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

Good afternoon, ladies and gentlemen. Welcome to the Greenlane Renewables First Quarter 2026 Video Conference. My name is Darren Seed, President of Insight Capital Markets, responsible for Investor Relations at Greenlane. I'm joined today by Brad Douville, Greenlane's Chief Executive Officer; and Stephanie Mason, Greenlane's Chief Financial Officer. We'll begin with prepared remarks followed by a Q&A, which I will moderate. 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. Please feel free to submit any questions you may have through our investor e-mail address at [email protected]. Now over to Brad.

Thank you, Darren. Hello, everyone. Thanks for joining today. So on the next slide, what I'll do is I will -- Stephanie is going to get into the numbers in just a moment, but let me set the stage to begin with. And you've heard me say this many times. We have 3 strategic initiatives for the company. They're underpinned by financial discipline and adjusted EBITDA growth. Our first strategic initiative is continuing sales growth in our most profitable areas of our business. In Q1, we saw strong gross margin contribution, particularly from parts and service and biogas desulfurization. So that's going well according to plan. Our second strategic initiative is to reconfigure our upgrading systems business area. So obviously, we're using the gross margin contribution from that while we work through the reconfiguration of our core upgrading business. So what does that mean? So that means we ramp down or we complete the ramp down of our legacy low-margin contracts and then we ramp back up centered on proprietary standard products and royalty revenue. We'll also undertake our new contracts that will be structured for lower risk, higher margin and lower revenue per system with lower overall cost for customers. Let me pause for a minute. There's a lot there. Let me unpack that for you. So we are doing a couple of things. So one is royalty revenue. I'll come back to that in a bit. But as it relates to third-party components, at the top, the upper image, that is the Greenlane proprietary products before system integration. Greenlane is responsible for system integration. The lower image shows what it looks like after system integration. So there's a number of third-party components in here. So what we do going forward to create the situation of lower risk, it does result in some lower revenue per system, but it's higher margin and it's an overall lower cost for the customer. We do that by eliminating the low-margin revenue associated with the modules for which Greenlane is not design responsible. So those third-party components, we establish a relationship between the customer and the third party so that direct invoicing can occur. Let me explain now the third strategic initiative. So that's one and two. Number three, then we add step change profitable growth potential with Cascade LF. That goes across all the business areas. So we complete the plan as of now, complete final development, commence manufacturing in Brazil by the end of 2026 this year. And then also this year, we'll be establishing our manufacturing plan to serve the North American market. Next. I've also talked about our key strategic success criteria. We always think about -- we come back to these 4 criteria often. Today, I want to focus in on the fourth one, partnerships. So why is that important? Well, we believe that collaborating with leading industry partners who bring complementary expertise, focus and value helps us deliver complete solutions, extend market reach and allows us to better serve our customers. The partnership with Panasonic that we announced earlier this week is to establish volume production of Greenlane's Cascade LF and MS proprietary standard product lines in Brazil, and it brings not only Panasonic's manufacturing expertise, but also the strength of Panasonic's balance sheet to support sales growth. Next slide. So let me just -- we press released this earlier this week, but let me just say a few words, the summary version of what we announced. So firstly, the facility location, it's an existing production facility that Panasonic has in Brazil. It's in San Jose Campos. It's in the Brazilian state of Sao Paulo. And under the agreements, Panasonic has been granted a technology license for fabricating the products in Brazil with a number of responsibilities. So those responsibilities include the cost and activities related to the facility modifications necessary to produce the Greenlane products for procuring and installing the tooling. And then very importantly, providing the necessary working capital and advanced payment assurances to meet customer requirements. So Panasonic's initial investment is in the range of CAD 2 million to CAD 3 million or BRL 8 million to BRL 10 million. Under the arrangement, Greenlane retains responsibility for product design, management of the supply chain, including supplier selection, supplier quality assurance, also sales and marketing and commissioning and servicing of the products. Next slide. So why Brazil? So we've talked about Brazil being our launch market for Cascade OF. With Cascade F comes along Cascade MS for the larger-sized digester projects. In Brazil, they have a vast agricultural sector, but also a large landfill sector that produce a lot of biogas. And it's been long developed for biogas to power. It's quickly switching from biogas to biomethane. Today, in Brazil, most of the biomethane is produced from landfill gas, probably about 80% -- and there's helpful government support as well with initiatives. So the first one is the government aims to replace all dumps with landfills equipped with biogas production. So that's one government initiative. The other one is the country's new fuel of the future law. That requires that natural gas importers and suppliers in Brazil have to reduce their greenhouse gas emissions with biomethane starting at 1% this year, and that's prorated because it's coming into effect midyear, and it climbs to 10% by 2034. So if we back up and look at the projections, that's roughly a 7x increase to 2035, and that's approximately 21% annual compound annual growth rate in the market in the demand side of biomethane. So hopefully, that sets the stage. I'll let Steph take you through the numbers.

