Orbite Technologies' (EORBF) CEO Glenn Kelly on Q2 2016 Results - Earnings Call Transcript

| About: Orbite Technologies (EORBF)

Orbite Technologies Inc. (OTCQX:EORBF) Q2 2016 Earnings Conference Call July 28, 2016 10:00 AM ET

Executives

Glenn Kelly – President & Chief Executive Officer

Jacques Bedard – Chief Financial Officer

Analysts

Fadi Benjamin – Echelon

Operator

Good morning, ladies and gentlemen. Welcome to the Orbite Technologies' Fiscal 2016 Second Quarter Results Conference Call. Considering most of the Company's shareholders are English speaking, the management presentation will be held in English only. Questions will be answered in the language of the question. A recording of the webcast will also be made available on the site.

[Foreign Language]

Before we begin, I would like to remind everyone that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties relating to Orbite's future operational results or business performance. Actual results could differ materially from those anticipated in these forward-looking statements.

The risk factors that could affect results are detailed in Orbite's periodic results and public filings, which you can access in SEDAR's database found at www.sedar.com. Please note that Orbite disclaims any obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance on these statements.

At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Thursday, July 28, 2016, at 10:00 A.M. Eastern Time.

I would now like to turn the meeting over to Mr. Glenn Kelly, President and Chief Executive Officer. Please go ahead, Mr. Kelly.

Glenn Kelly

Thank you, and good morning everyone. Thanks for being with us on the call as per usual. I am joined by Jacques Bedard, our CFO.

At the start of the second quarter in March, we announced that we required additional financing towards completion of our HPA plant. As you will recall, we scaled down the number of external contractors on site while we working financing mode to preserve our working capital. We were however able to secure this funding, and on April 27, we announced, we had entered into a letter of intent with Investissement Québec, or IQ, whereby the Québec Government indicated it would provide a total of $15 million in additional funding for the company.

Subsequently, and as announced throughout May and on June 1, we completed three $5 million transfers with IQ, as well as an additional $1 million with a different investor. Jacques will go into the details of this funding later. But for now I wanted to add that most of $15 million financing is non-dilutive, and the financing, all of it, did not carry any additional warrants significantly reducing dilution.

We are grateful to IQ for their continue support, who as our largest institutional shareholder, has proven to be a very stable supporter of the company. This has benefited both Orbite and its shareholders.

Upon completion of the financing, we're able to award the contracts for the remaining work to completion of our plant. These were awarded after a competitive bidding process on a fixed price basis and with strict financial clauses related to the eight weeks schedule to completion. This provides us with a very clear timeline towards completion. And as these are non-unionized workers, the crews continue to work through the present Quebec construction holiday. Finally, the new contracts respect to project budget as revised and presented in March.

So how are we progressing with construction? While I was walking to the plant, a few days ago, you can see the huge progress we're making and you get the sense that we're getting close to buttoning it up. I would invite those who are interested to visit our media section of our website early next week for updated photos on our progress.

So first off, all of the civil and structural work, all of the major mechanical equipment installation and the decomposer and calciner installation are complete. Electrical installation and ventilation system installation are materially complete with very minor work left to be done. Essentially there are three piping systems remained to be installed. The cooling water system, the crystallization system and the digestion system pipings. Installation of the cooling water system was completed this week, on schedule, by our piping contractor, Fjordtech, who is now concentrating on the crystallization sector piping, and will follow with the installation of the piping for the digestion sector.

The contract for the remaining electrical and instrumentation work, and I must note that most of the remaining work is instrumentation and not electrical, awarded to Électro Kingsey, is also proceeding as per schedule and it's being completed concurrently with the completion of the piping installation by Fjordtech. Installation of electrical and instrumentation has also been completed for the cooling water system.

As with Fjordtech work will now proceed on the crystallization and digestion sectors of the plant. Isartech [ph] has completed the installation work on the high temperature steam piping and the calcination system that is the decomposer and calciner, also under a fixed price contract. So the installation work, or insulation work, stands at 75% complete, and all that remains is the insulation of the low pressure steam system. So while we are in financing mode, and now as construction is progressing and systems are completed, commissioning activities have been ongoing. To date, these activities have met with expectations and we are pleased with the progress that has been made.

