Q2 2023 Anaergia Inc Earnings Call

Speaker 1: Hello and welcome to today's Energia Q2 2023 conference call and webcast.

My name is Bailey and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by 1 on your telephone keypad.

I would now like to pass the conference over to our host, Darling Web Investor Relations for Energia. Please go ahead.

Thank you very much, Gailey. And good morning, everyone. This call will be discussing our earnings for Energia's second quarter of 2023 under June 30, 2023. If you're following along with our slides, my comments are directed to slides one through three. For our call today, I am joined by Mr. Brett Hodson, Energia's chief executive officer.

Dr. Yaniv Shirson, ANERGY's Chief Operating Officer, and Mr. Andrew Spence, ANERGY's Chief Financial Officer.

Before beginning our formal remarks, we would like to refer listeners to slide 2 of the presentation, which contains a caution on forward-looking information and a note on the use of non-IFRS measures. Listeners are reminded 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 anticipated in these forward-looking statements. Energy is not undertaken 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 and the company's perspectives, which is filed with Canadian securities regulators. And lastly, while this conference call is open to the public, for the sake of brevity, questions will be open for analysts only. And with that, I'll turn the call over to Brett. Thank you, Darlene. Hello, everyone. Thank you for joining us on the call today. I will be speaking to slide four. The second quarter has been a difficult and challenging time for Energia. The Q2 financial statements and management discussion and analysis of the financial results have been released and describe and reflect our situation. A few of the significant items in the quarter that I want to highlight include Rialto and entering into Chapter 11, a pretty significant event that occurred during the second quarter. In addition, the recognition of the loss on certain loans that were no longer deemed recoverable and the company announcing the strategic shift in business reset that I'll discuss about more later in the call after we review the financials and Rialto in more detail. Given that, the financial conditions of the company plus the manifestation of the current risks surrounding our build-on-operate assets, particularly in Italy, in addition to the business reset, a strategic review is initiated on approval from the board of directors of Energia as previously disclosed. The company has engaged financial advisors to assist with the strategic review.

and was looking at options to maximize shareholder value. In the strategic review includes discussions with lenders. And as a result, the company has possible implications of a lender option relating to a loan to the BOO assets in Italy. In addition, a loss on certain loans that were no longer deemed recoverable were recorded. With that, as a summary, I want to hand this over to Andrew Spence, our CFO , to provide the Q2 financial overview. Over to you, Andrew. Thank you, Brett. Good morning, everyone. My name's Andrew Spence. I was appointed the Chief Financial Officer of Energia on June 12th, 2023. I'm gonna provide a brief discussion of the second quarter results, starting with key disclosures, and I'm looking at slides.

There can be no assurance, however, that the company can reach profitability, secure adequate debt or equity financing, or implement asset sales on desirable terms within the necessary timeframes or at all. These material uncertainties raise significant doubt about the company's ability to continue as a going concern.

Next, the company has disclosed in the press release, note 10 to the financial statements, and within the highlights section, the section on liquidity and in risk factors of the MD&A, that the loan from Arjun Infrastructure Partners, or AIP, for the build-own-operate projects in Italy.

has an option for AIP to require energy to purchase outstanding loans related to such projects if certain conditions are not met.

The company continues to assess this matter as part of the ongoing strategic review, including discussion with lenders.

During the company's ongoing strategic review, including discussion with lenders, we became aware that the loans for building, owning, and operating projects in Italy will probably not be collectible and thus determine that a full provision was necessary in order to adequately reflect the balance. This resulted in an additional loss provision during the quarter. On May 25, 2023, the company's JV subsidiary, Rialto, filed a voluntary petition for Chapter 11 restructuring. Rialto is 51% owned by the company. Due to the bankruptcy, the company has determined that it no longer controls Rialto.

and thus has to deconsolidated the subsidiary as of the same day as the filing. The company has recorded a loss on deconsolidation totaling $37.9 million in the second quarter.

Energia reported a second quarter operating loss of $22.4 million.

and a net loss for the same period of $119.8 million.

Cached used in operations year-to-date through June 30th.

was $33.9 million.

Regarding our guidance, Energia in prior periods has provided guidance with respect to projected revenue and adjusted EBITDA for the fiscal year 2023, which was based on the company having adequate liquidity and access to capital necessary to execute its plans. Due to a number of factors, including the continued deterioration of the company's financial performance,

As reflected in the reported net losses and negative operating cash flows, weakened liquidity position

reported net losses and negative operating cash flows, weakened liquidity position, recent changes to senior management.

potential transaction. ENERGY now believes it will not achieve the estimates included in previous guidance and expects such measures of revenue and adjusted EBITDA to be lower than previously guided. All right moving on to

on slide six regarding our Q2 financial results.

