Thank you for standing by. This is the conference operator. Welcome to the Blackline Safety Corp Second Quarter 2023 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 for analysts to ask questions. To join the question queue, you may press Star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing Star, then zero. I would now like to turn the conference over to Scott Boston, Vice President of Finance. Please go ahead.
Welcome. Thank you for joining us. Today, we will be discussing our fiscal results for the second quarter ended April 30, 2023, which were issued before market opening this morning. With me today is Cody Slater, CEO and Chair of Blackline Safety Corp., as well as our CFO, Shane Grennan. I will turn the call over to Cody in just a moment for an overview of our second quarter. Following that, Shane will discuss the financial highlights of the quarter in greater detail, and Cody will then close with our outlook and some additional commentary before we take questions. I'd like to remind everyone that this call is live and is being recorded today, Wednesday, June 14, 2023. An archive of the webcast will be made available on the Investors section of our website.
I'd 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, please review the forward-looking statement disclosure in the earnings news release, as well as in the company's SEDAR filings. During this call, there will be a discussion of IFRS results, non-GAAP financial measures, non-GAAP ratios, and supplementary financial measures. A 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 SEDAR. All dollar amounts are reported in Canadian dollars unless otherwise noted. With that, I will now hand the call over to Mr. Slater.
Thank you, Scott. Good morning, everyone, and welcome to Blackline Safety's second quarter 2023 conference call. Q2 continued our strong momentum from the last several quarters with another new record for total revenue of CAD 24.1 million, which was up 45% year-over-year. This is our 25th consecutive quarter of year-over-year revenue growth. The rate of revenue growth also accelerated when compared to the first quarter of 2023, with service and product revenues up 46% and 43%, respectively. We were able to achieve this while maintaining our reduced cost structure as we continue on our path to positive quarterly Adjusted EBITDA by the end of this fiscal year.
Q2 also set a record for gross margin at CAD 12.5 million, with an overall gross margin percentage of 52%, driven by our highest ever service margin of 75%, which validates the opportunity for our business model to generate free cash flow in the near term. At the end of the quarter, our annual recurring revenue had increased 38% year-over-year to CAD 42.4 million, demonstrating the longer-term opportunity for Blackline as we scale our connected worker solution and our market share through customer adoption of our world-class products and services across a variety of industrial verticals.
We are seeing this growing success across all our regions, and we saw year-over-year revenue growth across the board, with our largest segment, the United States, leading the way at 65%, including our recently announced win in Texas of a competitive bid for portable gas detection to protect 1,000 workers. Canada and Europe also remained strong, with 24% and 17% revenue growth, respectively. I want to specifically highlight the rest of world, which increased 123%, achieving a new high water mark with nearly CAD 2 million in quarterly revenue. This team, now under the leadership of our new Vice President, International Sales, Peter Attalla, is primed to continue driving the growth of Blackline in key international segments and increase the pipeline of deals from leading international energy, manufacturing, transportation, and chemical companies.
Within our service segment, we saw another quarter of extremely strong results from our rental team, generating CAD 1.6 million in revenue, a 247% increase year-over-year. This rental offering not only provides incremental high-margin revenue from the industrial turnaround and construction markets, it also enables companies who are not yet customers to experience the advantages of the Blackline solution at their facilities and is a strong leading indicator for future sales. We'd also like to highlight our net dollar retention, which surpassed our earlier goal to reach 115% by the year-end, coming in at 118% in Q2, up from 102% last Q2.
We are now targeting 120% for this metric by our fiscal year-end, as more customers renew their contracts with incremental service at a higher average revenue per unit. All of this contributed to reducing our Adjusted EBITDA loss by 73%, from CAD 12.3 million in Q2 of 2022 to CAD 3.3 million in the current quarter, normalizing for the effects of foreign exchange gains. This demonstrates how far we are down the path to our goal of achieving quarterly positive Adjusted EBITDA by the end of fiscal 2023. We maintained our solid financial position at the end of the quarter, with total cash and short-term investments on hand of CAD 21 million, including CAD 8.3 million of funding received from the sale of the initial tranche of lease contracts under our new securitization agreement with CWB Maxium.
