Quarterhill Q3 2026 Earnings Call - DEFI TECHNOLOGIES INC

Good morning, everyone, and welcome to the Quarter Hill, Third Quarter, 2026 Financial Results Conference Call. Joining us today are Chuck Myers, Chief Executive Officer, and David Chiron, Chief Financial Officer. At this time, all participants are in the listen-only mode. Following management's remarks, we will open the call for a question-and-answer session during which analysts are invited to ask questions. Earlier this morning, Quarter Hills issued a news release announcing its financial results for the third quarter, ended September 30, 2026. This news release, along with the company's MD&A and financial statements, are available on CEDAR+. Certain matters discussed during today's conference call or responses to questions may constitute forward-looking information and statements. Actual results could differ materially from those anticipated. Risk factors that could affect results and assumptions used to develop such forward-looking information and detailed in the company's earnings news release, most recent annual information form, and other public filings available on Feeder Plus. During this conference call, Quarter Hill will refer to certain non-GAAP financial measures and ratios, Such as adjusted EBITDA, non-GAAP financial measures and ratios do not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures disclosed by other companies. Please refer to the company's Q3 2026 MDNA and earnings release for full cautionary notes regarding the use of foredocking statements and non-IFRS measures. Finally, please note that all financial information provided is in U.S. dollars, unless otherwise specified. I will now turn the call over to Mr. Myers. Please go ahead. Good morning, everyone, and thank you for joining us. This morning, we reported another strong quarter. Revenue increased 9% year-over-year to $43.2 million, marking our highest quarterly revenue since 2022. Gross margin rose to 29%, and I'm happy to share we delivered our fifth consecutive quarter of positive adjusted EBITDA. These results reflect the tremendous amount of work that we've done over the last two years restructuring the business, improving contract economics, and investing in our technology. We've substantially improved our operating performance and financial position, and our focus is now on accelerating growth and scaling the business. Our technology continues to be a significant competitive advantage for Quarter Hill, and we're seeing that translate into major contract wins across both our tolling and commercial vehicle businesses. Our win with LA Metro is a good example. We were selected, along with our partner, to support the Express Lanes back office system, which runs the tolling transactions, customer accounts, and reporting behind one of the largest managed lane programs in the country. Our subcontract is worth approximately $28.2 million and could run up to 14 years. This was an important win for Quarter Hill and further validates our next-generation technology, as well as our ability to compete for some of the longest transportation programs inthe country. Our commercial vehicle technology is gaining the same traction. In Oklahoma, a longtime customer awarded us a $5.25 million contract to deploy our full screening suite on Interstate 35, including way-in-motion, electronic screening, and tire anomaly detection. We also won multi-year contracts with Penn Department of Transportation and the Idaho Department of transportation to maintain and modernize their commercial vehicle networks. This segment of the business continues to perform well overall, with opportunities to expand existing customer relationships and bring our technology into new markets, both domestically and internationally. AI continues to be an important part of our technology. We're using capabilities such as vehicle ID, automated image review, and anomaly detection to improve accuracy, create efficiencies, and provide transportation agencies with high-quality information to manage their operations. I believe we're still in the early innings of what AI can do for this industry, and we continue to invest in developing these capabilities. That brings me to the next generation of our AI-enabled platform as we roll out to our new customers. This modular platform automates the most labor-intensive parts of running a tolling operation, again, with image review to customer service and reporting. Agencies can adopt the platform in phases without replacing their existing systems. And while tolling is where we start, we built this technology to scale to broad transportation markets over time. We've discussed this investment over the last several quarters, and our January launch with our first customer represents another important step in bringing more intelligent automated transportation technology to the agencies. Over the past several months, we have also made significant progress strengthening our balance sheet and capital structure. In September, we closed a bought deal private placement, raising gross proceeds of Canadian $51.8 million and including approximately $2 million invested by company insiders. Following the quarter, we used a portion of the proceeds to repay our $57.5 million Canadian convertible