As reported at our AGM a month ago, commissioning and cold startup activities of the decomposer and calciner units were completed successfully. We also successfully conducted additional coal testing of these two units over the last few weeks. To date, alumina product, in these case smelter-grade alumina, has been successfully fluidized in both reactors, and up to five tons per day have been successfully transferred from the decomposer to the calciner via the sealed pot assembly system.

In addition, the control and stability over the transfer of material through the sealed pot assembly was also tested, and the ceiling of what we call torex [ph] discharge device was also tested and verified. Commissioning and startup of the cooling water system commenced this week and will be completed by the beginning of next week, thereby allowing us to start heating up the decomposer and calciner.

Field service personnel from Fjordtech [ph] they are the supplier of our decomposer and calciner, and Sandvik were the supplier of the heating elements involved with those units, will be mobilizing onsite next week to commence the commissioning and startup of the steam super heater and the heating elements in the calciner and decomposer. The initial heating up of the decomposer and calciner is thus forecast for mid-August as planned. This is the hot commissioning of this critical system and a key step in the sequence towards full commissioning of the plant planned to start early September.

So in conclusion as a result of the progress made and the clear visibility we have towards completion, we reiterate our timeline for commencement for production in Q3 of this year.

Beyond construction, progress was also made with the strengthening of our IP portfolio on which we reported in our last update and also on commercial activity. A special note or the commercial sample that have been ordered signifying our potential customers intent to produce commercial end-product using our HPA. As we also reported, one of these commercial samples has already shipped. We anticipate commercial activities to accelerate in this sense once our HPA plant is up and running.

In summary, we're able to secure financing at good terms to both the company and its shareholders. We were able to reaccelerate construction and are on schedule towards completion in line with communicated timelines, while commissioning activities continue to meet with expectations.

So on that note I will hand over to Jacques for a review of our financial, following which I will return with some closing remarks about Orbite going forward. Jacques?

Jacques Bedard

Thank you, Glenn, and good morning everyone. As per usual, I will focus on the key points for the quarter and year relating mainly to assets and liabilities. We reported a net loss before net finance income and taxes of $1.8 million which was a decrease of nearly 50% compared to $3.5 million for Q2 of last year.

Lower G&A expense as well as the $1 million, one positive development in other income related to an insurance settlement who are the main contributors to this lower loss. For the same reason, net loss for the period under review including finance income and taxes came at $1.9 million, a decrease of $1.8 million. As to our financial position. As of June 30, 2016, we held aggregate cash and short-term investments totaling $5.6 million and positive working capital which is current asset less current liability of $6.4 million. As we announced in our press releases throughout May and June, we completed the financing with IQ for an aggregate amount of $15 million.

Additionally, we received $1 million through a private placement on terms identical to the equity investment portion of the IQ funding. The funding with IQ is in three parts. The first part is $4.9 million bridge loan collateralized against the investment tax credits we anticipate receiving for the 2016 financial year which we expect to total $6.5 million. The loan bears interest at 3.5% over prime payable monthly. As of June 30, 2016, $2.8 million are then received. Subsequent to quarter's end, we drew the remaining $2.1 million, so as a result on a pro forma basis, we had cash and short term investment of $7.7 million.

The second part of the funding comes just off of a $5 million financing against common shares of the company priced at $24.01. The third part of the funding is $5 million in non-secured convertible debentures maturing five years following closing. Units consist of 1,000 principle with a conversion price set $24.1. The debentures will bear an interest rate of 10% per annum.

The interest accrued during the first two years will be capitalized and payable in cash at the maturity date of the debenture or convertible into shares at the then market price at the sole option of the holder. As part of the financing, Orbite agreed to amend the terms of the approximately $17.9 million outstanding warrants issued to Ressources Québec which is a subsidiary of Investissement Québec, in May 2014. The warrants will now be exercisable into shares of the company at a price of $24.1 per share instead of $0.33 and will expire on May 2, 2019 instead of May 27, 2017.

While the re-pricing of the warrants reduce its potential proceeds to accompany in the future, it greatly limits potential dilution as no additional warrants are to be issued in connection with the current funding with IQ.

