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Edited Transcript of BHTG earnings conference call or presentation 15-May-19 8:30pm GMT

Q1 2019 BioHiTech Global Inc Earnings Call

CHESTNUT RIDGE May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of BioHiTech Global Inc earnings conference call or presentation Wednesday, May 15, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian C. Essman

BioHiTech Global, Inc. - CFO

* Frank E. Celli

BioHiTech Global, Inc. - Chairman & CEO

* Richard Galterio

BioHiTech Global, Inc. - EVP

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Conference Call Participants

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* Vincent William LaBarbara

Network 1 Financial Group, Inc. - Director

* Walter Vincent Nasdeo

Ardour Capital Investments, LLC, Research Division - Director of Research and MD

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Presentation

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Operator [1]

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Greetings, and welcome to the BioHiTech Global First Quarter 2019 Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rich Galterio.

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Richard Galterio, BioHiTech Global, Inc. - EVP [2]

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Thank you, operator, and good afternoon, listeners. Welcome, again, to the BioHiTech Global First Quarter 2019 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 would like to start off by providing a brief overview of our business progress in the quarter followed by a more detailed discussion of our results from Brian Essman and then we will return the call over to Frank, our CEO, to provide an overview of our growth strategy as we move through the remainder of 2019.

During the quarter, we achieved 14.2% revenue growth led by a 79.4% increase in our management services revenue from Gold Medal and 10.7% growth in our food waste digester business. In our digester business, we saw improving metrics compared to Q1 2018 in overall rental revenue, number of units under contract and the contribution margin of that revenue. While Q1 digester revenue was up modestly, the number of units under contract increased by 37.5% reflecting market acceptance of our less expensive Revolution Series Digesters. We continue to expand our pipeline of multi-unit leasing opportunities with larger customers and strengthen our distribution capabilities with our recent distribution agreement with a national waste management services company.

We are confident in our plan to accelerate growth in this business that Frank will discuss later in the call. Our sustainable food waste solution is also starting to get media attention with our install at Lincoln Financial Field, the home of the Philadelphia Eagles being featured in an article by Forbes.

The largest driver of revenue growth in 2019 came from our management services to Gold Medal. As we have stated previously, this business relationship offers many synergistic opportunities for our technology and provides a revenue stream with almost no incremental cost.

We achieved several significant milestones this quarter that will help us to rapidly grow revenue beginning in the second quarter and more significantly in the second half of 2019. First, we commenced commercial operations at the nation's first HEBioT facility located in Martinsburg, West Virginia on March 29, 2019. The Martinsburg facility began ramping operations in April and is expected to contribute meaningful revenue in the second quarter that will become more pronounced in the second half of the year.

We anticipate the facility will generate $7 million of high-margin revenue each year by processing up to 110,000 tons of municipal solid waste each year, while diverting as much as 80% of that waste from landfills. As you're probably aware, our HEBioT technology produces an EPA recognized solid recovered fuel.

Second, we submitted an application for final approval from the state of New York for a second HEBioT facility in the city of Rensselaer's southern industrial area. The planned facility is expected to generate approximately $12 million of high-margin revenue annually, and we have already received local permit approval for the facility from the city of Rensselaer. We continue to target completing construction of this facility late in 2020.

Third, we signed a distribution agreement with a national waste management services company to market our line of food waste digesters and patented data analytics technology to its extensive customer base. And fourth, we completed the development for the launch of our new Sapling Digester, a larger capacity addition to BioHiTech's line of Revolution Series Digesters. Each Sapling Digester is capable of diverting up to 800 pounds of food waste per day or 146 tons from landfills each year.

We recently received our first multi-unit sapling order from a grocery chain with 19 locations. The 6 sapling units to be installed at this grocery chain's locations are capable of diverting from landfills as much as 2 million pounds of food waste each year. The elimination of the transportation of this waste would result in a reduction in CO2 emissions by the equivalent of removing over 120 trucks from the road, which gives you an idea of the positive environmental impact of this technology.

At this time, I would like to turn the call over to Brian Essman, our Chief Financial Officer, to discuss our financial results.

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Brian C. Essman, BioHiTech Global, Inc. - CFO [3]

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Thank you, Rich, and good afternoon to everyone.

Total revenue grew by 14.2% in the first quarter of 2019, with total revenues of $738,000 compared to $646,000 in the comparable 2018 period. Year-over-year growth was driven by our management services revenue from Gold Medal, which increased by 75.4% to $250,000 as well as by a 10.7% increase in recurring revenue from our digester rental and data analytics platform that totaled $488,000 in Q1 of 2019 compared to $440,000 in 2018.

