many of the large developments customers are pursuing fall into that $20–30 band.

This provides a wide margin versus current spot and long-term Brent, making program economics compelling. Deepwater projects are included in this, and most remain attractive well below $70 per barrel.

20/02/2025 How much of the $530m 2025 EBITDA midpoint is already booked versus dependent on new awards?

When we look at the midpoint, about 94% of revenue is contracted for the year. The remaining 6% is later in the year, but roughly 94% is already secured.

20/02/2025 Does this 94% contracted level tie to the midpoint of guidance?

Yes, that percentage is tied to the midpoint.

20/02/2025 What is the likelihood one of DS-11, 13, or 14 is working by year-end 2027?

Our focus is on putting the active fleet to work, with several rigs rolling next year. The DS-11, 13, and 14 are high-spec seventh-generation assets with two BOPs and strong thrust capacity. Based on the pipeline of activity we see, there will be good long-term opportunities for them.

We are going to be patient in returning them to the market. This is not about a calendar target but about timing the market. Offshore demand continues to grow, and these rigs will have their place, but we are in no rush to reactivate them in the near term.

20/02/2025 What gives you confidence that 2026–2027 programs will materialize on schedule despite delays in this industry?

We review the same macro models and customer CapEx plans as everyone, and those spending plans continue to rise into 2026 and 2027. More importantly, I spend significant time with our customers, both in their offices and offshore. The programs they have on the books are being actively planned, and they are seeking reliable partners to deliver them.

Yes, projects can move left or right due to macro or supply chain issues. But based on direct conversations with customers about specific programs, I feel very confident about the demand pipeline in 2026 and 2027.

20/02/2025 Are ultra-deepwater rigs fixing in the mid-high $400k range and sixth-gen in mid-$300k?

We only have one sixth-generation rig, the DS-4, contracted until Q4 2027. For us, the focus is seventh-generation rigs, which customers prefer for long-term programs. Recent fixtures for high-spec assets have been in the mid to high $400k range, and that is where the market sits.

Our strategy is clear: deliver strong operations for customers, minimize costs while rigs are idle, and place our high-spec fleet into attractive long-term contracts. We will be patient and disciplined in pursuing those opportunities.

20/02/2025 Does 94% contracted revenue midpoint also translate to EBITDA?

Yes, that is a fair way to look at it.

20/02/2025 Do the two high-spec floater opportunities under discussion have 2025 start dates?

Those opportunities are more likely to start in the first half of 2026. There is little work starting in 2025, and our priority is to secure long-term contracts that can span years and include follow-on work.
Once long-term programs are secured, we may look at adding short-term work ahead of them if it makes sense. What we want to avoid is ramping rigs up and down for small contracts that do not lead into those long-term development programs.

20/02/2025 Are smaller tie-back or exploration programs also being delayed, or just large projects?

Smaller tie-back and exploration programs are not being pushed back disproportionately. They act as gap-fill after operators allocate capital to their major development programs.

These decisions depend on operator capacity and budget in a given year. They remain a secondary priority relative to large-scale projects but are pursued when circumstances allow.

01/05/2025 Has the move lower in day rates created more subsea tie-back opportunities in the Gulf of Mexico?

I would not directly link the two. For the past several quarters, we have expected industry white space in 2025, with most Gulf of Mexico and international programs starting in 2026 and beyond. That outlook has not changed, despite some macro uncertainty. Customer behavior remains consistent with what we had expected.

There will always be opportunistic operators who may initiate wells in 2025, but this is not rate-driven. As we enter this period of white space, rates will vary, yet we have not seen a material shift. Most term contracts are still starting with a “four” in front of them.

01/05/2025 What pricing levels are you seeing on the five-year jackup extensions in Saudi, and do they signal the end of rig suspensions?

We cannot disclose day rates without customer approval. What I can say is that rates are above historic levels, and back-calculations by some observers have been fairly accurate. These are solid contracts, and we are proud of the work done with ARO to secure 25 years of backlog on those rigs. We are very comfortable with them.

As for Saudi Aramco’s future plans, ARO is a key partner and part of their infrastructure. We continue building new capacity through IMI, and our joint venture with Aramco is strong. With these extensions, from Valaris’s perspective, one leased rig rolls in 2027 and the rest into 2030, which we are very pleased about.

31/07/2025 Of the 30 floater opportunities, how many have been delayed or replenished this year?

A year ago, we were tracking about 30 opportunities, but many were pushed forward by roughly a year. We expected awards to accelerate in 2024, and that has happened. The pipeline remains at about 30 because as contracts are awarded, new ones enter the set. This is not the same 30 from last year. Customer discussions and ongoing awards give us confidence that these contracts will continue.

While some timing has shifted, windows for rig startups are narrowing, and consistency from customers is improving. These delays are mostly linked to equipment delivery rather than cancellations. The trend has moved from “if” to “when,” which is a very positive signal.

31/07/2025 What are your thoughts on leading-edge day rates trending into low 400s, and could they soften further?

Seventh generation utilization could exit 2026 in the 90s, which is very positive. As utilization increases, day rates typically follow. The pace will depend on availability, tendering, and duration of contracts. Recent contracts we secured were all in the 400s, which shows the resilience of the market.

This comes down to supply and demand. When utilization tightens, day rates rise, and when availability increases, day rates face pressure. We expect some pressure through 2025 as rigs are released and utilization troughs in early 2026. Still, with most of our rigs fixed above 400, and seventh gen rigs maintaining a clear premium over sixth gen, we expect them to lead the recovery and exit 2026 at high utilization with upward pressure on day rates.

31/07/2025 When might cold-stacked drillships be reactivated, 2027 or later?

We will not speculate on specific timing. Our near-term focus is on the active fleet and securing contracts for the DS-12. Three of our four rigs with near-term availability are already fixed, and we see good opportunities for the DS-12 in 2026.

As the market tightens over the next couple of years, having three high-specification seventh generation rigs with dual blowout preventers on the sidelines gives us valuable optionality. We will bring them back when the market is ready, but we will remain patient and disciplined.

31/07/2025 What is your outlook on Petrobras tenders for Buzios, Mero and a potential third round?

It is positive to see Petrobras back in the market. The consensus among peers and analysts is that Petrobras will maintain a flat rig count through the end of the decade, which shapes their tendering schedule. Our intelligence suggests the current Buzios tender under evaluation could award more than one rig, possibly three or four. A follow-on tender could look similar, though formally it starts with one.

Petrobras demand for high-spec rigs is a key driver of global floater demand. Alongside Petrobras, we are also seeing exploration work from IOCs such as Equinor and Shell. This combination of stable Petrobras demand and growing IOC activity points to a very healthy Brazilian market over the coming years.

31/07/2025 What is the current Saudi rig count outlook and your position there?

Saudi is currently running a rig count in the mid-50s, slightly above pre-ramp-up levels of 2022–2023. There will always be some fluctuation in customer needs, but from our perspective with ARO, we are in a strong position.

We executed extensions last quarter, and our Valaris fleet is largely contracted through the end of the decade, with only one rig rolling in 2027. This gives us good visibility and confidence in our Saudi position.

02/09/2025 What is your outlook for the jackup market, including benign and North Sea segments?

Jackups are an important part of Valaris and a productive business for us, adding scale, customer relationships, and earnings. Our position includes the 50/50 ARO Drilling joint venture with Saudi Aramco, where we lease seven rigs. This year we extended five of them through 2030 at significantly higher rates. Six rigs are contracted through 2030 and the other through 2027. We are selective in the jackup market, operating on long-term contracts in Qatar, Trinidad, and Australia, where high-spec assets command premium day rates. Despite Saudi releasing rigs, global jackup utilization has remained at 90% or above, making this a strong cash-generating market.

On the harsh environment side, we have a leading North Sea presence with solid contract coverage and customer relationships. While some operators have shifted focus to other basins, we see about 20 opportunities across the UK, Netherlands, and Denmark. Our jackup fleet is 70% contracted for 2026 and 60% for 2027. Year over year in 2025, we expect growth in both average day rates and operating days. Overall, the jackup business remains a strong contributor of cash flow and EBITDA.

02/09/2025 What oil price assumptions underlie your outlook for the 2026 cycle?

We see customers rotating from short-cycle onshore projects, which struggle at current prices, to large-scale offshore developments. These programs provide scale, compelling economics, and lower emissions intensity. Data from RESTAR indicates that 75% of expected projects over the next three years are economic below $50 per barrel.

With the forward strip north of $65, offshore development looks resilient. Our discussions with customers confirm this rotation, with expectations for increased exploration and greenfield development. We feel confident about the outlook.

Risks & Macro

22/02/2022 Could expected West Africa tenders slip into next year?

West Africa tenders usually involve long cycles and strict regulation, so operators generally plan ahead to secure rigs on schedule. Timing depends on regulatory approvals and local company processes. Some projects may need re-planning if rigs are unavailable, but activity is picking up in Angola and Nigeria, and new discoveries in the region support growing demand. Overall, we see strong momentum in West Africa.

22/02/2024 Will Saudi curtailments reduce jackup demand or affect your leased rigs?

It is still early to judge the exact impact, but we believe it will be minimal to none for our business. Saudi delayed expansion of Safaniyah and Manifa, two oil-focused fields, but expects to develop resources and sees increasing long-term demand for oil and gas. The global jackup market is very tight with active utilization near 95% and the rig count at its highest in almost nine years. We also see 10 to 15 incremental rigs of demand outside and inside the Middle East.

Valaris has eight rigs leased into ARO, with two more entering under new contracts this year. Saudi Aramco and the Kingdom remain committed to the ARO joint venture, and the IMI newbuild program is a cornerstone of Saudi Vision 2030. Two of our leased rigs are on gas fields, not the focus of recent announcements, and overall this represents about 5% of our backlog. We are comfortable with our position in Saudi and globally.

20/02/2025 What are Aramco’s plans for jackups, and do you expect further suspensions or recontracting?

I am not aware of any discussions about additional rig suspensions in Saudi Arabia. I cannot comment on other fleets, but for our rigs, we secured short-term extensions at the end of last year to support ongoing talks.

“Advanced discussions” is accurate. They are constructive, and if needed, further short-term extensions will help conclude them. I feel good about being able to roll those rigs in Saudi and continuing our strong relationship with ARO to support Aramco’s needs in the kingdom.

01/05/2025 At what oil price level could offshore FIDs begin to be delayed?

We have not seen any offshore final investment decisions (FIDs) or programs pushed back. We remain in ongoing tenders and customer discussions, particularly for long-term opportunities in 2026, 2027, and beyond. These are long-cycle developments that will produce toward the end of the decade, and we have seen no changes so far.

While macro uncertainty has increased, offshore project economics remain compelling. They are attractive well below current oil prices and even below the five-year forward curve. Offshore production remains advantaged relative to other sources, which is why customer behavior has not materially changed.

31/07/2025 How are customers feeling about the current macro environment compared to earlier this year?

Customers have not lost confidence. Offshore projects remain highly economic, with more than three-quarters of expected projects over the next few years breakeven below $50 per barrel. Even with OPEC+ adding supply and geopolitical uncertainty, oil has held in the mid-60s, which many would have doubted six months ago.

As a result, customers feel confident contracting rigs and moving ahead with developments. Compared to earlier in the year, we see a more constructive outlook from them and a willingness to advance programs.

Disclaimer:

The following transcript and Q&A have been generated with the assistance of Artificial Intelligence (AI). While we strive for accuracy, completeness, and clarity, the content may contain errors, inaccuracies, or misinterpretations. Neither the company featured in this document nor ValueBridge assumes any responsibility or liability for the accuracy, reliability, or completeness of the information presented.

This material is for informational purposes only and should not be construed as official company communication, financial advice, or a definitive representation of the company’s views. Readers should independently verify any information before making decisions based on it.

NEXGEL develops and manufactures advanced hydrogels, supplying both branded consumer products and medical-grade contract manufacturing. Its gels are 90% water, biocompatible, and uniquely adhesive, which makes them the default choice for large partners like AbbVie, STADA, and Cintas. Consumer beauty subsidiary Silly George generated $380k in one month on Shopify, with consumer product gross margins of 70–75% and contract manufacturing targets of 35–50%. Cash burn improved from $1.1m in Q2 2024 to $350–400k in Q4, supported by cash reserves of $3.3m. Plant utilization remains in the high teens, leaving significant excess capacity to support growth. Management projects $13m revenue in 2025, with about half from Silly George, while AbbVie’s delayed launch could meaningfully expand scale in 2026.

Catalysts & Milestones

2023 - Halion supply agreement established with meaningful revenue potential

2023 - Strong amblyopia patch adoption following APOS Conference exposure

2024 - MDR compliance in Europe expected, enabling Class 1 device sales and later Class 3 clearance

2024 - Haleon product launch targeted toward year-end

2024 - Cintas revenues expected to begin in Q4 with reorder potential

2025 - Innovative Optics sales to begin mid-year

2025 - STADA second enzyme launch scheduled in Q4

2025 - AbbVie Acoustic device shipments expected Q2, with launch still pending

2026 - AbbVie console launch delayed into early 2026, major revenue inflection if successful

Investment Highlights

• Consumer brands achieve 70–75% gross margins, supporting profitability

• Silly George posted $380k July revenue, nearly half of 2025 projections at $6–6.5m

• Cash burn reduced from $1.1m in Q2 to $350–400k in Q4

• STADA contributing $500k–700k annually with additional enzyme launches ahead

• Contract manufacturing margins range 35–50%, with utilization below 20% allowing scale-up
  
  

Future Growth Drivers

• AbbVie RESONIC and Acoustic device launches, with recurring gel pad usage

• Expansion of STADA enzyme portfolio across multiple digestive indications

• Cintas rollout with nationwide distribution and strong reorder visibility

• Silly George retail expansion into Sephora, Ulta, and large pharmacy chains

• European commercialization enabled by MDR compliance and regulatory approvals
  
  

Risk Factors

• AbbVie launch delayed twice, now targeted for 2026, creating execution risk

• Consumer product growth volatile despite strong $380k monthly sales

• Tariffs at 30–35% manageable, but 150% escalation would force costly relocation

• Cash burn still $350–400k quarterly, requiring continued margin improvement

• Retail expansion risk from poor sell-through or returns hurting brand equity

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Capital Allocation

13/11/2023 Do you still confirm you will not need additional cash to reach profitability next year?

Yes, we do not expect to need cash to reach profitability. Our cash loss last quarter was well below $500,000, and we still have $3.3 million. With our large-company partners, we avoid the long payment terms typical of retail, which helps cash flow.

We project profitability before cash runs out, with a solid cushion. However, if a compelling acquisition or opportunity arose, we might raise financing directly tied to it. As things stand, we do not need cash unless tied to a strategic reason we would announce.

01/04/2024 Have there been revenue synergies from the Kenkoderm acquisition, and has it been accretive?

It has been accretive because we bought a profitable business and improved margins by optimizing advertising. The bigger benefit will come from cross-promotion, which awaits the launch of our updated website, scheduled for early June.

So far, we have also seen interest in Kenkoderm in Europe and among certain U.S. retailers. You may not see revenue from those synergies until later this year, but they are developing.

13/11/2024 What initiatives will you pursue once cash flow positive?

Well, hi Naz, good to hear from you again. That churn is always important. When you're running a public company and you're not cash flow positive, you're playing defense. Becoming cash flow positive allows you to switch over to offense. So there are a lot of things we can do, like thinking about additional acquisitions or expansion. We've always been opportunistic.

We're partly a roll-up strategy, trying to grow our consumer products, while also working with some very large customers right now. Continuing to develop products with them and bringing them on board is really our focus.

12/08/2025 How did the $1 million non-dilutive financing work?

It was structured as an advance against future profits, with no recourse if the partnership is not profitable. It’s similar to how record labels advance artists money to record albums. If the album sells, the label recoups; if not, the artist keeps the advance. Our partner wanted to invest in our nine-product launch without burdening NEXGEL’s profitability. Repayment is capped at a minimum of 5% of profits, with no interest or other obligations. The terms are very favorable.

13/05/2025 Is equity still your primary financing option, or are you considering other instruments like convertible notes?

I do not favor convertible notes, and I avoid debt until we are EBITDA positive. We expect to cross that line soon, and once profitable, financing options open up, such as revolvers. For now, I am focused on reaching EBITDA positive before taking on debt.

13/05/2025 Can current cash reserves sustain operations until you reach EBITDA positive?

Yes, we believe so. If an acquisition or other opportunity arises, we would consider raising money, as we have done before, to support both growth and the balance sheet. For now, we do not see an immediate need for financing.

Competitive Advantage

23/04/2025 What differentiates your hydrogels and why do large companies rely on you?

High water content, biocompatible gel has no real competition, making us the default choice. When AbbVie partnered with us, they admitted they had no plan B. All we needed to do was pass inspections and deliver consistent quality.

Applications are expanding beyond medical uses into areas like body monitoring, aerospace, and even laser hair removal. We are approached with ideas we never anticipated. For example, maintaining cooler airplane wing temperatures during laser treatment or trapping carcinogenic fumes during disinfection are early-stage opportunities we are exploring.

13/05/2025 How does your hydrogel compare to competition in cosmetics?

Our hydrogel is mildly adhesive, not goopy like traditional masks. It is 90% water with hyaluronic acid and vitamin C, delivering moisture for hours while staying in place. This creates a very different user experience. With Silly George’s 300,000 active customer list, we now have a ready channel to introduce hydrogels to the beauty market.

Operations

27/03/2023 Who is responsible for commercialization and supply costs for the Halion product?

They are responsible for all commercialization costs. We simply supply the product.

27/03/2023 Will the CGM Labs joint venture enable more large partnerships like Halion?

I cannot speak for Halion, though we hope to work with them on more projects. Nothing is on the table right now, so we will first focus on delivering successfully. An order of Halion’s size was beyond our previous converting and packaging capacity. While gel production capacity has never been a bottleneck, our operations before the CG deal were too manual and costly for orders of that size.

The CG deal lets us handle large customers, which is key to our growth strategy. Even products like Silverseal and TurfGuard, which we currently outsource for packaging, will flow through CG once upgrades are complete. This JV strengthens our ability to serve larger orders and capture more margin.

27/03/2023 What are your promotional and launch plans for the amblyopia product?

We are fortunate to have Dr. Leonard Nelson, editor of the Journal of Pediatric Ophthalmology and Director of the Wills Institute, as co-developer and spokesperson. The first public presentation is this week at the APOS conference in New York, where we will meet many pediatric ophthalmologists.

Our model is to show them the product, demonstrate its superiority, and enable them to offer it to their patients, effectively becoming our distribution channel. We believe this model can achieve strong market penetration.

27/03/2023 What metrics will you use to evaluate the amblyopia launch?

To clarify, you are asking how we would evaluate the launch of the amblyopia patch. Yes, that is correct.

27/03/2023 How will you evaluate the amblyopia launch?

We will evaluate it like any other product, but we already have many practices lined up through Dr. Nelson’s introductions. The key factor will be patient feedback once the product is offered and used. If parents report positive results, such as children being more comfortable and looking better, that will drive continued use.

We expect to see reorder patterns emerge within 60 to 90 days in early adopting practices. Once that template for success is established, it becomes a matter of execution and scaling the rollout.

13/11/2023 Can you provide an update on development progress for the 510(k) devices?

The main issue delaying 510(k) devices was our inability to manufacture them at scale and low cost with our existing dies and pumps. We have now tested new prototype dies that performed very well, and we are ordering production units. We expect to be manufacturing within 60 to 90 days, after which we will submit for testing and move forward.

Despite delays, we have had many other projects to focus on, but we still consider this an important initiative and will resume as soon as manufacturing is effective.

01/04/2024 How has the amblyopia product launch gone, and are you seeing reorders from doctors

It has been growing, but slowly. We have seen reorder patterns, but one mistake we made was assuming doctors wanted profit margins from in-office sales. Many preferred a simpler model, suggesting patients buy on Amazon.

In the next 10 days, the product will be available on Amazon, allowing doctors to direct patients there. This should improve margins and distribution efficiency, speeding adoption.

01/04/2024 What products will you include in your retail strategy?

At retail, you want to lead with hero products because the wrong product or poor timing can be costly. Initially, we will focus on Kenkoderm, SilverSeal, and hexogels, as they are specialized and have strong traction. Other products may follow later.

01/04/2024 What is the status of the 510(k) medical devices, and what are your 2024 plans for them?

We have pushed those slightly down the priority list because our first mechanization priority is meeting AbbVie and STADA product demand. The equipment needs are clear, but delivery for those partners takes precedence.

That said, we are continuing experiments on sterilization protocols and exploring new opportunities, such as a cataract surgical drape. Development continues, but it is roughly fifth in priority given our current workload.

13/05/2024 After construction and equipment validation, will there be an FDA inspection and what is the timing?

No, probably not. That would be very unlikely. We are a 13485 medical device facility, so ISO inspections are required. The FDA usually only comes sporadically and only if there is a problem. The FDA does not inspect equipment like that for a non-drug facility such as ours.

13/05/2024 Will AbbVie or other partners conduct plant inspections regarding the expansion?

They will conduct their normal yearly inspections. They are required to inspect us just as we inspect them. For example, we recently completed our inspection of STADA’s manufacturing facility for the product they will be shipping to us. Inspections are a regular part of the business and occur all the time. The exact timing varies, but you can always count on regularly scheduled ISO inspections.

13/11/2024 What are the regulatory steps for the laser hair removal study?

That study really has no regulatory requirement. Its main purpose is to show that it suppresses the plume and allows us to commercialize. We'll be able to make claims about plume suppression, reduced patient pain if that endpoint is met, and potentially greater efficacy, which has been a pleasant surprise in early data. We’ll see the full results later this quarter when we release the data.

13/11/2024 Have you started funding the laser hair removal study?

No, the study is being funded by Vanalay. We did not pay anything for it. They are funding it because they want to be our marketing partner and distribute to laser hair removal companies.

10/12/2024 Does Nextel own the Pennsylvania property?

No, we do not own it. One of the first things I did as CEO was negotiate a 20-year lease extension. We now have about 19 or 20 years remaining, so our position is secure. We are not going anywhere in the near future.

23/04/2025 Can you explain how the electron beam accelerator works for hydrogel production?

Electron beam accelerators are widely used, for example in vulcanizing rubber. For hydrogels, we mix polymer, water, and additives in a vat, let it aerate depending on viscosity, then extrude the gel onto a liner with scrim and a top liner. The sheet passes through the accelerator, where energy cross-links the water and polymer. In about one second, the gel goes from liquid to solid without chemical initiators.

23/04/2025 How do you manage marketing and ad spend?

We do much of the analysis internally because profitability in direct-to-consumer products comes from understanding advertising effectiveness. On Shopify, we try to keep spend below 35%, and on Amazon below 15–20%. We constantly refine campaigns, eliminate poor keywords, and adjust targeting.

We also work with agencies that buy media, using specialized teams for each platform. If I find an ad buyer who performs well, I stick with them. Each platform is different: Amazon aggregates audiences and charges access fees, while Meta requires casting a wide net. For niche products like Histosolve with only 3–4% incidence, Meta is less effective. TikTok, meanwhile, requires entirely different strategies.

23/04/2025 How do affiliate platforms differ in promoting your products?

Affiliate platforms place your product in front of potential customers, and their algorithms are strong at identifying the right audience. Each has unique nuances, but success comes from making all of them work together.

13/05/2025 If tariffs increase, would you shift manufacturing to Texas and would it impact other business lines?

Much of the eyelash manufacturing process is manual. We built a new clean room with space for our needs, AbbVie, and other large customers, so we could expand if required. With tariffs now at a more manageable level and cost of goods only 16–17% of the selling price, a 35% tariff is likely manageable. However, if tariffs rise back to 150%, moving production to Texas is an option.

13/05/2025 Would shifting manufacturing to Texas require hiring additional staff or changing the operating base?

Yes, expansion would require more labor for assemblies and related tasks. That cost would offset savings from not paying for cheap labor in China. It is not ideal, but we are planning for different scenarios. Shifting to Texas is currently plan C if tariffs escalate to untenable levels.

13/05/2025 Can you discuss the magnitude of Silly George inventory build following tariffs?

The inventory build happened during the quarter, mainly on pop-on lashes from China, our most popular product. We built enough inventory to buy time and evaluate options. At 30–35% tariffs, we are comfortable. It was only at 145% that we seriously considered alternatives. Hopefully the situation does not escalate again.

12/08/2025 How much manufacturing capacity do you currently have to support more partners?

Driving gel sales is critical to profitability, but plant utilization is still only in the high teens, although much improved from the 4% level when I joined. We can make a lot more gel, so capacity is not the issue. The bottleneck is onboarding new customers, a process that can take 1.5 to 2 years. We continue to feed the pipeline, and as the year progresses, we expect to announce more partnerships. For example, iRhythm recently became a customer. Although we could not issue a press release, we did file an 8-K and can now use their logo in our materials. Several more customers are in the pipeline.

12/08/2025 What is current operating capacity for contract manufacturing and branded products?

Many branded products are produced internally. In Texas, we have substantial excess capacity as we await AbbVie, and in Langhorne, gel manufacturing remains well below 20% utilization. Capacity is not the issue; the focus is on filling the pipeline and continuing growth.

12/08/2025 Do you have plans to expand capacity if growth continues?

Yes. Our Texas facility sits on ample land, and we already expanded there once. There is plenty of acreage for further build-out. Our clean room was also overbuilt with additional space for new equipment. If two or three larger customers ramp within two to three years, we have a plan to expand capacity. It would be a good problem to have, and we know how to build these plants.

12/08/2025 What is the status of NEXDrape and NEXDerm?

We added Kip Crecca to our Scientific Advisory Board to focus on the Drape Program. Initially, we considered developing a surgical incision drape, but it required costly new pumps and dyes. Instead, we pivoted to opportunities like cataract surgical drapes, where we can supply adhesives for elderly patients. This makes us a material supplier, avoiding 510(k) hurdles, and leverages existing markets. We also see strong potential for NEXDerm as a gentle adhesive for IVs, potentially with silver impregnation to reduce MRSA and staph infections. It’s a great idea, but we can only pursue so many projects at once, so resources are focused elsewhere for now.

Competiton

12/08/2025 Are you mainly targeting bigger companies for contract manufacturing?

We serve customers of all sizes, but the larger companies offer the best opportunities because they need medical-grade biocompatible hydrogels for devices undergoing FDA 510(k) review. That’s where our strengths align.

Growth

27/03/2023 What is the market opportunity and future potential of the Halion supply agreement?

There is always a possibility of additional projects, and we have a very strong relationship with their team, but nothing is certain yet. They first approached us in January 2022, and the onboarding process was long, with difficult audits and intense testing. This represents a huge opportunity, though it depends on the product’s success in the consumer market.

