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spk01: Good morning and welcome to the Farmers Edge live audio webcast for its third 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, please press star then 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 conference over to Lori Robidoux, the Interim Chief Financial Officer of Farmer's Edge. Please go ahead.
spk02: Thank you operator and good morning everyone. Before we start, we would like to remind you that all amounts discussed on this call are denominated in Canadian dollars unless otherwise indicated. Today's prepared remarks also 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 and 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 discussing Farmers Edge's filings with the Canadian Securities Administrator. 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 Securities Administrators. I will now turn the call over to our Chairman, Bill McFarland, for opening remarks.
spk03: Good morning and thank you, Laurie, and to everyone for joining us on the call this morning. During the third quarter, we continued to execute on the strategies outlined in our initial public offering last March and have provided a roadmap summarizing our progress in the MD&A as we look to improve communications with shareholders. Our strategy is centered around increasing the number of new acre subscriptions on our digital agronomy platform, expanding revenue per acre by moving growers up our product ladder to higher revenue products, including fertility products. We made progress in Q3 on both of these fronts and are seeing a strong pull to our fertility solutions, which has increased average AAR per acre by 17% since the third quarter of 2020. We also recently expanded enrollments of smart clay makers and are building the foundation for more insurance products. working closely with Fairfax. These new products will be launched in the spring of 2022. The acquisition of Commoditeg in mid-August provided us access to a robust US retail network and combined with our expanding channel partner network will allow us to efficiently and in an accelerated manner source new digital agronomy acres. We also made progress on converting our 2020 Elite Grower Program acres in Q3, which will bear fruit in Q4 as we have upsold over 60% of the converted Elite Grower acres to fertility products. Wade will speak further on the 2020 Elite Grower conversions and the positive long-term impact of our decision to extend the conversion dates on that program. Many Elite Growers have also signed on to the Smart Carbon Program, and our signed carbon acres in Canada have exceeded our expectations and stand at 2.7 million acres. So lots of progress has been made by management over the past quarter, and there is lots more to do as we continue to work diligently on executing on our plan. A big thank you to Laurie Robidoux, our interim CFO, for coming back to help us through Q3 reporting. She has been absolutely fantastic to work with. I will now turn the call over to Wade and Laurie, who will provide more information and context on the business and financial results.
spk04: Thank you, Bill. Good morning to everyone. For today's call, I'm going to discuss a number of key business developments with you, and then I'll turn the call over to Laurie, who will discuss our financial results in more detail. On the sales front, we continue to add new acres with about 1 million new digital agronomy acres in Q3 and another 1.4 million added in the month of October, bringing our year-to-date digital agronomy sales to 5.7 million acres to the end of October. About two-thirds of those acres were sold under the Progressive Grower Program in North America, or as we call it, PGP acres. Including October results, our total acre sales are now at 6.5 million acres, which includes 800,000 of smart claim insurance-related acres sold in Brazil. Last quarter, we told you that the back half of 2021 would likely be stronger than the first half of 2021, and we are on pace, having achieved about 85% of our annual 2021 target of about 7.5 to 8 million total new acres. Our acre growth has been driven by the investments and the reorganization we have made in our sales teams and by the continued development of our channel partner network. We have over 42 new channel partners year to date, with a combined footprint of over 12 million acres. We've added new partner relationships in Brazil, such as Sumitomo Chemicals and a large retail group called AgriConnections, with several more in the works. Add that to our new U.S. retail network relationships, which we secured through the acquisition of CommodEgg, our existing channel partner relationships, a realigned, strengthened, and more aggressive grower program. These all give me confidence that the new acre sales in 2022 will far exceed 2021. Our new acre growth was offset by about 3.3 million discontinued digital agronomy acres year-to-date, including about 1.4 million 2020 elite grower acres that did not convert, or about 30% of the acres under that program. The remaining acres lost were from our four-year paid subscription contracts that were not renewed. But however, in the last 12 months, we've had over 80% of our long-term customers renew their contracts and in many cases upgrade into the higher value fertility products. We also decommissioned about 3.6 million of other acres this year, which we considered low value non-platform acres and had an annual revenue value of only of about $500,000. The move away from low value acres is now completed and done to realign our resources with our strategic focus on selling higher value digital acres which enables us to layer in new revenue opportunities in strategic verticals like insurance, financial services, carbon, and e-commerce. We continue to add new digital acres under our business analytics solution, including related to our financial services initiatives, with 1.5 million acres enrolled at September 30, 2021, representing our smart claim insurance acre subscriptions. An