Greenlane Renewables, Inc. (OTCPK:GRNWF) Q3 2023 Earnings Conference Call November 9, 2023 5:00 PM ET
Company Participants
Darren Seed – IR, Incite Capital Markets
Ian Kane – President and Chief Executive Officer
Monty Balderston – Chief Financial Officer
Brad Douville – Executive Vice Chair
Conference Call Participants
Aaron MacNeil – TD Cowen
David Quezada – Raymond James
Nick Boychuk – Cormark Securities
Operator
Good afternoon, ladies and gentlemen. Welcome to the Greenlane Renewables Inc. Third Quarter 2023 Results conference call. At this time, all participants are in listen-only mode. Following the results, we will conduct a question-and-answer session. [Operator Instructions] Today’s call is being recorded, and a replay will be available on the Greenlane website.
I’d will now turn the call over to Darren Seed from Incite Capital Markets. You may begin your conference.
Darren Seed
Thank you, operator, and good afternoon. Welcome to Greenlane Renewables third quarter 2023 conference call. I’m joined today by Ian Kane, Greenlane’s President and Chief Executive Officer; Monty Balderston Greenlane’s Chief Financial Officer; and Brad Douville, Greenlane’s Executive Vice Chair.
Before beginning our formal remarks, we’d like to remind listeners that today’s discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements.
Greenlane Renewables does not undertake to update any forward-looking statements except as may be required by applicable laws. Listeners are urged to review the full discussion of risk factors in the company’s annual information form, which has been filed with Canadian securities regulators. Lastly, while this conference call is open to the public, and for the sake of brevity, questions will be prioritized for analysts.
Now, I’ll turn the call over to Ian.
Ian Kane
Thanks, Darren. Good afternoon and thank you for participating on the call today. Given that this is my first conference call as CEO for Greenlane, I would like to start off with a slightly different format before turning over the call to Monty for more detailed review of the numbers.
Q3 was my first quarter as President and CEO of the company. I accepted this role because of the opportunity that I believe Greenlane represents to help transition to more difficult sector decarbonization, that being natural gas utility market and the commercial transportation industry. Greenlane has a tenured history in the RNG industry with over 35 years of experience.
The company was born out of its proprietary waterwash system and has added two other major technologies most often used in the biogas upgrading to its portfolio, namely pressure swing adsorption and membrane separation. These three core upgrading technologies coupled with our biogas desulfurization products allows us to provide the right solutions for the majority of the RNG projects across all of the most common feedstocks.
Greenlane experienced exponential revenue growth during its first several years of becoming public in 2019. While we continue to see many opportunities to grow our business further, we must do so at a pace that optimizes our resources and does not overextend our balance sheet. My goal as CEO is to manage the company’s sales growth with a focus on execution and overall company profitability.
We took action in 2023, and have been investing towards making the business scalable and creating operational leadership through the implementation of new systems and related processes. We’ve also rebranded and launched our new line of sector-focused standard products in September that will contribute to streamlining processes and cost efficiencies.
Our standard products are configured to order and will result in reduced engineering time and repeatability, simplified, and foster sales process. We are building and optimizing the business to achieve sustainable, positive, adjusted EBITDA results. We expect the actions we are taking to drive positive, adjusted EBITDA for fiscal year 2024, recognizing that the timing of new purchase orders for our biogas upgrading equipment can vary from quarter-to-quarter.
We have the drive to succeed and will continue to focus on efficiencies and overall cost reduction through key programs, such as the implementation of ERP and the PLM system. These efforts will continue in 2024, but at a lower spending level, with much of the initial investment having been made in 2023, these initiatives, coupled with our focused efforts to increase our system sales, have already benefited Greenland, with the largest sales contract in the company’s history announced last month.
The changes underway will take some time to show in our financial results, but are expected to reflect our resilience, adaptability, and commitment to deliver on our overall long-term results as we grow our product sales in existing and exciting new markets. I look forward to keeping the public informed of our progress, and want to thank the Greenland employees for their continued hard work and drive, and I look forward to bringing you further updates as we progress.
With that, I will hand you now over to Monty.
Monty Balderston
Thank you, Ian, and good afternoon everyone. As a reminder, all figures are in Canadian dollars, unless otherwise stated, and all comparisons are for the third quarter of 2023 against the third quarter of 2022. Greenland’s revenue in the third quarter was $10.1 million, compared with $19.9 million in the same period one year ago. System sales revenue accounted for 81% of total revenue in the quarter, which is recognized in accordance with the stage of completion of projects, with the remaining 19% of revenue coming from aftercare services.
We delivered a gross margin in Q3 of 31%, or $3.1 million, compared to $4.9 million, or 25% in the third quarter of 2022. The increase in gross margin percentage was largely driven by a higher proportion of service and component revenue versus system revenue in the current quarter. We reported an adjusted EBITDA loss in the third quarter of $4.5 million versus a $400,000 profit in the third quarter of 2022.
