Desert Control AS

OSE:DSRT

Earnings Call Transcript 2023-Q1

[Unknown Executive]

Welcome to the Desert Control Q1 2023 and Year-to-Date company update webcast. It will cover the Q1 report and interim financial results for the fiscal period that ended on March 31, 2023. Some recent updates for Q2 will also be included. A Q&A session will follow the presentation and we invite you to use the Q&A function for questions. Before that official Q1 update agenda, allow us to introduce Desert Control's CEO for a brief introduction.

[Ole Sivertsen, executive]

Desert Control specializes in climate-smart AgTech solutions to combat desertification, soil degradation and water scarcity. And our specific focus is the improvement of sandy soil. Sandy soils are thirsty and less productive. And when fertile soil degrades and turn to sand, even more water is needed to maintain life and grow food.

In sandy soils, less than 15% of water is retained for plant use. Most is quickly lost to deep drainage, causing fertilizer washout, increasing costs and lost productivity. Liquid Natural Clay from Desert Control is a nature-based solution to upgrade sandy soils with a larger storage bank. The liquid coats each grain of sand with an electrical charge that holds on to water, like a magnetic force, creating a solid structure that retains water and nutrients like a sponge. One treatment is expected to last for up to 5 years or more with maintenance programs. Our solution is designed to restore and enhance soil ecosystems to reduce water usage and improve the efficiency of fertilizers and natural resources for agriculture, forest and green landscapes. LNC saves up to 50% on water and energy usage, while improving fertilizer efficiency, which leads to higher yields, better crop quality and increased profit. Based on 12 years of R&D, the process of commercialization started in the second half of 2022, and we have developed a sales strategy with a customer conversion model that I will share more details about in a few slides. The experience from implementing technical pilots and commercial preprojects in the U.S. is helping us gain significant scalability improvement, which are of great value to the markets we address which is agriculture and green landscapes in the UAE and the United States, targeting sandy soil areas exposed to water stress and land productivity challenges. I am Ole Kristian Sivertsen, CEO of Desert Control, and I will take us through today's agenda, which have 4 parts. First, I will present Q1 highlights. Next, Marianne, our CFO, will take us through the financial update, then I will share a brief outlook before we close with the Q&A session. Progress in efficiency, scalability and sales is the headline for the first quarter of 2023. On the production side, during the first quarter, we unlocked further potential of our LNC production units with the ability to more than double the LNC production volume per hour per unit. This capacity increase will impact unit economics and drive increased efficiency and scalability of operations. For application, during Q1, we reached an efficiency rate of treating an impressive 500 trees per day in the second stage of Limoneira's deployment, marking a 30x improvement since the initial pilot in July 2022. We are also gaining experience with deploying LNC through established irrigation systems such as sprinklers which reduces the manpower requirements and speeds up application for larger areas significantly compared to manual application. Also, on the sales side, we have through several new projects, gained experience with our focused customer conversion model. Let me give you an overview of this customer commercial model. The objective here is to take customers from technical pilots to full-scale projects at the speed of trust through 3 stages. Stage 1 is the technical pilot, where we initiate engagement with a potential customer through smaller scale pilot programs to validate LNC's efficiency and essentially proving that it holds water like we did with Limoneira back in July 2022. The second stage is extended pilot and what we call commercial pre-projects. Successful Stage 1 pilots here evolve into larger pre-projects. The goal for this phase is to demonstrate our solutions scalability and economic viability across larger areas, assessing cost savings and the impact on yield and crop quality. An example here again is the Limoneira project where we finished the last phase of Stage 2 in Q1 2023. Stage 3 is then upon the successful completion of Stage 2 to convert this into a full-scale deployment contract. Our objective remains to secure our first contract for full-scale deployment by the end of the year. We also maintain our target of securing 5 pilots per quarter with a conversion rate of minimum 50% to larger deployments. Let me also share a few accomplishments from the quarter. During Q1, we successfully completed the Stage 2 of Limoneira project in Yuma as a well demonstrated commercial pre-project delivery. In parallel, during the quarter, we also secured 5 technical pilots, one with Lemonica Citrus in California, 2 golf courses in Southern Arizona, and alfalfa field with 5 Rivers and a date palm pilot with Griffin branches. For Q2, we are also well on track with our objectives. We communicated some signed contracts earlier this quarter as well with, amongst others, Yuma organic. We also announced a very exciting California large-scale vineyard with sandy soil areas. And most recently, we have secured a technical pilot with an exciting project with a farming operation that is tied to also dust mitigation as a service connected to some air fields in Southern Arizona, where we will address both the value of agricultural operation in desert climates, combined with dust mitigation to avoid the dust from these sandy soil areas into the airport operation as a demonstration project that can have lots of other replication across the area. Finally, we secured recently a project with a native American tribal land. This is an area that is basically barren land that has very low value today where the objective is to demonstrate the conversion of barren land into highly productive and fertile land for both value creation of the land and property areas as well as converting areas into agricultural productivity for the future. So with this, we can conclude that with 5 pilots per quarter as our target, we are well aligned with our objective that we are confident on securing for the quarter. Other accomplishments during the first quarter include winning the top price in sustainability and environment category at the entrepreneurship World Cup finals, which were held in Riyadh. Also, we achieved certification for organic farming in the UAE, which leaves us with just one more product registration, which is in the final stages with the Ministry of Climate change and the environment in UAE for it to open doors for Mawarid and MDC to larger opportunities in the public sector domain. Mawarid and MDC is also gaining more visibility in the UAE, and they were announced winners of the Research and Innovation Award by the Ministry of Energy & Infrastructure in the UAE, making it a good connection to important ministries and stakeholders in the nation. Now we will turn to the financial update, and I pass it over to our CFO, Marianne Vika Boe.

