Renovare Environmental, Inc.
Q3 2018 Earnings Call Transcript

Published: 15 Nov 2018

[Operator:]

Good day, ladies and gentlemen and thank you for standing by. Welcome to the BioHiTech Global Third Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. Before I turn the call over to the company, I want to remind listeners that during the call management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today and therefore we refer you to more detailed discussions of this risks and uncertainties in the company's filing with the SEC. In addition, any projections as to the company's future performance represented by management include estimate of today November 14th, 2018 and the company assumes no obligations to update these projections in the future as market conditions change. This webcast and certain financial information provided in the call are available at www.bihitech.com on the Investor Relations' page. I would now like to turn the call over to Mr. Richard Galterio, Executive Vice President of BioHiTech. Please go ahead Mr. Galterio.

[Richard Galterio:]

[Technical Difficulty] BioHiTech Global third quarter 2018 financial results conference call. In addition to myself, with us today are Frank E. Celli, our Chief Executive Officer; and Brian Essman, our Chief Financial Officer. I'd like to start off by providing a brief overview of our business progress in the third quarter, followed by a more detailed discussion of our financial results from Brian Essman, and then we will turn the call over to Frank, our CEO to provide an overview of our growth strategy for the remainder of the year and into 2019. During the third quarter, we achieved 65.8% of revenue growth, seeing improving year-over-year metrics in our food waste digester business in overall revenue, rental revenue, direct sales, and number of units deployed. We also benefited from growth related to our management services agreement with Gold Medal, which as you probably are aware is a revenue stream new to this year. Gross margin improved across all aspects of our revenue generating businesses and this higher margin revenue growth helped us to increase gross margin dollars by 282%. We also had a decrease in operating expenses that enabled us to improve our net operating results by about $600,000 compared to last year's third quarter. While our financial performance continues to steadily improve, we are becoming even more excited about the future growth we anticipate in our digester business as well as the near-term commercialization of our HEBioT business. We have focused our recent sales efforts for our digester business on larger scale opportunities in grocery, hospitality, and healthcare. And while this has led to longer sales cycle, we have generated a significant increase in the size of opportunities in our sales funnel, which Frank will discuss later in this call. We also achieved several key milestones in the third quarter of 2018 that will help us build value for our stockholders. First we entered into a letter of intent to increase our stake in the nation's first HEBioT resource recovery facility, a 56,000 square foot facility with over three -- excuse me located in Martinsburg, West Virginia. As you probably know, we control exclusive development rights in the Northeast to this patented HEBioT process that converts approximately 40% or more of municipal solid waste into a clean burning EPA-approved alternative fuel that results in up to an 80% overall reduction in landfill usage. As we mentioned in our last call, we expect to complete a definitive agreement in Q4 2018 that will result in our being able to consolidate these operations in our financials. Second, we recently received local permits in New York to build the 72,000 square foot facility in 23 acres of land in the City of Rensselaer, southern industrial area. The plant facility is expected to generate approximately $12 million of high margin annual revenue with an anticipated completion roadmap for Q4 of 2020. While there are several additional steps needed to complete that roadmap including fine -- excuse me including final state approval, feedstock and offtake agreements, and project debt financing, we now set the stage for a steady ramp in revenue from our business HEBioT business in the coming years, which Frank will go into later in the call. In our digester business, we partnered with Delaware North, one of the largest privately-held hospitality and food service companies in the world with over $3 billion in annual revenue to provide solutions tailored to meet the needs of its food service and hospitality customers, which led to our revolution seed digester being installed at Miller Park, the home of Major League Baseball's Milwaukee Brewers. That installation enabled the venue to win a Sustainability Initiative Award for Excellence in Concession. This award helps add to our credibility and partnerships with companies like Delaware North is one of the reasons why we're excited about the future of this business. And last, as a further validation of the value of our products in reducing the environmental impact of food waste, the University of Delaware conducted and released an independent lifecycle analysis that compared food waste disposal using our digester technology to composting and landfilling in accordance with ISO standards. The study found that when compared to our technology, trucking food waste to a compost facility resulted in double the amount of CO2 equivalents. While trucking unprocessed food waste directly to landfills yielded 900% more CO2 equivalents. This independent data helps improve awareness, backs our claims, and helps us -- our marketing effort significantly. At this time, I would like to turn the call over to Brian Essman, our Chief Financial Officer to discuss our financial results.

