Quarterhill Inc.

Good morning and welcome to Quarter Hill's Q1 2025 Financial Results Conference Call. On this morning's call, we have Chuck Myers, CEO, and Morgan Demke, Interim Chief Financial Officer. At this time, all participants are in a listen-only mode. Following management's presentation, we will come back a -and-answer session, during which analysts are invited to ask questions. To ask a question, please press star 1 on your touchtone phone to register. Should you require any assistance during the call, please press star 0. Earlier this morning, Quarter Hill issued a news release announcing its financial results for the quarter ended March 31, 2025. This news release, along with the company's MDNA and financial statements, are available on Quarter Hill's website and on Cedar Plus. Certain matters discussed during today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's annual information form and other public filings that are available on Cedar Plus. During this conference call, Quarter Hill will refer to Adjusted EBITDA. Adjusted EBITDA does not have any standardized meaning prescribed by IFRS. Please refer to the company's Q1 2025 MDNA for full cautionary notes regarding the use of forward-looking 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 meeting over to Mr. Myers. Please go ahead, sir.

Thank you. Good morning, everyone, and thanks for joining us on today's call. In terms of agenda, I'd like to discuss highlights for the quarter, after which Morgan will take a look at the key financial results. Following Morgan, we'll open it up for questions. In summary, our Q1 results reflect our ongoing business transformation and turnaround activities for the past 18 months. As we've discussed previously, Q1 is traditionally our seasonally slowest quarter, which had an impact on our results. Our results were also affected by the two legacy contract, tolling contracts that remain in renegotiation, which we mentioned during our Q4 call. Despite these challenges, we continue to make progress on our strategic initiatives, such as our new technology architecture, the onboarding of new leadership, and the expansion of our bidding activity, and unlocking of new markets. For the quarter, revenue was $33.9 million, and adjusted EBITDA was negative $3.4 million. Regarding the two tolling contracts in renegotiation, they represented $3.6 million in revenue in Q1, but they negatively impacted our adjusted EBITDA by $3.2 million. So excluding those contracts, we would have been close to adjusted EBITDA break even for the quarter. The good news is we remain actively engaged in these negotiations and working towards resolutions that we expect will improve our financial performance in the coming quarters. Finally, our contracted revenue backlog stood at $476 million at quarter end. Let me turn now to the performance of our individual business units. Our safety and enforcement unit continues to perform well, delivering solid top line growth and strong margins in Q1. This consistent performance stems from our long-term customer relationships, product innovation, and our team's dedication to addressing client needs effectively. During the quarter, we signed new contracts in several states, including Indiana, Illinois, Oklahoma, and New Hampshire. At the IBTTA conference in March, we featured Ithea, our AI vehicle counting and classification system, which generated significant interest from attendees. These capabilities, along with ongoing technical enhancements to our traffic data collection systems, deliver improvements in accuracy and reliability, creating real value for our customers while strengthening our competitive position. I'll speak more to some of our activity at that conference in a moment. In our tolling unit, we announced a significant new contract in Q1 with ACTC, valued at $40 million, with options to extend an additional four years at $15 million. Implementation on this project has begun, and we expect it to contribute more meaningful to our results as we progress through the year. We also won follow-on business with existing clients, which speaks to the strength of our customer relationships and our ability to expand those mandates over time. Just this week, we announced the successful completion and full systems acceptance of the US 290 toll road project for the Central Texas Regional Mobility Authority, CTRMA. The US 290 toll road in Austin is a critical six-mile corridor that has been successfully upgraded to an expressway facility. This enhancement has tripled the roadways' capacity and delivered meaningful reductions in travel times for the users of both tolled and non-tolled lanes. We also successfully completed phase three of the 183A toll project for CTRMA. This project provides direct access between key transportation points and significantly improves traffic flow in the region. What's noteworthy about this achievement is that the effective collaboration we fostered between TxDOT, which is the Texas Department of Transportation, and the other stakeholders throughout this project. This approach ensured timely completion and it reinforces our standing as a trusted partner for complex multi-agency initiatives. While we continue to win follow-on business with existing customers, we've also intensified our pursuit of competitive bids and remain optimistic in securing meaningful new contracts this year. That said, we're taking a disciplined approach to pricing. We won't pursue business at any cost. As shareholders have witnessed and are witnessing the consequences of that type of strategy. Switching gears, as most of you know, we have a 10% ownership stake in YLAN, the IP business that we sold in 2023. Our 10% stake entitles us to 10% of any dividends distributed by the LP that owns it. In Q3, 2024, we received a $3.8 million dividend. And in April of 2025, we received a second dividend in the amount of $3.2 million. This payment will contribute positively to our cash position and will be reflected in our Q2, 2025 financial statements. Let me take a moment to update you on our strategic priorities. Our primary focus remains on growing our core tolling and enforcement business units through improved integration, ongoing technology innovation, increased business development activity, and enhancing our customer