[Marianne Boe, executive]

Thank you. The figures are shared in detail in the financial report published earlier this morning. These financial key figures will be covered in more detail in the following slides. The company closed the first quarter with a positive cash balance of NOK 56.7 million and has no interest-bearing debt. The revenue recognized in the quarter mainly relates to the commercial pre-project in the U.S. In addition, we have some other income related to the price, one at the entrepreneurship world cup and a [ temporary comment ] of personnel to our joint venture. The expenses in the quarter are in line with our budget. Salary and employee benefit expenses was impacted by the employee share options exercised in March. The finance income in the quarter relates to unrealized foreign exchange gains on intercompany loans. There are no significant changes in the balance sheet in the first quarter. Other current financial assets consist of fixed income funds. And as mentioned earlier, cash and funds in total amounted to NOK 56.7 million as per the end of the first quarter, and we have no interest-bearing debt. Our runway is in accordance with our forecast and in line with the communication as per year-end 2022. The overall reported equity of NOK 86 million equals to 89% of the total assets. Cash flow from operating activities is the operating profit and loss adjusted for depreciation and amortization and underlines the cash-based nature of the company and its current day. The cash flow from this action is the release of bank deposits and funds to support the operations. No other significant sources of capital have been added through the first quarter. For further information regarding the Q1 financials, please see the full Q1 report. The development of the Desert Control share and the top 20 shareholders are updated at our webpage, desertcontrol.com/investors.

[Ole Sivertsen, executive]

Thank you, Marianne. We will now turn to outlook before we close with the Q&A. Our focus for Q2 will continue to be on commercialization, customer conversion and operational scalability, and we remain dedicated to our sales strategy for customer conversion. Desert Control sales strategy for 2023 focuses on generating revenue and developing a pipeline of opportunity through technical pilots that target commercially conversion to commercial pre-projects with the objective to start converting pre-projects into contracts for large-scale deployments by the end of the year. We secured 5 technical pilots in Q1 and have so far in Q2, achieved 4 new projects, putting us on track according to our target of 5 per quarter. As mentioned previously, we target a minimum of 50% conversion to larger deployments, meaning that the 20 technical pilots in the U.S. this year, as an example, targets a minimum of 10 commercial pre-projects of which we target a minimum of 5 contracts to larger scale deployment. Our goal remains to secure the first contracts for large-scale deployments, this is stage 3 by the end of the year. Please take note of the disclaimer relating to forward-looking statements. We will now start the Q&A session.

[Unknown Executive]

We invite you to use the Q&A function for questions, and we will also answer questions that have been submitted by e-mail. In February, it came reports that the State of Arizona is providing financial support of USD 1,500 per acre for implementing water conservation methods. If or is LNC, it's way to be a valid tool that grants access to this support.

[Ole Sivertsen, executive]

Thank you. That's a good question. We are well aware of this program. We are also in close discussion with the officials. It's actually the University of Arizona, who manages this process. So this particular brand program is designed for irrigation infrastructure. However, we have had ongoing discussions with the University of Arizona, looking into potential ways where also LNC as a technology can be qualified for this program. There is no decision yet. And I cannot say that it will be a yes or no, but we have very positive dialogues with the university about it. And we are also addressing other areas of potential grants and creating grant areas that are even more directly related to soil improvement and land improvement of these sandy soil areas because water conservation remains a significant priority for the Department of Agriculture in the U.S. Very important areas of this is coming up in the farm bill. There is a lot of funding that is flowing into these systems from initiatives like the inflation Reduction Act and others. So stay tuned, we are working on multiple areas for this.

[Unknown Executive]

How far have you come with the Q1 announced pilot project in U.S.A. for 5 Rivers cattle feeding?

