Desert Control AS

OSE:DSRT

Earnings Call Transcript 2022-Q4

[Unknown Executive]

Welcome to the Desert Control Q4 2022 and Year-to-Date Company Update Webcast. It will cover the Q4 report and interim financial results for the fiscal period that ended on December 31, 2022. Some recent updates for Q1 2023 will also be included. A Q&A session will follow the presentation, and we invite you to use the Q&A function for questions.Before the official Q4 update agenda, allow us to introduce Desert Control's CEO for a brief introduction.

[Ole Sivertsen, executive]

Thank you. Before we dive into updates on our recent progress, I will share a brief recap of our company presentation and 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 70% of all available fresh water 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 drainage, costing 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 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 more with maintenance programs.LNC saves up to 50% on water and energy usage, while improving fertilizer efficiency, leading to higher yields, better crop quality and increased profit. If you think it sounds too good to be true, note that 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 UAE and the United States, targeting sandy soil areas affected by drought and water scarcity. Clients are farmers, landowners and governments. Our business model is turnkey projects priced by hectare or number of trees, combined with various services for additional revenue streams. We're a team of 53 intelligent and passionate people with strong leadership to execute our mission.Commercial agreements are signed, the first salespeople are hired and the pipeline grows with solid tailwinds from government initiatives, positive references from pilots and strong results from independent validation program. As a result, LNC is deployed to more acreage in the last 3 months than over the previous 5 years combined.I am Ole Kristian Sivertsen, CEO of Desert Control, and I will now take us through today's official agenda, which have 4 parts. First, I will present Q4 highlights. Next, Marianne, our CFO, will take us through the financial update, then I will share a brief outlook before we close with the Q&A session.I will focus the main highlights for Q4 2022 in 3 areas. First, the progress on sales and commercial activities in the United States. Second, the continued streamlining of operations in the UAE and the first fully self-driven project by Mawarid Desert Control. Third, significant achievements in project execution for LNC production and delivery in the volume of LNC produced, size of projects and efficiency levels, which strengthen confidence in the ability to scale and achieve profitable profit execution. I will share more details for each area in the following slides, starting with the progress in the United States.The successful completion of the first preproject with Limoneira is a significant milestone. 2,000 citrus trees, over 20 acres in the Mojave Desert in Cadiz, California was completed in December 2022. While it took 3 days to complete 50 trees in the Limoneira pilot in July, the team reached a pace of 250 trees per day in Cadiz. The final 2,000 trees for the Limoneira project launched successfully in January 2023, covered 20 acres in Yuma, Arizona. In this project, the pace increased from 250 to 500 trees per day with the same team and equipment as used in Cadiz. This is a significant progress. And we identified ways to continue increasing efficiencies. Let's watch a short video clip from the field in Yuma.[Presentation]

[Ole Sivertsen, executive]

