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spk01: Good morning and welcome to the Farmers Edge live audio webcast for its second quarter 2021 financial results and business highlights. Please be advised that reproduction of this audio webcast in whole or in part is not permitted without written authorization from the company. All lines have been placed on mute to prevent any background noise and after the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time Simply press star and the number 1 on your telephone keypad. If you would like to withdraw your question, please press star, then 2. Individuals will be limited to two questions per person before being put back into the queue. At this time, I would like to turn the call over to David Patrick, Chief Financial Officer of Farmer's Edge. Please go ahead, sir.
spk02: Thank you, operator, and good morning, everyone. Before we start, we would like to remind you that all amounts disclosed on this call are denominated in Canadian dollars unless otherwise indicated. Please note that the prepared remarks contain forward-looking information and additional forward-looking statements may be made in response to your questions during the Q&A portion of the call. These statements reflect the company's current expectations regarding future events. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties. many of which are beyond the company's control, that could cause actual results and events to differ materially from those that are disclosed in or implied by such forward-looking information. Listeners are urged to consider the assumptions, risks, and uncertainties associated with such forward-looking information, including by referring to the assumptions, risks, and uncertainties discussed in Farmers Edge's filings with the Canadian Securities Administrators. These statements do not guarantee future performance, and therefore undue reliance should not be placed upon them. The company does not undertake any obligation to update the forward-looking information provided during this audio webcast, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws. Finally, we would like to remind listeners that the company may refer to certain non-IFRS measures and key performance indicators, or KPIs, During this audio webcast, for further details on non-IFRS measures and KPIs, including relevant definitions and certain reconciliations, see Farmer's Edge's filings with the Canadian Security Administrators. I now turn the call over to our Board Chair, Bill McFarland, for opening remarks.
spk08: Good morning, and thank you, David, and to everyone for joining the call this morning. Let me start by saying Q2 was a challenging quarter for Farmer's Edge with lowered unexpected revenue, which also impacted other KPIs, including EBITDA and free cash flow. Some of this decrease related to the purposeful delay in converting the 2020 elite acres to paid acres to coincide with the launch of the new smart carbon program with the underlying goal of improving the 2020 elite program conversion ratio. The other key elements in lower revenue for Q2 2021 compared to 2020 were the 2021 results had no fertility revenues as the current fertility season services were completed by the end of Q1 2021. And the progressive grower program, which is our key marketing program, does not include channel partner subsidies like prior programs. These items should not overshadow our record growth in new high revenue producing acres and the 17% growth in AAR on a year-to-date basis, which will be key factors in our long-term success. We are also pleased to report that an agreement was finalized yesterday to acquire Commoditech, an e-commerce platform developed by a strong and influential group of U.S. agricultural retailers. This strategic acquisition will add new capabilities to our Farm Command platform, and give us access to new customers for our progressive grower program as we continue to accelerate acre growth in the United States. The senior management team of Commoditech will also become part of the Farmer's Edge family, which is a real plus. Finally, we announced yesterday that our CFO, David Patrick, will be leaving the company and going back to his former employer in late September. A search process for a new CFO has been initiated. and Laurie Robideau will become the interim CFO. David and Laurie, our former CFO who retired about a year ago, will work together for a smooth and orderly transition as we search for a permanent CFO. I would like to thank David for his work over the past year in helping us go public. We welcome Laurie back to the Farmer's Edge team. I will now pass it over to Wade to discuss developments in the business and provide some more details around our acquisitions.
spk06: Great. Well, thank you, Bill, and good morning, everyone. For today's call, I'm going to share a number of key business developments with you, and then I'll hand the call back to David, who will discuss the financial results in more detail. I will also provide some remarks at the end about how I believe that the business is trending. Now, we have made several key hires this quarter in our sales group, We've brought in a completely new team to focus on channel development strategy. We've also beefed up our finance team and we've added new and talented leadership in our technology group. We continue to be committed to strengthening our team to gear up for our growth. The company has been very active adding new acres this quarter. The second quarter is generally our slowest period as farmers in North America are concentrating on field operations, and the Brazilian growers are focused on the safrinha harvest. With that said, we've added 3.4 million high revenue and high quality acres over the first six months of 2021, which is our strongest start in the company's history. And 1.3 million acres were added just in the second quarter alone. This success is being driven by our focus on new channel development in all verticals, such as crop inputs retail, insurance and insurance agents, equipment dealerships, agronomy companies, and with a special focus on the U.S. market. On March 1st, we rolled out our strategic channel development strategy with a brand new team focused on building key strategic partners across North America, but a focus again on the U.S. market. Our goal was to grow the number of channel partners quickly and accelerate our new progressive grower program. The program has been extremely successful with 30 new channel partners signed to representative agreements in this quarter. These new partners are providing direct access to over nine million acres. The new strategic channel team continues to focus on channel growth and has a pipeline of over 50 new potential partners that they plan to bring across the line in the next two to three quarters. The pipeline does not include the retail partners involved in the Kamath Ag transaction, which I will speak to later. Our pipeline of new channel partners will accelerate our growth for the next several quarters and beyond. The work that both the sales group and the channel team have done has put us in a great position to have a very strong last half of the year and we plan to easily exceed the first six months of sale. Most of these acres will continue to be on the Progressive Grower Program, but with the Smart Carbon Program being involved, these Progressive Grower Acres will be upselling into a fertility service, and that has a significant revenue potential for Q4 in 2021 and beyond. Approximately 75% of the 3.4 million acres added in the first half of the year are progressive grower acres and therefore are not contributing to revenue until their conversion to paid acres. The benefit from more acres can be seen in our forward-looking ARR after the conversion into