[Brian Essman:]

Thank you, Rich and good afternoon to everyone. We achieved strong revenue growth of 65.8% for the third quarter of 2018 with total revenues of $1.1 million as compared to $656,000 in the third quarter of 2017 and up approximately $200,000 sequentially. Quarter-over-quarter growth has driven our new management services revenue from Gold Medal as well as a 13.1% increase in recurring revenue from our digester rental and data analytics platform and a 17.1% increase in direct digester sales including our overseas distribution network. While revenue related to our digester business has grown -- shown consistent growth, our shift to focusing on larger opportunities has lengthened the sales cycle. As Rich mentioned, our pipeline of multiple unit opportunities has grown substantially and we remain confident that this will lead to a significant growth as we move into 2019. Gross profit for the third quarter of 2018 increased by 282.8% to reach $596,000 with gross margin increasing by 31 percentage points to 54.7%. The primary drivers for the increase in gross profit include the addition of our Gold Medal management services revenue, which through the leveraging of our existing management team, has not resulted in incremental cost; a 12.3 percentage point increase in gross margin from our digester rental and service business, which reached 28.3% as well as we benefit from a greater base of revenue generating units in the field. We continue to expect revenue margins to remain in the 28% to 35% range as our installed base grows and as our new smarter line of digesters require less maintenance and an eight percentage point increase in margins from equipment sales which rose to 44.8%. It is important to note that we typically only conduct direct sales in certain reselling markets, mainly internationally where leasing models are not common. Third quarter operating expenses decreased modestly by about 8% compared to last year's quarter, decreasing by $156,000 to $1.8 million. The decrease in operating expenses was mainly due to a $400,000 decrease in professional fees; partly offset by $227,000 in personnel expenses, principally related to stock-based compensation. A $24,000 increase in sales and marketing expense also. We expect cash based personnel expenses to decline during the first quarter of 2019 as we reduce headcount associated in software development as our projects have been largely completed and equipment maintenance as our Revolution Digester have proven to be extremely reliable. Our loss from operations decreased by about 33% to $1.2 million when compared to the same period in 2017. Now to our balance sheet. Our cash balance at the end of the second quarter approximately $400,000 with shareholders' equity of $2.9 million. This compares to cash of $901,000 with a shareholders deficit of negative $11 million as of December 31st, 2017. Subsequent to the quarters end, we increased our facility with --for America $1 million to $1.5 million and we’re currently in negotiations to increase our facility further to support anticipated digester leasing growth. The significant improvement in our balance sheet was a result of mandatory conversion of debt into common stock upon achieving our NASDAQ up listing in April, as well as a conversion of additional debt into equity during the first quarter. I will now turn the call over to Frank to discuss our growth strategy as we move forward into 2019.

[Frank Celli:]