Cash flows and operating activities were unchanged at $4.3 million, as an increase in other income and lower G&A expenses were offset by decrease in non-cash working capital items. Cash flows from financing activities for the quarter decreased by $3.2 million compared to last year, due mainly to lower proceeds received from the issuance of convertible debentures as compared to last year, partially offset by the issuance of shares, warrants and exercise of option.

Cash flows used in investing activities decreased by $3.98 million. So during the quarter, we focused on raising the fund required to complete our HPA facility. As Glenn mentioned, in order to preserve working capital while we were in financing mode, we have demobilized external contractors on-site and generally reduced construction activity.

With the fund raised throughout the quarter and subsequent to quarter's end, we have awarded the contracts for the remainder of the work on a fixed price basis and have remobilized contractors on-site to complete the project.

So this conclude my comment, and I will now end the call back to Glenn.

Glenn Kelly

Thanks, Jacques. As I mentioned and as Jacques just concluded also, we are able to secure the funding required to complete our plant on terms advantageous to the company and its shareholders. Subsequently we're able to continue the work to completion and are on schedule for our earlier communicated timeline of eight weeks. Commissioning activities as well continue to meet with expectations, and we are well prepared to commence full commissioning and plant startup following plant construction completion.

This as I mentioned previously will signify hugely important milestone for the company, and one that we will leverage in our pursuit of our efforts in the HPA market but also be on into our waste monetization efforts. We look forward to reporting on our progress on both of these fronts in the coming weeks.

That concludes our prepared remarks, and I will now turn the call over to the operator who will call participants for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Fadi Benjamin of Echelon. Your line is open. Fadi Benjamin with Echelon. Go ahead please, your line is open.

Fadi Benjamin

Hello, can you hear me?

Glenn Kelly

Loud and clear, Mr. Benjamin.

Fadi Benjamin

Thank you. Thanks, Glenn, and also thank you for hosting us at both of your facility at Cap-Chat, as well as at your technology development center at Laval. It was quite useful for me to see the progress that you guys have done. Certainly there's a lot of work since my earlier trip to Cap-Chat years ago. And also the risking effort at the TDC has been quite instrumental to your progress. On a key note here, and just something that obviously in print have gone saying that we look at the fourth quarter as the timeframe for you guys to start production but clearly after the visit there a lot of indication that it is quite attainable on the third quarter.

So perhaps instead of looking at it from the angle of giving me updates, maybe I'll look at it from the other end and I would say, if you're looking at your current schedule, what would you think if any could delay you from achieving your third quarter start up production? Perhaps another way of saying it, what keeps you up at night?

Glenn Kelly

Well not much keeps me up at night in terms of our, generally I'd say our oversight and control of the construction schedule with the changes we made that we announce in March and then again on June. Notably, with the arrival of Charles, we've modified our engineering and project execution teams at the site. We changed our contracting strategy. As I mentioned today which is probably wasn't known, we have non-unionized labor on the site, and that we've seen a pretty important increase in productivity and a quick responsiveness to if we're behind schedule it's quickly looked at and brought back into line.

So in terms of construction, things are going quite well. In terms of startup and commissioning of the different systems, things are going quite well also. So what could cause us to slip out of Q3 into Q4 for the beginning of production, it would be some unforeseen issues during commissioning and startup. We have not seen anything right now that's as you say keeps us up at night or worries us about that, but it's a new plant. These things are not, it's been seen in other places where you may have some issues on startup. But I'd like to recall that we've been commissioning different sections for a while now, so we're comfortable and I'd say looking forward cautiously and positively, and making sure we keep our timelines.

Fadi Benjamin

Great, if I can just follow on with one more question here. As we transition to HPA and then move forward, and I know that on the commercial side you guys have a lot of interest. Couple of things I would like to ask. First, do you have any sort of indication of how long of a qualification period for the plant you might take before you start booking revenues? I know this is hard to ascertain that right now, so I understand that.

And secondarily, you're obviously quite excited about moving forward with the waste monetization efforts, and you guys have done a lot of work in that area. And clearly you have the working base right now with the HPA plant moving forward and the TDC there to support you to go further into the waste monetization side. Could you give us a bit of insight, maybe a preview, an early preview or what your plans are for waste monetization?

