Blackline Safety Corp.

Thank you for standing by. This is the conference operator. Welcome to Blackline Safety's third quarter results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Scott Boston, Vice President of Finance. Please go ahead.

Thank you, Cherise. Welcome, and thank you, everyone, for joining us.

With me today is Cody Slater, CEO and Chair of Blackline Safety Corp., as well as our CFO, Shane Grennan. Before turning the call over to Cody, I would like to note that some of the information discussed in this call is based on information as of today and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings news release as well as in the company's CDAR filings. During this call, there will be a discussion of IFRS results, non-GAAP financial measures, non-GAAP ratios, supplementary financial measures. Reconciliation between IFRS results and non-GAAP financial measures is available on the company's earnings news release and MD&A, both of which can be found on our website, blacklinesafety.com, and on CDAR. All dollar amounts are reported in Canadian dollars unless otherwise noted. Participants are advised that this webcast is live and being recorded for playback purposes. An archive of this webcast will be made available on the Investors section of our website. Neither this call nor this webcast archive may be re-recorded or otherwise reproduced or distributed without prior written permission from Black Line Safety Corp. With that, I will hand the call over to Mr. Slater.

Thank you, Scott. Good morning, everyone, and welcome to Black Line Safety's third quarter 2022 conference call. Today, we will be discussing our fiscal results for the third quarter ended July 31st, 2022, which were issued before market opening this morning. To set the agenda for today's call, I will start by providing some high-level remarks. Shane will then discuss key financial highlights of the quarter in greater detail, and I'll conclude by providing our outlook and some closing comments before we take questions. Our third quarter continued our strong track record of growth, with revenue up 46% year-over-year to $18.6 million, representing our 22nd consecutive quarter of year-over-year annual revenue growth. This quarter's performance continued some of the trends we saw last quarter with strong regional results as we continued to garner increased traction throughout our markets. With the U.S. markets up 75%, the rest of the world markets up 64%, Canada's continued return to growth up 68%. As expected, Europe was a laggard with revenue down 6% over the prior year. Product revenue continues to grow at a rapid pace, up 69% year-over-year to $8.9 million, as past investments in our sales and marketing network and capabilities continue to drive market penetration. We are dramatically outpacing our competitors in product innovation and sales growth as we continue to increase our market share. Additionally, product gross margin improved to 17% from the prior quarter of 13% as we successfully mitigated continued elevated shipping costs. Without one-time restructuring costs incurred in the quarter, our product dose margin exceeded 25%. The third quarter product margins represent the highest of our current fiscal year that do not reflect any benefit from the pricing increase we are implementing in the fourth quarter. On the service side, revenue grew 30% year-over-year and 10% sequentially to $9.7 million, including software services growth of 26%. as our hardware-enabled Software-as-a-Service business model continues to deliver growing long-term recurring revenue. The 30% year-over-year service growth is the highest quarterly growth in the last two fiscal years and is consistent with the expectations we laid out on our last call for accelerated growth as several deployments associated with larger orders began implementation. Our hardware-enabled SaaS business model continues to generate strong KPIs with net dollar retention of 105% on a trailing 12-month basis and ARR growth of 28% to 32.9 million and up 7% sequentially from 30.8 million. Additionally, our service margins have remained very healthy at 70%, unchanged from the prior year, which we consider a noteworthy accomplishment amidst broad-based inflation that is impacting all businesses. As we have stated before, but bears repeating, the majority of our lifetime gross profit for most of our products is derived from our higher margin recurring service-based revenues and not the initial hardware sale. For example, on the G7 wearable, our line of cloud-enabled wearable safety devices, every dollar of hardware sales generates $4 in lifetime recurring service revenue. This dynamic sees the recurring service revenue deliver approximately 90% of the lifetime gross profit after the initial hardware sale. I also want to take a moment to highlight multiple noteworthy customer contracts we announced since our last call. The first was a $2 million deal with Severin Trent Water, the second largest water company in the UK. The deal includes over 2,600 G7 devices and associated services with a three-year award. It includes an option to extend for an additional five years of service that would bring the total value over $4.2 million. This deal marks the sixth water company we have won business with out of the 12 total that exist in the UK, giving us a commanding market share. In North America, we continue to see increasing sales velocity with larger enterprise customers, resulting in three energy deals last quarter that have a total value of over $10 million. The largest of these deals has a lifetime value of almost $7 million from a Texas-based oil and gas company, which is also a new customer for BlackLight, validating our continued market penetration. The other two deals represent new business with existing customers and all include higher margin services, including 24-7 live monitoring by our Safety Operations Center. Now shifting to the personnel front, I want to briefly highlight yesterday's announcement of the appointment of Jason Kohener to our Board of Directors. Many of you may be familiar with Jason's impressive track record at Sierra Wireless, where he served as President, CEO, and Director from 2005 to 2018. leading a business turnaround resulting in revenue growth of nearly 800% for over 1 billion Canadians during his tenure. His executive leadership, background in IoT, mobile communications and semiconductors experience, along with his engagements as a board member of other public companies, is a welcomed asset of the Blackline board. We look forward to his contributions to the company. Lastly, I want a moment to thank our many existing shareholders who continue their support of Blackline for our recent successful 24.9 million capital raise, which I will discuss further at the end of the call. I will now turn the call over to our CFO, Shane Grennan, to discuss our fiscal third quarter results and financial position in more detail.