The larger items included a charge on terminated O&M project that was $5.3 million, credit losses on trade receivables of $4 million, certain pre-petition expenses at Rialto $2.9 million, and an additional vacation accrual of $1.2 million. The Q2 2023 net loss increased by $103.4 million compared to the same period in 2022, mainly driven by the loss resulting from the deconsolidation at Rialto and the estimated credit losses expense of $59 million.

Adjusted EBITDA is $16 million lower than the same period in 2022, which is consistent with the reported loss from operations.

With that, I'll turn the call over to my colleague, Yaniv. Thank you, Andrew. I'm now on slide seven discussing the Rialto chapter 11 and deconsolidation issue.

As previously noted, Rialto Biorengy Facility entered Chapter 11 bankruptcy protection as a protection measure while enforcement of the feedstock laws continued to be implemented. As part of the restructuring process, there is a court proceeding occurring in August .

concerning a dispute over the valuation, the outcome of which will clarify potential outcomes in the future of the Brie Alto Biorengi facility assets.

As a result of the bankruptcy,

The company has seized control of the RBS and from an accounting perspective

RBF has been deconsolidated from the financial statements. The impact as of May 24th, the RBF had about total assets of $363 million, current assets of $11 million, current liabilities of $18 million, and total liabilities of $250 million. Certainly refer everybody to the Q2 interim financial statements for further details on the matter. And now over back to Brett. Okay, thank you, Yaniv. I'm on slide 8 now, discussing strategic shift in business reset. ENERGY acknowledges the business and financial results and recognizes their pipeline. We plan to develop future projects with a financial partner who will fund all or the majority of the capital in these projects. In these situations, ENERGY intends to recognize revenue in EBITDA from a development fee.

We are also in the process of evaluating our current BOO assets as part of the strategic review and are determining if certain financing options are worth pursuing at this time to increase capital resources available so that we can use them for the remaining projects. We will continue to seek equity partners and debt financing on our current build, own, operate projects through the strategic review process along with other measures. According to margin improvement, we plan to enhance contractual requirements for margin protection and perform a review of the business opportunities and improve discipline in our contracting and execution processes including incorporation of enhanced third party due diligence and improvement from past experiences. Many projects face risks of unique characteristics and at times those risks do come home to create challenges for the organization.

We've seen that in Q2 and the key is to how to take those forward and improve upon those in future work that we're going to engage in. Moving to SG&A reductions, management is and will continue to target SG&A reductions during this current difficult phase. We're already seeing results from reductions in headcount and we're striving to have significant run rate reductions in Q3 and Q4 heading into 2024. All of this is in the backdrop of prudent cash management and conservation.

Management is and will continue to target cash retention initiatives to improve liquidity and we look to the results of the strategic review to help guide us into the future. So with that I'm going to turn it back to the operator to open it up to questions and answers.

and over what time frame do you think this all plays out?

Aaron, thanks for the question. Thanks for having me.

I am new to the organization, but understand, you know, obviously the infrastructure industry quite well from my past experiences. So stepping into the organization feels and looks a lot like.

many of the successful places I have been that have been involved in such types of infrastructure projects. I think my assessment is similar to yours in terms of the market opportunity. The demand for the solutions...

the successful places I have been that have been involved in such types of infrastructure projects. I think my assessment is similar to yours in terms of the market opportunity. The demand for the solutions to offer are significant.

Now, you made a comment regarding current projects and leveraging the company and leaving little room. These types of projects tend to have debt and leverage in them and other ways to minimize equity capital upfront in order to get to your run rates on these projects.

But they do have risks in these projects and they're relatively normal risks, but they're usually unique for projects. I think for us, the challenge has been the simultaneous manifestation of several risks simultaneously that's put us into a bit of a challenge here in Q2.

leading us into the strategic review from the board of directors to look at all options going forward.

I don't want to forecast what the time frame will be on this. We're in the midst and deep into the work on that review. The options and outcomes are varied and different, and so it would be premature for me to comment on exactly where things are going to go. I can say, though, that the...

The future of the market and what Energia can do in this market encourages me quite a bit. I do believe that the services that we're offering, the technology packages we're offering, the people skill set.

capabilities are exactly in the right spot and give us some very significant competitive advantage going forward. So the key will be in the strategic review to assess these options and how to get to the point where we can capture those opportunities going forward in the future quarters and years.

Makes sense.

Does the language around the AIP loan and the rescinding of guidance imply that there are further delays to the ramp up of the Italian BOO facilities?

