Good afternoon, ladies and gentlemen. Welcome to the Greenlane Renewables Inc. First Quarter 2024 Results Conference Call. At this time, all participants are in listen-only mode. Following the results, we will conduct a question-and-answer session. To join the question queue, you may press star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. Today's call is being recorded, and a replay will be available on the Greenlane website. I will now turn the call over to Darren Seed with Incite Capital Markets. You may begin your conference.
Thank you, operator, and good afternoon. Welcome to the Greenlane Renewables First Quarter 2024 conference call. I'm joined today by Ian Kane, Greenlane's President and Chief Executive Officer, and Monty Balderston, Greenlane's Chief Financial Officer. 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 the Canadian Securities Administrators.
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.
Thanks, Darren, and good afternoon, and thank you for participating on today's call. As in my previous conference calls, I will cover some of the results from our last quarter and also comment on our future. We've had a good start to the year as we recognize a significant improvement in Adjusted EBITDA, with reduced loss of CAD 0.5 million in Q1 2024, compared to a loss of CAD 1.7 million in Q4 2023. Further to the Adjusted EBITDA results, our revenue grew 23% over Q1 of last year, with CAD 18.1 million in revenue for Q1 of this year. As many of you have followed, our financial goals for Greenlane have been clear and published. We continue to drive towards our goal of positive Adjusted EBITDA this year, which also requires us to refill our sales pipeline.
We have significant sales activity on the go and look to convert them in purchase orders, into purchase orders as soon as possible. With respect to our collaboration agreement with ZEG Biogás in Brazil, announced a year ago, we started to recognize royalty revenue this quarter, which will help improve our overall business and margin profile and further strengthen our brand presence in Brazil. I appreciate your continued support, especially given the short timeframe between our last call and today's call, and I look forward to keeping the public informed of our progress. Also, I want to thank the Greenlane employees for their continued hard work and drive. With that, I will now turn the call over to Monty.
Thanks, Ian, and good afternoon, everyone. As a reminder, all figures are in Canadian dollars unless otherwise stated, and all comparisons are for the first quarter of 2024 against the first quarter of 2023. As I noted in our release, I'm encouraged with the progress we've made towards our objective of achieving adjusted EBITDA positive results for this fiscal year. Greenlane's revenue in the first quarter was CAD 18.1 million, compared to CAD 14.8 million in the same period of fiscal 2023. System sales revenue accounted for 85% of the total revenue in the quarter, which is recognized in accordance with the stage of completion of our projects, and the remaining 15% of revenue was due to after-sale services and our royalty contract that Ian just mentioned.
We delivered a gross margin in Q1 of 26.5%, or CAD 4.8 million, compared to CAD 3.5 million, or 24% in the first quarter of 2023. The 250 basis point increase in gross margin percentage was largely the result of a change in product mix during the current quarter. We reported an Adjusted EBITDA loss in the first quarter of CAD 500,000 versus a loss of CAD 1.6 million in the first quarter of 2023. The company incurred an operating loss from continuing operations of CAD 1 million in the Q1, 2024, compared to a loss of CAD 2.5 million in Q1 of 2023.
Net loss and comprehensive loss from continuing operations in the first quarter was CAD 800,000, compared to a loss of CAD 2 million in the comparative quarter of 2023. The company's sales order backlog at the end of the quarter was CAD 24 million, and as a reminder, the 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 it progresses. Or sorry, as the project progresses towards completion with amounts recognized in revenue. You should also note that sales order backlog does not include our Cascade H2S sales, service revenue, or revenue from the company's agreement with ZEG Biogás. That's a royalty-like structure.
As part of management's ongoing evaluation of its operations and strategic plan, we exited non-core parts of our business to increase the focus on growth of Greenlane's core, including our Cascade products and services. More specifically, subsequent to March 31, 2024, the company sold a wholly owned subsidiary, Greenlane Renewables UK Limited, which carried on the company's UK and European-based legacy aftercare services business. For the first quarter, revenue generated was CAD 500,000, and the business incurred an adjusted EBITDA loss of CAD 100,000. This transaction triggered a restatement of our financial statements to reflect this business as a discontinued operation, and all comparisons for Q1 of 2024 against Q1 of 2023 reflect this adjustment.
