Good afternoon, ladies and gentlemen. Welcome to the Greenlane Renewables Inc.'s second quarter 2023 results conference call. At this time, all participants are in a listen-only mode. Following the results, we will conduct a question-and-answer session. To join the question queue, you may press Star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing Star then 0. 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 from Incite Capital Markets. You may begin your conference.
Thank you, operator, good afternoon. Welcome to Greenlane Renewables second quarter 2023 conference call. I'm joined today by Brad Douville, Greenlane's Chief Executive Officer, and Stephanie Mason, Greenlane's Director of Finance, sitting in for Monty Balderston, Greenlane's Chief Financial Officer, who's unavailable today due to medical reasons. 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 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 Brad.
Thank you, Darren. Good afternoon. Thank you, everyone, for participating on today's call. I'd like to start off with a brief recap of our business progress and updated outlook, along with some industry commentary, before I turn the call over to Stephanie for a more detailed review of the numbers. During the second quarter, we continued to work toward our goal of becoming cash flow and adjusted EBITDA positive in the next nine months. Our plans include streamlining the number of products we offer across each of our three product lines, rooted in each of the three core upgrading technologies, namely water wash, pressure swing adsorption, and membrane separation. Our plans also include ramping up sales of our proprietary biogas desulfurization products outside of Europe from the strong base of sales we currently enjoy within Europe.
With this more focused product portfolio approach, we are targeting the different market segments where each of Greenlane's products are most attractive to customers and partners and can realize volume opportunities. At the same time, we are continuing to invest this year in the necessary systems and processes that will allow us to scale the business as we take on more of these contracts. Our agreement with ZEG Biogas is emblematic of the type of opportunity that will create operating leverage in our business. During the quarter, we announced an exciting collaborative agreement with ZEG Biogas, a company 50% owned by Vibra Energia, previously the fuel distribution unit of Petrobras. Under the agreement, ZEG Biogas is to establish industrial-scale volume production of one of Greenlane's largest and most popular upgrading products in Brazil. ZEG Biogas's goal is to deliver 75 of these systems over the next five years.
To put that in perspective, that represents installing more biogas processing capacity in the next 5 years than the more than 140 units Greenlane has delivered over the past 30 years. ZEG Biogas will phase in production capacity over time, and the agreement includes minimum volume commitments in the first 2 years. This transaction is a shift in our standard business model. It provides revenue under a new royalty-like business model, together with supply of components from outside of Brazil and ongoing local service contracts. In addition to the ZEG Biogas deal, the Q2 was an extremely busy one for us as we continued to successfully build and commission over 20 separate upgrade, upgrading projects. We delivered strong gross margins this quarter. Additionally, our sales team has been active in building relationships with strategic customers interested in placing large orders.
We are looking forward to adding additional sales to our backlog through the remainder of 2023. Our plans for becoming cash flow positive and adjusted EBITDA positive in the next nine months also includes bringing in Ian Kane as new President and CEO, who will oversee execution of Greenlane's strategic plan. Ian is a proven leader with demonstrated skill in optimizing company growth and financial performance after the startup phase. As I transition into my new role as Executive Vice Chair of the company, I look forward to driving continued growth and success, focusing on key strategic initiatives aiming to unlock the tremendous untapped potential the company sees in the global RNG industry. Both appointments will take effect later today. The market for RNG continues to offer tremendous growth opportunities for Greenlane's products and services.
Not only are we excited about the growing sales opportunities that we see for biogas upgrading equipment, but we believe the expansion of our traditional business model to include a royalty-like structure offering standardized system will support further sales growth. During the second quarter, the company took control of one of the projects in its deployment of development capital program as a result of unforeseen circumstances and associated delays. Initially, under the convertible note that we issued, we had the opportunity to receive a return on our invested capital and to convert the note into a minority equity interest in that particular RNG project. As a result of this transaction, we have now acquired 100% of this pre-construction project and are advancing the opportunity.