If you noticed the square basins being filled with LNC in this video, the next is to fill an entire lanes or rows of trees without any borders between them. With the success of this, we will reach a pace increase from 500 to potentially thousands of tress per day. As mentioned in the introduction, the recent projects represent significant achievements in the execution of the LNC production and delivery. More LNC was deployed, covering more acreage of LNC-treated land from December 2022 to February '23, more than actually over the foregoing 5 years combined. From November 2017 to November 2022, 20 LNC deployments were completed for validation studies and various pilots. Most implementations were less than 1 acre, with only 1 project beyond 2 acres.In comparison, the Limoneira projects alone were 40 acres. The experience gained from increasing project sizes is essential for future large-scale projects and to validate the ability to deliver on the growing demand which is driven by multiple factors. Droughts and increasing water scarcity continues accelerating in the U.S. And regulatory action to increase water use restrictions is being enforced. Also, more incentives to promote water conservation are being introduced.Desert Control offers a relevant solution to these issues, and is positioned to qualify for government incentives that can support accelerated LNC implementation for farmers and landowners. Another positive driver is the 5-year program for independent validation of LNC for American soil by the University of Arizona launched in March 2022. We experienced positive interim indications already in the first season with a watermelon and bell pepper crops that showed positive potential for reduced irrigation frequency, 50% increased lateral movement of water and reduced mortality rates of seedlings. Several well-attended field days have been hosted by the university at the project site. And the interest from local farmers has been growing. The second season with crops expanded to romaine lettuce and celery even made headline news with Reuters after the romaine was harvested in December.The university field plots consist of three unique LNC formulations compared against untreated control plots. The lowest performing formulation showed a 21% higher yield compared to the control. While the best performing formulation yielded 53% higher salad production. The celery grows more slowly and was recently harvested. Although data is still being processed, we notice similar trends as for the romaine.[Indiscernible] drought-related drivers combined with positive references from the Limoneira projects and the results from the University of Arizona encouraged accelerated recruitment of a sales team and the first U.S. salesperson started in December 2022. In preparation for accelerating activities, we recently opened our first U.S. operational base in Yuma, Arizona, strategically located to reach customers across Southern California and Arizona.Further, two additional LNC production units are being sent to the U.S. The units are expected to arrive at a newly established operational base during April 2023 and will double production capacity in the United States. The long-term objective is to establish local fabrication of LNC production units for the U.S. market to support scale up.Sales exhibit activity in the U.S. is also increasing. And the new year started with the signing of 3 new agreements for commercial pilots. The customers are Five Rivers Cattle feeding in Wellton Mohawk, Arizona, Lemonica Citrus in Calipatria, California, and the golf course Fortuna De Oro in Yuma, Arizona. We're experiencing growing interest in the program designed to convert prospects into customers for large-scale LNC rollout. The program's first phase is a smaller scale commercial pilot to quickly build trust and document the financial value for the customer. Phase two is a preproject of larger size to demonstrate that the results can be replicated over larger areas. And based on positive results, the next phase is the full scale rollout of LNC. The time required from the launch of a commercial pilot to deciding on larger scale deployment varies by the crop's growing season. Limoneira citrus growing season is long with one harvest per year. Crops at the other end of the scale like alfalfa grow fast and often have 8 to 10 harvests yearly. Therefore, diversification of the sales portfolio is a focus for 2023. Agreements to convert preproject like Limoneira to full scale deployments are expected towards the end of 2023 based on results from the harvesting of this year's crops.Turning to updates on the UAE operations. The transition to the joint venture structure in partnership with Mawarid has taken longer than expected and is now in the final stage. The company Mawarid Desert Control, in short, MDC, established to be the exclusive sales and distribution company in the UAE became operational in the fourth quarter. The process of reducing the application of roles and responsibilities between Desert Control and MDC now creates improved alignment and is further contributing to reducing the operational costs for Desert Control Middle East by more than 50%. Changing from direct to indirect sales and distribution with a JV required some changes in the formal company and business licenses in the UAE. This has taken additional time. Further with the newly operational MDC model, some extra steps to register and fully qualify for doing business with government clients are being finalized. This is expected to conclude shortly after Ramadan and will open doors to additional opportunities for MDC in the UAE.In the meantime, MDC focuses on smaller opportunities in the private sector. In December, we passed the milestone for MDC's first fully self-driven project where LNC was sold and implemented for a commercial preproject with a strategic food security company that manages farms across the UAE. We congratulate MDC on its first successful project.Finally, let me reiterate the value of the advances made in LNC delivery capabilities. The efficiency gains and learnings from the recent projects strengthen the foundation for future deployments and the company's confidence in the ability to reach the efficiency levels required for profitable business and scalable unit economics. Growing the number of commercial pilots and preproject also brings more value to our digital services designed to measure, document, and visualize the impact of LNC. Live dashboards with real-time performance data from LNC-treated soil compared to untreated control areas are effective in creating a sense of urgency to drive customers toward deploying L N C at a larger scale.Finally, with additional LNC production units deployed between geographies in the new year, we also get further confirmation on the flexibility and agility to quickly shift production capacity to regions with high demand for LNC.We will now turn to the financial update. And I pass it over to our CFO, Marianne Vika Boe.

[Marianne Boe, executive]

