Loop Energy Inc

TSX:LPEN

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon. My name is Briana, and I will be the operator -- the conference operator today. At this time, I would like to welcome everyone to the First Quarter 2023 Earnings Conference Call for Loop Energy. [Operator Instructions]

Loop Energy, you may begin your conference.

[Natalie Arseneau, executive]

Hello, and welcome, everyone. Thank you for joining us this afternoon for the First Quarter 2023 Earnings Conference Call for Loop Energy. Joining me is our President and Chief Executive Officer, Ben Nyland; and our Chief Financial Officer and Corporate Secretary, Paul Cataford. We will be available for questions at the end of the presentation.

Before we begin, I would like to clarify that our comments today will include statements and answers to questions that could imply future events and financial performance and could include the use of non-GAAP and non-IFRS measures. These statements are subject to risks, uncertainties and assumptions. Accordingly, actual performance could differ materially from statements made today, so please do not place undue reliance upon them.

We also disclaim any obligation to update forward-looking statements, except as required by law. I ask you that you read our legal disclaimer and refer to our risks and assumptions outlined in our public disclosures, in particular, the section entitled Forward-Looking Statements and Risk Factors in our annual information forms for the year ended 2022, and our filings, which are available on SEDAR.

First quarter results were released today after market. The press release, financial statements and MD&A are available on SEDAR and our website at loopenergy.com.

I would now like to turn the call over to Ben Nyland.

[Ben Nyland, executive]

Thank you, Natalie. In my prepared remarks today, I will provide comments on our first quarter of 2023 and the current conditions that we're seeing in the hydrogen fuel cell industry. I will also update you on the 3 key initiatives that we're focusing on during the first half of 2023 and then provide some brief comments on our strategic engagement with Credit Suisse, the company's financial adviser.

Following that, I will pass the call over to Paul Cataford to provide a summary of our first quarter financial results. And Paul will also speak to some operating changes and reduction in workforce that we implemented in the first quarter, that we expect will provide Loop Energy with financial capacity and runway to the end of calendar 2023, with current cash and funding commitments. Following Paul's comments, we will open the lines for the Q&A session.

As I mentioned during our last quarterly call about 6 weeks ago, the market for commercial fuel cell solutions has slowed down in early 2023. Given current macroeconomic conditions, most notably higher inflation and higher interest rates globally, we are seeing purchase orders placed by our OEM customers being pushed out as their end customers are delaying commercial ordering decisions. This is resulting in a general slowdown due to the prevailing economic headwinds and impacting demand formation across the value chain in our industry.

We are continuing to work collaboratively with our customers and have made adjustments to our production and delivery schedules accordingly. As we said on our Q4 quarterly call, we expect that Loop Energy's full year revenue in 2023 will be in line or slightly above that of 2022 on a year-over-year basis, with potential for growth resuming in 2024 when market conditions are expected to improve. So no change there from what we said on our prior call.

In this environment, we remain focused on projects that provide clear near-term value creation and market opportunities. In this regard, let me update you on the 3 key initiatives that I mentioned on the last call. The first key initiative is completing the development of our low-profile 60-kilowatt unit, which is targeted at the municipal bus market, primarily in Europe, where the vast majority of fuel cell systems are low profile and on the roof.

As opposed to commercial operators, who are currently pushing out purchases, we are seeing municipal buyers making their decisions based on emission reduction plans and climate change mandates. So this is one of a few key markets where we are seeing growth activity despite current macro conditions. Our development program for the 60-kilowatt unit is on schedule. We presented a display unit in Germany at a fuel cell trade show in Hanover a few weeks ago and are seeing good interest from customers for this new product SKU.

The second key initiative is completing the vertical integration of the bipolar plate manufacturing process for our next-generation products, including the S1200. Bringing plate manufacturing for our next-gen product in-house improves the pace of our product development process and provides our engineering team with greater agility. It is also one of the key pillars in reducing our cost of goods and improving our gross margins over time. As with the low-profile 60-kilowatt unit, the vertical integration of our bipolar plate is also on track.

The third key initiative is sourcing a strategic partner for the development of an electrolyzer using Loop Energy's eFlow technology. There is certainly strong government interest for increased hydrogen production and our test work with Fraunhofer ISE has demonstrated that Loop can deliver compelling value and greater efficiency in electrolyzer hydrogen production. Our Chief Science Officer, Sean MacKinnon, presented on this topic at Hannover Messe in Germany in April. And we are moving with pace in our conversations with potential strategic partners regarding the next phase of development for this technology.

