Desert Control AS

OSE:DSRT

Earnings Call Transcript 2024-Q1

[Ari Greve, executive]

Welcome to the Desert Control Q1 2024 Company's Update Webcast. It will cover the Q1 report and interim financial results for the fiscal period that ended in March 31st on 2024. Some updates for the Q2 year-to-date will also be included. A Q&A session will follow the presentation, and we invite you to use the Q&A function to submit questions.Before the official Q1 update agenda, Desert Control's CEO will share a brief introduction.

[Ole Sivertsen, executive]

Desert Control specializes in nature-based solutions to combat desertification, oil degradation and water scarcity. Our leading innovation Liquid Natural Clay, LNC in short, enables sand and light thirsty soils to retain water and nutrients and improves soil health. Our clients span agriculture, landscaping and forestry sectors. With over 12 years of R&D complemented by 5 years of independent validations and field pilots, we have established a presence with commercial deployments in the United States and in the Middle East, where licensed operator partners extend our reach. Our solutions have proven to save water by 35% to 50%, while simultaneously improving plant health and crop yields.Thank you for joining us. I am Ole Kristian Sivertsen, CEO of Desert Control, and I will take us through today's agenda. But first, let me go off script for a moment. 5 years ago, I joined this adventure full of belief in our machine despite the risks that come with any startup. We started with a groundbreaking ID and the immense potential to transform arid lands into fertile soil and significantly conserve water and natural resources. Back then, our production capacity was at laboratory scale. It would have taken 7 weeks to produce enough LNC to cover a single football field. While the LNC itself held water, this highlighted the monumental challenge we face of scalability.Our commitment has driven us through multiple phases of development from redefining our technology and enhancing our application systems to tuning our operations and securing the necessary funding. Every step of the way our team has been guided by a resolve to transform believing into knowing, work hard, figure it out and get it done. Today, we are not just believers. We know our LNC technology has been proven in the field and it continues to hold water.Production capacity per unit has increased by 500x over these last 5 years. So far this year, we have sold and delivered more LNC than ever before and early adopters are becoming ambassadors and raving fans, who spread the word to others. We're still a start-up. It will still take some time to reach broad scale adoption, but we have a product that holds water. Our R&D technology development and operations have come a long way in making it scalable and feasible for clients to adopt at larger scale. 5 years ago, I joined believing in a dream. Today, I know it works and believe in our team's ability to turn it into reality, building a business that does well by doing good.Now on to the agenda for the Q1 and year-to-date company update. First, I will present highlights and achievements so far this year. Next, our CFO, Leonard will take us through the financial update. Then I will share a brief outlook before we close with the Q&A session.Desert Control is off to a strong start in 2024. We delivered our first larger scale commercial deployment for Limoneira Company in Yuma, Arizona, executed a significant first-phase contract in the Middle East through our partner in the UAE and made solid progress developing and adapting our technology to expand markets, increase environmental benefits and reduce the total cost of LNC production and application.A significant highlight of the quarter in the United States was Limoneira. The deployment started at the end of Q1 and was completed in the first week of April with revenue recognition split between Q1 and Q2. We treated citrus orchards over 60 acres at the Yuma ranch, which is 3x the size of land compared to what we treated in the same period of 2023, using half the number of production units and 1/3 of the labor demonstrating significant improvements in cost efficiency and scalability.We also deployed LNC for around 700 date palms, continued progressing with our pilot programs and completed the first deployment of a full fairway of a golf course. The midterm report from the 5-year validation program with the University of Arizona is being finalized, and publication is anticipated at the end of June. We are also expanding our university collaboration in Arizona and including new programs in California.Commercial traction is also growing in the Middle East, and I'm very proud of the progress being made by our partners in the UAE and Saudi Arabia. The first partner-driven commercial project with 3 million liters of LNC for new sustainable residential development in the UAE is being delivered and several other strategic pilots and projects are in the pipeline. Positive awareness is also growing, thanks to solid references and early adopters like Masdar City, who are becoming strong ambassadors for LNC, as part of their leading sustainability strategy.We're also excited about the opportunities in Saudi Arabia, where there are huge sustainability initiatives and investments within both the government and private sectors. So far, 3 strategic pilots and one MOU have been secured by our partners, all of them with projects that have the potential to grow to significant sizes and the partners keep growing the pipeline