Desert Control AS
OSE:DSRT
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Welcome to the Desert Control Q2 2023 and Year-to-Date Company Update Webcast. It will cover the Q2 report and interim financial results for the fiscal period of the first half year that ended on June 30, 2023. Some recent updates for the Q3 2023 will also be included. A Q&A session will follow the presentation and we invite you to use the Q&A functionality for questions. Before the official Q2 and first half 2023 update agenda, Desert Control CEO will share a brief company presentation as an introduction.
I am Ole Kristian Sivertsen, CEO of Desert Control, and I'm excited to share our vision of making earth green again. Our planet is drying, fertile land is dying and water scarcity accelerates in a vicious cycle. The annual cost of droughts and land degradation is hundreds of billions of dollars and governments invest heavily in initiatives for drought mitigation and safeguarding agriculture, which now needs more than 70% of all available freshwater on earth. When soil turns 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 is a nature-based solution to upgrade sandy soils with a larger storage bank.The liquid coats each grain of sand with a thin layer of minerals with electrical charges that hold on to water like a magnetic force creating a soil structure that retains water and nutrients like a sponge. One treatment can last for up to 5 years or longer with maintenance programs. Projects to implement LNC start by analyzing the target area, defining objectives and how to measure results. Next, a prescription for soil improvement is developed based on the current condition of the target area, which is used to formulate a tailored LNC solution to achieve the desired objectives. Finally, the LNC is produced onsite using mobile processing unit and applied to the land areas by traditional irrigation methods, all delivered as a turnkey soil improvement project along with various monitoring and maintenance services.Once applied, LNC saves up to 50% on water and energy usage while improving fertilizer efficiency leading to higher yields, better crop quality and increased profit. LNC is backed by 12 years of R&D followed by 5 years of independent validation and field pilots with consistent results. The total available market is huge and our initial focus is the United States and the Middle East targeting sandy soil areas affected by drought and water scarcity. Initial clients are farmers, landowners and governments. Our business model is a direct sales with turnkey projects priced by hectare or number of trees combined with various services for additional revenue streams. For the Middle East, we are transitioning to a royalty-based licensed operator model that I will share more details about under the company update in a few slides.Thank you for joining us for our company update. Before we move on, I want to take a moment to officially welcome Leonard Chaparian who joined us at the end of July succeeding Marianne Vika Boe as CFO of Desert Control. We also thank Marianne for her service to the company over the last year. I am Ole Kristian Sivertsen, CEO of Desert Control, and I will take us through today's agenda which has 4 parts. First, I will present Q2 and year-to-date highlights. Next Leonard will take us through financial update. Then I will share a brief outlook before we close with the Q&A session. We will structure the Q2 and year-to-date company update into 3 sections: corporate, United States and Middle East. Under corporate highlights: we will cover the recent strategic review in detail, we will also highlight the significant improvement achieved in unit economics and finally, some additional achievements that have increased the global awareness of Desert Control.On April 27, Desert Control announced initiating a strategic review to optimize long-term shareholder value and secure funding to pursue the company's growth strategies. The objective was to explore a broad range of strategic alternatives, including financing, structural and business development opportunities. The strategic review focused specifically on assessing our business structure for the Middle East. Our previous model in the Middle East functioned through a joint venture Mawarid Desert Control, MDC, focused solely on sales and distribution of LNC. Desert Control maintained 2 additional local companies to produce LNC and sell it to MDC as its sole distributor. After the initial projects, it became clear that the split responsibilities between MDC and DCME induced complexities and significant overheads that diluted operational and capital efficiency.Further, the model represented financial constraints for Desert Control as we were bearing all CapEx investments for LNC production assets. The solution we concluded is to transition to a licensed operator model where partners take on the complete responsibility for the production, sales and delivery of LNC in the local markets. This eliminates complexities, streamlines the value chain and reduces overhead by removing the need for local Desert Control entities. The licensing model further shifts CapEx requirements for production assets to the operators, create a strong incentive to drive sales for utilization of assets as a win-win. The strategic review was announced completed on July 3. Mawarid Holding Investment, MHI, entered an agreement to become a fully licensed operator for the U.A.E. with aspirations to expand operations in the Middle East.MHI further acquires Desert Control's LNC production entity