[Ole Sivertsen, executive]

Yes. For the cattle feeding operation, the alfalfa project, these are areas that have a larger plots of land. So if you remember, we also did move or send more production capacity from the UAE to the U.S. in order to have peak production capacity to be able to take on the size of land that you need to deliver in a short period of time. So we have not yet started to deploy LNC in the field. We've had some smaller tests very, very recently on this deployment, and we will keep you posted as we move into full scale delivery of this pilot.

[Unknown Executive]

How many full-time employees are there now in D.C. UAE and MDC, respectively?

[Ole Sivertsen, executive]

So for the UAE, we have 14 employees in the Desert Control Middle East organization. As for MDC, MDC is the joint venture sales and delivery organization for LNC in the UAE. Now the amount of employees there, what's important to consider there is that this is a JV with Mawarid who has an 11,000 people organization that MDC has access to Poland to quickly mobilize when larger projects eventually realize.

[Unknown Executive]

The Limoneira pre-project generated revenue of approximate USD 180,000 and is now fully deployed. What was the EBITDA margin for this pre-project if we exclude the cost structure of the headquarters and the UAE operations?

[Ole Sivertsen, executive]

Well, we are not reporting on EBITDA margin at this point. But -- what I will say is that for the technical pilots, we expect very small-scale revenue that is insignificant, but they're also smaller in terms of the capacity and resources that it takes to deliver them. When it comes to extending it to the Stage 2 pilots like the Limoneira one, our objective is more to reach sort of a cost coverage basis. We do not expect significant profitability from that level before we convert into the full scale projects. So I think that's what I will share on this for now.

[Unknown Executive]

If the full-scale Limoneira contract materializes, how do you expect the contract structure to look like? Will it be split into phases with, i.e., 50,000 trees in each phase?

[Ole Sivertsen, executive]

Well, that's yet to be negotiated with the client to align both with their investment and CapEx budgeting for this as well as how they see it achievable to gain the benefits that have been demonstrated for the project. So we believe that these Phase III full-scale deployment contracts in general will be a mixture of contracts that we deliver on a very short time frame, but larger-scale projects. We review kind of as a more frame agreement where there will be staged deployments. So it will depend on several factors, but it's likely that with Limoneira and their base of trees in Yuma, for example, will be split into some sections because they have orchards that are naturally divided into different irrigation zones as well, which makes for a good way of doing it. But we have to combine this with also what's going to give the best cost effectiveness in terms of utilizing the mobilization and demobilization and splitting it on a higher volume of trees as possible per segment.

[Unknown Executive]

What size do you expect the average full-scale contract size to be in 2024 and 2025, respectively?

[Ole Sivertsen, executive]

Well, it's still early to say. I mean, if we look at the 20 technical pilots that will then mature into commercial pre-projects for the year. I mean we can start to make some calculations and estimations based on our experience with the size of Limoneira, which from an agri business perspective, it's kind of like a mid- to high-range type of size deployment. But it's too early to give sort of a clear guidance on our expectation for the full-scale contracts of all these pilots at this stage.

[Unknown Executive]

Can you shed some light on the strategic review that you're currently undertaking with your advisers? Separately, what is the status of the pilot projects in the UAE and the joint venture with Mawarid?

[Ole Sivertsen, executive]

Yes. I can share some on this. And what I can share is that we are currently reviewing our business model for the UAE and the Middle East. This is part of our strategic review, and we will share in detail more updates about this when the review process is concluded.

[Unknown Executive]

And a question that relates to the same? Have there been any progress on the strategic move forward, referring to the [indiscernible] securities in regards to loan share capital.

[Ole Sivertsen, executive]

Yes. As I mentioned, one part of this is definitely looking at some evolution and transformation of our business model, which we expect to have impact on these mentioned areas. And we are working actively on this. I cannot share exactly any details right now, but we're making progress, and we will share in detailed updates on this once we now finish and concludes the strategic review process.

[Unknown Executive]

When do you expect to see cost savings from UAE and MDC? Cash burn is still similar to Q1 last year.

[Ole Sivertsen, executive]

Yes. I'll share some thoughts on this as well, and then you can add on that, Marianne. So when you do these kind of staged restructurings to align with sort of staged processes with MDC, we transport personnel, et cetera, right? You always have a certain lag. What I can share is that we're starting to see already savings on the burn rate for the UAE, and I think we'll be sort of at the 50% sort of OpEx reductions that we communicated earlier in the third to fourth quarter this year. So we're seeing them already, and they keep on getting more impact as we move through the year.

[Marianne Boe, executive]

Yes. And I just want to add that compared to Q1 last year, there are a significant higher number of employees in the U.S. that, of course, increases the burn rate, and we also have some changes in Norway that impacts our burn rate.

