Greenlane Renewables Inc. (GRN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Greenlane Renewables, Inc. Third Quarter 2022 Results Conference Call. [Operator Instructions]. Today's call is being recorded, and a replay will be available on the Greenlane website. I'd like to now turn the call over to Darren Seed from Incite Capital Markets. You may begin your conference.

Thank you, operator, and good afternoon. Welcome to the 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 revenue, questions will be prioritized for analysts. Now I'll turn the call over to Ian.

Thanks Darren. Good afternoon, and thank you for your participation 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 newly represents to help transition to more difficult sector decarbonization, that being natural gas tile markets and the commercial transportation industry. Greenlane with a 10-year history in the RNG industry with over 35 years of experience. The company was born out of its proprietary water wash system and have added 2 other major technologies, most often used in the biogas upgrade to its portfolio, namely pressure swing adoption and membrane separation. These 3 cores upgrading technologies, coupled with our big 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 in the 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 group 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 streamline processes and cost efficiencies. Our standard products or configure-to-order annual result, re-engineering [indiscernible] and repeatability, simplified and faster sales projects. 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 barges 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 paying 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 Greenlane 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 Greenlane 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.

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. Greenlane’s revenue in the third quarter was $10.1 million compared with $19.9 million in the same period 1 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 after care 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's 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 sales 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 a biogas. Our balance sheet remains healthy, and we exited the 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 shareholders apprised of our progress. And with that, I will open up the call to questions.

[Operator Instructions] The first question is from Aaron MacNeil with TD Collins.

Maybe I'm reading too much into this, but it seems like you've changed the language around your goal to be 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.

It's Monty speaking. 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 the exact timing of when those will land is not necessarily perfect or descriptive as to when they're going to land. So we are seeing some potential that Q1 is not the answer. But we are moving down that path throughout, the second half of this year. And one of the reasons why is here is to drive that. And then in 2024, there will be more changes that we believe that fiscal 2024 is the current target.

Working capital, excluding cash, is around $1.5 million, it's down quite a bit sequentially. And I'm just wondering how we should think about reinvesting in working capital now that you've got this large order and with SIG over the next couple of quarters?

Typically, if you were to go back, let's call it, 6 months or a year or 1.5 years, we'd be carrying loosely speaking, somewhere in the $5 million to $7 million range in noncash net working capital. And with the exception of the order that just came in on October 5, we've seen a lot of projects to get to the end. All the receivables has been collected and will be able to get paid. So that answer sits now in the cash balance. 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 aid 1 paid, you get paid when we get paid so that we don't have to carry a large or unusual working capital balance in the form of net AR.

Maybe I'll just sneak one more in. You highlight that you expect some royalty revenue from ZAGG in the first half of next year. How would you characterize the work you're performing in the magnitude?

We do have some of our engineering team, I want to say project team, which includes primarily engineering folks. And so we have been working very closely with the day since the agreement was announced in April. So loosely, it's been 6 to 7 months 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 1 unit land in the first fiscal half of the year, and then it will accelerate in the second half of the year with units 225 happening either in late 2024 or early 2020.

And can you say what the revenue per unit is or?

At this time, no, but 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.

The next question is from David Quezada with Raymond James.