multi-year paying contracts. North American growth is our number one focus and adding 2.4 million new acres in the first half of 2021. We've also grown the Australian market by 36%, and we've added over half a million new acres in Brazil. The overall mix of digital agronomy acres is also stronger, with higher revenue potential subscriptions coming in. The company rolled out our smart carbon program in North America in June. In Canada, we are focused on the voluntary market, And Farmer's Edge is the only agricultural tech company with both a soil organic carbon and a nitrous oxide emissions project. We have focused currently on the voluntary market because it is developing faster and is providing more clarity on rules and pricing compared to the regulated market. From the time of the IPO, we've seen the voluntary market price per ton double in value, and it continues to strengthen. In the US, we are using existing protocols, which are a bit more complicated compared to the Canadian market. But we've also moved quickly to develop our own protocols, which are very similar to the protocols we are using in Canada, with a focus on nitrogen management, which we plan to roll out early in the new year. We've had tremendous success since the June rollout, and we currently have contracted over a million and a half acres that have committed to our smart carbon program. And we anticipate adding another million acres by the end of the year. Our carbon program creates value not only for Farmer's Edge, but it creates a brand new revenue source for our farm clients. The data requirements to create high-quality offsets is extremely in-depth and very onerous on the growers. But the Farm Command platform makes it easy for the grower to provide the data set that allows us to create the highest quality offsets that will attract the highest value in the market. The Farm Command platform also allows us to validate historical management practices, which allows us to create vintage credits and create a windfall of revenue for the first year for the farmer. But we also will continue to create offsets based on farmers' practices on an annual basis going into the future. This new revenue source for growers absorbs most of the farmers' edge fertility subscription fees. As carbon values increase in the future, this will put even more money into the farmers' pocket. This program will not only drive business analytics revenues, but it will increase our conversion rate of progressive farm programs acres into paid acres and lift those conversions into higher value fertility programs at a quicker pace. We anticipate selling the majority of our voluntary offsets in the $20 Canadian per ton range and believe the market will continue to increase in value for both Farmer's Edge and our farm clients. We will receive a return on the sale of the carbon credits of 15% of the total fees. with 70% of those fees going to the grower and 15% going to our aggregation partners. We are estimating 2.5 million acres in our carbon program in Canada by the end of 2021 that could generate up to 800,000 tons of carbon offset, which would generate approximately $15 million of gross revenue for the company when sold in late 2021 or early into the 2022 seasons. The Smart Carbon Program will help generate new revenue streams for the company and create more customer stickiness. There's a significant revenue and bottom line potential for selling carbon offsets while driving new sales, faster conversions, and higher revenue generating products. We're very, very excited about this program. We continue to make progress with our insurance strategy as well. and created the first of its kind agriculture integration between our Farm Command platform and Munich Re's automated agricultural quoting engine for parametric insurance products. Unfortunately, the integration took longer than expected and the release of our canola heat blast product was delayed. We did provide over a million acres of quotes to our farmer clients But unfortunately, our growers only had a few days to make a decision to purchase the product before the Munich Re deadline. Unfortunately, most of these growers missed the deadline and were unable to purchase the product. But with the record hot, dry summer we've had in Western Canada, we continue to have significant interest and demand for this product. And now that we've developed the integration with Munich Re, we are now in an excellent position to execute on this demand for next year. In Brazil, the agricultural insurance market continues to see strong growth, and that market has doubled in the past year. The completion of the system integration with Munich Re will allow us to roll out new parametric products going forward in Brazil. We are also working with Munich Re to roll out a smart credit program with key financial institutions to provide insurance-backed credit lines. Our partnership with Fairfax Brazil continues to grow and expand as Fairfax Brazil expands their insurance business. Our platform has been instrumental in protecting Fairfax from fraudulent claims, which is a major issue in this market. With the success of our claims management program in Brazil, we continue to bring in new reinsurance partners, which in turn will expand our acre growth into that market. In the U.S., we continue to work with primary insurance companies to help improve their production reporting and improve their claims management and develop private products such as parametrics. Those relationships continue to open doors to agencies who want the data connectivity to the farm and to the insurance companies, and they are an extremely strong path to the farmer. Growing our insurance-related analytic revenues remains our top priority and we will continue to be a leader in this space. As Bill stated, we are very excited to announce our first acquisition as a public company with the purchase of Commodit Ag. At the time of the IPO, we were focused on disrupting the agriculture in key sectors such as agronomics, insurance, carbon, sustainability, ag finance, and e-commerce. The acquisition of CommodAg opens the door into the e-commerce space in a very meaningful way for Farmers Edge. CommoditAg was created by nine very influential retail organizations in the U.S. to provide growers with the ability to buy products online while also continuing their relationship with their local distributors. CommoditAg enables retailers to provide choice but utilizes brick and mortar assets that the retails bring along with the ability to transact digitally. The acquisition of Commodit Ag will enable Farmer's Edge to access and work with over 14 retail companies, 500 rooftop locations and 40 distribution centers. This group of retailers provides Farmer's Edge with access to over a 70 million acre footprint. By connecting the Kamad Ag e-commerce platform with our predictive decision-making tools in Farm Command, we will create a one-of-a-kind grower experience and significant value to all parties. We couldn't be more excited about bringing the Kamad Ag team into Farmer's Edge family, and we are looking forward to partnering with some of the largest, most progressive retailers in that U.S. market. E-commerce revenue estimates for the upcoming year will sit around $15 to $20 million. We expect a nominal impact on the EBITDA and the free cash flow in year one after we make some IT and other investments into the business. Our arrangement also includes agreements with the former owners of the Kamad Ag Group on a best efforts basis to put a minimum of 14.5 million acres on our Progressive Grower Program on annual subscription revenue in the future, which could be over $40 million. We strongly believe that this acquisition is a game changer for agriculture going forward. With that, I'll turn it back over to David.
