Carbon Streaming Corporation
Q3 2023 Earnings Call Transcript

Published:

  • Operator:
    Welcome to the Carbon Streaming Financial Update Third Quarter 2023 Conference Call. [Operator Instructions] Please note that this call is being recorded today, November 15, 2023, at 11 a.m. Eastern Standard Time.
  • And I would like to turn the call over to Justin Cochrane, Founder, President and CEO of Carbon Streaming.:
  • Justin Cochrane:
    That's great. Thank you very much, operator, and thank you, everyone, for attending Carbon Streaming's conference call for the 3 and 9 months ended September 30, 2023. I'm Justin Cochrane, the President and CEO of Carbon Streaming. And joining me on the call today is Conor Kearns, our CFO.
  • Today's call may contain forward-looking statements, which involve assumptions that have inherent risks and uncertainties. Please refer to the advisories and cautionary notes provided in the news release and the MD&A as well as the risk factors discussed in our annual information form. For more information, please review the company's regulatory filings available on SEDAR+ and on our website at carbonstreaming.com.:
  • Also, please note the company does use non-IFRS measures in its reporting. Participants are encouraged to review the disclosure related to these non-IFRS measures in the company's MD&A. And all dollar amounts mentioned in this conference call are in U.S. dollars, unless we otherwise note.:
  • So again, thank you for joining. It's been an important quarter for us, and I'm excited to walk you through some of the things that have been ongoing with the company, and Conor will certainly take us through the financial results. And then I will go and talk about the press release we announced this morning as well.:
  • So in 2023, the company began repositioning itself for long-term success and creating sustainable shareholder value as the voluntary markets -- carbon markets did face some headwinds, which, I think, we're all aware of. We initiated a corporate restructuring plan with really a focus on optimizing our cash flow by reducing operating expenses and taking a look and reassessing all of our existing streams and royalty agreements. And to date, those steps have resulted in significant reductions to our ongoing operating expenses. And we have already amended a few of our streaming agreements, and we'll continue to look at optimizations for more.:
  • We have decreased operating expenses by $3.9 million for the first 9 months of the year when we compare it to last year. That's an exceptional achievement. And on an annualized basis, that's over $5 million a year that we've already pulled out of those operating expenses, again, on an annualized basis. We will continue to look for opportunities to optimize that cash flow and position ourselves for long-term success and shareholder value creation. That is a big, big focus of the management team and of the Board all year.:
  • So with that, I thought I would just take you through a couple of the project updates we have on the quarter before turning it over to Conor.:
  • So in September, so just a couple of months ago, we did announce our second investment with Mast Reforestation in California. It's a project called the Feather River Reforestation project. We made an upfront deposit on that of $300,000, and we'll make additional upfront deposits of $400,000 as the project meets its development milestones. Mast continues to be an investment project -- an investment that we're extraordinarily excited about as we are looking at reforestation opportunities in the Western U.S. from wildfire-impacted regions, and it's just a tremendous group there at Mast Reforestation.:
  • In July, on the Nalgonda Rice Farming investment, we did amend the terms of that agreement, which resulted in an $800,000 decrease towards total committed upfront deposit there. And with Nalgonda, quite pleased that they completed their first submission of a validation report to Verra, and that just happened shortly ago. So excited to see that project continuing to advance.:
  • On the Magdalena Bay carbon streams, so this is the blue carbon stream in Mexico. Again, in July, we amended the terms of that streaming agreement, where we will now receive the greater of 300,000 carbon credits or 30% of the credits generated by that project on an annual basis. We did that by committing an additional $3 million in upfront deposits to Magdalena Bay, which will be funded again as the project achieves its development milestones.:
  • On Waverly, this is our biochar stream in Virginia. Again, in July, the company amended those -- the terms of our stream agreements, then committed an additional $1.6 million in upfront deposits. And we also entered into a royalty agreement on the volume of biochar that we receive from that project over a 25-year life.:
  • And importantly, announced an offtake agreement with Microsoft, and that offtake agreement is for 10,000 carbon credits [ or CORCs ] that are generated by that project per year. And I was exceptionally proud of the effort across the team, the sales team, the investment team to secure that offtake agreement with Microsoft and see that as an incredibly valuable partnership going forward.:
  • For a moment, just on Rimba Raya. Rimba Raya, we continue to work with our partners InfiniteEARTH at Rimba Raya, our project in Borneo, Indonesia. They continue to meet with government officials and try to understand the landscape going forward for credit issuances in Indonesia. This is our flagship project. We continue to see a lot of interest in credits generated from Rimba Raya and do hope that there's a path forward that we can figure out with Indonesia sometime soon, but unfortunately, we don't have any clarity on an exact time line just yet.:
  • And then just in terms of strategy before I hand the call back over to Conor, we're very much still focused on our sales strategy, through our marketing and selling efforts for our carbon credit project developers. We are very focused on finding some long-term offtake agreements to support our projects. And we are continuing to look at additional streams and royalties that complement our existing portfolio. We have 23 projects now spread around the world. And we will look at opportunities to continue diversifying that portfolio, particularly on carbon removal projects where we see a lot of interesting things on carbon removal projects.:
  • So with that, I will pause and hand the call over to Conor.:
  • Conor Kearns:
    Thank you, Justin, and thank you to everyone participating in today's call.