With CAD 15 million and $35 million in total availability, this facility provides us with the opportunity to more aggressively market our all-in monthly solutions, which continue to be attractive to many customers, including those for our newest product line, the G6. As it relates to the G6, we've seen strong customer interest in the product and its roadmap. This has generated a robust pipeline, with the majority of customers looking for enhanced services on the roadmap that were not available at the launch of the product, but will be available in the fourth quarter of this fiscal year. While this will result in the delay of volume shipments anticipated in Q3, the G6 should be on track in Q4. I would note that the short-term impact here is offset by the success we've had in the market penetration of our core products and resulting growth in our ARR.
In the longer term, the opportunity to monetize these higher value services for the G6 will create an even stronger product line for Blackline and its customers. I will now turn the call over to our CFO, Shane Grennan, to discuss our fiscal second quarter results and financial position in more detail.
Thank you, Cody, and good morning all. As Cody mentioned, we achieved our 25th consecutive quarter of year-over-year revenue growth of 45%, generating total revenue of CAD 24.1 million. This includes CAD 11.2 million in product revenue, which increased 43% year-over-year. Increase in the current year reflects the investment in the company's expanded sales network and global sales team in the prior year, with continued strong demand generation and sales development activities. Product gross margin percentage in the second quarter doubles to 26% from 13% in the prior year period. Product margin also increased sequentially from the first quarter, as we saw the benefits from our pricing increase, a higher proportion of sales being completed under our leasing model, as well as increased throughput from our expanded production facility, where we have enhanced capacity and process automation.
Overall, service revenue during the quarter increased 46% to CAD 12.9 million, which is the strongest quarterly service growth achieved in three years. Software services were a major contributor to the growth, up 36% year-over-year, which also drove ARR growth of 38% to CAD 42.4 million. Newly activated devices contributed to year-over-year growth of CAD 1.5 million in the quarter, and net service increases within our existing customer base contributed CAD 1.6 million of the growth. Our rental business also continues to generate robust growth, with revenue increasing 247% from the prior year to CAD 1.6 million, meaning we have averaged over CAD 1 million in quarterly rental revenue over the past four quarters.
Our service gross margin percentage came in at a record 75%, achieving our target set at the beginning of the year, two quarters ahead of schedule. Similar to product gross margins, we expect continued margin improvements through fiscal 2023 as we add new customers and renew existing customers under the new pricing model. Our total gross margin percentage came in at 52%, yielding CAD 12.5 million, representing our highest ever total gross margin. The growth in total gross margin is due to revenue mix, cost optimization efforts across our business, and the rollout of our pricing increase. In terms of our geographic growth mix, we are pleased with our performance as each one of our key geographic markets improved from the year-ago comparable period.
Our rest of world market represented our largest growth region, improving 123% from last year's Q2, as our sales team continues to deliver on the investments made over the past two years. The U.S. was our second largest growth market, at 65% from the year-ago comparable period, as we leveraged our established sales network in the region. Additionally, our Canadian and European markets were able to see a year-over-year increase of 24% and 17% respectively, as we continued to have excellent product wins and strong renewals across these regions. Shifting now to operating expenses. Our total expenses for the quarter were CAD 19.2 million, which was down 11% compared to our expenses of CAD 21.5 million in the prior year quarter.
Excluding non-recurring transaction costs incurred in the quarter, total expenses as a percentage of revenue were 75% in the quarter, compared to 127% in the prior year period, and was our 4th consecutive quarter where we reduced our total expenses as a percentage of revenue. Product research and development costs decreased 20% from the prior year quarter to CAD 5.1 million, and decreased as a percentage of revenue to 21% from 38% in the prior year period. Salaries, recruitment expenses, and consulting and contractor costs associated with the G6 were all down, with the core development work of that product having been completed. Sales and marketing expenses decreased 4% from the prior year quarter to CAD 8.6 million, which represented 36% of revenue, compared to 54% in the prior year period.