spk02: Thanks, Wade. My comments will primarily be focused on the three-month second quarter results of the current year, 2021. Revenue for the second quarter was $6.2 million, a decrease of $2.9 million from Q2 2020. On the year-to-date basis though, revenues were basically flat, highlighting our seasonality with revenues. Our second quarter results and key performance indicators show the progress on the implementation of our growth strategy. We continue to see seasonality in our business with the second and third quarters being slower as previously discussed in our first quarter results call. Our first quarter of 2021 had the last of our fertility revenues for the current season as compared to Q2 2020 which had 1.6 million of fertility revenues being recognized. Our Progressive Grower Program, or PGP, marketing plan does not rely on channel partner subsidies to sell acres. And so in Q2 2020, the prior year, we had 1.5 million more of those revenue subsidies in that year. ARR is measured by taking the annual contract value and adjusting for any committed recurring discounts or premiums on the contract, and it excludes any first-year discounts, such as PGP. ARR, as at the June 30, 2021, was $62.4 million. That's an increase of $9 million, or 17%, since the end of 2020. The addition of carbon offset revenue potential was added to ARR this quarter by using the estimated carbon offsets created on a normalized basis. The company's ARR increase in Q2 came from adding these normalized revenue estimates of approximately $4 million on the $1.5 million smart carbon acres currently under contract, and the new PGP acres as smart paying acres. This is partially offset by a combination of lower value acres discontinued in the first quarter in Eastern Europe, the satellite imagery contracts lost in Q2, and the strengthening of the Canadian dollar that lowers the value of the foreign ARR. Progress is being made with the conversion of 2020 free period acres under the LEAP program. As noted, we pushed back the conversion date to Q3 for acres with free periods ending in Q2. This reduced Q2 revenue by approximately $0.9 million, but was the right business decision. Combined with the benefit of smart carbon, we continue to plan for and expect approximately a two-third conversion of those 2020 elite acres from free to paying by the end of 2021-21. The vast majority of the 2020 elite acres will reach their conversion decision date in Q3, at which time those acres would become revenue generating with a smart subscription price and potentially a higher price with a fertility product. Our business analytics solutions revenue grew by 60% in Q2 2021, and that's coming from carbon offset sales within the Alberta regulatory market, but it was below expectations overall for business analytics solutions. with some delays in getting arrangements with insurance channel partners finalized. The insurance relationships are moving forward, but the seasonal nature means that some of those revenue opportunities will be delayed a season. We have completed a review of the smart carbon accounting with an external advisor and have concluded that the IFRS rules require our recognition timing to happen at the sale of the carbon offset. Therefore, no opportunity to accrue any revenue over the period as the data is being gathered. This will make that carbon offset revenue recognition seasonal and traditionally tied to Q4 and Q1. The Q2 results were positively impacted by the successful negotiation of a new satellite imagery contract, which included a contract for new imagery services and the settlement of an existing liability for 2020 services. The result was recording an $8.2 million gain on settlement of the existing liability in the second quarter. and that was shown through the line of data and technology infrastructure expenses. This recovery has a positive impact on our adjusted gross profit, EBITDA loss, net loss, and free cash flow. This settlement, though, results in significant real cash savings for us. The new services agreement will allow for us to incur much lower expenses compared to the old agreement. Our cost of revenue grew by 9% tied to higher headcount compensation and other variable factors associated with more subscription acres. We also had higher travel-related costs given that Q2 2020 in the comparable period was at the height of travel restrictions tied to the COVID-19 pandemic. Adjusted gross profit for Q2 2021 was $3.1 million, which is an increase of $5.9 million over the comparable period of 2020. Without the settlement gain, adjusted gross profit loss would be $5.1 million for Q2 2021 and $5.5 million for the six-month period of 2021. Cost savings from data and technology infrastructure expenses were realized beyond just the settlement gain. The revenue shortfall for Q2 compared to the prior year, though, was the primary reason for the overall decrease, excluding that gain. Looking at product research and development expenses, the amount expensed increased by $0.9 million. But when compared with the capitalized portion of intangible assets, we continue to see lower costs with a net decrease of $1.3 million or 33% in this group. This comes from reduced spending and headcount as the platform matures. The maturing platform also contributes to a higher percentage of the cost being expensed versus capitalized. General and admin expenses increased by $3.6 million in Q2 2021 over the same period in 2020. and that's tied primarily to the compensation-related expenses being the largest contributor. The transition to new long-term incentive plan resulted in 0.7 million more expense loan. We also incurred higher levels of legal-related expenses and other public company higher