relationships. We continue to see growing opportunities to expand in Europe, as well as other regions like the Middle East. And we expect to see some progress on this front in 2025. Regarding our new technology architecture, we have deployed significant time and investment in our next generation offering. In doing so, we're making progress in our transition from being primarily an integrator to becoming a more software-focused company. Our new platform is built on a microservices architecture that enables us to develop, deploy, and scale components independently, enhancing our market responsiveness and improving our ability to maintain solutions over time. This strategic shift is designed to drive higher margins, create defensible proprietary offerings, and enable recurring revenue streams. The platform supports both our tolling and enforcement business, while facilitating expansion into new verticals like logistics. Artificial intelligence, AI, is increasingly integral to our operations. Our AI strategy focuses on two key areas, visual technology applications for vehicle ID and classification, and data mining and analytics. Both capabilities have promising applications across all our business units and are aligned with customer demand. Technology development in the ITS industry has been evolutionary in recent decades, but AI now presents revolutionary potential. The most significant innovation opportunity since RFID emerged in the 1980s and 90s. We are among the first companies to explore comprehensive AI capabilities, from convolutional neural networks, transformation models, to large language models, and generative AI built directly into our products. The ITS industry generates substantial data, and we're equipping our customers with the tools to transform this data into actionable insights that address critical challenges in operational efficiency, roadway safety, and infrastructure management. This paradigm shift represents the compelling reason I returned to the industry. As mentioned earlier, the 2025 IBTTA Technology Summit in March was in our backyard in Dallas, and was a real success. We had demonstrations of our new software with several customers, and the feedback was excellent. Among other things, we showed off our digital video audio system, DBAS for short, which uses AI to classify in real time without needing any prior training. That would be training of the models, by the way. We also gave people a hands-on look at our quantum vehicle detection system, which is an above-ground tolling solution that's generating a lot of attention. That, by the way, is an offshoot of our acquisition of Red Fox last year. Overall, it was great exposure for our team and our technology, and an important milestone event for helping us stand out as innovators in the transportation technology area. On the logistics side, the pilot project we launched in the rail sector is serving as a valuable reference account, providing insights and a foundation for replicating our approach with other businesses in this vertical. Also, as mentioned, this market stands to benefit from the new technology architecture. Like to talk about board and leadership. Over the past 12 months, we've added new leadership capabilities to both management and the board. On the executive side, this has helped lead to important changes with our technology development and sales and marketing teams. At the board level, we held our annual AGM earlier this week and now have six board members, four of whom are new within the past six months. The changes to our board reflect the evolution of Quarter Hill over the past 18 months, and they align with our focus on core ITS operations and technology in financial management. I discussed the addition of Pat Dion, Sr. and Robin Saunders on our last call, but it's worth stating again that their combined experience in transportation systems, equity and debt financing, business development, enhances our ability to capitalize on our growth opportunities. And now I'm pleased to welcome Asha Dhanir and Stephen Smith as our newest members of the board. Following their successful election at our annual meeting earlier this week, Asha and Stephen have complementary skills. Asha brings strong legal and governance experience, while Stephen brings years of financial expertise. This mix will be key as we look to growing our core business and exploring potential acquisitions. They both help guide companies through similar growth phases, and bringing them on board shows our commitment to attracting leadership with the right mix of skills to create long-term value for our shareholders. Our outlook. Looking ahead, we remain laser-focused to drive revenue growth and margin improvement as we move towards the second half of the year. Completing our contact renegotiations, executing on our sales pipeline, and advancing our technology are our primary goals. On the renegotiation front, we have entered a structured settlement process for one of the two contracts to try to resolve the situation positively. Even though these projects generate some revenue, as you can see, it is unprofitable revenue, and it wouldn't be prudent for us to continue with the status quo. Generating consistent cash flow remains our top priority. The dividend received from YLAN will strengthen our position in Q2, and we continue to focus on improving operational cash generation across the business. Our bidding approach for new projects now ensures cash flow neutrality through the implementation phase, which represents a significant improvement over our historical approach. In closing for this, while Q1 presented expected seasonal challenges along with the ongoing impact of contract negotiations, we remain on track with our turnaround and with business transformation. We're building a stronger, more resilient business with enhanced technology capabilities, improved operational efficiency, and a path to top-line growth, margin expansion, and positive cash flows. I want to thank our team for their continued dedication and hard work during this phase. We're excited about the opportunities they had and remain committed to delivering long-term value to our shareholders, investors, customers, and employees. With that, I'll turn it over to Morgan to discuss our financial results in more detail.