Thank you, Cody, and good morning all. As Cody mentioned, we achieved another quarter of strong year-over-year growth of 46%, yielding revenue of 18.6 million, including product revenue of 8.9 million, which represents a 69% increase from Q3 of last year. The 46% increase was driven by higher sales of our connected safety products, as well as steady growth in recurring service revenues from new hardware sales over the past 12 months, and by customer renewals of service on existing devices. We realized a material improvement in product gross margin during the quarter, reaching 17%, an improvement from 13% in the second quarter and the prior year's third quarter, as we successfully mitigated cost inflation from shortages of certain components and higher than normal freight charges due to ongoing global supply chain challenges. As Cody mentioned, product gross margin would have been even higher at 25%, when excluding $0.7 million related to a one-time restructuring charge as we reorganized our wearable technologies operation. Overall service revenue during the quarter was $9.7 million, a 30% increase from the prior year quarter and up 10% sequentially. As Cody mentioned, the 30% year-over-year increase represents the strongest quarterly growth of the past two fiscal years for our service segment. Software services revenue was one of the driving forces, up 26% year over year, while rental revenue increased 730% from the prior year to 0.8 million. Newly activated devices contributed a growth of 0.5 million in the quarter, and service increases within our existing customer base contributed 0.7 million of the growth. This increase was partially offset by customers who renewed fewer active devices due to workforce reductions of 0.6 million and only 15,000 from customers who declined to renew this quarter. Our service gross margin percentage was unchanged at 70% compared to last year, as service revenue continued to grow, absorbing more fixed cost of sales. The overall combined gross margin percentage for products and services was 45%. which was an increase from the prior quarter of 3% and a decrease from the same quarter last year of 1%. The decrease in total gross margin percentage from the prior year period is due to sales mix, with product revenue comprising 48% of total revenue in the third quarter of 2022 compared to 42% in the third quarter of 2021. I would note that our third quarter margins, while strong, received no benefit to the pricing increases we are implementing in the fourth quarter that would positively impact both hardware and service margins in fiscal 2023 and beyond. We continue to achieve strong growth globally, with the U.S. revenue growth of 75% from the prior year and 64% for the rest of the world. Additionally, Canada continued its recent return back to growth with a 68% increase from the prior year, largely as a result of increased demand in the energy market. In Europe, revenue declined 6% from the prior year, as we underwent a realignment of our operations in the region. We expect the previously announced leadership changes in Europe, including the appointment of Sean Stinson, the Chief Growth Officer, and Simon Rich, the European Sales Director, along with other recent appointments of additional leaders in the European business, we returned the region to growth beginning in our fourth quarter of this year. Product research and development costs were up 72% from the prior year quarter to $7.5 million, as we saw additional costs associated with the final push to bring G6 to market. Salaries and wage expense increased $2.6 million compared to the prior year quarter, and we also incurred $0.4 million of incremental costs from the SWIFT Labs team that we acquired in the second quarter of this year, As Alliance share of the work associated with launching the G6 moves behind us, we expect product research and development costs to trend lower in the fourth quarter. Sales and marketing expenses increased 31% from the prior year comparable quarter to 9.7 million. The increase is primarily due to increases in headcount in customer care, demand generation, and customer acquisition and retention teams to fuel our commercial engine. The increase in salaries and wage