Greenlane Renewables Inc
TSX:GRN
Earnings Call Analysis
Q4-2023 Analysis
Greenlane Renewables Inc
In a period marked by transformation, the company Greenlane proceeds with strategic shifts aimed at fostering long-term growth. Despite these changes necessitating time to influence the financial outcomes fully, management remains optimistic about improving product sales in existing and new markets. A noteworthy collaboration with ZEG Biogas in Brazil introduces a royalty-like revenue stream, signifying an innovative move towards localized industrial-scale production and diversification of income.
Greenlane's revenue for Q4 2023 showed a minor uptick to $17.3 million from $17 million in Q4 2022, while the fiscal year 2023 experienced a 19% decrease to $57.8 million from $71.2 million in the previous year. The majority of 2023 revenue stemmed from system sales, albeit with a delineation: 84% from system sales and 16% from aftercare services. Their gross margin, though slightly down year-over-year from 19% to 18% in Q4, saw a full-year increase to 25% from 24%. Adjusted EBITDA painted a troubling picture with a deeper loss of $2.3 million in Q4 2023 compared to $2 million in Q4 2022, and a significant annual loss of $10 million compared to $2 million.
A notable contraction of margin percentages is primarily attributed to the complexities of project management, inventory challenges, and unique contract terms dictating volume pricing. Greenlane's concerted efforts in product standardization and cost reduction are key strategies earmarked to reverse this trend and boost gross margin enhancement in fiscal 2024.
A significant $35.3 million sales order obtained in October 2023 illustrates Greenlane's competitive vitality. Despite commanding a lower margin, the strategic acceptance of this order underscores an agile competitive response catering to larger contracts. While such deals deliver lesser margins, they are integral to maintaining a presence in competitive markets and securing potentially lucrative future projects.
The fiscal year 2023 concluded with a substantial net loss of $29.4 million, largely due to an impairment charge of $14.4 million linked to a goodwill valuation of a 2019 acquisition. However, the balance sheet shows potential for recovery with $11.8 million in cash and equivalents, a healthy working capital of $16.7 million, and no debt. The sales order backlog stood firm at $36 million.
The bulk of Greenlane's current backlog is anticipated to be realized in the first half of the ensuing fiscal year. The company expects to see substantial revenue materialization especially in Q1 and Q2 2024. The pipeline is filled with prospective projects across North and South America, hinting at imminent opportunities to bolster sales and potentially balance the books.
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Thank you for standing by. Welcome to the Greenlane Renewables Inc. Fourth Quarter 2023 Results Conference Call. [Operator Instructions] Today's call is being recorded, and a replay will be available on the Greenlane website. I will now turn the call over to Darren Seed from Incite Capital Markets. You may begin your conference.
Thank you, operator, and good afternoon. Welcome to the Greenlane Renewables Fourth Quarter and Fiscal Year-end 2023 Conference Call. I'm joined today by Ian Kane, Greenlane's President and Chief Executive Officer; and Monty Balderston, Greenlane's Chief Financial Officer. Before beginning our formal remarks, we'd like to remind listeners that today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in those forward-looking statements.
Greenlane Renewables does not undertake to update any forward-looking statements, except as may be required by applicable laws. Listeners are urged to review the full discussion of risk factors in the company's annual information form, which has been filed with Canadian securities regulators. Lastly, while the conference call is open to the public and for the sake of brevity, questions will be prioritized for analysts.
Now I'll turn the call over to Ian.
Good afternoon, and thank you for participating on today's call. I'll cover some of the events in 2023 and then focus on our goals in 2024 and the path ahead. In 2023, our focus was on preparing the business for future growth, scaling and positive adjusted EBITDA in 2024. We continue on this journey of business foundation building and are happy with our progress to date. We have invested and implemented processes, systems to enable us to scale sustainably. We are transitioning from an engineer-to-order to a configure-to-order business model, emphasizing standard products to streamline our costs and enhance our competitiveness in the market.