with delivery capabilities now in place. Knowledge transfer between Norway, the United States and our Middle East partners is also a key focus to ensure efficiency gains and advances reaching the markets effectively.On technology and innovation, we're also making significant progress showcased by the advancements in our production and application capacity demonstrated with Limoneira and recent deployments. Our R&D agenda is further advancing with promising early results in research on organic additives that have synergistic effects with LNC.In combination, these additives can strengthen the value proposition for soil health and yield improvement even further. Other priorities include validating and enhancing LNC's impact on reducing fertilizer leaching. This is related both to regulatory drivers and improved nutrient use efficiency to reduce farming costs and improve yields. These and other R&D priorities focus on extending the value of LNC beyond water savings, expanding market reach and continuing to drive improvements in cost efficiency and scalability.Combined with improvements in operations and LSC production processes, the advances we're making by integrating LNC applications with the client's existing irrigation systems make deployments faster, smarter and cheaper for both us and our clients. For Limoneira's first pilot deployment 2 years ago, we were limited to a manual application with injection spears to get LNC into the ground, deep enough to cover the trees' root zone. This was highly labor-intensive, and it took 3 long days of hard work to treat 0.5 an acre with just 50 trees.Similar application approaches were the standard in the Middle East using injection spears for trees and hoses for manual spray applications to fields and lawn areas. In Q1 last year, we deployed LNC over 20 acres for Limoneira's branch in Yuma, Arizona. This time, we used the hose reel as seen in the top left picture along with a Kubota tractor that pulled the hose through the allies of trees with hoses on both sides of the tractor. And then we filled basins around each tree with LNC, as the tractor moved through the field, enabling us to complete 20 acres in 8 days.In Q1 this year, we deployed LNC over 60 acres in [ 8 ] production and application [ dates ], using half the number of production units and eliminating the need for tractors, people and equipment in the field by applying LNC through the client's existing irrigation system. Applying LNC like this is enabled by refining the LNC further to ensure compatibility with the various irrigation systems, advancing formulations to ensure sufficient infiltration in the soil profile and mastering the technicalities of connecting to and injecting LNC into these irrigation systems. This is a great example of the collaboration between technology development, R&D and operations.Our digital services for data collection and analytics also play a key role in ensuring that the performance of the LNC in the ground remains at its peak with the changes in application methodology. So far, the results are very encouraging, indicating soil moisture performance, consistent with the previous more manual application approaches. I want to give a big shout out and thanks to our entire team for driving this amazing progress. Tripling land treatment capacity, while requiring fewer resources is an important step towards more scalable commercialization.The advances we have made over the last year would not have been possible without a solid number of pilots and deployments in the field. We continue our pilot programs with deployments across a wide range of agricultural and landscaping application. Each pilot provides significant operational and technology learnings and strengthens our local reputation, as a high-quality provider of important environmental and economic solutions. Most of the ongoing agricultural pilots will extend over multiple seasons to validate LNC's multifaceted benefits beyond water savings, including reduction of fertilizer leaching, lowering soil solemnization, improving soil health and increasing yields.During the first quarter, we also intensified efforts to explore landscaping opportunities in regions with high water costs, focusing particularly on golf courses in Southern California and Nevada. Kevin Neal has been hired as a dedicated business developer for this initiative, bringing a wealth of experience from the turf and golf management industry to our U.S. team, spearheaded by Marty Weems. We have since secured commitments for several technical pilots at golf courses in these high-water cost regions with initial deployments targeted for the second quarter and initial results anticipated already during the second half of the year.It is also very encouraging that clients are starting to come to us with a growing interest in exploring LNC and what LNC can do for them. The reason for clients now starting to come to us instead of us only chasing them, can to a high degree, be credited to early adopters, such as Limoneira in the U.S. and Masdar City in the Middle East. After our recent deployment at Martha's Garden, an organic high-quality date form in Arizona, more dialogues are also starting with growers for the date segment, thanks to our early adopters.Based on early adopter successes and experience from our pilot programs, our current main focus in agriculture is on permanent crops like citrus, dates and wines, as well as high-value specialty crops. While water cost for growers and farmers in many places remain low, water remains a limiting