Accordingly, the convertible note was canceled, and the company recorded a corresponding impairment in the note in the amount of $1.1 million. Greenlane has also evaluated its deployment of development capital program in the context of the rapidly evolving RNG market and our strategic growth plan. We have determined that funds previously allocated to this program should be reallocated to working capital. This shift better positions us to leverage our product and execution expertise over repeatable, high volume, high value opportunities globally. In recent industry developments, in late June, the US Environmental Protection Agency, or EPA, released its final rulemaking for the renewable fuel volumes for 2023 through 2025 under the Renewable Fuel Standard Program. The new rule was published without inclusion of the controversial RIN program and was positive for RNG.
RINs, as initially proposed, would have offered a substantial new source of revenue for biogas producers in the waste industry, many of which generate electricity and not RNG. EPA's deferral of the RINs resulted in a 30% jump in D3 RIN prices. It's important to note that according to EPA data, 99.8% of D3 RIN generation for the first half of 2023 was from RNG. In the same EPA rulemaking, the issue of co-digestion was fixed. Historically, anaerobic digesters processing food waste and producing RNG were automatically assigned the lower value D5 RIN, while digestion facilities processing manure and other biosolids to generate RNG were allocated to higher value D3 RIN.
Through the apportionment mechanism in the EPA rule, mixed waste stream digestion facilities that accept food waste, manure, and biosolids will be eligible for D3 RINs, which is a big win for the industry as the separation and processing of food waste is a growing source of feedstock. Furthermore, recently released data demonstrates that the commercial transportation sector has continued to turn to RNG as a driver of its decarbonization strategy. 69% of all US on-road fuel use in natural gas vehicles in calendar 2022 was RNG, surpassing the previous year's record, breaking level. RNG used as transportation fuel grew 17% over 2021 volumes and up 218% from 2018 levels. In California, the entire fleet of vehicles fueled with RNG were carbon negative in 2022 for the third straight year.
In closing, I want to thank all of those who have supported Greenlane in building our business as a leading global provider of biogas upgrading systems and joining us in our mission to help clean up two of the largest and most difficult to decarbonize sectors of the global energy system, the natural gas grid and commercial transportation. I'll now pass the call over to Stephanie.
Thanks, Brad. Good afternoon, everyone. As a reminder, all figures are in Canadian dollars unless otherwise stated. All comparisons are for the second quarter of 2023 against the second quarter of 2022. Greenlane's revenue in the second quarter was CAD 14.9 million, compared to CAD 18.1 million in the same period 1 year ago. System sales revenue accounted for 84% of total revenue in the quarter, which was recognized in accordance with the stage of completion of projects, with the remaining 16% of revenue coming from aftercare services. We delivered a gross margin in Q2 of 29%, or CAD 4.3 million, compared to CAD 4.6 million or 25% in the second quarter of 2022. The improvement in gross margin was primarily driven from more efficient project execution and a reversal of warranty provisions that have expired.
Excluding the reversal of warranty provisions, the gross margin was 26%, in line with our historical range. We reported an adjusted EBITDA loss in the second quarter of CAD 1.5 million versus a CAD 0.4 million loss in the second quarter of 2022. Net loss in Q2 2023 was CAD 4.3 million, compared to a loss of CAD 2.7 million in the comparative quarter of 2022. As of June 30th, the company's Sales Order Backlog was CAD 16.3 million. As a reminder, the Sales Order Backlog is a snapshot at a 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.
The company's reported Sales Order Backlog does not include amounts under the collaborative agreement with ZEG Biogas due to the nature of the agreement or Air Gap sales, given the smaller individual contract values and shorter delivery periods. Our balance sheet remains healthy as we exited the quarter with a cash balance of CAD 16.1 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 shareholders appraised of our progress. With that, I open the call to questions.
We will now begin the question-and-answer session. 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. We will pause for a moment as callers join the queue. The first question comes from Aaron MacNeil with TD Cowen. Please go ahead.
