Blackline Safety Corp

TSX:BLN

Earnings Call Transcript 2023-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Blackline Safety Corp. Second Quarter 2023 Results Conference Call. [Operator Instructions]I would now like to turn the conference over to Scott Boston, Vice President of Finance. Please go ahead.

[Scott Boston, executive]

Welcome, and 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 would like to note that some of the information discussed in this call is based on information as of today and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, 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.

[Cody Slater, executive]

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 $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 $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 $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 watermark with nearly $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 $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, but 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 $12.3 million in Q2 of 2022 to $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 $21 million, including $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 CAD15 million and USD35 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 road map. This has generated a robust pipeline with the majority of customers looking for enhanced services on the road map 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 our market penetration of our core products and resulting growth in our ARR. In the longer term, the opportunities 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.

[Shane Grennan, executive]

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 $24.1 million. This includes $11.2 million in product revenue, which increased 43% year-over-year. The increase in the current year reflects the investments 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 doubled 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 $12.9 million, which is the strongest quarterly service growth achieved in 3 years. Software services were a major contributor to the growth, up 36% year-over-year, which also drove ARR growth of 38% to $42.4 million. Newly activated devices contributed to year-over-year growth of $1.5 million in the quarter and net service increases within our existing customer base contributed $1.6 million of the growth.Our rental business also continues to generate robust growth with revenue increasing 247% from the prior year to $1.6 million, meaning we have averaged over $1 million in quarterly rental revenue over the past 4 quarters.Our service gross margin percentage came in at a record 75%, achieving our target set at the beginning of the year, 2 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 $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 markets 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 2 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 continue to have excellent product wins and strong renewals across these regions.Shifting now to the operating expenses. Our total expenses for the quarter were $19.2 million, which was down 11% compared to our expenses of $21.5 million in the prior year quarter. Excluding nonrecurring 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 fourth 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 $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 $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 $6.8 million, which represented 28% of revenue compared to 37% in the prior year. Excluding nonrecurring 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 $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 $18 million at quarter end compared to $18.7 million at the end of the fourth quarter. Recall that we had 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 $39.2 million in future contracted cash flows at April 30, 2023, up from $36 million on October 31, 2022. During the quarter, we closed our lease securitization facility with CWB Maxium and received initial funding of $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 1 month following the lease sale. With a CAD15 million facility and a USD35 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 $21.9 million, $8 million of availability on our senior secured operating facility with ATB Financial and CAD50 million 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?

[Cody Slater, executive]

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. The strengthening margins, corporate-wide cost discipline, $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 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.

[Operator]

[Operator Instructions] The first question comes from Doug Taylor with Canaccord Genuity.

[Doug Taylor, analyst]

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 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?

[Cody Slater, executive]

I'd say, yes, that's still on the go now -- that's still on something you see in the future. Now that we've got the 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. So I think you'd see that ramp up over time.

[Doug Taylor, analyst]

Okay. Let me switch gears and talk about the G6 rollout. You mentioned you expect to be on track with prior targets by Q4. I mean last quarter, you updated your expectations for units to be shipped this fiscal year. I think the last number was 25,000 to 30,000 units. Are you providing any update to that number today? And can you talk about what you've shipped so far?

[Cody Slater, executive]

I'd really just look at it, Doug, you're saying -- it's a similar number, but rolling over between Q4 and Q1 kind of thing. What we've really seen there is, in fact I talked a bit about it on the call is that G6 when it launched, it was launched really within that core safety element on the zero maintenance side, but with a road map 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. So -- but I -- from my view and the company's view, what I'd say is that the 6 is -- the market acceptance is exactly what we would have liked even more so on some of the higher value base because some of those services we're talking about, particularly the ones that get you closer to the kind of real-time workflow that you see from a G7 are additional value adds and extremely high margin value adds for us. So no specific number for Q4. But again, if you look at Q4 and Q1, similar numbers to what we were talking about before.