Thank you, Brian. We've achieved some important milestones this quarter that will set the stage for significant growth in 2019, but we also recognize that there is much work that needs to be done to reach our goal of becoming a force of change in waste management industry in order to build value for our stockholders. So I’d like to give everyone some insight as to our plan of action to commercialize our HEBioT business, significantly improve the growth of our digester business and leverage our opportunity with Gold Medal and Board Technologies. Let me start with the digester business. First, as both Brian and Rich mentioned, we believe our sales funnel has increased meaningfully as we enter into 2019. We’ve focused on larger opportunities of 10 to 100 plus units, and we believe we have the ability to learn several opportunities in the coming quarters. Some examples include, a 20 unit grocery opportunity in the northeast that has been testing our Revolution Series Digesters for several months where we're negotiating a full rollout for the spring of 2013. A 100 unit rollout within expanding national grocery chain that has already deployed more than 15 of our digesters in its system and we're hopeful to begin progressive installations beginning in Q1 2019, and another opportunity for 50 units for our ecosafe digesters with a very large national grocery chain. While we have not closed on these potential contracts, just these three opportunities alone would almost double the size of our current portfolio of least units which gives you an idea of why we're so excited. In order to support the anticipated growth, we've expanded our facility with Comerica Bank as Brian mentioned and we were looking to further expand that facility to support growth in conjunction with our investment in additional unit deployments. Additionally, we mentioned our bundled service program with Gold Medal last quarter where we provide a combined offering of traditional waste management services with BioHiTech Technology. Our initial test market of this yielded Temple University as a customer and we believe that others will follow suit soon including the 20 unit grocery chain previously mentioned. Beginning in 2019, Gold Medal has dedicated two sales professionals to market this combined offering which we believe will also drive growth. We've also received a number of inbound inquiries from other waste management companies regarding this opportunity and we intend to begin efforts to market the bundled services platform to other regional waste management companies in the coming quarters. With our HEBioT business, we're very excited about the near-term commercialization of the technology at Martinsburg. This facility is beginning to power up for testing and will serve as a showroom that will help us capitalize on building additional facilities in the future. In fact, the facility is already getting media attention with a delegation from West Virginia State Senate recently touring the facility and a number of press reports about its anticipated opening as well as the China plastics ban we talked about last quarter. This has begun to lead to inquiries from municipalities and other interested parties. Additionally, our plan to close on larger ownership stake in the facility in Q4 will enable us to consolidate the operations in our financials and provide us with significant revenue and meaningful EBITDA in the coming years. Receiving the permits for Rensselaer is another meaningful milestone which positions us for condition continued growth in the coming years. The facility will be larger than Martinsburg and we believe more profitable due to the higher tipping fees in the region. We've also begun to explore sighting of facility in Philadelphia where Gold Medal has acquired operations on a parcel that has already a solid waste permit in hand. As you can see, we have ambitious growth plans which will require planning, work and investment. In our HEBioT business, our goal is to have majority ownership in facilities and financial operations through a combination of project debt financing and strategic partnerships. Towards that end, we're in negotiations for potential strategic investments for Rensselaer as well as our go-forward plant roadmap. We believe this strategy will enhance our ability to grow and maximize value for our stockholders. As our digester business grows, we expect to gain more financial flexibility to improve gross margin dollars which will help the bottom line along with the cost reductions as Brian mentioned earlier. Comerica has been a great partner for both BioHiTech and Gold Medal as has Michaelson Capital, our senior lender in Kinderhook Industries. We believe with their continued support, coupled with our plans for strategic capital, we can build a solid foundation of growth for years to come. As many of these situations are very fluid in the near term, we expect to provide additional information in the coming weeks. And as our picture becomes clearer, we'll provide more insight as to where we see the business in 2019. Before I turn the call over to your questions, I'd like to thank each and every one of our employees for their dedication in helping us to position the company for sustainable long term growth. I would also like to thank our investors for entrusting a portion of their investment dollars in our company. Operator, this concludes our prepared remarks and you can now open the call to questions.

[Operator:]

[Operator Instructions] Our first question is from Patrick Murphy with Maxim Group. Please proceed with your questions.

[Patrick Murphy:]

Hey guys. Congrats on the quarter. First question rental model I guess taking hold, I know you guys spoke about a bit the opportunity to expand this into Gold Medal by providing a full service solution. Just curious how you view that opportunity now and how are you going to approach it moving forward and how large of an opportunity you view it as?

[Frank Celli:]

Hey Patrick, how are you. Thanks for joining. This is Frank. Yes, I mean, look we believe that that our digesters are the most cost effective as well as sustainable solution for organics disposal. So, as we continue to see regulations kind of moving in that direction, our ability to use Gold Medal as sort of a test kitchen I would say for that bundled services has been pretty successful so far. So, as I mentioned, our first customer or I should say our first trophy customer under that bundled services was Temple University. We now have a dedicated marketing team towards selling that value proposition. In many cases we’re able to offer customers savings up to like 15% over and above what their traditional waste costs are by using technology as opposed to -- as opposed to traditional means for disposal. So, we think we're going to get great traction in 2019. Gold Medal itself has about 3,000 customers in the suburban Philadelphia marketplace of which we've identified about 1,000 potential customers that might qualify for this kind of bundled service, so we think in a small -- very small geography, it represents a great representative sample for us as to what some of the larger national waste companies could do throughout the nation. So the opportunity is not thousands in the Gold Medal portfolio just based on Gold Medals current size, but the penetration inside that customer base should prove as that cookie cutter for some of the larger more regional and national waste providers, so we think it's a great opportunity for growth in 2019. We think it's a great catalyst for growth not just in the Gold Medal portfolio, but as an example of what some of these other waste providers can do.