Thank you. The figures are shared and detailed in the financial report published earlier this morning. These financial key figures will be covered in more detailed in the following slides. I want to highlight that the company closes the fourth quarter with positive cash balance of NOK 78.2 million and has no interest-bearing debt. Note that the revenue recognized in 2021 relates to the pilot evaluation with Mawarid Holding Investment in conjunction with the partnership negotiations that led to the joint venture with the establishment of Mawarid Desert Control. The sales pipeline is growing and streamlining the UAE operation for optimized cost efficiency, further contributes to reducing operational costs for Desert Control Middle East by more than 50%, aligning our cash runway with the anticipated timeline for entering contracts for larger-scale LNC deployment.The revenue recognized in the quarter relates to the first commercial preproject in the U.S., as well as the strategic preproject in the UAE. And as mentioned previously, the revenue in 2021 relates to the pilot evaluation with Mawarid Holding Investment in conjunction with the partnership negotiations. The expenses in the quarter are in line with our budget. And the finance cost relates to unrealized foreign exchange loss on intercompany loans.There are no significant changes in our balance sheet in the fourth quarter. Other current financial assets consist of fixed income fund. As mentioned earlier, cash and funds in total amounts to NOK 78.2 million as per the end of fourth quarter 2022. And we have no interest-bearing debt. Our runway is in accordance with our forecast and in line with the communication in the third quarter. The overall reported equity of NOK 107.7 million equals 90% of total assets. Cash flow from operating activities is the operating profit and loss adjusted for depreciation and amortization and underlines the cash-based nature of the company in its current state.The cash flow from this section is the release of bank deposits and funds to support the operations. No other significant sources of capital have been added through 2022. For further information regarding the Q4 financials, please see the full Q4 report. The development of the Desert Control share and the top 20 shareholders are updated are at our webpage, www.desertcontrol.com/investors.

[Unknown Executive]

We will now start the Q&A session. And we invite you to use the Q&A function for questions.

[Ole Sivertsen, executive]

Not quite yet. Not quite yet. We will now turn to outlook. I know a lot of people are waiting for some updates on Outlook, and then we will close with the Q&A.First, a little update on Q1 activities. The three newly signed agreements in Q1 are with customers that represent significant potential. Five Rivers is the world's largest cattle feeder with numerous farms across the U.S. The commercial LNC pilot will be carried out on the McElhaney farm in Wellton Mohawk, Arizona, Arizona, which has 1,100 acres of irrigated fields and alfalfa as the main crop for animal feed.Lemonica Citrus has a 1,200 acre citrus farming operation in Calipatria, California. And Fortuna De Oro is a 47-acre golf course in Yuma, Arizona. Based on positive pilot results, the objectives are to expand LNC deployments for large-scale rollouts through successive stages. We anticipate these projects to develop similar to Limoneira, where we expect to reach the final agreement for full-scale rollout after the harvesting of this year's crop in the fourth quarter. Here we also will have crop diversification with crops like alfalfa growing faster with multiple harvests per year that can speed up conversion processes even further.Outlook. Desert Control's sales strategy for 2023 focuses on generating revenue and developing a pipeline of opportunities through commercial pilots and preproject with the objective to start converting preproject into contracts for larger scale deployments by the end of the year. 3 new agreements for commercial pilots were signed by the 28th of February, 2023. And the company anticipates signing several additional agreements for similar projects during Q1 2023.The company will provide guidance and quarterly reporting on the number of commercial pilots and preprojects, with anticipated conversion rates going forward. Based on the current pipeline, we anticipate securing a minimum of 5 commercial pilots per quarter. We expect a minimum of 50% conversion rate.Please also take note of the disclaimer related to forward-looking statements.Now to, we will move on.

[Unknown Executive]

Yes, being a bit eager today, but now we'll start the Q&A session. As earlier, we invite you to use the Q&A functionality for questions, and we will answer the questions that have been submitted by e-mail. So let's have a look at our first question. "When will you be listed at bigger exchanges to reach out to more investors?"

[Marianne Boe, executive]

Ole Kristian, did you want to take this one?

[Ole Sivertsen, executive]

I can take this one.

[Marianne Boe, executive]

Yes, because it goes together with a question that we have received in advance about the U.S. OTC market. So maybe you can tie those 2 together.

[Ole Sivertsen, executive]

Yes, yes, I can tie those 2 together. There were questions sent by email related to OTC trading of the Desert Control share as well. So let me address that. So in the U.S. any investor can request to the OTC to be allowed to trade foreign shares in certain selected markets like from the Oslo Stock Exchange. That means that you can get registered for trading on markets in the U.S. such as OTC without any initiatives from the company whatsoever. So Desert Control has not actively been working on, or spending time and energy on registering for any kind of listing in the U.S. That's fully driven by the market itself in the same way that our stock is also facilitated by other companies to trade on stock markets, for example, in Germany and other places. So, no initiatives from the company on this side as of yet. And what the future will bring. I mean, we are seeing significant progress in the, in the U.S. Now we're focused on building sales and developing the market.