[Doug Taylor, analyst]

Okay. And so, I mean, the combination of 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? And then 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?

[Cody Slater, executive]

Keep in mind, our Q4 is always our strongest quarter. So if you're looking at it sequentially, you're going to see strong sequential growth for sure, from Q2 to Q3 to Q3 to Q4. And we're looking again at seeing very strong growth year-over-year in those actual numbers as well, too. We would say that -- again, keep in mind that 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. 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 pick up quarter-on-quarter on hardware.

[Operator]

The next question comes from Martin Toner with ATB Capital Markets.

[Martin Toner, analyst]

Congrats on the nice quarter, gentlemen. Quick question on the -- just would be great if you guys could give us a little color on some of the supply issues that are delaying your ability to ship G6.

[Cody Slater, executive]

It's not really supply issues, it's feature sets that we were -- that were part of our long-term or midterm road map on the G6. So [ as I was ] trying to say before, when we launched the 6, it's competing in that zero maintenance market space, which is purely a safety product. If there's a problem with [ fits ] and flashes, the 6 has the connected value, it has the ability to actually create a rescue, do all those kinds of things. But when -- we have a road map that we're giving customers a greater depth of value around the data they could gather from the 6 itself. And what we're seeing is that customers want to see that in place prior to doing the ship. That's a perceived -- they perceive the value that we thought they would on that space and really are willing to pay for that in the long run as well, too. So it's not really a supply chain element on the 6. We've got inventory. We're ready to start shipping on the 6 right away. We are -- but it's more an element of delivering on that road map for some of the additional, call them, software services that we tied in with the 6.

[Martin Toner, analyst]

Got you. Okay. Super. 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 proverbial bang for your buck as you would in other quarters? Or would you sort of temper our expectations there?

[Cody Slater, executive]

Like, if we're talking about just the 6 itself, then we're going to look for a strong quarter in Q1. Q1 always has a drop off as an overall base. So I'd still assume you're going to see that but from Q4 to Q1 but with a significant impact from the G6 in that relating to -- which will be in Q4 as well, too.

[Martin Toner, analyst]

Great. NRR was particularly strong. Can you talk a little bit to some of the drivers of strength there?

[Cody Slater, executive]

On the ARR side?

[Martin Toner, analyst]

No, sorry, NRR.

[Cody Slater, executive]

Yes, 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 up valuing the different services the customers have, the beginning of impact of that pricing increase, pricing change. It's a potion of all those kinds of elements. And again, it's that extreme -- the other point I'd make is that we're still seeing really 100% retention, basically. Like, we just aren't -- we don't see losses of customer base, but that net dollar retention was really a 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.

[Operator]

The next question comes from David Kwan with TD Securities.

[David Kwan, analyst]

You guys have done a great job on reining in the cost 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 it relates to 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. But just trying to want to understand how you're looking at the business from that standpoint.

[Cody Slater, executive]

Yes. The way we look at it is really that there's a lot of opportunity of our -- like our focus in this year has been what we call into the black. The next year, a lot of our focus is really on looking at optimization of some of our operation, services, et cetera. There's a lot of opportunity to increase the scalability by investing in better systems for our order entry systems or our payable systems, et cetera. So from the overall outside cost standpoint, that will actually be able to drive those costs down as a percentage of revenue long-term because we'll have less -- we'll need less people to -- given the increased volume of work, we won't need to be adding people to do that. We'll be adding improvements to different technologies and services we're using internally. So we look at really still a very strong cost base 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 longer term, more profitable.

[David Kwan, analyst]

So would it be fair to say then, Cody, that, I guess, the gains that you might -- the financial gains that you would get from this cost optimization activity would be kind of reinvested in for growth such that the kind of the cost line, the OpEx line should remain relatively flat?

[Cody Slater, executive]

Yes. I mean, there will be some growth in some aspects of it. Yes, for sure, compared to service -- excuse me, compared to revenue growth, for sure, much, much lower element on the cost space.

