Loop Energy Inc

TSX:LPEN

Earnings Call Transcript 2022-Q4

[Operator]

Good day, everyone, and welcome to the Loop Energy Q4 and Full Year 2022 Results Conference Call. Just a reminder that today's call is being recorded. [Operator Instructions]

At this time, I would like to hand things over to Ms. Natalie Arseneau. Please go ahead, Natalie.

[Natalie Arseneau, executive]

Hello, and welcome, everyone. Thank you for joining us this afternoon for the fourth quarter and full year 2022 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, such as our 2023 prospects and financial performance, and could include the use of non-GAAP and non-IFRS measures. Though it is obvious, these statements are subject to risks, uncertainties and assumptions. Accordingly, actual performance could differ materially from the statements made today, so do not place undue reliance upon them. We also disclaim any obligation to update forward-looking statements except as required by law. I ask 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 form for the year ended December 31, 2022, and our filings, which are available on SEDAR.

Fourth quarter and full year results were released today after market. The press release, financial statements as well as MD&A and annual information form are available on SEDAR and on 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'll begin by providing some commentary regarding the fourth quarter of 2022 and what we are seeing emerge in the marketplace here in 2023. I will then briefly review our 5-point operating plan that we've put into place and the important strategic engagement that we've entered into with Credit Suisse, which we announced after market today. I will then pass the call over to Paul Cataford, our interim CFO, to provide a summary of Q4 and year-end 2022 results. And then we'll open up the lines after that for the Q&A session.

In the fourth quarter of 2022, we continue to receive positive feedback on our recently announced S1200 next-generation 120-kilowatt module. Using our larger eFlow plate design, the S1200 fuel cell solution is targeted at mid- to high-end bus and truck manufacturers for electrification of their transport vehicles and to significantly extend their driving ranges.

On the operating side, we undertook a cost reduction initiative in the fourth quarter and decreased our operating expenses significantly. Paul will provide some additional commentary on this initiative in his prepared remarks.

As we headed into fourth quarter last year, we continue to see strength in our customers' expectations for the end of the year and for 2023. However, as we approach the end of Q4, it became apparent that headwinds in the capital markets, rising electricity costs and overall inflationary pressure will result in extended time lines for both new and existing projects, thus impacting demand formation across the value chain in our industry. Our close connection to the OEM customer ecosystem enables Loop to act collaboratively with our customer base and implement adjustments to both production and delivery schedules.

In this changing macro environment, I've been working closely with Kent Thexton, the Chair of our Board of Directors, and Paul Cataford, on a 5-point plan, which includes the following.

The first point of the plan is focusing the company's efforts on projects that provide clear near-term value creation and market opportunities. The second point of the plan is working closely with the existing and new customers to ship fuel cells as well as to better understand and plan for the deferred growth. In 2022, we expected the economic slowdown to be short-lived and for growth to return in 2023. We are now seeing that the slowdown is likely to be longer. In response to this, we are working closely with our customers to understand their near-term needs and to be prepared when the growth returns. The third point of the plan is adjusting our business development efforts, including sales, marketing and support, to the new economic and geographic realities of the sector. The fourth point of the plan is managing operating expenses to the current market conditions. And the fifth point of the plan is engaging Credit Suisse to advise us on strategic options regarding partnerships, joint ventures, investments and other opportunities.

Let me speak to the first and the last 2 points in the plan in a little more detail. I indicated that the first point of the plan is focusing the company after some projects that provide near-term value creation and market opportunities.

Within this part of the plan, there are 3 key initiatives, specifically, the first key initiative is completing the vertical integration of the bipolar plate manufacturing process for our next-generation products. This is one of the key pillars in our cost of goods reduction strategy. The second key initiative is completing the development of our low-profile 60-kilowatt unit, which is targeted at the vehicle market, one of the few markets that is continuing to grow in spite of the current economic climate. And the third key initiative is sourcing a strategic partner for the next stage of electrolyzer development using the eFlow technology. This allows us to focus our product development and business development teams on our core market, fuel cells for transportation, while continuing to move into the electrolyzer space.

