Good morning, ladies and gentlemen, and welcome to the Avante Logixx Q2 F22 earnings call. At this time, all lines are in listen-only mode, and following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on November 30th, 2021 . I would now like to turn the conference call over to Mr. Steve Rotz, CFO. Please go ahead.
Thank you. During today's conference call, management will be making forward-looking statements that constitute future-oriented financial information as such term is defined in securities regulations. Listeners to this call should read the company's forward-looking disclaimers contained within each of the filings related to this fiscal period. We have posted an investor relations presentation to our website. We encourage you to review this at avantelogixx.com under the Shareholders tab. I will now turn the call over to Craig Campbell, CEO of Avante Logixx Inc.
Thank you, Steve. Good morning, everyone, and welcome fellow shareholders to the Avante Logixx Q2 fiscal 2022 earnings call. I'm joined today by Steve Rotz, the company's CFO. Today, we'll review Avante Logixx's financial results for its second quarter ended September 30th, 2021, that we released last evening. We'll also provide an update on our strategic priorities and comment briefly on the August 26th announcement of the company's initiation of a strategic review. During our conference call in respect of Q1 during late August, we highlighted the risk of unwinding COVID specials versus the reestablishment of ordinary course contractual revenue streams as COVID reopening was slower than hoped. Consistent with this, revenues during Q2 were CAD 22.6 million, representing a 4.2% year-over-year decline and a 6.3% sequential decline versus Q1.
We are seeing signs of a return to normal within our results. Recurring and contractual revenues grew sequentially by 4.3% during the second quarter, and consolidated electronic service revenues grew by 4.7%. These represent positive metrics for our business, indicating improvements to the quality of revenue. With adjusted EBITDA of CAD 0.6 million during Q2, our trailing twelve-month adjusted EBITDA is CAD 6.3 million. I wanna thank the entire Avante Logixx team for contributing to our performance during these challenging times. Q2 has been a difficult operating environment, driven by inconsistent reopening and return to work policies and implementation, coupled with a tight labor market and supply chain constraints, resulting in significant increases in our labor cost as a percent of revenue.
I am proud of the team and our business that despite these challenges, we have demonstrably grown recurring and contractual revenue while reducing our direct operating expenses. It is my belief that these challenges are transitory and short-term in nature. While navigating these challenges, we continue to drive profitable growth in new markets while onboarding net new customers, increasing wallet share with existing customers, all while remaining focused on improving our operating metrics. We own and are managing two great businesses with empowered and aligned teams of owners, and we are doing it with a long-term vision. As we have communicated before, our team is focused on and positioned well for delivering growth. We continue to operate our business with a continuous improvement approach, driving cost out while enhancing our customer experience.
Since achieving national scale in December 2019, we have been delivering top and bottom line growth and remain focused on continuing this effort. Avante Logixx is a leading player in a large and growing residential and commercial security services industry. As the remainder of the year unfolds, we are well-positioned to increase market share and further develop the company's excellent growth prospects. Our portfolio of services is backed by exceptional brands with a solid base of recurring and contractual revenue from high-quality customers. Lastly, I want to remind you that our named executive officers and directors collectively own 16.6% of all shares outstanding. That is, we have alignment with all of you as shareholders. As noted in our August 25th press release, the Board of Avante Logixx initiated a strategic review to consider a range of possible alternatives intended to increase shareholder value.
Our continued focus on maximizing shareholder value led to the board's decision to explore strategic alternatives. At the same time, following a thorough review of our portfolio of business and the current strong valuation for businesses like Avante Logixx, we determined that the timing was right to explore strategic alternatives. Avante Logixx engaged Canaccord Genuity of Toronto and Imperial Capital of Los Angeles as its financial advisors and Norton Rose Fulbright Canada LLP as legal advisor in connection with this strategic review. While the process continues, we continue advancing our commitment to building predictable, sustainable growthability at Avante Logixx through continued execution of the operational transformation of the business that is underway. Avante Logixx is a valuable enterprise, and our management team is assisting the board and the company's advisors as we complete this process.
No final decisions have been made about any strategic alternative, and there can be no assurances that our board's review of strategic alternatives will ultimately lead to a particular course of action. We do not intend to provide any further comments on the process until the board has concluded the review and approved a specific outcome or otherwise determines that further disclosure is appropriate. I'll now turn the presentation over to Steve to further detail our Q2 fiscal 2022 financial performance. Steve?