costs. Including the settlement gain, EBITDA loss for Q2 2021 was 9 million. That would be an improvement of 4.5 million over Q2 2020. Excluding the settlement gain, the EBITDA loss for Q2 2021 is a decrease of $3.7 million, which comes from the lower revenue in Q2. Free cash flow for Q2 2021 increased by $4.4 million. The timing and recognition of government subsidies, including investment tax credits, is lumpy. The current period of government subsidies and financial assistance was lower than in Q2 2020. However, we expect the benefit from a couple other major programs in the back half of 2021. Net loss for Q2 2021 improved by $9 million over Q2 2020. This includes the positive impact of the one-time settlement gain of $8.2 million. The current period also saw the full quarter benefit of capital restructuring with the IPO in March, with finance costs almost completely eliminated with the removal of the convertible debentures and long-term interest debt. The balance sheet was impacted during Q2 by a significant decrease in current liabilities as we paid the IPO-related accruals and the satellite imagery settlement. Therefore, the outflow for those paid liabilities and the seasonality of billings resulted in a net cash outflow in Q2 that is not indicative of the annual run rate going forward, though. We will begin to consolidate commodity ag results on a go-forward basis. There is also seasonality with the commodity ag business that I want to highlight. where they have a large portion of their revenues being generated in the first and second calendar quarters of the year, which is when growers generally need crop inputs that they are selling. We see our Q3 revenues being slightly higher than our Q2, and it's our seasonality high Q4 when revenues should grow significantly compared to 2020. This increase will come from smart carbon offset sales, fertility upsells and progress, and from the benefit of the 2020 elite conversions that we are planning. With that, I'll turn the call back to Wade to provide some closing remarks.
spk06: It's been a challenging year in agriculture with the current weather conditions that farmers are facing. These risks to farmers make the use of our Farm Command platform even more appealing and will support strong acre growth in the back half of the year. The Smart Carbon Program will lead to stronger acre conversions and new acres and acres moving up the product ladder to higher value fertility products, which will accelerate our growth and subscription revenues, which is the main driver for us reaching our medium-term goals. Our business is seasonal and can be lumpy. We are committed to making decisions that support the long-term growth of the business and are very confident we will meet our medium-term goals outlined in the IPO marketing. Our strong acre pipeline and larger sales team will help us bring this opportunity to fruition. Our closing of the CommodAg acquisition will also broaden out our services reach and allow us to connect more deeply into the U.S. market. With that, I'll open up the line for any questions for us. Included in the room today is our President, Anita Wartsman. and I will pass this back to the operator. So thank you.
spk01: Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. Our first question comes from Richard C. of National Bank Financial. Please go ahead.
spk05: Yes, thank you. So this is the second quarter that you guys have kind of missed expectations since going public. Fairly meaningful, I'd say. What sort of specifics can you provide in terms of giving us and the street confidence here that you're going to see that pickup you're going to point to in terms of conversions in Q3 and Q4?
spk06: Yeah, so thanks for the question, Richard. You know, one of the critical components going forward for the success of the business is conversions. And so that was one of the reasons why we made the decision to delay the conversion program and extend it with the launch of the Smart Carbon Program. I mean, the Smart Carbon Program is such a meaningful product for the growers, which really sort of pulls those conversions in It eats up really the cost of not just our smart solution, but the fertility program. So we get kind of two kicks at this. One, it really incentivizes the grower to convert, and it moves them up into a higher value product, which is really what we're trying to achieve. From the field level right now, we're getting a lot of conversions moving in. We've added a lot of acres here just in the last six to seven weeks around the smart carbon program. And now those acres are now starting to convert. So we feel really good about those conversions moving in. It's also spilling over into the sales side of things. As our sales guys go out and sign people up to the progressive farm or to the progressive grower offer, Generally, it takes about a year sometimes to get those growers converted, but because of the Smart Carbon Program, they're converting very quickly. One, they know they need a fertility program. A lot of growers need to understand how much fertilizer has been left in the ground from the drought. Two, there's significant value that we'll be able to unlock for the grower here in the new year. The smart carbon program is a real driver to conversions right now.
spk05: Thanks for providing that color. It definitely sounds like it makes sense. Is that something that you wouldn't have anticipated in the prior quarter when you set expectations for the upcoming quarter? Is it an issue with your systems in terms of not being able to identify it? I'm just trying to understand that as we sort of look forward to the next couple of months in terms of how strong a handle you have in terms of those conversions.