Hey, afternoon, and thanks for taking my questions. I hope mommy's doing okay. I'm hoping we can dig in a bit more on this development capital project and the broader strategy. I guess I got a handful of questions, but I'm wondering, one, what exactly were the unforeseen delays? Two, what exactly do you own 100% of now? Three, you mentioned you're advancing the opportunity. What exactly do you plan to do with the project going forward, and if there are any incremental capital investments required? Four, can you remind us of any other development capital investments and their current performance relative to your expectations?
All right. Hi, Aaron. A lot of questions there. That's good. Let's, let's unpack this deployment of development capital topic a little bit. Firstly, I'm not going to get into the specifics of the anticipated delays and the circumstances, other than to say there were delays, and that resulted in an opportunity for Greenlane to take 100% of the project assets. What does that mean? The original construct of this deal was such that the developer pursuing the preconstruction project, that's in the phase of putting contracts together, feedstock, land lease, and, and all the associated development assets necessary to be able to construct a project. All of those contracts and any of the other development activities are now wholly owned by Greenlane.
What that means in terms of the next steps of us advancing that, that means to monetize it in whatever way that makes sense. Greenlane is not a developer. The developers are our customers. That may mean working with existing developers that we have preexisting relationships with. It may mean working with certain counterparties that will help us get the project to FID. All along, this program was meant to provide capital to those developers in the space that don't have the capital necessary to advance projects, get the Greenlane equipment specified, and then take a portion of the proceeds of the project once it was generating value from the sales of the resulting RNG.
If you think about it in the context of the original construct, whereby we would have a minority share in partnership with the original developer of the project, we have now 100% of the assets, which will generate, in theory, possibly more revenue to Greenlane. However, we do have now a situation where we have to, to, take it to market and engage developers to help us get it over the goal line. With all that said, the underlying document that the note agreement, given that that's now been canceled with the original developer, that is a result of the CAD 1.1 million impairment on the balance sheet. That's the mechanism that happened there. Hopefully, that answered all four.
I hope I answered all four.
Just maybe you could also just include where this or, like, what the status of the other-
Sorry, I still not clear about.
What the other development capital investments are to date, if at all?
Yes, that's right. That was the fourth one, so I didn't... We had three out of four. So there's two programs that we invested in to date. So one, one was on the West Coast of the US, and the other was in the Midwest. So those were the two programs that we had developed or provided development capital in the form of a convertible note. At this time, our plan is to see those through and realize the value from those. Right now, we expect to pause on initiating new projects.
Partly why we're redeploying the capital, into working capital or redeploying the funds we had allocated toward the development, deployment of development program, is because of ZEG-like deals, and other activities that we're working on in our pipeline to be able to generate the necessary working capital to realize the volume opportunities that we're pursuing. That's fundamentally core to our business, where we knew the deployment of development capital was somewhat adjacent to our core business.
That's actually a good segue into my next question on the ZEG relationship. I know there's a minimum volume commitment. When do you expect that'll show up in the backlog, and what do you think your working capital investment will be for that relationship, or what do you think it'll peak at, I guess?
Yeah, good, good point. The technicality there is we don't actually expect the ZEG volumes to show up in the backlog. The reason for that is because it's a different way of doing business for us. Historically, what shows up in our backlog is contracted system sales. The nature of the ZEG deal is that we'll be providing certain parts from outside of Brazil. ZEG will be responsible for local sourcing of parts within Brazil, and therefore, it's more of a production model if we're looking at 75 units over the next five years, which is ZEG's target. It's, like I said, it's not going to show up in our backlog per se. However, we will expect to see revenue contribution from that beginning soon. Minimum volume commitment is in the first year.
We also said that over the 5 years, the 75 will ramp over time. The first steps are to put the production... The first, the very first step is tech transfer, and simultaneous with that is setting up the local supply chain. We're in that phase right now.
Got it. I'll turn it over. Thanks.
Thanks, Aaron.
The next question comes from David Quezada with Raymond James. Please go ahead.