in the U.A.E., procures an LNC production cluster and assumes full ownership of the MDC JV. The result of the transition unlocks cash, streamlines the value chain and reduces annual operating cost for Desert Control by more than NOK 15 million by eliminating the need for local entities and reducing overheads. Further, Holistic Earth Advanced Regeneration Technologies, H-EART, entered an agreement to become a fully licensed operator for the production, sales and delivery of LNC in Saudi Arabia. H-EART procures an LNC production cluster and anchors the partnership with a NOK 10 million investment in Desert Control shares through a private placement. The outcome of the strategic review secures Desert Control approximately NOK 40 million in cash, reducing annual running cost by more than NOK 15 million and further reduces CapEx pressure by shifting the investment in production assets to the licensed operators.The transition to the new licensed model for the Middle East is anticipated to be finalized during the second half of this year. The next point I want to bring to your attention is the significant improvement in unit economics. LNC production capacity more than doubled for all deployed units enabled by continuous innovation efforts during the first half of the year. This means that we can produce twice as many liters of LNC per hour with the same equipment and manpower as before, which enables larger projects while utilizing and optimizing the reach of already deployed CapEx. For the United States, the improved production capacity is now anticipated to be sufficient to support our pipeline of technical pilots and commercial pre-projects. Future CapEx for additional capacity can thereby be linked directly to signed contracts for large scale deployments.For the Middle East, the capacity will be 4 plus 3 units in the U.A.E. and 4 units in Saudi Arabia. Our innovation efforts will continue to strive for further increases in capacity and unit economics going forward. As we conclude the corporate highlights, let me also point out 3 achievements that contribute to strengthening the global recognition of Desert Control. On March 12, Desert Control won the sustainability and environment award at the Entrepreneurship World Cup Global in competition with 30,000 entrepreneurs and startups worldwide. We were also named Green Impact of the Year at the Impact Awards in Stavanger on April 20. And on June 29, Desert Control was announced winner in the Uplink Challenge for Food Ecosystems in Arid Climates and named Top Innovator by the World Economic Forum, which garnered significant global attention.Moving on to the United States where we will focus on 3 main areas: sales execution and progression on securing pilots, operational milestones and regulatory certification. The U.S. team demonstrated steadfast progress and continued to deliver on target securing 5 new pilots each quarter. These pilots demonstrate the versatile capabilities of LNC showcasing its effectiveness across the agriculture, turf and landscaping segments and for an increasing variety of crops, plants and application methods. The team also executed a successful implementation of the commercial pre-project with Limoneira and Yuma at the start of the year and continuously track LNC performance with positive indications. Harvest is anticipated to take place during October. Further, we recently concluded the hire of a new salesperson who is joining the team already this week.The team maintains a positive outlook to continue delivering on target for the second half with a sharp focus on executing in alignment with our customer conversion model. Our customer conversion model aims to build trust with clients through 3 stages and this is done to respect soil as the lifeline of their livelihood. In Stage 1, engagement with potential client is initiated through smaller scale pilot programs to validate LNC's efficiency, essentially proving that it holds water on the client's ground. Successful Stage 1 pilots evolve into larger commercial pre-projects to demonstrate the scalability and economic viability of LNC across larger areas, assess cost savings and impact on yield and crop quality. Upon completing Stage 2, the objective is to enter contracts for large scale commercial deployment.The objective is to secure at least 5 new pilot projects per quarter targeting a 50% conversion to larger deployments and this strategy underscores our commitment to grow LNC adoption at the speed of trust. Pilots in the U.S. are progressing and we maintain our target of 50% conversion to larger projects. Engagement with clients continue to highlight the need for soil and water conservation as a linchpin for the sustainability of their business. Around the end of the year, we anticipate to start negotiations for the inaugural large scale contracts. On the operational side, we continue improving operational efficiency. Pilots have been executed consistently ensuring cost effectiveness. The overall efficiency and scalability of LNC applications have improved by more than 30x since July 2022. This progress coupled with more than double production capacity signifies an important milestone for U.S. operations.Larger projects can now be accommodated without additional asset investment, preserving capital while still growing operations. The increase in diversity of crops and application methods further strengthens the potential going forward. The experience gained during the first half demonstrates that LNC application is not limited by crop type and we continue proving viability for