UrtheCast Corp. (OTCPK:LFDEF) Q4 2018 Earnings Conference Call April 2, 2019 11:00 AM ET
Sai Chu - CFO
Donald Osborne - CEO
Conference Call Participants
Doug Taylor - Canaccord Genuity
All participants, please standby, your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the UrtheCast quarterly report conference call.
I would now like to turn the meeting over to Mr. Sai Chu. Please go ahead, Mr. Chu.
Thank you, operator. Good morning, everyone, and thank you for joining us today. I’ll start by reading our Safe Harbor statement.
Certain statements made in this conference call and our responses to various questions may constitute forward-looking information within the meaning of Canadian Securities Laws. These forward-looking statements, such as statements about expected growth, revenues or any financial outlook for upcoming fiscal periods rely on a number of assumptions concerning future events that are believed to be reasonable, but are subject to a number of risks, uncertainties and other factors, many of which are outside UrtheCast’s control, which could cause the actual results, performance or achievements of the company to be materially different.
While we believe that the assumptions underlying any forward-looking information are reasonable, we caution that there are inherent difficulties in predicting certain important factors that could affect the future performance or results of our business. We expressly disclaim any intention or obligation to revise or publicly update any forward-looking information whether as a result of new information, future events or otherwise except as maybe required by applicable securities laws.
During the course of this call, we may refer to certain metrics such as adjusted EBITDA not recognized under the IFRS standard. Non-IFRS measures do not have any standardized meaning under IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.
UrtheCast believes that these measures may offer useful supplemental information, but are subject to inherent uncertainties and limitations and rely on various assumptions by the company and should therefore not be relied upon for the purpose of making an investment decision.
For a complete discussion of the risks, uncertainties and assumptions, which may lead to actual financial results or performances being different from what’s contained in our forward-looking information, please refer to our most recently filed AIF, which is available on our website or on the SEDAR profile at www.sedar.com.
I’ll direct you to our earnings presentation which is available on the investor highlights, presentation section of our website, as we go through this call.
Please turn to page 3 of the presentation. We’re pleased to report the following accomplishments and developments since last quarter, completing the acquisition of Geosys, which is enabling us to seamlessly integrate UrtheCast’s unique imagery data into a suite of geoanalytics products and services.
Additionally, as part of the acquisition, we began providing services under a 13-year contract with Geosys’s former parent company, Land O'Lakes, which will generate more than USD10 million of annual revenue for UrtheCast, securing a USD12 million term loan and a USD10 million trade finance facility, finalizing the agreement to mutually terminate, the May 18, 2018, credit agreement, allowing UrtheCast to seek alternative financing for the UrtheDaily Constellation on more flexible terms and satisfying the requirements for continued listing on the Toronto Stock Exchange.
And with that, I'll turn it over to Don.
Thank you, Sai. Please turn to page 4 of the presentation. I'm going to be focusing my discussion this morning on four areas that continue to be top priorities for us. The restructuring and rationalization of our business to get us to a positive EBITDA during 2019 and strengthen our balance sheet, securing new financing to move us into the build phase of UrtheDaily Constellation, realizing synergies from our acquisition of Geosys and lastly monetizing our world class synthetic aperture, SAR intellectual property.
Please turn to page 5 of the presentation. We are continuing to make progress on restructuring the business and to operate more leanly. We've carried out a number of initiatives in recent months to get the cost down in our Canadian and Spanish operations, including eliminating non-core activities, rightsizing our staff, consolidating facilities, and adjusting service agreements with our suppliers. We are beginning to see the results of these efforts in our fourth quarter financials and expect to see further improvements in future quarters.
As I’ve said before, my intention is to run UrtheCast as a sustainable and profitable business, one which creates long term value for our shareholders and our stakeholders. We believe that the steps we have taken to reduce costs and improve operational efficiency will allow us to begin generating a positive EBITDA during 2019.
In conjunction with cost reductions, we are focused on generating top line growth, both organically as well as from our recent acquisition of Geosys. We have received positive feedback from Geosys’s customer base about opportunities to expand services, now that Geosys is no longer a subsidiary of Land O'Lakes and certain competitive considerations have been removed. In addition, as part of the detailed review of the business, its capabilities, operations and assets, we have determined that we can realize more values for strategic divestiture of certain assets.