expense for the sales and marketing team was 1.3 million during the third quarter compared to the same period in 2021. Additionally, distributor and sales commissions increased 1.1 million from the prior year quarter due to higher product sales overall and an increase in the percentage of sales generated from finance leases through our distribution network. General and administrative expenses increased 51% from the prior year to 6.2 million. The increase is due to a number of structural changes across the company in the last year, as well as its overall growth. Salaries and wage expense increased 1.4 million during the third quarter of 2022. It is important to note that while our overall operating expenses increased sequentially to 24.6 million from 21.5 million in the second quarter, 1.3 million of this increase was related to a foreign exchange loss and 0.7 million was related to one-time restructuring costs. This increase has no impact on our expectation to deliver total operating expenses in the fourth quarter that are at or below our second quarter level. Our third quarter operating costs still reflected many of the expenses associated with our Invest to Grow strategy to scale our business. costs associated with ramping up ahead of our G6 launch, and one-time severance costs associated with our workforce reduction efforts that occurred during the third quarter. Now moving on to capital expenditures, which totaled $0.8 million for the quarter, primarily for property and equipment additions of rental equipment, cartridges, computer hardware, surface mount technology, and manufacturing equipment. This is a decrease from the second quarter of 2.9 million, which is reflective of the fact that the majority of the investments required for manufacturing capabilities for the G6 and the scaling up of our rental fleet have occurred. Inventory totaled 18.6 million at quarter end, compared to 17.5 million at the end of the prior quarter, and 12.7 million at the end of our prior fiscal year. Over the last three quarters, we have invested almost $6 million in our inventory to mitigate supply chain challenges, with approximately $2 million of the increase being attributable to preparing for the launch of the G6. Note we announced on August 8 plans to shift our delivery strategy away from next day fulfillment to 30 days or less, with the majority of orders being fulfilled within 10 business days. Our new fulfillment strategy still delivers best in industry delivery time. We anticipate this strategy along with the launch of G6 to allow for lower inventory levels going forward and therefore expect inventory to be a source of cash in the near term. Blackline provides the option to our customers to purchase outright our devices or to lease to our G7 lease program. With this customer decision affecting the timing of our cash inflows associated with that sale. We have expanded the number of customers opting from finance leases with a total of 31.2 million in future contracted cash flows at July 31, 2022, which is up from 23.1 million at the end of April 30, 2022, and up from 16.3 million at the end of our prior fiscal year. These finance leases positively impact our immediate product revenues and service retention over time, but negatively impact the company's cash flows in the near term, as the associated cash inflows from leasing take one and a half to two years to catch up for purchase. We are implementing some additional pricing increases to our leasing model, which we expect to improve overall margins, but not significantly change the cash flow implications. We continue to maintain a non-leaver balance sheet with no debt and a working capital position of 15.6 million, including cash at 10.5 million. After the end of the quarter, we completed a concurrent bought deal and private placements that raised 24.9 million in gross proceeds. We also signed a term sheet with ATB Financial for a new $15 million line of credit. We believe these financial resources, coupled with continued revenue growth and near-term cost reductions, gives us a solid runway to fund our business through a cash flow positive inflection point. I'll hand it back to Cody to discuss our outlook and provide closing remarks. Cody?