any vegetation, crops and plants growing in sandy soils. Multiple deployments have further demonstrated the value of applying LNC through existing irrigation systems, enhancing scalability potential, reducing labor requirements and driving down costs. The final point to highlight under the U.S. update is that we obtained regulatory certification with OMRI in compliance with the USDA National Organic Program for LNC as announced on June 15.This certification extends the addressable market in the United States and validates LNC as a viable solution for the growing organic farming market. Now turning to the Middle East where the main topics are the transition to the licensed operator model, U.A.E. progress and the partnership with Mawarid and the new venture with H-EART for Saudi Arabia. We covered the licensed operator model in detail under the corporate update. I just want to highlight that this program is for now dedicated to the Middle East region with MHI and H-EART as the selected partners. Launching this program with MHI as an established partner, which is also a large and well-established corporation, combined with H-EART being an entrepreneurial startup venture will give us valuable experience and learnings that over time can help shape our future go-to-market strategy.In addition to the strategic agreement with Mawarid, we also achieved important milestones on regulatory approvals for LNC in the U.A.E. On March 16, LNC received certification for use in organic farming by the Ministry of Industry and Advanced Technologies. Then on July 13, LNC received final approval from the Ministry of Climate Change and Environment, MOCCAE. This final regulatory approval authorizes LNC for sale and use under the category of organic fertilizers and soil amendments across all sectors in the U.A.E. The MOCCAE authorization combined with recent authorizations will support future endeavors to obtain necessary regulatory approvals for LNC across the Middle East and other countries and markets we aim to serve.Before we move on, let me also share a brief recap on Mawarid Holding Investment, MHI. MHI is a group headquartered in Abu Dhabi with 11,000 employees and dedicated subsidiaries with significant experience and market shares in sectors such as forest and wildlife management, landscaping, nature reserve operation, agriculture, food security and management of natural resources. Mawarid Desert Control was incorporated on March 29, 2022 as a joint venture between MHI and Desert Control to be the exclusive sales and distribution vehicle for LNC in the U.A.E. with nonexclusive rights for sales and delivery across the broader Middle East region. Several pilots have been conducted with MHI throughout the partnership while working on the processes to obtain final regulatory approvals from the ministries as an important milestone to gain traction on commercialization especially considering the significant market share MHI represents in the public and governmental sectors.After launching the JV model with MDC, we also learned that a mixed model where responsibilities for interdependent steps in the value chain were split between MDC and DCME had several challenges. The structural setup also created significant overheads that diluted operational and capital efficiency. We are very excited to have resolved these challenges by streamlining the value chain with a transition to the licensed operator model and finally, also having obtained the regulatory approvals for the sale and use of LNC across all sectors in U.A.E. We anticipate completing the transition to the licensed operator model during the second half of the year, which in addition to unlocking business potential also significantly improves cost efficiencies. MHI will going forward be in a strong position to commercialize LNC as the exclusive partner for the production, sales and delivery of LNC in the U.A.E.And MHI also entails nonexclusive rights for sales and delivery of LNC across the broader Middle East region as an important part of the group's diversification and growth strategy. That brings us to the Kingdom of Saudi Arabia where we now launch our second partnership with Holistic Earth Advanced Regeneration Technologies, H-EART. H-EART is, as mentioned, a new startup venture and they are committed to becoming a driving force for sustainable initiatives aligned with the Saudi Vision 2030 and to build on the foundation of our Liquid Natural Clay innovation. The founding team is a unique group of high energy, skilled, passionate and strategically connected people who all embark on this journey driven by a contagious passion to make a positive impact on the future of our planet. The company is in its founding stage. It's still going to take some months to get operational and we have high expectation of what they will achieve in the future. We are excited to welcome H-EART to the extended Desert Control family.In summary, Desert Control had a successful Q2. We concluded the strategic review and initiated the transition to a licensed operator model for the Middle East. We delivered on target for the United States and achieved significant efficiency improvement, including more than doubling the production capacity of all deployed LNC production units. Key regulatory approvals and certifications were obtained in the U.A.E and the United States. The company closes the quarter with an outlook for significant cost reductions, improved capital efficiency and strengthened liquidity.We will now turn to the financial update and I pass it over to our CFO, Leonard Chaparian.