Our work with Fraunhofer ISE has demonstrated the potential of incorporating our technology into electrolyzers, something that we feel can deliver compelling value to strategic partners seeking to improve the performance of existing products or provide more the entry point for new players. These are the 3 key initiatives of the first point of our plan.

Regarding the fourth point of our plan, managing operating expenses, at the end of 2022, Loop's global head count was 134 employees. With the most recent changes we have made in Q1, we reduced that number by roughly 1/3. The changes were designed to maintain the functionality of the business and enable the focus on vertical integration, new product launch for buses and support the strategic options process with Credit Suisse. Our head count today remains higher than at the beginning of 2022, with an extremely high-caliber group of employees, and we believe this adjustment aligns the company's capabilities and capacity with the new reality of the market.

And finally, let me provide a little more context for the Credit Suisse engagement and the initiatives that we are undertaking. As I mentioned earlier, the market for commercial fuel cell vehicles has shifted over the last several months. What we have learned from the last couple of years is that Loop's products are compelling and customers are taking them on. However, the volumes that are needed to reach positive gross margin and, ultimately, profitability as a stand-alone fuel cell company, are market growth dependent and, as a result, may be further away than previously expected.

In this situation, it is prudent to step back and assess all of the options available to the company. This can range from equity investment to more strategic engagements, such as joint ventures, partnerships, mergers or even acquisitions. We have engaged Credit Suisse because of their global reach and strong existing relationships with many of the companies who will be great strategic partners or investors in Loop. Engagement is underway, and we plan to provide further updates as appropriate.

I can say that we are excited about the opportunity to engage in this process and to enter into discussions with world-class potential partners to map out a path forward for Loop Energy and our leading hydrogen fuel cell technology. Credit Suisse is advancing the process quickly, and Loop's management team has consistently proven that it is agile and capable of moving quickly as well.

Given the current economic climate, we are looking to fully understand all strategic options available, so our Board of Directors can then decide on the ones that best serves the interest of the shareholders, customers, partners, employees and company going forward.

I will now turn the call over to Paul for his review of the fourth quarter and year-end 2022 financials.

[Paul Cataford, executive]

Thanks, Ben. I will now review Loop Energy's results for the 3-month period ending December 31, 2022, and then I will provide a quick summary of the full year 2020 results.

In the fourth quarter, we reported $681,000 in revenues compared to $128,000 for the same period in 2021. During the quarter, we sold 9 units compared to 1 unit in Q4 2021. While we did ship additional units in Q4 2022, we were only able to recognize revenue for these units in the first quarter of 2023.

We recorded negative gross margins of $3.1 million in Q4 2022. As mentioned in the past, Loop Energy is not unlike many other companies at this stage of development. Negative gross margin is expected. As we scale up operations and optimize product design for specific use cases, we expect to get positive gross margins. The timing is largely dependent on market demand and unit forecasts for our products.

Operating expenses in the fourth quarter of 2022 was $6.5 million versus $5.7 million in the same quarter last year. The net loss for the quarter was $9.6 million versus $7.4 million for the same period last year. For the fourth quarter ending December 31, 2022, the total comprehensive loss was $9.6 million or $0.28 per share versus a comprehensive loss of $7.4 million and $0.22 per share for the same quarter last year.

The cash and cash equivalents balance at the end of December 31, 2022, was $24.524 million versus a little over $67 million on December 31, 2021. In December 2022, we initiated an operating cost reduction and cash preservation exercise, which included head count reduction, operating expense reduction, a thoughtful and carefully planned reduction in activity in product development and engineering and only a modest increase in commercial activity.

Remember that at current gross margins, every unit sold for field testing and trials increases costs. These reductions implemented over the last few months have reduced the cash burn significantly, allowing the company to continue operations to the end of the calendar year on our current cash reserves and committed funds. Management and the Board believe this rightsizing of the company's operations is more in line with current market conditions, and the current cash reserves and cash burn rate allow us the time to properly evaluate where we go next.