We will see a meaningful revenue increase from their first order and projections. The long-term impact depends on commercial success, which is never guaranteed in consumer products. The fact that Halion, a large company, chose us over many alternatives speaks volumes about our platform, and we are very proud of that.

15/05/2023 What feedback are doctors and patients giving on the amblyopia patch?

Feedback from doctors’ offices has been phenomenal. They have thanked us, requested more samples, and told us their patients really like the patches. It is still too early to say whether children are consistently sticking with our patch compared to existing alternatives, but practitioner response has been overwhelmingly positive.

15/05/2023 Are sales concentrated among a few practices or spread across many? Have you received bulk orders?

Yes, depending on practice size, preorders have ranged from 5 boxes to as high as 200. Pediatric ophthalmologists are the key prescribers, and they are the ones choosing between traditional patches and ours. At the APOS Conference in March, 20% to 30% of doctors said this product was exactly what they needed, even describing how they currently use Milk of Magnesia to reduce irritation. For them, our patch would be a godsend. These doctors form our key opinion leaders and distribution base, and we have already taken preorders in anticipation of a June launch.

15/05/2023 Are strong order pools concentrated in certain geographies?

So far, demand is broadly distributed across the U.S. based on contacts from APOS. We came back with about 150 practices showing strong interest, some of them international, including Israel and Italy. Right now, our focus is the U.S., with interest spread across the Midwest, West Coast, and Northeast. It is still too early to identify one region as strongest.

15/05/2023 Are you considering selling hydrogel products in retail pharmacies?

Yes, that is our next focus. We are in discussions about distribution deals with large pharmacies and foreign companies for Europe and beyond. I was deliberately cautious about retail, since moving too early risks poor sell-through and returns that can damage a brand. Now, with three proven hero SKUs that deserve retail placement, and with partners pleased the products are fresh to shelves, we are ready to move into that channel.

13/11/2023 What feedback have you received from physicians on the amblyopia patch, and are patients mainly new or switching?

Feedback so far has been very positive. Doctors are mostly giving it to existing patients, particularly those with severe irritation from other patches, such as red rings or blistering. These patients are now reordering steadily, and adoption is expanding.

The open question is what percentage of patients will switch. The patch is roughly 50% more expensive than cheaper Amazon alternatives. We are studying whether broad adoption occurs because of comfort or whether only patients with the worst irritation drive demand. That will define the market size, and we are gathering physician and patient input before deciding how to allocate resources.

13/11/2023 Have you received inquiries for very large wholesale orders of the amblyopia patch?

Not yet, aside from some large practice orders of around 100 boxes at a time. That is still small overall until many practices adopt. Before hiring an expensive professional sales force, we need to refine our product pitch and strategy. When ready, that will be a key next step.

13/11/2023 SilverSeal showed strong growth, but overall sequential revenue growth was limited. Did any parts of the business decline?

Sequential revenue did not grow much, but SilverSeal grew strongly. Some products are discontinued if they fail to perform, especially those tested on Amazon, which often start with high advertising costs and limited profitability. We monitor advertising ratios and drop products that fail to reach thresholds.

This constant weeding is part of our process. Going forward, SilverSeal’s growth will rely less on Amazon, which is a limited market. The next stage will be retail and international expansion, which is coming soon.

13/05/2024 How has Kenkoderm progressed under NEXGEL compared to 2023 when it was private label?

The main thing is that there have only been pleasant surprises. We thought we could help optimize the advertising, and that has been going very well, with optimization ongoing. As mentioned earlier, we now also have interest in smaller territories and distribution in Europe. These are incremental additions to something we already own.

In addition, we have not yet begun cross-promotion. We are working on an update to our retail website, and once that is completed in June, we will announce to Kenkoderm’s 35,000 e-mail subscribers and 9,000 Facebook followers that we have a sister company. We will offer a 15% discount code and begin cross-promoting between the two companies.

13/05/2024 What feedback are you receiving from trade shows regarding NEXGEL’s technology and possible new verticals?

We have been getting great feedback. There are very interesting companies at early stages for which we are making test rolls, with applications across medical devices. These are not big customers yet, as they order $5,000 to $15,000 worth of gel to run experiments and develop projects.

There seem to be many promising applications for our technology. While most opportunities are still very early stage, a few could end up being very significant.

13/11/2024 What is the status of retail and European distribution expansion?

We have partners in Europe now who are interested in taking products, and I expect some European deals to come through in the first half of 2025, pending regulatory steps. In the U.S., we are in discussions with Walgreens and other large retail operators. Once their planograms are set, I expect SilverSeal to be the first product in U.S. stores sometime in 2025

We are also very close to getting approval for Canada, a smaller market, but it will allow us to sell SilverSeal both on Amazon and at retail there.

13/11/2024 What is the size of the laser hair removal opportunity, and update on the drape project?

As for the drape project, we brought Kip on specifically to advance it. He has interesting ideas for using our adhesive in other drapes that could be simpler to bring to market. Our patented gel application for surgical drapes was one of the reasons he joined, and it’s an early-stage but promising area.

Regarding laser hair removal, I’m embarrassed to say I don’t know the exact size. I do know it’s a very large and growing market, but I don’t have access to precise U.S. data.

10/12/2024 What new platforms is Silly George expanding to?

The first is TikTok and the TikTok Shop, which we recently had approved. We are cautious given the ongoing controversy around TikTok, but if it survives, it is quickly becoming the third core platform. Other beauty and lash brands, including some that sell less than us on Amazon and Shopify, are seeing large volumes there, so it is a place we need to be.

Beyond TikTok, the next logical step is retail. Ultimately, this product should be in stores like Sephora and Ulta, supported by television advertising and co-op marketing. Those are costly commitments, and we will only move forward once we know more about the product’s performance and feel fully confident in that direction.

24/03/2025 How large and broad is your customer pipeline?

We usually work on four or five large opportunities at a time. Right now, we have four progressing well. The onboarding process is long, involving design iterations, testing, and validation runs. Some opportunities have been in the pipeline for over a year, while others are just a few months old. Simpler devices, such as with Innovative Optics, can move faster, while diagnostic applications take longer due to stricter performance requirements and the 510(k) clearance process. Overall, we believe the pipeline is strong.

24/03/2025 How big is the market for Innovative Optics and what is your strategy?

We are partnering with Innovative Optics, who already have relationships with major laser hair removal companies and access to key opinion leaders. Feedback from dermatologists and laser cosmetic practitioners has been very positive. Beyond the primary product, there is strong interest in related items such as a cooling mask for post-procedure care. This product is sterile, gentle, high in water content, and could be sold both in doctors’ offices and used by practitioners immediately after procedures.

23/04/2025 What are AbbVie, Cintas, and Stada contributing to growth?

We projected little from AbbVie in 2025 because their console launch has been repeatedly delayed, now likely by another six months. We maintain biweekly meetings but only expect a few hundred thousand dollars from them this year.

Cintas is significant. We previously made a product called Cool and Soothe, basically our gel without silver, which had strong demand. We expect steady revenue here, though I cannot disclose precise projections. Stada remains at a $500,000–$700,000 run rate with one product, but growth will come as new products launch. A second product is scheduled for October or November, so real revenue impact begins in Q1 2026. Additional five products should follow in Q1 and Q2 2026.

23/04/2025 What role does your small cancer ablation customer play?

They sell a cancer ablation device popular in Japan and China, now FDA approved in the U.S. They are a small customer, generating $200,000–$300,000 annually. They prefer outsourcing gel production to us rather than making it themselves.

13/05/2025 Can you provide more details on the STADA product launch in 4Q and its market opportunity?

The first product was Histasolv, a digestive enzyme. The strategy with STADA is to build a line of digestive enzymes for different indications. Another enzyme will launch in Q4, a third in Q1, and additional products with synergies to Medagel are planned for Q1 and Q2 of 2026.

13/05/2025 Is Histasolv still growing or plateauing, and what strategies are in place to accelerate sales?

Histasolv has grown every month, with last month being the strongest. Meta’s broad targeting is less effective due to low overall incidence of histamine sensitivity. Platforms like Amazon work better since audiences are more targeted. TikTok was identified as a major opportunity, but we paused due to regulatory uncertainty. Alternatives like WebMD are underway, and we will revisit TikTok once there is clarity.

13/05/2025 After owning Silly George for about a year, are there optimizations left to grow margins or is it mainly about launches?

Margins will continue to grow. In Q1 we saw the largest margin increase despite lower sales than Q3 or Q4. Early on we tested different strategies, some effective and some wasteful. Now, optimizations are showing results. Silly George’s profitability potential is significant, and we are only scratching the surface.

13/05/2025 What is the market opportunity for the laser hair removal application,w and what is your strategy?

It is a large and growing market, though I cannot give an exact size since detailed data is costly. Major players like Removery have shown interest. The carcinogenic plume is a serious hazard, especially for practitioners. OSHA is starting to mandate plume control. Our study should demonstrate that we are the most effective and cost-efficient solution, which presents a significant opportunity.

13/05/2025 Did Silly George’s Q1 revenue decline reflect broader market seasonality, and is it still gaining share?

We saw only a modest seasonal decline from Q4 to Q1, less than in prior years. It was also the most profitable quarter despite not being the largest. We are not seeing consumer weakness at this point, though future macroeconomic conditions could change that.

13/05/2025 Should Silly George improve seasonally in Q2–Q4, and what new products are planned?

Yes, historically sales strengthen into Q2, Q3, and the holiday season. Last year was boosted by pop-ons, and we now have new launches lined up: focus packs of lashes, three-quarter lashes, five lip gloss shades, a lip mask, and our own hydrogel under-eyes. These products should drive further growth in Q3 and Q4.

12/08/2025 What are the market opportunities for upcoming enzyme launches compared to Histasolv?

Histasolv is a digestive enzyme targeting histamine sensitivity, a condition that affects about 2.5% to 3% of the population. It is already a large product in Europe, generating over $25 million annually, and it is growing nicely for us here. However, the bigger opportunities lie ahead with enzymes for gluten, dairy, and fructose, along with an extra-strength vegan version of Histasolv. These represent much larger markets. Building out a suite of solutions also strengthens our ability to pursue retail distribution, as it is difficult to contemplate retail with only one product.

12/08/2025 What new Silly George products have been launched this quarter?

At the end of Q2, we released new lash variations, including a 75 Lash that nearly covers the full eye, and Focus Packs of 24 lashes of the same size, based on customer feedback. These have been very successful, adding 17% to 18% in new sales, with only about a 4% decline in 60 Pack sales. Focus Packs also carry higher margins. Looking ahead, we will launch five shades of lip gloss, a lip and eye mask, under-eye masks made from our hydrogel, and a new mascara. These products will roll out through Q3 and Q4, and we are excited about their potential.

Financials

27/03/2023 Why did gross margins decline nearly 20% from 3Q to 4Q despite only a 4% drop in consumer branded sales?

We need to dig into that because you are talking about smaller size numbers compared to the aberrations that could occur. Some of the contract manufacturing margins differ by product type, which contributed to the decline, along with reduced Amazon sales. Amazon has become a very high margin business for us, much more than it was in the first and second quarter. We have optimized our advertising spend there to where we are approaching 74–75% margin on our hero Amazon products.

So while a decline in Q1 would not have caused a dramatic margin shift, in Q3 and Q4 it did, since those products now represent our most profitable part of the business.

12/03/2024 What are margins in the 3 segments and how will mix affect gross margins?

In contract manufacturing, our target gross margin is 45% to 55%, averaging around 50%. The main constraint has been operating at very low capacity, which historically skewed fixed costs and at times resulted in negative margins. At CG Labs, our converting and packaging business, margins range from 25% to 40%, depending on whether the product is medical device or consumer.

In our branded consumer products, gross margins are typically 70% to 75%. This is before marketing costs, but reflects cost of goods relative to our Amazon selling price.

01/04/2024 Do you have enough cash runway to fund large orders from AbbVie and STADA Health given your balance sheet?

Actually, the opposite of your concern is true. Our biggest challenge with cash flow is retail, where payment terms can be slow. With multinationals like AbbVie, Medtronic, and Owens & Minor, payment is extremely fast since they have financing arms. We have even been offered early payment on deposits.

So, for a point or two, these companies are eager to pay quickly. The real concern arises with retail partners, not with these large multinational accounts.

13/11/2024 How will gross margins evolve in 2025 as volumes increase?

That is a great question. Thank you for the compliment on gross margin improvement, though it is not entirely accurate in Q3. The margins you see are skewed by the explosion in Silly George, and much of that improvement is offset by higher sales and marketing spend that pushed SG&A up.

Consumer products report gross margins of 85% to 87% because direct-to-consumer marketing is below the line as advertising. Contract manufacturing is different. The real improvement will come in Q4 as underutilized facilities like ours generate revenue with little added expense beyond materials. Salaries and facilities are already paid, so bringing Cintas and AbbVie on board in Q4 and Q1 will drive larger effects in reducing losses and improving cash flow.

13/11/2024 What contract manufacturing margins do you expect in 2025?

Segregating gross margins, we project a range of 35% to 45% at our Texas facility and 40% to 50% at Langhorne on the medical device side. These ranges assume we are covering facility and personnel costs. Since those are already in place, every incremental dollar of revenue in 2025 should contribute more strongly to reducing losses. That is why we are bullish on achieving cash flow positive.

23/04/2025 What was Q4 cash burn and how is it trending?

Our Q4 EBITDA cash burn was about $350,000 to $400,000, down from $1.1 million in Q2 last year. As the company grows, cash burn continues to decline. The pace depends partly on acquisitions. Last year, we did three raises: after acquiring KencoDerm, after acquiring Silly George, and again when Silly George’s growth accelerated. We can reach breakeven without another raise, but we will weigh opportunities carefully, so I am not ruling it out.

23/04/2025 How do margins vary across product lines?

Margins differ between contract manufacturing and consumer products. We posted about 47% gross margin in Q3 and Q4, but that was skewed by Silly George, where cost of goods is only 16% and most expenses sit below the line in advertising and marketing.

For contract manufacturing at Langhorne, our target is 40–50% margin. In Texas, for converting and packaging, we aim for 35–45% depending on whether it is a medical device or consumer product. Consumer products are managed by contribution margin, including marketing and advertising, with a target of 15–20%, ideally 25%. To offset skew, we reclassified Amazon sales commission fees above the line as cost of goods. Ultimately, margins will depend on which side grows faster.

Outlook & Guidance

27/03/2023 How confident are you in the 2023 fifty-fifty revenue split between branded products and contract manufacturing?

That mix is more relevant to Q1 and perhaps the first half of Q2. With new higher margin products like amblyopia launching in Q3 and Q4, we expect the mix to improve beyond fifty-fifty. It could move toward sixty-forty as the year progresses. We are confident in that because our product release schedule supports it.

15/05/2023 What drives confidence in $1 million Q2 guidance, and do CG Labs contracts contribute?

We are very confident because we are already halfway through the quarter and see strong trends on Amazon as well as existing contracts and orders. Sales with CG Labs no longer count toward our revenues. The $1 million includes consolidated sales from CG, plus a substantial increase in our own sales. However, we also back out one of NEXGEL’s two largest customers, since those sales no longer count for us.

15/05/2023 How will COGS and gross margin improve across Q2–Q4?

You will see costs improve dramatically starting in Q2, and the impact will really accelerate in Q3 and Q4. One driver is our strategy of giving away higher-priced samples, especially for amblyopia, to generate doctor and patient interest. We also seed Amazon sales with free samples. As a result, we manufactured a lot of product in Q1, some of which will be reflected in Q2 as cost of goods without revenue. That investment should pay off in stronger adoption and margins later in the year.

13/11/2023 Can you discuss the market opportunity and potential economics from the AbbVie RESONIC supply agreement in 2024?

We are under NDA with AbbVie, so I cannot share their forecast, nor are we in control of their launch. What I can say is you could not ask for a better partner for this type of product. If AbbVie is successful, it represents extremely significant and impactful revenue for us.

13/11/2023 Any updates or timelines on the Haleon product launch announced earlier this year?

That product is further off than AbbVie’s. Expect an update around mid-2024, with their target launch still toward the end of 2024, which has always been our guidance.

13/11/2023 With such a transformative 2023, what do you see as the most significant strategic growth driver in 2024?

Unquestionably AbbVie. There will be other good developments, but AbbVie is clearly the most important and visible driver.

13/11/2023 How much of your revenue could AbbVie represent?

It could be very significant. AbbVie paid about $550 million for this product. While I have no direct knowledge due to NDA, I cannot imagine them launching weakly with that level of investment. If they execute as expected, it is by far our biggest opportunity.

13/11/2023 When could retail launches for SilverSeal and other products occur?

It is reasonable to expect mid-summer. Retailers follow their own process, but our meetings have gone extremely well, and interest is strong across three to four hero products, not just SilverSeal. As we gain more clarity, we will provide updates on the next quarterly call about timing for market entry.

13/11/2023 Given rising accounts receivable and inventory investment, should we expect sequential growth in Q4?

We do not provide quarterly guidance. You will continue to see very strong growth overall, but large customers come in periodically, so growth looks more like a staircase than a flat line. This quarter was relatively flat, but as new customers and products are added, you will see large jumps. That is the pattern you should expect going forward.

12/03/2024 Which segment will drive the biggest revenue impact in 2023–2025?

In the short term, we believe white label will be the largest driver, primarily due to the AbbVie Brazonic machine opportunity. That said, consumer products can deliver explosive growth if a product gains traction or a market develops quickly. We plan to release Vistata products in the U.S. that we see as having strong potential.

We generally do not build significant new product contributions into our numbers because of the unpredictable nature of consumer products. Meanwhile, at CG converting and packaging, we have been approached by several customers with potentially very large opportunities. Overall, we see strong growth potential across all three segments, though it is hard to say which will ultimately dominate.

01/04/2024 When do you expect to be MDR compliant in Europe and start selling products overseas?

We have already gone through several pre-inspections, and the final inspection is scheduled for late May or early June. At that point, we expect to be MDR compliant, which will allow us to release all of our Class 1 devices as self-certified. Some Class 3 devices, like SilverSeal, might take longer, with clearance targeted by year-end.

That milestone will start the flow of products into Europe, where we are seeing significant interest from various parties.

01/04/2024 When can we expect the company to achieve positive cash flow?

That is one of our primary objectives. We have had to spend on MDR initiatives and expansion, but positive cash flow is coming. Stay tuned.

01/04/2024 Will there be revenue recognition in 2024 from AbbVie’s planned launch of the resonic device?

Delivery is set for the end of 2024, so there will be some revenue that year. The first full quarter of significant revenue should be Q1 2025, but preorders will bring revenue in Q4 2024.

14/08/2024 Silly George posted $380k Shopify revenue in July. Will this impact H2 if growth continues?

Consumer products are unpredictable, but right now the results are very strong. Our guidance was set when the run rate was lower, and that run rate continues to grow. We are increasing spend because we believe the product line has an excellent chance to keep expanding and become an outstanding acquisition.

Yes, if Silly George maintains its pace, we should perform very well in the second half. Consumer products always carry some risk, but momentum is clearly positive.

14/08/2024 When should revenues from Cintas begin, and what scale do you expect?

Revenue from Cintas will start in Q4. Orders for the gel required for CG converting and packaging have already been placed, and that gel is in production. Products will ship in Q4. This is critical for reaching cash flow breakeven because, while consumer revenues are strong, contract manufacturing dollars contribute nearly three times as much to the bottom line given our fixed cost structure.

The Cintas opportunity will begin in Q4 at multiple hundreds of thousands of dollars and continue with a reorder pattern. It will be significant revenue, alongside another large customer we recently onboarded.

14/08/2024 What is the status and expected timing of AbbVie revenues?

We communicate with AbbVie regularly, though less since the design lock was completed. Our initial expectation was Q3 revenue, but AbbVie delayed the console launch by six months. That shifts our start into Q1, with a soft launch then.

Revenues will begin in Q1, ramp further in Q2, and reach full launch in Q3. These revenues will be meaningful and accretive to our bottom line.

14/08/2024 How do you expect Silly George to evolve with Amazon, and what are the gross margin implications?

It is difficult to predict exactly how Amazon will affect Shopify sales, since I have never seen a product grow this large on Shopify before moving to Amazon. Overall, Amazon should be accretive, but we do not yet know if sales there will cannibalize Shopify by 25% or 50%.

We target similar margins on both platforms. The key lever is advertising cost. Amazon allows us to operate with a lower advertising cost structure, which offsets their commission. This makes margins comparable across both channels, leaving us agnostic to where customers purchase. The only uncertainty is the degree of cannibalization.

14/08/2024 Can you share baseline expectations for AbbVie RESONIC pricing and treatment volume?

We cannot disclose internal projections due to NDA restrictions, and treatment volumes will depend on machine adoption. Each procedure uses large 8x8 pads, at least two per treatment. Based on AbbVie’s packaging choice, pads are priced between $3.50 and $5 each, meaning $7 to $10 per treatment.

14/08/2024 What gross margins do you expect from AbbVie RESONIC sales?

Margins flow through two levels. CG converting and packaging will operate like a medical device contract manufacturer, with margins in the 30% to 40% range. Because they also purchase gel from us, we capture additional margin on that input.
It is reasonable to expect overall gross margin greater than 50%.

13/11/2024 What do you expect from Silly George during the holiday season?

On laser hair removal, we think revenues could start as soon as the first half of next year, once the study results are released. Regarding Silly George, this is our first season with the new products heading into Christmas. Historically, November has been their best sales month, and they’ve seen a strong holiday boost.

One reason I've been cautious on Q4 guidance is because we’ve never done this before. It could be very big, moderately big, or something in between. I'm not 100% sure, but we are gearing up for a very strong Black Friday and Christmas season.

13/11/2024 What is the rollout cadence for Cintas in 2025?

Cintas distributes to over 1 million businesses, so the reach is very broad. We already supply them with a different product for medical kits, so we have an idea of how it will sell. Revenue will be significant, and Cintas will likely become our largest or second-largest customer.

Beyond revenue, the visibility is valuable. If employees use SilverSeal at work and see its benefits firsthand, they are more likely to purchase it at home through Amazon. Both the distribution scale and the brand exposure are important benefits for us.

24/03/2025 When will you reach positive adjusted EBITDA?

On an adjusted EBITDA basis, which reflects actual cash outflows, we expect to get there quickly. We had a $240,000 one-time event in Q4, but otherwise we see growth ahead. Q1 is traditionally our weakest quarter, yet it should still be strong, with improvement over Q4 and Q3. By Q2, we expect new customers to ramp up and drive us closer to break-even.

24/03/2025 When will you start selling Innovative Optics products?

We expect to begin selling around mid-year. Regulatory requirements are minimal, so as long as we can present a strong value proposition, this should become accretive for us in 2025.

24/03/2025 What is the status of the AbbVie Acoustic device launch?

AbbVie is on schedule as previously discussed. We will ship product in Q2 to meet their initial orders, and we are already receiving Q1 orders as planned. Their actual launch has not yet started, and while we believe they have a solid plan, they do not include us in every detail of their go-to-market strategy. Our responsibility is to be ready to supply product according to their timeline.

13/05/2025 How much revenue was included from AbbVie and does the delay affect guidance?

We did not include a large amount from AbbVie since it is not under our control. The revenue tied to AbbVie was relatively minor and should not affect us meeting our $13 million projection.

13/05/2025 Is the EBITDA target for a quarter or the full year?

Yes, it is on a quarterly basis. Given our growth and the stickiness of our contract and white-label business, once we cross into EBITDA positive, I expect us to remain there. Fixed costs are covered, and I do not see us reverting to losses after achieving profitability.

13/05/2025 What is AbbVie’s baseline revenue run rate and your remaining water gel capacity?

AbbVie planned to follow a model similar to CoolSculpt, targeting 900 machines per year. The launch was delayed from July 2024 to early 2025, and now into early 2026. Each procedure requires at least two of our gel pads, so the math scales quickly if AbbVie deploys as planned. This would bring significant volume and improve our capacity utilization. For now, we have sufficient space, and needing more capacity would be a good problem to have.

12/08/2025 When could you enter the retail market, and will you consolidate brands?

Each brand has its own identity based on the solutions and markets it serves, so combining something like wound care or blister products with Silly George Beauty does not make sense. For example, STADA Health products are sold under the MetaGel brand store, which works in that context, but Silly George remains separate. On retail, we are in discussions with several large retailers, mainly on a private label basis. SilverSeal has drawn the most interest. However, entering retail with just one product is risky and requires heavy advertising support. Realistically, we are probably 8 to 10 months away from anything significant on shelves, given the length of the planogram process.

12/08/2025 What is the revenue opportunity from the iRhythm partnership?

While I cannot disclose unit numbers due to an NDA, I can say that most large medical device customer opportunities fall in the $300,000 to $800,000, or up to $1 million per year range. Companies like Owens & Minor and iRhythm fit that profile. Beyond that, some partnerships could be transformative, such as projects where we are effectively the razor blade in the device. The AbbVie project is one of those, although it has been delayed a few times. I am in regular contact with AbbVie, and they assure me the project is progressing. Those types of opportunities could generate millions of dollars in revenue.

12/08/2025 What is the status of the AbbVie partnership?

AbbVie experienced delays with a separate vendor working on their console, unrelated to us. They terminated that vendor and brought the work in-house. I remain in close contact, as this project is critical. Originally, we expected it to be in full swing by now, but we have not yet started. AbbVie assures us they are back on track with the revised timeline, and things are progressing. Fingers crossed.

12/08/2025 When do you expect AbbVie’s product launch?

AbbVie indicated a 10- to 12-month delay starting from Q1 last year, so I now expect the launch in Q1 2026. There may be small orders before then, but realistically this is a 2026 event. The timeline has already slipped twice. When they first approached us in 2022, the target was July 2024, and we even built a facility with that in mind. Despite the frustration, AbbVie has committed $550 million to the device, which gives me confidence the product will launch.

12/08/2025 How are Silly George sales trending this quarter?

Sales remain very strong. July was our biggest month of the year so far. We are not seeing consumer weakness despite broader economic concerns. While Q4 is our biggest seasonal period, back-to-school is also strong. We hope to carry this momentum through the rest of Q3 and into Q4 with the benefit of new product launches.

12/08/2025 How would NEXGEL handle a recession or long-term high interest rates?

A recession forces discipline, and I believe it can be the best time to build. We would cut costs and reexamine margins if needed. Fortunately, we are not seeing slowdown yet. Our consumer products have very high margins, typically 83% to 85%. Even a 25% to 30% tariff only raises cost of goods from 17% to about 21%. Some of that can be passed on without serious damage. The biggest expense pressure is advertising, not tariffs.

12/08/2025 Which partnerships rank in your top three to five?