Thank you, Chuck, and good morning, everyone. I'll start with a look at revenue in the quarter. Q1 revenue was $33.9 million, down $1 million from Q1 last year. The decrease was primarily due to the timing of revenue received from certain ongoing projects, which in general leads to some quarterly fluctuation. As you know, Q1 is our seasonally slower quarter due to the impact of winter weather on implementations, which explains the sequentially quarterly variance. As Chuck mentioned, the two contracts that are in renegotiation contributed $3.6 million to revenue in the quarter. This revenue generates a significant negative contribution to operating margins, which is why we are pursuing the renegotiations. I'll touch on their margin impact in a moment. Finally, at quarter end, we continue to have a significant backlog of US$476 million, providing good visibility into revenue for 2025 and the next several years. A large portion of the backlog is higher margin contracted maintenance revenue versus implementation revenue, which we expect will drive better margins in 2025 and beyond. Gross margin percentage in Q1 was 12% compared to 20% in Q1 last year. The decrease was primarily due to the poor margin on the two noted tolling projects, which is partially offset by continued strong margin performance from our enforcement unit. Total operating expenses for Q1 were $11.2 million compared to $10.5 million in Q1 last year. The increase was primarily due to investments in leadership and resources for our project bid development teams, which were offset in part by steps we've taken elsewhere in the organization to optimize the workforce. Q1 adjusted EBITDA was negative $3.4 million compared to positive $0.2 million in Q1 last year. The two tolling contracts that are being renegotiated resulted in a reduction to Q1 adjusted EBITDA of $3.2 million in Q1 2025. So excluding those two contracts, Q1 adjusted EBITDA would have been a more modest loss of $0.2 million versus negative $3.4 million. As we've said previously, driven by continued steady results from the enforcement unit and better expected performance from our tolling unit, we are looking for adjusted EBITDA to grow in 2025 compared to 2024. Completing the two renegotiations will be a big contributing factor for generating that growth. Turning now to the balance sheet. At quarter end, we had adjusted working capital of $59.8 million compared to $66.2 million at the end of 2024. As stated previously, we use adjusted working capital, a non-IFRS measure, to highlight the strong working capital position that we have. Adjusted working capital is defined as working capital adjusted for convertible debentures and derivative liability. We ended the quarter with cash and cash equivalents of $26.1 million compared to $31.9 million at the end of 2024. As Chuck mentioned, subsequent to quarter end, we received a $3.2 million dividend for our 10% ownership and YLEN. This will be reflected in our Q2 statements. Also on the cash front, one of the main focuses has been the progress billing and collecting on some of our longer standing unbilled revenue balances. With the work still to be done on this front, that should help our cash balances in future periods. In 2025, we continue to expect positive cash from operations for the year, as to timely completion of the renegotiations. Due to the nature of our business, operating cash flows may vary significantly between periods due to changes in timing and working capital balances, namely with collections and payments. This concludes my review of the financial results. I'll turn the call over to the operator for Q&A.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press the star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press the star followed by the number two. Once again, please press the star one to ask a question. And with that, our first question comes from the line up. Gavin Fairweather with Cormark. Please go ahead.