Thanks, guys. Maybe I'll, I'll just start with some of the commentary that, that you provided, Brad, that was really interesting about the industry in general. You know, the, the lack of moving forward on the eRINs and, and the, of course, the jump in D3 RINs. Do you have some, some sense of when that might or when you expect that might translate into, I, I guess, more project originations in the US? Do you think that, or could you speculate on whether or not higher D3 RIN pricing is what project developers want to see in order to start looking at new projects, or is there some other policy they'd be looking for down the line here, like uncertain- or, or, sorry, like, more certainty under the IRA or something like that?
Yeah, good, good question. Thank you, David. Why don't we start in reverse order? The IRA, you know, there was a big focus on that last August, a year ago already, that it was announced by the Biden administration. We have to remember that that program had significant uncertainties for a significant amount of time before the Treasury Department released how it was all gonna work. That caused a bit of, I'd say, some confusion and anticipation in the market. As people have become more familiar with it, the more sophisticated developers in our realm have concluded that it doesn't add a ton to the overall financial performance. Really what they are after, and this is the earlier part of your question, is what are they looking to see?
I think it's fair to say that the eRINs was certainly weighing on decisions, particularly those of our customer set that have large portfolios of landfill-to-gas projects, or I guess, landfill-to-power, I should say. If you think about the eRINs program, if you're an owner of a landfill, you're generating power, the eRINs program comes out. It's, again, it's like the IRA, not fully defined. You can choose to not invest in your project and possibly have some sort of revenue stream coming from eRINs, or you can invest in RNG and go to the more traditional RIN path. That's why, you know, I think it's fair to say why the pricing jumped on the D3 RINs when the EPA kiboshed the eRIN program, because that gave a certain degree of certainty.
People were, you know, didn't have to wait anymore. To your question as to when do we think? You know, can't say exactly, but we do know that that was certainly, a reason for pause amongst our customers. That's not a current reason for pause, so hopefully, that brings some, some, some initiatives back. The one that you didn't ask about was the LCFS pricing in California. That started declining last year, as we all know. It's stabilized at a, a lower level than historically it's been. We have talked in prior Q calls around, the Air Resources Board taking action within their program to get the get a floor price up or, in fact, possibly put in a floor price.
They had always expected, when they launched the program back, 10 years ago or so, whatever it was, that the pricing would end up around $125 in the credit value. It's been for many of those years at $200. It's right now somewhere in the neighborhood of $70. They want to take the actions that they are able to take under the program and get it towards, you know, either $100 or $125, because they believe, they firmly believe that that's the pricing level that's necessary to ensure a healthy market and driving additional volumes of RNG, low carbon, in particular, RNG into the marketplace. Did I answer the question, David?
Yeah, no, that's a great color. Thanks, Brad. Maybe just a follow-up there. Just in terms of the LCFS pricing, I think the, it was a 30%, it was a move from 20%-30% in terms of the carbon intensity reduction. Maybe if you could just provide me, whatever you're hearing in the industry, has that, has that change happened, and is that starting to, do you still expect, is it still widely expected that that would push the LCFS price higher?
Well, good question. There was a modeling piece of work that was done by the EPA, sorry, by the ARB six months ago, I think. They had done a piece of work to say that if they did lower the carbon intensity target, that that would result in a higher price. That's the, the lever that they have. It's a bit of a coarse lever. It takes a bit of time to work through. The expectation was that that would send a signal to project developers, that they would see higher pricing over time. Has that happened? Well, we haven't quite seen LCFS pricing, credit pricing on a spot basis, increase significantly because of that. I think it's gonna take a little bit of time for that to work through the system.
What we do know for certain is, that the ARB is behind the program and is taking the action, to ensure there is a, a floor-level price.
Okay, excellent. Thanks for that. That's, that's good news. Then maybe just one other one for me. Just in terms of your, your target of reaching cash flow breakeven by first quarter, I mean, it seems like you're making pretty good progress based on, on the first half of the results here. Would you say the things are kind of, evolving in line with your expectations there, any puts and takes you're seeing and, or, or, and/or any comment on how far through those cost reductions you are?
