Desert Control AS

OSE:DSRT

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Tor Karlsen, executive]

Welcome to Desert Control Q3 2023 and year-to-date company update webcast. It will cover the Q3 report and interim financial results for the fiscal period that ended on September 30, 2023. Some updates for Q4 2023 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 Q3 update agenda, Desert Control CEO will share a brief company presentation as an introduction.

[Ole Sivertsen, executive]

Thank you, and thanks for attending our Q3 company update. I will kick off by sharing a brief recap about our company and mission before we dive into the Q3 update.

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 safeguarding agriculture, which needs more than 70% of all available freshwater on earth.

When soil turns to sand, even more water is needed to grow food and maintain life. Less than 15% of water is retained in the soil, long enough for plants to make use of it. Most is quickly lost to deep drainage posing nutrient washout, increasing costs, lost productivity and declining plant and food quality.

Liquid Natural Clay, LNC, is a nature-based solution to upgrade sandy soils. The liquid coats each grain of sand with an electrical charge that holds on to water like a magnetic force creating a soil structure that retains water and nutrients like a sponge. One treatment can last for 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 on-site using mobile processing units and applied to the land areas by traditional irrigation methods in the same way you deliver water to the field. All is delivered as a turnkey soil improvement project, along with various monitoring and maintenance services.

LNC saves up to 50% on water and energy usage, while improving nutrient efficiency, leading to higher yields, better plant 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, our farmers, landowners and governments. Our business model is 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 operate through partners under a royalty-based license model.

Once again, thank you for joining us. I am Ole Kristian Sivertsen, CEO of Desert Control, and I will now take us through today's agenda, which has four parts. First, I will present Q3 highlights. Next, Leonard, our CFO, will take us through the financial update. Then I will share a brief outlook before we close with the Q&A session.

We will structure the Q3 company update into three sections: Corporate, Middle East and United States. Starting with the Corporate updates. Desert Control concluded the third quarter with a solidified financial position owing a capital raise of NOK 67.5 million and a subsequent repair issue with an additional NOK 8 million. The capital raise, combined with the outcomes of the perceiving strategic review, has secured more than NOK 100 million in additional liquidity for the company. Along with cost efficiency gains, this secures funding for the company's commercialization phase through the first half of 2025.

Turning to the Middle East. The shift to the licensed operator model in the Middle East is making headway, bringing operational efficiencies and market responsiveness. Key technical and operational personnel have transitioned to the partners with a limited team remaining in the UAE Desert Control entity to support the final steps of the transition. For Desert Control, these are primarily administrative steps related to dissolving the remaining local entity in the UAE, and this is anticipated to be completed before the end of the year.

The LNC production units acquired by the partners have been handed over. Our Middle East partner in the UAE is anticipating starting some LNC projects by the end of the year, potentially both in the UAE and Saudi Arabia. Our Saudi-based partner is also making progress. As previously communicated, they anticipate turning fully operational in Q1. Their LNC production units have arrived in KSA and employees are onboarding.

All payments from the partners related to the strategic review are settled and collected and the process of transitioning to the license operator model is progressing as planned. The new go-to-market model is already driving increased commercial traction in the United Arab Emirates and Saudi Arabia. Regulatory approvals obtained in the UAE have fostered new opportunities and are opening more doors, especially in the public sector. The Middle East license partners share an optimistic outlook for sales growth in the upcoming quarters and several promising opportunities with large entities are progressing.

Now let's turn to the United States. In the U.S., the team has diligently executed the sales strategy focused on the customer conversion model. Five new technical pilots were signed during Q3, making three consecutive quarters of on-target achievements with 15 pilot projects signed. The pipeline is developing positively to maintain this performance with the strategy pivoting towards converting technical pilots to extended deployments in 2024.

Efficiency gains in LNC production and application have also grown steadily through the year with projects spanning and increasing diversity of crops and use cases. R&D initiatives and the ongoing 5-year program with the University of Arizona are also continuing with positive momentum. As we enter Q4, which is the high season for the agricultural sector in Yuma, 6 remaining technical pilots are being planned for LNC implementation.

Before we move on, let's have a look at the U.S. pilot portfolio overview. As of Q3 2023, we have 15 signed Stage 1 technical pilots and 1 extended pilot in the Stage 2 commercial pre-project phase. The 15 pilots include 11 within agriculture and 4 within landscaping. Let me summarize the current status of the Stage 1 technical pilots.