Thank you, Shane. As we discussed last quarter, we are streamlining our expense profile as we transition the company to cash flow positive in fiscal 2023. Our third quarter operating expenses still reflect costs with our invest to grow strategy, but as we transition to a lower cost profile, nothing has changed regarding our ability to achieve our previously communicated goal of operating costs in the fourth quarter to be at or below second quarter's 21.5 million. I also want to be clear that while some of these cost reductions have been achieved through a workforce reduction, the majority of the reductions have been from the delayed launch of the G5, and therefore we do not expect there to be any impact on our ability to successfully launch the G6 and continue delivering robust growth and top-notch service for our customers. In addition to these cost reductions, we also implemented an approximate 15% pricing increase for our hardware and services in the fourth quarter. This represents the first pricing increase on the G7 since its launch five years ago, and the first service pricing increase in five years. Given the market adoption of our advanced technology, global inflation and similar pricing increases from competitors, we are confident that this pricing increase will not impact our competitive positioning and will enable us to earn a more reasonable return for the world-class products and services that we deliver. This pricing increase will provide a step change in our hardware margins and that will become visible over the next two quarters, while the service pricing increase will have a smoother uplift in margins over the coming quarters as we add new customers and renew existing customers under this new pricing model. To give you some context for the materiality of this increase, if this pricing were in effect over our 12 months trailing results, hardware revenue would increase from $35.2 million to $40.5 million, and hardware gross margin percentage would increase from 19% to 29%, equating to $5.3 million improvement in gross margin. similarly a 15 service pricing increase would expand service revenue from 35 million to 40 million and service gross margins percentage from 69 to 73 with a 5.2 million improvement in gross margin and of course these impacts give no benefit to global supply chain relief or continued revenue growth which we have a strong history of delivering on and on the topic of continued growth We are very much looking forward to strengthening our growth story with the upcoming launch of the G6, which is the first of its kind connected safety personal device for the 240 million annual zero maintenance gas detection market. We are launching the product in October and look forward to showcasing the G6 next week at the NSC Safety Congress and Expo in San Diego, which is North America's largest workplace safety event. Similar to our innovation in the market with our G7 and G7 Exo products, we see a comparable opportunity to capture the zero maintenance gas detection market that we expect will extend our competitive lead with the most comprehensive connected safety suite of technologies globally, including our Blackline Live for cloud-based real-time reporting. Our competitive advantage is driven by our software platform that delivers tremendous value and insights for our customers who rely on our technology daily to ensure the well-being of their workers. Demand and interest for the G6 continues to exceed our initial expectations, and given how early we are in the commercialization process, we have great confidence in its revenue-generating capabilities. The last topic I would like to discuss is our decision to raise nearly $25 million in gross proceeds from the concurrent bought deal financing and private placement. which included insider participation from myself, a board member, our single largest shareholder and many existing shareholders. We have a plan in place that we believe can achieve a cash flow positive position over the coming quarters within our existing liquidity profile. We're not ignorant to the fact that the world has many uncertainties right now. So we felt this was a prudent risk reduction move to fortify our balance sheet. We were also able to quickly follow this equity raise with a term sheet from ATB Financial for a $15 million secured operating facility with a potential $5 million accordion feature. This new facility will have improved financial flexibility over our formal facility, which we view as a highly successful outcome considering current market conditions. Collectively, we believe our continued organic revenue growth, accelerated by our pricing increase, operating cost reductions, and enhanced balance sheets provide us with a compelling outlook that we are excited to execute against and deliver value for our shareholders. Thank you to everyone for your attention today and your continued support of Blackline Safety. I'll leave it there, and we'll turn the call over to the operator and open it up for questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. The first question comes from Chris Thompson with PI Financial. Please go ahead.