As Rich mentioned earlier, we focused much of our marketing efforts during the first quarter on larger multi-unit opportunities with longer sales cycles and establishing new distribution partnerships with waste management services providers. Still the number of digesters under lease grew by 37.7% to 176 units compared to 128 units in the first quarter of 2018.

Our pipeline of multiple unit opportunities has grown substantially, and we expect to see the results of these efforts to become more evident in the second half of 2019. We also achieved improving metrics from our digester leasing business with cost of revenue declining as we benefit from a greater base of revenue generating units in the field and less maintenance expenses associated with our Revolution Series Digesters.

In fact, margins improved to 37.5% compared to 23.1% and exceeded our target of 30% to 35% we stated in our year-end call. We continue to de-emphasize the de-emphasis of direct unit sales. While there were no sales in this quarter, we do expect some future sales in certain reseller markets mainly internationally where leasing models are not common.

Revenue from Gold Medal services has not resulted in incremental cost through the leveraging of our existing management team. Operating expenses for the first quarter of 2019 increased by 34.8% to $2.7 million compared to $2 million in the first quarter of 2018.

Selling, general and administrative expenses increased by $746,000 primarily the result of a $544,000 increase in other expenses, including a write-down of costs associated with an MBT site and the start-up cost of our Martinsburg HEBioT facility. Personnel-related expenses increased by $138,000 or 13.1% quarter-over-quarter. Included in this number, stock compensation, a noncash expense, increased by $218,000 as a result of grants made in the second half of 2018.

Base salaries and payroll decreased by $65,000 or 7.8% due to staff reductions we made in late 2018. That decrease was offset by increases in staff and payroll expenses at our Martinsburg HEBioT operations.

Our loss from operations in the first quarter of 2019 increased to $1.9 million from $1.3 million in the comparable 2018 period. The increase in operating loss is a result of the $700,000 increase in operating expenses, partially offset by increased contribution to margin dollars.

Now to our balance sheet. We ended the first quarter of 2019 with $1.4 million of unrestricted cash with shareholders' equity of $8.8 million compared to $2.4 million of unrestricted cash with shareholders' equity of $10 million as of December 31, 2018.

I will now turn the call over to Frank to discuss our growth strategy as we move through 2019.

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [4]

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Thank you, Brian. In the first quarter of 2019, we're just beginning to scratch the surface of the tremendous potential of our sustainable technology platform for the waste industry. This past year, we've laid the foundation that set us up for significant future financial growth through our acquisition of a controlling interest in our Martinsburg HEBioT facility, while we strengthened our partnerships with Gold Medal, Kinderhook and our technology partner, Entsorgafin. Now we're full swing into execution mode and we're very excited about what lays ahead for BioHiTech and our stockholders.

When we talk about execution, the first and most important accomplishment in this area is commencing operations at the nation's first HEBioT facility in Martinsburg. The opening of this facility is the cornerstone of our future growth plan. It represents the hard work of all of our employees and the belief of all of our stakeholders that we can affect positive cost-effective change in the waste management industry when it comes to large-scale municipal waste. We commenced operations at the end of the first quarter, and we're very pleased with our progress thus far. Since the plant is open commercially, we've quickly began ramping operations, including receiving waste on a daily basis and progressing through each stage of the plant's mechanisms.

As you can imagine, it does take some time to fill a 55,000-square foot facility. Even as we are processing over 200 tons per day and at each new stage the plant has operated as expected, or in some cases, better than expected leading to a progressive ramp in revenue as well.

Based on our 1.5 months of operations, we're confident that we'll be receiving the economic benefit of running at full planned operations in the second half of this year and thereafter. In addition to driving high-margin revenue, the Martinsburg plant commencing operations also serves a very important function for our company. The ability to showcase how we can divert 80% of waste from landfills and potentially be a part of the solution to the growing plastics problem in the U.S. We've mentioned several times about conducting tours of the facility to members of the waste industry, large corporations and municipal officials from numerous states. While that may seem like a small thing, we believe it's critical to building a road map for success in this business. It's creating awareness and we have already begun to have discussions regarding a number of business relationships, including several with municipalities, seeking to potentially use our facility and technologies as a solution for their waste disposal needs.