[Unknown Executive]

Thank you. The next question, "Congratulations on the great progress in U.S. The UAE, however, seems to be sticky. Why is this? And what are you planning to do to mitigate the slow speed in the UAE?

[Ole Sivertsen, executive]

Yes, as I am shared in my UAE update, things have taken longer than expected. We are working on those final steps to mitigate the steps of, for example, being fully qualified to do business with large-scale government entities. In the meantime, we're focusing together with MDC, or MDC is focusing on smaller opportunities in the private sector, such as the food security company that was recently announced on company level as well. We are seeing significant benefits of the model in terms of reducing our operational costs in the Middle East so that we get more resources to accelerate commercial activities in the U.S. as another example.

[Unknown Executive]

Thank you. "Please say something about a issue of new stocks. It's called [indiscernible] Norwegian. Will this happen? Or are you trying to get funds from contracts?

[Marianne Boe, executive]

I see there's a lot of similar questions about this here. So the general cash situation in Desert Control and potential capital rates, we are completing the restructuring process in the UAE with the transition to the joint venture as we speak, which will impact our costs and our burn rate. On the other side, with the increased activity in the U.S., we expect to see an increased cost there. However, we are also seeing revenue coming in now. And we did communicate last quarter that we had a runway of approximately 1 year. And there has been no significant changes to that. And what we also mentioned in the third quarter, there are of course alternative sources to financing which are even more relevant now that we are generating revenue.

[Unknown Executive]

And then a question that has been submitted by email, "How is MDC, Mawarid Desert Control and Mawarid working?

[Ole Sivertsen, executive]

So Mawarid Desert Control, MDC, is working as an autonomous company. So they are the exclusive sales and distribution company for selling and delivering LNC and delivering projects in the UAE. That means that they are building a sales organization, they're developing marketing activities, bringing customers and doing the entire end-to-end delivery of LNC projects. Desert Control through Desert Control Middle East is a material supplier who produces and delivers the required volume of LNC. And all other elements of the business is driven autonomously by Mawarid Desert Control, MDC.

[Unknown Executive]

Thank you. Another question about our production units. "Are the two LNC units coming to the U.S. built in Norway? Or are they being delivered from UAE?"

[Ole Sivertsen, executive]

Yes, so we did build a number of clusters in the UAE early on. We did not build those clusters because we had contracts or demand for the production capacity, but we needed to make sure that we were able to build units of a consistent quality. And we needed to know that we were going to be able to do so on budget and on time so that we know based on the projects and the contracts that we're entering what is it going to cost. How long is it going to take to provision additional capacity. That cannot only be an Excel exercise or a PowerPoint maneuver. You need to really build those and get the experience of that. So we had additional capacity in the UAE that was not yet utilized in terms of capacity utilization. So therefore we shipped additional units from the UAE to the U.S. both last year, 2 units, and this year additional 2 units. So we'll have a full cluster operational, doubling the capacity in the U.S. in the timeframe of April this year.

[Unknown Executive]

Thank you. And then another one. Are the 3 new pilots prepaid? If so, is it possible to give an indication on the price?

[Ole Sivertsen, executive]

Yes. They are commercial projects, not significant in terms of revenue as it's smaller areas that we start to quickly build trust and move on to larger preprojects. Once agreements reach a larger significant size, we will report those as we go.

[Unknown Executive]

Thank you. What is the negative financial costs or currency loss?

[Marianne Boe, executive]

I mentioned in the presentation that the currency -- the financial cost that relates to unrealized currency loss on intercompany loan. So that is 4Q isolated. If you look at the full year, we have a net financial income which relates to the same item, this intercompany loan.

[Unknown Executive]

Thank you. "And is there any need for new equity or debt?"

[Marianne Boe, executive]

Yes, I think this one has been answered earlier. We have no significant changes to what has been communicated in the last quarter, which is the runway of approximately 1 year.

[Ole Sivertsen, executive]

Yes. And that's also, to add to that, correlates with the time line of when we're anticipating to enter larger contracts that will have a positive cash contributing element to it. So those are the considerations that we're continuously looking at.

[Unknown Executive]

Thank you. Another question that was sent by e-mail. "How are the processes which will end up in time contracts?"