To this end, in January 2019, the company committed to a formal plan to sell all or substantially all of the assets of Deimos Imaging, which includes the Deimos-1 and Deimos-2 satellites, operations and ground station assets. The company has commenced a bid process and expects to complete the transaction in 2019. The proceeds from the sale of these assets would be used to strengthen our balance sheet by reducing debt and improving our working capital position.
We strongly believe that through this rationalization of the business, UrtheCast will be in a position to begin delivering positive operating results on the basis of its existing business lines alone and will be well poised to execute on a UrtheDaily Constellation, as a value accelerant. And although the process has been challenging, we are pleased with the progress we've been able to make to date and continued to make towards this end.
Please turn to page 6 of the presentation. As recently announced, UrtheCast and its counterparties have finalized a mutual termination agreement with respect to the senior secured credit facility that had been signed in May 2018 to finance the UrtheDaily Constellation. The termination of this credit agreement will not affect UrtheCast day-to-day operations nor its ability to continue servicing its customers.
We are already in discussions with a number of other lenders and investors to secure a new alternative financing for the UrtheDaily Constellation with what we believe will be more flexible terms. The business case for UrtheDaily has continued to grow stronger. Since Q3 of last year, we have added almost 200 million to the UrtheCast total revenue backlog. In addition, the market pull for UrtheDaily continues to grow and we’re actively engaged with several key potential customers across a variety of industries, including agriculture, commodities, insurance, finance, defense, as well as several government organizations.
The UrtheDaily Constellation will deliver scientific quality, multi-spectral imagery, almost the entire Earth’s land mass every day. And it's been designed from the ground up to power machine learning and artificial intelligence ready geoanalytics applications. The committed dated services contracts represent only one of the revenue streams enabled by the groundbreaking UrtheDaily system.
The other equally significant opportunities are in value added information, services and geoanalytics. These areas are the focus of our innovation and UrtheCast acquisition of Geosys positions us strongly in the agriculture geoanalytics sector. Therefore, we continue to be confident that on our strength of our business case, we will secure competitively priced financing to move us into the build phase of the UrtheDaily Constellation.
Please turn to page 7 of the presentation. On our last call, we announced that November 6 signing of definitive purchase agreement with Land O'Lakes for the acquisition of all assets of Geosys, a global leader in providing analytics, products and services to the agricultural market. Since the November announcement, we have reached first close and have commenced the 13-year service agreement with Land O'Lakes. We expect the second close to take place within 24 months.
We expect to generate positive EBITDA from Geosys in 2019 and working to realize the synergies from the acquisition, including near term, high margin revenue growth through collaboration with the UrtheCast data services team, greater accessibility to ag customers with Geosys now operating as an independent UrtheCast business unit, and thus removal of any competitive concerns that potential customers in the space may have had about doing business with Geosys’s former parent company, Land O'Lakes, optimization and right sizing of both technical and business development resources to better suit Geosys’s needs and perhaps most importantly, bringing together the technical expertise of both companies to optimize the ability to monetize this investment to UrtheDaily.
Additionally, we have begun the transition of integration of Geosys with the UrtheCast 2019 and beyond, which includes the following, identifying the highest priority revenue opportunities, enabled by prioritization of development resources on key initiatives to drive 2020 revenue growth, establishing a common software engineering roadmap to drive cost effective development and efficiency delivery of ag analytics through the Earth pipeline, and innovating new products and capabilities. For example, radar and change detection, which we think will provide the winning combination of data and analytics in the ag market space, and of course, delivering on 2019 customer commitments, which is a high priority to maintain during the transition in order to grow revenue and market share in the short term.
Please turn to page 8 of the presentation. Finally, I want to update you on UrtheCast’s groundbreaking and world's first dual band fully synthetic SAR aperture radar technology, which we call SAR-XL. SAR-XL technology is backed by multiple patents filed to date with more in the pipeline. Recent lab tests have exceeded our expectations, the performance is outstanding. As we disclosed last quarter however, the contract we had signed with our customer for a follow on program to build and launch the first SAR-XL satellite is unlikely to proceed due to a deterioration in geopolitical relations. And we are there for exploring a number of different avenues to monetize the SAR technology. In the long term, our strategy is to develop and deploy a commercial SAR mission, which is coincident with and highly complementary to the UrtheDaily system.