spk06: Yeah, we're going to have a real good feel here week by week of those conversions as we drive towards the fall season. So right now, I get a weekly report from our CSM group, and we are tracking towards that conversion number. I mean, some of the issues around the miss was, you know, the fact that we essentially extended the conversion program to kind of run alongside the carbon program, and we missed some revenue because of that. We just felt it made sense to tie the two together. And, you know, from the time of the IPO, we moved to roll out the carbon program, and this market has moved really quickly. So we were... excited about how fast we were moving the carbon program, and then I made a decision that, look, we'll miss a couple of months' revenue as long as we can tie it together so that we don't create confusion with the growers by bringing out too many programs at once.
spk02: And some of the first acres that were kind of offered or focused on for the smart carbon program, We're those existing acres, the ones that are already in our fertility products as an example. And so the delay is kind of this next tranche or the focus that the team's working on right now is now those call it elite acres and so forth to kind of really put those at the forefront. And so that timing is happening now.
spk06: And one other point that really gets us excited, we've had acres that have turned out at the end of the year that have already churned back in because of the Smart Carbon Program, which really gives us some strong confidence and visibility of how well this program is going to work.
spk01: Our next question comes from Jacob Bout of CIBC. Please go ahead.
spk00: Good morning. Good morning. Just a little bit more on another question on the conversion. I think you quoted in the MD&A a two-thirds conversion rate. Is that lower than what you had previously forecast? The number that I had was 75% plus. And then how many acres do you expect to be converted in the third and fourth quarter?
spk02: Sure. Those are two kind of reference points, but the first question is, yeah, the two-thirds is what we probably were planning for. That's what we internally had as a target. Keep in mind that's also impacted by kind of a product mix of those two-thirds. We think smart carbon probably helps to improve that product mix as well with a higher proportion to fertility, again, tied to giving the grower access to more smart carbon. The 75% is a rate that we saw in previous programs under kind of the elite in previous years. So that's where the 75, that had that kind of a historical looking backwards, but in a smaller size scale than what we had in the 2020 program. Okay. So if you kind of look at it, we've got kind of 4.5 million acres in that elite period. pool last year, and then you kind of do the two-thirds off of that. Some of those are already converted, for sure, but the vast majority, as we highlighted, would have only had their conversion dates starting in Q2. Those were pushed back. Those are now kind of being attacked and really worked on. One other factor to keep in mind is that some of the growers upsold to a fertility product in that first year. That we always see as a positive sign, right? So this is This is a grower, for example, who signed up in 2020 and in the fall of 2020 purchased and actually paid dollars for it. So we do have some of those acres already. Yes, they still have an option to convert out, but again, if they put money into it, then you add in the smart carbon program as well. It's a good indicator, but it's kind of having to wait to the fall for some of those upsold acres from last fall. in order for them to turn in to be fully paid with kind of the first year discount being removed.
spk06: Yeah, I might jump in. So we had really strong year-end conversions on the Richardson Elite program. We now, on some of those farms that have churned out, we're going back to them with the carbon program, and we're seeing them churn back in. So we're excited by that. In regards to CNH, a lot of the CNH acres, both on the Canadian side and the U.S. side, were signed up later in the season, and those renewal dates are just coming up now. So we're going to all those customers, some of them ahead of the renewal date, and getting them educated. One of the issues around the Smart Carbon Program, this is a financial transaction for the grower. Some of these farmers have had a bad experience this year with being on the wrong side of a grain contract. They're doing their diligence, which is taking a little time, but we're seeing really positive results with the growers. They want this new revenue source, and it's a little bit of delivering on the promise of the value that's created out of data. I would say that we believe it'll be two-thirds, but the momentum is strong enough in the field that we think there could be some upside on that number.
spk00: My second question is just about the smart carbon program. I think you mentioned the MVNA about 2.25 to 3 million acres could translate into an uplift of 13 to 16 million in year one. How much do you expect to be recognized in the second half of this year and then Maybe as a secondary question, just talk about what your plans are in the U.S. When do you actually expect to generate some revenue in the U.S. from carbon?
spk02: Sure, I'll address kind of that range that we put into the MD&A that you highlighted, and I'm glad you raised it. Yeah, so in essence, that's, again, we've got a million and a half carbon-related acres right now, we're going to plan to turn that into $2.5 million. And then from that, there will be a good portion or a significant portion of those that actually create the carbon offsets. The sale recognition timing to kind of get to that revenue range that's in the MD&A that you highlighted, Jacob, is tied to kind of being able to serialize those and then sell them into the marketplace. So we're confident that we're going to kind of be able to continue to add those smart carbon acres And then it's the focus of, and we're already starting this, is to work on that. And that revenue projection has got some kind of first-year benefits. So growers in the Canadian Marketplace for Smart Carbon program, in essence, have an ability to go backwards a couple of years and apply for credits beyond just the current year. And so that's really what those ones are. And so we get some added uplift, meaning that there's more than one year's worth of carbon offsets being created for the growers that are signing up this fall.
