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Edited Transcript of TRNX earnings conference call or presentation 20-May-19 5:00pm GMT

Q1 2019 Taronis Technologies Inc Earnings Call

Palm Harbor Jun 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Taronis Technologies Inc earnings conference call or presentation Monday, May 20, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Scott Mahoney

Taronis Technologies, Inc. - CEO, President & Director

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Presentation

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Operator [1]

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Good afternoon and thank you for joining Taronis First Quarter 2019 Financial Results and Business Update Conference Call. On the call today, we'll be hearing from Taronis' CEO, Scott Mahoney. Mr. Mahoney will give an overview of Taronis' activities in the first quarter of 2019 as well as the company's plans for the remainder of 2019. At the conclusion of today's call, Mr. Mahoney will be taking a few questions. (Operator Instructions)

Before we begin, let me take a moment to note that on this conference call contains forward-looking statements. Forward-looking statements address future events and conditions and, therefore, involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. Such information is subject to known and unknown risks, uncertainties and other factors, which could influence actual results or events such that they differ materially from those stated, anticipated or implied. Listeners are cautioned to not place undue reliance on forward-looking information as no assurances can be given to the future results, levels of activity or achievements.

With that out of the way, let me turn the conference over to Mr. Scott Mahoney. Thank you. You may begin.

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Scott Mahoney, Taronis Technologies, Inc. - CEO, President & Director [2]

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Thank you, Matt, and thank you to all those listening to this call today. In my discussion, I'll provide you with an update on our first quarter financial performance, our near-term business plans and our planned technology initiatives for the remainder of 2019.

With that said, let's turn our attention to our first quarter financial performance. Our revenues for the first quarter of 2019 were $4.9 million compared to $1.2 million in the first quarter of 2018, an increase of 188%. Much of this growth was the result of the series of acquisitions that were initiated beginning at the end of the first quarter 2018 and continued into the first quarter of this year. We expect the revenues derived from these deals to have a significant influence in our near-term revenue growth for several more quarters.

Further, this is also not just a serial acquisition success story. Our organic growth in sales of previously acquired operations has also continued to accelerate and is performing very well. As an example, Complete Welding of San Diego averaged 40% higher sales 1 year after ownership. Green Arc in East Texas averaged 30% higher sales in the first quarter of this year after 1 year of ownership. Trico, which was already exceptionally well-run and very large, was up more than 10%. Complete Welding of Los Angeles and Tyler Welders Supply, our 2 largest acquisitions to date, both grew 10% year-over-year in their very first month under our management. Our team is developing an excellent track record growing our businesses under our leadership. With this success, we're now focused on eliminating redundant operating expenses, streamlining our infrastructure cost and maximizing the profit from our new fab scale.

Our gross income also increased significantly during the first quarter to $2.2 million as compared to $400,000 in the first quarter of 2018. This is a 450% increase from the first quarter in 2018 and yes, it was probably due to acquisitions. As previously discussed, it's also due to gross margin improvements. Our gross margins improved from 35.3% in the first quarter of 2018 to 45.5% in the first quarter of 2019. In fact, our gross margins improved each month throughout the quarter and we believe we can continue to make further improvements in the coming months. Part of this improvement in gross margins was due to the benefit of stronger buying power and economies of scale. In many instances, our national buying power has now made us a very large client for many of our key supplier vendor relationships. As a result, we've been systematically working to improve pricing and terms as we buy at scale.

We also anticipate this gross margin improvement trends may continue as we leverage economies of scale as well as increase sales of higher-margin MagneGas metal cutting fuel products. As we convert acetylene and propylene users to our MagneGas product, our margins on that product can be 3 to 4x more profitable. Over the next 12 to 18 months, this could add an additional $75,000 to $100,000 in monthly profitability without any further revenue growth.

We also expect to see further improvements specifically in our Florida market where our bulk fill plant gas operations are just now coming online. The new fill plant could impact our bottom line by more than $100,000 per month as soon as June. We also believe this fill plant will let us compete for many larger customers that we could not support without this needed infrastructure. We estimate there's as much as $2 million in incremental business that we can compete for in the Tampa market alone with our new capabilities. We look forward to seeing how our sales team is able to capitalize on this development going forward.

Next, we turn our attention to expenses, excluding all stock compensation expenses including vendors paid with stock compensation, our operating expenses increased from $2.6 million in the first quarter of 2018 to $5.7 million in the first quarter of 2019. The largest contributing factor to the increase in expenses was payroll as our employee base increased from 47 people at the end of March 2018 to 137 people today. Also contributing to higher operating expenses in the first quarter were increased occupancy costs due to our expanded retail operations.