[Unknown Executive]

Can you elaborate a bit regarding commercial status and process in the UAE?

[Ole Sivertsen, executive]

Yes. So I mentioned already the UAE and the Middle East being part of the review that we're working on to accelerate things through business model evolution as well. I also mentioned in this update that we finally in Q1 achieved the first certification on the product in the UAE for organic farming specifically, and that there is one more certification outstanding, a product registration with the Ministry of Environment and Climate Change -- this is why we also earlier this year established one more company entity in the UAE on the Desert Control Middle East side because we need it with the change of the indirect model with a sales and distribution partner, we needed to have both a trading license company and a manufacturing industrial company to have the required business licenses for making this transition work, especially to be able to unlock doors for larger governmental opportunities and the public sector. We're in the final stages of this certification and that will unlock even more significant opportunities for MDC.

[Unknown Executive]

How many employees have moved from D.C. Middle East to MDC in total?

[Ole Sivertsen, executive]

Well, I mean, if you remember back, we shared that we had 48 employees in Desert Control Middle East, that's now moved down to 14. A good portion of those have moved across from Desert Control Middle East to MDC and some have been made redundant along the way.

[Unknown Executive]

And I think we've answered this, but can you please share updates related to the strategic review that was announced last month.

[Ole Sivertsen, executive]

Yes. I think we've already addressed this.

[Unknown Executive]

How much cash do you expect to raise in 2023/2024 to facilitate Desert Control's business rollout during that time? What degree of shareholder dilution do you expect?

[Ole Sivertsen, executive]

Well, I think we need to just look at this from the angle of the interest of both the company and our Board of Directors to safeguard and build long-term shareholder value. Of course, nobody wants to see a high degree of dilution, including the Board and the management of the company and our shareholders, right? So we will focus on making sure through the strategic review that we address a broad range of opportunities, including financing business development and structural opportunities where we see opportunities to both unlock cash and even further reduce our burn rate to make the organization more efficient so that we can balance the capital need on the short-term with the value creation that we intend to create through our customer conversion model so that any larger-scale capital that you would put into this organization to fuel growth, will be growth capital related. So I cannot give you an exact answer to that, but I can say that in terms of the size of potential capital raises that it will be done in a way that takes shareholder value into the equation. And naturally, if the share price is trading low. You want to avoid taking on any more than you actually just need to make sure that you get to the trigger points, which is our focus, right? So we're focused on delivering on our customer conversion plan now and to use the momentum of that and basically, first, demonstrating that it holds water on the small scale -- on the mid-scale and that we're able to drive transformation of these projects into the full-scale deployment. And then we're on the right track to start to look at this as growth capital going forward.

[Unknown Executive]

Next question is somewhat related to the same. How long will the current cash balance left? Have you gotten any positive feedback from loans, banks? Will our shares be diluted? What can we expect?

[Ole Sivertsen, executive]

Yes. I think it's very much what I covered in my previous answer. Also when it comes to the runway, nothing has changed. All the fundamentals of Desert Control is still very strong, and we have not had any events or happenings that has changed our runway from what we've communicated earlier. We still have a financial runway as communicated to the end of the year, right? We announced this process proactively in order to be able to actually work with some strategic opportunities that would have been very, very difficult to manage as a publicly listed company that we have confidence will create good value going forward.

[Unknown Executive]

Are you still optimistic about the future for D.C.?

[Ole Sivertsen, executive]

I am very optimistic. I know any start-up journey and especially this pathway to go from the pre-revenue stage through commercialization is a very critical and important part of any company's journey. I have the pleasure of taking time into the field with the people to meet with clients to see the interest -- incoming interest, right, that we've had from clients, from multiple markets where we're not even operating at the time. I think the big macro drivers of what we are addressing has not slowed down. I mean we are still in a world where we're not seeing that water is going to be something that we have more of going forward. We're not seeing that the impact of climate and temperatures and droughts and pressure on land is reducing in any way, shape or form. And we are very committed to being part of the solution, especially for these areas of sandy soils, which are the ones that are the most exposed to these challenges, right? So to the question, am I optimistic? I am definitely a believer in the future and the potential of the innovation that we have, and we are working diligently to make sure that we can bring this to the world.

[Unknown Executive]

And with that, we have concluded on the Q&A section.

[Ole Sivertsen, executive]

Thank you for all the good questions in the Q&A. We will now conclude the Desert Control Q1 2023 and year-to-date company update. And as we round off, I want to leave you with a short video that we released recently on an LNC explainer. If the video is a little bit slow in the session here, you will get it in full quality in the recording of the webcast, which will be released shortly hereafter. [Presentation]

[Ole Sivertsen, executive]

Thanks for your attention. Thanks for your continued support. I look forward to seeing you all in upcoming updates.