We always have large opportunities in the pipeline, and at least one under development would rank in the top three if finalized. Among existing partnerships, Cintas is a strong, steady partner with replenishment demand. We recently gained Canadian clearance for SilverSeal, which could expand that relationship. AbbVie remains a major opportunity despite delays, and steady accounts like Owens & Minor and iRhythm are important. STADA is also exciting; if the first nine products perform well, their full catalog could open to us.

12/08/2025 What percentage of projected 2025 revenue will be from Silly George?

Out of the $13 million projected for this year, about $6 to $6.5 million, nearly half, will come from Silly George. The brand is performing very well.

Risks & Macro

23/04/2025 How resilient are your products in a downturn?

That is hard to predict, since our consumer products have only been out for about four years and we have not faced a recession. Contract manufacturing should be stable, as medical procedures continue even in downturns. Beauty and cosmetics, such as Silly George, have resilience, and products like bandages from Metagel should also remain steady.

I have been through recessions with previous companies, but not with these. Until it happens, you cannot know for certain, so I cannot claim full visibility.

12/08/2025 How have tariffs impacted NEXGEL?

The impact has been mixed. On the negative side, there has been some mild margin pressure on Silly George and other products sourced overseas, although not as bad as feared. On the positive side, we are seeing greater interest in our gels from domestic companies seeking alternatives. This interest began in Q1, so it has not yet translated into significant revenues for Q2, but we expect conversions from these customers to benefit us in Q3, Q4, and into Q1 of next year.

Disclaimer:

The following transcript and Q&A have been generated with the assistance of Artificial Intelligence (AI). While we strive for accuracy, completeness, and clarity, the content may contain errors, inaccuracies, or misinterpretations. Neither the company featured in this document nor ValueBridge assumes any responsibility or liability for the accuracy, reliability, or completeness of the information presented.

This material is for informational purposes only and should not be construed as official company communication, financial advice, or a definitive representation of the company's views. Readers should independently verify any information before making decisions based on it.

Sources

Earnigns Calls

SANUWAVE is a wound care company built around UltraMIST, a portable, FDA-cleared device with razor-and-blade economics. The system lists at $35,000 and each treatment consumes a single-use applicator priced at about $100, with reimbursement averaging $420 per session. In 2024, SANUWAVE generated $32.6 million in revenue, up 60%, with operating income of $5.4 million and adjusted EBITDA of $7.2 million. Q4 2024 gross margin reached 77.9%, compared to 58% a year earlier, reflecting manufacturing scale. The company exited 2024 with 1,047 systems in the field, including 374 sold that year, and under 1% U.S. market penetration. Guidance for 2025 calls for $48–50 million revenue (47–53% growth). Consumables represent 55–65% of revenue and drive recurring sales. Debt stood at about $27 million, with refinancing underway to lower costs and a stated goal to retire it fully within 18–24 months from operating cash flow. The company holds 140 patents covering ultrasound and shockwave technologies and has monetization agreements providing upfront cash and potential revenue share.

Catalysts & Milestones

2022 - Recapitalization led by Manchester Explorer Fund; governance and board strengthened

2023 - Returned to profitability; achieved OTCQB relisting; doubled production capacity to 100 units/month

2024 - Revenue of $32.6M, up 60%; gross margin reached 77.9%; 1,047 UltraMIST systems in field

2025 - Second-source applicator manufacturing operational in Q2; guidance of $48–50M revenue (47–53% growth)

2026 - Applicator redesign expected to add 350–400 bps gross margin improvement

Investment Highlights

• Revenue grew 60% in 2024 to $32.6M, with operating income of $5.4M

• Gross margin reached 77.9% in Q4 2024, up from 58% prior year

• Consumables contribute 55–65% of revenue, driving high recurring sales

• Installed base of 1,047 systems with under 1% market penetration

• 2025 revenue guidance of $48–50M, up 47–53% year over year

Future Growth Drivers

• Expansion of sales force beyond 13 reps with full U.S. coverage

• Applicator redesign to boost margins by 350–400 bps starting 2026

• Penetration of nursing homes, skilled nursing, and mobile wound care providers

• Reimbursement expansion across five places of service including home health

• Clinical data moat from studies and real-world outcomes supporting adoption

Risk Factors

• Carrying $27M term debt; refinancing still in process

• Reimbursement risk from CMS code changes despite recent increases

• Revenue concentrated in UltraMIST, now 99% of total sales

• Customer acquisition cost of 10–15% of sales may weigh on scaling

• Manufacturing redesign execution risk with phased margin benefits in 2026

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Capital Allocation

17/04/2025 How are you addressing debt and the IP settlement?

Debt is the one remnant of SANUWAVE’s messy past. We reduced it through a note exchange but still carry some balance. Our plan is to continue paying it down from operating cash flow. We are evaluating whether refinancing could create flexibility, but our overarching focus is de-leveraging steadily while growing profitably.

On intellectual property, we reached a settlement that protects our portfolio and reduces litigation risk. I cannot disclose every detail, but it eliminates an overhang and allows us to focus resources on expanding Ultramist rather than legal disputes. Together, debt reduction and IP resolution put us in a stronger position to be valued on the merits of our business rather than legacy issues.

17/04/2025 What is your plan for refinancing and paying down debt?

We currently have about $27 million of term debt. It was incurred when the company’s footing was weaker, so rates are high. With Q3 and Q4 results showing clear improvement in EBITDA and operating margins, we can now sit down with stronger lenders and refinance at lower rates. Our goal is to pay the debt off fully within 18–24 months from operating cash flow.

We also have a partnership with a large intellectual property assertion firm involving legacy shockwave patents in cardiovascular applications. They already paid us $2.5 million for an option. If they exercise it, we receive a mid–single-digit millions cash payment, which we will immediately use to pay down debt. If their assertion is successful, we share in the proceeds. Importantly, we no longer need cash to run operations, so every dollar received can go toward stripping down the capital structure. Ultimately, I want a simple structure—around 8.6 million basic shares, no debt, and more than $200 million of net operating loss carry-forwards, ensuring no taxes for some time. That would make adjusted EBITDA and cash flow converge closely.

09/05/2025 What are you seeing regarding debt and refinancing opportunities?

Our debt is not cheap, and we are looking at refinancing opportunities. It is premature to say anything definitive, but this is a top priority. We are exploring a number of options and feel good about the likelihood of improving our interest rate.

08/08/2025 Any update on refinancing the senior secured debt?

We viewed refinancing primarily as a cost of capital decision, weighing debt versus equity. After running an internal process, we received several attractive term sheets and have chosen one. We are now working to close it. While I cannot yet name the counterparty, we believe the lender and terms will be viewed favorably, representing a significant improvement over our existing facility.

Competitive Advantage

15/11/2022 How strong is the company’s IP, and what is your strategy for possible infringements?

We are very fortunate to have a strong patent portfolio. Our science team and the Ultramist predecessor team did a very good job ensuring use cases are covered, with over 50 patents currently issued or pending.

There are certain verticals where we believe companies may be infringing on patents—either published but not yet issued, or already issued. We were first on this technology, so it is foundational, and others may be in violation.

Our approach is to communicate effectively with those parties and always seek a peaceful resolution. While I don’t have anything to report today on monetization, that is the path we follow. We prefer friendly resolution but are prepared to act aggressively if needed.

22/03/2024 Status of patents and Shockwave discussions?

As you saw in our 8-K, we announced an intellectual property deal earlier this month. There is not much detail I can provide in this forum, but it is fair to assume SANUWAVE remains very aware of the value of its intellectual property portfolio and continues to look for ways to realize it.

17/04/2025 How does SANUWAVE’s product demonstrate value to patients, physicians, and payers?

It works through what I call a virtuous cycle: evidence drives reimbursement, which drives usage, which leads to better outcomes and more evidence. At the end of the day, there are three constituents—the patient, the physician, and the payer. The payer wants proof that a treatment improves outcomes and lowers costs. A Mayo Clinic study on deep tissue injuries in ICU patients is a good example. These injuries are common in immobile patients and can progress into severe wounds. In a two-arm study, patients treated with standard of care saw 70% progress to Wagner stage four or beyond, meaning full thickness wounds exposing bone, muscle, or tendons—serious injuries that often require surgery and risk loss of limb or life.

In contrast, 80% of patients treated with Ultramist resolved at stage two or less, essentially a partial thickness wound similar to a bed sore. When the difference is between 80% bed sore versus 70% bone-deep, it is a clear outcome improvement. That result was a key driver in Ultramist becoming standard of care at Mayo Clinic.

17/04/2025 How long does your IP protection last, and where do you see SANUWAVE in 2–5 years?

Our intellectual property portfolio is rolling. Some patents date back years, while others—especially broad application and technology patents around Ultramist—were issued recently and have nearly full terms remaining. We continuously add new filings to extend protection. Looking forward, we are actively considering what Ultramist 2.0 will look like. It will focus on making the product easier and stickier for clinicians, more effective for wound care, and, critically, able to generate large volumes of high-quality clinical data.

That data moat is the strongest long-term defense. As adoption grows, more data accumulates, and the product becomes the standard of care. In two years, I expect SANUWAVE to be a debt-free, profitable, cash-generating leader in wound care with broader market penetration. In five years, I want us to be positioned as the dominant evidence-based solution, protected by both IP and data scale. The business evolution has been three acts so far: 2023 was digging the car out of the mud, 2024 was rebuilding it, and now in 2025 we are taking it out on the track. For the first time, we have the luxury to ask: where do we want to take it? That’s the exciting part of the next stage.

09/05/2025 Any developments on patent assertion agreements or related legal actions?

We entered into an intellectual property assertion agreement with an outside firm last year. They paid us $2.5 million for an option to pay a mid-single-digit million amount, take the patents into a special purpose vehicle, and begin assertion. If successful, we share profits on the back end.

Details of the process are private and outside of our control, but we are pleased with our partner and think they are making good progress. I cannot provide more specifics at this time.

08/08/2025 Can you discuss the value and scope of your 140 patents?

SANUWAVE holds a large patent portfolio covering shockwave and ultrasound technologies. Some patents provide core protection for our operations, while others support extensions of what we can do with the UltraMIST platform. In the past we have monetized certain patents, including a relationship with a partner interested in applying our shockwave patents to vascular conditions.

Last year that partner paid us $2.5 million for an option to pay a mid-single-digit million fee to assert selected patents, with a revenue share on collections. We also receive periodic interest in licensing or acquiring patents. While I cannot share further concrete details at this time, the portfolio represents a strong foundation and potential source of value beyond core operations.

Competition

15/11/2022 How does Ultramist compare to negative pressure wound therapy, how do you view the need for a complete product line, and what are your plans for inpatient vs. outpatient/nursing home markets?

Negative pressure came on the market around 1998 with Kinetic Concepts, KCI, and it grew from zero to $4–5 billion as a category. It took time because physicians were asking, “What am I doing putting a vacuum cleaner on a wound?” But it became the standard of care. Unfortunately, as wound care claims grew, CMS pushed down pricing, and reimbursement for negative pressure has been impacted dramatically. In some cases, it’s no longer profitable for wound care centers to operate them. It remains a wonderful product clinically, but financially it’s become a burden.

To be successful, we always talk about the three P’s: payers must be happy because they’re not overpaying; physicians must be happy because it’s clinically efficient and they can make money; and patients must be happy because their wounds are healing. With negative pressure, physicians have struggled financially, and payers have squeezed them. It is still widely used in surgical/post-surgical settings.

For Ultramist, we have the three P’s. Clinically it is excellent, so patients are happy. Reimbursement at $450–520 per treatment is fantastic, making it likely the highest gross margin product wound care practices use. Payers are happy because it falls under the price umbrella of other modalities like skin substitutes and hyperbaric therapy. Overall, it’s a winning combination. We also have a head-to-head study coming out in early Q1 that compares Ultramist to negative pressure, showing the savings generated when shifting to Ultramist. We’ll use that to drive adoption among commercial payers who have not yet come on board.

On inpatient vs. outpatient: during COVID, nursing home patients could not be transported to hospitals or outpatient centers, so treatment moved to the edge—in nursing homes and at home. This was new, but it worked. Now we see growth from providers treating patients directly in nursing homes, often 15 at a time, then moving on. This prevents bed sores, improves nursing home quality scores (and thus reimbursement), and is more efficient than transporting patients. Home care and nursing home wound care are trends we see continuing for years

On product line: currently we’re very happy with dermaPACE and Ultramist. We also have BroomShield in development, an ultrasound patch for use between visits. For now, our strategy is partnership rather than building a complete in-house product line. Combination therapy is becoming more common—physicians use Ultramist along with fish skin, amniotic tissue, or hydrogels. We also work with diagnostic providers to help shape protocols. So today, a complete standalone product line isn’t essential. In the future, it may be, but right now our focus is on supply and meeting demand.

17/04/2025 What does the competitive landscape in wound care look like?

The industry offers many modalities. Hyperbaric chambers were popular years ago but are less common now given the lengthy, specialized procedures and mixed efficacy. Negative pressure therapy shows some effect but requires patients to remain connected to devices for weeks or months, making it cumbersome. Skin substitutes are used often in conjunction with Ultramist, especially by mobile wound care providers. In practice, our biggest competition is traditional methods—antibacterials, antimicrobials, gels, salves, and bandages. That “this is how we’ve always done it” mindset dominates wound care today. Once clinicians see Ultramist’s mechanism and outcomes, it is compelling. With less than 1% market penetration, there is still enormous white space.

Financials

15/11/2022 Can you expand on operating expense reductions, gross margins and supply chain, and procedure volumes returning to normal levels?

On expenses: reductions came largely from eliminating consultants hired to help catch up filings when we were late. Those costs were high—legal, audit, consultants—and largely went away after we staffed up internally under our CFO. That saved about $1.4M per month. The manufacturing move from Georgia to Minnesota also reduced costs by consolidating teams and facilities. Sales efficiency has improved: a smaller team (from ~15–16 to 9) has been highly productive, driven by consumables and larger customers. Additional savings will come from automation projects. Cuts are made only when they don’t hurt sales. The biggest impact will show up in Q4, with some additional benefit flowing into Q1.

On supply chain: last year we were affected by labor shortages at suppliers and specific material shortages (e.g., Tyvek, saline). We were on allocation for applicator pouches, and some practices struggled to get saline. Those were external. Internal issues were resolved after the August capital raise, which allowed us to restart manufacturing for consoles, wands, and dermaPACE. Currently, no material supply chain issues, though inflation has raised costs.
On gross margin: Q3 margins were reported at 85%, up from 58% a year ago, but that included an inventory adjustment. Guidance remains at 75% going forward, with 9-month results at 77%, up 19% from the prior year.

On procedure volumes: underlying demand is strong—diabetes cases are rising, driving higher incidence of wounds. Nursing shortages are affecting some wound centers, but growth in skilled nursing facility and home-based care has offset this. Wound procedures are less deferrable than knee or hip replacements: untreated wounds risk infection and amputation, so care demand persists. Volumes at wound centers are back to pre-COVID levels, even though staffing remains tight.

12/05/2023 Were the higher professional service costs one-time?

Yes, they were largely one-time. During the quarter, we had several SEC initiatives, filed one assessment, and regained listing on the OTCQB. These unique events drove professional service costs, but we do not expect them to recur.

Overall, operating expenses have been increasing much slower, about 4.57%, compared to revenue. This demonstrates the effectiveness of our cost control initiatives that began last year.

08/11/2024 How many systems this quarter were from the new higher-margin manufacturing versus older sources?

Just a few at the end of the quarter, as the new manufacturers only came online near the end of Q3. We still had inventory from prior sources, so the margin impact was limited this quarter. In Q4, we expect to see another uptick in gross margin as cost of goods sold comes down on systems from the new contract manufacturers.

08/11/2024 When will the $26 million secured debt and $1.3 million note in default be resolved?

The $1.3 million note has already been repaid and is no longer an obligation. The default on the LH expansion debt was due to noncompliance with a $5 million minimum cash covenant, which has since been met. We are no longer in default or forbearance on any debt obligations.

17/04/2025 How would you describe SANUWAVE’s business model, growth, and financial performance?

It fits together into a very attractive model. We have high gross margins, 77.9% in Q4, with 55% to 65% of revenues coming from consumables. In 2024, we generated $32.6 million in revenue, up 60% year over year. Operating income was $5.4 million, and adjusted EBITDA was $7.2 million. While I know many dislike adjusted EBITDA, we use it because our capital structure caused significant non-cash charges. It helps clarify the company’s actual cash generation. For 2025, we guided revenue of $48 to $50 million, representing 47% to 53% growth. The opportunity is huge, with a $45 billion U.S. wound care market. The addressable base is broad: roughly 30,000 nursing and assisted living facilities, 15,000 skilled nursing facilities, more than 10,000 physician offices, 2,200 wound care centers, and many mobile providers treating patients at home.

CMS is also pushing a “care to the edge” initiative, shifting treatment from hospitals to where patients already are. This reduces strain on hospitals and leads to better outcomes. For elderly patients with compromised immunity, transporting them into hospitals often increases infection risk. Avoiding infections like methicillin-resistant staph in a diabetic foot ulcer can prevent costs of $500,000 to $900,000. Recently, CMS expanded reimbursement codes to include nursing homes, skilled nursing, assisted living, and patient homes, which has been a big driver. Our Ultramist system itself weighs just 7 pounds, is portable, and can be learned in 30 minutes by a physician, nurse, or physical therapist. Treatments take 3 to 20 minutes, average 6, and are effective in reducing wound size, speeding healing, easing pain, killing bacteria, reducing biofilms, and promoting blood flow and revascularization.

17/04/2025 How are sales, system adoption, and market penetration progressing?

Consumables continue to show steady growth, though with some seasonality. Q1 is always a step down from Q4 in wound care, and last year was also affected by a price hike. Still, Q4 2024 was a record quarter with $10.3 million in sales. We ended the year with 1,047 systems in the field, including 135 sold in Q4 and 374 sold across 2024. That means 36% of all Ultramist systems in use were sold in the last 12 months, yet we are still under 1% market penetration.

When I became CEO, SANUWAVE was a show-me story. Over the last 23 months, we focused on building trust by setting forecasts, delivering on them, and demonstrating profitability. We have now guided for six consecutive quarters and met or exceeded guidance every time. That consistency, along with growth in operating income and adjusted EBITDA, shows we can be profitable while scaling. Customers—especially large ones considering hundreds of systems—want to know we will be here long-term to supply applicators. Sustained profitability is the best way to prove that. For Q1 2025, we guided to $8.4 to $9.0 million in revenue and pre-announced that we will report between $9.1 and $9.3 million, above the range.

17/04/2025 What drove gross margin improvement to 77.9% in Q4, and how should investors view margins going forward?

System pricing in Q4 was consistent with Q3, so margin improvement was not price-driven. Instead, it came from lower manufacturing costs after standing up two new contract manufacturers in Q3. Q4 also had minimal non-recurring engineering (NRE) expense, giving a clean view of the new cost structure.

Margins may fluctuate slightly in 2025 as NRE related to new applicator lines runs through, depending on how much can be straight-lined versus expensed. Variability may be 100–150 basis points quarter to quarter. Sustained margins in the high 70s remain realistic, with Q4 serving as a representative baseline absent one-time items.

08/08/2025 How will the new applicator design impact gross margin and EBITDA leverage?

The purpose of the new applicator design is to increase capacity and reduce cost. We expect to pick up about 350 to 400 basis points of additional margin on applicators once the new design flows through. Because we carry roughly six months of applicator inventory, the benefit will phase in gradually, with the impact becoming visible in early 2026. We use blended cost as our cost basis, so improvements will show steadily over time.

Operations

15/11/2022 Are you current with all filings, and do you expect to remain current? How would you characterize staffing and ability to sell into demand?

On the filings, we’re current. We actually had the Q done really on time and early, and the team filed it yesterday. They’re already starting on the K today. We have a great finance and accounting team. Our goal when we brought on our CFO, Tony, was to have her staff up and get rid of the consultants. The people and talent she brought on are fantastic. Minnesota, especially Eden Prairie, has a lot of good medical device talent, so we’re finding a good team to come on board.

On the sales force: obviously, if you’re going to sell it, first you have to build it. Once we have more products flowing from manufacturing increases in Q1, that’s when we want to put more sales feet on the street. The balance of the next year is really about matching sales capacity to sell what we can make with manufacturing capacity to make what we can sell. These are like two pistons that have to work in synchrony—too much of one and not enough of the other creates problems.

There are also a lot of top-notch salespeople looking for jobs right now. Skin substitute players are seeing treatment counts per patient drop from 10 to 2, plus price caps and eligibility limits. Salespeople notice this fast, and when doctors say they can’t make money anymore, reps start looking for alternatives. That works in our favor, since many of the markets we want to enter aggressively are the same markets where salespeople are actively seeking new opportunities. To the extent we can hire those who know how to hit the ground running, this is an unusual opportunity, and we intend to take advantage of it.

03/04/2023 What will peak production look like in the next few quarters?

We’ve brought production back online after some delays, mainly from long lead items. Right now, we’re at about 40 new products per month, with plans to reach 100 by year-end. The ramp will double through the summer and reach that 100-unit pace in new production. Alongside this, we’re doing refurbishment to help fill gaps. On the applicator side, which generates over 50% of revenue, our partner has already expanded capacity and is running about 20% ahead of demand. They should be able to increase by another 70% to 80% by the end of the year, supporting a 100% production increase overall.

03/04/2023 What will production ramp look like at year-end and in six months?

We’re doubling from the beginning of the year, but the ramp is gradual. On the system side, it depends on employee ramp-up and inventory, which builds month by month. We expect 60–80 units per month by midsummer, then 100 per month by year-end, with average selling prices in the high 20s. That translates to about 500 devices for 2023 and over 1,200 next year. For single-use applicators, customers typically use two to four cases monthly, so with our installed base, we’ll need around 1,000 cases weekly, about 4,000 a month.

12/05/2023 Will supply constraints persist throughout the year, and which products are affected?

The supply constraints are primarily with UltraMIST. Its production line was inactive for a period and restarting took longer than expected to ensure consistent, high-quality output. We are close to the point where I am confident we will have the supply we need on a weekly basis, though we are not there yet.

I do not expect this to last a year. It appears we are nearing resolution. We are targeting more than 400 devices for the year, and our main focus is meeting demand across the full year.

10/11/2023 Will you bring device or applicator manufacturing in-house?

It is something we always consider, but we have no plans at this time. Standing up in-house manufacturing is a heavy lift, and our current partners can likely execute more efficiently and with better supply-chain access. If we were generating $200 million to $400 million in revenue, the equation might change, but I do not see that occurring in the next year or two.

22/03/2024 How can doctors get involved in trialing SANUWAVE products?

Contact information is available on our website. Tim Hendricks, our Head of Sales, would be glad to hear from anyone interested in trying the product. Doctors or partners can also reach us through our customer service department on our newly revamped website.

08/11/2024 Status of transition to new manufacturers for systems and disposables?

On the system side, we completed the transition to two new contract manufacturers and are now receiving about 25 to 30 systems per week, which is going well. On the applicator side, we are finalizing a redesign to eliminate a few ultraviolet steps in production. Once the design is complete, we will cut new, larger molds and expect a second source for applicators with the new design to be operational in Q2 2025. Our goal is to maintain multiple sourcing to avoid any single point of failure.

08/11/2024 What about the material weaknesses in internal controls noted in the 10-Q?

It is not uncommon for companies our size to have material weaknesses. We are addressing them by hiring a full-time employee dedicated to remediation, reporting directly to both our CFO and the board’s audit committee. These issues are well within our ability to fix and are actively being worked on.

08/11/2024 Are you conducting or planning new clinical or validation studies?

We already have strong data on UltraMist and a growing base of users with positive experiences. The focus now is on bolstering claims with real-world data, which insurers and CMS increasingly value. Several users have repositories of data and are eager to work with us, so we expect to compile results over the next year.

We are also evaluating prospective studies that could support new claims. There are a couple of areas under consideration that we believe could be managed efficiently and yield data highly beneficial to the company.

21/03/2025 Can you provide updates on confirmatory studies and new studies that could expand UltraMIST use cases?

Now that the company is on stronger financial footing, we can focus again on research. We have reengaged with key opinion leaders and researchers, and some of our customers have significant data repositories. At least one or two papers or posters are expected at SAWC this year, including an interesting new application of the product, though I do not want to preempt those announcements. Those will mostly be retrospective analyses, but we are also considering prospective studies.

Several past studies showed promising results but were underpowered. For example, in 2015 we had a split-thickness donor site study with only 27 patients that still hit statistical significance on time to reepithelialization and nearly hit significance on wound recurrence at 6 weeks. Standard of care showed a 45% recurrence rate, while UltraMIST was only 8%. That outcome was compelling despite a 0.6 p-value. Replicating with a larger study could confirm a meaningful benefit. Recurrence rates are a major cost driver and clinical concern in areas like diabetic foot ulcers, so further validation could be impactful. We expect to have concrete plans for new studies within the next quarter or two.

17/04/2025 How does Ultramist improve patient outcomes compared to traditional wound care?

The cost of care drops dramatically, and healing time falls from 16 weeks to 8.2 weeks. Patients want to get better, and they want wound care that is not miserable. Traditional methods like sharps debridement involve scraping necrotic tissue from wounds, which is painful. Ultramist provides non-contact, pain-free debridement with immediate pain reduction afterward, unlike most alternatives. Patients often ask when their next Ultramist session is scheduled, which is rare in wound care.

Physicians want their patients to heal, but they also need a viable business model. Ultramist is reimbursed under CPT code 97610. We are the only company with clinical evidence proving it can be billed for non-contact use, and the code itself names our product and its precursor. Reimbursement ranges from $400 to $700 per procedure, up from around $170 to $180 just a few years ago, with the nationwide average at about $420. A session lasts 3 to 20 minutes, averages 6 minutes, and can be performed by nurses, physical therapists, or doctors. Each procedure uses a consumable applicator with a $100 list price, while the system itself lists at $35,000. It takes about 85 procedures to pay off a system, and together these economics generate blended gross margins in the high 70s.

17/04/2025 How is SANUWAVE managing manufacturing and scaling production?

We outsource manufacturing. Two contract manufacturers build Ultramist systems, one builds applicators, and a second source is being added. All manufacturing is U.S.-based, and nearly all components are domestic. We use vertically integrated partners, so tariffs and trade issues have not materially affected us. In January, we began cutting steel for a new four-cavity applicator mold, which will simplify assembly by replacing UV cure adhesive steps. This should improve automation, reduce cost, and raise margins when live in Q4 2025.

As of last month, capacity was about 10,500 applicators per week, targeted to rise to 24,000 by year-end. On systems, we currently produce about 25 per week, with the ability to double within 60 days if needed. We stockpiled long-lead components, so we have ample inventory of systems and parts. Ultramist now represents 99% of revenue, as the older Dermapace and Profile shockwave products have essentially faded. This focus allows us to scale efficiently without foreseeable disruption.