Thank you very much, Ole, and thank you all for joining us today for our quarterly results presentation. It's truly a pleasure to be here with you as the new Interim CFO. I'm thrilled to have the opportunity to share our latest financial insights and strategic updates with 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 second quarter with a positive cash balance of NOK 42 million and has no interest-bearing debt. In addition, we would like to highlight that the result of our strategic review enabled us to secure a private investment of NOK 10 million this month. Furthermore, we're expecting approximately NOK 30 million in connection with the sale of assets and the transaction related to the licensing agreement in the Middle East.The revenue recognized in the quarter mainly relates to the commercial pre-project and technical pilot projects in the U.S. Furthermore, we derived additional income from the temporary assignment of our personnel to our joint venture in the Middle East. This quarter's expenses have seen a 15% reduction compared to the budgeted costs. The finance income relates mostly to unrealized foreign exchange gains on intercompany loans. In connection with the modifications to the financial model in the Middle East, we have made an adjustment to the balance sheet. In accordance with IFRS regulations, we have presented the assets held for sale on a separate line in the balance sheet. Other current financial assets consist of fixed income funds. And as mentioned earlier, cash and funds in total amounts to NOK 42 million as of the end of second quarter of 2023 and we have no interest-bearing debt.It's worth mentioning that following our strategic review, we have gained additional liquidity and will reduce operational costs in the U.A.E. once the transition to the new licensing model is implemented. This is expected to notably impact our runway. We project the runway to extend until mid-next year. The overall reported equity of NOK 67.8 million equals 91% of total assets. The cash flow from operating activities represent the operational profit and loss adjusted for depreciation and amortization emphasizing the company's present cash-oriented condition. The cash flow from this section shows a larger release of funds to bank deposits to support the operations. No other significant sources of capital have been added through the second quarter. For further information regarding the Q2 financials, please see the full Q2 report. The development of the Desert Control share and the Top 20 shareholders are updated at our web page www.desertcontrol.com/investors.And now back to you, Ole.
Thank you, Leonard. We will now turn to outlook before we close with the Q&A. Let me start with a brief recap of what we have done so far this year. We have executed and concluded our strategic review with a highly successful outcome. At the same time, we continued delivering on target in the U.S., significantly improved unit economics and secured key regulatory approvals. Based on this, we are entering the second half with a stronger financial position, a streamlined organization and a strengthened focus. Looking ahead, we will now complete the transition to the licensed operator model and empower our partners to develop the Middle East while we double down our focus on the United States to drive sales and adoption of LNC at the speed of trust. We remain committed to our sales strategy focused on the customer conversion model.We also maintain our objective of securing at least 5 new pilots per quarter targeting a 50% conversion to larger deployments. Around the end of the year, we anticipate starting negotiations for the inaugural large scale contract marking a pivotal milestone for LNC commercialization in the United States. Executing this sales strategy focused on our customer conversion model will build a growing pipeline of pilots and pre-projects as indicated by the light green color in this chart. Our ambition of a 50% conversion to larger projects will build a growing pipeline of large scale deployments as indicated by the dark green color in the chart. By delivering on these objectives, we aim to reach cash flow positive revenue contribution from projects in 2024 and secure a good handful of contracts for large scale deployments going into 2025, representing a solid EBITDA positive business.The outlook for Phase 1 of our business plan remains promising bolstered by the strategic initiatives and advancements in the first half of 2023. We continued to execute on targeting the United States, increased LNC production capacity by more than twofold and extending the reach of deployed CapEx. The transition to a licensed operator model for the Middle East unlocks approximately NOK 40 million in cash, it lowers annual running cost by more than NOK 15 million, extending our runway to around mid-next year, significantly strengthening the foundation for our vision. I want to close now by thanking our team for their amazing dedication and invaluable contributions. I also extend thanks to our customers, partners, investors and all of you who follow and support our journey. Thank you very much.
We will now start the Q&A session and invite you to use the Q&A function for questions. So the first question is when will you become more transparent when it comes to the cost of application and the cost for your customers? Today, it's somewhat hard to evaluate the company.