Net loss and comprehensive loss in Q3 2023 was $5.2 million, compared to a profit of $300,000 in the comparative quarter of 2022. The loss was driven by a lower contribution from gross margin as a result of lower revenue, bad debt expenses for provisions on projects, and an increase in professional, fees, insurance, and system implementation costs.
The company sales order backlog was $46.7 million. As a reminder, sales order backlog is a snapshot at one moment in time, which varies from quarter-to-quarter. The sales order backlog increases by the value of new system sale contracts and is drawn down over time as projects progress towards completion with amounts recognized in revenue. Note that sales order backlog does not include our Cascade H2S sales, service revenue, or revenue from the company’s royalty agreement with ZEG Biogas.
Our balance sheet remains healthy and we exited a quarter with a cash balance of $16.9 million and no debt, providing flexibility for Greenlane to invest in and grow our core RNG business, as well as pursue other strategic initiatives. We look forward to keeping the shareholder surprised of our progress.
And with that, I will open up the call to questions.
Question-and-Answer Session
Operator
Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question is from Aaron McNeil with TD Cowen. Please go ahead.
Aaron MacNeil
Hey, afternoon and thanks for taking my questions. Maybe I’m reading too much into this, but it seems like you’ve sort of changed the language around your goal to the EBITDA positive in Q1 of ’24 to within the year 2024. So I’m wondering if you could just give us a sense of what your latest expectations are in terms of your path to profitability?
Monty Balderston
It’s Monty speaking. Good observation, Aaron, and you are accurate. Obviously, the biggest variable there is system sales and revenue mix. And so obviously, we do have a number of projects that are in the pipeline if you want to call it that, but exact timing of when those will land is not necessarily perfect or descriptive as to when they’re going to land. And so we are seeing some potential that Q1 is not the answer, but we are moving down that path throughout obviously the second half of this year. And one of the reasons why Ian is here is to help drive that. And then obviously in 2024, there’ll be more changes that we believe that fiscal 2024 is the current target.
Aaron MacNeil
Understood. Working capital excluding cash is around $1.5 million. It’s down quite a bit sequentially. I’m just wondering how we should think about reinvesting in working capital now that you’ve got this large order and with SEG over the next couple of quarters?
Monty Balderston
Yeah, another great question and good observation. Typically, if you were to go back, let’s call it six months or a year, a year and a half, we’d be carrying, loosely speaking, somewhere in the $5 million to $7 million range in non-cash networking capital. And with the exception of the order that just came on October 5th, we’ve seen a lot of projects get to the end. So all the receivables have been collected and all the payables have been paid. So that answer sits now in the cash balance. And so as we go forward on new projects, we don’t have that cushion. Effectively, we have the cash. And so in the case of this large order that we just signed, a significant amount of efforts were put into what is called the concept of paid when paid. You get paid when we get paid so that we don’t have to carry a large or non-usual working capital balance in the form of net AR.
Aaron MacNeil
Understood. Maybe I’ll just sneak one more in. You highlight that you expect some royalty revenue from SEG in the first half of next year. How would you characterize the work you’re performing and the magnitude?
Monty Balderston
So we do have some of our engineering team, I should say project team, which includes primarily engineering folks. And so we have been working very closely with SEG since the agreement was announced in April. So loosely, it’s been a six to seven month exercise now. And I would suggest that most of the heavy lifting is done. And so payments that have been made and costs that have been incurred have been deferred on the balance sheet until the first unit, that will be the revenue trigger. And so our expectation for 2024 is that we’ll see at least one unit land in the first, let’s call it half of the year. And then it will accelerate in the second half of the year with units two through five happening either in late 2024 or early 2025.
Aaron MacNeil
And can you say what the revenue per unit is or?
Monty Balderston
At this time, no, but because we don’t provide forward guidance, but you will see it when it hits. It will be a separate line item in the P&L.
Aaron MacNeil
Got it. Appreciate it. I’ll turn it over.
Operator
The next question is from David Quezada with Raymond James. Please go ahead.
David Quezada
Thanks. Hi everyone. Maybe just one question on sort of like how costs will trend year-over-year. I’m just curious because you mentioned like things like the ERP and the PLM programs, that there were some costs related to those in ’23 that would fall off in ’24. That, and I guess there were some bad debts that were mentioned in the quarter. I’m just wondering like for each of those buckets, if you can quantify how much cost you saw this year and yeah, I guess that would be the question. How much cost was incorporated there?
Monty Balderston
Yeah. So in our MD&A, we do provide some specific numbers of one of being, we did incur or we recorded an allowance in the quarter for a bad debt expense of $1.5 million. So obviously we don’t want that to ever recur, but it does happen from time to time. So that’s kind of a, if you want to call it, a carve out of an unusual item, and that was significant. And then I would suggest on the PLM and ERP front, there are costs that will, that we have incurred that are going to continue going forward. So for instance, the licensing fee, they’re all web or cloud-based programs. So you do have an annual cost that wasn’t in our historical numbers, but what goes away is the consultants. So the implementation consultants have been working heavily in Q2 and Q3 and part of Q4, we actually just went live with our ERP on November 1st.