17/04/2025 How do you ensure customers actively use Ultramist after purchase?

We have split our commercial team into sales and commercial operations, with the latter focused on driving utilization. We maintain steady engagement with customers through check-ins, sharing new research, and showing fresh applications. For example, if a poster is presented at a conference, we bring that insight back to customers to encourage adoption. Our operations team also reviews wound care billing codes at facilities, identifies patients who could benefit, and advises on use cases.

This approach has evolved into an ongoing education curriculum, helping customers understand where Ultramist fits best and where other modalities may be more suitable. By staying close to customers and continuously showing value, we maximize utilization. When we can sit down side by side with providers and review real cases, adoption and consumable usage naturally follow.

09/05/2025 What is the typical time from initial conversation to receiving a purchase order?

We see a wide range. Some inbound inquiries come directly to our corporate email, asking for a price quote, and those can close within a few days. Larger customers, where negotiations are more complex, often take much longer and are still ongoing.

Overall, timelines range anywhere from a couple of days to several months. As customers get bigger and the capital outlay grows, the time frames tend to stretch.

Growth

11/08/2023 Any comments on the dermaPACE product?

Thanks for the question. We are still actively selling dermaPACE units both domestically and internationally, as well as the Profile system that serves the orthopedic market in the U.S. It was not a focus on the conference call since it represents a relatively small portion of SANUWAVE’s revenue.

It is a product we hope to place renewed focus on in coming quarters. For now, we anticipate UltraMIST will remain more than 95% of SANUWAVE’s revenue in the near term.

13/08/2024 Can you provide actual numbers on UltraMIST or SANUWAVE units, new customers, and their impact on costs and returns?

The list price of an UltraMIST system is about $35,000. We are not capturing the full list price, but we are capturing much more than before. Our model is like razor-and-blade, where the real revenue comes from applicator sales tied to each procedure. We track this internally through what we call tax rate, which measures how many cases of 12 applicators a system uses per week. While we have not disclosed this number publicly, consumables revenue has been rising significantly each quarter and is the main driver of growth.

In terms of customer acquisition, we operate three channels. First, a direct sales force that has grown from two reps at the start of the year to nine now. Second, a group of 1099 distributors paid only on placed units. Third, our internal noncommissioned commercial sales operation, which acts as both business development and sales. Overall, the cost of acquisition is likely in the 10% to 15% range of sales, varying by channel.

08/11/2024 Of the 124 systems sold this quarter, how many went to large sophisticated customers versus small buyers?

It is difficult to break it down that way. We can say that a few new customers ramped aggressively in Q3, and between a couple of large customers they had a significant effect on the quarter. We try to avoid disclosing detailed data on which customers are buying how much.

08/11/2024 Why does international revenue appear sluggish compared to U.S. growth?

International sales are almost entirely tied to dermaPACE and Profile. Our primary focus remains UltraMist in the U.S., where the opportunity is much larger. Since UltraMist is not cleared in the EU, we do not plan to prioritize international expansion near term. We would rather focus on one market and succeed than split resources and underperform.

21/03/2025 How is the new head of sales changing strategy versus last year, and how is it going so far?

We started 2024 with two salespeople and ended the year with nine. We will likely end Q3 with about nine again, though three of them will be different from the group we had at the end of Q4. The change in strategy reflects a shift toward a deeper, more consultative sales approach, where we go beyond the easy economics and instead build long-term partnerships. We aim to be integrated into customers’ treatment plans, therapy protocols, and even patient enrollment guidelines.

This type of sale is more top-down and involves engaging larger customers. We restructured the sales force and leadership to reflect that, bringing in Tim Wern as our new head of sales. Tim was the number two under our Board member Jeff Blizzard when Jeff was Head of Sales at Aviomad, and together they grew that company from $50 million to $400 million. He comes highly recommended, and we are excited to see him and Jeff working together again.

21/03/2025 How would you characterize Q4 UltraMIST placements in terms of large enterprise orders versus small one- or two-unit orders, and what does that mean for 2025?

We sold a number of one- and two-unit systems in the quarter, and we were pleased to see many new customers. Some existing customers also expanded significantly, with one large customer ordering nearly 20 systems. So, it is a mix. For planning purposes, we assume ongoing smaller orders and steady uptake from existing customers, while treating larger potential deals as upside. It is still early in understanding how bigger customers will roll out, whether all at once or in stages, so detailed guidance is difficult at this point.

Internally, we are preparing to handle large opportunities by building inventory. We currently manufacture UltraMIST systems at about 25 per week and are working to double that on 60 days’ notice, which is the challenge I gave to our operations team. We are close to being able to achieve that.

21/03/2025 Can you manage large customer orders to avoid lumpy revenue in any given quarter?

If a customer wants systems in the field, that is our goal because systems in the field drive consumable sales and get more patients on care. We would prefer to deliver them earlier rather than later. When giving guidance, we focus on the base rate of business that we can rely on and do not build forecasts on the assumption of large one-time deals every quarter.

That said, when those opportunities arise, we want to be ready to move quickly and take advantage.

17/04/2025 How do you view SANUWAVE’s opportunity and market positioning today?

This is a very rare situation. In nearly 30 years, I have seldom found a market this large with so much white space. We are past the early hurdles, as the company is fully commercial and FDA cleared. The next hurdle in this industry is reimbursement, and SANUWAVE has nationwide CMS reimbursement at Schedule One. In fact, CMS rates were increased substantially a couple of years ago.

Wound care is a much larger market than most realize, at $45 billion in the US, and I believe that estimate is low. Medicine is shifting toward an evidence-based paradigm, restructuring reimbursement around efficacy and cost effectiveness. That dynamic plays to our strengths. We have a highly differentiated product, backed by an extensive intellectual property portfolio, and positioned well to benefit from these changes.

17/04/2025 Where is Ultramist gaining the most traction, and how do nursing homes benefit?

We are seeing strong adoption in nursing homes and skilled nursing facilities, where the fit is natural. Patients are already there, making it easy to deliver treatment three times a week, which is optimal early on. For nursing homes, patients who were previously expensive become profitable because diabetic and venous ulcer patients are reimbursed at higher rates, but their downstream costs are large. By treating wounds in-house, facilities avoid sending patients to hospitals, retain occupancy, and improve quality-of-life outcomes. Preventing bed sores also protects CMS quality scores, which affect reimbursement across the board.

17/04/2025 How is your sales model evolving as you scale, and what contributed to 2024 success?

We began 2024 with just two salespeople, primarily using a direct model with limited distributors. By year-end, we had nine salespeople and had shifted toward a consultative approach. This model focuses on building long-term partnerships rather than quick sales, and it requires a different type of salesperson—more experienced, senior, and used to selling high-ticket medical devices to CFOs, COOs, and CEOs rather than only therapy managers.

As SANUWAVE has grown, it has become easier to attract top talent. Joining us no longer feels like a risky career move but rather a chance to participate in a profitable, fast-growing company. We have been turning over parts of the sales team to align with this strategy. At the start of 2025, we hired a new head of sales, Tim, highly recommended and a protégé of our board member Jeff, who previously led sales at Abumed. Together they built that company from zero to $400 million in sales. We are excited to reunite that expertise and combine it with our chief commercial officer, Nancy Gilmore, whose market knowledge and organizational skills are central to prioritizing opportunities and structuring the sales process. This combination gives us confidence in scaling effectively.

17/04/2025 How are you expanding sales coverage and marketing to drive awareness?

We ended Q1 with nine salespeople, three of whom were new since Q4, and we plan to hire another three or four quickly. That will give us full national coverage for the first time. We are also launching a more structured marketing effort—attending conferences, symposia, and building visibility so Ultramist is better known. A key tipping point is shifting from sales calls that begin with “what is Ultramist?” to having real mindshare where people are already familiar or even referred by peers. We are also beginning to engage with larger, more sophisticated customers who could purchase several hundred systems. These sales have longer cycles, but our team now has the experience to manage them. Internally, we call this the “elephant list,” and we are learning how to close elephants.

17/04/2025 Why had Ultramist’s potential not been realized before SANUWAVE’s stewardship?

It is a complicated history. The product was originally developed by a company run by engineers. They built an excellent device but lacked reimbursement and capital, so traction was slow. They eventually ran into financial trouble and sold it. Successive owners were also thinly capitalized or distracted. Cellularity, one owner, focused its capital on early-stage biotech programs, leaving Ultramist as a back-burner asset. When SANUWAVE acquired it in August 2020, COVID made commercializing a new device extremely difficult.

Ironically, the pandemic helped. “Care to the edge” delivery models—treating patients where they are—gained traction out of necessity, and they proved to be better for patients, providers, and payers. Since SANUWAVE took over, reimbursement rates increased from about $120–$180 to an average of $420, and eligible places of service expanded to include nursing homes, assisted living facilities, and patient homes. These changes, combined with stable capital and focus, created an ecosystem where Ultramist could thrive.

09/05/2025 Can you quantify system placements across smaller and larger customers, and how that may look going forward?

Thanks, Carl. Good to catch up. That sounds simple but is actually complicated to delineate. For example, we have customers that are large chains of nursing homes or long-term care facilities, but each facility buys individually and makes its own decision. Whether you count those as a single large customer or many small ones changes the picture.

If we treat those chains as single entities, we had 58 new customers in Q1. Defining big versus small is tricky since some customers grow rapidly. A group that is at five or ten units now could reach 40 or 50 by year-end. It is more about our ability to grow with each customer than about labeling them large or small.

09/05/2025 Within the total addressable market, where are you seeing success, and what types of wounds is the product mainly used on?

We do not get clear visibility into patient-level data because of HIPAA rules. Providers hold the patient records, and we do not see details such as exact wound types. We talk with practitioners to understand how they are using the product and share insights across providers, but we cannot track the exact number of diabetic foot ulcers, venous leg ulcers, burns, or other wounds. All of it is billed under the same code, so that data is not accessible to us.

09/05/2025 With Tim joining, how is the sales strategy evolving compared to six months ago?

We are essentially continuing the strategy we developed in the latter half of last year, focusing on engaging larger customers at a higher level. We wanted senior, seasoned sales executives who are accustomed to selling in the more executive-facing parts of facilities. It has been interesting to see how people with strong medical device backgrounds, even if not wound care, bring a fresh approach. That has started to build real momentum.

The core strategy remains the same. We see strong opportunities with nursing homes and skilled nursing facilities that have their own clinical groups. At the same time, the mobile and home health care space is growing rapidly, and we are making strong outreach there, along with doctors’ offices and hospitals. At this stage, we estimate we are only at about 1% market penetration. The focus now is deciding what to prioritize and where to allocate resources.

08/08/2025 Do you expect to expand beyond 13 sales reps?

Right now the focus is on getting everyone fully trained and performing at a high level. The group feels qualitatively strong, with good collaboration and best practice sharing. We may add a few more reps this year and are considering whether sector-specific hires or regional managers make sense, as U.S. coverage still involves large territories. For now, we believe we have true national coverage, but modest expansion is likely.

08/08/2025 Which patient types or facilities are targeted in the October marketing program?

We are moving toward a “market of one” approach, tailoring marketing by wound type, patient type, and user type. This includes targeting mobile wound care providers, nursing homes, skilled nursing facilities, hospitals, podiatry practices, and wound care centers. The goal is to differentiate and tailor the offering so clinicians see how the product fits into their practice. Success depends on building trust and reaching critical usage levels so that the product becomes widely recognized and recommended across regions.

08/08/2025 How are you approaching large “elephant hunting” accounts with the new team?

We were recently added to the approved vendor list at one of the largest U.S. hospital chains, creating a significant opportunity. We are engaging with organizations that have several hundred locations. Our new key accounts representative joined in mid-July, so it is early, but momentum is building. Large accounts vary: some hinge on a single national decision maker, while others require winning site by site once approved. Penetrating these networks tends to reach a tipping point where the question shifts from “why should I use this?” to “why aren’t you using this yet?” We are working toward that critical mass.

Outlook & Guidance

16/08/2022 What is the plan to get back on OTCQB and eventually list on NASDAQ?

Great question. Let me first address OTC, then NASDAQ. We were moved to the OTC gray markets in September last year when we did not get our 10-Ks filed on time. Since then, we have caught up with filings and moved to the OTC Pink Sheets. The application to move to OTCQB has been started and could take anywhere from two to ten weeks. The group we’re working with expects it to be on the faster side. Once approved, we’ll inform investors. This will enable broader market maker participation, solicited bids, and smoother transactions for individual investors through more brokerage firms.

The next step is NASDAQ. We’re working with our investment adviser, Kestrel, and have made governance improvements, such as an independent Board and separating the CEO and Chairman roles. We added three new Board members in April and another as part of a recent transaction. Requirements include a track record of timely filings and certain balance sheet conditions. This likely won’t occur in 2022, but in early 2023. The recent raise requires us to achieve a NASDAQ listing, making the company investable for institutions. We now have the right team in place to build the accounting and finance function, stay timely with filings, and execute on this process.

16/08/2022 What would success and revenue growth look like for SANUWAVE in 2023?

The wound care market is undergoing significant change, and our product belongs in every wound care center treating chronic wounds. That represents billions of dollars in opportunity. As the saying goes, you eat an elephant one bite at a time. Our focus is execution—adding evaluations, placing devices, ensuring usage, and penetrating markets. The goal is to heal wounds, save lives, generate economic returns for centers, and deliver cost savings for payers.

We offer a unique situation: physicians can earn more using our product while payers save money and wounds heal faster. The only constraint is resources to build out effectively. With the recent capital raise, we can scale supply chain, hire the right sales team, and expand clinical work to target private payers more aggressively. These are the initiatives we are pursuing to ensure success in 2023.

15/11/2022 Looking a year out, what would success look like? What are the hurdles for DermaPACE reimbursement and revenue, how will the revenue mix split between Ultramist and DermaPACE, and what about international growth?

Ultramist is a wonderful product with fantastic reimbursement today. Clinically it is strong, it’s lightweight and mobile, and it’s the easiest success path for our sales team. Patients are happy, physicians earn money, and payers save money relative to other therapies. That’s the winning combination, and Ultramist is the lead dog right now. It’s only eight pounds, so nurses can easily bring it into nursing homes, which makes it even more compelling. Ultramist will continue to be the driving force.

DermaPACE will also grow next year. We got our first product ramp in October. When you move manufacturing facilities, you must go through recertification, which stalled DermaPACE this year, but it is back on track. We’ll have more supply at year-end and then a very consistent flow starting January. The move was not only for cost savings but also to get all talent under one roof. That purpose has been achieved, and supply will be stable going forward.

Internationally, we see large opportunities in both new and existing markets. Our South Korean partners just received reimbursement, so we expect a sizable ramp there. In Brazil, the partnership is having tremendous success and should contribute over $1 million next year, if not more. Italy and Europe are performing well, and the Middle East is also showing strong progress. Now that we can ship again after completing the facility move, the focus is on ramping those markets.

15/11/2022 How are you approaching high-utilization accounts and best practices for consumables? What would you deem success a year from now?

We are making a concerted effort as we put product in the field to focus on accounts with high attach rates—those using a lot of consumables. We have an average of a little over 26 per month being used, but some accounts are using over 100. A lot of mobile wound care providers are going through very high numbers of applicators.

It’s a matter of serving more accounts like that and spreading best practices to existing ones so they get more use out of the devices they already have. On success a year from now, it’s premature to provide guidance, but we can point to console production increasing from 240 to 600 units and applicator production from 5,400 per week to 24,000 per week. That should give some indication of what we are preparing to address.

12/05/2023 Can you expand on reimbursement across different places of service?

In my experience, a strong device reimbursement spans multiple places of service, such as hospitals and other settings. UltraMIST has reimbursement in hospitals, including wound care and inpatient, and also strong reimbursement in private offices through Medicare at Place of Service 11.

Our fastest-growing channels are Home Health, where mobile practices treat patients in their homes (Place of Service 12), assisted living facilities (Place of Service 13), and nursing homes, which are quickly becoming our top channel. The results go beyond reimbursement to include benefits for chronic wounds and deep tissue injuries. Having reimbursement in five places of service gives us multiple dynamic channels to pursue.

12/05/2023 Should investors assume breakeven or profitability going forward?

Our goal this year is profitable growth, as we cannot rely on returning to the markets. Breakeven is about $1.8 million per month with 75% gross margins. That equates to roughly 25 systems, plus or minus, and we are tracking close to that.

Once supply is resolved, demand will not be an issue. We have a backlog of customers waiting for product, so we expect to cross into profitability once supply constraints are fixed.

10/11/2023 What is the current state of dermaPACE and outlook going forward?

Our dermaPACE business was slower in Q3, and we are reassessing its direction. We are reviewing international channels to determine which are most likely to deliver results, as well as two U.S. channels, particularly in cash-pay applications that do not require extensive studies and reimbursement work.

We are also considering participation in longer-term studies that could generate data to support attractive reimbursement opportunities. Products without nationwide codes are always more challenging, so we are weighing immediate versus long-term opportunities. While the update may sound vague, we expect to provide more concrete plans within a quarter.

10/11/2023 Can you update on merger approval, timing of the vote, and any hurdles?

We filed our amended S-4 last Friday in response to SEC comments on the first draft, so the process is now back in their court. We expect another round of comments, which is typical, and assuming those are straightforward, we are aiming to close the deal this year. Of course, some factors are outside our control, which limits predictability.

On closing conditions, we are in good shape on our side. The main remaining items are the shareholder votes, the SPAC public warrant exchange, and financing. We are targeting $13 million of capital in the deal and currently have approximately $9 million committed before formally raising the rest. I believe we are within striking distance and will push to close the deal this year.

10/11/2023 Are you concerned about shareholder support for the merger vote?

I do not believe so. Their holders appear supportive, our holders appear supportive, and I see no indication that either side does not want to proceed.

10/11/2023 What is your production capacity outlook for devices and applicators?

We have reached a weekly double-digit cadence on system production, which puts us in good shape for the next quarter. Looking into 2024, we expect system capacity to be two to three times higher than in 2023. On applicators, which are critical to the company, demand will require meaningful expansion next year.

We are pursuing a minor redesign to make applicators more manufacturable, which should free capacity by simplifying assembly. With Andrew Walco leading efforts, we have made strong progress on both systems and applicators. I am confident in our ability to expand capacity significantly next year.

22/03/2024 When should investors expect the exchange listing to be completed?

If all these matters were within our control, I could give a time frame. Now that we have our financials, we are capable of finalizing pro formas and filings. However, the completion of an exchange listing depends on external groups and factors outside our control. Our hope is that it will not be long, but I hesitate to provide a precise timeline since the process remains somewhat opaque.

22/03/2024 Is a legal matter delaying the merger?

No, it is not a legal matter. The timing is tied to completing pro formas, SEC filings, and the finalization of the exchange listing.

13/08/2024 How are you generating more sales, and will publicity help given the low share price?

Our focus has been on first cleaning up the capital structure so investors can properly value the business on its fundamentals. The current note and warrant structure makes it difficult to assess the true share count and market cap. Once those fundamentals are clear, we believe the story will stand out.

At present, many investors avoid a stock priced at fractions of a cent. This is why we are working to bring the stock price to a more respectable integer level. With my 30 years of capital markets experience, I believe that once the stock is positioned more appropriately, we will be able to expand outreach and gain far more attention from The Street.

08/11/2024 Should we expect margin step-ups on systems in Q4 and on applicators in 2025?

Correct.

08/11/2024 What are you seeing in the new customer pipeline?

The top of the funnel is the best we have ever seen, though it looks different than before. These are larger, more sophisticated customers who could become much bigger buyers. Their decision process is slower because buying 100 systems is very different from buying two. We are still learning what it takes to move them through the funnel, but we are excited. Over the next several quarters, it feels like we could be turning a corner.

08/11/2024 Outlook for operating expenses and salesforce size next year?

We started the year with three salespeople and, despite some turnover, now have nine. We expect to be at 11 by mid-month, which gives us traction, particularly with larger customers. Headcount increases do add to operating expenses, but not proportionally. Q3 included some expenses tied to the October transaction and nonrecurring engineering costs for new production lines. Despite headcount growth, operating expenses in Q4 should be roughly flat with Q3, with modest growth across 2025. Swing factors include weather and potential additional clinical studies. Overall, using the Q4 dollar level as a base is reasonable.

08/11/2024 How soon do you expect to be cash flow positive, and will more debt be needed?

The company was cash generative in Q3. We have not issued formal guidance, but based on what we have said regarding operating expenses and revenue expectations for Q4, investors can do reasonable math from there.

17/04/2025 Where do you want SANUWAVE to be in five years?

We are entering the next stage of our corporate cycle. In five years, I would like Ultramist to be so embedded in the wound care lexicon that “I misted it” becomes a verb. I want it to be universally understood as standard of care. That is the vision—broad adoption and recognition at scale.

17/04/2025 What is the incremental contribution margin on growth, and how much revenue drops to the bottom line as you scale?

This is one of the strengths of our capital-light model. Once the new applicator design is in production, we expect gross margins to improve by another three to four points, potentially moving into the 80% range. At that point, after paying commissions and operating expenses, there is no reason we should not sustain dropping roughly 50 cents of every incremental revenue dollar to operating income. That kind of leverage can move the needle meaningfully as we continue growing. Our large net operating loss carry-forwards also mean we will not be paying taxes for years, further enhancing cash conversion.

09/05/2025 Any upcoming conferences or events we should expect in the next few months?

We are starting to consider additional conferences and non-deal roadshow activities for later in the year, but nothing is definitively set at this time. We will provide updates as those plans evolve.

Risks & Macro

17/04/2025 How exposed are you to CMS reimbursement changes, and how do you protect against that risk?

Anything reimbursed by CMS can always change, but the last major move on our code was upward. Annual adjustments are usually small percentage tweaks applied broadly. The best way to protect reimbursement is to prove the product works. CMS wants to know whether it is effective and cost efficient. Now that we are well funded and stable, we are partnering with sophisticated users to gather data, publish papers, and present at conferences. For example, we will present posters at SAWC at the end of this month. We are also exploring new indications, one of which represents a potential $2 billion opportunity. Some may require modest clinical work, but nothing difficult.

Another safeguard is to prevent code abuse. Our code is narrow, specific, and not widely applicable to other devices, which makes it easier to police. When others try to use it inappropriately, we can push back. By keeping the code clean and continuing to show strong value for money, we strengthen our case for reimbursement stability. That approach has already delivered pricing increases and place-of-service expansions, though with CMS there can never be 100% certainty.

Personal Questions

17/04/2025 Can you walk us through early career experiences and how you became CEO of SANUWAVE?

Sure. My business partner, Jeb Basser, and I founded Manchester Explorer Fund in 2004. We have run it together for 22 years as a highly concentrated activist fund specializing in life sciences. We typically take between 10% and 40% positions in the companies we back, acting as long-term, hands-on investors, though not usually this hands-on. Our fund led SANUWAVE’s recapitalization in August 2022, and I became chairman then. By early 2023, the board and I began discussing the need for a leadership change, and in May 2023, I stepped in as CEO.

It has now been 23 months. From the start, it felt like a complete renovation of the business. We rebuilt the company almost from the ground up, with about 70% of employees new since I started. The goal was to make the company operationally effective, capable of capturing its opportunity, and to clean up the capital structure so it could be valued on its business rather than its complicated cap table.

17/04/2025 What makes this a passion project for you, and how does Ultramist impact patient care?

This is a huge market with tremendous white space, and what excites me is aligning the incentives of patients, payers, and providers while delivering real outcomes. On a personal level, it became tangible when my uncle developed a Wagner Stage 4 wound after a systemic staph infection. He was treated at a leading Florida hospital with traditional wound care—gauze, antiseptic, and a plan to wait months for swelling to subside before surgery. I was not satisfied with that approach, so we arranged for him to be treated at home with Ultramist by a mobile wound care provider.

The results were dramatic. After just five treatments, tissue granulation was visible. Within three weeks, the wound was mostly closed, and by March 28—about six weeks in—it was fully healed, pain-free, without scarring, and with rapid return of hand function. That is the difference Ultramist can make. When people ask about competition, the real competition is outdated wound care practices still used in hospitals today. This is what motivates me and underscores why SANUWAVE has such an important role to play.

Other

03/04/2023 When will management provide the next updates?

If investors want to speak with management, we’re glad to set that up outside blackout periods. Q1 results will be released in May, and we’ll share other updates throughout April and May. We appreciate everyone’s support and look forward to keeping shareholders informed.

Disclaimer:

The following transcript and Q&A have been generated with the assistance of Artificial Intelligence (AI). While we strive for accuracy, completeness, and clarity, the content may contain errors, inaccuracies, or misinterpretations. Neither the company featured in this document nor ValueBridge assumes any responsibility or liability for the accuracy, reliability, or completeness of the information presented.

This material is for informational purposes only and should not be construed as official company communication, financial advice, or a definitive representation of the company's views. Readers should independently verify any information before making decisions based on it.

Sources

Earnings Calls

youtube.com/watch?v=FC0GISpguo4&t=1s&pp=ygUVc2FudXdhdmUgTW9yZ2FuIEZyYW5r

Sylogist is a SaaS provider serving government, education, and nonprofit sectors with ERP, CRM, and payments platforms. The company generates over 60% recurring revenue and reported an annual run rate above $62 million by 2023, with EBITDA margins in the mid 20s%. Contracts like the Texas VSS award (CAD 15 million, CAD 3 million recurring annual revenue) highlight its ability to secure large, ARR-driven deals without revenue sharing. Bookings momentum is strong, reaching $17 million in Q2 2025, supported by competitive displacements (nearly 75% of bookings). SaaS accounted for 65% of recurring revenue in 2023, with expectations to rise toward 70% by 2024. The company invests 12–13% of revenue in R&D ($2 million per quarter), with strategic acquisitions funded by a $125 million credit facility. Management emphasizes a partner-led go-to-market model, leveraging Microsoft’s ecosystem to accelerate adoption across tens of thousands of underserved municipalities and K-12 districts.