spk06: Yeah, and I'll maybe touch on the U.S. market. So the U.S. market is a little bit behind with what we're doing in Canada in regards to carbon. Now, there are existing protocols already, and there's other companies that are very active in the space there along with us. We are now starting to contract carbon acres in that market, and it's picking up a lot of momentum some of the issues in the U.S. market that because of the protocols and how they're set up, it's more difficult for farmers to qualify. And so we've been really active the last two or three months implementing protocols that are very similar to what we have in Canada, focused around what we call the NERP protocol. And so we hope to have that stood up here by the end of the year. What's really important for the farmers is that they need to be signed up to our smart solution and to our fertility program at the end of the year so that they could actually qualify because we can create a vintage credit. And that's a lot of the momentum in Canada because we've got more history here. We're able to create vintage credits for farmers that have been on our smart and smart VR program for the last few years. They're going to get value for those credits, and that's what we're sort of leading growers to in the U.S. market, and it's working. We're getting a lot of VR sign-ups with growers, you know, believing that one, they need this fertility program, but two, that there's going to be a carbon value for it at the end. In the U.S., it's even a little more exciting because the carbon values are higher because They use more nitrogen, and they generally have higher precipitation. So though the U.S. market is behind, we see it as a real driver going forward.
spk01: Our next question comes from Neil Bakshi of Canaccord Genuity. Please go ahead.
spk07: Hi, good morning. Can you hear me okay? Yes. All right, thank you. Just looking at the two satellite imagery-only customers you lost in Q2, I was just wondering if there's any way to maybe quantify or provide more color on the ARR impact of any remaining satellite-only imagery customers you have. How should we be looking at customers who are just imagery-only compared to other services?
spk06: I'll maybe start and then Neil hand the rest over to David. Since the time of the IPO, we're really focused on digital and up. We've been aggressively looking at some of these lower value products like pure satellite imagery plays or pure weather plays and realizing that in order to create this ecosystem that we're trying to create, Data is the most critical aspect of it. Our view is that we'll do some of these what we'll call lower value, lower data products, but they've got to be at a good revenue. If they're not... then we're willing to walk away because it doesn't really impact our long-term ARR. But with that, I'll turn it to you, David, to get into more detail.
spk02: So those would have had about a million dollar of annualized kind of revenue potential that would have been within ARR, Neil. And so that comes out and that's part of what's impacting ARR in Q2. But there's not a lot of other. The other kind of satellite only would be kind of connected to the platform satellite only, which is different. These ones were, call it other acres. They weren't digital agronomy acres. So just again, keep in mind that within our digital agronomy subscriptions, there is an imagery only in there. I just want to highlight again, Brazil generally has a higher product mix portion that is on that lower end of the product ladder, which would be that smart imagery and and smart insight type levels. So those are all in. Brazil is still a significant market for us, but those are different. They are not necessarily satellite-only imagery, the ones like these ones that we lost in Q2.
spk07: Okay. And then just a second question, just looking more towards the OpEx side, noting the uptick in general administrative costs. Should we be seeing this level in Q2 as kind of the go-forwards from a modeling perspective? It's a bit of an uptick, but I guess it was public company, legal expense. Just wondering if that's level setting now.
spk02: Yeah, so the legal part you could probably see as hopefully more one-timing. We still do have a couple of claims out there that we're working with, but this one was tied to one that was supposedly going to a court proceeding, but then that was pushed out to another year, to the next year. So that should kind of level off and not be as recurring. Some of the other just general public company, that's fine. Q2 in the prior year had some, again, various accruals and things like that, adjustments coming through it, again, which would make it more of a one-time uplift. So if you look at kind of more of the run rate of the absolute dollars that we had this year, or sorry, this quarter, and then pull back a little bit for it, that's probably a good guess of what that run rate for G&A would be on a go-forward basis that I would point to.
spk01: Our next question comes from Steve Hansen of Raymond James. Please go ahead.
spk03: Just wanted to circle back on tying the carbon program to the LED acre conversion. The logic certainly makes sense. Is there any sort of, you know, data that you can provide us thus far to the success of that tie together? Just trying to get a sense for, you know, how effective it is in combining those two and really get a sense for the, you know, the decision to push out that conversion date, you know, how effective that's been thus far.
spk06: Yeah, I mean, we're right kind of at that critical stage where we're starting to see those conversions come in here at a rapid pace. I mean, we're at a kind of 80,000-acre-a-week conversion rate as we go forward, and it's starting to ramp up. So, you know, I think over the next 30 to 45 days, we'll be in a real clear position of where that number is. You know, a lot of these farmers... will want to have those decisions all made going into the fall. Because the one thing that we're seeing is that when we look at this, we expected that on a conversion, a significant amount of the conversion acres would stay at the SMART only program. And what we're finding is that the vast majority of the conversions are all going into the fertility program. because the farmers, one, need it, and two, it captures a significant amount of value that actually covers the cost. So, yeah, I would say by the middle of September, we should have a real good feel of whether we're going to hit those numbers. You know, from the field, our teams are pretty excited. I mean, they feel it's like shooting fish in a barrel right now with this program. So we've got lots of momentum. The only issue, again, that we see is that this is new to the farmers. They're a little cautious around the agreement. A lot of them are seeking a little bit of legal advice to get a lawyer to put their eyes on the agreement. They want to be certain they know what they're getting into because many of them have never had any involvement in this before. But we're feeling really good about this program, so.