Excluding a general provision for bad debts, sales and marketing expenses were 34% of revenue, or an 8% decrease year-over-year. The decrease was a result of lower headcount and contractor expenses compared to the prior year. I would like to underscore that even with this decrease, these go-to-market teams were key to driving revenue growth of 45% for the quarter. General and administrative expenses increased 9% from the prior year quarter to CAD 6.8 million, which represented 28% of revenue, compared to 37% in the prior year. Excluding non-recurring transaction costs for our lease securitization facility and costs related to the departure of our Chief Technology Officer, G&A was down 9% year-over-year and was 24% of revenue. This decrease was a result of reduced professional fees and subscription and license costs, resulting from our cost reduction initiatives over the past year.
Moving on to capital expenditures, these totaled CAD 2.8 million for the quarter, primarily for additions of revenue-generating sensor cartridges being used by customers and rental equipment to support the continued growth of that service life. Inventory totaled CAD 18 million at quarter end, compared to CAD 18.7 million at the end of the fourth quarter. Recall that we have built up our inventory during fiscal 2022 for G6, G7, and G7 EXO due to global supply chain challenges, and have begun reducing inventory levels in the current quarter as we fulfill our pipeline of orders and optimize our fulfillment strategy. Ultimately, this will allow us to improve our inventory turnover in the coming quarters, making it a source of cash for us over the balance of fiscal 2023.
Our G7 lease program had a total of CAD 39.2 million in future contracted cash flows at April 30, 2023, up from CAD 36 million on October 31, 2022. During the quarter, we closed our lease securitization facility with CWB Maxium Financial and received initial funding of CAD 8.3 million from the sale of the initial tranche of lease contracts. We will receive cash from our strong Q2 lease sales in our third fiscal quarter, with future funds being received approximately one month following the lease sale. With a CAD 50 million facility and a $35 million facility, we have plenty of capacity to grow our leasing program, which can potentially become the core of our go-to-market strategy, driving stronger margins and even better customer retention, while lowering our overall cost of capital.
We are pleased to have a financial partner like CWB Maxium, who is committed to the success of Canadian companies looking to grow beyond their home market. At quarter end, we had total cash and short-term investments on hand of CAD 21.9 million, CAD 8 million of availability on our senior secured operating facility with ATB Financial, and CAD 50 million, Canadian dollar equivalent, of availability under the lease securitization facility with CWB Maxium. The lease securitization facility will create a step change in our cash burn, which, combined with our improving gross margins and cost discipline, ensures the company has the cash it requires to execute on our path to quarterly positive Adjusted EBITDA. I will hand it back to Cody to discuss our outlook and to provide closing remarks. Cody?
Thank you, Shane. In closing, we are reiterating our goal to achieve positive quarterly Adjusted EBITDA by the end of this fiscal year and remain firm in our belief that our high margin recurring service revenue is key to delivering long-term profitability. With strengthening margins, corporate-wide cost discipline, CAD 42 million in ARR, 118% net dollar retention, and increasing market adoption of our products by companies around the globe, we are well on our way to being a significantly profitable company. I want to thank our customers for their continued trust in Blackline Safety to help protect their most important and irreplaceable assets, their people.
I also want to thank Blackline's own people around the world for their hard work, creativity, and their commitment to our purpose to ensure that every worker has the confidence to get the job done and return home safe, as we pursue our vision to transform enterprise workplaces through connected safety technology. Thank you for your attention this morning. I'll now turn it over to the operator for questions.
Thank you. We will now begin the analyst question-and-answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. The first question comes from Doug Taylor with Canaccord Genuity. Please go ahead.
Hi, thanks. Good morning. Congrats on a great growth performance this quarter. Let me start by asking about the securitization facility that you announced sort of towards the end of this quarter. We can certainly see the impact it's having on the balance sheet in the near term. Is it too soon to say you know, how or see the impact it's having on the sales velocity and your ability to secure new leased business? Is that still on the come here?
