Good afternoon, ladies and gentlemen. Welcome to the Greenlane Renewables Inc.'s 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. 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'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 brevity, 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 Greenlane represents to help transition to more difficult sector decarbonization, that being natural gas utility market and the commercial transportation industry. Greenlane has 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 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 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 growth with a focus on execution and overall company profitability. We took action in 2019, and have... Sorry, we took action in 2023 and have been investing towards making the business scalable and creating operational leverage 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 streamlined processes and cost efficiencies. Our standard products are configured to order and will result in engineering time and repeatability, simplified and faster 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 FY 2 024, 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 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.
Thanks, 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 CAD 10.1 million, compared with CAD 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 on projects, with the remaining 19% of revenue coming from aftercare services. We delivered a gross margin in Q3 of 31%, or CAD 3.1 million, compared to CAD 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 CAD 4.5 million, versus a CAD 400,000 profit in the third quarter of 2022.
Net loss and comprehensive loss in Q3 2023 was CAD 5.2 million, compared to a profit of CAD 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 CAD 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 Biogás.
Our balance sheet remains healthy, and we exited the quarter with a cash balance of CAD 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. With that, I will open up the call to questions.
Thank you. We'll now begin the question-and-answer session. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. The first question is from Aaron MacNeil with TD Cowen. Please go ahead.
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 be EBITDA positive in Q1 of 2024 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. Yeah, good observation, Aaron, and you are accurate. You know, obviously, the biggest variable there is system sales and revenue mixing. 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. 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 FY 2024 is the current target.
Understood. Working capital, excluding cash, is around CAD 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 ZEG over the next couple quarters.
Yeah. Another great question and good observation. You know, typically, if you were to go back, let's call it six months or a year, a year and a half, you know, we'd be carrying, loosely speaking, somewhere in the CAD 5-10 million range in non-cash net working capital. And, you know, with the exception of the order that just came in with, on, October fifth, you know, we've seen a lot of projects get to the end. So, you know, 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.
Understood. Maybe I'll just sneak one more in. You highlight that you expect some royalty revenue from ZEG in the first half of next year. How would you characterize the work you're performing and the magnitude?
So we do have some of our engineering team, or I should say, project team, which includes primarily engineering folks. And so we've been working very closely with ZEG, you know, since the agreement was announced in April. So loosely, it's been, you know, a 6-7-month exercise now. 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 2-5 happening either in late 2024 or early 2025.
Can you say what the revenue per unit is, or?
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.
Got it. Appreciate it. I'll turn it over.
The next question is from David Quezada with Raymond James. Please go ahead.
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 2023 that would fall off in 2024. 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?
Yeah. So, in our MDA, we do provide some specific numbers, and one of it being, we did incur, or we recorded an allowance in the quarter for a bad debt expense of CAD 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, you know, if you wanna call it a component of an unusual item, if that was significant. And then I would suggest on the PLM and ERP front, there are costs that we have incurred that are gonna 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, you know, 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 1. So we do expect, you know, you're gonna 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, you know, in the last two quarters, the non-recurring portion would be in the CAD 300,000 range, would be a good proxy of respective consulting costs that hopefully should not recur in 2024.
Okay, excellent. Thank you. And then maybe just, you know, as for the outlook, I mean, obviously, you had that big project win in Brazil. I would imagine it'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 give, 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?
I mean, you know, there's no doubt Brazil is a focus for us, and we are in 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 in delivering there. We're also building a team there, and so we expect that to be a focus for us, going forward.
And then your comment 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. It's just that, for a variety of reasons, they haven't gotten 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.
Hi, Dave.
Okay.
I'll just add a bit extra color. So you'll recall in the last quarter, we talked about the change in EPA's program as it relates to the E-RIN. So that was a relatively recent thing in the context of the development cycle with the project. So, we had highlighted that last quarter in terms of a bit of a drag on our customer base in the U.S., particularly those that were not reliant on the LCFS program in California. That they have gone off and 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.
Excellent. Thanks. Appreciate that, guys. I'll turn it over.
Once again, if you have a question, please press Star, then 1. Our next question is from Nick Boychuk with Cormark Securities. Please go ahead.
Thanks. Evening, everyone. Going and kind of continuing on the same theme of the landfill, I'm curious, guys, Ian and Brad, if you can comment on how many other landfills you think there are in the States that could 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 opportunities that are available to you, where does that come from relative to ag and the type of projects that 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.
Yeah, it's a, it's a really good question, Nick. I mean, as you know, the U.S. market has been active for RNG for much longer-
So many of the larger size projects, I mean, the one we announced was CAD 35 million. So that's a big, big project. And a lot of those, you know, very large ones in the U.S. have been already converted over to RNG. Not to say that there isn't some large ones left. The focus in the U.S. is going more to getting the mid-size and some of that smaller mid-size ones going. So I wouldn't expect to see a ton of order flow in the contract value. 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 steep slopes and high-producing landfills, partly because of the mix of organic matter that goes into them, the tropic being in the tropics. You get the warmth that those things contribute to high gas production out of the landfill. So, in the Brazilian context, there is quite a number of opportunities like that to come, and hence why, you know, we built the 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 the sales side is both markets, Brazil, North America, as it relates to landfill.
Okay, thank you. Just kind of touching on as well, Ian, I'm curious if when you're looking at this opportunity in front of you, it's obviously exciting, but you, you've got CAD 17 or so million of cash on hand. Are there any acquisitions that you could potentially have interest in or, or ways that you would try and turbocharge the growth, and, and really streamline this opportunity and start to realize some of the things, these things sooner? Any color there?
I mean, our focus, you know, 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 gonna be for the next period. You know, 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.
Okay, thank you very much.
Once again, if you have a question, please press Star, then 1. 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.
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.
This concludes today's conference call. You may disconnect your line. Thank you for participating and have a pleasant day.