[Ole Sivertsen, executive]

Yes. As sent by e-mail, I explained those steps and the program that we're seeing significant interest in that we're now seeing with the examples in the U.S., the project of a commercial prepilot or commercial pilot that can really quickly then demonstrates the financial value and build trust with the client to expand it to larger scale to show that the results can be replicated over larger areas. And based on the result achievements there, we're then moving forward to a full-scale rollout. And we're also targeting to get as many as possible of these contracts combined with signed LOIs or letter of intents of the full-scale rollout as we have with the Limoneira contract, where the contract went from the commercial pilot to the larger preproject combined with an LOI for full-scale deployment. I can also add that the digital services make a important contribution and factor here because it's not in a way where you have to sit and watch the grass grow. Basically you will be able to see pretty instantly the improvement of water use efficiency by soil sensors that are deployed in the soil of LNC-treated areas, as well as in control areas that are managed just the way they are today. Then we'll see indications from the water applied, the maintained moisture levels and the performance of the LNC with real-time data and these live dashboards that will drive a sense of urgency to the client to see what they're missing out on in terms of water saving potential for the remaining areas that they have. So that's also a very strong contributor to convert sales more quickly. And then the final part being the diversification of our sales portfolio where if we only go after 3 base crops like lemons, for example, it's going to take a full year before the client has harvested the crop and see the full impact also on crop yield to then diversify with row crops, vegetables that you have 2, 3, 4 harvests per year on, or the likes of the alfalfa with 8 to 10 cuts per year. Then we can get a good healthy balance of diversification and quicker conversions.

[Unknown Executive]

Thank you. "Can you provide some flavor on the full potential of the 3 customers you have signed pilot projects with?"

[Ole Sivertsen, executive]

Yes. There are some estimates being made by various people already. I don't want to go in detail today on the total estimates on them, but they are significant, right? So the size of the alfalfa fields of Five Rivers are huge. A lot of it being sandy soil. So we need to understand the total potential of the farm and potential additional farms in more detail as we move along. The potential for the citrus project with Lemonica is 1,200 acres of mandarins and lemons being cultivated there. Very, very sandy soil conditions, desert environment where we are confident to make a huge impact on water savings, reducing the usage of pumping time, sulfur burners, water treatment, as well as improving the efficiencies of fertilizers to help them produce more per acre to be profitable in their business. Also on the golf course, yes, I mean, it is the full scale of the course that is the potential. And as I mentioned, we're also working on a handful of additional similar projects that we anticipate signing in the first quarter here.

[Unknown Executive]

Thank you. "Have you been contacted by fertilizer producers or others who have shown interest in strategic collaborations or acquisitions?"

[Ole Sivertsen, executive]

Yes, we have had a dialogue with fertilizer companies who see the value of improving fertilizer efficiency and also see a big interest in creating a larger market by creating agricultural land out of areas that currently struggle to be farmed and protecting and safeguarding agricultural land. Another component that we have discussed is potential impacts of reducing leaching and loss of fertilizers to groundwater systems, et cetera. That is something that we will look deeper into. It's going to require more scientific data. And those are things that we see a potential of adding on to projects such as, for example, the University of Arizona initiative.

[Unknown Executive]

Thank you. "So what time line do you expect with the government project contracts with UAE? Do you expect small preprojects or big commercial contracts from the start?"

[Ole Sivertsen, executive]

Well, time lines on governmental projects is always, as I've said in the last couple of quarters, to this same question, they are lengthy. I think they will start as well because there is risk averseness. So they will likely start with stages as well. And the stages may be bigger steps than we typically see in the smaller private sector areas because we're talking about vast sort of total areas under management there. And as I said, once the processes on being fully registered and qualified for these governmental projects, that will be very interesting opportunities that open up for MDC.

[Unknown Executive]

Thank you. And another one is, "How much do you need to sell to go breakeven? Like how many acres needs to be treated or how customers do you anticipate to get breakeven?"

[Marianne Boe, executive]

Well, this goes together with [indiscernible] I mentioned earlier. We are seeing significant improvement in both our production and application efficiency, which will definitely drive our breakeven target. We don't see any changes to what we have communicated earlier. But keep in mind that we are still a start-up company moving towards a scale-up company. We do not have all the answers yet. But these projects that we are doing now are definitely giving us a lot of useful knowledge and experience to improve our cost efficiency.

[Unknown Executive]

Thank you. "Where do you see the greatest market potential? In the U.S. or in the UAE?"