Glenn Kelly

Okay, there are two parts of your question. I'll start with your question on the commercial side of the HPA production and sales, and how we see that going forward. I'd say right now we are the rate limiting step to use the chemical engineering term that you probably know in terms of getting samples to our customers. Recall that we have three commercial sample request; one has gone out, it's a fidden [ph] sample, we have two other samples. Huge in terms for samples of 100 kilogram each. One of those potential customers is after us to get that sample. And what's limiting us is just our calcination capacity. As you saw at the plant, everything else we've used the rest of the plant to produce the crystals, then they have to be decomposed and calcined. We use the old Harper calciner to decompose and then we use the smaller, which are pretty well outside calciners, to do the calcinations.

So we can produce two to three kilograms per day of samples working 24 hours a day. So we're the rate limiting step, we're working very diligently to get this out. In parallel to that to address another part of your question. Once we get the plant up and running, I would think we would be able to book, based on some of the strong interest we've seen, book some customers relatively soon. Definitely not all of our production capacity, but anyway our production capacity will not be at three tons per day on Day 1. That will be ramping up over the subsequent quarter or quarters. So we think we'll be able to book some, close into before or right after having started our commercial production and increase our booking as we increase plant capacity.

On the waste monetization front, we're working with and treating samples from a variety of potential customers/partners. I think you can understand that the focus of our team at Laval is 110% on catch-up, and we won't do any work that will take that focus away. Once we get up and start producing and the plant and the lab at the plant that you saw can start, I say supporting the workload in terms of analysis and sample analysis. The focus of the Laval team will start going towards waste monetization. So we see one of the plants coming up and running giving us credibility with our customers/potential partners to, once the plant is up and running we can start focusing our technology development personnel on waste monetization.

We still have some work to do with them to finalize the design of our frontend and them being our people in Laval. So the short answer is once HPA is up and running, the focus then changes to waste monetization.

Fadi Benjamin

Great, thank you very much. That's good. Thank you.

Glenn Kelly

Thanks, Fadi.

Operator

Your next question comes from the line of Paul Cavenna [ph], who is a private investor. Your line is open.

Unidentified Analyst

Yes, I'd like to know, I know you have sent a lot of samples and I like to see what is the level of satisfaction from your customer, and also did you receive any order? And also what's the commitment that you're getting from you customer? When you start producing, is there a potential that there would be no customer?

Glenn Kelly

Thanks for your question, Mr. Kavanagh, and I was just writing down. Well the level of satisfaction had been good because some of the samples are repeat samples, and I don't remember the number of customers or potential customers, I think it's seven or eight that have asked for either a second set of samples or a third set of samples. So there is a qualification process that varies per industry. Some industries will want two or three samples before going to a commercial samples. Others it will be much quicker. But I'd say in general the level of satisfaction has been very good. I think the, I'm looking for the right word here, what is a very positive aspect of the product that we have is the high level of purity that we can attain. We've shipped, I recall, or I would like to recall, up to five and eight. We're just calling that 5N5 plus, now we're 5N plus.

But on the first point, level of satisfaction is good. We're going through the qualification processes and we're the one that are limiting the speed of that because we can't produce our samples quickly enough. Once we get producing with the plant, the samples we'll be able to produce in much larger scale and much more quickly. So we would expect then to go through the qualification process much quicker. That being said, we have I'd say significant interest from a couple potential customers that I think could bring us to having sales agreements in place, either at startup or shortly after. I'm not making any promises on that front, but there is interest there.

So to your other question, do we have any sales agreement or purchase agreements in place yet. Not at all, but we are in substantial discussions with, or significant discussions with a couple of potential customers.

Unidentified Analyst

Okay, thank you very much. I guess one last question. Do you have any raw material that you have hauled up ready to use when the tide is ready to go, 'cause I was at Cap-Chat, I'm from Vancouver but I visit Cap-Chat to check my investment and I saw there was big, kind of a building there, is it where you're going to store your raw material when it's time to start the plant?

Glenn Kelly

Yes and no. You may have seen that behind the big, it looks like a big temple or a big white tent.

Unidentified Analyst

Yes.

Glenn Kelly

Well, it's very big. That is where we will be storing the raw material. If you look just behind that, there was a very big pile with a tarp on it, and that is clay from the Don Valley [ph] site that we have or the potential Don Valley mine. However, I just want to clarify that in the short term our raw material or feed stock, we won't be using the clay. That we'll be doing in end of '17, beginning of '18. We're going to be using aluminum hydroxide that we purchased and will be purchasing from Rio Tinto Alcan. Once we've modified the front-end to our chlorides process, then we'll be using the raw material that you were just talking about, fly ash or red mud, to extract the alumina and then purify it. And when we do that, that big white tent will be used to store the raw material.