In summary, for the full year 2022, total revenue in the 12-month period ending December 31, 2022, was $3.3 million compared to $1.4 million in 2021. In full year 2022, Loop sold a total of 49 units compared to 14 in the prior year. Operating expenses in 2022 were $27.9 million compared to $19.9 million in 2021. Full year net loss in 2022 was $37.5 million compared to a net loss of $25 million in 2021. And CapEx for the full year 2022 was $15 million compared to $6.7 million in the prior year.

Given the market uncertainty and the risk factors the company has outlined in the quarterly MD&A and annual information form, we are not providing any forward-looking financial guidance at this time.

Back to you, Ben.

[Ben Nyland, executive]

Thank you, Paul. This concludes our prepared remarks. We'll now turn it back over to the operator for questions.

[Operator]

[Operator Instructions] We'll take a question from Rupert Merer, National Bank.

[Rupert Merer, analyst]

So Ben, you're looking for revenue in 2023 to be in line or slightly ahead of 2022. If we look at your backlog and some of the announcements you've made historically, one in particular, with Tevva Motors, I think they had commitments in excess of USD 12 million up until next year. So what's happened with that? Is that pushed out later now? Or is it off the table?

[Ben Nyland, executive]

Great question, Rupert. Yes, the answer to that is it's pushing out. So what we're seeing across the industry, especially in our OEM customers, like Tevva, who are looking at the commercial truck market where buying decisions like fleet operators are very much based on commercial decisions, the current economic situation is causing those plants to be delayed. But we're not seeing those orders be canceled, we're just seeing them pushed out.

[Rupert Merer, analyst]

Right. And it sounds from your prepared remarks as though part of the reduction in cells going forward could be to conserve cash. You don't want to be using money on too many demonstration projects, let's say. If that wasn't the case, how much more cells could you do? How much demand is there for a product that may be priced just a little less than what you're willing to sell it at today?

[Ben Nyland, executive]

Well, I think the bigger issue there, Rupert -- it's true that we're being judicious with our cash. I'm not sure that it will have a huge impact on the number of cells. What we're seeing right now is a general slowdown in moving through to volume purchases because of the prevailing economic conditions.

And I think you'll remember that in our customer adoption cycle, we have 3 phases. So there's a pilot, scale-up and the commercial phase. Today, we've got 21 customers, so we've seen great broadening of that through the course of 2022. We almost doubled the number of companies. We had 2 companies move into the commercial phase, and we've got 2 companies in the scale-up phase. But I think the impact of the current economic situation is causing a general slowdown in companies moving through that process. And so that's why we're seeing the unit numbers moving out. So that's the primary driver in terms of numbers and quantities.

[Rupert Merer, analyst]

Great. Then just finally, it sounds like you are looking at a cash runway that will take you to the end of this year. So fair to assume that the mission you put forward to your advisers to get you that, maybe the next step in your path by the end of this year?

[Ben Nyland, executive]

That's right, Rupert. I'm sure you'll recall that when we did our IPO 2 years ago in February 2021, the plan was that the IPO would provide a 2-year use of proceeds. We're obviously at that 2-year mark, and we adjusted appropriately to the current conditions. But certainly, what we're working through with Credit Suisse over the next little while is how best to fund the company and move the company forward in this different climate that we find ourselves in now.

[Operator]

Your next question today comes from Mac Whale, Cormark Securities.

[MacMurray Whale, analyst]

You talked about 3 initiatives that you're still pursuing under this sort of restricting your investments or your expenditures. Can you go through -- what do you expect to be able to accomplish in those 3 things? Like, what should we be looking for? Like, one was cost reduction, one was a low profile technology and the other is the electrolyzer project. Can you sort of put them in context of the types of things to expect in 2023?