Finally, let me provide a brief update on the process with Credit Suisse and the initiative we are undertaking with them. We are pleased with both the level of interest and engagement from players in and around the hydrogen industry. Our management team is working very closely with the Credit Suisse bankers, and we are moving quickly on this program. Given the current economic climate, the Board of Directors will be examining all strategic options available, which best serve the interests of our shareholders, customers, employees and the company going forward.

I will now turn the call over to Paul for his review of the first quarter financials for 2023.

[Paul Cataford, executive]

Thanks, Ben. I'll now review Loop Energy's results for the 3-month period ending March 31, 2023. In the first quarter, we reported $0.9 million in revenue compared to $0.2 million for the same period last year. Gross margins continue to be negative as revenues for our products are below our costs. In the first quarter, we experienced a gross margin loss of $2.95 million. As we mentioned on our prior earnings calls, the company continues to collaborate with our OEM customers at very early stages in product commercialization. We expect gross margins to become positive with volume rollouts and commercial scale.

While operating expenses increased slightly in Q1 over the previous quarter, we incurred restructuring expenses as a result of the reduction in employee count and other matters. The full effect of our restructuring efforts, including the reduction in our operating expenses will be fully realized in the second quarter and will continue thereafter.

Cash and cash equivalents at the end of Q1 2023 were $13.2 million compared to $24.5 million at the end of last year. Cash in the quarter was used in raw goods inventory purchases, which were committed to in prior periods and the deposits for inventory purchase commitments also made in prior periods. We continue to work with our suppliers to dial back inventory purchase commitments until the end of the year and plan to use up existing inventory to fulfill orders in 2023 and 2024.

Capital expenditures in Q1 2023 were $2.4 million compared to $3.3 million in the first quarter of 2022. Capital expenditures in the quarter were a result of commitments made in prior periods. While these purchases used up cash, these cash expenditures were partially offset by cost recoveries as a result of government-funded grants.

With the full effect of the employee and operating expense reductions taking effect at the beginning of the second quarter, an ongoing reduction in the company's working capital and CapEx forward purchase commitments, company continues to believe that adequate cash resources and funding commitments to continue operations until the end of the calendar year. This gives us adequate time to evaluate strategic options resulting from the process already started with Credit Suisse.

The company's net loss in Q1 2023 was $7.3 million compared to a loss of $8 million in the same period last year. And loss per share in Q1 was $0.21 compared to a loss per share of $0.24 in the first quarter 2022. Given the current market uncertainty and the risk factors, the company has outlined in quarterly management discussion and analysis and our recently filed annual information form, we are not providing forward-looking guidance at this time.

[Ben Nyland, executive]

We'll now open it up for questions and answers.

[Operator]

[Operator Instructions] Your first question comes from Rupert Merer with National Bank.

[Rupert Merer, analyst]

Wondering if you can -- can you maybe give us just a quick update on where you are in the strategic process? And how long do you think the process will continue?

[Ben Nyland, executive]

Sure, Rupert. We will provide a little bit of detail on that. We can't provide a lot of detail on the time line. As I mentioned, we're moving quickly in this process. You can tell that we've got sufficient cash for a period of time. We want to make sure that we're able to make decisions well within that time frame. And so the process has started.

We're very pleased with the way that it's going. We're pleased with the engagement of Credit Suisse, and we're pleased with the engagement of other companies that are participating in it. So we hope to have updates in a timely fashion out to the market, and we'll provide those as there are material updates, but we're not providing specific details on the time line at this point.

[Rupert Merer, analyst]

Okay. Understood. And as you look to have that outreach to potential partners, what would those partners look like? Are you casting a broad net here looking at pure financial partners, maybe hydrogen fuel cell partners, other companies that are involved in heavy transport, if you can give any color there?

[Ben Nyland, executive]

I would say that the net is cast wide and includes all of the above. There are no geographic restrictions to the process. And we are -- the mandate for Credit Suisse is to find the opportunity that rewards shareholders the best and as we said, rewards customers and employees and all the stakeholder groups. So in this economic time, we want to make sure we're considering all options.

[Rupert Merer, analyst]

So if you're casting the net far and wide and into international markets, so that include China? I'm just wondering if you can also maybe give us a comment on how the Chinese market is evolving? And if any geopolitical concerns are heating up there?

[Ben Nyland, executive]

I would say that we're watching the geopolitical landscape carefully. We have a number of suppliers in China that we're seeing relationships continue with well [Technical Difficulty]

[Operator]

We have lost the connection with the speaker line. [Operator Instructions] You are now live.