  • In the third quarter, Carbon Streaming generated revenue from the sale of 42,000 carbon credits. These credits were sold from the company's Rimba Raya inventory, which we purchased outside of the Rimba Raya stream agreement.:
  • Regarding our streams, the company continues to generate cash flow from its streaming and royalty agreements, with the company realizing sales from the Community Carbon stream for the first time in the quarter. The company continues to receive encouraging demand for the carbon credits being delivered under its streams as corporate customers continue to view Carbon Streaming as the preferred supplier of quality carbon credits.:
  • For the third quarter, the company reported net income of $718,000. Included in net income of $718,000 for the quarter was a $1.8 million gain on the revaluation of the company's carbon credit streaming and royalty agreements, primarily related to the accretion from the unwinding of the discount rate.:
  • Carbon Streaming is required to do a fair value assessment on its streaming and royalty agreements at each reporting period. In determining the fair value for its streaming and royalties, the company incorporates both project-specific factors, such as project-specific legal, regulatory, political and methodology risks and current voluntary market conditions. For more information and an increased discussion on these inputs used in our fair value calculation, please refer to the company's financial statements.:
  • For the 3 months ended September 30, 2023, no gain or loss on revaluation of the Rimba Raya stream was recognized as the changes to management's estimates for the timing of carbon credit issuance and delivery and the resulting impact to the carbon credit production and sales profile was offset by the accretion due to the passage of time.:
  • After adjusting for the fair value revaluation of our carbon credit streaming royalty agreements, the revaluation of warrant liabilities, derivative liabilities and convertible note, impairment loss and corporate restructuring expenses, the company's adjusted net loss was $1.7 million. This is a significant improvement to our Q3 2022 adjusted net loss of $5.4 million and shows the success of our cash management practices and ongoing restructuring efforts to reduce corporate G&A.:
  • Evidenced in the success of the company's ongoing cost-cutting initiatives for the 9 months ended September 30, 2023, other operating expenses decreased by $3.9 million when compared to the prior year period. In the third quarter, we paid $2.1 million in upfront deposits for the carbon credit streaming and royalty agreements. These primarily related to a stream amendment for the RB Waverly and the upfront deposit for Feather River Reforestation Stream.:
  • As of September 30, the company had $54.4 million of cash, no corporate debt, and the company's balance sheet remains strong. And we continue to be well positioned to execute on our strategy, lead our streaming commitments and return shareholder value.:
  • With that, I would now like to pass it back to Justin Cochrane.:
  • Justin Cochrane:
    Thank you, Conor. So this morning, as I hopefully most saw, we did announce an additional -- made additional announcements, which is the initiation of a review of strategic alternatives as the company firmly believes that the market cap of this company is not reflective of the underlying value of our assets. As we discussed in our Q2 call and the same remains true today, we have almost $4 of net assets on the balance sheet of this company, which consists of the cash and the investments that we have, the investments that we've made. So almost CAD 4 of assets, and the share price today, that's about $0.91.