Thanks. Good morning, gentlemen. Cody, just a question on the $2 million UK water deal that you signed with Severance in July. It includes a three-year service deal with an option to extend for five years. Just help us understand that agreement with the potential eight-year life when I think our understanding is the G7 might have a shelf life of four to five years before potentially it's ready to be upgraded to the next version, if you will.

Sure, Chris. I mean, the typical field use of the G7 is around a five-year time span. As you mentioned with Severin, there's an option here to extend service contracts for up to eight years. Typical with all of our customers within that base would be a hardware repurchase somewhere along the line at the point in time when the hardware was reaching its term of end of life. That's not contemplated within the service structure, but would be an additional revenue pick up somewhere down the line in that contract length.

Okay, that's great. That makes sense. And just speaking of the replay cycle, I mean, the G7 was launched, call it around the beginning of fiscal 2019. You've got 20 or 30,000 units, say, that are coming up on three years plus in the base. Are you starting to get any indication out of your existing customers about intentions to upgrade those devices over the next four quarters or so?

We are actually some of the very early adopters of the G7 and G7X. So, we're seeing in fact you'll you'll probably see some announcements over the next while of a couple of scale contracts there where they're uh purchasing all new hardware and then re-upping typically for a higher level of service base so uh we think that will be an additional driver of growth over the next year on the hardware side not so much on the service side chris of course because these are concurrent service customers okay just the last one for me cody

on the service segment of the business. It looks like you're monitoring over 47,000 devices now, and I believe last quarter it was 49. This is the first time I've seen that number actually decline quarter over quarter. Can you just give us some color on what's happening there?

Yeah, I mean, for clarity there, the customer count number you were seeing before was the total number of devices that our SOC team are monitoring. As part of looking at some of our cost reductions here, Chris, we did a deeper dive into that pool to find out if there were any devices in there that were not under contract, not being paid for. So the difference really is the reflection of removing those devices, which enables us to turn their SIMs off or turn their satellite modules off and reduce that cost base. Okay, that's very helpful. Not reflective of a customer change, just reflective of a better discipline of removing ones that have, you know, that have no longer had a service contract associated with them.

Okay, that's helpful. Thanks. I'll hop back into the queue.

The next question comes from Doug Taylor with Canaccord Genuity. Please go ahead.

Yeah, thank you. Good morning. I want to touch on the pricing increase. It's been a little over a month since you publicly announced that initiative. Can you speak to how your conversations with your existing customers have gone in reaction to that announcement?

I'd say the general reaction is one of total lack of surprise. We're the only company in the gas detection world who hasn't increased their prices over the last couple of years. So, you know, we have, you'll start seeing the impact of that in Q4, but the real impact in Q1 is a lot of our Q4 businesses, you know, already under quote. And so we're not changing the quotes of current customers or quotes in the current queue. But all new customers are adopting the new price and all service renewals are starting to now happen at that newer price point. And we've had, as I say, no pushback from the customer base or the distributor RSM networks on that.

Okay. Last quarter, you'd spoken to a handful of larger deals that had kind of slipped or been delayed in their deployments or implementations. Is any of that still in effect here, some delays that have slipped into Q4, or have you caught up on all that business now?

More caught up. I would say at the end of the quarter we were caught up, so they wouldn't be fully reflected in the numbers. In other words, the largest particular customer we're referring to there continues to deploy. They'll finish their full deployment in Q4. the amount of revenue they you know if you looked at their not the quarterly number from them but the last month number you you're getting closer to a full deployment so a little bit more uptick in q4 but a good portion of that happened in q3 okay and last question for me i'm not trying to steal thunder from the big g6 launch next week but you know maybe you can update us a little bit now that we're this close to to launch on you know what

I guess what success looks like for you with that product here in the next couple of quarters. What kind of goals and what we can expect to see in terms of metrics reported on that to help us track the success of that product?