LNC is deployed for 9 pilots now in the monitoring and performance evaluation phase. The 6 remaining pilots are targeted for LNC application in the coming weeks and months, along with additional pilots being signed in Q4. Two of the pilots on golf courses have already requested proposals for extended Stage 2 pilot deployments. Conversion of technical pilots to Stage 2 pre-projects is anticipated to commence in the new year. Based on current observations, we anticipate the most robust business cases to be initially within high-value permanent crops and landscaping.

The forest market comprises commodity crops which are highly price sensitive and exposed to significant market fluctuation. Key drivers will likely be linked directly to the availability of water. Most pilots for the raw crop market are still pending LNC implementation in the coming weeks and months as we enter the Yuma winter vegetable cultivation season. Several of these include high-value specialty crops, where water use efficiency, primarily for yield increase, will be the key driver.

Another area of high interest is the possibility of converting low-value farming land limited to low-value crops, such as forages into soil that can support the cultivation of high-value specialty crops such as vegetables. We are working on developing specific pilot programs to explore this opportunity in more detail.

Now turning to the Stage 2 extended pre-project with Limoneira Company. Limoneira started as a Stage 1 technical pilot with 50 trees at the Yuma ranch in July 2022. In December '22, we deployed LNC for a commercial pre-project with 2,000 trees at the Cadiz ranch followed by 2,000 trees at the Yuma ranch in Q1 this year. As you may know, Limoneira discontinued their farming operation in Cadiz earlier this year and the focus of the LNC commercial pre-project consolidated into the Yuma ranch.

There may still be opportunities for LNC and Cadiz when a potential new client enters a lease for the ranch. And in the meantime, our focus with Limoneira remains on Yuma. The performance of the LNC treated land has consistently shown solid results. On soil moisture data and water retention and the relationship with the Limoneira team has continued to be a strong partnership with shared values and objectives.

This year's harvest has been late due to colder than normal start of the season challenged by extreme temperature peaks in the later part of the year and harvest data is, therefore, still being collected and analyzed. Around the end of the year, we anticipate concluding dialogues with Limoneira assessing the future scale and timing of extended LNC deployment for the Yuma ranch.

As previously communicated, the future LNC rollout for Limoneira based on the positive outcome of the pre-project is anticipated to develop in stages. For the Yuma ranch, such stages are likely to be linked to specific fallowing programs and the associated schedule for replanting of acreage as blocks gradually come out of the fallow program.

Sustainability is a vital cornerstone for Limoneira and their entire team is at the forefront of how to make the best lemons in the most sustainable way, which is what the team lives and breathes every day. We look forward to reaching conclusions about the next steps with Limoneira in the near future.

We will now turn to the financial update, and I pass it over to our CFO, Leonard Chaparian.

[Leonard Chaparian, executive]

Thank you, Ole, and thank you all for joining us today for our quarterly update presentation. 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 third quarter with a positive cash balance of NOK 35 million and has no interest-bearing debt. Furthermore, it's important to note that in relations to the agreements in the Middle East, along with the capital increase and repair issue, we are set to receive approximately NOK 100 million in the fourth quarter. To date, we already secured NOK 92 million of this amount.

In the context of the company gradually ceasing its operations in the Middle East, the quarterly report has distinguished between the financials for ongoing and discontinued operations. Additionally, the comparative figures have been revised for a more clear comparison for the readers. As evident, the activity in the Middle East represented in the discontinued operations cost line has experienced a substantial reductions and expected to persist in its decline throughout Q4. The financial income relates mostly to unrealized foreign exchange gains and on intercompany loans.

Following our phasing out the Middle East operations, we present the assets held for sale as a distinct line item 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 35 million as of the end of the year, of the third quarter of 2023, and we have no interest-bearing debt. However, as mentioned earlier, we will, in Q4, receive approximately NOK 100 million. At this moment, we have already secured NOK 92 million of this amount. This is impacting our runway that now is extended through the first half of 2025.

The overall reported equity of NOK 52.5 million equals 60% of total assets. The cash flow from operating activities now divided at the starting point between continued and discontinued operations, represent the operational profit and loss, adjusted for depreciation and amortization underscoring the company's current cash-oriented status. In addition, we have received approximately NOK 1 million in tax refund from the Research Council of Norway and about NOK 3 million as a partial payment from H-EART regarding the agreements mentioned earlier.