This accelerates our ability to increase the sales pipeline, revenue and enhance our bottom line. In 2023, we progressed 28 active biogas upgrading projects, demonstrating our team's experience and capacity. This puts us among the global industry leaders and with a broad variety of solutions and configurations that are unparalleled. We announced $42.5 million in new sales contracts, featuring one for $35.3 million for landfill to RNG projects in Brazil announced in October. As we mature our business, we have prioritized cost management, realigning our cost structure and focusing on efficiency in our supply chain execution.
These efforts are expected to contribute to our goals of achieving positive adjusted EBITDA in 2024 as was achieved in 2021 and maintaining cash reserves. Our dedicated team closely aligned with our customers ensures the delivery of quality services and products. I am confident and excited about our strong future considering the foundation work we have done and continue to do. With respect to the market backdrop, the RNG market is maturing and customers are becoming more sophisticated, shifting towards both larger projects and larger portfolio of projects, and this is influencing how we are orientating our business model going forward.
Our sales funnel is robust, giving us confidence in our approach, and we're particularly excited about Brazil and North America with extensive interest from multiple repeat customers and new customers. Additionally, the collaboration agreement that we entered into last year with ZEG Biogas to establish industrial scale volume production locally in Brazil is structured to provide revenue under a new royalty-like business model together with service contracts.
While the changes underway will take time for the full benefit to reflect in our financial results, we expect to reflect our resilience, adaptability and commitment to deliver on our overall long-term results to grow our product sales into existing and exciting new models -- sorry, new markets. I look forward to keep the public informed of our progress and want to thank Greenlane employees for their continued hard work and drive, and I look forward to bringing you further updates as we progress.
With that, we will now turn the call over to Monty.
Thanks, Ian, and good afternoon, everyone. As a reminder, all figures are in Canadian dollars and all comparisons are for the fourth quarter and fiscal year 2023 against the respective periods of 2022 unless otherwise stated. Greenlane generated revenue in the fourth quarter of $17.3 million compared to $17 million in 2022. This was a significant improvement over Q3 2023 as the company commenced work on its $35.3 million sales order announced in October.
For the fiscal year 2023 revenue of $57.8 million was a decline of 19% over 2022 revenue of $71.2 million. System sales revenue accounted for 84% of the total 2023 revenue, which is recognized in accordance with the stage of completion on the projects, with the remaining 16% of revenue being generated from aftercare services. Our gross margin, excluding amortization in the fourth quarter of 2023 was 18% or $3.2 million compared to $3.3 million or 19% in the fourth quarter of 2022.
For the full year, we delivered a gross margin, excluding amortization of 25% or $14.4 million compared to 24% or $16.8 million in 2022. The company has a portfolio of active projects at different stages of completion and a different gross margin levels. While the quarter and year-over-year results were effectively similar gross margin percentages, I do want to provide some additional color on the current quarter. During the fourth quarter, gross margin before amortization reflects additional commissioning and related costs from 3 projects and inventory obsolescence charge of $300,000.
Furthermore, the October '23 $35.3 million sales order I previously mentioned was a significant portion of our activity in Q4 and the contract reflects volume pricing, hence a lower gross margin profile in comparison to the company's historical run rate. As Ian noted earlier, we are transitioning our business model and emphasizing product standardization and cost streamlining together with royalty revenue from our ZEG Biogas agreement, which should assist in our gross margin improvement efforts in fiscal 2024.
Adjusted EBITDA in the fourth quarter was a loss of $2.3 million versus a loss of $2 million in the fourth quarter of 2022. For the full year, adjusted EBITDA was a loss of $10 million versus a $2 million loss in 2022. The adjusted EBITDA results for 2023 reflect the overall decrease in system sales revenue and an increase in G&A expenses as we made a conscious investment in 2023 to improve our systems and processes to facilitate the company's ability to scale and be more cost effective.