Yeah, I mean, as an overview, as you know, we're launching the G6 at the NSC on Monday. uh so all the marketing material all the webinars are starting training starting distribution channels are firing up uh you won't really see much of an impact in q4 we'll we'll start deliveries in october but it will be small numbers in october towards the end of the month and with full delivery starting in q1 uh you know as to the metrics we'll be providing going forward on that you know we're we'll Much like we did with the EXO when we launched the EXO, we'll separate elements of the G6 going forward to give a bit of an indication as to where the success in that product is. That's sort of the profile we think we'll want to take in the future as each new product launch for a year, give some better visibility of that as it's going along. Again, we expect it to be a significant contributor with a much faster ramp up than the G7 initial ramp up, primarily because we're already in the marketplace to a much greater degree when we launched the G7. As I've mentioned before with the G6, the market itself has a more rapid turnover rate with a two-year disposable product being the main competitor in there.

Thanks. I'll pass the line.

The next question comes from Amir Ezat with Echelon Partners.

Please go ahead.

Cody, Shane, thanks for taking my questions. If I could piggyback on Doug's question, outside of North America, I believe the price increases are going live tomorrow. Is there any reason where we should expect sort of a different outcome or reaction than what you're currently seeing in North America?

No, I would say not at all. The difference in the timing in Europe is distribution agreements that required a larger notice point in time for the shift in the pricing model, but our European team is seeing the same reaction as the North American that there's generally a surprise that we haven't increased our prices over the last numbers of years and no real pushback on anything that we're talking about there.

Okay, that's good to hear. Then if I switch my attention to operating expenses, Excluding the non-recurring expenses and stock-based comps, you look to be at $21.5 million. Just wondering, in your prepared remarks, you're alluding to potentially further cuts that would be reflected in the P&L going forward. Can you quantify the magnitudes of these cuts, or are you guys still sticking to the $21.5 million or below?

Hi, Merce.

Shane here. Yes, that is still the level we're looking at in terms of our Q4 operating expenses, including reflective of those other items you just mentioned, to be added below our Q2 level of $21.5 million.

Okay. I'll ask you again next quarter. Then on the write-off you guys had on the wearable division, would we see any specific spillover into next quarter, or is that largely reflected in fiscal Q3?

That has been all reflected in Q3, Amr.

Okay. So when thinking about product gross margin going forward, other than the price increases that you spoke to, which we'll start to see in Q1, are there Are there factors that we should be thinking about, you know, like obviously adjust for that write-off?

I wouldn't say anything significant. The product mix is always something that does impact that a little bit. It can impact it positively in the margin of the G7X, so it has a higher percentage number towards it, but the trend we're seeing in that recovery and that margin is something you should see continue as the volumes grow as well, too.

Okay. If you'll allow me one last one. You guys have totally been very diverse How should we think or how are you guys thinking about your capital structure going forward? Are there any changes there in light of the new facility?

Generally speaking, we still are debt averse.

The facility will enable us to look to better manage some aspects of capital over the next period of time, I would say. you know, something that we consider to be truly, you know, part of the capital mix right now, maybe to a greater degree than we have before, Amir.

Great. Thanks. I'll pass the mic.

The next question comes from David Kwan with TD Securities.

Please go ahead.

Hey, guys. So, Shane, you talked about Europe, expecting Europe, I guess, to return to growth in Q4. And obviously the sovereign trend win helps from that perspective. But can you maybe talk about what else you're seeing that gives you this confidence? I think particularly given you've got a pretty tough comp year over year in Q4.

Sure. It's Cody here. David, it's really in the midst of the changes we've done within Europe, a lot of it is a different manner of managing our sales pipeline. it gives us a lot more clarity of, you know, a lot better visibility, I would say, of what we're actually going to close within this quarter, next quarter. The strength in that pipeline and the results to date already give us the confidence to see that we're going to see a good return to growth in Europe in Q4. And that's, you know, Severn Trent's a good part of that, but it's a good mix of actual, you know, of actual order intake from the whole range of the European, of our European marketplace there, where we're seeing strength in nice mid-size to larger orders across the scope there.

Thanks, Scotty. And maybe just more generally, can you talk about kind of what you're seeing in the pipeline and kind of the general demand environment? Like, are you seeing sales cycle lengthen or any signs of slowing due to the macro environment?