The cash flow from this section shows the release of funds to bank deposits to support the operation. Furthermore, in this quarter, the company completed a private placement with H-EART totaling NOK 10 million. No other significant sources of capital have been added through the third quarter. For further information regarding the Q3 financials, please see the Q3 report.

The development of the Desert Control share and the top 20 shareholders are updated at our web page. It should be noted that due to significant capital raise carried out in Q4, there has been a material change in the company's ownership structure, which is not reflected in the Q3 report. Thank you.

[Ole Sivertsen, executive]

Thank you. We will now turn to outlook before we close with the Q&A. I will structure outlook into the same three sections as the company update: Corporate, Middle East and United States. Starting with the Corporate. The final administrative steps of dissolving the remaining company entity in the UAE are anticipated to be completed by the end of the year. Going forward, the restructured organization and corporate functions will focus on supporting the ongoing commercialization activities in the United States and supporting our partners to drive commercialization in the Middle East.

Moving to the Middle East. The new go-to-market model is already driving increased commercial traction and a handful of partner-driven LNC projects, pilots and proof-of-concept implementations are anticipated to commence in the coming months. Several initiatives in the UAE are also developing aligned with the upcoming COP 28. Traction is also growing in KSA and the local Saudi partner anticipates turning fully operational in Q1.

As mentioned previously, the Middle East license partners share an optimistic outlook for sales growth in the upcoming quarters and several promising opportunities with large entities are progressing with increasing commercial traction.

Turning to the United States. Moving forward, Desert Control's strategic focus in the United States shifts towards advancing technical pilots into subsequent development stages evolving towards larger scale commercial deployments. Our objective is to convert around 50% of Stage 1 technical pilots to Stage 2 extended commercial pre-projects and to convert around 50% of the Stage 2 projects into larger-scale deployments.

Conversion of technical pilots secured this year is anticipated to commence in 2024. Around the end of the year, we anticipate concluding dialogues with Limoneira assessing the future scale and timing of the extended LNC deployment for the Yuma ranch as mentioned previously.

In summary, the financial foundation secured in Q3 allows us to remain focused on accelerating commercialization within the initial target markets of the Middle East and the United States. We had a strong third quarter, strengthening the overall outlook. We have brought in more than NOK 100 million, putting the company on a strong footing for all of 2024 and the first half of 2025. Going forward, we remain steadfast in our commitment to drive market adoption of liquid natural clay by building trust through demonstrating the ability to improve both sustainability and the bottom line for clients within agriculture and landscaping.

[Tor Karlsen, executive]

We will now start the Q&A session and invite you to use the Q&A function for questions. So there's more questions coming in here, and that is why do we not get to know the names of the new pilots.

[Ole Sivertsen, executive]

So we have shared and communicated names on pilots along the way. But as we now start to grow in a number of pilots, we find it more useful to communicate the aggregated status of pilots by crop type and by agriculture and landscaping, so that it becomes easier for our shareholders and stakeholders to follow the overall progression of our work.

[Tor Karlsen, executive]

Thank you. Right now, we do not have any incoming questions. So if you have any, just type in here. Yes, then there's one coming in. When do you anticipate generating revenue in 2024?

[Ole Sivertsen, executive]

Yes. So I mean, we've started smaller revenue generation already from the Stage 1 technical pilots. These are very small in scale and size. And we continue to deliver projects like that also going forward. So we maintain still our objective of 5 technical pilots per quarter.

And then, as I said, our focus shifts towards converting these pilots to larger-scale Stage 2 opportunities, which will bring somewhat larger revenue figures than the technical pilots as well as revenue from the first anticipated stages of large-scale deployments. We also, as mentioned in my update, do anticipate to see some projects and revenue generation starting already in the coming quarter here in the Middle East where we will then in 2024, start to see an increasing revenue contribution from the license model as well.

[Tor Karlsen, executive]

Thank you. Now there's a lot of questions coming in. So there is a similar question here, but the difference here is -- the question is when do you expect to monetize on the projects and cooperation in a way that you do not need external financing?

[Ole Sivertsen, executive]

Yes. That's kind of a question that depends on a lot of factors, right? But let me first address, again, our prognosis of that customer conversion model as an example, right? So the customer commercial model has 3 phases. Stage 1, technical pilots, which are pilots that we do not make any profit from or partly part financing them to get a volume of projects going. We ask for payments from the clients, but they are small, and the projects are also small in size, right?