We also recognized the $3.1 million onetime expense for the retirement of the Series C convertible preferred stock during the first quarter. While this is a very expensive step for the company, it was a mission-critical decision made to avoid catastrophic dilution for all shareholders. Fortunately, the convertible preferred instrument is fully retired and we believe we have gradually moved towards being able to source new capital at increasingly favorable terms since that vehicle was retired.

In order to better compare our changes in expenses over time, we would like to compare our cash expenses as a percentage of revenues. In the first quarter of 2018, our cash operating expenses were 225% of sales. In 2019, our cash expenses were 121% of sales. Even without the benefit of excluding a large amount of nonrecurring expenses that I'm about to discuss, we should recognize that there's been very significant progress in our path to profitability in our most recent quarter.

Now outside of our normal recurring expenses, Taronis incurred a series of nonrecurring expenses in the first quarter of 2019 related to acquisitions, capital markets transactions and several international expansion initiatives. We were busy and this activity was expensive, but well worth it. In total, approximately $1.4 million in nonrecurring legal, consulting, advisory and critical integration expenses were incurred in the period. It's very important to recognize that little to none of these expenses are expected to be incurred going forward and operating expenses should decreased significantly in the second quarter of 2019. If these expenses are excluded, our ongoing operating expenses were $4.3 million for the first quarter of 2019. As a percentage of total revenues, this recurring expenses represented 83% of our revenues for the period. This improvement is even more apparent when we look at the monthly improvements made during the first quarter of 2019 when expenses decreased to only 62% of sales in March. What that basically means is that in March, our business was able to afford all of its expenses with margins for profitability. We're wringing out costs of our business quickly and we see a clear path to profitability.

It's also important to note that pro forma sales for the 2019 first quarter would have been much higher, had the 2019 acquisitions been completed on the first day of the quarter. Pro forma sales would have been in excess of $6 million and with only payroll and a few other occupancy cost increased in correlation to added sales. As a result, we can anticipate that profitability may continue to improve in the next few quarters as we get past all the recent integration and transaction expenses incurred.

Next, I'd like to shift our focus to our outlook for the rest of the year. Based on our current scale of operations, we believe our business is now operating very close to breakeven from an EBITDA perspective. We reduced our operating expenses throughout the first quarter and have maintained strict expense control into the second quarter. As a result, we're increasingly confident in the company's ability to generate free cash flow in the coming quarters.

Our internal organic growth target is 20% annual revenue growth. We believe we have adequate infrastructure and personnel to accomplish this for the foreseeable future. We will look to selectively augment our staff in key growth markets as well as to the expanded marketing of our proprietary fuel products. We also believe that we have the capital resources on hand to accomplish our organic growth goals for the year. We expect this assessment will become increasingly apparent to shareholders as we execute our business plan throughout the remainder of the year.

Next, I'd like to shift to our international outlook. Our consolidated retail growth strategy is not solely based on domestic markets but also identifying international growth opportunities. In 2018, a significant amount of time and effort was spent on market research, determining the ideal location for a new MagneGas plant in Europe. We ultimately selected Amsterdam as our European pilot for launch and recently identified a specific location within the port for our site. We intend to move forward permitting for the site over the next 3 months and hope to initiate scalable operations in the third quarter.

We believe the Netherlands represents a compelling test case to the European market. First, 2 of the largest ports in Europe, Amsterdam and Rotterdam, are located there. In addition, Hamburg in Germany and Antwerp in Belgium, which in addition to the Netherlands ports, represent 4 of the 5 largest ports in Europe are all addressable -- are all able to be served initially from this 1 location.

We also see the Netherlands itself as a scalable, attractive market within a very dense geographic footprint. We estimate the Dutch metal cutting fuels market is approximately $150 million and that all of our potential customers located within the addressable market may be served -- serviced from our selected site in Amsterdam. This means that we can scale efficiently in 1 location with a minimized need for capital and personnel investment. To accomplish this, we intend to retrofit one of our existing mobile gasification units for immediate deployment. Local permitting partners that can facilitate our compliance procedures have already been identified and we've initiated independent gas analysis in Germany in order to comply with what is called the REACH certification process. This would permit us to sell our MagneGas products across all of the European Union once our certification is complete. This would also be useful for European Union expansion beyond 2019 as several of the key prospective clients that we're speaking with in Amsterdam also have meaningful operations in other port locations across Europe.