debentures in full and divested our remaining interest in YLAN, generating an additional USD $8.5 million in cash proceeds. These transactions have simplified our capital structure, eliminated a potential source of dilution, and strengthened our financial position, which gives us greater flexibility to invest in the business and pursue growth opportunities. Turning to Conduit, we continue to work towards closing the acquisition of its tolling business in the fourth quarter, subject to the satisfaction of closing conditions, including receipt of TSX approval, and we've made significant progress in the integration planning. Now, I'll turn the call over to Dave. Thank you, Chuck, and good morning, everyone. I'll start with our third quarter financial results, and it's September 30th, 2026. And as a reminder, all figures are in U.S. dollars unless otherwise noted. It's important to note that the financial results I'll discuss today cover Quarter Hill's current operations only and do not include any operating contribution from Conduit's tolling business, which we continue to work towards closing in the fourth quarter of this year. Our results do, however, reflect certain transaction related costs, which I'll touch on shortly. Okay, starting with revenue, our third quarter revenue grew 9% year-over-year to $43.2 million compared to $39.7 million a year ago. As of September 30, 2026, our revenue backlog was $418.9 million, which includes the value of work that we have not yet completed but expect to perform under existing customer arrangements. This includes signed contracts and expected extensions of existing programs where we have defined the scope and timing. Our backlog excludes pipeline opportunities and unsigned change orders. Our gross profit in Q3 was $12.3 million, or 29% of revenue, compared to $10.5 million, of revenue in the same period last year. This represents approximately 230 basis points of year-over-year gross margin expansion, reflecting the benefits of our restructuring, improved contract economics, and higher revenues from our commercial vehicle and enforcement business. Adjusted EBITDA totaled $3.9 million, or 9% of revenue, a significant improvement compared to adjusted EBITda of $1.4 million, over 3% of Revenue in Q3 last year. This marks our fifth consecutive quarter of positive adjusted EBitda. Cash used in operations in Q4 was $8.6 million compared to cash generated from operations of 6.4 million in the prior year period. The change was driven primarily by acquisition-related costs, largely tied to the conduit tolling transaction with no comparable costs in the previous year. On the balance sheet, we ended the third quarter with 51.6 million in cash compared to 26.2 million at the end of the second quarter of 2026. The increase primarily reflects the bought deal private placement we closed in September, which raised gross proceeds of approximately $51.8 million Canadian through the issuance of approximately 20.9 million common shares at Canadian $2.48 per share. We were pleased to see strong support from new institutional investors and our insiders, who subscribed for roughly $2 million of the offering. After quarter end on October 30th, We repaid in full the $57.5 million Canadian principal amount of our 6% convertible debentures, along with all accrued interest. Retiring the debenture removes a significant obligation from our capital structure and eliminates the related interest expense. Separately, on October 30, we entered into a definitive agreement and sold our remaining 10% equity interest in YLAN. We also received early payment of the $6.25 million earn-out related to our original sale of YLAN in 2023, which was not due until December 2027. In total, these transactions totaled $8.5 million in aggregate consideration. Taken together, the bought deal, the debenture repayment, and the YLAN transaction have strengthened our financial position and simplified our capital structure, providing greater flexibility to execute on our priorities. As we stated earlier, we continue to work towards closing the acquisition of the conduit tolling business in the fourth quarter. With that, I'll turn the call back over to Chuck for his closing comments. Thanks, Dave. As we look towards 2027, our improved operating performance and stronger balance sheet have now put us in a solid position to execute our strategy. I believe we're well positioned to capitalize on the opportunities ahead. I've never been more confident in our strategy or our ability to execute it. I'll now ask the operator to open the line for questions. Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1. To withdraw a question press star 2. Please limit yourself to one question and one follow-up. One moment, please, for your first question. Your first question comes from Gavin Fairweather from ATB Carmark. Please go ahead. Oh, hey, good morning. Thanks for taking my questions. Maybe just to start out for Chuck, you know, you've had the time now to do the rounds and talk to a bunch of the condo and customers. Curious if you could just give us an update on the feedback that you're hearing from that base there. Well, I mean, some of it, obviously, you can imagine Gavin is confidential, but I would say that the customers have been cautiously optimistic about the transition and are looking forward to changes. Appreciate that. And then I'm just curious, given all the RFPs that are on the market, like how are you and Conduent approaching the market now? Are you bidding separately on these RFPs or customers looking at you as or prospects looking at you as one entity? Do you think that the announced transaction is helping you in those bid processes? For antitrust reasons, I can't discuss that publicly. Okay, that's fair. Hopefully, we'll be getting an update soon alongside closing. Maybe just on LA Metro, maybe you can just update us on that project and when it kicks off, how we should be thinking about the implementation revenue and maybe some of the deciding factors that helped you get that win? I would say that just our size and our reputation helped us get that wind. Our partner has a good relationship with the customer. We have a good relation with the client. We have good relationship for the customer that project's been going actually for quite a while now. I think as I mentioned in one of my other calls, we just don't press release it because a lot of our customers don't let us press release things. So that project's well underway. It's been several months at this point. And I think we talked in there about the value of the contract. It's initially a $28 million contract. That's great. And then maybe just on the European and UK market, maybe we can just talk about how you're thinking about getting growth across the Atlantic there. It looks like you got certified with IRD in the UK. I know you're inheriting a couple of tolling contracts. Maybe just talk about your plans to expand in Europe and the UK? Well, I think that if you look at, first of all, there's a piece of the conduit business that's fairly large in the U.K. that we should be closing on. And then we continue to grow well over there. I mean, our commercial vehicle business does quite well. That's just another product, another product kind of in the quiver of, through our group in Brussels. We did sell off a small business doing speed enforcement and red light enforcement cameras to, in Germany, but it was a kind of an underperforming asset and strategically it didn't really fit with the business. But we continue to look very hard at all of the ITS and the tolling opportunities. And there's going to be a number of tolling opportunities coming up here in the next couple of years over there. And we see that as really a good sweet spot for us. Great. And then lastly for Dave, just on gross margins, still a nice progression year over year, a little bit more kind of flat sequentially. Anything that you would call out in terms of revenue mix or other factors there? No, we had a good performance of our commercial vehicle operation, as Chuck mentioned in his remarks. We continue to see good growth there. There's always opportunity to squeeze out a couple more points on gross margin, and we're going to be working really hard to do that. Thanks. I'll pass the line. Thanks, Kevin. Thanks again. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star one. Thank you, as we have no further questions at this time, I will turn the call back over to Mr. Myers. Oh, I do apologize, we do have one more question. Your next question comes from Todd Copeland from CIBC, please go ahead. Thank you. Good morning, everyone. I was hoping you could just bring us up to speed on pro forma balance sheet. So pro forma, the closing of the conduit acquisition, what would debt and cash stand at? That's a little premature, Todd, to talk about that right now. But when we announce the closing of the deal, we'll provide more information at that time. Okay. With all the changes and the, okay, so pre the closing of the conduit acquisition, where would debt and debt capacity stand today? And where would cash stand with all the changes post the end of the quarter? Yeah. So if you look at the balance sheet as of September 30th, what you'll, you know, what's changed is we've paid off our convertible debentures. So that's gone. We still have the term loan from our lender that continues on into our third quarter results. And then, of course, cash would be different from third quarters given we use cash on our balance sheet to repay those converts. So, that's really the biggest change on a sort of organic basis, Todd. Okay. Okay, thank you very much. Appreciate that. Thank you. As we have no further questions at this time, I will turn the call over to Mr. Myers for closing remarks. Yeah. Hey, thank You, operator, and thanks to everybody for listening in, and we have some important milestones ahead as we close out this year and move into 2027, and we look forward to updating you on our progress. We will be participating in the Roth Technology Conference in New York City next week and the Cowan Tech Conference in Toronto on the 23rd, so we hope to connect with some of you in person. And as always, I want to thank our shareholders. I want to thank our employees. I want to thank our board. As people can imagine, internally, our employees are working extremely hard over a lot of strategic things we're working on, and we look forward to wrapping up the year on a positive note. Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you