factor for field cultivation. Improving water and nutrient use efficiency to grow more with less is also highly valuable and attractive for clients, when proven consistently over multiple seasons on their farms and ranches.In addition to water conservation, reducing energy requirements for pumping and distributing water to the fields, as well as enhancing resilience to droughts are key drivers. Our focus in the study with the University of Arizona and Yuma has also enhanced the focus on increasing the value of agricultural land and enabling the transition to grow higher-value crops on these lands.We have also identified certain districts of Southern California, where water prices for farmers have increased significantly, and we will be expanding our focus to explore opportunities in these areas. There are several pathways to broader commercialization of LNC for agriculture. We can lower cost or and increase value, which is why our R&D initiatives focus on soil health developments that will increase yields and crop quality. We can focus on the crops of the highest economic value. We can focus on locations, where agricultural water prices are high. And we can work to become part of governmental incentives and subsidy programs, where water prices remain low. Our strategy is combined efforts across these pathways to deliver the progress that we're already seeing.Another part of our strategy is to balance the huge, but longer-term agricultural market opportunity with shorter-term niche opportunities in areas, where water is expensive, such as the landscaping segment, where golf courses represent some of the largest water users. We're also making good progress here, and it was an exciting day on April 29th when I joined the team for our very first LNC deployment to an entire fairway. Having the capacity to treat these complex high-demand golf courses is something that we dreamed about already 5 years ago. But back then, when producing enough LNC to cover a single football field would take 7 weeks, a golf course that is close to 70 football fields was an immense stretch.Further, these courses are undulating landscapes with slopes and hills that make them different from football fields and parks. The irrigation systems on a golf course is also very different from most agricultural system. It's a single main line that meanders through the entire golf course branching out to individual sprinklers across the fields. Everything is underground and the only place to inject LNC effectively into this system is at the [ main intake ] that supplies the entire golf course.We've done a couple of pilots on small greens before, but here, we rigged our own sprinkler system on top of the turf for the application, which is obviously not scalable and not possible for an entire gulf course. So with this in mind, you can understand my excitement about the first-ever deployment to a full complete fairway through an irrigation system of the client. I can tell you, it went beyond expectations. Application through the irrigation system went well. The LNC did not run off the slope than undulated terrain. It infiltrated nicely into the sandy layer beneath the turf and the field was firm and playable the next morning.We treated an entire fairway, multiple greens and a softball field in a working day, and we could likely have completed this entire 9-hole golf course in a day. Sensors are in the ground, and we will be monitoring performance closely over the coming months. It's still too early to conclude based on just one pilot, but the client is excited, and we are lined up for the next full fairway deployment at another golf course at the beginning of June.As a niche segment, there are still significant opportunities in the gulf market. Among the 16,000 golf courses in the United States, our initial focus is on the areas with the highest water costs and proximity to our operational base in Yuma, Arizona. These are the ones I've highlighted here. Due to high water costs, the business case for clients in this segment is more straightforward than in the more complex yield-driven agriculture sector.There are also increasing water use restrictions for landscaping users, and the water prices are expected to continue rising by double digits every year for the foreseeable future for these users. An average golf course in the regions of focus for us now reports annual water costs ranging from $500,000 to well above $1 million without including electricity and pumping costs, et cetera. This means that an LNC investment for the entire course based on achieving 25% to 50% water savings can target an ROI of between 1 years and 2 years.Gaining sufficient pilot and validation traction to prove this and make superintendents and key stakeholders confident that it poses no risk to their pristine turf is the pathway to unlocking larger opportunities in this market. And the initial results are setting a promising tone, and we expect making significant headway in this market by the end of the year.While the total acreage available in golf course applications is smaller than an overall agriculture, as here illustrated by California figures to put it in perspective, it remains a significant market with high water costs and demanding customers. Success in the high-touch, high-tech golf industry will also enhance our experience and reputation, which will be valuable in other less demanding landscaping areas and the significantly larger agricultural market.We will now turn to the financial update, and I pass it over to our CFO, Leonard Chaparian.