The company incurred a net loss and comprehensive loss of $17.7 million in the fourth quarter of 2023 compared to a net loss and comprehensive loss of $1.5 million in Q4 of 2022. For fiscal 2023, the company incurred a net loss and comprehensive loss of $29.4 million compared to a net loss and comprehensive loss of $6.1 million in the prior year. The net loss and comprehensive net loss was largely reflective of impairment of goodwill and intangible assets charge taken in Q4 of $14.4 million. The impairment removes the remaining balance sheet value of our 2019 biogas upgrading business acquisition, which is reflective of Greenlane's current enterprise value.
The company sales order backlog was $36 million at December 31, 2023. And as a reminder, our sales order backlog is a snapshot at one moment in time, and it varies from quarter to quarter. The sales order backlog increases by the value of new system sales contracts and has drawn down over time as the projects progress towards completion with those amounts being recognized in revenue. Further, our sales order backlog does not include our Cascade H2S sales, service revenue or revenue from our royalty like agreement with ZEG Biogas.
As at December 31, Greenlane had cash and cash equivalents of $11.8 million and working capital of $16.7 million with no debt. We look forward to keeping our shareholders apprised of our progress. And with that, I will open the call to questions. Operator?
[Operator Instructions] The first question comes from Hamzah Faris with Cormark Securities.
I just wanted to get a little bit of color on the market. So what are you currently seeing in the Brazil market compared to the U.S. and Italy in terms of market tailwinds and headwinds.
Yes, that's a good question. I mean there's no doubt in Brazil, there is a drive for biogas and a lot of it's partly because [indiscernible] doesn't have to own source of gas. And secondly, they have a lot of large sugarcane facilities and landfill facilities that are great sources of biogas. So overall, the country is well suited for the biogas RNG market. .
Okay. Great. And then second question, can you help me understand the thinking around this $35.3 million sale order you secured. You quoted the sale is at a lower margin, what's the reason behind accepting this order? Do you expect to see future sales from different projects from the same customer? Or is the competitive landscape changed? And then how much of this project contribute to Q4 revenues?
So it was loosely about half of our upgrader sales revenue in the fourth quarter, maybe a little bit more than half. And obviously, the logic behind the lower margin is, we were in a competitive process and certain things have larger dollar value, but they don't necessarily require more physical work, the engineering work, the procurement work, that type of thing. And so in absolute dollars, we're seeing a bigger number, but as a percentage of the revenue, the margin is less than what we've historically quoted and so there's always gives and takes in that exercise.
But when you look at our cost of goods sold on upgrader projects, essentially, 85-ish percent plus or minus, maybe even 90% is third-party acquisition of materials. So the labor component, which is often ours is loosely in that 10% to 15%. So that's where the kind of the math comes into -- on a larger contract being able to be more aggressive and obviously, we were in a competitive process with other parties and to secure it that's why we went down that path.
[Operator Instructions] As there are no more questions from the phones, this concludes the question-and-answer session. I would like to turn -- pardon me, we have another question from Mr. Hamzah Faris of Cormark Securities.
Yes. Sorry, just 1 final question. Of the 11 contracts completed this quarter, how much revenue do you believe is remaining? And can you provide any color on how you expect these revenues to be distributed across 2024?
Well, at December 31, we still had a backlog of $36 million. Obviously, that's going to largely be realized in the first 6 months to 9 months. So you're going to see a lot of that revenues coming through here, in particular in Q1 and Q2. It will tail off -- the project isn't linear, there's a lot of heavy lifting at the beginning and then there's a bit of a lull and then there's a push when you go to commissioning. So hopefully, that answers the question there.
And then obviously, as Ian had mentioned, we do have a number of projects that are at various stages in the sales pipeline. Obviously, they're not done because if they were done and contracted, we would have announced them. But we do have a have a stable of projects that we're working at the present time in both North America and in South America and Brazil.
This concludes the question-and-answer session. I would like to turn the conference back over to Darren Seed for any closing remarks.
Thanks, everyone. Thanks, operator. I appreciate your questions and ongoing interest and support and look forward to seeing you on the next conference call.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.