Catalysts & Milestones

2020 - Revenue decline reached 11% before turnaround investments began

2022 - Organic growth reached 17%, swinging from prior 11% decline

2023 - Consecutive quarters of 20%+ organic growth achieved

2023 - SaaS reached 63% of revenue, run rate surpassed $62 million

2023 - First North Carolina school district went live with successful payroll tie-out

2024 - SaaS recurring revenue share expected to approach 70%

2024 - Expansion into 2–3 additional U.S. states planned beyond Oklahoma and North Carolina

2025 - Texas OAG contract secured (~USD 10.6m / CAD 15m, ~CAD 3m ARR)

Investment Highlights

• ARR lifted by 5% annually on long-term contracts, compounding growth

• Annual run rate above $62 million, over 60% recurring revenue

• Texas contract adds CAD3 million ARR, full CAD15 million value retained

• Q2 2025 bookings totaled $17 million, 75% competitive displacements

• SaaS recurring revenue share rose to 66%, targeting 70% by 2024

Future Growth Drivers

• Expansion of SylogistGov and SylogistEd into additional U.S. states beyond Oklahoma and North Carolina

• Microsoft ecosystem partnerships scaling reach into municipalities and nonprofits

• SaaS migration of legacy Bellamy, SunPac, and Great Plains cohorts ahead of 2028 sunset

• Cross-selling payments, ERP, and CRM modules to existing customer base

• Partner-led implementations accelerating customer adoption and reducing internal delivery costs

Risk Factors

• Biannual invoicing delays cash inflows, straining working capital early in contracts

• $1 million ARR hit from NGO funding cuts illustrates policy risk exposure

• Texas VSS contract accounting shifts depress gross margins in year 1

• Heavy OpEx in sales and marketing sustains mid-20s% EBITDA margins

• Acquisition pipeline valuations remain elevated, risking overpayment or delays

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Capital Allocation

11/02/2021 How are you thinking about Sylogist's strategy and mix of organic and inorganic growth?

Given our strong cash position and new credit facility, we are in a very strong position to accelerate M&A. That may include complementary tuck-ins, IP-related targets to strengthen go-to-market competitiveness, and possibly larger transformative opportunities. On the organic side, we will focus on markets that present the best value creation opportunities, making investments in R&D, direct sales, and partner channel initiatives.

Sylogist enjoys high customer satisfaction and substantial best practice expertise that we will leverage in thought leadership and customer success. We also have a significant opportunity to bring new capabilities to customers that already exist in-house and simply need to be repurposed. This will increase our annual recurring revenue (ARR) and lifetime value (LTV), and, as importantly, deepen customer trust and commitment.

11/02/2021 How have rising tech valuations affected your M&A strategy?

Valuations have certainly risen, especially in our spaces as the private equity community has become very active. Given our strong financial position, we can be aggressive in pursuing opportunities. We evaluate companies through a strategic criteria lens of how they drive value creation in our business, supported by our modeling.

With our experience and industry relationships, we can identify and approach companies that may not consider themselves for sale and are not on others’ radar. That gives us the ability to engage and potentially close transactions that competitors may not even see.

12/05/2021 How is the mass integration progressing, and will you use their products in your portfolio?

The mass integration is going very well. Unlike past acquisitions where integration of IP, team alignment, and systems was handled differently, I have brought a methodology I used at other companies that allows us to approach integration systematically, repeatably, and measurably across the organization. Our leaders are actively interacting with their counterparts, and the framework gives us visibility into the effort required.

Most importantly, we know their business well from due diligence, including the markets they serve and the intellectual property they hold. We are well along with integration and expect it to be largely complete by the end of June or early July.

12/05/2021 What is Sylogist’s appetite for further M&A, and how does the pipeline look?

The appetite remains strong. As I’ve mentioned before, we are focused on finding companies that are a good fit, which we qualify against a number of criteria. Our tracker currently has more than 100 opportunities we are following. We recently added another resource to the team to increase outbound connections and research, ensuring we keep opportunities fresh and engaged.

The pipeline is very strong, our appetite is strong, and we have the resources to execute once we identify and engage. We are in a very good, very positive position as we look forward.

17/08/2021 What are your thoughts on the recent link deal with Alio and E-Grantz, and what does it mean for Sylogist and sector M&A dynamics?

The deals in the market are attracting interest from all corners. The one you referenced was consummated through a private equity-backed firm that has been acquisitive. It was an opportunity we were aware of, though it had gone somewhat quiet. The impetus for them to strike the deal was compelling enough that they did not feel the need to reach out further. Overall, the landscape continues to offer opportunities, with a mix of regional players and legacy systems that have been particularly challenged during the COVID period.

We certainly look at similar opportunities within our pipeline, and those conversations are ongoing.

17/08/2021 What does your M&A pipeline look like, and how much capital are you comfortable deploying?

The pipeline is as strong as I have seen. Kudos to the team, as we added resources to increase outbound activity. We are tracking well over 120 opportunities, constantly refreshed and evaluated relative to our strategy and market dynamics. We also use our connections to motivate strategic targets that may not see themselves as for sale.

Those conversations are more active than ever. In terms of size, MAS is generally representative, with targets typically in the $5 million to $15 million run-rate range, where they face hurdles in technology or capital to expand. Overall, the pipeline and market are strong, and we are well positioned to continue pursuing opportunities.

17/08/2021 Where does your dividend strategy sit given heavier M&A investment?

The dividend is a long-standing value component for our shareholder community. While it is not the cherished golden egg, it is something we respect and review each quarter. We weigh the dividend’s value against other uses of capital, such as M&A, and those conversations will continue.

Overall, our commitment to the dividend remains strong at this time.

14/12/2021 Will future M&A focus on managed services or was Pavliks mainly about the Portal Connector?

We value all three facets of Pavliks. Its synergies with our D365 practice expand our North American footprint. Government grants flowing to cities and states to upgrade technology will create a strong project pipeline for 2022 and beyond, positioning us well for services delivery.

The Portal Connector is especially synergistic, as it can be pulled across our customer community to support citizen engagement, school communications, medical records, and other two-way data needs. Managed services also bring strategic advantage. Customers with a SaaS posture often struggle with licensing, subscriptions, security, and optimization. By complementing in-house teams with consulting and expertise, we help them stay secure, efficient, and ready for next-stage adoption. Managed services will grow in value as we expand our SaaS footprint.

14/12/2021 Can you provide an update on the M&A funnel, deal multiples, and fiscal 2023 revenue goals?

We believe our $20–25 million fiscal 2023 revenue target from M&A is achievable, possibly sooner, if transformational deals arise. Good companies with attractive attributes still command strong multiples, while weaker companies draw less interest and lower valuations. We are not pursuing bidding wars, but instead building trust with founders who want a strong steward for their business.

Our deal tracker is more robust than six months ago, reflecting a refined screen focused on growth orientation and the Rule of 40. We have added resources to support outreach and diligence while protecting the executive team from distraction. We can move quickly if companies enter a process and are confident in our ability to execute without disrupting core operations.

10/02/2022 Can you update us on M&A activity following the credit facility increase to $125 million?

Our M&A pipeline is strong, stronger in both quality and visibility than at any time in the past 12–15 months. The team has been disciplined, focusing not on dialing broadly but on entering meaningful conversations with targets where Sylogist can be a true partner. Capturing companies before they enter a formal sales process often leads to better outcomes.

The three acquisitions we made recently have created positive momentum. Leaders of those businesses have shared their experiences, and because our approach was not “buy and bury” but instead collaborative and respectful, it has generated quality inbound leads from brokers and direct outreach. We feel very good about the quality of our pipeline and our ability to continue executing in the markets we’ve targeted.

12/05/2022 What is the outlook for M&A activity with the expanded $125 million credit facility?

Our M&A pipeline is stronger in quality and visibility than at any time in my 15 months here. The team is disciplined in pursuing meaningful conversations with targets before they enter formal sale processes, which tends to lead to better outcomes.

The success of our recent three acquisitions has generated positive momentum and word-of-mouth in the market, including from brokers and directly from company leaders. This reputation has attracted quality inbound leads, giving us confidence in both the quantity and quality of targets we are evaluating.

11/08/2022 Will M&A activity be higher in the next 12 months?

Our appetite remains high, but we are prudent and strategic. This year’s cadence was not impacted by interest rates, but by some targets not fitting strategically or being at price points we felt were not appropriate for long-term value creation. We continue to be acquisitive, and our deal cadence is now higher than since I joined. We had about 200 targets in our tracker, now we are near 400 across North America and beyond. It is a healthy pipeline, and we will be aggressive on strategic deals that drive our plan forward.

11/08/2022 What are your updated thoughts on the dividend given M&A growth priorities?

Same as before, Jim. I’ve said we would revisit the dividend when we had earned the right to consider the best use of capital. The Board and I continue to evaluate our fiduciary duty to maximize opportunities for Sylogist. While we respect the dividend, we believe at this stage that capital may be better used inside the company to drive growth and long-term value creation.

15/11/2022 Will M&A activity increase in the next 12 months, and how does NCIB fit into capital allocation?

On NCIB, there is no set threshold; the Board will weigh buybacks when they clearly create shareholder value. Regarding M&A, we are in a strong position to pursue opportunities, though we are applying a tighter lens. Our focus remains on executing initiatives already in front of us, which we view as substantial from an ROI standpoint.

We still see M&A as a potential accelerator for value creation, but acquisitions must be complementary. Our platforms—SylogistGov, Ed, and Mission—are already well rounded, so IP is less critical than customer density and talent. The pipeline of discussions is robust, and we continue to scrutinize opportunities carefully.

15/11/2022 Are there assets that no longer fit the business model, and are you considering divestitures?

Since I joined, we have consistently reviewed our portfolio. While some assets may appear asymmetrical, they contribute cash and EBITDA. That said, focus and execution are critical for long-term success, and we continue to evaluate alignment.

We are open to potential divestitures but will only pursue them under favorable conditions. There is no cash pressure forcing sales, and we will not accept terms that fail to reflect the value we have built. Any decisions will be thoughtful and strategic.

15/11/2022 With the dividend cut freeing capital, will you target $20–25 million of annual M&A in 2023 or lower expectations?

Inorganic growth is evaluated through a tight lens of return on investment. We feel bullish about our organic growth and return on invested capital, which remains the priority. That said, our interest in M&A is unchanged. Some private companies still have inflated valuation expectations due to the prior buying frenzy, so we are prepared to be patient.

There is nothing missing in our IP offerings that forces us to buy rather than build. We will continue to pursue opportunities, even outside of formal processes, but patience is now an advantage. The dollar threshold does not change materially, but if activity comes in lower, it should not be viewed as a concern. It simply reflects whether the opportunity is the best use of capital.

15/11/2022 Will you be more acquisitive in the next 12 months, and how do you balance that with share buybacks?

The Board will evaluate NCIB opportunities case by case, without a fixed number. Buybacks will be considered when they create shareholder value. On M&A, we are well positioned and have a robust pipeline, but our lens is tighter. Our focus is on execution of current initiatives with strong ROI potential. M&A remains interesting as an accelerator of value, though we now prioritize customer density and talent over incremental IP, since our platforms in government, education, and mission markets are already well rounded.

15/11/2022 Are there assets that no longer fit the business model, and will you divest?

Since I started, we have continually reviewed assets, including those that may appear asymmetrical. While they contribute cash and EBITDA, focus and execution are what drive success. We evaluate market conditions in the tech sector to assess timing and value.

We will only consider divestitures where we believe there is a fair return. We are not under pressure to sell for cash reasons, so any action would be deliberate and thoughtful, not a forced sale.

15/11/2022 With dividend capital freed, will you pursue $20–25 million of annual M&A in 2023?

Our approach weighs inorganic opportunities against organic returns. We are bullish on organic growth and confident in our ability to win new business. That does not dampen M&A interest, but we see some private sellers still holding inflated expectations after recent market froth, so we can be patient.

Currently, nothing is missing in our IP that compels us to buy rather than build. We will continue to evaluate opportunities, often off-market, but with a tighter lens on ROI. Deal size thresholds may flex, but that should not be viewed as cause for concern—it simply reflects best use of capital.

14/03/2024 How are you approaching capital allocation between organic growth and M&A?

Organic growth remains the priority, and we will continue investing capital in marketing and sales to raise awareness, especially in the newer Gov and Ed markets. Sales and marketing spend will remain in the current range as a percentage of revenue. At the same time, we have free cash flow and credit facilities available for M&A. We do not expect to use equity given dilution concerns, unless in a very unique situation. Our approach will be a blended use of capital, with organic growth as the primary lever and M&A as a strategic complement.

14/03/2024 How has competitive intensity evolved in M&A, and what pace do you expect in 2024?

We do not set a specific pace but remain highly active. Brokered deals remain competitive, but we differentiate through direct relationships built over time, focusing on targets that add IP, customer density, or team strength. M&A remains a strategic lever, supported by the board, but it is not required for competitiveness. We believe our existing customer base provides credibility, so acquisitions are pursued through a disciplined but opportunistic lens.

09/05/2024 Were the $800,000 restructuring and acquisition costs mainly earn-out accruals and integration?

That is accurate. About $600,000 relates to the Mission CRM earn-out accrual, which combines Q1 and Q2. Their fiscal year ends September 30, so we are at the halfway point of year three.

The remainder reflects acquisition and integration costs.

09/05/2024 How do you view M&A competitiveness and urgency in education and public sector markets?

We feel positive about our approach. Brokered deals remain competitive, but our strength lies in direct outreach to founders and organizations not currently in a process. Our network and long-standing relationships across our three verticals give us direct access to strategic opportunities.

We focus on two criteria: customer density and strategic IP that complements our platform. There is no urgency to act, as deals must evolve on their own cadence. Direct outreach, ongoing conversations, and opportunistic timing remain key to our M&A strategy.

11/05/2023 Are you still targeting $20–25 million of acquired revenue this year, and what are you seeing in private market valuations?

We continue to see private company valuations at a premium that does not make sense for us right now. We are engaged in conversations and stacking actionable deals, but we believe time is on our side as market pressures begin to reset valuations. For that reason, I would not put a firm pin in the $20–25 million acquired revenue target for this year.

We think patience is working in our favor. At the same time, strong execution on the organic side is ensuring that management remains focused on initiatives with the highest return on invested capital. Our organic strategy is delivering, and we do not want distractions from that.

11/05/2023 How are you thinking about share repurchases while waiting on M&A?

We are aligned with the idea that repurchases are highly accretive at current levels. The Board is actively discussing continued use of the NCIB to enhance shareholder value. We believe the stock price is ridiculously low compared to the value creation path we see ahead.

We intend to keep taking advantage of this opportunity to buy our own shares, while also encouraging our investor community to recognize the same opportunity. Repurchases fit alongside our internal investments and patient approach to M&A as part of delivering long-term shareholder value.

29/09/2023 How do you view capital allocation and M&A at Sylogist?

Once we had data proving our strategy was working, we significantly cut the long-standing dividend to free cash for growth investment. We also put a normal course issuer bid in place during the tech sell-off, repurchasing shares to create value. Debt repayment is another focus, with about $20 million outstanding from the three acquisitions since I joined. With a $125 million credit facility available, I want to keep dry powder and avoid being constrained by debt when strategic opportunities arise.

M&A for us is an accelerator of organic growth, not a revenue growth mechanism. We will not chase shiny new objects or stray from our three core markets. At current share prices we do not intend to use Sylogist paper for deals to avoid dilution. We see the SaaS flywheel building momentum, accelerating revenue growth, expanding partner channel leverage, and increasing gross margins. With three massive markets in buy mode, positive reception to our platforms, and KPIs trending strongly upward, we are only at the beginning of creating long-term shareholder value.

09/11/2023 Guidance on capitalized R&D going forward?

The increase this quarter was mainly from tail-end education investments and rollout of our victim services suite. We saw more eligible projects in those areas. While we are not providing formal guidance, we expect elevated capitalized R&D through year-end, then a return to normalized levels in 2024 as most incremental investments are completed. We are in our 2024 budgeting cycle now, so further clarity will come next quarter.

08/08/2024 With strong vertical momentum, is M&A becoming a bigger focus, and how is the deal landscape?

Yes, it continues to be a focus. For us, it is not an or, it is an and. We remain diligent and see many opportunities in the space, but we are disciplined about only pursuing deals that are synergistic rather than adding revenue for its own sake.

Strategic M&A is an accelerator for us. We are focused on complementary intellectual property, talent, and customer density. Appetite for acquisitions remains high, but we want the right results, not distractions.

07/11/2024 How are you approaching M&A in the current market?

Our appetite for M&A remains strong. We continue active outreach, both directly and through partners, and we have a credit facility available to pursue deals that make sense. We are disciplined about not taking on burdensome or ill-fitting assets.

Valuations remain high for quality assets, with significant activity in public processes. We are also pursuing opportunities that may not yet be in a process, where we can present a compelling preemptive case as a buyer. Although we have not closed a deal in recent quarters, we remain very much in the hunt and continue to evaluate targets for value creation.

07/11/2024 Can you update on capital allocation priorities and M&A focus?

Our capital allocation priorities remain consistent. We will continue exercising our normal course issuer bid, as we believe there is headroom in share value and that repurchases remain a shareholder value opportunity. On M&A, while we are complete on IP, bolt-on or complementary IP remains attractive, particularly if it supports school districts, municipalities, or charities. We also prioritize customer density, especially where legacy communities have not moved to SaaS and may need a bridge solution.

We are open to acquisitions as well as partnerships that generate royalties without requiring full purchase. Our partner community has relationships with many solution providers, creating opportunities for integration and revenue. We have the team, playbook, and appetite to pursue both organic and inorganic growth, while remaining disciplined in execution.

14/08/2025 What are your investment priorities beyond R&D, and where do you see mid- to long-term operating leverage for margin expansion?

Without a doubt, we are leaning in further on sales and marketing motions, where ROI has been very strong. Partner advocacy and direct efforts are raising awareness significantly; a year ago, few Canadian municipalities knew of SylogistGov, but now nearly all do. Customers are pleased with the new software, which provides material advantages over legacy systems.

Sales, marketing, and partner enablement remain key areas of focus. We also evaluate capital deployment across debt repayment, inorganic opportunities, share buybacks, and reinvestment where we see long-term value creation.

Competitive Advantage

14/12/2021 Can you update us on the payments initiative and its opportunity?

It is a unique win for us because we own the technology, unlike others who rely on partnerships. Shortly after I joined, I identified it as a hidden jewel. We have since developed pilots offering a ready-to-go model across product platforms, enabling easier displacement of incumbents through value beyond pricing.

The richness of transaction data fed back into ERP or fundraising systems provides differentiation. Materiality in 2022 is limited, but it builds a flywheel effect as more transactions occur and deployment expands across our footprint. We expect green shoots in the back half of this year, with long-term growth ahead.

10/02/2022 What interest do Bellamy and SunPac communities have in cloud migration, and what is the revenue lift?

Interest is high, as customers recognize they are on legacy systems and cannot delay digital transformation. We have conducted webinars and roadshows to demonstrate our roadmap and technology, generating excitement and long-term commitment.

Beyond services revenue, cloud migrations create pricing opportunities and wallet share expansion. Modern platforms offer more innovation, and we can cross-sell additional intellectual property such as payments. This combination should drive recurring revenue lift and expand our relationship with these customer communities over time.

12/05/2022 What is the cloud migration appetite in Bellamy and SunPac customer communities?

Appetite is high, as these customers know they are on legacy systems and cannot postpone digital transformation. We have run roadshows and webinars to acclimate them to our technology and roadmap, and the response has been very positive.

Beyond services revenue, there is real pricing opportunity from moving to more modern platforms with greater innovation. This also enables us to cross-sell additional IP such as payments. We see meaningful potential to increase wallet share over time.

15/11/2022 What trends are you seeing in pipeline size and development?

We now have a much stronger pipeline due to consolidating disparate marketing systems into a single company-wide platform. All initiatives are tracked consistently from first inquiry through deal progress. Lead activity is strong within our ideal customer profile, which is exactly where we want it. We no longer chase opportunities outside that profile.

All new deals are viewed through a lens that ensures a material IP component, driving annual recurring revenue (ARR) and higher billing rates on project services. This positions us competitively with a full SaaS posture, strong customer satisfaction, and references that support our credibility in the market.

14/03/2024 What gives you confidence in accelerating ARR conversion and deal closures in coming quarters?

Our platforms are now industry leading in innovation, usability, and full functionality, which strengthens our competitive position and ability to win business. Customer advocacy has never been stronger, and with pipeline expansion and ICP targets, we are confident in converting more leads. Both direct and partner efforts are driving attachment rates and increasing deal velocity, and as buying cycles kick in, we expect even greater momentum in the back half of the year compared to 2023.

14/03/2024 Are partner contributions broad-based, or are they mainly from Microsoft?

We are seeing both. Microsoft is walking us into deals in our targeted Ed, Gov, and nonprofit markets, while other partners with regional or North American footprints are also becoming accredited and bringing us opportunities. Collaboration between our team and partners is not easy, but under the leadership of our CRO, Grant McLarnon, we are building a repeatable, scalable model. Customers are enthusiastic about these partnerships, and we see partner traction as a key differentiator going forward.

14/03/2024 What drives success in competitive displacement wins?

Three factors stand out. First, competitor pricing often assumes customers will renew at levels they no longer find acceptable. Second, many competitor offerings lack a full SaaS posture, while customers now demand stronger security and innovation. Third, customer advocacy is powerful—our satisfied clients are sharing their experiences with peers, which drives awareness and credibility for Sylogist beyond what marketing alone can achieve.

09/05/2024 How important is word-of-mouth versus direct and partner sales efforts?

Word-of-mouth is essential but not sufficient on its own. Referenceable customers who can speak to successful transitions or long-standing partnerships are a critical lever in both direct and partner-driven sales. These testimonials differentiate us and reinforce confidence in our platform and execution.

Both our direct sales team and partners rely heavily on this, and it remains a must-have element of our strategy. However, strength of platform and delivery capability are equally critical to win and retain business.

29/09/2023 How would you describe the customer value proposition of Sylogist’s products?

Our differentiation is not just technology. Public sector clients adopt slowly, and when they do, they want a trusted partner to guide them, not simply sell software. Many had used legacy systems for 20 years. We focus on easing that transition, helping them change ingrained processes while ensuring staff feel empowered, not overwhelmed. Citizens, parents, donors, and teachers expect more, so we provide solutions that deliver value quickly and help organizations adapt successfully.

29/09/2023 Why is your Net Promoter Score (NPS) so important, and how have you improved it?

We poured in both personal and political capital to deliver what we promised. For decades, this market has been overpromised and underdelivered to. I told the board I would only take this role if we could be truthful, transparent, and consistently over-deliver. We rebuilt trust by engaging customers early in our roadmap, involving them in development, and giving them a voice in shaping outcomes.

When I started, we faced churn, revenue loss, and looming renewals. COVID ironically gave us breathing room, as schools and governments delayed ERP changes, allowing us to prove ourselves before customers made decisions. We engaged key customer leaders—respected voices in their peer groups—and worked with them first, creating advocates who then influenced others. That approach doubled our NPS in less than two years, moving us into the top-tier “great” category, and it continues to fuel growth through customer advocacy.

29/09/2023 How do dynamics in the public sector drive both repeat and new business?

There is no place to hide in this market. If you disappoint one customer, the entire community knows about it quickly. On the other hand, if you deliver and build trust, word spreads just as fast. In the charitable sector, professionals often move between organizations, carrying their experiences with them. That mobility reinforces the importance of being a trusted partner.

These are not “nice to have” systems; they are the systems that run schools, towns, and charities. That makes us extremely sticky, with lifetime value through the roof. But if trust erodes, customers will influence others not to work with you. After 35 years in this space, I deeply appreciate how critical reputation and trust are in sustaining growth.

07/11/2024 What is your strategy to protect Government customers and drive organic growth?

Our moat comes from the lack of viable alternatives matching the sophistication and security posture of SylogistGov. We can demonstrate working solutions in active municipalities, which partners can present to their customer cohorts. We also use technology and AI to track RFPs across North America, sharing that data with partners to align efforts and ensure pipeline visibility.

In many cases, we can secure sole-source provider scenarios due to our unique Microsoft Business Central platform, avoiding competitive bids and shortening sales cycles. Partners are so encouraged by the opportunity that they are adding staff to better leverage the data and accelerate their go-to-market activity with our platform.

07/11/2024 What must occur to monetize synergistic partner integrations?

Technically, very little. We are continuing to expand our API suite, which makes integration largely plug and play. As part of Microsoft Business Central and CRM, many plug-ins are available out of the box. Strategically, we are prioritizing customer onboarding and success in Government and Education before fully activating complementary IP.

That said, discussions are already underway. Our Director of Partnerships and CRO, Grant McLarnon, are engaged in conversations with potential partners, preparing for future integrations that can drive incremental revenue without acquisitions.

14/08/2025 How do you maximize opportunities given strong partner and internal win rates?

Partner-attached deals are increasingly becoming partner-led, with partners proactively identifying opportunities in their large customer bases, such as legacy Great Plains cohorts. Their confidence in our solutions is driving transitions we might not uncover through marketing alone. This creates an exciting accelerator as partners leverage their deep customer relationships. We see this as a key pillar of the partner thesis and a powerful driver of future growth.

Financials

11/02/2021 Are lower margins from higher professional services revenue an anomaly, or should we expect this mix going forward?

We acquired InfoStrat in April last year, and it generally takes 18 to 24 months to fully integrate an acquisition. We are reorienting that business to be more product-focused versus services-focused, which takes time. As we prioritize products, this will drive more services tied to subscription and maintenance revenue, which command higher margins.

As we integrate InfoStrat, we expect our margin profile to expand and move closer to our long-term subscription-driven model.

14/12/2021 Why did MAS revenue jump 35% quarter-on-quarter to $2.3 million?

As you mentioned, deferred revenue accounting rules changed. Under IFRS 15 we now recognize actual contracted value rather than applying a haircut, which added about $300,000 that had been excluded the prior quarter. Q4 also included billings for contracts running through June, with July 1 moving onto our books.

Beyond that, in addition to recurring subscription fees, we billed for forms used by schools and some professional services on training. Those elements accounted for the variance.

14/12/2021 What drove the 400 basis point gross margin lift in Q4, and is it sustainable?

That margin lift came from an accounting policy change. Revenue previously recognized with a haircut against deferred revenue was fully recognized in Q4, which increased margins. This was a one-time effect tied to the policy adjustment.

10/02/2022 Should we expect mid-60% gross margins after acquisitions?

Mid-60% to low-70% is where we expect to track. We did face delays, and as Bill mentioned, some milestone billings were deferred until this quarter. With those now coming through, I see gross margins picking up into the high-60s to low-70s range.

12/05/2022 Should we expect gross margins in the mid-60% range going forward after acquisitions?

Mid-sixties to low seventies is where we expect to track. Some delays and milestone billings were deferred until this quarter, but we see margins picking up into the high sixties to low seventies range.

12/05/2022 What revenues come from legacy platforms being sunset?

We have not carved that out specifically, but from today’s comments you can unpack it at roughly $1.2 million per year, or about 15% of that portfolio. That is in exchange for a three-year secured contract, plus associated services revenue on top.

11/08/2022 What explains recent gross margin erosion, and have margins troughed?