[Leonard Chaparian, executive]

Thank you, Kristian, and good morning to you all. 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.Our revenue figures show a 53% increase in LNC sales, the highest ever for Desert Control. Last year's comparison figures included over NOK 1 million in other income. The company closed the first quarter 2024 with a positive cash balance of NOK 105 million and has no interest-bearing debt. These figures include both ongoing and discontinued operations of Desert Control. However, the discontinued operations make up a very small part of the total.Desert Control has sold and delivered more LNC this quarter than ever before. In Q1, our sales revenue is exclusively derived from the Limoneira project. While our revenue from LNC sales is 53% higher compared to Q1 of last year, it is important to note that delivery volume has increased even more, indicating that we have been able to sell the product at a lower price. This has been possible due to significantly lowering our production and application costs, allowing us to reduce the price of LNC for our customers, while still preserving our margins. Our delivery to Limoneira was completed in the first week of April. This means that there are still some revenue from this project that will be recognized in Q2.Following the strategic change in the Middle East, we have reduced our operational costs by 38%, mainly due to discontinued operations. Even in our ongoing operations, there have been significant reduction in costs, keeping us on track with previous run rate projections.During Q1, the company has sold off most of its financial assets and reduced its exposure to market fluctuations. Cash and funds in total amounts to NOK 105 million, as of the end of Q1 2024, and we have no interest-bearing debt.We are sufficiently funded to support our existing and planned operations. Currently, our financial run rate, excluding revenue takes us into Q4 2025. The overall reported equity of NOK 115.4 million equals 96.4% of total assets.The cash flow from operating activities divided between continued and discontinued operations represents the operational profit and loss adjusted for depreciation and amortization, underscoring the company's current cash-oriented [ stakes ]. The standout change in cash flows this quarter is the sale of our financial assets. No other significant sources of capital have been added through the first quarter.As you can see from the discontinued operations, the costs are approaching [ 0 ], and we expect to finalize the liquidation of the subsidiary within a few months. For further information regarding the Q1 financials, please see the full Q1 report.To get additional information about the Desert Control share and the top 20 shareholders, please visit our webpage desertcontrol.com/investors.

[Ole Sivertsen, executive]

Thank you, Leo. We will now turn to outlook before we close with the Q&A. Driven by the year's strong start, we aim for considerable progress in 2024. In the U.S., we expect continued positive developments from ongoing and new agricultural pilots. While revenue anticipated from these pilots and other small-scale deployments is expected to be modest. The key value of these projects lies in the learning and development opportunities they provide, as well as the validation and reputation they build for Desert Control as a trusted science-led field-proven provider of environmental and economic solutions.The result of the longer-term pipeline emerging from these projects will also be seen in 2025, as they move to second phase expansions and large-scale agricultural deployments in 2026 and beyond. Further, as mentioned, we expect substantial headway in the golf and landscaping market during the year. Initial pilot results in the second half of 2024 will set the stage for more notable contracts at the end of the year with a growing number of larger deployments in 2025.In the Middle East, momentum is anticipated to grow from a steady run rate of smaller projects toward larger strategic contracts in both the UAE and Saudi Arabia. After years of building scientific and government support for LNC, we and our partners see the beginning of a transition from validation and research type applications to broader adoption and rollout.Desert Control's research and development efforts will be key enablers of this progress, growing the addressable market and enhancing the underlying value of LNC beyond water savings. The continued focus on scalability, cost efficiency and holistic soil health solutions aim to unlock broader adoption and deliver long-term value for the company's customers and stakeholders.I want to close this part of the update with a huge thanks to our team, our customers, early adopters, our partners and shareholders for being part of this journey from adventure to venture, onwards to today, where we consider ourselves more, as a venture plus with a proven product, making tremendous progress towards being scalable and feasible for broader scale adoption.

[Ari Greve, executive]

We will now start the Q&A session, and we [ want to ] invite you to use the Q&A function for questions.So we have a first question, how is the process for operators in the Middle East to find and produce the right LNC mix for the soil and what mechanisms are implemented to ensure that the LNC know-how remains within Desert Control?