I'm encouraged by our progress during the quarter as we continue executing on our strategy, and we continue to evaluate our operations, and we'll look to extract further efficiency as we focus on the core aspects of our business. We look forward to keeping our shareholders apprised of our progress, and with that, I'll open the call to questions. Operator?
Thank you. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. The first question comes from Nick Boychuk with Cormark Securities. Please go ahead.
Thanks. Evening, guys.
Hey, Nick.
Can you expand on the ZEG royalties that started up this quarter? Like, what are the details around the project or project that those royalties were derived from, and, and how they're being calculated, and, and really, what we should be expecting in royalty revenue moving forward, for the rest of the year?
Well, probably the easiest way to describe it is there's an assured portion of the royalty agreement, and then there's an assured portion of the royalty agreement. So right now we're in the firm piece of that contract, and so how it works is, as units are delivered, we recognize a portion of that royalty. So in Q1, the first unit was physically manufactured and the portion of our contribution towards that, so our activities towards that were completed, and so we were able to recognize the revenue on that. So on the contract, there's a two-year term that's the fixed portion of it, and so we're a year in, and we delivered the first unit.
We expect ZEG to have one or two units in the second half of the year, but obviously, we're they're, they're still in progress on that. And so when we complete those units, the revenue will be recognized on that as well. So, you know, basically what you're seeing in Q1 is one unit under the fixed portion of the contract, so you can do the math if it was two or three or four.
Got it. That makes sense. Is there a recurring component? So now that you've got this one system into the field, is there gonna be a smaller, ongoing recurring component that will come on the back of that as well?
Yes. So, we have a similar to our other projects, we get involved in the commissioning of the unit. We don't actually construct the unit, but we do the commissioning piece, and so that's where you'll see a smaller portion of revenue being recognized. I mean, it's not the size of the royalty, but each unit, we do have a service component to it. And then, depending on the situation, we hope to have an aftercare support agreement with those units as well.
Okay. And so you mentioned that there's gonna be one or two more ZEG systems sold within the year. Have they given you any indication on what they need to see from you guys or just from their local market in order to really start to ramp up production towards that kind of bigger TAM that they previously suggested is there?
Well, I think what you're seeing now is the first units delivered, and with any supplier-customer relationship, once they've got the units running, they, you know, the customers get more and more accustomed to it and more interested in it. So, you know, as I expect with any customer, as they're seeing the increased performance and delivery, they will be more interested in more units. So we'll see. We'll watch this space.
Got it. Okay, thanks.
Once again, if any analysts wish to ask a question, please press star, then one. The next question comes from Aaron MacNeil with TD Cowen. Please go ahead.
I think I'll try to follow on the last question. Afternoon, guys. Thanks. Thanks for taking the time.
Hi, Aaron.
You know, I know there's a minimum volume and commitment for the first two years. Can you say what that, like, the number of units is that we should expect?
The minimum commitment is five.
Five. Okay. And then, you know, once that minimum commitment is up, you've talked about 75 units over five years. Like, is that still something that you can reasonably expect, or like, how do you see this ramping up over time? Or, Ian, as you mentioned, maybe it's that you need to demonstrate the first unit in the field before you have more visibility on that.
Well, I mean, it's really in our customers' hands more than our hands, so I'm not saying we don't know anything about it, but it's, you know, we're not in control of how many units. Obviously, we want to see our customer be extremely successful, but, you know, perhaps the 75 might be a little aggressive within the timeframe that they're suggesting, but you know, they've got the facilities to build the units set up. They've got the, for lack of a better term, the floor plan on how to build it and the first unit has been, you know, fully constructed. So, they've gone through the growing pains, if you wanna call it, on getting their idea set up.
And the unit that we're talking about is actually being commissioned here in the next 45 days. So it's been moved to site, and now it's, you know, for lack of better term, being turned on. And so a lot of our customers, we find, wanna go and see what you've already done. So now they're gonna have one that's actually up and running here in the next few months. So I think you'll see some momentum from that.
Obviously, time will tell as to how successful they'll be, but there's the minimum commitment, which we was, you know, kind of what we agreed to, and then we have expectations that the momentum will continue to get stronger as they've got a proven unit deal that people can, you know, for lack of a better term, touch and taste and feel.