Oh, hey, good morning and thanks for taking my questions. Maybe just to start on the tolling business. I think that was a new point that you brought up, Chuck, in terms of one of the contracts being in a structured settlement. Maybe you can just kind of help us understand what that looks like. Is there a mediator involved? Is there a timeline that we should think about? What does that structured settlement process

look like? Yeah, it's I have to have to be somewhat careful because it is considered confidential, which is why I use the structured settlement. There is a structured process that we're following with the customer to come to a resolution of the costs associated with the operating of that system. I'd like to I can also re-emphasize both of the those contracts are in revenue collection mode. So they're they're substantially into their implementation phase.

You might not be able to answer, but I'm going to ask it anyway. Are you are you looking to recoup some of the previous losses or are you just looking to fix the marginal and go for it?

It's both are distinctly possible. My my my sole my my you know primary focus is for this to be cash flow positive as fast as humanly possible.

Understood and maybe you can I understand that there's two that are being causing some issues. So what about the one that's kind of not in that structured settlement? Are things progressing on as well?

Yes, they are. It's just a it's a much different customer relationship and and it's progressing along. That's it's more of a it's a it's a positive relationship with that customer.

I understand and then maybe just on the sales side on on tolling you know you've had some expansions and new ones recently. Maybe you could discuss though the the size of the pipeline in terms of how many RFPs are hitting the market, how many RFPs you've responded to and are waiting for a response on. Maybe just give us a sense of the size of that that bit book and pipeline. I can

say I knew you were going to ask that question, Gavin. Our current pipeline that we're going after is about two billion dollars right now. The weighted our waiting on the on the toll side is about 278 million and on the sales and safety enforcement side it's about 250 million. We currently have 131 million dollars in proposals out for review right now. We have quite a good backlog of proposals at the moment. We have been bidding actively.

And yeah as you start to get some some decisions on those kind of RFPs like would these be things that would be ramping up in 26 assuming that you

you know some of them will be ramping up this year. We had one that was we should have we thought we were going to hear about that got pushed till October. We have another one that we should hear on in the next few days. So you know they're definitely actively I mean we're talking about we expect some awards very quickly here.

Okay that's great to hear. And then maybe one quickly for Morgan. Can you remind us of kind of your view of the excess working capital in terms of the you know unbilled revenue tied to some of these toll and contracts? Have you sized that up recently?

Kevin I don't have an exact number for you on for those two projects specifically but throughout the year we're looking to actively move that unbilled revenue into AR and collect it in the second half of the year.

Like assuming like I think it was 37 38 million in the quarter or like do you help us? Yeah. On some of what might be excess?

For the two projects we could see a sizable decrease in that in the second half with successful negotiations. I don't have exact number Gavin. I can get back to you on that.

Okay sounds good. Thank you. I'll pass on.

And your next question comes from the line of Todd Kupland with CABC Capital Markets. Please go ahead.

Oh yeah good morning everyone. I was wondering if the run rate in Q1 is the right number to use for revenue and loss until these contracts are resolved. If you could just give us a sense on seasonality and where the business should be until you're able to adjust those programs.

Yeah so typically Q1 is our seasonally softest quarter so we will start to see an improvement in quarterly revenue starting in Q2 and wrapping up in Q3 and Q4 as we've seen in previous years. We can still see some impact until those two contracts are renegotiated but we're actively working to limit the exposure on those on a weekly basis.

It's

like seven billion dollars.

I mean is

the right way

to think

of oh sorry. I was just gonna say in the previous year it was approximately a seven point four million dollar loss on those projects on those two projects combined for EBITDA. I see. If that helps give some clarity.