... Yeah, good question. You know, we, we obviously are partway through that plan, if not, earlier in the plan. We had announced that, one quarter ago, that, one quarter ago, we said 12 months, that we would expect to be, EBITDA and cash flow positive. That's now 9 months away. We're working through a number of initiatives. The initiatives are twofold. One is, the top line, because there is no bottom line without the top line. Hence the move to create more focus on some of the bigger, larger, more significant deals, that we can translate.
As part of that is bringing in Ian Kane to take on my duties from a day-to-day CEO perspective, freeing my time up to focus on those strategic initiatives and areas of the business that we think will contribute more fulsomely to the top line. On the bottom line, obviously, our mission there is to make sure that we align the resources accordingly with the top line. Our ambition is to grow the top line, and therefore we'll be, you know, in a situation of needing more, not less people. Obviously, we'll monitor that over time. The other thing I can say is, if we bring it back to the ZEG deal, you know, that's clearly a Brazilian focus.
We know in Brazil, it has a very different dynamic, a very different interaction with the government and policymakers than we see here in North America and in Europe. You know, for us, that's really exciting, that there's a market-based opportunity. We're already taking advantage of that. We are the market leader in Brazil, and that is a particular focus area for us to maintain that market leadership. There's been significant amounts of effort, not just this past quarter, but prior to that, beyond the ZEG opportunity that we think we can realize in the near term here.
Excellent. Thanks for that, Brad. Appreciate it. I'll turn it over.
The next question comes from Nicholas Boychuk with Cormark Securities. Please go ahead.
Thanks, Vivian. Going back to the prior commentary on the development program, I'm wondering if you can expand a little bit, Brad, on how much capital and internal resources you're going to have to need, deploy, to get that project to FID, and then what the potential return is on that? Like, is it a meaningful potential bump, or is this more of like a recovery of dollars already deployed?
Firstly, hi, Nick. Can you just restate your first question? Because to be honest, I'm not sure I'm understanding what you're asking.
I'm curious how much capital you'll have to deploy, or other working capital you'll have to use in order to get that project from its current state to FID, a level where you could then sell it off to another party.
Okay. All right, good. The impairment that was taken, CAD 1.1 million, that reflects the amount of money that was invested into that project to date. That, that gets it pretty far along. As of now, we are looking at our options as to whether we invest further funds or we bring a partner in that will fund the remaining portions to take it all the way to FID. We think that the investment made to date takes the project quite far down the road. However, you know, there is more, more investment to go. I think it's, it's very safe to say that the majority of the, the investments are have been made, and there's a minority left to go.
We haven't yet taken a decision as to whether Greenlane will invest more.
Got it. Thanks. Then just on the sales forecast, you had mentioned a couple of times that you're looking forward to having additional sales in 2024. I'm curious if the revamping of product sales and making things a little bit simpler and streamlined has increased the visibility that you have, or has given you the opportunity to high grade prior opportunities that were already in your pipeline, such that you could now potentially bring them forward, either because they have a better return profile or the margins are better? Any color on the sales outlook would be good.
Yeah, that's a great question, Nick. Thanks for that. It gives me an opportunity to expand a little bit more on what we're up to here. What we're trying to accomplish with this is a reflection. Over the last 3 years, we had tremendous growth in the business. We also had quite a proliferation in a positive way of our product portfolio. We expanded out the product line. We already had 3 years ago, a very fulsome water wash product line. We expanded significantly our PSA product line, our pressure swing adsorption, as well as our membrane product line. The point is, is we learned a lot.
We learned a lot about the market segments, we learned a lot about the customer appetite, and what customers are looking for across the 4 key sectors that we serve, which are landfill, wastewater, agricultural and food waste. Each of those has a different characteristic, and what we've learned, as well as, as the market has evolved and, and, become a bit more sophisticated in understanding the needs, we're able to target our products towards each of those sectors, using the different technologies. We've learned that our technologies, they're more relevant in certain markets than others, and that's, that, goes across all 3 of the technologies.