important focus for us last quarter was to convert 2020 elite acres. And today, we've converted about half of those acres under that program and are targeting to get to 60% by the end of the year. Although the rate of conversions has been lower than originally expected, the proportion of those converted growers moving into higher revenue generating fertility products has outpaced our expectations with over 60% of those converted acres moving into premium products. Our strategy to defer the conversion of these acres back in September and connect the conversion to our smart carbon program proved to be successful, and we've witnessed improved upsells to fertility solutions, and these upsells will improve our ARR by another $3 million. With many of those converted acres also signing on to the carbon program, we expect our AR to only improve further. Like the 2020 elite acres, our 4.4 million of the new 2021 PGP acres provide one year free trial to growers and are not subsidized by our channel partners. Until these acres convert to a paid product, either a digital or fertility product, they do not contribute to revenue. Our sales teams expect to convert about 20 to 25% of these PGP acres before the end of the year to a higher value fertility product. With over 10% already converted to date, many of the growers, we're in active conversations with many of these growers. These conversations will not only provide, sorry, these conversions will not only provide revenue in Q4, but will also be a good base for our conversions to build in 2022. Improving the conversion rate in our 2021 PGP program acres will be our focus over the next few quarters. We have already put in new measures in place in our sales process to pre-qualify new customers enrolling in the PGP program. We also have added a deeper, more diversified channel of partners that we are drawing from on new acres. A refreshed plan for customer acquisition and conversion and retention combined with the steps we've taken to reorganize certain parts of our sales and customer service teams responsibilities will improve the 2022 conversion rates. So let me be clear, we are not satisfied at 60% conversion rate and we expect that rate to improve next year. The last quarter, we are excited to announce the launch of our Smart Carbon Program along with a goal of reaching an enrollment of around 2.5 million acres by the end of the year. We have already exceeded that goal with 2.7 million acres enrolled and we're still actively adding more acres. All of these acres are in Canada and we have minimally enrolled into a smart solutions program to qualify for the conservation tillage protocol. In order for a farmer to maximize this offset opportunity, they need to upsell into our higher value fertility products, which allows the grower to stack protocols. You can see that the Smart Carbon Program will not only drive sales of our digital solutions, but also drive conversions and upsells. Through the third quarter, our teams have been testing and improving the carbon reporting system, streamlining and automating certain parts of the data gathering process, and assembling and verifying the data required to advance the related agricultural carbon offsets serialization. Our process requires very little time or intervention from the farmer, which creates a significant competitive advantage for Farmer's Edge. We completed a pilot project to allow and effectively test and refine and improve the efficiencies in our internal process so that we can adopt to greater scale of this program going forward. The pilot is now nearing completion and we expect to generate some serialized offsets later this year. However, the remaining carbon offsets will be serialized and sold in the first and the second quarters of 2022. We are also in the process of finalizing the carbon offset sale agreements with long-term strategic buyers with prices to create a win-win-win-win solution. A win for the farmer because the carbon offsets will provide a new revenue stream to fund their costs. And a win for Farmer's Edge as we build the agricultural ecosystem to execute on our strategy to expand on our revenues per acre. A further win will also be achieved for the offset buyers because they will be able to secure a source of high quality agricultural carbon offset. And finally, a win for society as farmers practice greener methods of farming and contribute to change for climate. On the insurance front, we also recently launched our yield prediction feature in Brazil for the use by farmers, insurers, lenders, and other agribusinesses. This enhancement to our technology offering will provide more data for those within the agricultural supply chain particularly those looking to manage underwriting and lending risk. The 800,000 acres of smart claim we added in Q4 were largely driven as a result of this new feature. We've been working closely with Fairfax, and in North America, we've built a foundation to connect our platform and our growers directly to reinsurers. We expect to introduce some new insurance products, including Hale, weather parametric, and margin-based products in 2022. Finally, another important development this past quarter was the closing of our acquisition of Kamad Ag in mid-August. The integration efforts have been underway since the acquisition, and we've built a plan to increase e-commerce sales of crop inputs and other farm-related products, with revenues that will be skewed to the first half of next year. We're also working on the Kamad Ag Group and their former owners in integrating Farm Command into their agronomic programs and developing a list of growers representing over 6.5 million acres as a source of new PGP program in 2022. It has been a busy quarter and I remain excited about our progress and the future as we build more value for our growers, our subscribers, and to others in the agricultural ecosystem. So let me now reintroduce you to Laurie Robitu, our new interim CFO, who can provide more comments into the third quarter financial results.