Todd does that give you some clarity on where we think we will be? So you basically

are sorry what was the total last year 7.4? Yes. Yeah and you got hit by 3.2 this quarter something like that so yeah okay so and

some of

that is because the idea that I mean just for simplicity do we just assume until it's cleaned up spread that out over the rest of the year the balance?

Yeah

I think it depends on timing but I think the reality is that you know we expect that we're going to make some positive progress here in the short term on those. We're sure hoping on that and then but it gives you an idea if you were to eliminate those two contracts where our EBITDA would have been. That's

fair. Yeah maybe that's

so we were trying to give clarity to our shareholders and the market on what that was because we've been asked that so that's why Morgan did the calculation.

Yeah okay that sounds good okay. I was wondering so I see the debenture is you know classified as current now. I guess that's October 26 that comes due. What's the anticipating and update on that?

Thanks. We're actively in discussions to refinance those where they are just to make sure that we're covered. That kind of thing keeps me up at night so we're actively in discussions with banks on managing that and or converting it next year.

Yeah but the conversion price is 3.80 so you're going to need to get that two billion of backlog awarded to quarter hill or the pipeline sorry. Yeah yeah got

it

yeah thank

you.

And just on that sorry one follow-up on the convert. It's six percent what's your sense with the turnaround in the business if you were to refi do you feel like that's a lower rate? Do you have a sense on that?

Don't have a sense on it yet. I obviously the rates have become a little more manageable in that so I probably have a more positive feeling about it now than I would have you know three months ago.

Yeah okay yeah fair enough yeah. Okay that sounds good and then on the pipeline Chuck what do you mean when you say waiting 278 and 250 tolling and enforcement out of two billion? What does that actually mean?

The high the we we waited according to a higher probability of our win so you know right now we have actively opened two billion dollars of opportunities but we see about you know 575 million of that you know we have a higher probability of win. Okay so we wait it when we look at it.

Yeah yeah I got you and if you think about so you have you you see two billion and then you wait your high probability what does that look like over you know the next let's say one two three years is that two billion stay steady in the pipeline? No. What's the opportunity set if we just think about looking out a little bit longer?

I think it probably goes up by over a billion dollars a year.

And just so you

know so what we do is as you know at the beginning at the you know beginning of the end of last year I was very careful about making sure we were cleaning up our own house before we focused on opportunities. We brought in a good head of sales that's really driving this product project right now and so we have we have much more confidence in our bidding and proposal capability today so we're definitely getting more active and we're definitely looking at more and bigger opportunities.

Yeah and what's the the urgency would you say in the market right now you have I guess you have sort of I don't know if you're impacted by Doge I mean a lot of this is is state driven I suppose but you know what's the urgency I guess from a budget point of view and then maybe leveraging the tech that you were talking about before. Yeah give us a sense on what are the factors that are impacting decisions?

Right the biggest factor is you know usually the urgency is that these systems are in for a long time so these which contract lives are coming to an end or the technology is just kind of evolutionarily phasing out. A lot of these these systems that are bids there's new ones there's new roads like some of the stuff we look at CTRMA the ACTC is a new road or newer road anyway and then we're bidding we're bidding on projects right now that have been in existence for a long time but the technology is basically past its expiration date so that's usually where the urgency comes. You know you touched on the right point and it's also got to sometimes with these contract renegotiations I know they're frustrating for you and they're frustrating for all of us but they're state and local contracts which makes even the federal government look fast so they're painful to get through but when they get through they tend to be long-term you know steady systems this again is all legacy stuff from before I joined but we're working very hard to get through these things and hopefully we'll have some good news here in the short term.

And sort of one last question on this you know you made the the the point on trying to have a higher software content in your business what is the EBITDA margin look like with some of these new wins given given that software possibility?