  • So we did initiate what I'll call the next phase of our restructuring plan, and the Board of Directors did establish a special committee that's going to have -- and assist with the oversight of that plan. We are very focused on ensuring that the company maintains its competitiveness and focuses on optimizing the remaining cash that we have on the balance sheet.:
  • As we previously discussed today, we've made -- we've already made significant progress in reducing our operating expenses. Those are expected to reduce expenses over $5 million per year on an annualized basis. And that was from headcount reductions, we sublet our Toronto office space, and we've optimized other expenses throughout the organization. And we do expect to continue that work. We are looking at a potential reduction in the size of the Board of Directors. We're looking at additional personnel reductions. We're reviewing total executive compensation across the board and do expect to be able to deliver additional savings when some of those are implemented. And we're continuing to actively look at and manage our existing portfolio of streams and royalties, with a focus on supporting our existing project partners and, again, other opportunities to continue diversifying our portfolio but, again, with a focus on renewal projects.:
  • But in conjunction with this restructuring plan, the Board and the special committee, with the assistance of financial and legal advisers, are going to evaluate a broad range of options, with a focus on maximizing value for all shareholders. At this stage, of course, we're open to exploring all strategic alternatives that are in the best interest of the company and all of its stakeholders. The company did retain BMO Capital Markets as its financial adviser and Stikeman Elliott as its legal adviser and Miller Thomson as legal adviser to the special committee. We have not set any definitive timetable nor really begun this process. And certainly, no decisions have been made at this time.:
  • But we did want to make it clear that we are very, very focused on our existing portfolio and optimizing that portfolio, on protecting and optimizing the remaining cash that's on our balance sheet. The Board and the management team take those responsibilities very seriously. I think we've done a great job of making progress this year. Again, a bit more can be done and will be done. And we want to make sure that we're taking actions that are in the best interest of all shareholders. And that's why the company has retained this -- these advisers.:
  • And that's unfortunately about all I can say at this point on that process, but very happy to take any questions now. And operator, hopefully happy to open up the line for the Q&A.:
  • Operator:
    [Operator Instructions] And your first question will be from Aaron MacNeil at TD Cowen.
  • Aaron MacNeil:
    I was wondering if you could give us a better sense of what your current inventory of credits are specifically related to streams that have delivered credits. Any updates on marketing those credits and what the average price was for the 13,000 in revenues from those credits in the quarter?
  • Justin Cochrane:
    Yes. So on inventory -- thanks Aaron, thanks for joining. On inventory, we still, I believe, have a couple of hundred thousand credits on inventory, expecting sort of substantial still -- some substantial delivery of credits coming later this year and obviously into next year.
  • So -- and then -- so the marketing and selling of those credits -- the market is a little bit slow, as you would expect this year, but we are starting to see a real pickup as we typically do in Q4. Q3 has historically been always the slowest time for selling credits. Q4, we see -- we tend to see a bit of renewed interest around year-end commitments to offset carbon emissions and obviously some interest around the various conferences of the party meeting because you have COP28 coming up this year.:
  • So yes, it was a bit of a slow quarter, so we don't have a lot of unsold inventory. So it's just a small amount.:
  • Aaron MacNeil:
    Right. And when you say you've got a couple of hundred thousand of inventory, does that relate to the credits you've previously purchased? Or is that related to the streams?
  • Justin Cochrane:
    There is a little bit in both there, Aaron.
  • Aaron MacNeil:
    And any comment on like the average price as it relates to the 13,000 in revenues? Was it...
  • Justin Cochrane:
    Conor, do you have the price?
  • Conor Kearns:
    Yes. So on those stream credits, the average price was USD 9.50. Again, we -- given our financial issuing treatment, our streams and royalties, we are not able to break out the details specifically. So yes, but the average selling price was $9.50 for that period. And then obviously, the 13,000 represents sort of our net economics following that rate.
  • Aaron MacNeil:
    Yes. No, that's perfect. And then it looks like the deliveries for Sustainable Community and the biochar streams were delayed in the quarter. Can you just give us a sense of what changed relative to last quarter and if there's any read-throughs to delays in other streams?
  • Justin Cochrane:
    No, it's just ongoing -- that is ongoing validation, verification delays at the various projects. And nothing -- it's just -- these things are taking a little bit longer than anybody expected, but still -- we're still continuing to make very good progress on all the biochar and the Sustainable Community streams. So nothing to be overly concerned if it's a delay in timing.