The second major part of executing our HEBioT business is layering on additional facilities, and we're excited about where we are with the number of potential future locations, including Rensselaer, which we've discussed in this call. We are far into the permitting process and believe we're on target for completing a facility at that location in late 2020. We're also making progress in discussions to sign additional facilities in the Northeast and look forward to updating on our progress in the coming quarters.

In discussing our digester business, I want to emphasize that while revenue growth has been modest, we're making significant progress in building value that we believe will lead to accelerating unit growth. And more importantly, a solid and predictable high-margin revenue stream that grows every year.

We finished the first quarter with a base of lease contracts that was 37% greater than this time last year, and we believe we can improve on that with our strategic plan to grow the business. First, as we stated in the third quarter of last year, we focused the majority of our sales efforts on larger multi-unit opportunities either through direct relationships or by establishing distribution relationships with traditional waste industry partners. While these sales cycles have proved to be longer than we anticipated, our pipeline continues to grow, and we're excited about where we are headed.

During the quarter, we announced our first distribution agreement with a major nationwide waste services provider, and we expect to add other large companies as distributors this year. That first relationship is already opening the door to some very interesting large-scale unit opportunities. When looking at some of our success in multi-unit opportunities, companies like Sprouts Farmers Market have installed 18 units and we're hopeful to expand significantly further into their store network. We've installed multiple units for our health services network that could potentially grow to more than a dozen units. We also recently announced a 7-unit order with another regional grocer that included 6 of our new Sapling Digesters.

In speaking about the new Sapling Digester, it's another example of how we design products to meet customer needs and achieve better performance. The sapling is a larger capacity unit, similar to our Eco-Safe 400 that does not require special electrical or plumbing hookups. We've also completed the development of our BioHiTech cube, a bolt-on product for high volume food generators. Our penetration into the hospitality market continues in earnest with expansion opportunities in hotels, sporting venues and travel hubs. Both of our technologies are starting to gain media awareness as solutions for the growing waste problem in this country. Articles in Forbes and Bloomberg are helping our case -- our cause to get the word out and lead environmentally responsible change in this industry.

Before I turn the call over to your questions, I'm pleased to announce that on May 10, we closed a $1.25 million Series D preferred financing led by management and several long-time investors in the company. The Series D is convertible on a fixed price of $3.50 a share. This financing demonstrates the share belief in the value of what we're building here. The total offering is $2 million, and we expect to close on the balance in the near future. This financing will help us to continue our growth plans and build value for our stockholders.

Once again, we'd like to thank our investors for entrusting a portion of their investment dollars in our company and our dedicated employees for their efforts.

Operator, this concludes our prepared remarks, and you can now open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Walter Nasdeo with Ardour Capital.

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Walter Vincent Nasdeo, Ardour Capital Investments, LLC, Research Division - Director of Research and MD [2]

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I -- obviously, you are moving forward on all fronts here, and it's looking good, and we're impressed with the progress. One of the things that I wanted to ask about is a little bit more high level and how is the development of the recycling aspect of the business coming? Are you able to kind of pool in like plastics and things like that to have more of a -- like a general appeal to the municipalities instead of just for the municipal solid waste but to come in with more of a -- like a renewable, recyclable kind of aspect from it. Is there any development on that front?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [3]

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Yes, it's an interesting question, Walter. The recycling industry in the United States is in a pretty significant crisis right now. As you're probably aware, it's probably, I'm assuming, the driver for the question. When we initially developed both of our products, the emphasis wasn't on necessarily solving for this, this recycling problem. Nobody really quite frankly saw that coming. But with China's ban and with some additional companies -- countries like Vietnam and India coming online, it certainly has created a significant issue around plastics, in particular as well as paper recycling in the United States.

So municipalities, where they, a year ago, were getting rebated for their recyclables are now looking at paying significant tip fees for their recyclables. And in many cases, as high if not higher than for solid waste, which is not something quite frankly, we really anticipated. However, it's a huge opportunity, we think for us, in the sense that it's another stream of feedstock that would yield a high quality and high volume of alternative fuel.

So as we kind of go forward, we certainly aren't thinking about areas where there is a recycling crisis and where we could potentially be a solution for that plastics problem. The unique thing about recycling is if you are not handling municipal solid waste, the permitting process is exponentially faster. So we're definitely evaluating it. We believe there is an opportunity to be a solution for some of this problem. And we think we can deploy technology quicker than what we would otherwise be able to do for municipal solid waste. But there is also that social sort of element where folks still envision recyclables being turned into recyclable park benches. And so there is a little bit of an education process, I think, that has to take place, but no doubt we see it as a huge opportunity for additional development projects for us.