Thank you, Craig, and good morning, fellow shareholders. A reminder that our fiscal year-end is March 31, so September 30th represents the end of our second quarter of fiscal 2022. Quarterly financial statements and MD&A are filed on SEDAR and are available on our website. Let's begin with a few key financial highlights for Q2. Total RMR and contractual revenues increased during Q2. Electronic service revenues also increased, offset by unwinding COVID specials during Q2 versus Q1 and versus the prior year period. Our Avante Security business generated sequential growth during Q2. Direct OPEX decreased CAD 172 ,000 during Q2 versus Q1, and adjusted EBITDA was CAD 0.6 million during Q2, down versus Q1, CAD 2 million and last year's CAD 1.6 million. Cash flow from operations before working capital was CAD 0.6 million.
Turning first to the income statement. Consolidated revenue during Q2 was CAD 22.6 million, versus CAD 24.1 million in Q1. The sequential decline is largely explained by a reduction of COVID specials within Logixx Security, offset by improved contractual revenues within Logixx Security and stronger revenues within Avante Security. Compared to last year, Q2's consolidated revenues were lower by 4.2% for the same reasons. Our largest platform, Logixx Security, represents 81% of consolidated Q2 revenue. Logixx Security experienced a 9.4% reduction of sequential revenues during Q2 due to the unwind of COVID specials, offset by improved regular contractual protective service revenues. Logixx Security's year-over-year revenue decline was 5% during Q2 due to the same reasons. Avante Security represented 19% of consolidated revenue. Its revenue was essentially flat on a year-over-year basis but grew by 10.2% sequentially.
Within the MD&A, we provide additional disclosure of our revenue layers by summarizing recurring monthly revenues and contractual recurring revenues. Total recurring and contractual revenues were CAD 17.3 million during Q2 versus CAD 16.6 million during Q1 and CAD 15.4 million during the comparable period of last year. This improvement reflects stronger return to normal revenues within Logixx Security protective services. Recurring and contractual revenues represented approximately 76.7% of total revenues during Q2 versus 65.3% during last year's second quarter. This demonstrates that a higher concentration of revenues are from ongoing and stable revenue streams. The remaining revenues were from electronic services, revenues from COVID specials, along with secure transport and other revenues that are not subscription-based. Diluted gross margins declined both year-over-year and sequentially.
These were 18.8% during Q2 versus 24.4% during Q1 and 24.5% during Q2 of last year. Some of this decline in sequential margins relates to the closing out of an installation contract during Q1 within Logixx Security at higher profits than originally anticipated. Over the last six quarters, consolidated gross margins have ranged between 18.8%-24.5% as sales mix drives the actual percentage given our electronic service revenues. The difficult operating environment created by COVID-19 negatively impacted our margins during Q2 as labor shortages and higher wage rates combined with the removal of higher margin COVID-19 specials. Q2 represents a low point in our historical margins. During Q4 of last year and year to date this year, regular electronic service revenues were less than we would like within Logixx Security.
Electronic service revenues are being impacted by COVID-19 in terms of customers delaying decision-making and supply chain issues relating to delivery of customer installations or equipment needed for us to record revenue. Currently, our sales teams are focused on winning our share of electronic service installation opportunities as these become available. We are pleased that we are now seeing growth in bookings that will be implemented and become revenues over coming quarters. Such installations are important to our long-term strategy of increasing gross margin dollars during implementation and RMR dollars after installation. In terms of direct operating expenses, we saw a sequential decrease in total expense during Q2 versus Q1 of CAD 172,000. Direct OPEX as a % of revenue increased sequentially to 16.2% during Q2 versus 15.9% in Q1.
However, this year's Q2 improved versus last year's 17.1%. We will continue controlling direct operating expenses and will focus on organic growth in revenues during future quarters. Adjusted EBITDA during Q2 was CAD 0.6 million versus CAD 2 million during Q1 and versus last year's CAD 1.7 million. As explained earlier, this is due to the unwinding of COVID specials during Q2 and the delay in return to normal revenues. However, the company continued to generate positive cash flow from operations before working capital of CAD 0.6 million during the second quarter. This represents six straight quarters of positive cash flow from operations with LTM at CAD 5 million or 82% of our reported adjusted EBITDA over the last twelve months. Now looking at the balance sheet.