Well, when it comes to the cost of application, I can refer to what we've already shared in today's update in continuously improving efficiencies on both application and production of LNC and also the objective that we share of reaching cash flow positive contribution from projects in 2024 and a basis for a solid EBITDA positive business in 2025. It's too early to go sort of in extreme detail on each and every project because there will be differences from project to project.
Next question. When can we expect revenue from the U.A.E.?
Well, we've already had some very small revenues from the U.A.E. But as I mentioned previously, we will now transition to the licensed operator model. That will have a number of transition activities before we anticipate that revenue contribution to start steadily growing from the region. Also when it comes to H-EART, as I mentioned, they are in the founding stage and it will take some months still to get them operational, but we have high expectations for what they will achieve in the future.
At the current burn rate, how are you planning to handle Q4 2023?
So with this run rate, we are expecting some of -- we have already NOK 10 million from the private placement and we're expecting the next NOK 30 million within September, October, November and we'll get far into the next year with this run rate.
Yes. So as mentioned by Leonard as well in the financial update, the result of the strategic review extends our runway into mid-next year so Q4 2023 is well covered. And this also aligns well with our objectives connected to continued development with our customer conversion model going forward.
And then another question. Have you experienced plants dying or being damaged after applying LNC?
We have been working as Desert Control with LNC deployments for very many years now and these kind of innovative journeys are always a learning experience. And I would say that if you haven't had a couple of failures or done something wrong along the way, you haven't learned anything, right? So yes, there has been in early parts of our journey cases where we needed to understand LNC formulation better to get it right, to get it properly into the ground, avoid especially creating a layer on the top that will kill everything. And as we have progressed in our recent year, we haven't killed anything. We've advanced in our knowledge base of formulation and experience and skills to develop with better and better precision. But thanks for the question.
Next question. How far have you come with applying LNC in the U.S. pilots signed in Q1?
Yes. So the pilots signed in Q1 and Q2, a good portion of those are already applied with LNC throughout the first half. We have some 3 of those signed pilots that's still lining up now for application in the coming months.
And then another one are the results from the pilots in the U.S. as expected regarding water saving and yield increase?
Well, the results of the pilots, as I mentioned in the company update, are progressing. We are monitoring LNC performance and the moisture retention and impact on water savings continuously with very positive indications. When it comes to yield, it is still too early to say any definitive conclusions. That's why we wait until after the harvest seasons and a lot of these annual crops that we have embarked on have harvesting in around October time frame. So we're looking forward to a very exciting fourth quarter where we're getting in results on yield as well, which are important factors for the financial value for the clients for the LNC in addition to water savings, savings on energy costs, better efficiencies on nutrient induced fertilizers, et cetera.
Next question. At the time of the IPO, it was estimated that the payback time for a cluster would be around 1 to 1.5 year once at full utilization. Following the efficiency gains announced today and accounting for the other changes since the IPO, what is the current estimated payback time for a cluster?
So compared to what we shared at the IPO, of course we've maintained those expectations at full utilization of a cluster. So naturally, a doubling of capacity has a significant impact on this. I will not go into exactly the details on the changes of the impact, but it has a significant impact.
Another one. Earlier you emphasized on a minimum of 5 pilots per quarter. You have delivered quite accurate 5 pilots per quarter so far. Is this progress going as fast as expected? Can we expect an accelerated speed of pilot and pre-projects in the next coming months?
So the project signings on these pilots have gone on target as expected. When it comes to accelerating it, we are also balancing it so that we have the ability to line them up for a successful implementation to make sure that we get proper projects into the ground with a high likelihood of being able to convert these customers to larger scale. We will have, as we go forward now, more capacity on the production side and we have been improving our ability to also apply and deliver these pilots. So our capacity is strengthening also with a new sales person onboard, but we maintain our objective at the 5 pilots per quarter also for the second half.
Can you say something about the total size sales potential of the pilots in rough terms?
The total sales potential of the pilots in rough terms. I mean each of them are very unique cases and they have of course various sizes of opportunities. As you're aware, we have a couple of golf courses, for example, where the potential is to go from these small technical pilot areas to eventually covering the entire green area; half of that on the farms, they are of different sizes. I do not at this point want to give you sort of an accumulated detailed number of hectares and acres. But as we start to convert pilots into Stage 2 and closing up on Stage 3, we will share more details on the total potential of that pipeline that we're working on.