Thanks, Brad, and good afternoon, everyone. As a reminder, all figures are in Canadian dollars unless otherwise stated. We delivered solid financial results for our first quarter this year with $9.5 million in revenue and a gross margin, excluding amortization of 43% compared with $7 million and 40% in the same period last year. The 36% increase in year-over-year revenue at higher gross margins helped improve our adjusted EBITDA loss to $0.8 million from $1.1 million adjusted EBITDA loss in Q1 of 2025. As Brad noted, we are also investing in the final development and production start readiness of our new CASCADE LF product line and our operating expenses in Q1 2026 reflected these investments accordingly. Raine's research and development expense increased to $0.8 million in Q1 2026 compared with $0.3 million in Q1 2025. general and administrative expenses of $3.9 million in Q1 2026 in comparison to $3.5 million in Q1 2025, mainly represent an increase in operational staffing in preparation for the sale and production of Cascade LF later this year. We've maintained a solid balance sheet, ending the quarter with a cash balance of $13.5 million, no debt and a sales order backlog of $31.5 million. The movement in the cash balance from December 31, 2025, primarily reflects the movement in noncash working capital and the final payment of the contingent earn-out. As we flip to the next slide, Greenlane does not present biogas desulfurization results separately from upgrading systems. They're both included and combined in system sales. But if we look back on a pro forma basis, you can see that biogas desulfurization, which is primarily our regenerative H2S removal, saw a 3-year growth CAGR of revenue of 27%, and it has an average gross margin over those 3 years of roughly 50%. If you look at parts and service, its CAGR for revenue is 34% over that same period and has a gross margin of around 40%. Now if you look at our royalty, it has a smaller dollar value of revenue contribution, but an outsized contribution on margin as its gross margin is sitting around 86%. And then if you look at our upgrading systems, it's been seeing a decline in revenue over those 3 years, and it has an average gross margin of around 20%. So as Brad noted above, Greenlane has been deliberately ramping down its legacy low-margin upgrading system contracts to ramp back up centered on proprietary standard products and royalty revenues. We look forward to keeping you appraised of our progress. And with that, let's go over to you, Darren, for the Q&A.

So looking at today's negative adjusted EBITDA of approximately $800,000, where can we see R&D expenses increase significantly year-over-year? How should investors think about R&D leading up to CASCADE LF's commercialization?

Yes. So if you looked at our last year's results, R&D started increasing in the second half of last year. We ended with Q4 of around $700,000. And then you can see in Q1 of this year, we're at around $800,000. So we're continuing to make investments throughout the year. We'll probably be roughly at the same rate as what you've seen in the last couple of quarters. But another thing that I want to highlight is that if you're looking at our adjusted EBITDA results, if you're to exclude R&D from our adjusted EBITDA, we're EBITDA neutral, which means that without any contribution from Cascade LF, we're sitting in an EBIT neutral position. So as Brad was noting, as we get Cascade LF in production, which is a target for later this year, you have the potential to see that growth in our bottom line kind of as soon as that product gets online.

Do you anticipate needing additional capital to support the Brazil ramp of global expansion?