Then for the Stage 2 pilots like the pre-commercial project with Limoneira, there, our objective is to aim for cost coverage, more or less breakeven on those extended pilots and then positive revenue -- positive cash flow contribution revenue on the projects from the Stage 3 deliveries, right? So those conversion models, as we see the rollout and deployment of that will see a larger number of Stage 3 deployments coming in towards the end of 2024 and into 2025, that starts to generate a significant positive contribution to our business. We also have solid anticipations and expectations for developing the business in the Middle East together with our partners.

Now this is a different model, where it's a royalty-based revenue that has a different impact directly on to our profitability. So that will also come into place during this upcoming period. That, again, does not answer your question on when we will not need external financing, right? I mean that all depends on growth strategy and a multitude of other things, right? If there is an addressable market that is large enough, you may want to continue investing, et cetera to accelerate and drive the business faster. So I hope that covers with more totality in my perspective on your question.

[Tor Karlsen, executive]

Thank you. And also a slight follow-up question to this one is do you anticipate any license or royalty income in 2024 from the Middle East partners and then approximately which quarter is that expected?

[Ole Sivertsen, executive]

Yes. We definitely anticipate royalty revenues from the partners in 2024. We do see that there are projects coming up that have a high likelihood of commencing already in the coming months and quarters here. And as I mentioned previously, we anticipated to start generating royalty revenues from early on in the year with a gradually growing revenue prognosis from that.

[Tor Karlsen, executive]

Thank you. And then another question is Desert Control is very often winning international prices or challenges. Why do we not get any stock exchange announcement related to these?

[Ole Sivertsen, executive]

Well, I think they may be subject for press releases, some of them. But for us, we do not want to overinflate stock exchange releases with frequent messages of varying importance, right? I think for us, it is more important to win business and sign contracts and do stock exchange releases of significant revenue-driving achievements rather than diplomas and recognition and international awards. Those are always nice.

And our primary objective of those is to elevate the importance of the challenges that we are addressing and to build thought leadership in a way that will convert to revenue generation and support our commercialization. So that's the importance of this. And for us, being part of -- nominated for various things is good. But the important outcome that we get out of it is that we get in front of potential future clients and bring our message out that way.

[Tor Karlsen, executive]

Thank you. And another question is related to one of your earlier answers where you described the model. And that is, if you can explain difference here between the commercial pre-project and the commercial projects.

[Ole Sivertsen, executive]

Yes. So I can use the Limoneira example, it's a good one for that. So the Stage 1 technical pilot with them was for 50 trees. So a very small one because farmers are very conscious about their soil and their land being the lifeline of their business, right? So they want to test on a small sale to see that it holds water pun intended and is not causing any challenges or problems before they move on. Well, since they've done that on a very small scale on huge farming operations, the next step in the Stage 2 commercial pre-project is to validate, number one, that it is scalable that you can actually apply it to an entire irrigation block that goes from 50 trees to 2000 trees or from 25-acre to 40 acres or 50 acres to see the scalability and the operational delivery for this.

And secondly, this is where you really want to see the combination of the business case of the cost of the LNC implementation being paid off by the reduction in operational costs and the cost of water, fertilizers, energy consumption, et cetera and then as well improved in terms of doing that without negatively affecting yield or preferably positively impacting the yield. And then based on those data sets is where you make the decision that we're going to roll this out on all our farms or multiple larger areas as a commercial full-scale project.

[Tor Karlsen, executive]

Thank you. And then another question here is, could you provide some information on the process for onboarding the initial technical pilots? And is there a steady pipeline of these opportunities available already?

[Ole Sivertsen, executive]

Yes. So when it comes to onboarding the initial technical pilots, we definitely have a steady pipeline. And for us, it's very much about selecting as well the right ones. So as I shared in the pipeline overview, you could see that we have them now grouped in categories where we have 3 in forages, 3 in vegetable crops, 3 in permanent crops. And then we want to expand in permanent crops as well. There are now citrus, which there are many varieties of citrus that we can expand into. There are other types of fruit trees. There are nuts. There are vines, right? So that's the strategic view where we look at it from a business value potential angle and then prioritize where we want to emphasize to grow our technical pilot base.