... I'd say, yeah, that's still on the going out. That's still on something you'd see in the future, that now that we've got securitization in place, we're shifting some of our marketing, some of the more making that whole program more visible, the sort of X dollars per month kind of approach to the whole package of device and software. I think you'd see that ramp up over time.
Okay. Let me switch gears and talk about, you know, the G6 rollout. You mentioned, you know, you expect to be on track with prior targets by Q4. I mean, last quarter, you updated your expectations for units to be shipped, you know, this fiscal year. I think the last number is 25,000 units-30,000 units. Are you providing any update to that number today? Can you talk about what you've shipped so far?
I'd really just look at it, Doug, as saying it's similar number, but, you know, rolling over between Q4 and Q1 kind of thing. What we've really seen there, as we tried to talk a bit about on the call, is the G6, when it launched, was launched as really within that core safety element on the zero maintenance side, but with a roadmap of a bunch of additional value add data that could be that would allow companies to see, have better visibility, deeper depth of data on workforce, on site aspects. What we've really seen is that the customer base we're dealing with, a lot of whom know the G7, really want that extra value service, and that's really rolling out towards the end of our Q3 here, beginning of Q4.
You know, from my view and the company's view, what I'd say is that the six is, you know, the market acceptance is exactly what we would have liked, even more so on some of the higher value base, 'cause some of those services we're talking about, particularly the ones that get you closer to the kind of real-time work flow that you see from a G7R, additional value adds, and extremely high margin value adds for us. No specific number for Q4, but if you again, if you look at Q4 and Q1, similar numbers to what we were talking about before.
I mean, the combination of, you know, still expected benefits from G6, contributions to revenue in Q4, Q1, and the benefits of securitization on the revenue and income statement, your ability to sell that type of a pricing plan or model. With the pricing, I guess my question is, I mean, should we be expecting, even from the 45% growth that you delivered here in Q2, growth to inflect higher through the balance of the year and into next year?
You know, keep in mind, our Q4 is always our strongest quarter. If you're looking at, you know, if you're looking at it sequentially, you're going to see strong sequential growth for sure from Q2 - Q3 - Q4. You know, we're looking again at seeing, you know, very strong, you know, growth year-over-year in those actual numbers as well, too. Wouldn't say that. You know, again, keep in mind, Q4, always that top level quarter for us as far as the hardware numbers, particularly, the service will just continue that strong growth you've seen. You know, the ARR growth will continue along the same sort of a path, not have a big inflection in the quarter at the year-end, but good strong pickups quarter-on-quarter on hardware.
Okay. I'll pass the line. Thank you.
Thanks, Doug.
The next question comes from Martin Toner with ATB Capital Markets. Please go ahead.
Thanks so much, and congrats on a nice quarter, gentlemen. Just would be great if you guys could give us a little color on some of the supply issues that are delaying the ability to ship G6.
It's not really supply issues, it's feature sets that were part of our long-term or midterm roadmap on the G6. Trying to say before, when we launched the six, it's competing in that zero maintenance market space, which is purely a safety product. If there's a problem, beeps and flashes, the six has the connected value. It has the ability to actually create a rescue, do all those kinds of things. We had a roadmap that was giving customers a greater depth of value around the data they could gather from the six itself. What we're seeing is that customers want to see that in place prior to doing the ship.
That's a perceived, you know, they perceived the value that we thought they would on that space, and really are willing to, you know, pay for that in the long run as well, too. It's not really a supply chain element on the G6. We've got inventory, we're ready to start shipping on the G6 right away. It's more an element of delivering on that roadmap for some of the additional, call them, software services that were tied in with the G6.
Gotcha. Okay, super. Thanks so much. Any issues with the availability coinciding with Q1? I mean, given that that's the slowest sequential quarter, are you going to be able to get as much, you know, proverbial bang for your buck as you would in other quarters? Would you sort of temper our expectations there?
You know, like if we're talking about just the G6 itself, you know, you know, we're going to look for a strong quarter in Q1. Q1 always has a drop-off as an overall base. You know, I'd still assume you're going to see that, but, you know, from, you know, Q4- Q1, but with a significant impact from the G6 in that, you know, relating to, which will be in Q4 as well, too.