So we do expect, you’re going to see a little bit of those costs in Q4, but they should turn down significantly into 2024. To throw a number at it, I would suggest that it’s, in the last two quarters, the non-recurring portion would be in the $300,000 range would be a good proxy of respective consulting costs that hopefully should not recur in 2024.
David Quezada
Okay, excellent. Thank you. And then maybe just, as for the outlook, I mean, obviously you had that big project win in Brazil. I would imagine that’s a fairly high profile project. I’m curious if that has driven any more inbound inquiries in that market and maybe if you could just provide some thoughts on what you’re seeing there in Brazil and when we might see a bit of an uptick in North America, what kind of dynamics you’re seeing there?
Ian Kane
I mean, there’s no doubt Brazil is a focus for us and we had a number of just different discussions with potential customers. There’s a lot of activity for us. We’ve demonstrated, we’ve delivered projects there and we’ve been successful at delivering there. We’re also building a team there and so we expect that to be a focus for us going forward.
Monty Balderston
And then your comments about North America, just because we haven’t announced any sales doesn’t mean we’re not active. We have a number of projects that are in various levels of discussion that for a variety of reasons, they haven’t got across the goal line, but we do have some projects near-term that we do have expectations turning into orders. It’s just predicting the timing with certainty is nearly impossible. All right, David?
David Quezada
Okay.
Brad Douville
But I’ll just add a bit extra colors. So you’ll recall that last quarter we talked about the change in the EPA’s program as it relates to the eRINs. So that was a relatively recent thing in the context of the development cycle with the projects. So we had highlighted that last quarter in terms of a bit of a drag on our customer base in the US, particularly those that were not reliant on the LCFS program in California. So now that the eRINs have gone away and there was the bump up in the regular RIN pricing, then that caused a bunch of the landfill developers to swing back into action. So in terms of the activity level on the sales side of things, it’s healthy as a consequence.
David Quezada
Excellent. Thanks. Appreciate that guys. I’ll turn it over.
Operator
[Operator Instructions] Our next question is from Nick Boychuk with Cormark Securities. Please go ahead.
Nick Boychuk
Thanks, evening everyone. Going and kind of continuing on the same scene with the landfill, I’m curious guys, Ian and Brad, if you can comment on how many other landfills you think there are in the state to potentially have a similar order size to what you just did in Brazil, specifically trying to figure out if you’re looking just generally at your backlog and the opportunity set available to you, where does that come from relative to ag and the type of projects maybe are a little bit more reliant on that California market where the prices are still a little bit more muted, so just trying to get a sense of that landscape?
Brad Douville
Yeah, it’s a really good question, Nick. I mean, as you know, the US market has been active for
RNG for much longer than the Brazilian market, so many of the larger size projects, I mean, the one we announced was $35 million. So that’s a big, big project. And a lot of those very large ones in the US have been already converted over to RNG, not to say that there isn’t some large ones left. The focus in the US is going more and more to getting the midsize and some of the smaller midsize ones going. So I wouldn’t expect to see a ton of order flow in the equivalent contract value to what we just recently announced for the Brazilian contract.
So on the Brazilian side, as Ian mentioned, it is a focus area for the company and the market today in Brazil is very much looking at the landfills for obvious reasons because they’re large point sources. Brazil has a particularly large and high producing landfills partly because of the mix of organic matter that goes into them, the drop being in the tropics to get the warmth that those things contribute to high gas production out of the landfill.
So Brazilian context, there is quite a number of opportunities like that to come. And hence why and we’ve built a team, we continue to double down on our market leadership in that part of the world because we do see a tremendous amount of opportunity there. And so our focus on a sales side is both markets of Brazil and North America as it relates to landfill.
Nick Boychuk
Thank you. Just kind of touching on it as well, Ian, I’m curious if when you’re looking at this opportunity set in front of you, it’s obviously exciting, but you’ve got 17 or so million dollars of cash on hand. Are there any acquisitions that you could potentially have interest in or ways that you would try and turbocharge their growth and really streamline this opportunity and start to realize some of these things sooner? Any color there?
Ian Kane
I mean, our focus for the short term is to ensure we’ve got execution of our projects and managing our costs and then on top of that, driving our standard products. We believe our standard products give us a competitive edge. As I mentioned, the three technologies are key. And that’s where our focus is going to be for the next period. We’re always open to technologies and potential acquisitions that align with our standard products, and we’ll keep our eyes open and our discussions continue with various parties. But at this stage, our primary focus is on cost management, standard products, optimizing our delivery, and execution of existing projects.
Nick Boychuk
Okay, thank you very much.
Operator
[Operator Instructions] Seeing no further questions, this concludes the question-and-answer session. I’d like to turn the conference back over to Darren Seed for any closing remarks.
Darren Seed
Thank you for participating on today’s call, everyone. We appreciate your questions, as well as ongoing interest and support, and look forward to seeing you on the next conference call.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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