Right so if you look at if you look at in the industry you know kind of the gold standard is 20% EBITDA corporate wide for this business I think that oh there's a there's a lot of competition you know it's part of the reason we see a good opportunity in this market because the market's a bit fractured you're probably looking at the companies that are around -12% EBITDA margin across the corporation. The difference is if you look at the software when you look at it from an integration perspective and you look at yourself as an integrator you're looking at kind of 35% gross margins to 40% whereas if you're looking at the software components you're more up in the 60 and 70% and also the maintenance gets significantly better with a modern architecture.

So Chuck is your point on this that that just builds a case for your 20% goal where the industry's kind of broken down at 10 or is there a possibility above that what what's your point on the 20?

I think I think you know in the next two years I think the probability is 20% as a corporate EBITDA but I do think with the new software platform and taking it frankly a much more modern approach to it you could see those numbers creep above 20% the next couple of years more software oriented margins. Now some of it is it's not completely realistic because you're still going to have implementations and you're still going to have subcontractors and things like that but you know we still feel pretty good about 20% and you can see if you add back the loss on those two contracts we're definitely keeping to our plan. We didn't get them resolved as fast as we wanted to but you can see when we do we will we start to approach those numbers pretty quickly.

All right Chuck one last question so on AI you know you talk about how it can be used for vehicle counting etc. Is this just a feature that people are going to want or does it actually give you revenue upside i.e. you can actually charge more for that functionality?

The reason you could charge more for that functionality is it eliminates humans so right now you know a lot of the revenue recovery is based around violations and things like that and a lot of it involves pretty heavily human involved image review and when you're putting those violations together rather and also when you're just identifying the vehicles or you know we kind of use the the loose nomenclature of vehicle fingerprinting you know identify kind of a blue Toyota with this license number or if i don't have a license number find the blue Toyota with these markings that's been through these lanes because it doesn't have a license plate and we want to identify it so that's one so you're not requiring human intervention to do that and the other side of it is when you get on the just on the tolling side it allows you to process you know disputes and things much faster because you start to use kind of active learning with transformer models and large language models it allows the users and the customer service reps to be able to handle the calls and the chats and everything just with much less human intervention which really drives your operating costs down for the customers and and the software is more more reliable because it shows up at work on the logistics side you start to look at what you're using for models like in a scene so typical vision systems where we're just kind of identifying a license plate or the color of a vehicle center around convolutional neural networks as you look at transformer models and think of those as almost serial models and transformer models are more active models so the it's almost like the experience of actually monitoring a scene and identifying things that come up in an active and a parallel kind of processing thought process so there's a lot more crossover between the convolutional neural networks and large language models given that we're using these these transformer models which only really kind of started to come about in 2017 and 2018 so they've only now just gotten very good

appreciate you taking these questions thanks very much chubb

absolutely thanks to

and your next question next question comes from the line of steven lee with raymond james please go ahead

um thank you hey guys um so on the on the program contracts i appreciate the quantification of the impact but i also want to clarify is we say run rate impact so every quarter drags on it's um three million dollars on the ebda thanks

i had to think about that for me um yeah

so we're taking action to bring that down from 3.2 million in the first quarter this year as we referenced last year was approximately 7.4 million dollar loss in those two projects so we're actually working to bring that down so that the quarterly rate or run rate is not 3.2 million

okay

and taking actions within the company

yeah okay that's helpful okay and and so leave aside the these contracts so can i ask if iod grew year over year for q1

yes it did q1 uh this year over last year was a growth of approximately 28 percent oh wow okay very good thank you um it's a seasonally soft quarter so we just started the year off very very strong but we're looking forward to growing up

and we've and we've grown the margin significantly in that business over the last year or two

yeah got it thanks guys you bet

and that concludes your question and answer session i would like to turn it back to mr meyers for closing remarks all

right i'd like to thank you the operator for for hosting the call today i always want to thank the investors and and and our shareholders for their patience and their support and you know we we'd like to view ourselves as fairly transparent and provide as much information as we legally can without doing something we're not supposed to and i and again our employees are working hard i want to thank our new board members and you know where i think everybody's marching in the same direction so we look forward to a positive outcome

thank you presenters and ladies and gentlemen this concludes today's conference call thank you all for joining you may now disconnect have a good day everyone