[David Kwan, analyst]

Okay. That's good to hear. And on the gross 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 mix. I guess, where now do you think the margins could get to? You've hit your target for the year on the services side. You've seen a nice sharp rebound on the product side. Like, how should we be looking at that?

[Cody Slater, executive]

If we look at -- on the product side, there's still -- supply chain is obviously more of a challenge always on hardware than it is on the services side. We still see the company trending into 35% to 40% by the year-end here, probably now a little bit more -- a little bit closer to that 35% than the 40% we've said before.

[David Kwan, analyst]

And 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?

[Cody Slater, executive]

Yes. It's a big -- service is a big number there, you'll start -- but yes, you'll see a little bit of improvement, a percentage -- a couple of percentage points of improvement over the period of time. Again, we'll have more customers flowing through on to the higher-priced newer plans and the new customers come in at that higher price as well, too, which sort of helps drive that margin up a little bit.

[David Kwan, analyst]

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 Analytics? I know -- I think that's been a key differentiator for you guys. And also, you've had a massive data advantage versus your peers, given that the G7 has been on the market for many years longer than some of them that at least have a comparable product on the market. But do you think also Gen AI could help narrow that data gap?

[Cody Slater, executive]

David, I'd say what we're doing on that right now is more exploratory work, and not just in the data science side, but in some of the other aspects of the design, development, customer support, those kinds of things. So it's definitely going to be something that will have a long-term impact for us. And you're right, the only value -- the only way that becomes valuable is if you have the data to actually get those insights out of and we are the only company out there that has that scale of that kind of customer-focused data. But right now, I'd describe the work we're doing is exploratory.

[Operator]

The next question comes from John Shao with National Bank.

[Meng Shao, analyst]

So it looks like the price increase has been fully rolled out among your customers. So could you share with us any customer feedback so far? And do you see any pushbacks or contract losses for that reason?

[Cody Slater, executive]

No pushbacks. No -- I wouldn't say so. Nothing that I'm seeing.

[Meng Shao, analyst]

Okay. And it seems like the rental revenue has become a meaningful contributor of your total service revenues. So 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?

[Shane Grennan, executive]

John, yes, in general, maybe a touch lower, given some of the other activities that are involved in the rental business. But 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.

[Meng Shao, analyst]

I guess a related question on that topic is, so how much operating leverage does the rental business have? The base continue to grow from $1.6 million to potential of $3 million, $5 million in future. Do you think that there's a potential that gross margin is going to fully scale?

[Shane Grennan, executive]

Within that base, 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.

[Meng Shao, analyst]

Okay. My last question is, I just wanted to dig into the international markets, especially the Middle East area. So what kind of market dynamics does that region have and in terms of your presence in that market, so what does Blackline Safety do to tap into the market potential in that region?

[Cody Slater, executive]

Sure. That's an interesting question. We really started investing in there more than a little over 2 years ago. The Middle Eastern market is an excellent market for us. We're really just starting to see the traction there now, it's one where you need to have 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 spaces in that market, like, customers want to get to -- the customers there 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 -- well, next 4 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 -- starting to see the traction we can generate there.

[Operator]

The next question comes from Jason Zandberg with PI Financial.

[Jalson Zandberg, analyst]

I just wanted to drill down a little bit more on the rental side. You'd mentioned that you'd invested in your rental equipment in your CapEx this quarter. Just wondering 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's your expectation in terms of where this business can compete either this year or next year near-term?

[Cody Slater, executive]

Yes. I mean over the next 6 months, we're looking at putting another about $0.5 million in capital into the rental pool to allow for the growth in the rental space. We tend to run -- the rental team does a superb job of their utilization that tends to run in the high-80s. So growth requires more investment in hardware into the space, look at it over the next couple of quarters as being about a $0.5 million of investment there.