Great. NRR was particularly strong. Can you talk a little bit to some of the drivers of strength there?
On the ARR side?
No, sorry, NRR.
Yeah, on the net dollar retention, it's a series of different elements. It's really the selling of additional services. We're seeing the team there that's responsible for, you know, upvaluing the different services the customers have, the beginning of impact of that pricing increase, pricing change. You know, it's a, it's a portion, it's portions of all those kinds of elements. Again, it's that extreme, you know. The other point I'd make is that we're still seeing really 100% retention, basically. Like, we don't see losses of customer base. That net dollar retention was really, you know, strong pickup, again, based on additional service sale, and based on the beginning of seeing that 15% price increase start to flow through our service channels. Service renewals, I should say.
Fantastic. Thanks so much. I'll pass the line.
The next question comes from David Kwan with TD Securities. Please go ahead.
Hey, guys. You guys have done a great job on reining in the costs here to try to get to positive EBITDA. I guess, looking out, I guess, at what point would you feel comfortable starting to ramp up some of these investments as to really see growth in sales and marketing, R&D, and the like? Because obviously you've got a big opportunity out there, especially, I think on the G6 side, but even on the G7 side, there's lots of opportunity to penetrate more, obviously, customer or competitor displacements, and whatnot. Just want to understand how you, how you're looking at the business from that standpoint.
You know, the way we look at it is really that there's a lot of opportunity. Like, our focus in this year has been what we call, in the black. The next year, a lot of our focus that is really on looking at optimization of some of our operations, services, et cetera. There's a lot of opportunity to increase the scalability by investing in better systems for our order entry systems, our payable systems, et cetera. You know, from the overall outside cost standpoint, that will actually be able to drive those costs down as a percentage of revenue, you know, long term, because we'll need less people to, you know, given the increased volume of work, we won't need to be adding people to do that.
We'll be adding, you know, improvements to different technologies and services we're using internally. We look at really still a very strong cost-based focus going forward into the next year to allow us, but really focus on investing and allowing us to be a more scalable company across those aspects, which will make us, you know, longer term, more profitable.
Would it be fair to say then, Cody, that, I guess, the financial gains that you would get from this cost optimization activity would be kind of reinvested in for growth, such that kind of the cost line, the OpEx line, should remain relatively flat?
Yeah. I mean, there will be some growth in some aspects of it. Yeah, for sure. Compared to revenue growth, for sure, a much lower element on the cost base.
Okay. That, that's good to know.
Yeah.
On the growth margin side, you made some good gains there. I know obviously you had some headwinds on the product side, particularly as it relates to the supply chain, and you're benefiting from the price increases and next. I guess, where now do you think the margins could get to? You've hit your target for the year on the services side. We've seen a nice sharp rebound on the product side. Like, how should we be looking at that?
If we looked at, you know, on the product side, there's still, you know, supply chain is obviously more of a challenge always on hardware than it is on the services side. Still see the company trending into, you know, 35%-40% by the year-end here. Probably now a little bit closer to that 35% than the 40% we've said before.
How about on the services side? Like, you're at 75%, that was kind of the target exiting the year. Like, could we see much more improvement beyond that?
You know, the service is a big number there. You'll see a little bit of improvement, you know, a percentage, a couple percentage points of improvement over the period of time. Again, it will have more customers flowing through onto the higher priced, newer plans. You know, the new customers come in at that higher price as well, too, which sort of helps drive that margin up a little bit.
That's helpful. Last question. Can you talk to me what you guys are doing on the generative AI front? I guess, particularly as it relates to Blackline and analytics. I know, you know, I think that's been a key differentiator for you guys. Also, you know, you've had a massive data advantage versus your peers, given that, you know, the G7 has been on the market for many years longer than some of them at least have a comparable product on the market. Do you think also GenAI could help narrow that data gap?