spk03: Okay, that's helpful. And just maybe a couple questions on commodity ag, if I might. The first is, you know, how has the growth profile been leading into your decision to purchase? And how should we think about that revenue ramp going forward? And just a clarification on a point I think you made in your prepared marks around the bid-odd contribution. I think you said it was nominal, meaning it's roughly flat. I just wanted to get some clarification there.
spk06: Yeah, so I'll maybe start and I'll hand over for David. But, I mean, you know, look, we're really excited about this partnership. I mean, I think that if you talk to any retail groups in the marketplace, they all believe that a percentage of their business is going to be done through e-commerce. You know, we see the moves that Nutrien is making. What we're finding is that, you know, in the rest of the retail industry, A lot of these groups aren't sophisticated enough on the technology side to go out and implement some of these programs. And so that's what I think we saw with these partners on the retail side. They stood up this business. They got it rolling. One, you know, to compete against FBN and to get ready for Nutrien. And I think they felt that, you know, in a partnership with Farmer's Edge, we could take that business to the next level. What's quite game-changing is the ability of using these existing retail groups and their infrastructure to distribute the product out. And that's something that an SBN doesn't have access to. And it certainly is a unique offering that can be replicated in different markets. And we've also got really good feedback from some of our Canadian partners around this already. So we see... This only ramping up, and we see more and more farmers utilizing this. I got a bunch of inbounds late last night from farm customers after the announcement, excited, telling me that they've been utilizing FBN already and that they're quite focused on an e-commerce platform. So with that, I'll maybe turn the financial piece over to David.
spk02: Yeah, so we're pointing to kind of a growth for kind of the next 12 months from here, Steve, to kind of get to that $15 million range. And, yeah, to your point, as we quoted in the script, it would be a nominal, so kind of just maybe a little bit below, like a small EBITDA loss in that first year for that or a small EBITDA gain, but nonetheless a nominal kind of EBITDA contribution on that. Then as that kind of growth continues where that $15 million turns to $30 million and so forth, it will help and that scalability of the business will help. But it is still more of a lower margin type revenue number just given the kind of arrangements that it is with e-commerce sales where we're creating and just getting a small gross profit off of each sales dollar. But hopefully that helps to give some color.
spk06: The one other point I'll make on this, so the Farmer's Edge platform is extremely strong at helping growers make decisions. So our platform helps the grower understand how much fertilizer he may need or when he needs to put it on or what seed variety that he should use or when he has a fungicide outbreak. When you connect that decision tool into an e-commerce platform, it's extremely powerful. And I would say that that's probably some of the weakness that probably Nutrien doesn't have or FBN doesn't have. And you then connect that to the ability for a farmer to continue to do business with his local retailer. It's a powerful mixture. And I think it's going to really draw, it's going to be another arrow in our quiver around conversions. And these are really strong retailers that are focused on getting us on their customers and to digitalize them. And if we had a weakness at the time of the IPO is that we were really weak in the U.S. market when it came to the retail side, and this partnership really changes that.
spk01: Our next question comes from Jacob Bout of CIBC. Please go ahead.
spk00: Just a follow-up on free cash flow and burn rates. During the IPO, we were talking about being kind of near a break-even free cash flow in 2022 and positive in 2023. Is that still the expectation?
spk02: Yeah. Again, the acre growth and so adding these new acres this year are basically all in that free kind of first-year period. So, again, we hope to turn some of them into an upsell of a fertility product this fall. But, again, in... the desire to kind of then convert those and we wouldn't have as much of a delayed conversion next year, i.e. meaning we wouldn't be holding them back for, call it the smart carbon program, that should all help contribute. Again, the Q4 2022 will be a very seasonally high period. So again, to kind of reach that free cash flow neutral, it really takes our seasonally high Q4 period into it so that's a guide whether that end of 2022 leads to early 2021 with the finishing of call it the fertility season of that year or some of the carbon offset recognition timing which is also going to have some seasonality got to keep that into mind or take that into consideration Jacob but yeah again if the convergence happened for the acres in 2020 They'll start to contribute in the back half of this year and then contribute revenue dollars towards free cash flow going into next year for the full year. That on top of some upsells and growth in some of the other regions like Brazil and so forth that we probably aren't getting there right now, but we have some opportunities. possibilities there that we're working through in BD opportunities that will turn into opportunities in the back end of this year, which again will lead into a season and contribution next year.
spk01: Our next question comes from Richard C. of National Bank Financial. Please go ahead.
spk04: Yes, in terms of the 4.5 million acres in the elite pool that you expect to be converted by two-thirds later this year, do you have kind of a view of what the split would be between Q3 and Q4?
spk02: For timing, it would be probably, again, there would be a balance. The desire right now, and again, that's what the focus on the teams is right now in the kind of for most of Q3. So we're hoping that we're going to get them into before that September 30th timeline, which would allow to have some revenue recognition within that period.
spk06: Yeah, look, I think the lion's share will come in in Q3. You know, just because the seasonality part of ag, the growers will be done harvest and they're going to start to want to think about their fertility program. So and it's kind of the nature of agriculture. It comes hard and fast, you know, that over the next two months, we're going to see a lot of these conversions take place. And so, yeah, I mean, that's kind of our view is... You know, we believe we're going to be at that two-thirds. I have a high level of confidence. You know, I believe in the Canadian market it'll be stronger. But you give us another month or so, we'll have a real good transparency because a lot of these acres will come in. You know, farmers have a bad habit of waiting to the last minute all the time to make decisions, and it's just something that we have to kind of deal with. But, you know, October 1 is generally – the start of sort of the new year for farmers. And so we anticipate that we should have a big chunk of those acres all converted over and ready to go.