spk02: Thank you, Wade. My comments below will focus mainly on the third quarter results of 2021. Annual recurring revenue, or ARR, is one of the key performance indicators we use, and it's defined within our management discussion and analysis. At September 30th, 2021, our ARR grew to $64.6 million, an increase of 11.2 million, or 21%, since the end of 2020, primarily reflecting growth in our high-quality digital agronomy acres and contracted upsells to fertility products, offset in part by acres discontinued, including the 2020 elite grower acres that were not converted. ARR also includes the addition of estimated recurring carbon offset revenue of approximately 4.2 million, which excludes carbon offsets that may be generated in respect of prior years. The positive shift in our product mix is further demonstrated in our average ARR per acre, which on our digital agronomy acres increased from $2.79 an acre at December 31, 2020 to $3.26 per acre at the end of the third quarter of 2021. I'm also very pleased to report that our recurring revenue retention on our paid acres was about 91% in North America over the last 12 months. The acre retention on this same cohort of customers over the same period was just over 80%, with a number of customers coming to the end of their four-year contract. The difference reflects improvements in product mix within our retained subscribers as growers have added on fertility products. Revenues reported for the third quarter improved over our second quarter revenues by about 11%, increasing to $6.8 million from $6.2 million which is in line with what we told you last quarter. Compared to the same quarter of 2020, revenues were down $3.5 million, largely attributable to channel partner subsidies received in the third quarter of 2020 on elite grower program acres and lower commercial contract revenues. These subsidies related to channel partner arrangements, which have since been discontinued, and those related agreements will expire at the end of 2021. The PGP program in place in 2021 provides a one-year free service period and has no channel partner subsidies. Therefore, new PGP acres of $2.9 million added up to the end of the third quarter had no revenue recorded to date and will only become revenue generating once they convert in 2022 unless converted earlier to fertility contracts this year. and the elite grower conversions, which were strategically extended and discussed earlier by Wade, will become revenue generating in the fourth quarter of 2021. As described more fully in our prospective materials, the digital portion of revenues on a fertility contract are recognized evenly over a 12-month period, but the fertility portion is recognized when the related services are performed, which is typically in the period between October 1 and March 31 each year. In 2020, we did see some anomaly in that timing with a delayed harvest in 2019, which pulled more of the fertility services into the first half of 2020, resulting in about $1.6 million of additional revenues booked for fertility in 2020 and contributing to the year-to-date variance in our revenue. The strengthening of the Canadian dollar in the nine months ended September 30, 2021, relative to the U.S. dollar, also contributed to lower revenues on a year-to-date basis. The results of Commodit Ag have been consolidated in our Q3 results, however, only reflect in a month and a half of operating results, which are also at a seasonal low in Q3. Commodit Ag was on plan for the quarter with revenues of about $350,000. Our cost of revenue increased by about $2 million this quarter and include cost of goods sold of $300,000 related to the consolidation of the Commodit Ag business and cost of sales of about $400,000 related to sales of carbon offsets in the Alberta regulatory market. Increases in costs on a year-to-date basis were largely for the same reasons. Data and infrastructure expenses continue to trend lower than the prior year, with the current quarter results down 3.9 million compared to the prior year, primarily due to new imagery and cloud hosting arrangements. As noted in our Q2 results, our year-to-date results included an 8.2 million settlement gain which contributed to lower costs of $20.8 million for the nine-month period. Overall product, research, and development expenditures are lower in Q3 and on a year-to-date basis, although the amount of expense relative to those capitalized has gone up compared to the prior year. On a combined basis, the total spend this quarter compared to the same period in 2020 reflects a reduction of about $300,000 or 10% year-over-year. The company is currently capitalizing less costs than in 2020 as the platform becomes more mature. General and admin expenses increased in Q3 2021 by $600,000 over the same period in 2020, mainly due to an additional $800,000 in non-cash share-based compensation accruals related to the long-term incentive plan granted in the first quarter. EBITDA loss for Q3 2021 was 16.3 million or 4.1 million higher compared to the same quarter of 2020. The higher EBITDA loss this quarter compared to the prior year is the result of the lower quarterly revenue this quarter and changes in expenses as described earlier. Free cash flow for Q3 2021 was $6 million less than the prior year, largely a reflection of lower EBITDA and a $5.8 million reduction in government subsidies and financial assistance compared to the same quarter of 2020, offset in part by $3.3 million in reduced investments in capital expenditures and intangibles. The timing and recognition of government subsidies can be highly variable, and last year included refundable shred credits, as well as higher grants that were tied to funding associated with COVID-19. The net loss for Q3 2021 improved by about $500,000 compared to the comparative quarter. Lower finance costs in 2021 since the IPO were largely offset by lower EBITDA and government grant income. On a year-to-date basis, the net loss improved by $20.9 million, which includes the $8.2 million settlement gain realized in the second quarter of 2021, and the benefits of a $17.6 million reduction in financing costs offset mainly by lower revenues. Non-cash working capital at the end of Q3 was $3.4 million, which includes $1.4 million in inventory balances related to the newly acquired commodity egg. Excluding the inventories picked up on the consolidation of this new subsidiary, non-cash working capital was relatively consistent with the prior quarter. We expect in the future there will be more seasonality as the level of inventories at CommodAg will fluctuate and build up in the fourth quarter of 2021 and first quarter of 2022, with corresponding sales reducing inventories in the first and second quarters of 2022. Some of these inventory purchases will be offset by customer deposits over those same periods as growers secure supplies for the upcoming season. As noted earlier, we expect the majority of commodity ag revenues will occur during the first half of 2022. As I mentioned, revenue in our fertility products begins to be recognized in the fourth quarter as the related fertility services are performed. Therefore, with the favorable shifts in our product mix this year and the high proportion of elite growers moving into fertility products, We are expecting Q4 digital agronomy revenues to be about 33% higher than the fourth quarter of 2020, subject to favorable weather conditions for the balance of the year. The company also expects its cash burn rate to significantly improve in Q4 and into 2022. Because of the seasonality of our business, it helps if you look back at our trailing 12-month free cash flow, where we used about $41 million of cash over the last year. but that last year's numbers included some non-recurring items such as subsidies, commercial contract revenue, and higher levels of government grants. Our forecast for this coming quarter is to have higher digital agronomy revenue driven by the conversion of the elite acres, the early conversion of some of our PGP acres, and higher upsells within our paid subscriber base. In Q4 this year, therefore, we're going to see a lower cash burn, somewhere in the range of $5 to $10 million, and most of that will be driven by the core business and not unusual items like subsidies or commercial contract revenue. The progress that we made this year on sales and upsells will significantly reduce cash flow needs next year as the new acres roll over and start delivering revenue. In order to become cash flow break-even in the medium term, we will need to continue to deliver our strong sales efforts for new acres and reap the benefits of a largely fixed cost structure. As far as the target date, we may see some quarters where we have positive cash flow in the next 12 to 18 months, given the seasonality of our business, but on an annual cash flow basis, we expect 2024 will be positive based on our current trajectory. We have sufficient cash resources with the $70 million of cash we had at the end of Q3 and a lower burn rate in 2022 and beyond until we become cash flow positive. I'll now turn the call over back to Wade to provide some closing remarks.