[Ben Nyland, executive]

Yes, you bet. So I'd go first with the bipolar plate project. So as you know, our technology, eFlow, is primarily a bipolar plate technology. We have, for a number of reasons, over the beginning of our company, chose to outsource the manufacture of that bipolar plate. By bringing that in-house we accomplished the first goal, which is to reduce the cost of our components. And as Paul pointed out, we want to make sure that we start closing the gap on the gross margin as we can, even though sales may be lagging. So that's the primary there is to reduce the cost. And so you can see that impacting, in 2023, some of our costs, and we'll make some announcements about it as we get the bipolar plate line up and running.

The other thing that provides for us, Mac, that I think is really important so that we can continue to be as agile and nimble as possible in a changing environment is by having the ability in-house to manufacture those plates, we can have more rapid new product development cycles with less overhead. And so it will allow us to adjust to changing market conditions much more quickly and then products to market as they're needed over the next couple of years. So that's with the bipolar plate, that's what you can expect.

With the low profile, I mentioned that it's really targeted towards municipal buses in Europe, municipal vehicles in general, but municipal buses in Europe. What we're seeing in this market is that companies that are typical commercial buyers of fleets that make decisions on a pure total cost of ownership basis are pushing their orders back and waiting in this climate where we have high interest rates and a degree of uncertainty. But there are certain markets that are choosing to continue to move forward, and municipal buses in Europe is one of those where the buyers are making decisions to purchase not on purely economic reasons but also for climate change and emissions reasons. And so you can expect out of that process to see us announcing some new customers in those sorts of spaces. And that's our way of continuing to scale our production and continuing to open up new markets in spite of the current economic climate.

And then the third area, the electrolyzer area, is a strategic effort. It doesn't require a lot of resources as a company today, but we see it as a really good opportunity for the company to get into the electrolyzer market. What we're seeing is government programs really focused around, in terms of hydrogen, is the production of hydrogen as opposed to the consumption of hydrogen. Obviously, our fuel cells are on the consumption side, we would like to have an opportunity to participate in the production side. And so we're very pleased with the results of the testing that we did with Fraunhofer, and we're now in the process of looking for strategic partners. And so during the course of 2023, it'd certainly be our hope that we find one or more strategic partners to proceed with the next phase and be able to announce those.

[MacMurray Whale, analyst]

Okay. That's helpful. I'm wondering, can you speak on the municipal bus kind of time -- sort of order size or timing that you see. Like, if -- have you seen any sort of increase or change in the commitment on the sizes? Like, are these situations where they'll commit to maybe a set number for the year and then have individual purchase orders? Like, how is that shaping up as a commercial business for you?

[Ben Nyland, executive]

Well, you'll be familiar, I'm sure, with the 2 bus manufacturers that we're already working with, Mobility and Innovation as well as Rampini. Those relationships are going well. Both have become repeat customers for us. So they're continuing to move through the customer adoption cycle. We're quite happy with that. Both of those companies have been able to use our existing products because of the profile of the buses, the engine they design on those buses.

What we're finding in Europe is that the vast majority of the municipal bus market puts fuel cell systems onto Loop. And that's what this new low profile fuel cell system that's designed for is to tap into that market that we don't yet have presence in. So we'll be approaching it the same way as we have with our customer adoption cycle previously, the 1-10-100 process, we would expect customers to follow that. The thing that's most promising about that particular market is we are seeing tenders coming forward. In some cases, tenders are starting to accelerate in terms of buying buses that have fuel cell systems in them. So really, for us, it's a matter of using a new low profile unit to get the beachhead in the market and participate in a space that we see growth.

[Operator]

[Operator Instructions] There appear to be no further questions at this time.

[Ben Nyland, executive]

Great. Well, thank you very much. I'd just like to thank everybody for attending the call. I want to send out a particular thanks to the team here at Loop. As you can probably imagine, the last few months have had a few challenges associated with them. And I have to say that the company, the team, the employees right through to the Board, has been extremely professional, taking these changes in stride and looking for the path forward as we move the company forward. We're all very excited about the balance of 2023.

So thank you again, everybody, for joining us today, and we will talk to you again in several months.

[Operator]

Thank you, sir. Once again, everyone, that does conclude today's conference. Thank you all for your participation. You may now disconnect.