[Jalson Zandberg, analyst]

Okay. That's helpful. And then you also mentioned that a lot of your customers or your rental fleets, one of the side benefits of that is those rental contracts tend to convert into sales. Just wondering if you have any metrics to that in terms of what -- how many customers actually do go into the long-term sales agreement after they do a rental [indiscernible]?

[Cody Slater, executive]

We have no direct metrics we can share with that, Jason, but I'd say it's introduced us to a number of new logos, like it's added logos to our customer base 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. So if you've got a customer who is normally buying their gas detection every 4, 5 years and it's maybe 2, 3 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 connective, the services and it is a significant opportunity to lead to sales. But again, I'd just say -- the point I'd make is that it has actually already added new logos to the customer base here.

[Operator]

The next question comes from Raj Sharma with B. Riley.

[Rajiv Sharma, analyst]

Congratulations on solid results. Can you please remind me or refresh the G6 delay in Q3 is only related to feature sets, not any supply chain issues or...

[Cody Slater, executive]

Yes, that's correct. It's just -- really, it's been customers looking at the product asking for -- once they see something connected now, given what we've done with the 7, they know themselves what other values they'd like. Fortunately, everything they've been asking for is something that's been on our road map. So it's something we've been anticipating delivering but -- delivering in that Q4 period. So once the -- once we're over that development hump there, then there will be no restriction on our shipping products.

[Rajiv Sharma, analyst]

Got it. And then the lease contracts, are they -- they are about -- so the rental income is the lease contracts, and that's about a little over 12%, 13% of product sales every quarter?

[Shane Grennan, executive]

I would just say that there's 2 distinct business activities helping here, Raj. The rental are under discrete rental agreements with various organizations and the lease agreements themselves are -- the product associated revenue is captured within our product revenues.

[Cody Slater, executive]

Just to add, Raj, that the percentage of our sales that tend to be in lease, right around the 25% to -- I would say, 25% to 30% of the hardware...

[Rajiv Sharma, analyst]

Of product?

[Shane Grennan, executive]

Revenues.

[Cody Slater, executive]

Correct. Yes. Yes. Correct.

[Rajiv Sharma, analyst]

And do you see that percentage going up in the next few months, in the next 12 months?

[Cody Slater, executive]

In the next 12 months, yes, yes. Next few months, no. I don't think we'll -- like it won't be like turning on a switch. But it's a nice way -- from a company standpoint, it's a nice system. It's $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 payment terms are pretty quick and direct. And so it's an easier thing for us to press a little bit more. And we do believe the market is very receptive to that as [ it's to a ] higher percentage down to long term of companies, we'll likely take advantage of that.

[Rajiv Sharma, analyst]

Got it. So I just wanted to, I guess, get an understanding of, over the next 12 months, the percentage of product that would be leased? And also what securitization cash flow could you expect?

[Cody Slater, executive]

It's -- still we're looking at -- I think we can do better than the 25% we've been doing, but it's a number we don't drive. It's a number the customers drives. At the end of the day, that's dependent on markets, that's dependent on other things. Given, 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.

[Rajiv Sharma, analyst]

Right. The total [ $50 ] million about, CAD15 million plus USD35 million there.

[Cody Slater, executive]

Yes.

[Rajiv Sharma, analyst]

And 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?

[Shane Grennan, executive]

No, Raj. 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 going forward into the third quarter, but you're not going to see an extensive spending happening in the third quarter for that.

[Rajiv Sharma, analyst]

Right. And do you think that, that takes care of the capacity expansion, takes care of the growth for the next few years at this pace?

[Cody Slater, executive]

I wouldn't necessarily say -- it's something we'll always be looking at investing in. That certainly takes us -- it gives us the capacity to do what we'd like to be doing for the next year. So depending then on how the growth is looking out, we'll look at that on an ongoing basis as to when do we invest more into that.

[Operator]

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.

[Cody Slater, executive]

I just want to thank you all for attending the call, and we wish you a good rest of the day. Thank you very much.

[Operator]

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