Hi, Amr. You are correct that professional services carry lower margins than subscriptions. Much of the backlog we worked through required front-end professional services. Additionally, Pavliks has a customized D365 arm that is primarily professional services. Combined with purposeful discounts, this explains margin levels. As subscriptions grow, margins should improve somewhat. We are in the midst of planning for fiscal 2023 and will share more then.

11/08/2022 Is Mission CRM revenue about $0.5 million this quarter?

We do not break out revenue for individual entities on a quarterly basis. That said, they are tracking well and are on pace to deliver more than 100% of revenue compared to when we bought them.

15/11/2022 Should we expect margin compression with inflation and ongoing investment?

We believe margins can continue at current levels. Our ability to attract and retain talent remains within budget, which is solid. Investments will continue, but they will be balanced as we move forward with the posture I described.

14/03/2024 What is the upside potential for SaaS gross margins as the platform scales?

We see SaaS revenue as a percentage of overall revenue accelerating, driven by increased deal velocity and shifting project services to partners. This transition creates leverage for margin as ARR becomes a larger contributor to profitability. Partners are enthusiastic about delivering services with us, and these combined levers position us for stronger margins as SaaS grows.

14/03/2024 How will SaaS margins be impacted by partner-led delivery?

There will be margin contribution from additional SaaS revenue, but we must maintain a professional services bench to train partners as they onboard. This means that while SaaS growth increases gross margins, overall margin expansion will be somewhat muted until we fully pivot to a partner-led delivery model.

14/03/2024 Can you quantify SaaS margin differences between partner-led and direct models?

On an annualized basis, SaaS represented about 65% of recurring revenues at the end of fiscal 2023. We expect this to rise into the high 60s, close to 70%, by the end of 2024.

14/03/2024 Why did EBITDA margins jump in Q4 despite guidance for expansion later in 2024?

The margin expansion primarily came from lower G&A, driven by several factors. Recruiting costs declined significantly because we brought recruiting in-house, reducing reliance on external agencies. Legal and professional fees were lower due to cadence of use. Our vacation policy created a benefit as accruals reset at year-end. Lastly, a few non-key departures late in Q4 created temporary savings, with backfills occurring in Q1 2024.

09/05/2024 Was the gross margin softness from wrapping up a multiyear project just one quarter?

Yes, it was a one-time anomaly. The wrap-up of the project had two accounting impacts: we held off on recognizing revenue until the appropriate triggers, and at the same time, we recognized accumulated costs.

This created the appearance of softness, but it was tied specifically to the timing of revenue recognition versus costs. Your understanding is correct.

11/05/2023 What were the one-time expenses that reduced EBITDA margin by 300 basis points, and why were they not excluded from adjusted EBITDA?

These expenses relate to items we would not expect to see on a continuing operating basis. In a sense, they are the opposite of the tailwinds we saw in the prior quarter. On whether to adjust them out of EBITDA, we discussed it internally and reached consensus that the appropriate approach was to include them, in line with GAAP fidelity.

That said, we do not expect to see these expenses recur. The most accurate presentation was to include them in adjusted EBITDA but call them out as one-time items that impacted results this quarter and will not affect us on an ongoing basis.

10/08/2023 Capitalized software development costs rose to $1.2 million from $700,000. How should we think about that trend?

Capitalized development was 5% of revenue this quarter versus 8% to 9% in prior quarters, with overall product development costs closer to 12%. The 5% reflected a true up from additional projects, some dating back to Q1.

Looking ahead, we expect capitalized development to rise into the 7% to 8% range, higher than this quarter’s 5% but below prior peaks of 9%. The true up affects expenses, not cash costs.

29/09/2023 How has Sylogist’s financial performance evolved since 2020?

Before I joined in 2020, the company had virtually no investment in products, service, or sales and marketing. Revenue erosion had begun and accelerated, with organic growth non-existent and EBITDA myopically prioritized. By Q1 2022, revenue decline reached 11 percent. Through strategic investments, active outreach, and strong team execution, we reversed the trend, generating 17 percent organic growth in 2022, swinging from minus 11 percent to plus 6 percent in Q4. In 2023 we have reported consecutive quarters of 20 percent-plus organic growth.

This reflects the recruitment of a talented management team with deep public sector SaaS experience, effective strategic M&A as an accelerator, and the discipline to endure short-term discomfort to build long-term value. With annual run rate above $62 million, over 60 percent recurring, and EBITDA margins in the mid-20s, Q2 2023 results show profitable growth. Importantly, 64 percent of project services revenue is attached to our intellectual property, a leading indicator of future SaaS ARR growth that becomes a high-margin annuity after implementation.

09/11/2023 Is $2 million per quarter still a good estimate for total R&D spend?

Yes. Viewed as total R&D spend, both capitalized and expensed, we have been running at about $2 million per quarter, or 12% to 13% of revenue. That remains a reasonable number to use going forward.

09/11/2023 What prevents subscription revenue growth from matching 26% SaaS ARR growth, and how does bookings translate into ARR?

Doug, the transition of bookings into ARR occurs as customers go live. Depending on size and complexity, that can take three to nine months. So the timing is tied directly to implementations.

In terms of subscription revenue aligning with ARR growth, subscriptions were 63% of total revenue in June 2023 and are now 66%. We expect that upward trajectory to continue, with a long-term goal of about 85%. While legacy customers still provide valuable recurring revenue, we are transitioning them to SaaS at a steady pace. The objective is not 100% SaaS, but rather maintaining healthy recurring revenue while expanding SaaS.

09/11/2023 Does converting legacy government customers to SaaS increase ARR without similar subscription revenue growth?

Yes, that is a fair characterization. SaaS revenue growth is significantly higher than maintenance and support growth, and also higher than total recurring revenue growth. While timing of conversions creates some offsets, overall recurring revenue and SaaS revenue are both increasing, with SaaS growing the fastest.

08/08/2024 Can you explain the working capital movements this quarter and how to model them going forward?

From a working capital perspective, our business has a clear seasonality. The first half of the year looks very different from the second half. In the second half, particularly on the education side, we issue a large volume of invoices.

This creates positive impacts across cash, free cash flow, accounts receivable, and deferred revenue. What you saw in this quarter’s results is tied to this seasonality, not an underlying shift in working capital dynamics.

07/11/2024 Explain the slight dip in SylogistEd net retention rate this quarter.

There were some legacy customers that no longer aligned with our go-forward SylogistEd strategy. This was anticipated strategic attrition, as several of these customers exited as a cohort during the Q3 budgeting cycle. Nothing should be read into it as churn picking up. It was strategic churn, not something that gives us pause.

15/05/2025 Can you provide more detail on the Texas contract revenue recognition and implementation timeline?

From a revenue recognition perspective, the Texas contract is an integrated bundled arrangement. We are working through the mechanics of this with our auditors. Our best view is that the bulk of the revenue will be recognized as annual recurring revenue (ARR) over the contract term. You will see this reflected in our Q2 results, and we will keep you posted on any accounting updates, but the essential point is that this contract is largely ARR-driven.

15/05/2025 Does the full CAD15 million contract value flow entirely to you, with no partner revenue share?

Yes, that is correct. Unlike typical partner arrangements, there is no margin share in this deal. The approximately CAD15 million is the total contract value, and we retain full revenue.

15/05/2025 Should we expect a lift in project services revenue, or is the contract revenue all embedded in ARR?

That’s broadly accurate, it is embedded in ARR, primarily SaaS, rather than project services or maintenance. The structure of the agreement as a bundled arrangement lends itself to recognition largely as ARR. While the accounting is complex and still under review, the directional assumption is correct.

15/05/2025 What was the NGO funding headwind number, and is it fully reflected in your revenue base?

It was a $1 million ARR impact. We do not view this as an ongoing erosion scenario. Most affected NGOs now have their footing and are moving forward, so we do not anticipate additional drops unless broader policy changes occur.

The timing is important: much of the impact occurred late February into March, so Q1 only reflected part of it. The fuller effect will flow through the remaining three quarters, primarily affecting maintenance and support revenue.

15/05/2025 What is the scope and revenue basis for the Texas VSS contract, and how might it expand?

Because this is a public contract, the published ARR equivalent is clear. The Texas OAG award represents approximately USD 10.6 million, or about CAD 15 million, translating to roughly CAD 3 million of recurring annual revenue. These figures are public and align with what has been disclosed.

15/05/2025 Can you provide more color on revenue trends in Mission, given the quarterly fluctuations?

We are seeing expanding bookings in this segment, with more subscriptions per user at implementation. Importantly, we now have an integrated CRM and ERP offering following the Mission acquisition, which strengthens our pipeline. In some deals we are securing both CRM and ERP, which was not possible before.

Deal sizes in Mission can be lumpy quarter to quarter, as a single transaction can skew results, but the overall trend shows expanding deal sizes.

15/05/2025 What progress have you made migrating your customer base to SaaS, and is this being actively pushed or left to natural evolution?

We haven’t disclosed exact percentages, but the transition is on or ahead of plan. Customers have an appetite to move, and we prefer to operate from one SaaS platform that ties to our knowledge base and AI capabilities rather than supporting both SaaS and legacy. Once we reach the 80% range, some customers will continue at their own pace, depending on their flight path.

That said, not all legacy platforms have a SaaS upgrade path. In areas such as our Epic community and other user groups, we will continue to maintain those platforms as they are. These customers typically generate strong margins and remain profitable. So while the majority of the base will migrate to SaaS, a segment will likely remain on maintenance and support.

14/08/2025 Can you discuss the $17 million bookings mix across SaaS and services, and whether any large deals drove the number?

Gavin, thanks for your question. I don’t think we’ll break out the actual SaaS and professional services mix; I’ll defer to Sujeet on that. What I will say is the blend was very healthy across all three segments. Importantly, there wasn’t anything materially chunky that skewed bookings upward. We saw a good blend of all platforms firing, strong deal closings, and partner success.
So overall, it was just a really strong quarter in terms of the mix and performance of our efforts.

14/08/2025 Can you explain the shift in accounting treatment of the Texas VSS contract between SaaS and services?

You are right, Gavin. Initially, accounting experts viewed the contract as an integrated bundled arrangement, meaning all revenues would be recurring and recorded within SaaS. That would have resulted in higher ARR and SaaS revenue on the income statement.

Based on additional guidance, the view now is that it should be unbundled. Revenues are allocated between SaaS and project services based on standard selling prices. The effect is an unbundling on the income statement and project services costs being fully allocated upfront, which depresses gross margins early in the contract. However, as the contract comes up for its first renewal, the SaaS ARR returns to its original level. That is the key impact of the accounting treatment.

14/08/2025 Can you explain the cash flow treatment of the Texas VSS contract compared to accounting?

On this contract, invoicing is on a biannual basis, regardless of whether it is professional services or ARR. This creates a lag in cash inflows. Meanwhile, costs are incurred and cash is spent upfront, particularly on implementation and project services. That bulk outlay happens mainly in year 1, which is why there is a mismatch between revenue recognition and cash timing.

14/08/2025 What caused the revenue decline in Mission, and was it only NGO customers impacted by U.S. federal cuts?

The decline was predominantly due to further DOGE cuts impacting a small number of large global charity customers, especially in health and human services. Many are reorganizing and reducing in-country footprints faster than expected, which created pressure.

From a numbers perspective, the bulk of the decline came from project services, which are nonrecurring. SaaS subscriptions remained intact and even grew modestly in both ARR and revenue, partially offsetting the impact of DOGE-related reductions.

14/08/2025 Should we view Q2 as peak OpEx intensity, or will investments continue in the second half?

We think thoughtfully through each quarter and invest where ROI is strongest. We highlighted in our prepared remarks continued investments in sales and marketing to support pipeline growth. We avoid calling a quarter a peak or trough, but Q2’s OpEx profile will generally continue into Q3, with selective targeted investments where ROI is highest.

14/08/2025 What was SaaS RPO this quarter, and can you provide color on bookings-to-revenue conversion pace?

Total RPO, defined as deferred revenue plus SaaS ARR contracts not yet converted into revenue plus project services revenue, is roughly the same as last year and slightly higher year over year.

On conversion pace, it varies by segment. Education tends to be more elongated due to school-year cycles, while government has its own timing nuances depending on state and municipal structures. We don’t guide at that level of specificity, but we confirm variation exists by vertical.

Competition

15/11/2022 What sales pipeline trends are you seeing, including new hires and funnel development?

We now have a much stronger pipeline because disparate marketing systems have been consolidated into a single company-wide system. All initiatives are tracked with consistent KPIs, from initial inquiry through deal progress. Lead activity is concentrated within our ideal customer profile, which is where we want to compete.

We have shifted pricing to ensure every deal includes a material intellectual property (IP) component, driving annual recurring revenue (ARR) alongside higher billing rates on project services. Deals coming in reflect this new lens. We are confident in our competitive positioning given our IP stack, full SaaS posture, and strong customer satisfaction, which is reinforced by customers actively advocating for us.

15/11/2022 How will you approach the municipal solution opportunity, including Bellamy migration, new logos, and deal sizes?

The market is calling for a modern mid-market solution, and that is where SylogistGov is focused. Large vendors dominate big cities, but mid-market municipalities lack a full SaaS, comprehensive platform. We see a huge North American opportunity with tens of thousands of potential customers, many stuck with legacy providers who have not modernized.

We will target pockets of customer density where relationships are weak, focusing on smooth data migration and onboarding. Scaling will rely heavily on partner channels for coverage and implementation, leveraging their local presence and delivery capabilities. Typical annual IP subscriptions range from $75,000 to $200,000, with services adding $100,000 to $150,000 per year.

14/03/2024 How much Mission growth comes from competitor displacements?

We are not disclosing that. The more quietly we execute on displacements, the better. Momentum is building, and we believe it is best to keep walking the walk rather than publicizing those details.

09/05/2024 What factors led Dallas United Way to transition to Sylogist?

The United Way of Metropolitan Dallas had been pursuing a national platform with United Way Worldwide and Salesforce since 2018–2019. That project struggled in development and rollout, creating material problems in meeting the needs of local United Way groups seeking corporate community engagement and direct donor capabilities. The relationship dissolved in 2023, leaving a major market looking for a new solution to empower their communities.

It is a market I know well from my prior companies. Dallas is recognized for technology adoption and innovation, and when they looked for a new system, they considered us along with others. The win, along with United Way of King County in Seattle adopting Mission CRM, represents two key leaders in the space. These wins signal more opportunity within a major market as we move forward.

09/05/2024 Do local United Way affiliates decide independently, or could these wins snowball?

They are independent and make decisions at the local level. While the United Way brand is shared, decision-making is loosely held within each community. However, affiliates collaborate extensively on ideas, infrastructure, and strategy.

Momentum among leaders in the space often influences others, and I have seen that play out for years. These wins, and others in our pipeline, are representative of that dynamic.

09/05/2024 How large are customer bases still using Great Plains ahead of its 2028 sunset?

It is material. Great Plains has been widely used, and many partners built strong practices around it. As that platform reaches end of life, it creates significant opportunity for us on the Mission ERP side.

Our strategy is both direct and indirect through channel partners, as they already serve large cohorts of Great Plains customers.

29/09/2023 What is the competitive landscape in your markets, and how do you measure success against larger players?

On the government side, the largest players focus on major cities. They do not scale down well in terms of pricing, delivery, or support. That leaves the mid-market underserved, where legacy regional providers are struggling or unwilling to modernize. Occasionally we compete in RFPs where a Workday or similar tries to move down market, but the price is usually prohibitive. This is where our positioning is strongest.

In education, states have unique requirements for reporting, funding, and compliance, which have traditionally been served by regional vendors. Those players are now running out of steam, creating both organic and acquisition opportunities for us. Acquiring Municipal Accounting Systems in Oklahoma is a good example of riding strong local relationships to scale. In non-profits, we have the most innovative technology, combining fundraising and finance into one platform. Competitors like Blackbaud are raising prices on outdated products, creating a significant opportunity for us to capture share. With a head start in AI, we are confident in extending our leadership.

09/11/2023 How are RFP activity levels and win rates trending across Mission and other products?

RFP activity is increasing and the pipeline is up quarter-over-quarter on a consistent basis. We are refining our ideal customer profile to focus efforts on customers where we are most likely to succeed. This sharper focus, combined with strong platforms and process discipline, is improving win rates. It shows both the strength of our solutions and the efficacy of our approach in driving decisions in our favor.

08/08/2024 How is the competitive environment evolving, and are you seeing new entrants or mainly the same players?

It is largely the same players, which is a good thing for us. Some competitors have rebranded or been acquired, but the core solutions remain unchanged and still lack innovation or usability within our ideal customer profile. These are mission critical systems, so newcomers face a heavy lift, and organizations are unlikely to risk betting everything on unproven solutions.

Many competitors have been unwilling to modernize into full SaaS or improve usability, while we are ahead on both fronts, including AI. We feel good about where we sit, having invested and leaned in. I do not expect the landscape to change meaningfully, which is also positive for us.

07/11/2024 Update on competitor displacement pace compared to prior quarters?

We are actually seeing it accelerate. With all three platforms in market, we now have crosshairs in Education, Government, and Mission. Within Mission specifically, we are seeing strength, better efficiencies, and new customer wins against targeted competitors. The momentum is building, and we feel it is sustainable for many quarters ahead.

07/11/2024 How much of go-to-market success comes from greenfield versus competitor displacement?

Greenfield is a small segment. Most organizations are coming off existing systems, sometimes decades old. Nearly 75% of our bookings this quarter were targeted competitor displacements. This shows the size of the opportunity, our focus, and the high efficiency of our motions.

Displacement is not a small pond but a very large ocean of opportunity. We are focused on where we can win at high rates with efficiency, leading to strong customer satisfaction.

07/11/2024 How is the Microsoft relationship evolving, and what was its contribution to bookings and pipeline?

We feel very good about our commitment to the Business Central and Dynamics 365 CRM platforms. They give us advantages over competitors in AI, security, and scalability, and customers increasingly see Microsoft as the platform of choice in the public sector. This is a strong tailwind for us. With Grant McLarnon’s leadership, our engagement with Microsoft has expanded, aligning marketing and go-to-market efforts, and positioning us as a premier partner. Microsoft is horizontally oriented, so they rely on vertical partners like us to add functionality, sell SaaS subscriptions, and deliver solutions.

This relationship helps accelerate growth while containing R&D spend. Financially, we don’t disclose bookings attributed directly to Microsoft, but the real benefit is business leverage. More often than not, we are brought into deals because of the Microsoft relationship, and that is a huge advantage for both growth and efficiency.

07/11/2024 Are you displacing smaller local players or larger incumbents, and how does deal size trend?

Our displacement strategy targets our ideal customer profile rather than moving down market. We are not seeing deal deflation; in fact, booking sizes are expanding. In some markets, we are displacing larger incumbents, while in Government we are not targeting ultra-large cities served by SAP-type solutions, which are not our customer profile.

Deal value continues to grow, not just in initial installs but also through upsell and cross-sell as customers expand functionality and users. This reflects strong opportunity across both Education and Government segments.

14/08/2025 Can you discuss the bookings strength, mix of net new vs. expansions, and how much of net new came from competitive displacement?

On the new business side, all wins were targeted competitor replacements, not unexpected bluebird deals. These were specific motions against identified competitors, and we are seeing strong repeatability both in wins and customer onboarding.

Regarding operating leverage, the compression we are experiencing is tied to ARR postponement and the need to absorb full professional services costs of the Texas contract upfront, rather than over its full term. This impacts current margins, but as ARR scales and professional service costs roll off, margins will expand significantly.

Growth

14/12/2021 What trends are you seeing in the pipeline, new logos, and cross-sell opportunities?

We see activity resuming where projects were not canceled but postponed. Customers have learned to manage COVID realities and now view a SaaS profile as essential to strategy. Many recognize clear ROI from upgrading, especially as COVID exposed weaknesses in legacy systems. We served them well through the hardest times, and now they view us as a trusted partner, creating a backlog that accelerates our SaaS flywheel.

On new opportunities, visibility has increased through stronger web presence and self-serve content, which generates more qualified leads. We now celebrate leads that match our ideal customer profile (ICP), and those are growing well, with traction in our target markets.

14/12/2021 Can you provide an update on MAS and expansion into new markets?

There were two prongs available to us. First, pulling MAS intellectual property into our existing ERP-focused customers by offering the student information and lunchroom solutions. Appetite is there, and most K-12 schools make system decisions early in the calendar year with implementation in the summer. Workshops and walkthroughs have shown strong interest, so we feel good about that.

Second, expansion beyond Oklahoma. Federal funding for technical and workforce training schools has created opportunities both in Oklahoma and elsewhere. We are targeting footholds through superintendents who left Oklahoma, as well as leveraging existing footprints on the eastern seaboard. We are raising awareness through workshops, online presence, and hiring account executives focused on this market.

14/12/2021 Which of your key markets show the strongest near-term spending opportunities?

We are seeing consistent activity across all markets. The U.S. federal program is driving demand, but there is also pent-up need as organizations reassess their systems. Schools are transforming not only classrooms but also administration and parent engagement through apps and digital access. Non-profits and NGOs are shifting toward personalized digital engagement with donors, emphasizing impact reporting rather than just thank-yous.

Municipalities, once steady and slow to change, were forced to adapt when in-person services stopped. That urgency is pushing ERP upgrades. Our acquisitions and platform approach strengthen our position by letting customers onboard where they feel pain while giving us room to expand value across their organization. Overall, activity levels are material and positive across sectors.

10/02/2022 Can you provide more color on pipeline strength and fiscal 2022 growth confidence?

The sales pipeline remains strong, benefiting from the pause in 2021 and increasing urgency for transformation. With new quota-carrying account executives—experienced hunters rather than green hires—we are better equipped to capture opportunities. Customer wellness is also driving quality referrals and endorsements, reinforcing our credibility.

Overall, I feel confident about both our pipeline and our expanded headcount’s ability to convert those opportunities into revenue.

10/02/2022 Can you provide an update on Navigator for municipalities and expected market entry?

We are very excited about this opportunity. Municipalities represent a market with significant appetite for digital transformation, both in Canada and the U.S., especially in the mid-market where legacy players are struggling to keep up. From both organic and inorganic perspectives, we see attractive opportunities. The project is already staffed, and the base technology and intellectual property are in place—we are adapting them to meet municipal needs.

We expect to begin engaging early adopters in 2023, with demonstrable interaction to queue them up for upgrades. Momentum should then accelerate in the back half of 2023 and into 2024 as municipal customers align this with their planning cycles.

12/05/2022 How are your two recent acquisitions performing relative to expectations?

The mission-CRM ideal customer profile overlaps strongly with our Ceramic Navigator ERP, and we already have customers adding one or the other depending on their starting point. This validates the appetite we anticipated and shows the team’s collaboration. We also see additional cross-selling opportunities in the pipeline.

For Pavliks, we are already introducing the Pavliks Portal Connector to our government customer community and are looking to extend this to K-12 and non-profit customers. We have also integrated the Pavliks Dynamics 365 practice with our InfoStrat unit and are seeing cross-selling opportunities emerge, while also adding bench strength to accelerate implementations in North America.

12/05/2022 How will you achieve high single-digit organic growth in fiscal 2022 after Q1 headwinds?

The sales pipeline remains strong, building off the pause in 2021. We have added experienced, quota-carrying account executives who know the space and can be effective hunters. Customer wellness and referrals are also increasing, driving high-quality leads.

We now have the headcount to deliver on this demand, giving us confidence in bridging the gap between Q1 softness and our full-year expectations.

11/08/2022 Is 7–10% organic growth sustainable or will there be volatility?

Hi, Amr, thanks for your question. Generally, because there is some lumpiness in our bookings and projects, there could be peaks and valleys. But for the most part, that’s our target and what our plan calls for. As I’ve said for quite some time, sustainable high single-digit growth is our goal with some ups and downs along the way.

11/08/2022 When will subscription and maintenance organic growth materialize?

Thanks, Jim. As a SaaS company, we no longer see the large, immediate license revenue spikes; revenue is spread across 12 months. The fullness of recent deals will not be visible until the same period next year. We aim to maximize passive revenue but must also have staff to deliver, since we are not simply a download-and-done solution. Aside from Sylogist Pay, most offerings involve active services. We see the market now more conducive to deal flow, and initiatives that stalled earlier are moving again. We expect growth to normalize in late Q3, continue into Q4, and carry into the new year.

15/11/2022 Where are new bookings coming from—new logos, sectors, or existing clients?

Booking activity has been strong across all divisions, including large deals that had been delayed but closed later in the year. This reinforces our confidence that market pressures are not causing deals to disappear. Bookings include a healthy mix of IP and project services, with encouraging new logo wins.

I feel positive about both the new customer activity and the strength of our sales pipeline. Deals continue to progress well through the pipeline, providing visibility into future growth.

15/11/2022 How will you pursue the municipal solution opportunity, including Bellamy migrations, new logos, and deal sizes?

The mid-market is underserved, and SylogistGov is designed to fill that gap with a full SaaS, modern, comprehensive solution. Large providers focus on big cities, leaving tens of thousands of municipalities with legacy systems. We see strong opportunities to displace these incumbents by offering seamless onboarding, particularly around data migration.

Our strategy includes targeting disenfranchised customer communities and leveraging a partner channel for scale. Local partners bring relationships and delivery capabilities, enabling simultaneous implementations at scale. Typical deals are in the low six-figure range: subscriptions of $75,000 to $200,000 annually, plus associated services, often totaling $100,000 to $150,000 per year. This combination positions us well to capture share in a large market.

15/11/2022 Can you expand on new bookings by logos, sectors, or sources of strength?

Bookings came from all divisions, including large deals that had slipped but closed later in the year. This reinforces confidence that market pressures are not causing deals to vanish. We saw a healthy mix of IP and project services, with good new logo additions and a strong sales pipeline moving forward.

14/03/2024 Can you give an update on the Education segment in North Carolina?

Yes, our position in North Carolina is strong, supported by the state itself promoting our efforts, which we see as a positive competitive signal. We have successfully delivered our first lift there and are now building a pipeline with existing and new customers, including new market opportunities. Interest is high, with schools engaging in webinars and serious discussions about contracts. Because of school-year cycles, procurement and implementation are mostly in the back half of the year and summer. We are very positive about progress in North Carolina and are beginning discussions in additional states.

09/05/2024 What KPIs stand out in your 2024 pipeline after strong Q1 bookings?

We highlighted the acceleration in partner attachment, which tripled from Q4. Partners are increasingly walking us into deals, and that cadence is ahead of expectations.

With our education and government platforms launching at the end of 2023, the pipeline now shows balance across all three markets. We see government and education opportunities accelerating into the back half of 2024, with most growth so far coming from Mission. By late 2024 and 2025, we expect all three divisions to contribute strongly.

09/05/2024 How involved are you in partner-attached sales processes?

It is highly collaborative. While partners increasingly bring opportunities, most marketing motions originate with us. We then involve partners during the sales process and empower their teams with our sales engineers so they can take on more over time.