Lastly, we've identified a prospective industrial gas products distributor that may serve as a critical partner in the Netherlands. This distributor is one of the largest independent gas distributors in the region and has expressed a very strong interest in partnering with Taronis as we launch our operations. Securing a role for them would enable our team to focus almost entirely on marketing our products and trying to build key relationships with leading consumers of metal cutting fuels as well as the daily production of our gas products themselves. Virtually all other key roles will be outsourced, thereby keeping our staffing costs to a minimum.

Outside the Netherlands, we're also in the process of finalizing a similar expansion plant in the Persian Gulf. Significant progress has been made in discussions with the Kingdom of Saudi Arabia and in United Arab Emirates in particular. Multiple demonstrations for some of the largest consumers of metal cutting fuel in the region have already been conducted and our products have been very well-received. We're focused on finalizing a form of our operational launch and currently evaluating the role of a potential joint venture partner and how we can work together to grow the market. We believe our 0 water footprint production process for MagneGas is a very compelling solution for all desert economies and this may prove to be a critical differentiating factor in terms of government involvement and support for our technology and our products. Our goal is to have an operational footprint in the GCC within 6 to 12 months.

Lastly, we're actively in discussions with licensing of our technology and the sale of gasification units in select markets, including several of the desert economies discussed herein. While we do not have a binding agreement in place, the nature of the counterparties we have engaged with suggest that if we reach definitive initial agreement, they have the capacity to scale their operations and acquire a significant quantity of our gas units to meet their country's needs. All these growth opportunities can provide high-margin supplemental cash flows to support our long-term domestic growth strategy. We believe these opportunities have a reasonable probability of success and in navigating a clear path to implement these initiatives with little to no capital deployment.

Lastly, I'd like to touch upon our 2019 technology outlook. We have made excellent progress in our gasification technology during the first quarter of 2019. Most importantly, we completed our ethanol study and formalized our supply chain agreement with Catalent, a global medical manufacturing company that is now our provider of ethanol waste products for our gas product. We are in the process switching our production model to use their ethanol as our primary feedstock and this is expected to provide meaningful cost savings to the production of our MagneGas products going forward. We also made significant progress on our emerging waste energy applications with our fourth generation gasification process. We recently began a project with the Welding Institute in Cambridge, and we expect them to play a key role in this process. Their interest in participating was driven by the technology's potential to decrease our fuel production costs by up to 80%. If we're successful in this endeavor, we will have unmatched pricing power relative to acetylene and propylene products as well as to be able to explore micro-grid electric power generation concepts that would directly compete with today's biofuels and liquid natural gas power production plants.

Lastly, our water technology business is advancing as planned. We successfully completed an efficacy study in conjunction with Dr. Sven Kranz from Florida State University, validating our ability to help solve the toxic cyanobacteria crisis in Florida. We leveraged this study to recently win our first pilot program with one of the leading municipalities in Florida dealing with this issue. We will be providing additional details in the near term as we look to launch this pilot in the second quarter of 2019.

We also made meaningful progress in our USDA and North Carolina projects, which utilize our patented agricultural waste sterilization technology. We're in the final phase of our USDA grant funded project on a dairy farm in Florida, which is expected to end in the third quarter of this year. Additionally, a potential pilot location for our waste services model in North Carolina was identified and we secured a lease for the project. We intend to provide a comprehensive update on this front in the coming weeks as we finalize our facility documents and commence the permanent -- permitting process.

Finally, we're also extremely excited about our newest potential acquisition. As we announced earlier today, we executed a letter of intent to acquire a controlling interest in a water conservation technology that we feel is highly complementary with our existing water technology portfolio today. The technology has over 100 pilot installations to demonstrate, on average, a 20% reduction in water consumption and up to a 35% reduction in water utility bills. The acquisition would instantly give us acquisition -- excuse me, access to a number of household names in the hospitality, restaurants and retail space. We also anticipate that many of our prospective customers and partners in the Middle East, in Europe and other global markets will be ideal partners for the distribution of this solution for years to come. The acquisition's target business model is very lean financially, with a low cost path to scaled revenue and EBITDA generation. We are very optimistic this acquisition could create meaningful value for our shareholders in the near term.

In closing, our industrial gas business is quickly maturing and is beginning to achieve the scale that should lead to profitability over the next few quarters. Our Water business is quickly reaching a point of commercialization that may require further investment, but could unlock global value by solving some of the most pressing issues related to water conservation. We are exploring a series of potential corporate transactions that could impact the scope of our business, the scale of our operations and how we can most efficiently grow our company for the benefit of our shareholders.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question submitted here is, what is the company's plan to regain NASDAQ compliance?