[Richard Galterio:]

Yes, I think -- this is Rich. Just to add onto that our ultimate goal is to become a technology provider that's sort of embedded into the traditional waste model. We want to not -- we want to show the waste management industry how utilizing our technology will benefit the customer as well as the waste management company, and overall, the environment. So, we think that Gold Medal not only represents the opportunity inside itself, but also serves sort of as a white paper that we can show other waste management companies how to do it, how to benefit their customers, and how to make more money. So, that's really our ultimate goal.

[Patrick Murphy:]

All right. Thank you. That's very helpful. On to the West Virginia facility, it sounds like a positive update from the quarter. You look like -- you look to update and increase your investment in there in the fourth quarter. How should we think about that moving into 2019?

[Richard Galterio:]

In terms of what we think it's going to do?

[Patrick Murphy:]

Yes, like what sort of revenue opportunity is it for you guys and like what's the timeline to get that up and running?

[Richard Galterio:]

We've already publicly said that we think it's a $7 million revenue opportunity in 2019. Now that is going to be a little dependent on the progress of the commissioning and as this is the first facility, that's new to this country, it certainly operated in Europe, but we expect that it will do around $7 million. We're still working through until we -- as we complete this acquisition of the additional stake, what that will flow through down the bottom-line, but we expect when the facility is optimized, it'll throw us EBITDA margins around 50%. That's the target that we are looking -- that we're looking at now, but we'll certainly as -- other guys -- like as Frank said, when these things unfold, we'll definitely provide a little bit more detail in the coming weeks as this picture becomes clearer and hopefully that we execute on definitive agreements.

[Patrick Murphy:]

Okay. Thank you. And then one final one. Very solid management advisory fees during the quarter, was this due to anything one-time in nature or unique about the quarter and what kind of level should we expect for this going forward?

[Brian Essman:]

The majority -- this is Brian the majority of the fees were a standing management agreement. That's -- it will be every month, every quarter. In addition to that we have individual project fees and given the growth in Gold Medal and their acquisitive nature, I anticipate those fees will continue likewise and potentially to grow.

[Patrick Murphy:]

Thank you very much guys.

[Richard Galterio:]

Thank you.

[Operator:]

Our next question is from Eric [Indiscernible] Investor. Please proceed with your question.

[Unidentified Analyst:]

Thank you. Couple of questions. One, I'd like to maybe have your insight, Frank and/or others with regard to how you feel like you stack up against the competition and fairly the research of the market on the digester side, especially, and it seems like at least my perception of that that ORCA or totally bringing the parent company has done a good job on the national sales side -- signing national agreements with Avendra who is the buying agent as I'm sure most of the caller are aware for Hyatt and Marriott and other hotel chains as well as Aramark, with Aramark having a huge global presence. And I just want to know how you would assess your performance with the national sales side when you compare to those? Because I don't believe I've heard of anything with BioHiTech that would be on the scale of Avendra or Aramark for BioHiTech?

[Frank Celli:]

Yes, this is Frank speaking. So, yes, take caution in those national sales agreements because we actually do have some of those in place as well. Some of which we've announced when we felt they're meaningful, others which we haven't because our history shows that while you can have a national account sales agreement in place with Avendra, I'm not picking on Avendra because we've had an agreement in place with Avendra in the past, that doesn't necessarily mean that there'll be any execution under those agreements. So, announcing national agreements that don't end up amounting to actual sales is not something we get super excited about. We do have some in place, I would say, the one that comes to mind for me that's probably most meaningful is probably Hilton where we do have an agreement in place with Hilton International. We also have some agreements in place with some other master services agreements we would call them with some large retailers, but until they amount to actual sales and deployments, we don't get super excited about them. We used to, quite frankly, because sales guys would come in and say hey Yahoo! Got an agreement with Avendra and at the end of the day; if you didn't pull the trigger property-by-property, it was meaningless. So, as far as our competitors go, I won't knock any of them. What I would say is that we are the leader in the marketplace. We have always been the leader in the marketplace. Our technology is what we believe to be far superior and one of the things that I think is very important to understand is that any of our competitors that are claiming to have any level of data and analytics are potentially in violation of existing patents that we have in place. So, the concept of a digester is not really something that is all that unique. Quite frankly, we could argue all day long over who builds a better stainless steel box? Whose cocktail of microorganisms is more efficient? But at the end of the day what really differentiates us from our competitors is our data and analytics component and that is a patented component. We do have some copycats out there that we're not exactly pleased with as you can imagine because we've spent millions of dollars and countless hours on developing the concept and the technology. So, at the end of the day, we differentiated ourselves with our technology. We do own a patented process and we'll protect our intellectual property where we see fit.