Can you just give us a sense of where those facilities are at today and what you expect the ramp up period would be? There are some continuing challenges with the Italian boot project. Again, from a risk point of view, one of the drivers of the...

value for doing these projects is the government incentives, which unfortunately have timelines attached to them of when they can be applied. So they require.

almost like a bit of a rushing to getting these projects to completion. And so in that approach, that's when execution risk and other risks can manifest themselves and we've had that happen on those projects. We have, as I mentioned earlier in terms of the strategic review, we're looking at the

in terms of additional capital and time to completion. And as I said, we're in the middle of the review and the process, so I can't say exactly what's gonna be the end result of that, but I'm hopeful that where we are today can be accelerated over the coming weeks and months so that the projects.

have a reasonable chance to meet their expected construction deadlines on those projects. So we're making progress. We've had risks that have increased on those projects from various different things, from supply challenges to feedstock challenges.

and other and in a lot of cases because these projects have as I mentioned government aspects to them whether they're in terms of permitting or in terms of the incentives themselves. Those are risks that you know

definitely change and adjust and we're constantly having to pivot towards them. So all of those require us over the coming weeks and months to make sure that we've got the...

the right focus on trying to get those projects into their best place over the coming quarters. But at this point in time the strategic view isn't complete. So I'm a little bit short of details on being able to say, you know, this project here or that project there. But we are looking at it in the context of the strategic review.

And then, I know it's been deconsolidated, but can you provide any updates on the current feedstock situation at Rialto? Have you seen volumes increase, even if the volume has increased?

And then, I know it's been deconsolidated, but can you provide any updates on the current feedstock situation at Rialto? Have you seen volumes increase, even if immaterially?

Yeah, good question. Rather than my generalities, I'll turn it over to Yaniv to give you a bit more specific on that. Yeah, thank you, Brad. Thanks Aaron for the question. The feedstock situation hasn't changed materially. There's been slight impacts in a positive direction.

But there hasn't been a material change in the feedstock situation. As mentioned before, we're still anticipating improvements to occur with the installation to additional oraxes.

which will bring a step function increase in feedstock and of course, the continued implementation of the ordinance with penalties that can start early next year.

Thanks, Erin. Thank you.

As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question today comes from the line of Derek Whitfield from Stiefel. Please go ahead, Derek, your line is now open. Good morning all and thanks for your time and taking my questions.

I wanted to ask two follow-ups, maybe leaning in on the six Italian boosts first. Tell us how you got to be positive and how you got to prove that you were actually good upon".

help frame the incremental capital required to bring those plants on and what a reasonable timeline to optimize the adjusters once they are online.

And again, I'm looking for parameters more so than very specific numbers.

Thanks for the question, Derek. It's difficult at this point in time for us to give specifics as we're in the middle of a detailed review on all of the projects with our...

financial analysts who have been hired by the organization to help us get to those exact answers on those questions. So I anticipate, subject to the strategic review, work being completed over the coming weeks.

and months that we'll be announcing possible details with regard to that. However, that particular review is looking at lots of different aspects of the business at this point in time. So it's uncertain when and how that information will be put forward. Also, the actual timeline is necessary to...

commissioning and also different de-bottlenecking at the plant once you get up and going. Those can vary from days and weeks of upgrading to many months. And like most processing plants, even after you get them up to the original design specs that they were intended, operators at that point in time often start to identify numerous ways to improve capacity at the plant.

commissioning based on what they're seeing on the ground. Unfortunately, I understand you're looking for a range of numbers with regard to the dollars necessary to complete off or get to that commissioning stage versus the ramp up stage. But I don't have those for you at this point in time. It is a focus of the strategic review and we'll continue to be looking for giving you more clear line of sight for that over time here. Terrific. As my follow-up and perhaps shifting over to the sector more broadly, we've seen a record amount of M&A across the R&D sector over the last two years. While not asking you to project a potential outcome for your strategic review, what's your sense on industry interest in the strategic review? What's your sense on industry interest in the strategic review?

of parties, whether they be infrastructure funds, whether they be strategics, whether they be companies that are looking to expand into this market to improve their environmental track record or their environmental capabilities.

That makes for, as a backdrop, there seems to be a lot of interest out there. I would agree, my dialogue, my instruction out there, what I'm getting from instruction out there in the industry, is that is accurate. What I would say though, that what overlays all of that is the macro environments that exist in the market condition anyways. And it feels to be more of a buyer's market than a seller's market out there.

What I mean by that is, given the uncertainty around interest rates, despite the fact that there seems to be a lot of interest and a lot of capital, there seems to be some caution relative to maybe some of the M&A deals that had been done in previous years in a bit more of a frothier...

frothier market. So that's just my gut. I'm trying to give you a bit of color of what I see out there in terms of the opportunity. In terms of going back to us and Energia and our strategic review, we're more micro obviously and we'll be talking with our closest stakeholders.