In addition to our SAR technology, since 2013, UrtheCast has also been developing advanced cloud native ground segment software to support our previously deployed international space station cameras, the OptiSAR mission and the upcoming UrtheDaily Constellation. This software, which we call Earth pipeline is designed to transform broad downlink data into scientific great analytics ready data products. Unlike traditional ground segments on the market today, which have costly manual operations and varying levels of quality, the earth pipeline is designed to automatically and economically calibrate, perform quality assurance and process raw satellite data into high quality image products at scale.
In Q4 of 2018, an initial version of the fully cloud based Earth pipeline was completed, which demonstrated multicenter capabilities that automatically calibrated sensors and processed real world data sets to sub pixel accuracy, providing the viability of this, so proving the viability of this low cost solution. Our development has now reached a stage where we are looking at near term commercial opportunities with select non-competitive customers, which will monetize our investment in Earth pipeline and address an opportunity in the market to reduce operational costs, improve image quality and rapidly generate and disseminate products.
And with that, I’ll turn it over to Sai to discuss our Q4 2018 financial results.
Thank you, Don. Please turn to page 9 of the presentation. Our financial results in the fourth quarter continue to reflect the significant restructuring that has taken place at our UrtheCast. Fortunately, they've been impacted by some legacy and delayed timing issues. While we're not pleased with these results, they are not unexpected. We continue to make meaningful and appropriate steps to address the challenges faced by the business, many of which Don outlined at the top of the call, which included headcount reductions of more than 35% that have been realized compared to a year ago. In addition, once additional headcount, final headcount reductions are done, probably at about 45% by the end of Q2. This excludes the addition of Geosys. We believe these steps combined with the revenue growth opportunities afforded by the recent acquisition of Geosys will put UrtheCast firmly on a path to be self sustaining and to begin generating positive EBITDA during 2019.
Total Revenue was 5.8 million in Q4 compared to 9 million last year. And for fiscal 2018, it was 15.6 million compared to 40.4 million. Earth observation revenue increased by 4.6 million Q4 of last year, and increased by 1.6 million for the year, primarily due to finally being able to recognize the first tranche of revenue from the ESA Consortium contract. We're continuing to manage the conclusion of our SAR related contracted revenue, which decreased by 7.7 million from Q4 of last year and 26.4 million for the year, primarily due to a change in the expected completion date and milestones of our major engineering services contract.
As noted by Don, we have achieved a 50% reduction in our operating costs. Operating costs declined 6% or 1.5% from Q4 last year and declined 5% or 3.3 million on a full year basis. While we've taken steps to reduce our fixed operating costs base during the second half of 2018, there have been a number of non-recurring expenses that were included during the year, including severance, bad debt expense, special committee costs, which obscured the fixed cost reductions.
If we exclude these non-recurring items, fixed costs, operating costs have been reduced by 5 million. Adjusted EBITDA, excluding non-recurring costs, decreased by 14 million. Although revenue declined by approximately 25 million described earlier, this was offset by $5 million reductions in both fixed and variable costs. The net loss of 83.3 million for the year increased when compared to net loss of 31.8 million in 2017.
Current year results were impacted by 54.5 million of adjustments required for accounting purposes that are substantially on cash, including a $20 million asset impairment charge, net finance costs of 28.6 million and a $5.5 million reversal of deferred taxes. It should be noted that we’ve continued to make progression on a quarter-by-quarter basis in reducing the EBITDA loss. In terms of government funding, in the fourth quarter, the company filed claims for grants and loans under several government programs, tolling approximately 800,000.
The company also received in the fourth quarter 1.4 million under the Canadian government strategic aerospace defense initiative and 1.1 million from other Canadian government programs related to claims previously filed. Additionally, UrtheCast was awarded approximately 1.75 million of non-repayable grants, which reimburses development costs that are eligible under the Government of Canada, Defense Innovation Research and LOOKNorth programs.