[Ben Nyland, executive]

Thank you. Apologies, everyone. We were cut off there for a moment. We're back. Perhaps Rupert can be reconnected and -- question if he can hear it. Okay. Great. Thanks, Rupert. Did -- before I was off, did I answer your question? Or was I cut off mid-sentence?

[Rupert Merer, analyst]

Mid-sentence. Yes, maybe...

[Ben Nyland, executive]

Okay. So it was the question regarding China, correct? Geopolitics?

[Rupert Merer, analyst]

Yes.

[Ben Nyland, executive]

Okay. So yes, our supply chain out of China is performing very well. We're pleased with it. We are seeing indicators that the economy is starting to move in China as the zero-COVID policies have been relaxed. So we're watching it with interest. But I would say that geopolitical developments are something that we're watching quite closely and recognizing that could create interference. So I think it's fair to say we're emphasizing other geographies at this point while we see how things play out in China.

[Operator]

Next question comes from Mac Whale with Cormark.

[MacMurray Whale, analyst]

I was going to ask you about the CapEx and the OpEx, but I think you touched on it. It sounds like those previous commitments should slow, I guess, over the next couple of quarters is -- what should we be thinking about the magnitude of that? Is it -- does it sort of go down by half? Or what's -- I'm just cognizant of the sort of the burn rate given the balance of cash.

[Paul Cataford, executive]

Yes. No, thanks for the question, Mac. It's Paul Cataford. The -- most of the commitments for inventory purchases and all that have been kind of tidied up and dealt with in the first quarter. And then as far as capital expenditures are concerned, a marginal amount through to the end of the year. But as we indicated and we'll say it again, we've got adequate cash resources without a successful Credit Suisse outcome to maintain operations to the end of the calendar year.

[MacMurray Whale, analyst]

Right. Okay. Okay. And then with the -- the recoveries look fairly high on the SDTC and JGF program. Are those -- would you expect the same level to continue? Or were there some one-time things in Q1?

[Paul Cataford, executive]

There were one-time things tied to specific programs and specific deliverables. There is still some availability on the JGF program and the SDTC program is completely filled now. So -- but the JGF funding is to fund the capital expenditures or partially offset some capital expenditure costs. So that's the only real impact we'll see till the end of the year. As I mentioned earlier, most of our CapEx programs are fully committed to and completed by now.

[MacMurray Whale, analyst]

Okay. And then the last question, you talked, Ben, about not changing the view about the revenue from '22 to '23 and then expecting growth resuming in 2024. So given that it's May, are -- what are you expecting to see? What's the timing on the resumption in activity to -- for the guidance on growth resuming in '24 to still be valid? Do you know what I'm getting at? Like when do you -- what's the sort of the lead time you need to see to be comfortable that 2024 will see that resuming growth?

[Ben Nyland, executive]

We've been thoughtful in the way that we've made the changes over the last few months, Mac, to make sure that we're in a position to respond when the market starts to move. And so we feel like we're in a great position to be flexible and agile as the market conditions change and we continue to be in close contact with our customers to really understand their outlook because obviously, that's what's going to drive things for us.

I think our view that things should start to recover in 2024 is informed by conversations that we're having with our customers, and we're going to make sure that we're in a position to be responsive to their needs.

[MacMurray Whale, analyst]

Okay. So presumably, like the customers you have in the -- in your pipeline, they may not be moving forward with actual deliveries or being able to receive the deliveries, but you're continuing to work -- like you're continuing to interface with them and understand what their latest view is, are those discussions sort of ongoing? Is -- if not -- it might depend down, so to speak, but is it -- can you give us sort of the nature of the interaction as this thing sort of suspended?

[Ben Nyland, executive]

Yes. So the conversations absolutely are ongoing, Mac, where we've got great relationships with our customers. And the nature of their view on it is that this is about delay, not cancellation is the messages that we're getting at this point. And so they're seeing overall the market being pushed out, and we'll continue to talk with them about that view.

[Operator]

There are no further questions at this time. Mr. Nyland, I turn the call back over to you.

[Ben Nyland, executive]

Thank you. I'd just like to conclude the call today by thanking our staff and our senior management team at Loop, who have been working very diligently over the last 2 quarters despite all of the changes and the challenges that we've had. We have a very high-caliber group of employees, and their effort and commitment is greatly appreciated as is the effort and commitment of our shareholders. So thank you very much, everyone. That concludes our quarterly call today. Thank you all for attending.

[Operator]

This concludes today's conference call. You may now disconnect.