This allows us to increase sales capacity with partners at our side. Our win rate is strong, attracting more partners, and their relationships in target markets give us confidence the cadence will strengthen further.

09/05/2024 What is your strategy for expanding channel partners beyond 30%?

We prioritize quality over quantity. The right partners matter more than opportunistic ones. We are focused on Microsoft ecosystem partners with established practices in Business Central or Dynamics CRM.

Enlisting partners is only the start. We commit to a six to twelve month process of training and empowerment so they can execute sales and implementation as effectively as we do. This ensures long-term alignment and effectiveness rather than short-term opportunism.

09/05/2024 Has initial customer feedback on new government and education products met expectations?

Yes, early feedback has confirmed the strong appetite we anticipated. In government, particularly the underserved mid-market, reactions have been very positive, with customers expressing relief that our SaaS platforms and innovation are now available.

In education, results are playing out as expected given our prior experience in that footprint. Overall, early signals validate our thesis that these markets represent material opportunities.

09/05/2024 How motivated are customers to change compared to when Mission launched?

The motivation is real. COVID was the turning point that forced many to move beyond simply thinking about system changes to actually executing them. The realities of the pandemic required self-serve and cloud-based platforms. That urgency drove budget commitments to digital transformation and more self-serve offerings for parents, teachers, and citizens.

We feel very good that our timing and thesis are proving out, and customers are now acting decisively on these needs.

09/05/2024 Does increased marketing spend directly drive more wins?

Yes, we see clear ROI on increased marketing motions and spend. We track inbound leads, partner-driven leads, and direct opportunities to confirm what is working. The data shows that more investment leads to more wins.

While there are ceilings, the flywheel effect of greater brand awareness and visibility through customer referrals and testimonials is building momentum. Near term, we will continue to lean into marketing spend to amplify awareness and expand opportunities.

11/05/2023 Which verticals are gaining the most traction now, and when will others begin contributing?

The education and government verticals are tied to the rollout of our new SylogistGov and SylogistEd platforms. On the education side, beyond Oklahoma, we saw a very strong quarter in mission-driven not-for-profits, largely from cross-sell opportunities where customers who already used us for CRM or ERP came back wanting more of our platform. That success is often at the expense of competitors.

For education and government, we have a healthy pipeline, but their buying cycles push contributions toward the latter part of this year and into 2024. Our plan remains to demonstrate success with early implementations, generate customer enthusiasm, and then expand rapidly. So you should expect meaningful contribution from those markets starting late this year and into next year.

11/05/2023 Is strong services growth this quarter a leading indicator of future subscription and maintenance revenue?

Yes, that is exactly how we view it. The services growth is tied directly to our IP, meaning bookings are converting into project services to onboard new customers. Once those customers go live, we can then recognize SaaS revenue over time.

This is a clear leading indicator of strength. We have built the capacity not only to win new business but to implement successfully and then expand with customers who may not adopt the entire platform immediately. Services momentum signals SaaS revenue growth in the coming quarters.

10/08/2023 What are customers saying about budgets, priorities, and your pipeline for recurring revenue growth?

We are not seeing any pullback from customers. The number of RFPs (requests for proposals) available in the market is strong, and our positioning is improving. Customers feel confident about targeting their budgets toward digital transformation, queuing them up for 2024 and 2025.

Our pipeline is as strong or stronger than it has ever been since I joined. The blend of deals is aligned with our focus on mid-market and up-market segments, and we expect these opportunities to materialize over the coming quarters.

10/08/2023 Where are you in building the partner channel, and how are you approaching enablement?

I give a lot of credit to the team for identifying partners with strong market roots and relationships in the areas we want to expand. We have developed and refined our own playbook, and partners are shadowing us on early deals to learn our priorities and how to represent our software with customers. The foundation is being laid, and early partners are already in place.

We now see additional interest from partners, including those in the Microsoft ecosystem. We have built repeatable motions, added three resources dedicated to the partner channel, and will soon add an implementation specialist to ensure partners have the support they need to succeed.

10/08/2023 How are recurring revenue and professional services trending, and what is the mix between mission and government?

We are pleased with the project services attachment rate, which has risen to 64% of overall project services revenue tied to our RFP activity. This is a clear leading indicator for SaaS revenue, which takes 12 months to flow through. As a SaaS provider, there is an inherent lag, but the strength of our professional services backlog supports subscription revenue growth over the next year.

The pipeline for professional services remains very strong, and we have expanded resources to deliver on the growing backlog. Project services are increasingly tied to the blossoming of subscription revenue in the coming 12 months.

10/08/2023 How much of your higher win rate is from RFPs versus greenfield opportunities?

The vast majority of our deals are competitive RFP situations. We feel well positioned with a strong SaaS posture, integrated platform, and Microsoft’s support in our core markets. The number of Microsoft-originated leads being passed to us is higher than at any time since I joined.

This dovetails with our marketing strategy, which is driving more ICP-qualified leads. We are now seeing better quality prospects, stronger awareness, and overall more effective outreach than in the past.

10/08/2023 What is the outlook for North Carolina expansion?

We have solid market share in North Carolina. Some customers had been moving to other state-anointed solutions, but those decisions have been unwound. We feel confident about transitioning existing customers while also growing share based on the credibility we have earned.

We deliberately took a measured approach to avoid the struggles our competitors faced. The state has now stepped back from endorsing specific vendors, and our relationships with stakeholders are strong. With a new customer signed, we are well positioned to accelerate growth in North Carolina.

10/08/2023 Can you quantify the education opportunity and explain how state-level talks unfold?

When we lifted our platform from Oklahoma into North Carolina, we removed state-specific hardwiring and made the code state agnostic. It now operates with toggle switches and setup information tailored to each state’s requirements. This allows us to expand into new states without the same level of R&D investment required initially. We wanted to first prove both the software and our ability to deliver the type of long-term relationships states expect, as competitors offering “shiny new objects” have struggled with delivery and service.

We already have some customer density in other states from legacy software. While not yet at North Carolina’s scale, these outposts give us a base to expand. We plan to build bridges into those states and believe the opportunities are material. Our sights are on two to three additional states in 2024.

10/08/2023 Is the education market as collegial as other public sector areas?

School districts tend to collaborate extensively, more so than nonprofits or other public entities. Within each state, one success often leads to many others. Once a district adopts a platform and feels supported, they typically stay for decades.

Our very high net promoter score in education reflects strong trust and long-standing relationships. We believe this loyalty and collegiality will enable us to grow effectively as more states adopt our solutions.

29/09/2023 Which products will drive growth going forward?

Our legacy brands such as Serenity, Wengage, and Mission CRM have been rolled into our core thesis: ERP and finance at the center of each vertical. These are all built on Microsoft Business Central with fund accounting tailored to the public sector. That provides a common IP foundation deployed across government, education, and non-profit.

In the mission sector, growth opportunities are strongest due to Blackbaud renewals and broader demand for integrated fundraising-to-finance platforms. On the government side, we estimate over 1,000 opportunities in Canada and roughly 10 times that in the U.S. While I do not speak in TAM terms, we believe we can capture 50 to 60 percent of the addressable market within three years. In education, the opportunity is state-by-state. Once we establish a foothold, expansion within that state accelerates quickly. Over the next few years, we see ourselves as a five- or six-state player with dominant positions. Today, government and education contribute little to growth, but by 2024 we expect those segments to accelerate meaningfully.

09/11/2023 You mentioned partner channel is 5x year-to-date. What does that mean?

While starting from a low base, partner channel activity is now on its way to becoming a 7-figure number as of Q3. Interest from partners has been strong, and our focus has been on effectively screening and onboarding them to ensure they deliver the same quality and customer commitment as we do directly. This creates upside in bookings and provides leverage in service delivery.

09/11/2023 What percentage of Q3 bookings came from partners?

It remains small, but we expect to share percentages once we have more data. Within the next quarter or two, we should be comfortable providing that breakdown.

09/11/2023 How is the partner channel building in municipal and K-12 verticals?

It is building well and thoughtfully. On the government side, we expect the majority of business will eventually be accomplished through the partner channel. For education, the process will take longer to build regional density, but we expect strong partner contributions to bookings and service delivery in 2024 and 2025.

08/08/2024 Can you explain the strong bookings pace this quarter, and how much was displacement versus wallet share growth?

We are not providing specific numbers, but the acceleration in the education sector was a major contributor, lifting bookings significantly. Cross-sell was also important, with our largest total contract value booking to date. We are intentionally reaching out to customers and showing how our integrated platforms provide new benefits.

We feel very good about acceleration on both fronts, new bookings and cross-sell, and both will be meaningful contributors going forward.

08/08/2024 The 25% figure you gave, was that of growth or total bookings?

It was 25% of the total dollar bookings.

08/08/2024 Is the 25% figure specific to North Carolina or are other states contributing?

Currently, only North Carolina is contributing to that breakout pace. Other states will follow, as I have signaled in the past.

08/08/2024 Are the new bookings being executed in 2024?

Yes, we are executing on those bookings in 2024. We are delivering on them while also continuing to build pipeline activity within education and other sectors.

08/08/2024 How confident are you that Mission can maintain its strong growth amid competition and cross-sell opportunities?

We feel good. Our targeted competitor displacement campaign is broadening, and awareness is growing within communities about the outcomes we deliver. Success stories spread quickly, which accelerates growth.

We are confident in our ability to keep driving the Mission segment forward, not just through ERP or fundraising solutions but also by layering in other intellectual property over time.

08/08/2024 How much runway remains in cross-selling Navigator with Mission CRM, and how do you size the opportunity?

Only in the last 12 months have we earnestly positioned CRM on top of ERP. After our acquisition, we worked to integrate the systems in a way that brought real new features to customers rather than just compatibility. This positions us well for both existing customers and new logos.

Typically, organizations start with their primary pain point and then add other mission-critical systems. In the non-profit sector, those are fundraising and ERP. Once we are embedded, we believe the moat is very strong for the future.

08/08/2024 Where do you plan to increase go-to-market investment to sustain bookings momentum?

It is really about awareness. We feel very good about where we stand in the ERP and CRM landscapes, especially within competitor communities, but these are still relatively new offerings. We must continue to raise awareness of our dual offerings in Mission and the non-profit community. In Gov and Ed, we wanted proof of results, and that is now showing through.

Our marketing and sales messaging continues to improve. We are very encouraged by what we see in education bookings and in government pipeline activity. Unlike education, government activity has less seasonality, so we see opportunities to convert deals throughout the year, supporting growth into 2025 and beyond.

08/08/2024 What does a typical land-and-expand motion in Mission look like?

Cross-selling CRM to ERP or vice versa is key, but our modular architecture allows us to add incremental IP over time. Customers may not adopt the full solution immediately, but additional modules expand wallet share.

We are also seeing more users activated within existing customers, as our platforms displace competitors and provide more usability. Adding both incremental IP and new users drives compounding growth in wallet share.

08/08/2024 How do you expect the mix of net new bookings versus expansions to evolve long term?

Net new will continue to expand as a percentage because our two new platforms are now in market. Upgrades remain important to our remaining performance obligations, but new bookings are accelerating, signaling stronger awareness and demand. Mission ERP is more mature, but the CRM addition gives us a powerful new offering.

That acquisition was a home run, creating innovation and differentiation for the non-profit sector. It allows donors to better engage and track their impact, fundamentally changing the landscape. This has increased cross-sell and attracted new customers. In education and government, the opportunity is still largely untapped, and early successes point to sustainable, long-term growth.

07/11/2024 What factors are driving strength in the Education vertical?

It is validation of our lift-and-shift approach. We adapted technology originally developed for Oklahoma and successfully deployed it in North Carolina, adding both existing and new customers. This has led to adoption by other districts dissatisfied with their current systems.

This strategy now acts as our springboard into other states in 2025 and beyond. We have removed Oklahoma-specific hardwiring, allowing the platform to adapt to state-specific requirements through configuration rather than code changes. That validation in North Carolina gives us confidence in our ability to scale efficiently.

07/11/2024 What feedback are you receiving from Government customers and partners on the SaaS platform?

Customers are delighted, having transitioned their core business functions onto a fully SaaS platform. Prospective customers and RFPs are also very receptive, as there has been a lack of modern technology in this segment. RFP activity is strong and demand for Microsoft-based solutions is high.

We are bullish on Government as an accelerator, expanding east to west in Canada and across North America. This is 100% partner-driven, with partners eager to serve their Great Plains customer cohorts that have lacked suitable alternatives. We believe we are now in a strong position to accelerate in this space.

07/11/2024 Do you still face a SaaS growth capacity bottleneck, or has that eased?

We do see SaaS ARR growth increasing, but we want to be measured through mid-2025 so as not to overstate. Our capacity is expanding on both the direct and indirect side, and partner efficacy is high as they are now able to deliver independently. This increases implementation capacity and accelerates ARR realization.

We are coming out of the bottleneck. Success remains precious, but we now have visibility to greater capacity across all three markets, whereas previously we were more limited. By the back half of 2025, we see strengthening acceleration and leverage, with clear momentum in place.

15/05/2025 What key learnings are you seeing from working with channel partners to drive SaaS growth?

We are finding that our partners often have unique visibility into customer cohorts, sometimes through prior system installations or existing relationships. This gives them a strong understanding of customer needs and how our software fits. In some cases, we see two or three partners bidding our platform as the solution, which has resulted in a very high win rate given both the strength of their relationships and the alignment of our platform to what these communities want.

15/05/2025 Can you speak to the pipeline and size of opportunities following your large contract win?

We see both acceleration and balanced expansion across all three of our market segments, which, combined with our high win rate, is a strong signal for the future. The recent large wins in Texas, Massachusetts, and Nevada reflect the nature of our VSS suite, which typically involves larger statewide agreements. These deals skew our average deal size upward, but overall, our cadence and consistency remain strong.

We are also seeing SaaS usability driving expansion, with customers adding subscriptions as they acclimate to the software and empower more users. This “land and expand” approach increases wallet share and is a positive signal for ongoing growth.

15/05/2025 How do you view the VSS total addressable market (TAM) and the pipeline of RFPs?

We are displacing a long-standing incumbent that holds most of the U.S. market with a more contemporary platform and a differentiated approach to customer data. Unlike them, we don’t touch, use, or aggregate customer data, which is a significant differentiator. Public contracts allow us visibility into expiry dates, giving us a clear sight line to engage states in advance. Our growing momentum means more states are aware of us, and within each state there can be two or three separate opportunities across different departments.

Texas, for example, was already an account for us in one area of criminal justice before this latest award, showing that opportunities extend beyond a single win. With 50 states, that represents many potential opportunities. We are also seeing early signs of interest in Canada and abroad, where systems are less sophisticated but still need victim notification and related services. This supports our belief that the opportunity goes beyond just the U.S. market.

15/05/2025 When do you expect to see RFPs related to the Great Plains 2028 sunset, and are customers waiting until then?

We are already starting to see movement. Many of our partners originally implemented Great Plains years ago, and they are actively encouraging customers not to wait until 2028. With our marketing motions and partner outreach, customers are realizing it is better to transition sooner in a smooth, thoughtful, and organized manner. As a result, we are seeing Great Plains-related RFPs continue to increase both through us and through our partners.

14/08/2025 Any additional comments on pipeline momentum and sales funnel growth?

I’ll defer to Sujeet on specifics, but the healthy blend I mentioned is the most positive outcome we’re seeing across our motions. Our platforms are in market, live with customers, and serving them well. The lift of development is largely behind us, so the pipeline reflects stronger product uptake.

We are also seeing partners gaining more traction every month, building confidence, and having incredible success winning their own deals. That is very encouraging.

14/08/2025 What additional color can you provide on pipeline growth drivers?

Gavin, from a pipeline perspective, I’ll tie back to our prepared comments. We are seeing very strong traction from sales and marketing investments, particularly programmatic marketing. Our marketing team is traveling across the country, attending conferences, and engaging directly with stakeholders in what is a very collegial business.

This visibility is driving pipeline growth. Our CRO has built a robust marketing team under a new Head of Marketing, targeting each channel specifically. We’re very pleased with the traction and with the ROI from our sales and marketing spend.

14/08/2025 How should we think about growth expectations into Q3 and Q4 after the managed services sale?

The managed services business was not material, so we are not adjusting growth expectations downward because of it. The updated outlook reflects elongated sales cycles and partner-led delivery motions that affect timing of revenue, not bookings themselves. Bookings remain driven by a strong pipeline, particularly in education and municipal government, and we continue to see momentum there.

14/08/2025 With record bookings but elongated revenue timing, how does the growth curve look going forward?

The elongation of sales cycles and partner-led implementations is the main factor shifting revenue timing. This does not reflect weaker bookings, which remain robust. As Bill noted, the booking outlook into 2026 is very strong and balanced across all platforms. Product competitiveness, partner efficacy, and marketing motions are driving high win rates and market appetite. Temporary Q2 disruptions are largely behind us, and we see momentum improving in the back half.

Operations

17/08/2021 What are you seeing in professional services backlog and funnel, and will Q3 be the trough for billings?

Project services are largely triggered by customers gaining confidence in budgets and stability to engage in add-on projects, new modules, and upgrades, especially in relation to our SaaS offering. Those are more active than I have seen since joining, which is a positive sign.

To replace the large projects we wrapped up last year, we are seeing activity tied to deals that have been in our pipeline for some time. I am pleased with those conversations, many of which are moving toward contracts. I expect project services to return to a more normal level in the near future.

17/08/2021 What are the gating items before taking the Wen-GAGE platform to other states?

We first wanted clarity on our go-forward strategy for their intellectual property relative to our existing IP, and alignment with customer communities in K-12. We held focus groups with these communities to orient them to the MAS offerings compared to what they currently receive from us. It was important to stay in touch with our existing customers and align around accelerating MAS’s visibility.

Second, each state has its own hurdles for introducing technology. Over the last 75 to 90 days, we have curated these requirements to identify states most amenable to our fit and where hurdles are fewer. Where material opportunity exists but reviews are required, we will pursue them. It comes down to navigating each state’s nuances.

17/08/2021 Can you provide an update on the nonprofit payments initiative?

We first inventoried where our customer communities are already transacting with third parties. We now have a clear understanding of where the opportunity lies. Some areas are being postponed, such as within the MAS customer community, where Oklahoma waived all lunch fees for the school year due to COVID. We are evaluating community by community.

The platform itself is ready, adapted into a plug-and-play capability with our offerings. The focus now is strategic rollout where opportunities exist. That does not preclude us from entering other spaces, such as fuel payments, where current technology is used. We have created a new business plan for opportunities both within our customer base and externally, through partnerships and direct go-to-market approaches.

17/08/2021 Can you update us on MAS implementation and cross-selling efforts?

Our integration plan included more than 185 tasks touching HR, people, processes, systems, marketing, and sales. This multi-faceted playbook was necessary because that level of integration had not been prioritized in the past. It was embraced and effective, enabling us to bring the companies and teams together quickly and collaboratively. We built on diligence learnings and executed on them, meshing development and product teams successfully.

It is a shining example of success. Many acquisitions drain resources or leave assets orphaned, but this integration has proven the opposite. It sets the stage for future acquisitions with confidence that we can execute without derailing other activities.

14/12/2021 How is the integration of Mission CRM and Pavliks progressing?

Our diligence before closing gave us a solid understanding of what we were acquiring, though inevitably some items emerge post-close. So far the integration has gone extraordinarily well. We go far beyond just accounting or early system work, using a companywide playbook we also applied with MAS. That includes people, processes, go-to-market positioning, branding, and capturing early wins while planning long-term synergies.

The teams are talented, the intellectual property is complementary, and the cadence demonstrated with MAS shows we can bring a company fully into the fold within about four months. We are now about a month into both Mission CRM and Pavliks. Doing two simultaneously raises the bar but demonstrates our growing integration muscle.

10/02/2022 How are recent acquisitions performing relative to expectations?

The Mission CRM ideal customer profile overlaps well with our Navigator ERP, and we already have customers adding one or the other depending on their starting point. That demonstrates appetite within the base and strong team collaboration. We also see cross-selling opportunities developing. With Pavliks, we are already introducing the Portal Connector to government customers and are exploring the same for K-12 and nonprofit clients.
We are well along in integrating the Pavliks Dynamics 365 practice with our InfoTrack business unit, and cross-selling opportunities are materializing. This also strengthens our North American bench to accelerate implementations.

10/02/2022 What revenues come from legacy platforms being sunset?

We have not carved that out specifically in disclosures. However, you can unpack it from today’s comments. It represents about $1.2 million per year, approximately 15% lightening of that portfolio, in return for what we secured over a three-year timeframe plus additional services revenue on top.

10/02/2022 How will operating expenses evolve with investments and wage inflation?

We recently added quota-carrying sales reps and engineers in Q1 and a few more in January. On R&D, we were purposeful last year in allocating spend and used offshore resources to add innovation and complete sprints. Regarding wages, we are able to attract strong talent with competitive salaries and the employee bonus plan introduced last year, which makes us competitive and aligned with performance.

We have already made significant investments, and I expect them to bear fruit in securing and landing more deals as the year progresses. On wages, we feel confident we can continue attracting talent. The employee bonus plan was implemented to address industry-wide pressures and is hyper-aligned with the company’s key performance indicators and shareholder value creation.

10/02/2022 Are other contracts at risk of requiring similar pricing discounts?

This was a one-time event based on our portfolio. I was aware of it when I joined, and we wanted to get ahead of it. The pricing discounts effectively locked in those customer communities and their annual recurring revenue in a way that is highly beneficial.

We are not seeing any other contracts that would require similar action in fiscal 2022 or 2023. This was a specific situation we wanted to resolve proactively.

12/05/2022 Can you update us on Navigator for municipalities and timeline to market?

We are very excited. This market has a clear appetite for transformation, not just in Canada and the U.S. but also mid-market globally where legacy players are falling behind. The project is already staffed, built on technology and IP we have in place, and adapted for municipal needs.

We expect to engage early adopters in 2023, then accelerate in late 2023 and 2024 as municipalities align upgrades with their planning processes.

15/11/2022 What product or IP initiatives are you focusing on now?

We remain focused on our three core markets. Our platform strategy combines internal product development with acquired IP, ensuring that solutions deliver clear value through data visibility, decision support, and customer engagement.

The most significant initiative is a complete rewrite of our municipal solution, SylogistGov. Building on our longstanding ERP foundation, we are enhancing modules for city and town management, including citizen engagement, asset management, and licensing and permitting. Customer roundtables and competitive analysis have shaped this development, which we aim to roll out as a complete platform in early 2023.

15/11/2022 Why were some bookings delayed from Q3 into Q4, and what drove the pickup?

In the public sector, timing is often out of our control. The delays were not due to pauses or extra diligence, but rather government and municipal approval processes that sometimes take longer. Deals occasionally slide into the next quarter.

Quarterly timing is not always the best measure of performance. The $12.1 million reported reflects one or two large deals that shifted into Q4. There was nothing unusual behind the delays; it is simply the nature of the business.

15/11/2022 What are you currently focusing on in product innovation and IP?

We remain focused on our three core markets, not adjacent sectors. Recent product work combines internal development with acquired IP to deliver improved visibility, decision-making, and engagement. Most significantly, we have completed a full rewrite of our municipal solution, SylogistGov, building on our legacy ERP foundation. We drew heavily on competitive insights and customer round tables to design for the future. Key modules include citizen engagement, asset management, licensing, and permitting. Over the past six months we leaned heavily into this work and will continue for another three to four months before rolling out the complete platform in early 2023.

14/03/2024 What are your sales hiring plans for 2024?

We will add more modestly than in 2023, focusing on perfecting sales and marketing motions while building partner capacity. Partner-led deals grew 8X from Q1 to Q4 of 2023, showing that channel is becoming the lead driver of pipeline and deal conversion. As a result, we do not need to expand direct sales at the same pace as last year.

14/03/2024 When will operating leverage from the partner channel start to show?

We will see early signs in late 2024 and more materially in 2025. We are careful not to compromise implementation quality, so our internal bench will continue training and supporting partners. By 2025, repeatable and scalable processes such as self-serve training will be in place, allowing real acceleration and leverage benefits.

14/03/2024 Do you still expect an acceleration in services revenue and margin improvement despite weaker recent quarters?

Yes. We will continue to maintain an internal professional services bench, supplemented by both full-time hires and contractors, to stay agile. This mix lets us adjust spending depending on whether services are delivered directly or through partners, which provides flexibility to protect gross margins. We will monitor closely through 2024 as we pivot more toward the partner-led model while retaining the ability to pull levers on cost and utilization.

14/03/2024 How does the Gov and Education product cycle differ from Mission?

We are platform, not product. In Gov and Ed, customers typically adopt the full platform upfront to replace existing functionality. Dynamics are different from nonprofits, as pricing and adoption are tied to citizen or student footprints. We have carefully researched these markets to offer superior functionality and innovation without pricing ourselves out of the mid-market. Our goal is to maximize SaaS value without leaving dollars on the table.

09/05/2024 Can you give an update on North Carolina and your team’s progress there?

It is going well, and we are tracking ahead of expectations in North Carolina. As with any school district or state entity, decisions are made independently if there is no statewide agreement. In this case, on the ERP side, there is no blanket agreement in North Carolina.

We see upgrades of our existing footprint progressing well, along with new logo opportunities in our pipeline. Execution is at or ahead of plan, and we expect to share more detail on wins and acceleration over the next quarter or two.

09/05/2024 Why was R&D spend 15% of revenue, higher than the usual 12–13%?

There is nothing unusual to read into it. Capitalization of R&D depends on time spent and projects meeting capitalization criteria. This is tied to getting our education and government offerings fully market-ready, and we are in the final stretch.

Looking ahead, we expect the capitalized development portion of R&D to start declining in the second half of 2024.

09/05/2024 What KPIs do you track to measure partner impact beyond attach rates?

Efficacy is the focus. We monitor whether partners can deliver the same success motions as our own team, including training, data conversion, and customer standups. The key KPIs are time to implement, outcomes relative to platform utilization, and net promoter score (NPS), both near term and at scale.

Currently, we collaborate on most implementations, but in the back half of 2024 more will be handed off to partners while we shadow their efforts. These three KPIs will be monitored closely as we transition.

11/05/2023 What is your partner strategy, and which markets or products are best suited for the channel?

The government vertical is primarily a partner-led go-to-market model. We first prove out the sales and implementation motions with early adopters, and then partners shadow us to learn our DNA, which is about being a trusted partner as much as a technology provider. Education is similar, where local presence is important to reflect state or district nuances.

We are also seeing growing partner involvement in the mission vertical. Consulting firms with credibility in the space often guide charitable organizations that are struggling with legacy platforms. These consultants increasingly recommend us because of our customer wellness reputation. As a result, partners are actively encouraging prospects to evaluate us and working alongside us to transition them to our platform.