spk05: Okay. And just on your ARR, I had a question in terms of carbon and how you've incorporated that into your ARR. So it's not clear to me whether what you've incorporated is fully contracted in terms of the carbon revenue or is it sort of based on your estimates? Can you kind of run through that for us?
spk02: Sure. So the carbon that's included in the $62 million ARR for June 30th, Richard, is tied to what we have under contract. So we know we've got a million and a half smart carbon acres right now. Then we do recognize and build estimates into there as to, of those acres, how many will turn into revenue, or call it real carbon offsets, and then apply kind of a value of that carbon right now. So that works out to be about $4 million. And again, what's in ARR right now would be what we call kind of a normalized. So again, it's not this first year push. So in some ways, there's this kind of reference to having call it approximately $15 million of carbon offset revenues in late quarter four or early quarter one tied to this year's carbon offsets. And that would be for some of those vintage years. But that's because we get more than one year's worth in that first year. That's why there's a discrepancy between that and the $4 million. And obviously the other discrepancy would be that kind of this extra million of smart carbon acres that we're still working through and planning to add on in Canada by the end of the year.
spk01: Our next question comes from Steve Hansen of Raymond James. Please go ahead.
spk03: Yeah, thanks. Just want to circle back on this commodity bag again, sorry. Just want to understand, so the platform today, is that currently just running on the existing nine founding retail platform members? And if so, does your acquisition give you the ability to broaden and extend that scale into the other smaller retailers that might not have a digital platform?
spk06: Yeah, no, great question. Absolutely. I mean, CommodEgg got a really good start with their nine owners and they're expanding into new retails. They've got a nice pipeline of new retails that'll be announced here over the next while. And we think that, you know, now that we're working together, we're going to actually be able to speed that process up because we're bringing... value from our side as well. And look, I mean, Nutrien is moving in this space. It's causing a ripple and people are going to need to react. And so we believe that we'll be able to provide them with the ability to counter the moves that Nutrien's making in this space.
spk02: With the acquisition, we've even had some conversations with retailers here and even Canada and have gotten positive feedback from that as a combination of possibilities for them, possibilities for them to expand or expand some of the investments that they have in the U.S. already to kind of go and again just highlight that it's going to be more than call it the existing group of retailers that is associated with commodity ag that we envision will be opened up to this throughout the Farm Command Network.
spk06: And you also have to think about, you know, with the amount of acres that we're currently on, that carries a significant amount of crop input. So So even acres that aren't connected to those existing retails will actually be driving some potential e-commerce revenue to them. So I think that's also an exciting opportunity. And when you talk to a lot of the retailers, I mean, a lot of them use the 20% number, that they believe that either 20% of their customers or their customers will buy 20% of their products through the e-commerce here going forward. And if you think about it, I mean, those are a lot of dollars, and there's not really anybody that has the distribution component set up the way that Comod Ag does.
spk03: Understood. Thank you. And just quickly, if I may, on the protocol issues on launching smart carbon in the U.S., it sounds like you're pushing towards the new protocol that you described. I mean, how difficult of a process is that to get that set up in the U.S. relative to the existing protocols, which have greater share?
spk06: You know, we're feeling pretty confident about it. I would say that a lot of, I think there's been a realization in the U.S. with the protocols that are in place, that they've made it too difficult for growers to actually be able to comply with it. So there's already a movement within the existing protocols to expand it to include a NERP style. And so our view of it is that it's just sort of a timing mechanism to go through the process to get this implemented. So we feel really good about it. I would say that there's probably... not probably there are other companies in this space that are also realizing that the NERP protocol is the best way forward in that U.S. market and the beauty part about it is that not all farmers use no-till and not all farmers use cover crops but the vast majority of farmers use nitrogen and nitrogen is a huge contributor to greenhouse gases and so our platform fits the NERP protocol like a glove, and so it's just really a byproduct of what we do, and that's what makes this program so unique. It also, most of the other companies out there that are trying to do carbon, there's a huge amount of onus on the grower to supply the data, and it makes those carbon offsets, I would say, risky. Whereas with the Farm Command platform, we collect all of that data, which really de-risks it for a buyer and really increases the quality and makes it easy for the grower. So it gives us a huge competitive advantage going forward into this market.
spk01: This concludes the question and answer session. I would like to turn the conference back over to Mr. Barnes for any closing remarks.
spk06: Yeah, well, great. Well, thank you very much. And as Bill said, it was a challenging quarter for us, you know, but we see a huge opportunity going forward, you know, with a focus on our smart carbon program, continued focus on the insurance products, and we think that with the commodity acquisition is really going to drive opportunities in that U.S. market. So, We feel really good about our quarter three coming up and our quarter four, and we really hope that we'll have better news and better results for you then. So thank you for your time today and look forward to speaking with you soon.
spk01: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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