[Ole Sivertsen, executive]

Thank you. It's a good question. So the process, as I mentioned also in the update is one of knowledge transfer being a key focus. We have clear procedures in place in terms of also how to run the formulations, the interactions between our partners and our R&D team here in Norway. For the longer term, we currently kind of manual in some of these approaches. But for the longer term, we're also creating systems and portals that will handle this in a more automated fashion, where all types of security aspects are being built in to ensure that the know-how keeps developing as a core asset that we keep sharing with our partners to keep building their process, while at the same time, protecting our intellectual property.

[Ari Greve, executive]

Thank you, Ole. We have another question. Through recent post on LinkedIn, we have got to know that the project in Masdar City has during a study over 7 months achieved up to 60% in water savings. Are there comparable or maybe even larger ongoing studies or projects in the Middle East?

[Ole Sivertsen, executive]

Absolutely. There are several projects in the Middle East that show significant results. Let me also point out that as they clearly stated in the updates from Masdar City, they had the 60% level of water savings in certain parts of the year. So it was not the total average for the entire period, which is closer to the 50% range, which is consistent to what we're seeing in other pilots, both in the Middle East, and we're also seeing the seasonality changes in what we're doing in the U.S. So to answer, yes, we've also previously spoken about the results of the forest projects in the UAE, where we had above 50% water savings and multiple projects that are trending in the same area.

[Ari Greve, executive]

Next question. How big is the sales organization in the U.S. now, if so, open vacancies now set?

[Ole Sivertsen, executive]

Yes. So in the U.S., we've been growing our sales organization and most recently by adding a sales and business developer for the golf and landscaping market. We had from before 2 people driving agricultural sales based out of Arizona. And we're expanding with sales relationships also to help us cover these opportunity areas that I mentioned in the Southern California markets, where the water prices for growers have been growing significantly.

[Ari Greve, executive]

Do you intend to develop LNC solution in other regions than the Middle East and U.S.A.?

[Ole Sivertsen, executive]

It's been part of our big vision since the very beginning, right? There are more than 110 countries around the world that we believe and see have a potential and need for LNC that suffer desertification, growing water scarcity, degradation of soil, et cetera. In the start-up phase, where we are, we've decided to remain very focused and not spread our resources too thin. But we definitely do intend to grow this to a broader deployment and open up additional markets over time.Once we've built a solid foundation for our partner platform in the Middle East and through our direct initiatives in the United States, I can tell you that -- we are receiving incoming questions about this every single month from companies, who are interested in different markets around the world, everything from local ag providers to interest in synergistic opportunities with our solutions from larger ag players, et cetera.

[Ari Greve, executive]

Thank you. You are in positive dialogue with the UN. We have been told any progress to share.

[Ole Sivertsen, executive]

Well, when it comes to the United Nations, we've maintained a relationship, as I've shared before, with the United Nations systems for many years. And we're particularly proud of having been invited into this innovation accelerator program by the World Food Program. We're very proud of that because it's very close to our heart to contribute to these areas and stopping world hunger, as the main overarching objective of the World Food Program. We are still in a scoping phase with them. And I look forward to sharing more concrete results once the details of the next step and the initial piloting programs are finalized on this.

[Ari Greve, executive]

[ Have you ] experienced of attending at HANNOVER MESSE earlier this year?

[Ole Sivertsen, executive]

Yes. This -- I can give to you, Ari, you can share some experience there.

[Ari Greve, executive]

Yes. It was really nice to see -- to be part of HANNOVER MESSE this year. We just have great partners. We were in the Norwegian Pavilion. So we can see that our technology is being well received by everyone. So yes.

[Ole Sivertsen, executive]

Great. And we got lot of positive attention as well. And we're -- for the size of our company to be so highly prioritized by a little bit larger organizations such as Siemens is something that we also are very proud of.

[Ari Greve, executive]

Yes. We have another question. Do you mind share with us if you have identified any potential competitors, who may have similar products or solutions?