[Ole Sivertsen, executive]

Well, I mean, with the 40% of the Continental United States being at risk of desertification, we see sandy soil areas in multiple strategic locations. The potential in the U.S. is significant, right? Let's also remember that the United States is the most advanced and largest homogeneous agricultural market in the world. Also, the United States has significant strengths in terms of globalizing products and services within these sectors through all the intelligence of the U.S. Commerce Department, the World Bank, et cetera. So the U.S. is really the strategic stepping stone for our development for sure.

[Unknown Executive]

Thank you. "Are there any other Five Rivers farms outside Arizona applicable for LNC application?"

[Ole Sivertsen, executive]

I think there may be multiple areas applicable for LNC application. We need to analyze the potential in more depth. And that's typically what we see with every customer that we work with, that you start with a focus area and then additional opportunities show up while working with the client as they present problems that you didn't know about before you came there, like, for example, walking around in the fields in the Mojave Desert, talking to the people of Limoneira, being on the fields in Yuma. Suddenly, you have discussions where you figure out that these farmers are spending quite a lot of money and time and energy on irrigating and putting water on all of the farm roads inside of the orchards and around the fields because they need to keep the dust off the sandy dirt roads away from the crops. Suddenly, we then discover a potential to why don't we also put LNC on the roads to reduce the amount of water that they need to put there. And those kind of development opportunities, we find a lot of in the field with each project.

[Unknown Executive]

Thank you. "Do Desert Control have any direct competitors?"

[Ole Sivertsen, executive]

Well, we do not see any other liquid-based solutions like ours. But there are, of course, alternatives to increase water holding capacity in sandy soils. There are other technologies or products such as biochar, polymers, et cetera, that are physical products that needs to be mechanically worked into the soil, where Desert Control is building on the advantage of having a nonintrusive way to be applied to the fields. But as well, I mean there are other options as well for farmers, like in the U.S. what we see is, amongst others, fallowing programs, where a farmer may be paid an amount of money to not use water at all, to stop farming for a number of years. So we are seeing that as not a direct competitor, but as an alternative use of the fields. And we're seeing clients that are considering fallowing programs. They don't do that because they want to do so because a farmer will always want to farm. They love farming, that's their life, that is their families, that's their business. So they do not want to stop farming. And that's where we see that we can help them to overcome those challenges, to make sure they are not pursuing those kind of alternatives by being able to get to a profitable model where they can maintain yields with less water, less fertilizers, less energy spend.

[Unknown Executive]

Thank you. Another question. "Have you been approached by any wine producers in the United States?"

[Ole Sivertsen, executive]

Well, that market is as well struggling in some areas with water. Some have fields of sandy soil. And it is a market where we have opportunities. And we're actively working with some. And we will announce progress we're making also in that segment as we go along.

[Unknown Executive]

Thank you. "Any news on the partnership with Amarenco?

[Ole Sivertsen, executive]

Well, we had the CEO of Amarenco visiting our offices in Stavanger very recently, where we were sitting together to identify specific opportunities and discuss the next steps. So the planning is in progress.

[Unknown Executive]

Thank you. A new question, "Do you feel any pressure regarding the share price? And do you feel that your guiding is reflected in it?"

[Ole Sivertsen, executive]

Well, for us, we are focused on selling and bringing this product to market, overcoming the hurdles that we have had in the UAE, and mitigating any slowness by the activities we're doing in the U.S., et cetera. So basically, for Desert Control, of course you always get remarks on the share price. But for us, we are focused on really developing the business and creating the results. When it comes to guiding, and if that is built into it, it's somewhat of a more difficult question because we haven't been giving any guidance, right? So I can understand that without any guidance through last year, that following the Desert Control share may be like watching a football or a soccer game where there isn't any much activity or scores, right? So that's why we said it last year, we said it in Q3 and Q2 as well, that as we enter 2023, we will start giving guidance. And that's going to start first with a focus on the sales pipeline. And now we're doing that on a concrete basis on the number of commercial pilots, preprojects and anticipated conversion rates. So that's something that we already announced early last year, that we would start doing from the beginning of 2023. And it's a natural evolution. Then once we reach maturity levels, we'll be giving more and more sort of rich matrixes of parameters to be guiding on.

[Unknown Executive]

Thank you. Then we have another question. "Is it hard to sell LNC in general?"