The process of onboarding them is multiple. We need to find a client that is suitable, that has crops or land that we see together with the client that can have a potential good future opportunity where we believe there will be a strong feasibility for the LNC and then we define those objectives and then initiate the project with them and then initiate the typically performance monitoring. So even for those 50 trees, we did deploy that with soil sensors, reduced water measurements so that we could have a continuous ongoing monitoring to prove and demonstrate that, yes, it holds water, as I said.

[Tor Karlsen, executive]

Thank you. And we have a set of questions that is also related to the pilots. And one of them is, do expect the model of 3 stages to persist in the foreseeable future? Or can you, to some extent, use the results from the previous technical pilots to prove potential for new customers that it holds water, so we can skip step 1?

[Ole Sivertsen, executive]

Absolutely, absolutely. I think this is about more or less similar comparisons to the model for diffusion of innovations on this curve that we may have seen this bell curve, where the first 2.5% in your curve are your innovators and then you have your early adopters and then you have your early majority and your late majority. And at some point, you've proven it to the thought leaders and the ones that we have picked out in the technical pilots to such a degree that the rest will follow, right?

Now I think we'll need to sort of have those type of local points of proofs in certain local markets and also within certain segments, right? So when we have enough proof in vines or citrus, for example, I definitely believe we're not going to go through Stage 1 and Stage 2, it's going to be more directly to larger scale deployments and that will develop and grow sort of sector by sector.

[Tor Karlsen, executive]

Thank you. And then how long do you expect it to take from Stage 1 to Stage 3? How many -- or is that a number of years from start to kind of end?

[Ole Sivertsen, executive]

Well, it depends a bit on the crop and the overall objectives of the pilot. As we saw on that Limoneira example that started in July 2022, and then in December that year, we expanded to Stage 2 and Q1 in this year, the last part of the Stage 2 deployment. And then you need a full cropping season basically waiting for the fruits to be ready for harvest to get the harvest data and analyze that and see are we then making the KPIs and the business justification that will demonstrate improved sustainability and an improved bottom line. So it will vary a bit.

Some crops are faster, right? So we have vegetable crops and things where it goes quite a bit faster to grow these crops. And the same is with turf grass and sports fields and golf courses in the landscape segment, where we see that already just a number of months after the technical one pilot, that clients request proposals to move to Stage 2.

[Tor Karlsen, executive]

Thank you. And then would it be possible for you to share your operating cash flow prognosis for the revenue expectations from a Stage 3 phase and Middle East royalties? And do you expect to be breakeven level in 2024?

[Ole Sivertsen, executive]

Well, I think when it comes to giving a future prognosis, we're still an early-stage company, right? This is why we did not start at this point to give the quarterly outlook where you typically forecast what do you think your EBITDA is going to be. It's going to go up and down X percent per month and per quarter in the coming period, right? That is still too early for us to go into that level of reporting. So I think on that question, I will refer back to my previous answer when it comes to how we see revenue development related to the different stages of projects and the anticipated development of our Middle East partners that we have great expectations for as well.

[Tor Karlsen, executive]

Thank you. Another one is, do you plan to have any -- to do any uplifting to a more major stock exchange potentially to attract more investors?

[Ole Sivertsen, executive]

Well, I would say that the last -- this last year, I think we've spent way too much time focusing on raising capital and working with our investors. So my short answer to that is that our plan is to focus now on generating sales and commercialization, demonstrating through projects that we can deliver value to clients, both on sustainability and improved bottom line for them with liquid natural clay in the Middle East for our partners and in the U.S. So that's key number one for us. Anything else will be -- it's not on our agenda focus at the moment, right? So it's about commercializing, selling and keep on developing the business that is the focus now.

[Tor Karlsen, executive]

Thank you. And then we have a more broader question here. Going into 2024, can you outline the main challenges that you're anticipating and how you plan to overcome them?

[Ole Sivertsen, executive]

Yes. So going into 2024, the main challenges that we were facing just a few months ago was ensuring that we had the right funding to execute our plan for developing the business going forward, both for the Middle East and for the United States. That is now achieved, right? So that's a major achievement announced of this quarter. So the biggest challenge is now removed on that. There is no question on the financing of the longer-term plan and to support the customer conversion model that we will drive in the U.S. market.