You know, I'd say what we're doing on that right now is more exploratory work, and not just in the, you know data science side, but in some of the other aspects of the design, development, customer support, those kinds of things. It's definitely going to be something that will have a long-term impact for us. You're right, the only way that becomes valuable is if you have the data to actually, you know, get those insights out of, and we are the only company out there that has that scale of that kind of customer-focused data. Right now, I'd describe the work we're doing as exploratory.
I appreciate the color. Thanks.
Thanks.
The next question comes from John Shao with National Bank. Please go ahead.
Good morning, guys. Thanks for taking my question. It looks like the price increase has been fully rolled out among your customers. Could you share with us any customer feedback so far, and do you see any pushbacks or, you know, contract losses for that reason?
No pushbacks. You know, I wouldn't say so, John. Not that I'm seeing.
Okay. It seems like the rental revenue has become a meaningful contributor of your total service revenue. My question is, how should we think about the margin profile of that business? You mentioned it's high margin, but, is this comparable to the rest of the service business?
Good morning, John. Yes, in general, maybe a touch lower, given some of the other activities that are involved in the rental business. You know, a point between what the product margin is at and the service margin is at, would be a good benchmark there in terms of the rental revenues.
Thank you. I guess a related question on that topic is, how much operating leverage does the rental business have? They've continued to grow as to from CAD 1.6 million to potentially, like, CAD 3 million, CAD 5 million in the future. Do you think that there's a potential that gross margins are going to fully scale?
Yeah, within that base, yeah. Yes, for sure, John. As that business grows, and there's less inputs needed in terms of building that business, that would be the expectation for sure.
Okay, thank you. My last question is, I just wanted to dig into the international market, especially, the Middle East area. What kind of market dynamics does that region have? In terms of your presence in that market, what does Blackline Safety do to tap into the market potential in that region?
Sure. That's an interesting question. We really started investing in there more than a little over two years ago. The Middle Eastern market's an excellent market for us. We're really just starting to see the traction there now. One where you need to have, you know, feet on the ground, the people who know the marketplace. We do that very well. It's a long-term relationship. It's a bit longer term introduction space that's in that market, like, customers want to get to.
The customers are large, and they want to understand their suppliers well, and the, so it's a bit longer of a ramp-up into some of the aspects there, but that's what we're starting to see, that inflection point now in that market space where, you're going to see a strong pickup over the next fiscal over the fiscal, or, well, next four quarters, shall we say, as we start penetrating that market more. There's also. There's lots of different things you could talk about as far as different regulations, different other approvals you need for that market. We've got all that in place now, and now it's really a matter of starting the, you know, starting to see the traction we can generate there.
Thank you. I'll pass along.
The next question comes from Jason Zandberg with PI Financial. Please go ahead.
Hey, guys. Thanks for taking my questions. I just wanted to drill down a little bit more on the, on the rental, side. You'd mentioned that you'd invested in your rental equipments, in your CapEx this quarter. Just wanted to sort of If you could share sort of what you expect to invest in that rental fleet, for the remainder of the year, and sort of what, you know, what's your expectation in terms of where this business can peak either this year or next year in the near term?
Yeah, I mean, over the next six months, we're looking at putting another about half million dollars in capital into the rental pool to, you know, to allow for the growth in the rental space. We tend to rent. The rental team does a superb job of their utilization. That tends to run in the high 80s. You know, growth requires more investment in hardware into the space. Look at it over the next couple of quarters as being about a half a million dollars of investment there.
That's helpful. You also mentioned that a lot of your customers or your rental fleets, you know, one of the side benefits of that is, you know, those rental contracts tend to convert into sales. Just wondering if you have any metrics to that in terms of, you know, what, you know, how many customers actually do go into a long-term sales agreement after they do a rental rate?
We have no direct metrics we can share with that, Jason, but I'd say, you know, it's introduced us to a number of new logos. Like, it's added logos to our customer base, you know, in a reasonably significant, to a reasonably significant degree, but we don't actually have a specific number that we've tracked that says this is the relationship, one to the other. Like I said, the biggest thing for us is getting into a, getting into a customer, what I would say is off cycle.