[Unidentified Analyst:]

So that being said, do you have any litigation against these potential vendors if you're saying they're unfriendly?

[Frank Celli:]

There's no current litigation in place right now.

[Richard Galterio:]

We actually just received some of that -- some of those patents not to -- I think we made an announcement this summer about the first one and we talked about that in our call. We have not done anything yet. That's not to say that we won't do anything. We're not looking to be a litigious company that's going out after anyone; we believe our equipment speaks for itself. We believe the traction we're getting is speaking for itself. We believe that the other business lines that we have working together make a great value proposal and that's really how we're operating at this point in time. So, sure there's going to be some competition in any business. We believe our product is better. We believe we have patented advantages and we believe our model is evolving into a model that makes sense. So, that's how we are moving forward.

[Unidentified Analyst:]

I appreciate the response. I would counter with saying that the CEOs of [Indiscernible] and of ORCA are totally agreeing with, let's say, pretty much the exact same thing and they have to their product is leading. So, I guess I'm just asking -- I'm not saying that you're not, but all three of you are claiming to be a global leader in the technology and from a numbers standpoint, you have a relapse number, I would say the total number huge average, so when you say you're the global leader, are you referring to from a technology standpoint or from a number of units in operation?

[Richard Galterio:]

Well, I think we do believe we're a leader from a global technology standpoint. What I will tell you is it's very difficult to compare yourself to companies that aren't public or aren't reporting their financials and don't have a great deal of transparency and I don't want to make this call into a competitive argument about where we stand versus some of the competitors in the digester business. I'm sure that they think they have a great product and they think they have some advantages and I'm sure we do too. And that's what makes it -- if we were the only ones in the business that might say something that's a little disconcerting to me that there's nobody else in this business is generally not the most favorable place to be because nobody believes there's a business there except you. So, yes, there are competitors. Yes, they are -- yes, they are in the industry. We believe that head-to-head we're in a better position from a standpoint of where we are and as private companies, we really can't compare ourselves to them on a financial basis. So, that's where we are right now, but moving forward, we believe we have the right strategy. We're implementing that strategy and we're excited to report on where we are in the coming quarters. Thanks.

[Operator:]

[Operator Instructions] Our next question is from Anthony Williams [ph], Investor. Please proceed with your question.

[Unidentified Analyst:]

Frank, its Tony Williams.

[Frank Celli:]

Hey Tony, how are you?

[Unidentified Analyst:]

Good. Congratulations on a very solid quarter.

[Frank Celli:]

Thank you.

[Richard Galterio:]

Thank you.

[Unidentified Analyst:]

I didn't hear Brian or if he said it, I missed it. Would you mind giving us of the $1.1 million revenue in the third quarter; can you give us a breakdown on the topline and the bottom-line for each of the lines of business?

[Brian Essman:]

On the topline side, we did file our Q, which has that, but the retail -- the rental is just $4.7 -- $407,000; equipment sales $282,000; and the Gold Medal management contracts at $335,000. At the gross margin level, we saw growth in all of them. And let me just pull my numbers up on that, the gross profit which for the company totaled $595,000 was comprised of $133,000 from the digester rental; $126,000 from the equipment sales of the digesters; and obviously, $335,000 on the management contracts because as I mentioned we do not incur additional costs to the company by doing those contracts.

[Unidentified Analyst:]

Okay. Thank you very much.

[Operator:]

Ladies and gentlemen, this has concluded our question-and-answer session. And this concludes today's conference. You may disconnect your lines at this time and thank you for your participation.