Gotcha. And in the prepared remarks, you talked about filling the backlog back up and the significant sales activity pipeline. I'm wondering a couple things on that front. First, can you comment on the pricing strategy, like are historical margins a good benchmark? And second, like, can you give us a sense of how quickly you could recognize revenue? I know that you've said historically it's 9-24 months, but can you give us a sense of, you know, what you would expect for some of the projects you're chasing? How quickly that revenue would be recognized?
Yeah. So, from a, you know, from a backlog perspective, these larger projects, obviously, as we said previously, they do take. There is a lower margin on them, so there certainly is that piece. And revenue recognition, I'll let Monty cover that piece.
Yeah. So on revenue recognition, you know, basically it's your activities against the contract, right? So as you complete the activities against the contract, you recognize the revenue. And so, I mean, it's not straight line, but a significant portion of the work is done in the first, I would call it, let's call it six to eigth months. And then there's a slowdown period while the unit gets constructed, because obviously we're not involved in the physical construction of the unit on site. But then we come back in at the end to do the commissioning. So it's a little bit front-end loaded.
So on these projects, like for instance, on the large project in Brazil that we're doing now, you've seen the revenue pop, you know, materially in Q4 and Q1, and it's, it's largely related to that project being in the heavy lifting phase, for lack of a better term, of, you know, the design and the construction of the components by our suppliers.
Gotcha. And then final question: As we think about updating the model for the aftercare services segment, you know, I'm wondering if the, the performance in the quarter and the prior quarter comparable is indicative of, of the run rate. Like, you know, you've got your revenue there and a modest loss on a, on an EBITDA basis. Is that what we should sort of think about when we're adjusting the-
Yeah, so-
model on a going-forward basis?
Yeah. So to adjust the model, if you look at our P&L, the UK operation has been removed from the P&L, and it shows up as a discontinued operation line at the bottom. So the P&L that you're looking at for Q1 of this year and Q1 of last year reflects the UK operation being removed. So you can kind of, you know, get a little bit of a sensation for or a sense as to what the, you know, go-forward business has achieved in the past. You could also, in the note disclosure, look to see that, like you mentioned, the business had, you know, CAD 500,000 in revenue, but on a EBITDA basis was, you know, slightly, slightly below zero.
So our expectation is, it's not a huge bottom-line mover, but from a revenue standpoint, you know, we're probably gonna be short somewhere between CAD 500,000 and CAD 750,000 a quarter, if you were to use the run rate previous, when that business was included in our operations.
Yeah. Let me just quickly touch on aftercare. You asked about aftercare as, you know, a piece. We expect as we deliver, you know, commission these projects we have on the go at the moment, aftercare contracts will be signed with the various customers as we go. So that book should in-
Yeah. So what we're seeing is, you know, our UK business was starting to decline because obviously we haven't commissioned a new project in the UK in a long period of time. But in North America, we had a lot of operator work in the last two years, and so those projects are now coming online, and so that's where the recurring service revenue is gonna grow. So basically, it's a shift of that activity from the UK to, for the most part, the United States.
Understood. Thanks, everyone. I'll turn it back.
Thanks, Aaron.
We have a follow-up question from Nick Boychuk with Cormark Securities. Please go ahead.
Thanks, guys. Just one quick follow-up here. Kind of curious how you're thinking about staffing levels right now. Obviously, you have to manage costs, but also kind of striking that balance to have enough people on hand to take advantage of that revenue opportunity you're looking at. What are your thoughts on the current cost profile and how is that going to evolve over the rest of the year?
Yeah, I mean, we will see some adjustments in cost over the next six months. At the end of the day, you know, staffing profiles are mostly stay pretty stable as they are, and our model is, you know, as we get more projects or less projects, we adjust as needed. So that's kind of our objective.
Okay. Thank you.
This concludes the question and answer session. I would like to turn the conference back over to Darren Seed for any closing remarks. Please go ahead.
Thank you for participating on today's call. We appreciate your questions as well as your ongoing interest and support, and look forward to seeing you on the next conference call. Thanks, everyone.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.