Can you elaborate why not more pilots have gone from pilot Stage 1 to Stage 2 in the U.S. yet and when can we expect it?
So when it comes to the time it takes from Stage 1 to Stage 2 for these pilots, there are individual sort of objectives of what the client wants to see in terms of how they see that LNC will give them value. Some of them may have connections to seeing also how the trees respond. There's been a good portion of permanent crops and they have a long development time. We will see more pilots for faster growing crops now in the second half of this year especially for the Yuma area because they're now moving towards the winter season, which is really the super busy season for vegetable crops where that region represents 90% of the production of the leafy green vegetables for the U.S. and Canada during that part of the year. So we'll see more pilots there that will have some shorter stage times to move forward. And also remember that from the time of signing them, it takes a little bit of time before we actually implement them. We have a couple of pilots from the first half, as mentioned, that is still up for LNC deployment now in the coming month and 2. So that's as expected and progressing according to plan.
Then the question about H-EART. How did the agreement with H-EART come in place? How will this new established company May 2023 plan to get into operation in the Kingdom of Saudi Arabia? Is this plan to work -- is the plan with the already established companies, but will run with operation as H-EART team to only have been established to own the rights to apply LNC in Saudi Arabia?
So what I said in the update about H-EART. H-EART is a startup venture with a group of people in Saudi Arabia that have a strong dedication to be a driving force in sustainable initiatives aligned with the Saudi Vision 2030. It's a very unique group of people who are very strategically connected in Saudi Arabia and it is a startup as I mentioned. They are in the incorporation stages and phases to set up a full-fledged company that will be delivering according to their name holistic advanced earth regeneration technologies where LNC will be a fundamental part of their platform. And we're just very happy that they reached out to us in planning this initiative for Saudi Arabia.
What are the logistics behind the clay you're using? How far does it have to be transported and how much does it cost per liter?
Yes. So we have mobile production units where we produce on the sites where we are delivering LNC treatment projects so at the client location where we access the water locally and only bring in the clays and the minerals that we need for the LNC process. So this makes the process very sustainable and it also allows us to source the raw materials as close to where we are operating as possible. So that means we'll always find the nearest lowest cost options for minerals and ingredients for the LNC and it varies of course by state in the U.S., in the Middle East we have some local resources and sources available and some importers available. When it comes to the exact cost of how much that equates per liter, that also depends a bit on formulation and stuff like that. So I don't want to give a specific figure on that part.
Can you give an estimate of a minimum amount of trees on the Limoneira project if you have success on landing a commercial contract?
Well, as I said before regarding Limoneira, we expect sort of things there to develop on the larger scale deployment in staged phases. We're also assessing other opportunities with them. But if I were to sort of look at the initial potential that we would look at isolated for the Yuma operation here, I would target around 50,000 trees in the first stage and then assessing more opportunities through the years of that staged development in the relationship with Limoneira.
And then about Amarenco. Are there any update on the MOU with Amarenco and it was expected to progress in this summer?
With Amarenco, we have signed the MOU last year and also the focus for Amarenco in the first stage has been on Southern Europe. They also have some significant business initiatives in Egypt and the Middle East. But what we looked at was Southern Europe where there's been ongoing initiatives to identify energy plants, solar plants where there could be opportunity and potential for this. We are dedicating of course our financial resources now to accelerate the United States. We still maintain an open relationship and dialog with Amarenco to engage on future developments for entering into Southern Europe. But before we move to that stage, we need to identify projects that are large enough justify the investment in both CapEx and setup of the operational requirements for a new region before we embark on that and that can still take some time.
Thank you. I think that was all of the questions. So thank you for the effort.
Thank you very much. We go back to our presentation. Then I thank you all for joining Desert Control Q2 2023 and year-to-date company update. Before we close the session, please take note of the disclaimer relating to forward-looking statements. And in closing, I thank you all for your attention, for your questions in the Q&A and I look very much forward to seeing you all in the next update. Have a wonderful day. Thank you very much.