[Ole Sivertsen, executive]

Well, I would say that it's not a hard sell if you price it extremely cheap. What is hard is always to do an approach where you're trying to optimize and find a fair way of balancing the rewards with your client in solution-based selling. That's always a harder sell, right? So it's also the strategy that we have chosen deliberately in the beginning because if you take a sort of a pricing strategy, just cost plus and just try to get it out as cheap as possible, you will very much struggle later on to bring up a fair value of your product in the market. And secondly, remember also what I said about our historic ability to deliver, right? All the projects that we have delivered up until November last year have been tiny, right? So they've been the size of a football field or smaller, right? If you think about the validation projects with International Center for Biosaline Agriculture in the UAE, that was like 15% of a football field in terms of size. And many of these deployments have now been growing significantly. We have shown that we can deliver at larger scale. And that's also important to remember. If you're then driving too much into your pipeline too early, you risk actually delivering something that is not going to be a good experience for the client. So right, the approach that we have taken now is really building trust with the clients and is also building trust and confidence in our organization, in our team's ability to know that we can master what we're doing, to make sure that we're delivering in a way where every single client and every single project becomes a reference and an ambassador for Desert Control.

[Unknown Executive]

Thank you. "Are there any progress on R&D regarding automating of the mixing of the LNC. And would this impact required personnel requirement per unit cluster?"

[Ole Sivertsen, executive]

Yes. We're continuously seeing opportunities of improvement. Our main focus in the last period and in the short term is to make sure that we utilize the equipment and the assets that we have, while being ready to quickly improve and upgrade the capacity of the current assets when we see that we reach the utilization rates that require it. But we're always looking in areas of improvement. I think also when we heard the improvements of going from 50 trees taking 3 days to 250 trees per day to 500 trees per day. We need to look at the totality as well so that we make sure that we have a technology readiness level that is harmonized across the ability to apply and the ability to produce and the logistical elements to support the overall operations together with people, processes and technology.

[Unknown Executive]

Thank you. A new question about guiding. "Does this mean that you're guiding 10 new customers within the next year? Meaning that there's 5 pilots every quarter with 50% conversion?"

[Ole Sivertsen, executive]

Conversion is not a win rate for the pilots, right? So what we are sharing in our guidance is that we are targeting a minimum of 5 signed commercial pilots every quarter, right? So there is no conversion to sign them, right? So we will be guiding on signing a minimum of 5, and then we're guiding on a 50% conversion of those pilots to larger-scale deliveries, right, as a minimum. Our experience so far is very, very good. But sometimes you may run into some pilots where for the client, they're changing landowners and they are suddenly saying we need to make that decision a year later or whatever. So we're not going to go out and give an unrealistic guidance of converting 100%. That's why we've said minimum 5 projects like this per quarter and thereafter of these, a conversion rate of minimum 50%.

[Unknown Executive]

Thank you. Another question is, "Is there a plan of doing the live time lapse of crops with and without LNC deployed side-by-side?"

[Ole Sivertsen, executive]

Yes. I love that time lapsing thing. It's actually more difficult than I had imagined to get those time lapses, really of the close ups of the crops. We do have some of entire fields, but it doesn't really give the impact that [ Doug Magnus ] here is asking about. But we're focused on trying to capture some. I have a few very, very beautiful night clips from field with the University of Arizona, which were interesting because you could see sort of the LNC-treated crops and the control rows next to each other. And then every time they got a little bit of water, the -- both of the crops kind of like they directly elevated themselves. And then you could see the control crops are quickly pulling down, whereas the LNC ones were more slowly holding up and then, some potential videos to look out for on that side at least.

[Unknown Executive]

Thank you. And then we have a last question. "Is LNC expensive to produce? And do you produce LNC overseas for our customers?" [indiscernible].

[Marianne Boe, executive]

Yes. So the LNC, right now we are doing the pricing for our customers on a project-by-project basis because in the stage we are now, it can vary. However, as we have mentioned, we are seeing significant improvement in our production and application efficiency, which will definitely impact our margins going forward. And if we produce LNC overseas, right now we are producing in the U.S. and in the UAE.

[Unknown Executive]

Thank you. I think that's all then.

[Ole Sivertsen, executive]

Perfect. That was a very good and long Q&A session. Again, very exciting to get all these questions and engagement from the participants. I think we're also making it perfectly well-timed, which is great because with the momentum we're now having in the market with more contracts already signed than others to be signed, we have to move on and go out there and sign those contracts. We're very optimistic, and we're very excited. So with that, we will thank you for today. I will switch back to the presentation as well. And we will finish up by saying thank you all for tuning in and being part of our journey. We will leave you with a short video clip from our December project in the Mojave Desert as the final closing. Thank you very much.[Presentation]