Trade accounts receivable net of allowances increased by CAD 0.9 million during Q2 and by CAD 0.4 million on a year-to-date basis. We remain focused on customer collections and are confident in the high-quality nature of our receivables. Collections since quarter end have been strong, so we expect the DSO to decline during Q3. Senior funded debt includes bank debt and vehicle loans. The total was CAD 9.3 million on September 30th versus CAD 9.4 million at June 30 and CAD 6.9 million as at our year-end of March 31, 2021. Net of cash, senior funded debt increased by CAD 1.9 million year-to-date. This year-to-date change is explained by net cash used in operating activities, capital expenditures, costs associated with replacing the credit agreement and strategic activities, including the board's strategic review project.
Senior funded debt of CAD 9.3 million and CAD 7.1 million net of cash is small in context of our trade accounts receivable of CAD 18.5 million and inventory of CAD 1.6 million, as well as LTM cash flows from operations of CAD 5 million and LTM adjusted EBITDA of CAD 6.3 million. At September 30th, drawings under our CAD 8 million dollar revolver were CAD 3.7 million. That is, CAD 4.3 million is available. Cash balances were CAD 2.1 million, providing further sources of liquidity. The company remains in compliance with financial covenants applicable to new banking arrangements established in June two years ago, in November 2019, we issued CAD 8.26 million of subordinated convertible debentures.
These notes have an interest rate of 7%, a maturity date of November 27th, 2024, and a conversion right to common shares to the holder at CAD 1.56 per share. On the balance sheet, the total liability is reported under IFRS as CAD 11 million. That is, the IFRS reported liability now exceeds the actual liability by CAD 2.7 million due to the share price at September 30 being well in excess of the conversion price. With an adjusted EBITDA, we smooth out the quarterly mark-to-market of the related conversion rate that must be included within IFRS net income or loss. During Q2, we reported net loss on an IFRS basis of CAD 2.9 million. This was largely due to the CAD 2.2 million hypothetical loss on the convertible debentures.
The quarterly IFRS loss also reflects CAD 0.2 million of intangible asset amortization. As noted in our press releases for Q1 and Q2, COVID-19 created challenges for our business, and we are managing through. COVID-19 continues to impact regular contractual revenues and the pace of return to normal, which has delayed re-ramping of regular business. The launch of book contracts within new customers for regular services continue to be pushed from July out to increasingly delayed launch dates. In Q2, we experienced removal of Q2 special revenues with strong margins that we benefited from for several quarters prior to Q2. During the second quarter, COVID-19 increased our labor costs as we were impacted by higher hourly labor rates and labor shortages, resulting in elevated unbillable overtime. As mentioned earlier, COVID-19 is impacting supply chains that cause delays in our implementation of electronic service revenues.
However, our entire team understands these risks. We are experienced at dealing with them and are implementing mitigating strategies as needed. In summary, Q2 was a challenging quarter, representing a decline in profitability as compared to prior several quarters. We have a strong balance sheet, significant liquidity, and committed credit facilities to fund organic and strategic growth. The quality of our revenue streams are improving with higher levels of RMR and contractual revenues, and management is continuing to grow in both of these. I'll now turn the call back over to Craig. Craig?
Thank you, Steve. We recognize that the EBITDA numbers were not as expected. I believe that our team has managed through a difficult operating environment quite well. Heading into future quarters, we continue to focus on the controllable levers while being prepared and responsive to the continued challenges and opportunities presented by the evolving COVID situation. I wanna thank and acknowledge the thousands of team members on the front line and those in the back office that continue to work tirelessly in delivering our customers their security and peace of mind. We'll be back to you in late February to provide and to discuss our Q3 fiscal 2022 financial results. That concludes our formal remarks. Kelsey, Steve, and I would be pleased to address any questions at this time.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request, and all your questions will be pulled in the order that they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Doug Taylor from Canaccord. Please go ahead.
Yeah, thank you. Good morning.
Good morning.
Higher labor costs are a pretty common subject right now. Can you speak to your ability to pass through some of those labor costs as part of your regular contracting or renewal processes, you know, in the event that, you know, these higher costs related to the labor force are not transitory?
Yeah. Thanks, Doug. A great question. We definitely have done a review of all customer contracts. For the most part, we have had an action plan that has targeted specific customers, where you know, we just are in an environment that you know, we need to make hard decisions about those customers. We've seen a very responsive and probably the best and least resistance we've had to pricing in an industry that you know is highly competitive and price sensitive. We actively work through that and are seeing great success because it is such a topical issue, not only for us as sort of third-party contractors, but those customers are experiencing in their own business.
The other main action plan is just in investments in and bolstering our recruiting teams as well as using some other workplace tactics that whether that be employee referral programs, signing bonuses, things like that, to just get more boots on the street and we're seeing positive momentum in relation to all those activities.