In one respect, we've actually seen sales cycles shorten over this last period of last six months, shall we say. It's a trend that's been there over the year. I think that's more about Blackline's presence in the marketplace than it is about the marketplace itself. more mature customers understand us more. A lot of our business is expansion within current customer base, which has a higher velocity. And I think we manage under Sean's leadership there, they're managing that whole operation to a greater degree. We're constantly watching for elements from the macro environment as far as the context of interest rates, et cetera, but don't currently see those as a headwind right now.

but great and two more questions um you talked about cody i guess the the g6 response has been better than expected to be um as we get closer to that launch next month like are you starting to see a material backlog built ahead of that we haven't opened the ordering um book for that that happens after the nsc uh i don't expect that we'll see a truly large backlog base built up in the first you know uh

Yep, 30, 60 days, shall we call it, you will wind up with a lot of field trials, will line up with a lot of initial interest penetration. I looked at seeing that number somewhere in Q1, David, to see a better understanding of what the backlog is there.

Perfect. Last question. I guess there hasn't been too much discussion on black line vision kind of over the last year. I know it's not a big revenue driver, but could you provide maybe an update on what's kind of going on with that business and how that could be helping with the demand generation?

Sure, it's actually something you're right, we haven't talked about in a while. We've somewhat restructured some of the technology group that's in that vision team under Brian, our CTO, and have focused more on commercializing, I would say, the work that was done in that team, the work that's been done in the Vision team. Prior to this last while, Vision generally did sort of bespoke work for customers. Now what you're seeing with Vision is actual more saleable platforms for different particular target markets that we're generating. So it continues to be a strong driver for customer acquisition, and I think the way it's positioned now and the team that's there now actually adds strength to that because it's now much more of a product we can sell than a sort of bespoke service.

Great. Thanks, Eddie. Thank you.

The next question comes from Raj Sharma with B Reilly.

Please go ahead.

Hi, Maureen, thank you for taking my questions. I wanted to understand, so the sales and marketing and DNA expense, should we assume that once in Q4 you bring them down to 21 and a half, that should we see them stabilizing after that? Have you built up the sales team enough to now be able to, you know, stabilize the expense levels on the sales and marketing and also on the GMA?

I think that's a fair comment to make, yes. You know, the numbers we're talking about there are obviously ones that we want to see, you know, improvement over the top of, and where we're sitting right now, for the next period of time, given the projections we have, you're not going to see a material shift in that number.

Got it. Thank you. And then just on the working capital flow and the cash usage cadence, I know that Q3 was a big cash user. How should we look at that going forward? Are the inventory build-ups done? I know the G7 launch, of course, next week. There was a build-up to that. Should we expect a similar cash burn in Q4 slash the next several quarters? How does that stabilize?

Hi, Raz. It's Shane here. In the fourth quarter, in terms of the cash burn there, you should see a significant change in that number as we implement the items that we spoke about in our press release earlier in relation to our restructuring. And that includes the change in the inventory management strategy in terms of that. So you'll see that reflected in the fourth quarter and moving forward from there.

Yeah. And so I guess related to that, Shane or Cody, is the cash balance that you have performed of the raise, and now you also have significant liquidity on the line of credit, should we view that as ample sufficient for the next several quarters?

Yes, absolutely.

Great. And then just lastly, was there any outlook on the next quarter or the next few quarters in terms of revenues and margins?

No, Raj, we don't publicly share outlooks before or forward.

Okay, got it. Well, I think great results again. Thank you for taking my questions, and I'll take this offline.

Thank you.

The next question comes from Brian Fast with Raymond James. Please go ahead.

Good morning, Cody, Shane. We saw a step change in rental revenue this quarter. Could you just talk a bit about seasonality of rental and what it will take to see, I guess, further investment in that vertical?