If you've got a customer who is normally buying their gas detection every 4 years or five years, and it's maybe two years, three years out, but they're doing a turnaround or a construction opportunity, you get in there with our product, that gives them an opportunity to see what we can do, the value of the deck, of the services, and it, you know, is a significant opportunity to lead to sales. You know, I, again, I just say, the point I'd make is it has actually already added new logos to the customer base here.
Okay, great. Thanks very much.
The next question comes from Raj Sharma with B. Riley. Please go ahead.
Thank you for taking my questions. Congratulations on solid results. Can you please remind me, refresh the G6 delay in Q3 is only related to feature sets, not any supply chain issues or?
Yeah, that's correct. It's just really, you know, it's been customers looking at the product, asking for it. Once they see something connected now, given what we've done with the seven, they know themselves what other values they'd like. Fortunately, everything they've been asking for is something that's been on our roadmap. It's something we've been anticipating delivering, but the delivering in that Q4 period. Once the, once we're over that development hump there, then, you know, there'll be no restriction on us shipping products.
Got it. Thank you. The lease contracts, are they? The rental income is the lease contracts, and that's about a little over 12%, 13% of product sales every quarter?
I would just say that there are two distinct-
Correct.
Business activities happening there, Raj. The rental are under discrete rental agreements with various organizations. The lease agreements themselves are the product-associated revenue is captured within our product revenues.
Our, and our typical number is a percent. Sorry, Raj, I was just gonna add that the percentage of our sales that tend to be in lease run around, I'd say 25%- 30%.
Oh, great.
Of the hardware sales.
Then of product revenues?
Correct. Yeah, correct.
Do you see that percentage going up in the next few months, in the next 12 months?
The next 12 months, yes. Yeah. Next few months, no, I don't, I don't think we'll like, it won't be a like, turning on a switch, but it's a nice way from company standpoint, it's a nice system. It's a, you know, CAD 50 a month. It's simple, it's clean, it includes everything. From our standpoint in the past, it was just a very negative impact on cash flow. With the securitization, with CWB Maxium, now it's almost the opposite. The, you know, the payment terms are pretty quick and direct, it's an easier thing for us to press a little bit more. We do believe the market is, you know, very receptive to that, as as a higher percentage now, the long term of companies will likely take advantage of that.
got it. I just wanted to, I guess, get a understanding of over the next 12 months, the % of product that would be lease and also what the securitization cash flow could you expect?
You know what? It's still we're looking at...
Tough to tell.
As I said, I think we can, I think we can do better than the 25% we've been doing, but it is a, it's a number we don't drive. It's a number the customer does. At the end of the day, it's dependent on markets, it's dependent on other things.
Right.
If one thing we'll say with this CWB line is that the line has capacity to handle what we're looking at doing for leasing for the next couple of years.
Right. The total $50 million, about $15 plus $35?
Yeah. Yeah. Yes.
Right. Then lastly, just, excuse me, could you comment on the CapEx? Was it a CapEx requirement or any CapEx spent on the new capacity expansion at your headquarters?
No, Raj, there was, there hasn't been extensive expenditures incurred in relation to that. We captured most of that in the fourth quarter of last year. There may be a small element that you'll see coming forward into the third quarter, but you're not going to see extensive spending happening in the third quarter for that.
Right. Do you think that that takes care of the capacity expansion takes care of the growth for the next few years at this pace?
I wouldn't necessarily say, you know, it's something we'll always be looking at investing in. That certainly takes us, gives us the capacity to do what we'd like to be doing for the next year or so. You know, dependent then on how the growth is looking at, we'll look at that on an ongoing basis as to when do we invest more into that.
Got it. Yeah, that's all. That's all for me. Thank you so much for answering my questions.
Thanks, Raj.
Congratulations again.
Thank you.
Thanks.
This concludes the question and answer session. I would like to turn the conference back over to Cody Slater for any closing remarks. Please go ahead.
Just want to thank you all for attending the call, and we wish you 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.