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Walter Vincent Nasdeo, Ardour Capital Investments, LLC, Research Division - Director of Research and MD [4]

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Just to be clear, your current technology would need to be modified to be able to handle the plastics or could it currently go right into your waste business?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [5]

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No, we certainly could handle plastics with our existing technology. The fact of the matter is the technology we've got deployed in Martinsburg is significantly more extensive than what would be needed if you were handling just specifically plastics. So the plant in Martinsburg is a solution for plastics today. But there are other development opportunities that would be less costly and probably quicker to deploy if we were just receiving plastics and paper products.

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Richard Galterio, BioHiTech Global, Inc. - EVP [6]

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Yes, Walter, this is Rich. Just to add on to that. The Martinsburg facility today in mixed municipal solid waste, there is a lot of plastics still. I mean people sometimes don't recycle. So there is -- whether it's plastic wrappers or the occasional plastic cups and things like that do make their way into the trash and the facility is more than capable of handling plastic and does so every day now that it's open. So it is a solution today. It does work today. And I think what Frank is getting at is we wanted to really gear it towards specifically plastic, we could build facilities towards that, we're looking into that and strictly handle that. So it does handle plastics right now. And it could potentially be a part of the solution moving forward.

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Walter Vincent Nasdeo, Ardour Capital Investments, LLC, Research Division - Director of Research and MD [7]

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Yes. So when you look at how the municipalities handle the municipal solid waste along with the recycling, typically, they have to separate. One would assume that if they didn't have to do that, it would dramatically reduce the cost of gathering trash, recyclables and everything into one container and just delivering it to you guys. Is that something that you could market that type of a solution through the local municipalities to reduce their internal operating expenses to manage this?

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Richard Galterio, BioHiTech Global, Inc. - EVP [8]

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Yes, that's a great point. I think with some of the things that's going on with China not taking recyclables, India and all of those other countries moving out of it, I think that you can make the case that if they went to a single stream and didn't pick up that separately and sent it directly to our facility, the outcomes, the ultimate outcomes from a less CO2 emissions, less methane, with all of those bad greenhouse chemicals would be reduced significantly by going through our process and ending up with a solid recovered fuel as opposed to plastic ending up in the ocean and a lot of other places where ultimately it ends up now because the recycling effort as you can read every day in papers and on the Internet is starting to fail.

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Operator [9]

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Our next question comes from the line of Vincent LaBarbara with Network 1 Financial.

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Vincent William LaBarbara, Network 1 Financial Group, Inc. - Director [10]

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Frank, as someone who's been following the process from the start, it's pretty exciting to see how well you've come in. And it makes me very excited for the future. Have you started producing the fuel? And what do you anticipate the demand for this type of fuel will be?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [11]

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Yes, we have started producing the fuel. In fact, we manufactured our first loads of fuel earlier this week. So we're pretty excited about that. We've sent it out for testing. And initially, the review based on sort of visual inspection and whatnot is that the fuel's a really high quality. So we're pretty excited about the yield of fuel that we got. We're not surprised based on the amount of packaging in the waste in the United States. But we're still waiting on technical sort of testing to come back to tell us, hey, do we meet the criteria or not? We're pretty excited about it.

The demand for alternative fuels in general is growing enormously. So I can tell you that there is -- we have more demand right now from users of this fuel than what we could possibly supply, which is good problem to have. I think it's a great catalyst for us into our sort of next development project. So the users of coal are under continued scrutiny in the United States as far as the emission standards and lowering their carbon footprint. So right now, we've got demand around the Martinsburg facility, we've got demand in the Baltimore market, the Lehigh Valley of Pennsylvania and all the experts are not seeing demand for alternative fuels shrinking. So it's a good thing to have in support of our future development project. So we think not only will we be able to sell all the fuel that we can manufacture, but we think it should be -- there should be a pretty positive effect on pricing as well.

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Vincent William LaBarbara, Network 1 Financial Group, Inc. - Director [12]

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Great. Thank you, Frank. I'm really looking forward to your future execution.

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [13]

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Thank you.

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Operator [14]

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(Operator Instructions) We have no further questions in the queue at this time. And I would like to turn the call back to Frank Celli for closing remarks.

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [15]

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Thank you. Well, I'd like to once again thank everyone for joining today. Thank you for continuing to monitor the progress of the company, and we look forward to hearing and speaking with you again next quarter. Thanks very much.

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Operator [16]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.