  • Operator:
    Next question will be from David Quezada at Raymond James.
  • Theophilos Genzebu:
    This is Theo Genzebu, calling on behalf of David Quezada. Just in regards to Rimba Raya, I appreciate the color given on the continued review in Indonesia. But just looking at the fiscal goal of participation, right, did [ they give you ] play, any like deciding factor for them to be considered? Or is there something else in the thought process? And I guess also what does that mean just moving forward for you guys?
  • Justin Cochrane:
    Yes. So no impact on us. Good question. But yes, no impact on us. [indiscernible], just decided to -- it's -- it had a participation right going back to when we entered into the stream in 2021. It had -- it had not sort of finalized that participation. And it's been sort of ongoing for a couple of years. So -- and they just notified us that they don't intend to participate in that. I can't really speak to their reason, but no impact on us. And frankly, we now own a bigger stake in our flagship asset. So not anything that we're upset about, to put it that way.
  • Theophilos Genzebu:
    All right. Great. That's fair enough. I guess just on a more high level as well as strategically. And I appreciate that nothing -- not much else can be said on the restructuring or the strategic review, just amounts. But I guess moving forward, can you just give maybe a little bit more color on like if there are certain types of projects that you'll be focusing on considering this [indiscernible]?
  • Justin Cochrane:
    So in terms of new investments, in terms of new investments, the focus, as I was saying, is largely going to be on carbon removal projects as we see a lot of interest from buyers in those types of credits today. In terms of the strategic review, there's no particular focus on any one type of project in our portfolio. That's for sure. Yes, so nothing specific there.
  • Theophilos Genzebu:
    Okay. Great. And then just one more for me. You have a healthy amount of cash on your balance sheet still. I'm just wondering, considering it's -- considering the review and everything, how you can stretch that? And would you consider taking out any type of corporate-level debt, anything?
  • Justin Cochrane:
    Yes, I mean, at this stage, it's not a consideration, just given we have almost $55 million in cash, we generate a couple of million dollars of interest income on that cash balance today, which goes to offset any remaining G&A that we have. So we are extremely well funded. So we've not considered -- no near-term plan to consider debt at this time.
  • Operator:
    [Operator Instructions] And your next question will be from [ Ian Gazard ], an investor.
  • Unknown Attendee:
    [ Ian Gazard ] here. I'm impressed with the operating cost reductions. Can you give us an idea of a time line for when you'll be cash flow breakeven on an operating cost basis?
  • Justin Cochrane:
    Yes. Thanks, [ Ian ]. Yes, thanks for the question, and it's a great question. I would say, while we can't commit to time lines right now, I would say it's a big priority of the company to get to cash flow breakeven, cash flow positive as quickly as possible. It's a big -- and we do that through delivery of credit, sales agreements, generating revenue and cash flow from the credits that are delivered as part of our stream agreement, and of course, doing what we can to lower G&A, recognizing we do have a marketing and sales organization that is critical in the success. So we believe it's critical to the success of this business and ongoing public company expenses that are hard to avoid.
  • So -- but we're focused on reducing -- continuing to reduce our G&A and our spend, starting to materially generate revenue and cash flow from our various streams and royalties and getting to that cash flow breakeven as soon as possible. I'd love to be able to commit more in terms of a timetable, [ Ian ], but unfortunately, we can't right now. But rest assured that it's a big focus of ours.:
  • Unknown Attendee:
    Okay. I appreciate that. Do I take your answer to mean it's probably not going to happen in 2024?
  • Justin Cochrane:
    I wouldn't take it to mean that, no.
  • Operator:
    And at this time, it appears that we have no further questions. Please proceed.
  • Justin Cochrane:
    Well, thank you very much, operator, Sylvie, and thank you to all the listeners and participants today. I appreciate the time. As always, there's great information up on our website and also the ability to support our projects and buy credits from our projects on our website, but I encourage you to jump on the website for any additional detail on our projects. Again, thanks, everyone, for joining, and look forward to the next update for our year-end financials.
  • Conor Kearns:
    Thanks again.
  • Operator:
    Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.

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