29/09/2023 What changes have you made at Sylogist since you joined in 2020?

When I joined in November 2020, the company needed investment and realignment. We made those investments quickly, guided by a clear strategy, and within a tight timeframe launched three 100% SaaS platforms: Sylogist Gov, Sylogist Mission, and Sylogist Ed. With the heavy R&D lift complete, we are seeing traction across all three markets.

Sylogist Gov is a new ERP platform for mid-sized cities and towns, built on Microsoft Business Central. It is the only Microsoft-based ERP solution for municipalities. We are upgrading legacy customers and adding new ones as national players retreat from the small-to-mid market and regional providers struggle to modernize. Sylogist Mission combines ERP and CRM into the only fully integrated fundraising-to-finance SaaS platform for non-profits. Through our 2021 acquisition of Mission CRM and significant integration work, we now provide mid- to upper-market charities with unique end-to-end data visibility. More than half of Blackbaud’s 10,000 Razor’s Edge customers are up for renewal in the next 18 months, and with their lack of investment plus price increases, we see a major share-capture opportunity. Sylogist Ed, meanwhile, serves public school administration behind the scenes—finance, budgeting, and student information—rather than the classroom.

29/09/2023 How did you build and expand Sylogist Ed for school administration?

Although Sylogist already had three school administration products, I determined the time, cost, and risk to rewrite into a modern solution were far greater than acquiring. In March 2021, we acquired Municipal Accounting Systems, whose fully SaaS school administration software was already in use at 450 Oklahoma districts. We invested to lift and shift that technology, rebranded it as Sylogist Ed, and expanded into North Carolina. One of the top 10 U.S. school districts will go live in the coming weeks, with many more expected in 2024. We have also targeted expansion into two additional states in late 2024.

If I have a paranoia, it is that if we do not fill the vacuum, someone else will. To move quickly, we rely on a partner channel strategy, led by our partnership with Microsoft and their vast ecosystem. Building out a strong partner channel expands our reach, boosts implementation capacity without significant headcount growth, and most importantly focuses revenue growth on high-margin cloud subscriptions and annual recurring revenue.

09/11/2023 Can you update us on North Carolina education opportunity, client feedback, and strategy progress?

Thanks, Amr. The North Carolina school district we targeted first, Durham, is now fully live on the platform. Due to payroll issues with other vendors in the last year and a half, the state asked us and our customer to run parallel with its payroll through year-end, though the system is effectively live. Our first payroll tie-out was 100% accurate, which gives us confidence, and onlookers are excited about the progress.

We intentionally slow rolled the implementation to gain the trust of the state and districts as they assessed their path forward. Now we feel well positioned, with many other school districts leaning in and preparing to go live in 2024, both from existing customers and new logos.

09/11/2023 Are you working with other North Carolina districts for 2024 go-lives?

We are in discussions with both existing and new districts about timing, so yes, those conversations are happening now.

09/11/2023 Outside Oklahoma and North Carolina, where are you focusing deployments?

We made sure Oklahoma-specific hardwiring was adapted for North Carolina and beyond. We are working with legacy customer pods to extend conversations into other strategic states, which are going positively. The work ensures we meet requirements not only in those states but also in a few more. Those discussions are active and encouraging.

09/11/2023 Was the SylogistGov go-live an existing customer transitioning to the new platform?

Yes, we deliberately started with an existing customer we understood well. The goal was to ensure functionality and costs aligned. It was a major achievement by our team to migrate data from an old legacy system into the new platform, empowering users to continue working as before while also unlocking new innovation opportunities. Yesterday’s go-live was a significant milestone.

08/08/2024 Do channel partners now lead implementations independently, or are your PS professionals still shadowing them?

We have transitioned with several partners from us leading and them shadowing, to them leading and us shadowing. This is a natural step we had planned. The original partner cohort has reached this stage, and we are adding new partners where we still lead and they shadow.
This momentum gives us confidence in our overall capacity not only for implementations but also for broader sales activity in 2025.

08/08/2024 Will your professional services teams be focused mostly on education going forward?

No. We see a continued role for our professional services teams through 2025 and beyond, delivering directly where there are nuanced needs. For the foreseeable future in education, however, nearly 100% of implementations will be direct without partners.

08/08/2024 Any updates on SylogistPay?

Not at this time. Stay tuned.

07/11/2024 Any updates on SylogistPay? Nothing material this quarter.

We expect to provide updates in coming periods. SylogistPay remains integral to our strategy as we monetize transactions flowing through the platforms. As SylogistEd, Mission, and Government continue to scale, we expect to see more transaction activity, particularly within municipalities.

07/11/2024 How many partners do you have now, and how mature is the cohort?

We have approximately 2x the number of partners compared to this time last year, which gives us the coverage we need. About one-third to one-half are now standing on their own, with us shadowing them rather than the reverse. Newer partners remain in training and certification. It is very positive to see inbound partner interest and increasing activity, and we view the transition toward more partner-led implementations as an encouraging signal.

07/11/2024 Will you deepen existing partner relationships or expand partner count further?

We see both happening. Many inbound partners are Microsoft-certified firms with deep practices in digital transformation and public sector consulting. We are selective, ensuring new partners are committed and sustainable, as turnover is costly. We appreciate the visibility and scale mature partners bring, as their relationships open more opportunities and add credibility.

Going forward, we expect partners to go deeper with us while also expanding partner count. The combination provides stronger deal flow, more coverage, and broader reach across North America.

13/03/2025 Bookings mix by vertical: broad-based, small contracts, or large government deals?

We won’t provide specific pipeline detail, but we are seeing more balance across our three growth pillars, which validates our strategy. These opportunities are not just early-stage, they are sales-qualified leads with direct and partner engagement.

In government, both municipal opportunities and our victim services suite are gaining traction. We see larger deals with good visibility where our offering competes strongly against entrenched providers. Some large contracts are present, but we view them as part of the normal cadence going forward.

13/03/2025 Any new wins in victim services suite within bookings number?

We do.

13/03/2025 Differences in partner strategy between Education, Government, and Mission segments

In education, we have not yet engaged partners and are delivering directly due to the smaller footprint and traction. Government and Mission are being addressed with partners, many of whom have segment-specific expertise. Some partners focus initially on one vertical, then expand into both as they gain experience. A few already operate in both.

The technology underpinning is the same across segments. Differences lie in modules, such as assessment, tax, and billing for government that do not apply to non-profit or Mission. As partners gain familiarity with these nuances, we expect a blended community of partners with expertise across both Gov and Mission.

14/08/2025 Where are the bottlenecks in government contracts going live, and can implementation timelines compress?

The main challenge has been partner readiness. Their teams needed more resources to meet municipal customers’ requirements for all-at-once implementations, as opposed to phased approaches. They are now adding resources to match customer timelines, and we’ve embedded some of our own team members to help accelerate delivery.

Municipal governments often operate with very small crews, so even one or two people being out can delay projects. We’re coaching partners on how to plan around this. In addition, municipalities often pause implementations around budget season, preferring to wait for approval of new budgets. Some of our early adopters didn’t reflect these delays, so we’re adjusting our expectations and planning accordingly.

14/08/2025 How are Ed and Gov implementation cycles evolving, and what impact does this have on ARR recognition?

Historically, Ed and Gov customers viewed implementations as limited to narrow annual windows, like school-year transitions. We are seeing that mindset change. Partners are helping open more windows throughout the year, allowing projects to begin outside those traditional cycles.

This shift means ARR recognition is no longer tied exclusively to annual windows, and postponements don’t necessarily imply 12-month delays. Our partners are now starting municipal implementations monthly, creating a more normal cadence and expanding influence over revenue timing.

Outlook & Guidance

11/02/2021 How should we think about revenue impact from a large implementation project that completed last year?

This was a multi-state, multi-year implementation across the globe. Some sites were installed in previous years, and as new versions are released, upgrades will be required. That means there will be a continual cadence of upgrades, along with regular ongoing maintenance and support.

Going forward, you will not see another large one-time implementation, but we will generate upgrade revenue as the customer moves to the latest version of Microsoft, along with steady maintenance and support contributions.

11/02/2021 Can you describe the strategic planning process now underway at Sylogist?

The first step is communication—ensuring our teams and technologies have top-down sharing so we fully understand the strengths and weaknesses of our assets and talent. We then combine that with an assessment of the market landscape, identifying where we are strongest, where organic and inorganic opportunities exist, and whether our teams are aligned and prepared to execute. Another component is company wellness: how connected we are around focus and goals, accountability, and keeping our customer communities engaged. These communities do not see themselves as competitive, which creates an opportunity for us to foster best practice sharing, generate market buzz, and position ourselves as partners rather than just a product company.

Out of this comes a focused plan with defined 12-month goals, action items, ownership, and measures of success. Beyond that, we map out 24 to 36-month objectives with broader targets. This includes recruiting, resourcing, and IP development to ensure we can execute near-term plans and then build on them in years two and three.

12/05/2021 Do you anticipate stronger near-term growth, and what does that mean for margins?

Yes, we are seeing NGOs and NPOs return to the table and finalize deals. However, we probably will not see billable time pick up until Q4 of our fiscal year.

As we continue executing on our strategic investments, margins will compress as we gear up for rapid growth.

17/08/2021 Should we expect EBITDA to move lower near-term as you invest, ahead of returns building in fiscal 2022?

Yes, our investments need to continue in line with our strategy. Returning the company to a growth posture required infusion across people, processes, alignment, and reward structures, including bonuses. These investments are foundational to sustained growth.

I believe those investments must continue through this year and into the latter part of the calendar year. We will refine the strategy and budget over the next 60 to 75 days before presenting to the Board. There is no hesitancy from the Board to keep investing to accelerate growth and create value.

14/12/2021 Are you seeing recovery in professional services volumes?

Yes. Deals announced are representative, not exhaustive, and we see increasing activity for our professional services team. We are adding capacity now and in future quarters to meet demand. This reflects both customer eagerness to upgrade, creating sustained workstreams, and new implementations as technology adoption broadens within our community.

10/02/2022 How are you modeling the business given EBITDA margin decline despite strong Rule of 40?

Investments naturally precede results, so results lag investment. We continue to target a Rule of 40 posture for fiscal 2022, balancing revenue growth and profitability at or above that level. We are deliberate in our strategic spending, and the impact of those investments should accelerate later in 2022 and into 2023.

This company needed to be jump-started into a growth profile, so we made the investments. COVID affected us through 2021, and the Omicron surge impacted Q1 2022, but we expect the effect of those disruptions to be behind us now.

10/02/2022 Should we expect a $3 million-plus run rate for professional services in fiscal 2022?

It depends on the solution, project size, and whether it is with a new or existing customer, which drives revenue recognition cadence. Typical deployments last 3 to 12 months, with some larger projects extending 12 to 18 months, occasionally 24.

On the other end, some solutions take only weeks to implement. For bookings already discussed, we are confident that the majority of that revenue will be recognized in fiscal 2022.

12/05/2022 How should we expect operating expenses to evolve given investments and wage inflation?

We recently brought on quota-carrying sales reps and sales engineers in Q1, with more added in January. We have been purposeful in R&D spending, using offshore resources to drive innovation. Wage pressures are manageable—we are attracting strong talent with competitive salaries and the employee bonus plan introduced last year.

We believe our investments are well-timed and should begin to bear fruit in securing and landing more deals as the year progresses. The employee bonus plan aligns closely with company KPIs and shareholder value creation, helping us get ahead of broader industry pressures.

12/05/2022 Are other contracts at risk of needing similar pricing discounts as the recent three-year contract?

No, this was a one-time event based on our portfolio. We were aware of it when I joined, and we wanted to get ahead of it. The pricing discounts locked in customer communities and annual recurring revenue in a way that is very beneficial. We do not see any other contracts requiring similar actions at this time.

12/05/2022 How are you modeling EBITDA margin floors given revenue growth and declining margins?

Investments naturally precede results, and results lag investments. For fiscal 2022, we expect to maintain a Rule of 40 posture, at or above that level. The impact of our strategic spending should accelerate later this year and into 2023.

We are conscientious about spending, but the company needed to be jump-started into a growth profile. COVID disruptions in 2021 and the Omicron surge in early 2022 affected us, but the impacts seen in Q1 are now behind us.

12/05/2022 What professional services run rate should we expect in fiscal 2022?

It really depends on the solutions, project size, and whether it is a new customer or cross-sell. Typical deployments span three to twelve months, though a few very large projects may take twelve to eighteen months, sometimes as long as twenty-four. On the other end, some solutions take only a few weeks to implement.

Overall, for the material revenue we’ve booked, we are confident we will see the majority recognized in fiscal 2022. While a consistent $3 million per quarter may not always hold, we expect strength in professional services to continue.

12/05/2022 Have you begun to see benefits from U.S. infrastructure bill funding?

Yes, we are starting to see that. COVID created real pressures on our customer community and highlighted that digital transformation could not be delayed. The infrastructure bill has accelerated this, with dollars now flowing into the markets we serve.

Customers are moving into a posture where transformation is accepted as necessary, and they have budgets to act. We are well positioned to capture this increased momentum.

11/08/2022 Can Mission CRM still achieve its big fiscal 2023 revenue target?

Yes. They were penalized by the Omicron flare-up in Q1 and Q2, but we are seeing strength in bookings and pipeline each month. Organizations are excited about the solution, which is industry-leading and the premier Microsoft-based option in the space. While the first-year goal was ambitious, they are already up 100% year over year. We expect them to maintain the pace we saw in Q3 and continue in Q4 and beyond.

11/08/2022 As subscription grows, will gross margins rise or stay flat due to reinvestment?

Yes. Since I started, my posture has been to earn the right to deploy capital strategically. This quarter, as we executed our plan, we put ourselves in position to invest behind the opportunities we’ve teed up. We will remain conscientious of profitability, but when attractive windows appear over the next 12 to 15 months, we would be remiss not to invest to drive value.

11/08/2022 Closing remarks on Q3 and outlook for Sylogist

Q3 was a turning point. For several quarters I’ve said our work was purposeful and positioning us to unlock value, and now that is showing up in our financials. Investors can begin to see the traction, which makes me more confident. I’ve never been more positive about the opportunities ahead for Sylogist. I’m very excited and deeply appreciative of the support from our investor community as we continue forward.

15/11/2022 Did you guide to low single-digit or low double-digit growth for fiscal 2023?

To clarify, our posture is low double-digit growth as we exit the year. This reflects customer buying cycles, which in our markets are largely midyear. If any document suggested low single digits, that should be corrected.

15/11/2022 What is the organic growth potential beyond fiscal 2023 relative to investments?

Yes, we believe organic growth will rise further. There is plenty of headroom, but because of customer buying cycles, bookings and ARR tend to be skewed toward the back half of the year. The compounding effect of ARR will continue to drive growth as more recurring revenue enters the portfolio.

Cross-selling and upselling across the platform, combined with customers adopting broader IP solutions, should further boost organic growth. As we expand our product portfolio and migrate customers to integrated platforms, we expect to sustain IRR above 100%.

15/11/2022 How should we think about Rule of 40 given higher organic growth targets and EBITDA pressure?

We are continuing to invest, which will put some pressure on EBITDA in the near term. As bookings and subscriptions from Q4 and earlier periods take hold, profitability will improve. This is not a case of needing major new R&D, and our largest expense—people—remains well managed. We feel good about attracting and retaining top talent, which powers our growth.

There may be fluctuations between growth and margin, but we remain committed to strong profitable growth and maintaining balance. As growth accelerates in the back half, scaling will rely on the partner channel rather than large headcount increases, helping us manage costs effectively.

15/11/2022 How are client conversations evolving given economic uncertainty?

We are not seeing clients show increased hesitation despite inflationary pressures. The need for digital transformation remains strong, and overall dialogue has not been negatively affected by broader market concerns. We feel confident in the cadence continuing.

15/11/2022 How should we think about margins amid inflation and investment?

We believe margins can continue at current levels. Our ability to attract and retain talent remains within budget, and while investments will continue, we expect them to be balanced with profitability going forward.

15/11/2022 Can you clarify growth guidance—low single-digit or low double-digit?

It is low double-digit growth as we exit the year. If the MD&A indicated low single-digit, that was incorrect. Growth reflects our market’s midyear buying cycles.

15/11/2022 What is your view on organic growth potential in 2024 and beyond relative to investments?

Yes, we believe we can drive organic growth higher. There is significant headroom. Our go-to-market approach is only beginning to show results, but given customer buying cycles, the materiality of bookings and ARR typically skews to the back half of the year.

As ARR builds, it compounds growth, adding passive revenue and pushing net revenue retention above 100%. With more IP embedded across our platforms, customers can adopt broader solutions, fueling cross-sell and upsell. This flywheel effect supports higher organic growth in 2024 and beyond.

15/11/2022 How should we think about Rule of 40 positioning with higher organic growth and lower EBITDA margins?

We are continuing to invest, which applies some pressure to EBITDA near term. However, bookings and subscriptions are gaining traction, particularly from Q4 onward. Importantly, we do not face heavy new R&D requirements, and wages remain under control. Our ability to attract and retain talent, our key expense, is strong.

15/11/2022 Why were some Q3 bookings delayed into Q4?

After 30 years in this industry, I can say public sector deals often slip due to factors outside our control, such as government or municipal approval timelines. These delays were not due to pause or added diligence, just normal process.

Quarter-to-quarter is not always a good performance indicator for us. The $12.1 million result was driven by one or two large deals sliding into Q4, but there was nothing unusual behind the timing.

14/03/2024 Does low to mid-teens growth exiting 2024 imply single-digit full-year growth and double-digit growth in 2025?

No. Growth acceleration in the latter half reflects market buying cycles, with budgets typically approved around July. ARR and overall growth will be stronger in the back half, but we expect full-year 2024 growth in the low to mid-teens range, with that velocity carrying into 2025.

14/03/2024 How should we reconcile muted backlog and RPO growth with stronger ARR and revenue growth?

We do not want backlog to grow at the same pace as ARR. Increased delivery capacity, both internally and through partners, allows us to work through backlog more efficiently rather than letting it build up. This reflects business maturity and ensures customers are not left waiting. ARR is now more closely tied to contract signing and platform provisioning, rather than being recognized only at project completion, which accelerates ARR recognition relative to historical practice.

14/03/2024 Should we still expect margin expansion exiting 2024?

Margins in 2024 should remain in the mid-20s range. We need to maintain a professional services bench to onboard partners, which is a drag. At the same time, we are increasing sales and marketing capacity, while benefiting from G&A savings. With these puts and takes, we remain comfortable guiding to mid-20s EBITDA margins.

09/05/2024 What drove recurring revenue margins to fall to 68%, and what is the outlook?

The one-time project wrap-up also affected recurring revenue gross margins, creating a tandem impact. This was specific to the quarter.
Going forward, we expect recurring revenue margins to return to their normal cadence of 70% and above.

09/05/2024 Should we assume growth spend as a percentage of sales will decline from 15%?

Yes, our expectation is that it will likely be around 14% in the second half of the year.

11/05/2023 How long will EBITDA margins remain in the mid-20s percent range given higher sales and marketing spend?

We are pleased with the ROI from go-to-market investments and will continue to push ahead. These activities create inertia, where new wins lead to referrals and expansion. It is a collegial market, not a highly competitive one, so we see exponential effects as adoption spreads. Over time, we expect margins to strengthen, but in the near term our best use of capital is to keep investing so that inertia builds into 2024 and beyond.

Yes, for the balance of 2023 you should assume margins around the mid-20s, plus or minus. We do see opportunities for margins to improve over time. It is always about balancing profitable growth, and as our SaaS revenue base grows the annuity effect will have a positive impact. EBITDA margins will expand as that shift plays through.

11/05/2023 Will you keep EBITDA margins at 25% if organic growth reaches at least 15%, in line with the Rule of 40?

Yes. The Rule of 40 has been a guiding principle for us, and we view it as a north star. We will not drain the piggy bank just to chase growth at all costs, because that is not the right posture for Sylogist.

We will generally aim to be plus or minus the Rule of 40. However, that does not mean we would celebrate 45% growth with no profitability. We believe maintaining both growth and profitability together is the right balance, and that principle will continue to guide us.

11/05/2023 When will operating leverage begin to show, with incremental revenue coming in at higher margins?

We expect operating leverage to become more visible as we head into 2024 and beyond. The SaaS bookings we are making now will start to show up more materially in revenue recognition and margin expansion as they build into recurring revenue streams.

The effect of these investments will be a stronger margin profile as the SaaS annuity base grows. The combination of subscription revenue scaling month by month and reduced incremental cost will support operating leverage starting in 2024.

10/08/2023 Should we expect margin expansion this year or more in 2024?

Our view is that operating leverage and efficiencies of scale will be more evident in 2024, particularly in mid-2024. That is when we expect the benefits of operating leverage to flow through more meaningfully.

10/08/2023 Should we expect R&D spending to decrease or plateau?

At this stage, R&D spending is plateauing. We still have quarters ahead with ongoing development needs, but we do not expect R&D to rise further. Over time, R&D will decline as a percentage of revenue, and leverage should begin to materialize in 2024.

10/08/2023 So R&D dollars may stay the same but decline as a percentage of revenue?

Yes, that is accurate. This quarter included a true up for additional capital development projects, which created a trough in R&D expense. Going forward, R&D as a percentage of revenue should trend downward.

29/09/2023 Can you introduce yourself, Sylogist, and the opportunity you see in the public sector?

Thank you and good morning. Sylogist is a software as a service company providing mission-critical solutions to over 2,000 customers in three public sector verticals: education, non-profit, and government. These markets are large and support multi-billion-dollar market cap companies. Historically, the public sector has been slow to adopt new technologies, often relying on decades-old systems. That created stability but also slowed innovation.

COVID changed that dynamic. It exposed outdated systems, drove federal stimulus earmarked for digital transformation, and heightened cybersecurity concerns. As a result, public sector organizations are now in a buying mode unlike anything I have seen in 30 years. That opportunity brought me back to a space I care deeply about. Today’s Sylogist is customer-centric, disciplined in capital allocation, focused on profitable growth, and fully aligned with shareholder value creation. We have a balanced Rule of 40+ posture and strong customer advocacy, as shown by our Net Promoter Score rising from the low 20s to 51 in less than two years. This advocacy fuels growth because municipalities, schools, and charities share best practices openly. Earning their trust is the key to long-term success.

29/09/2023 What did you inherit at Sylogist in 2020, and how far along are you in turning the business around?

When I joined, the company was overly focused on EBITDA through an inorganic roll-up strategy—acquire, cut costs, generate cash, and repeat. That approach had run its course, with products underfunded and customer trust at risk. In the public sector, customers need more than a vendor. They need a partner that invests in solutions, people, and long-term support. At that time, Sylogist had five development teams, seven marketing systems, and four finance systems. Internally it was fragmented, and externally customers weren’t confident in our future commitment.

COVID changed the timeline. It forced institutions to accelerate digital adoption, giving us a unique opportunity. My focus from the outset was to move Sylogist rapidly to a SaaS posture. That required fixing people, processes, and systems, eliminating tribal silos from prior acquisitions, and showing customers that we were making real investments. Without COVID, competitors might have pulled ahead. Instead, we used that window to transform the company and rebuild customer trust.

29/09/2023 What growth rate do you expect over the next two to six quarters?

I am comfortable signaling mid-teens growth and believe we can deliver that consistently. I prefer to under promise and over deliver, but our partner channel strategy should begin to blossom in 2024, giving us additional leverage. The key is not just any partner, but the right partners who can deliver the same high NPS outcomes as we would directly. That will allow us to scale without heavy operating expense and maintain gross margin expansion.

09/11/2023 Why guide to low-to-mid-teens organic growth when results have been stronger?

Seasonality plays a role, particularly in Q4 when holidays limit customer activity and team availability. Despite putting up higher numbers recently, we remain comfortable with mid-to-low-teens organic growth as a consistent year-over-year range. It reflects realistic pacing while acknowledging continued market expansion in government and education verticals.

08/08/2024 What proof points are you seeing in Ed and Gov product rollouts, and what are the next steps?

Success comes not just from pipeline or signed contracts, but from standing customers up successfully and using them as ambassadors. Early adopters are now live and can show peers how our software outperforms prior systems. That creates momentum in the market.

We are now further down the path, with more early adopters active and more partners being enabled on the Gov side. Our marketing is bringing in the right organizations within our ideal customer profile, giving us confidence to expand outreach in both segments.

08/08/2024 What are your priorities for continued investment, particularly in OpEx and product development?

Our investment plans remain unchanged, and we will lean in further. First, we needed to regain customer confidence, which we have done by delivering and engaging differently. That gave us the right to introduce SaaS migration and new technology with the customer voice embedded in development.

We will continue innovating, adding modules, and separating from competitors. On go-to-market, we will increase investment across all three markets now that motions are proving successful. Internally, our professional services team is carrying a dual load—helping partners ramp up while also supporting increased bookings. We expect relief beginning in early 2025 as more partners take full ownership of implementations.

08/08/2024 What are you seeing in terms of customer demand profiles and budget trends?

We are not seeing any budget compression or slowdown. On the education side, even as federal stimulus dollars phase out, schools are maintaining classroom capabilities and relying on mission critical systems that are fairly priced. Competitors we thought would be harder to displace are losing customers who want a better fit and more capabilities at a sustainable price point.

In government, legacy systems are being replaced by modern SaaS platforms for both usability and security reasons. Security requirements are intensifying, and as a Microsoft-oriented provider, we are well positioned. Overall, demand remains strong across our markets, and we see activity accelerating, not slowing.

07/11/2024 Do you expect further attrition in education over coming quarters?

We see that mostly done. There may be the occasional instance, but we have a good sight line to that customer community and have been engaged with them for several years. We believe any further churn would be minor.

07/11/2024 With expanded partner capacity, what SaaS growth rates do you anticipate entering 2025?

We expect to maintain SaaS recurring revenue growth at current levels. The partner channel is gaining traction, but because there is a lag between bookings and revenue, sustaining current growth rates reflects that timing effect. Our pipeline supports this view as we model 2025 impacts.

07/11/2024 Could SaaS growth inflect from mid-teens to 20%+ with new capacity?

Yes, an inflection will happen, though pinpointing when is difficult. The lag between bookings and revenue means the growth acceleration occurs after the underlying bookings inflect. The timing of that crossover is what remains less precise.

07/11/2024 What do pipeline KPIs suggest about investment in marketing, partners, and direct sales?

We agree with your assessment. With the motions now reflected, we are not just spending blindly. By enabling partners to bring us into deals, activating our own deals, and leaning on increasingly meaningful customer referrals, we are gaining efficiency from marketing efforts. Starting from a small base, we wanted to scale thoughtfully before having more demand than we could serve. We are now through that phase and see scalability ahead.