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Scott Mahoney, Taronis Technologies, Inc. - CEO, President & Director [2]

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Okay. So this is an excellent question. There are several ways that a company could regain compliance. Our preferred path is to clearly outline the immediate near-term catalysts that may enhance or improve the value of our business and explain those details to the arbitration panel -- excuse me, the appeals panel and demonstrate sort of the reality, the time frame and the nearness of that term -- time frame, the likelihood of that reality taking place and make a business case that we see significant near-term catalysts that could potentially regain compliance without having to take any of the corporate actions.

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Operator [3]

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Great. Another question that was submitted, are there any viable alternatives if you're unable to regain the NASDAQ compliance?

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Scott Mahoney, Taronis Technologies, Inc. - CEO, President & Director [4]

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This is also a really good question. Yes, we do believe that NASDAQ is the ideal solution for us, it's the preeminent listing alternative in the United States for us today. However, there are other choices that could be made. For example, we could look very seriously at The New York Stock Exchange, Euronext. We've also explored the AIM listing process in the U.K., and what we've come away with is that there are a number of very attractive alternatives for our shareholders if we were required to seek an alternate exchange for listing purposes, and it is our plan to keep our shares in some way, shape or form listed on the best possible exchange for our shareholders.

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Operator [5]

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Our next question here is how confident are you that the company is in a clear path to profitability?

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Scott Mahoney, Taronis Technologies, Inc. - CEO, President & Director [6]

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Very much so. Based on what we saw in March and April with our full operations, being able to run at full capacity, we see a very, very clear path to steady improvements. We are past most of the noise related to acquisitions and capital markets transactions. Our legal expenses have fallen off dramatically. Our consulting and our other third-party expenses related to these transactions have basically gone to 0. We don't anticipate buying back any additional convertible securities because there are none related to the Series C and Series E that were purchased in the previous quarter. So basically, at this point, we don't see any of the kind of large-scale transactional expenses that were incurred in Q1, and the revenue is ramping rapidly. And as a result, we believe that with strict operating cost control, we can continue to get very close very quickly to operating profits.

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Operator [7]

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Our next question here is, is the company considering a share buyback? And if not, what other actions could the company take to improve shareholder value?

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Scott Mahoney, Taronis Technologies, Inc. - CEO, President & Director [8]

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So the 2 questions that we get regularly from people, are we looking to do a reverse split? Or would we consider doing a share buyback? Right now, we are really very, very focused on driving the business, growing the business and we ultimately see both those other alternatives as well, short-term fixes. Doing a reverse split might regain compliance with NASDAQ for a period of time, but unless the business is growing, prospering and shareholders remain confident in the business prospects, a reverse split may be a short-term fix.

Same thing with the buyback. A buyback basically starves the business of cash that could and should be used to grow in the short term. Now as the business grows and matures, a buyback should always be on the table as something for management to consider if there's no other better use for cash. However, at this time, when we're growing north of 20% annually and in some cases, some of our locations are growing as fast as 80% year-over-year, that requires cash. It's consuming cash for inventory. It's consuming cash for equipment and for staffing. And if we continue to push that top line rapidly, it's going to drop to the bottom line, and we're going to create scaled cash flow. And if there are no acquisitions, if there are no other better uses of cash, then at that point, we could definitely consider a buyback. But that's not something we're trying to do in the next couple of weeks or couple of months as a short-term fix. It's got to be part of a long-term strategy.

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Operator [9]

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That's all the questions we have time for today. Scott, do you have any closing comments?

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Scott Mahoney, Taronis Technologies, Inc. - CEO, President & Director [10]

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I'll just try to emphasize to people, we get a lot of questions about the strategy and whether or not it's working, and I can't emphasize clearer than the strategy is working categorically. We have made a series of smart acquisitions and in virtually every instance, we're making a difference. Our management's growing the business faster than it was managed previously. We're winning new customers, and we're only just in the tip of the iceberg as far as our growth potential.

We are just now starting to introduce at scale our MagneGas product into many of our new client market bases, and we think that we can go well beyond the 20% annualized revenue growth rate in some of these markets and we can do so very profitably, and with a world-class team that we can all be proud of. So we hope that our shareholders see those results in the coming quarters and they're supportive and they're rewarded with significant appreciation in their investment. We thank them for their support in the interim and we look forward to speaking with them soon.

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Operator [11]

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

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Scott Mahoney, Taronis Technologies, Inc. - CEO, President & Director [12]

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Thank you, Matt.