[Ole Sivertsen, executive]

Well, when it comes to competitors and similar products and solutions, they do exist. We've known about that for years, and I'm very glad that they do because the market and the need for these solutions is immense, right? If you're the only one to have the solution for something you believe is a problem, then you may be way too early, or it may not be a problem at all. So seeing that there are other solutions out there and focusing on our strengths and the uniqueness of being a liquid delivery that we now see even more value of in what I talked about in the scalability, the integration with the clients' irrigation systems, et cetera, is our focus.And we're sure we'll -- there will be a growing number of solutions for this area in the time to come. And with 110 countries in the world, 12 million hectares of land that perishes the desertification annually and several hundred hectares of land needed to be restored in the coming decade to ensure food security for our planet we need all solutions that we can get.

[Ari Greve, executive]

Yes. We have another question. Could you provide an estimate of the timelines from the agreement of a technical pilot to full-scale commercial deployment?

[Ole Sivertsen, executive]

Well, I can provide a conceptual description of this because it depends on the crop and it depends on the time of the year when we deploy, et cetera. So our main focus now, we have a lot of pilots going on in the permanent crop segment, right? So I mentioned citrus, dates, wines, some significant [indiscernible] opportunities, et cetera. And LNC will be implemented in technical one pilot to just prove that it holds water in the first round. And you need to prove that over time to see that you can save water without negatively impacting the yield. And in most cases, they want to see an increase of the yield over time.So the one thing that we do not have a direct impact on is making the wine grapes or the dates or the citrus's grow faster, right? The agriculture takes that time, so we need to follow the crop seasons. And most of these types of crops have an annual harvesting. So we see that with Limoneira, it took 2 years from Stage 1 until they started to roll out a larger scale commercially, which I think is a good type of reference, which is also the reason why I'm in my update and the outlook section, also saying that I have a huge belief in seeing continued successes from the pilots that we're working on now. We'll see more and more conversions to Stage 2 and second phase deployments in 2025, as well that will build a significant pipeline of larger-scale opportunities for 2026 and beyond.

[Ari Greve, executive]

Yes. We have another question. How long does it normally take from you to sign a first phase of the contract and start the deployment, but I think we just covered that question at the moment. We have another question.

[Ole Sivertsen, executive]

Well, I can comment on that as well because from we signed a commitment with the client that they would like to have a technical installation deployed, that can happen sometimes within days and weeks, right, that we do a soil sample and then if we already have a formulation for that type of environment ready, we can deploy fairly quickly. Sometimes we need to do some additional analysis and adjust a bit. But usually, we can start pretty quickly.But just because we can start pretty quickly, that doesn't mean that the farmer and the field is ready, where we need to sometimes adjust the deployment time to the farmers' schedule and crop rotations and how he is actually farming the field. So we've had pilots that we got commitment for months and months and months back that are then being delivered now as an example. And we have others that can start very, very quickly.

[Ari Greve, executive]

Do you mind to provide some revenue estimates and royalty licenses income expected in 2024?

[Ole Sivertsen, executive]

So I think you've already seen the revenue that we had in Q1. As Leo mentioned, we will see more revenue recognized from Limoneira in Q2. There are also revenues coming out of these other pilots and smaller-scale deployments. Now these date palms and Stage 2 conversions on the golf course that we delivered. But as I said, these revenues are modest, and the real value of these projects are in the learning and development opportunities. Remember, these are the type of activities that have unlocked the scalability that we are now demonstrating. We'll see more of that going forward.We'll focus on also expanding our compatibility and the quality assurance with any relevant irrigation systems and other application scenarios and fields that are out there, as key values of this. They will deliver some revenue. And we'll also from the first deployment that we have in the Middle East now commercially, the 3 million liters we will start to see royalty revenues coming out of our license operators here in the second half, starting as a, as I call it, a smaller run rate type of business of similar projects that then will grow in size and impact, as we transition later on towards more strategic deployments.

[Ari Greve, executive]

There is no more questions, so we can close the Q&A session.

[Ole Sivertsen, executive]

Okay. Thank you for the questions and an engaging session as always. Thank you for joining. Before we close the session, please take also note of the disclaimer related to forward-looking statements, and we look forward to seeing you on August 20th, 2024, for our Q2 and first half update. Thanks for joining us.