To answer your question around, you know, improved margins, that's the, that's the end game, is that we, we believe, that the smarter we are, because we're, you know, we've been at this for decades, particularly over the last 3 years, we've had a, an opportunity to learn an awful lot in the projects that we've deployed. Remember, we're currently actively working on more than 20 right now. That, that gets us a unique position in the market. It gets us a vantage point that not others, or competitors have. The idea is that we have attractive products targeted towards each of those, those sectors. We don't expect to sell multiple technologies in each sector, but rather pre-select for the customers the technology that we've learned is the right one for them.
The synergy there also is that that should result, hopefully into a better gross margin profile, for Greenlane.
Yeah, thank you.
Once again, any analyst who wishes to ask a question may press star, then 1. The next question comes from Ahmad Shaath with Beacon Securities. Please go ahead.
Hey, Brad, and thanks for taking my question. I guess back, back to the one project that you guys now own. Are you able to give us a little bit more color on what stage of development it is in, in terms of just getting, I know you've been asking for, but maybe some of the key things that are required to get the project going? Have you, have you secured feedstock? Is the site allocated? Like, just, just give, give us a general sense of how far is it along the development to kind of make our own assumptions in terms of how much money is needed?
Thanks for the question, Ahmad. Interesting question on, on feedstock. Partly in the development phase. Firstly, what phase is it in? It's definitely pre-construction, so pre-FID, and that's always a continuum. The, the main point I would say in terms of when do you call it done, when do you know you're done? That's not so clear because of aggregating feedstocks, in this case, from a number of different, in this case, farms. To pull feedstock in, we do have, there's a target in mind. Whether you exceed that target or stop slightly shy of that target, that's the thesis that you need. There's nothing, you know, extremely magical about the target, other than that's what's being given time to make the, the pro forma work and function.
As you add more and more feedstock, you know, the project gets larger and more attractive. That's the phase it's in. We will, as we continue to advance this project, whether we invest ourselves or get a partner, then we'll be making that determination. When is done, when it relates to the feedstock? There are other aspects of the project in terms of the lease side, you know, that's in good shape. Pipeline interconnect, you know, the basic elements of the development cycle are pretty much done. The focus is on feedstock aggregation, as I was just mentioning.
A lot of that's, that's, that's very helpful. And maybe one more on, on the same topic, and sorry to harp on the same issue. Would you say that the fact that the RIN and LCFS environment kind of made the project a little bit stagnant, and then you were able to get your hands on it, and now as things are picking up again, the project's become super attractive. And I guess you ignite the initial reason that you guys got involved in the project to begin with. Is that a fair statement? Or really, the environment is really nothing had to do with it, and it was just intrinsic to the project developer that you were dealing with?
I, I like the way you framed that up, I, I don't think we can say that. I think we can say that we're going to benefit from that with some lower LCFS pricing over the last little while, because we, you know, certainly from where we sit at Greenlane, we think the price will go up. I think we'll benefit from that. I, I don't think it's safe to say that the reason for us acquiring 100% of the assets is, is a direct line to the drop in LCFS pricing. I don't, I don't think we can say that.
That's, that's very helpful. Thanks. A last one then. I haven't got a chance just to go through the full financials yet, because we just we'll go through it. Do you guys disclose the contribution from Airdep for this, for this quarter?
Do you mean, did we disclose it on its own, as a, as a division? Is that your question?
No, no. I mean, did you guys point out to the amount that you guys generated from Airdep for this, for this quarter, or are you able to give us that number by any chance?
Yeah. Last year, we disclosed Airdep uniquely because of making acquisition within the year. This year, we're not splitting it out as its own segment. We have the segments that we report publicly are system sales and the aftermarket. The answer is, sorry.
All good. Fair enough. Thanks. Thanks for answering my questions. I'll jump back in with you guys.
All right. Thanks so much.
This concludes the question and answer session. I would like to turn the conference back over to Darren Seed for any closing remarks.
Thank you. Thank you very much, everyone, and we look forward to seeing everybody on the next conference call.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.