In terms of financing and liquidity, we ended the fourth quarter with cash including restricted term deposits of 9.5 million. Subsequent to the year end, on January 14, we secured a USD12 million term loan secured by the assets of Geosys. 5 million of the proceeds were used to repay an unsecured demand promissory note that was issued in September 2018, 2.5 million of the proceeds were used towards the first installment with respect to the Geosys acquisition, remainder were the proceeds available for general corporate purposes.
In February, we signed a USD10 million receivables purchasing agreement, which allows us to finance certain qualifying trade receivables. The company received advance proceeds of USD2.2 million in March 2019 under this facility. Furthermore, during the fourth quarter, UrtheCast and Banco Sabadell agreed to defer EUR2.5 million for the principal repayment that was due on December 11, 2018 and subsequently agreed on a payment plan to repay EUR2.5 million in four installments, the first two of which, EUR0.3 million and EUR0.2 million respectively have already been repaid in January and February. And a further EUR0.5 million was due on May 31, 91.5 [ph] million on July 31. Given the ongoing restructuring that is underway at UrtheCast, we will not be providing financial guidance at this time.
And with that, operator, we would now like to open up the call for questions.
[Operator Instructions] And the first question is from Doug Taylor from Canaccord Genuity.
Let me start by asking about the Airbus contract, the revenue that you received in the quarter, I believe, it was EUR2.8 million or something. To that effect, I mean, for the first tranche, how would you compare that to the run rate you expect for that contract? Is it higher than you would expect on a quarterly basis? Or do you still expect an uptick as you catch up with future tranches of that?
The run rate on the contract has been complicated by the contractual arrangements between us and Airbus and ESA and it has to do with the acceptance of the actual data by the end customer. So we've actually completed our deliveries, it's just a matter of getting acceptance and recognizing the revenue, which we expect to do by the end of this quarter or early next quarter for the entire contract.
Our team in Spain is doing a good job of trying to manage that relationship, but it's somewhat of a complicated consortium agreement as Don has noted. So we do expect that we’re working hard at getting that complete in acceptance.
Okay. You've highlighted the potential for the sale of the Deimos assets as an, one way, you can bolster your balance sheet. Can you just help us understand or confirm for us? I mean, would the majority of your earth observation revenue go with the Deimos asset or would you be left with a material amount outside of Geosys of course?
The majority of the revenue will go with the business if we sell the entire business, it depends whether we sell it in its entirety or parts thereof.
Okay. And I mean, the same go for, what cost base do you think you're carrying that, to support the Deimos assets at this point which would go with it and I guess I'm just trying to understand, if the Deimos business or assets were sold, to what extent that's going to, I mean, I understand the balance sheet impact is going to be immediate, but what the impact is going to be on your ongoing P&L from a sale or some of the things that you're considering with that asset?
I mean, we're -- as I said earlier in the call, we are still driving to EBITDA positive with whatever business we're running by the end of this year, and we think we can achieve that.
Yeah. Doug, we look at each individual business unit on a standalone basis. And, right size the organization and the cost structure accordingly based on revenue. So, as we've noted, we've substantially restructured the operations. We're realizing the benefits, you've seen the cost reductions, there are more cost reductions coming. And we expect that we'll be able to get to ea positive during this year, as a result, the cost base that Deimos was significant. The people there have done a great job. Having said that, there were some difficult decisions in ensuring that that business is sized appropriately.
So, hopefully, that helps understand the situation. You look at it very carefully.
Yeah, just, I mean, a couple more questions to clarify, the 50% cost reduction, which is an impressive amount in the short time that you gentlemen have been involved with the company, forecast for Q1 that does not contemplate the sale of Deimos within that number. And would you confirm then that if Deimos was sold, you would expect actually the EBITDA would increase as a result of that transaction. Or the loss would improve?
Well, we confirm that this does include Deimos, because we're – we’ve just completed Q1. And obviously, we can look for scenarios and analyze the situation. And again, we expect that we get the business to ea positive with or without Deimos.
[Operator Instructions] There are no questions registered at this time. So I'd like to turn the meeting back over to you, Mr. Osborne.
Okay, well, I'd like to thank everybody for joining us again today. We look forward to talking again next month in our Q1 2019 results call. Thank you very much.
Thank you. The call has now ended. Please disconnect your lines at this time. And thank you for your participation.