Sure. It is a seasonal business to a great degree, but with our growth right now, you're not going to That maybe won't be quite as visible. Q4, we'll see another strong quarter on the rental side. So it's really right now primarily focused on the North American market. So you're looking at the plant turnaround kind of periods of times. For us, sort of Q2s, Q4s, the... What you're going to see there, as far as the investment we've made to date, it's in the hardware and the people and the systems to be able to run the whole rental base. We see that with a good long runway for it as far as continued growth within the current investment. In the future, we'll be looking at expanding that into Europe and into the Middle East. And those are totally new markets for that rental space. that also should see strong opportunity for growth for us. And it's a nice business because it's one, you know, it's a good margin business, the rental side. It introduces us to, but it also has some other additional real values and it introduces us to new customers. It's a, you know, it's a very visible portion of the business as you're typically doing major projects with them, construction, turnarounds, etc., So we look at it as both an excellent marketing tool, but also an excellent revenue and margin generator for the company going forward.

Okay, that's helpful. And does it make sense for the G6 product to be included in the rental program, or is it just given the short term?

I guess, nature of the product. I think the more likely base there would be that we'd be leveraging the rental to sell the G6 to that customer for their operating aspects after the turnaround.

Okay, fair enough. And then understanding, I guess, the rest of the world still makes up a smaller portion of revenue, but growth was still up sharply year over year. Could you just talk about areas where you are seeing success?

Yes, certainly. On that ROW portion, it's been pretty much across most of the places where we have our RSMs, where we have people sitting on the ground. I think the next really big growth area there you'll see will be the Middle East to a greater degree as we roll out the G6. That's a major market for the zero maintenance is that Middle Eastern marketplace. But We're just starting to gain some significant traction after having been in all those markets for a period of time across the board. I should say a small segment overall for us, but one that we see the investment today really beginning to pay off quite well.

Okay, thanks. That's it for me.

The next question comes from Gabriel Leung with Beacon Securities. Please go ahead.

Good morning. Thanks for taking my questions. Cody, just one for you. Just curious, based on your own research on G6, with the launch of the product, do you have any concerns or should we have any concerns about potential cannibalization of the G7, particularly the G7 single gas product? Or do you expect it's going to be G6 will have a different customer profile, different use case? How should we think about that?

Yeah, very clearly it's a totally different market segment. So there's no cannibalization of the G7 with the G6. I'd actually say a little bit of the opposite in the base that, you know, if you look at a lot of sites where you might have a couple of thousand zero maintenance or disposable devices on site and you've got a few hundred multi-gas devices similar to a G7, it's easier to penetrate those sites if you can offer both products and if you can just offer one. So different market, different use case, and I do think that it will actually help drive adoption of the G7 into some of the spaces.

Yeah, I sure appreciate that. Shane, I've got two questions for you. First, just going back to the product growth margins, obviously there was that write-down in the quarter, impacted margins by 8%. So should we think about product margins The base level at this point being 25% and then the price increases improving it from there?

I think that mid-20s level is fair, Gabriel. There's obviously ongoing supply chain challenges around the world and our teams are working hard to mitigate those as best we can. There may be maybe times where there's additional freight charges incurred and bringing in particular vital components but you know that that level of um of mid-20s is uh it's a good baseline to have um uh for uh for product margin gotcha that's all fun just one last thing uh i know you've got it to uh sort of operating expenses being sort of in line maybe below the uh the q2 uh 21 and a half level um but you know looking

sort of beyond that, maybe in the fiscal Q1, and with the benefit of a full quarter of the restructuring, should we expect operating expense to maybe show another sequential decline from sort of the anticipated Q4 level?

I mean, Q4 has always got some additional significant costs built in within it, things like the National Safety Council show, et cetera. So I would say there'd be a natural view that there would be a shift downward from Q4 to Q1.

Gotcha. That's helpful. Thank you. Appreciate the feedback. Thank you, Gabriel. Thank you, Gabriel.

This concludes the question and answer session. I would like to turn the conference back over to Cody Slater for any closing remarks.

Thank you, operator. I would just like to thank everyone today for their questions and their participation, and we'd like to wish you all a good rest of the day. Thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.