Would you expect that to, you know, those action plan that you just detailed to have an impact on your margins in the near term, or is that going to take quarters and years to manifest?
Definitely not years, Doug. Certainly, in the quarters we're seeing it. It's, you know. I wanna use an analogy of, you know, just how fast we can flip it. It, you know, it's not an overnight fix. That said, you know, if I think of the actions taken over the last two months, we've had very little resistance on the customer pricing side. That said, in our recruiting and development, you know, we manage turnover as just a regular, everyday, you know, sort of challenge in this business that's been there long before, you know, COVID ever happened, where we experience now a higher turnover.
Not to mention the recruiting, you know, and anecdotally, I would share with you know, where we used to count on 80% of all the new hires on the front line to complete their training and report to work, we've seen declines where, you know, now we're having to hire two people for every, you know, one expected position that we're getting out there. It's a challenge as a result of, you know, everything from the government subsidies to employers like Amazon and others that have been, you know, upping their wages. We're out there responding with all the tactics available to us.
Okay. You mentioned that, you know, COVID related, you know, special work that's kind of has begun to roll off. Is that now completely off the books and out of the quarterly results now, or is there still some other work related to those kinds of activities that, you know, may you know roll off in future periods?
It's not completely out. That's you know sort of the question around our weekly operating meetings with all of our operating divisions. This quarter definitely saw much of what I would call maybe the meat like the juicy meat on the bone. Probably not the right analogy, but we saw a big unwind come at the beginning of Q2. Then which we always knew and expected, but like you know we knew as the world reopened that we would see a rollback.
As we said in Q1 and as we repeat here again in Q2, we saw it come off faster, but the offsetting return, you know, in some of our customers that had, you know, peeled back some revenue, it has not returned as fast. Now, you know, even as a week ago, you know, we start to draft press releases and things, here we have a new variant and the new variant's hitting the news over the last couple days, and that's, you know, could be very good and sort of throw us right back into an environment where we're responding to the needs of our customers to deal with that new variant. It really is a challenging environment to forecast and predict. We are laser focused and our finger is on the pulse of the business.
Okay. One last question then from me. I mean, given everything that we've just talked about related to the costs and also the revenues, I mean, should we look at Q2's EBITDA performance as sort of the, you know, a bottom or a low point, and you'd expect to rebuild from there?
Yeah. You know, Doug, I kind of reiterate that, you know, we're not in the business of giving guidance. But as we pointed out in our remarks, if you look back at our historical performance and on margins, Q2 is absolutely and most certainly the bottom as we've seen in our historical gross margins. You can, I think, really see it in the way the cost of goods sold has been impacted this quarter as being directly attributable to the reasons mentioned. You know, my hope is that this is the low point and that we'll continue to improve from here. But obviously, you know, not in the position to have the crystal ball with certainty on that.
Thank you very much.
Thank you, sir.
Thank you. Your last question comes from Nick Corcoran from Acumen. Please go ahead.
Good morning, and thanks for taking my questions. My first question is just to do with the labor market. Were there any revenues you think might have been lost in the quarter from just not being able to staff a contract?
Yes. Yes, in the sense that, one of the key metrics on the Logixx side is around the fulfillment of shifts. We have definitely been impacted in not being able to fulfill some of the shifts requested. As well, I would say to you that the delay of onboarding new revenue has been impacted, not specifically to the labor market, but to the operating environment being, you know, customers have said, "Okay, well," you know, what was originally planned to be started in August, they pushed to September, and then they pushed it again. We've definitely seen a kick the can down the road on some of the new contract, new wins that remain in our pipeline, in our backlog, so to speak.
That's good color. Switching gears to the implementation of electronic services, can you maybe give a little bit more color on the backlog and what we've seen in subsequent quarter on?
I guess we don't disclose the exact backlog. What I would say to you is, if you run an analysis about our sort of historical run rates on electronic services, you'll see that for a couple of quarters now, they have been tracking under our historical performance. We believe that every, you know, sort of one of those projects will monetize and be converted to revenue and that there will be this eventual catch-up. Currently, you know, with both the supply chain issues of just getting things as well as this whole, you know, access to get into properties and to get work done, has been an impact on ES.
Thanks. That's all for me.
Well, thank you, Nick. Thank you.
Thank you. There are no further questions at this time. You may please proceed.
Well, thank you very much. As mentioned, I wish everybody a safe and happy holiday season, and we look forward to being back to you with our Q3 results in the new year.
Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.