And I think our partners in the Middle East will probably have a different model. I don't think necessarily it will be a replica because in those markets, LNC has been a topic and a subject on governmental level for a longer period of time. So things may develop differently there. But I think the important thing now is to make sure that we fully get our partners in the Middle East, empowered to be successful in developing that market.

We've spent a long time investing in that market, building infrastructure, building pilots, win validations, securing product registration, certifications, regulatory approvals and things like this. And it is fantastic to see that, that is now starting to pay off. And we believe definitely that, that is the right model for that region.

So supporting the partners and empowering them to be successful is one of the areas that we will focus on. And the other area is to commercialize successfully in the United States, where we have a number of pilots ongoing. We will not convert all of them, right? So we will have to learn quickly iterationally on finding the strongest and best financial business cases for that in order to then narrow in on what I call the optimal product market fit, which are the sweet spots that are replicatable to a larger level. So I think that is the main challenges, which also represents the biggest opportunities for 2024.

[Tor Karlsen, executive]

Thank you. And we have a completely different question here. Can you explain your expectation regarding COP 28?

[Ole Sivertsen, executive]

Well, that's almost like a political question. And I think there is always a lot of awareness around these COP events. And then is the question related to if my expectations are that global leaders will agree on actions that will actually be implemented. I think that's a bigger discussion. But what I do see there is a significance of the COP event actually taking place in the Middle East, an area that is at the forefront of climate change, a region that has 5% of the world's global population, but less than 2% of the available freshwater resources on the planet, as an example. An area that imports maybe 90% of the food that is consumed, et cetera.

So I believe that this will put at the forefront discussions on how to accelerate the advancements in food security, in water security and climate action initiatives related to supporting things such as the Middle East green initiative, et cetera. So I think it will have a positive impact.

These events are very much political events, but they do drive also a lot of awareness on turning these ideas into reality. I think there may also come some potential regulatory changes from the event in the Middle East. I think one area that we are very much excited about hearing what will happen on is the actual pricing of water and water tariffs, which is something that could come to change because water is a big part of the CO2 equation as well with desalination and energy usage, both for producing fresh water and for distributing it is an important component. So those are some of the expectations.

[Tor Karlsen, executive]

Thank you. And then another question here is related to the pilots. Do you initiate contacts with the clients? Or are they approaching you? If so, how is a typical pilot secured time consideration on physical meetings, et cetera?

[Ole Sivertsen, executive]

It's a combination, right? So the initial pilots primarily started by the University of Arizona hosting what they call field days, where farmers, growers, companies came to have a look at the LNC validation project going on, on the Yuma Mesa. So a lot of it started that way. And still today, we see there is a good combination of initiatives that come up or pilots that are identified through our R&D and field validation initiatives. Some that come through word of mouth, but also a combination of very hard and focused sales work by our team over there.

So I mean, these are small projects. These type of pilots are designed in a way that is very common in the agricultural sector, right? So all the providers, if it's a provider of seeds or some kind of other input or product in the agricultural sector, they always go through a small test, a small trial. So the farmers and the growers are very used to it. So the Stage 1 technical pilot doesn't necessarily take a long time and a lot of meetings because it's a model that is familiar but then when it comes to implementing the pilot from we agree on doing it, and then we need to see sort of when is the optimal time for the farmer because he has a lot of activity on the field, maybe he says I'm a little bit reluctant to do it while the field is planted. I'd like to do it when I prepare the soil before I do my next planting, et cetera. That can take a little bit of time before you have the LNC in the ground and you enter the monitoring and performance evaluation period.

[Tor Karlsen, executive]

Thank you. And then you mentioned earlier that we don't know if the 3-stage process is whether we have the technical pilot, pre-project and large-scale project if that's going to be the model in the Middle East. But are there any projects in the Middle East where the early stages are already done with the potential for large-scale projects?

[Ole Sivertsen, executive]

Yes, there are, there are. We've had also a number of pilots historically in the Middle East. And now with the MOCCAE certification and the regulatory approvals in place, et cetera, some of these are coming to play and starting to discuss larger deployments. So the answer to that is definitely yes.

[Tor Karlsen, executive]

Thank you. And then a more fundamental question. Why isn't everyone using LNC? Can't they calculate the increased yield home? Or is it the upfront cost too big?