Unidentified Analyst

Thank you very much. And glad to see that you're doing business with [indiscernible], is it possible that you could help them to sell some of your patent process for them in next tenure?

Glenn Kelly

They have, they're one of the only, and if I'm not mistaken the only box site smelter or refinery in Canada. They do produce red mud. They know of us. I've sat with the folks at Rio Tinto. They're following us closely. And once we have the front-end of our plant converted to the chloride process which is what would be used to treat or monetize red mud. Definitely they'll be coming over to visit and we'll be looking at what we can do with them in the Sagnae [ph] region.

Unidentified Analyst

Excellent, thank you very much to all that good information.

Glenn Kelly

Thank you, Mr. Cavenna [ph].

Operator

Your next question comes from the line of Same Rajbani [ph], who is a private investor. Your line is open.

Unidentified Analyst

[Foreign Language]

Glenn Kelly

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Glenn Kelly

[Foreign Language]

Operator

[Operator Instructions] And your next question comes from the line of Vetnar Munger [ph]. Your line is open.

Unidentified Analyst

[Foreign Language]

Glenn Kelly

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Glenn Kelly

[Foreign Language]

Unidentified Analyst

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Glenn Kelly

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Operator

[Operator Instructions] Thank you. Your next question comes from the line of who Jill Koset [ph] who is a private investor. Your line is open.

Unidentified Analyst

[Foreign Language]

Glenn Kelly

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Glenn Kelly

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Glenn Kelly

[Foreign Language]

Unidentified Analyst

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Glenn Kelly

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Unidentified Analyst

[Foreign Language]

Glenn Kelly

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Glenn Kelly

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Operator

[Operator Instructions] Thank you. Your next question comes from the line of Clod Craddlie [ph] who is retired. Your line is open.

Unidentified Analyst

[Foreign Language]

Glenn Kelly

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Glenn Kelly

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Glenn Kelly

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Operator

And your last question, ladies and gentlemen is from the line of Fadi Benjamin with Echelon. Your line is open.

Fadi Benjamin

Hi, you probably have answered this question probably in French. Glenn, you've got about $8 million in cash that you could use on your balance sheet, and we're coming close to starting production here. So just wondering any thoughts on what you might be left with that you can deploy for working capital to build inventory and start the...

Glenn Kelly

Yes, good question, Fadi, and actually I should maybe in the future answer questions in both languages because it was asked by -- I believe, Mr. Cassette [ph]. Yes, we have $7.7 million or close to $8 million in cash and short-term investments. And what I was saying to Mr. Cassette [ph], there are couple of facilities that can piggyback on that. We have restricted cash of close to $4 million under our mid-cap financing agreement. Once we produce one ton per day for three days in a row and book our first sale, that cash is released. So that brings us to $12 million. We also have a $7 million U.S. revolving facility. So that once we get into production, generate sales, we can finance our receivables from that.

And if those two are not good enough, we do have, and I believe you know what they are, investment tax credits are, we have some as I can put it non-monetized or non-fully monetized investment tax credits that we can use to raise some funds on a non-dilutive fashion. So with those three, we're feeling comfortable. I would add that there are warrants that are largely in the money. We do not control the activity or the decision of shareholders to exercise or not warrants, but that may bring in or could bring in potentially additional funds as we continue to progress positively over the next months.

Fadi Benjamin

That's great. [Foreign Language] and hopefully on the next call we'll be talking sales and production.

Glenn Kelly

Thank you very much. [Foreign Language].

Operator

Ladies and gentlemen, there are no further questions at this times. Mr. Kelly, I'll turn the call back over to you.

Glenn Kelly

Well thank you very much, everyone, for participating. [Foreign Language]. I just like to say that we do have an important shareholder base in Quebec, and for the first time at least half the questions were in French. And it's never easy for us to either work in English or in French and we do our best to cater to all of our shareholders. So thank you everyone for participating today. For those that are on holidays [Foreign Language] and we look forward to updating you over the next weeks. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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