[Ole Sivertsen, executive]

Well, I think you can calculate the yield upfront, but if you consider the upfront cost of several thousand dollars per acre, that is a significant cost compared to what a farmer has in other input costs in annual fertilizer costs and all these kind of things, right? So also, if we look at how they book this in their books, some of them are looking at this more as a CapEx investment as a land upgrade. And for those type of investments, they want to make sure that they have everything in place and they have done a proper due diligence of validating that it will work on their land.

So I think it's like any new innovation. It needs to get a large enough base of the progressive early-stage innovators, early adopters going which we are working on with our customer conversion model and I think another number of lighthouse projects, I think that's where really the Middle East can come out with a very strong play with some very, very, very large organizations that are starting as initiatives to deploy LNC that will change it dramatically by just a stamp of such reference deployments.

[Tor Karlsen, executive]

Thank you. And then is there any possibility that Desert Control can come under U.S. programs where farmers get governmental support to use LNC?

[Ole Sivertsen, executive]

Yes. There is opportunity for that, and that is also why our initiatives with the University of Arizona, as an example, is important because the way that these programs operate is that they also need the level of validation and confirmation of the solutions before significant government funding is pushed into them. So as some of you may remember, there has been a water efficiency, irrigation efficiency grant in Arizona as an example of a number of dollars per acre that the farmer can get of grants and support from this program and LNC is being evaluated for these type of programs. And the next step that we need to complete is to get our first peer-reviewed publications published that will be supporting this and strongly position us then to be fully qualified for these type of programs as well.

[Tor Karlsen, executive]

Thank you. And then a question about margin. So do you manage for a target margin, investors could expect from Stage 3 projects or corporations?

[Ole Sivertsen, executive]

Well, I mean, it's still early stage to start giving guidance on that before we've executed any of them. We anticipate starting in the new year with the potential first Stage 3 delivery, right, where we will be getting all the validated actuals of that into play. But -- I mean, we've historically sort of shared some expectations of this and some gross margin estimations in our financial business models. We do not see any significant change from that. But I'd like to see us having executed the first couple of deliveries on Stage 3 before we start sharing guidance on this.

[Tor Karlsen, executive]

Thank you. And also related to the licensing model, could you give some color on how one would think about revenue generation from this model?

[Ole Sivertsen, executive]

Yes. I mean, we have published a detailed FAQ, frequently asked questions, that details the license operator model, also, when it comes to expectations in terms of how to calculate the percentage of the royalties, et cetera. So if you go to our website, you will be able to find that. And it's quite straightforward and simple, right? It's a percentage of the sales of the licensed operators and potential other services and component deliveries that will drive that revenue. The main driver will be the royalty from sales at a certain percentage. And we've shared quite detailed information in the FAQ.

[Tor Karlsen, executive]

Thank you. And then one last question. Do you have any common arrangements with Mawarid with potential customers during COP 28?

[Ole Sivertsen, executive]

Well, I've been invited by the UAE COP 28 team, the team that is arranging the COP 28 and also by the Expo Live team. We were part of the Expo 2020 as well by the Expo Live program for innovations for good and the Good Place Pavilion. So I'm invited to hold some presentations there, also to participate in some panel discussions. And by Expo Live, I'm asked to moderate the session, bringing together a couple of the Expo Live participants to talk about their journeys and the progress that we've made and our expectations for what will happen in the aftermath of COP 28 for sustainable innovations. So I'll be there, and I will be, of course, also working diligently to engage with stakeholders, potential clients, opportunities and influencers in the industry.

[Tor Karlsen, executive]

Thank you. And I said last question, but we have a runner up here. And that is, when do you expect us to hear about success stories from the Middle East and U.S.? This may increase publicity for new customers.

[Ole Sivertsen, executive]

Yes. I think when it comes to the successes of ongoing rollouts and expansion to larger deployments, we will share these along the way. So when there are significant contracts being made, they will be announced on an ongoing basis. And I definitely agree that this may increase publicity for new customers. And as we've seen in some of the later interviews that we have also published on our social media, we see the positive effect of happy clients that are thrilled about what they have experienced so far being a very important part of our way of bringing this forward. The voice of the customer is the strongest one.

[Tor Karlsen, executive]

Thank you. And thank you all for very good questions today. So I think we will conclude the Q&A session as there is no more remaining.

[Ole Sivertsen, executive]

Thank you, Tor, for taking us through the Q&A here. Before we close the session, I just want to remind people to take note of the disclaimer related to forward-looking statements. And in closing, thank you all for joining the Desert Control Q3 2023 company update presentation.