spk04: Thank you, Laurie. I'll just round out by bringing us back to our strategy and path forward. At the time of the IPO, we outlined that we would use some of the proceeds raised to adopt a more permanent progressive grower program to accelerate the adoption of our technology platform and add more acres. Aligned with that, we wanted to advance the most sustainable agricultural solutions which in our case means promoting a shift for farmers from a base of digital solutions to a more encompassing digital plus fertility solution. We are making great progress in these areas, which may also be accelerated as farmers see the impact of rising fertilizer costs affecting their farm incomes. Capturing and selling carbon offsets is adding to our story, along with our plans to develop our insurance and financial services products. To complement our capabilities, these initiatives will drive improvements to our bottom line. Moreover, with a strong pipeline of acres to support the continued acre growth in 2022 and higher revenues associated with the improvements of our product mix and our continued focus on cost management, we expect an improved EBITDA and free cash flow by 2022 and beyond, and to become break-even in the medium term. So with that, let's now open up the lines to questions for our team, and I'll also let you know with us today is our president, Anita Wurzman. I'll now turn the call back over to the operator and look forward to your questions. Thank you.
spk01: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, you may press star, then two. We will pause for a moment as callers join the queue. Our first question is from Jacob Booth with CIBC. Please go ahead.
spk00: Good morning. Good morning, Jacob. Wanted to maybe just start off and ask a question about digital agronomy acres. I know you said that you added another million new subscribed acres in Q3. But, you know, when we look at the actual number, it was flat at 19 million acres. What was the offset? And then maybe how are you thinking about subscribed acre growth over the next 12 to 18 months?
spk02: Hi, Jacob. I can answer the first part of that question, and then I'll turn the last part of that over to Wade. When you look at our acre growth, I think we addressed it in the script. We did get rid of 3.6 million acres that were non-platform, low-value acres. That was part of the offset. We also had another 1.4 million elite acres that we took out of the out of the account. And then the balance would have just been non renewals on our four year contract. So there were some, you know, bigger numbers in there that offset some of the progress we made on sales. But you know, of the 3.6 million low value acres that we took out, they really only were contributing about half a million dollars of revenue.
spk00: Yeah, I was just actually looking specifically at the digital ground makers.
spk02: But yeah, those ones again, about 1.4 million of those would have been elite. and then that didn't convert, and then the balance would have been non-renewable. Okay.
spk00: And then on the growth over the next 12, 18 months?
spk04: Yeah, I'll maybe jump in on that one. So, you know, at the time of the IPO, you know, our main channel of growth was really two partners, which was CNH and Richardson's. You know, after the IPO, we focused on developing a team to go out and diversify a new channel. And they've done a tremendous job. We've got over 43 new partnerships across North America, but specifically in the US market. And with that comes a strategy to pull their customers into our platform. And we're seeing the value of that now. We're starting to add a lot of acres on this past month, We have strong forecasts and sales going into the end of the year. And the one thing that we see from these 43 new channel partners, it's really going to give us a strong leg up in the first quarter of this year. So our expectations is strong growth. I'm not going to give you a number right now because we're still working through what our expectations are going to be here for budgeting purposes. But we're feeling really positive that the work that we've done is going to lead to much stronger growth in the future.
spk00: Okay. And then my question on the conversion rate, you know, at 60%, you know, lower than, you know, what we've been originally talking about during the IPO process, which I think was, you know, closer to 75% to 80%. I know it's a key focus in 2020, but – And you also talked about, you know, carbon probably will help with this conversion rate. But do you think there's something structural going on here that's driving these conversion rates lower? You know, it certainly seems that it's becoming more competitive in this space, you know, especially as more of these ag equipment, ag fur companies expand presence in this space.
spk04: So maybe, Jacob, I'll correct you a little bit. At the time of the IPO, what we had said was that when we ran the first, what we called the PGP, but it was called Elite at the time, and it was a smaller program, that we had a 75% conversion rate. But we knew that as we expanded that program, we made it larger, that it would be reduced. And so we were targeting more of a 65% conversion rate for this year. Now, we didn't hit that number. We feel strongly that we'll be at 60 by the end of the year. But one of the really important aspects is that on the acres that are converting, they're converting into the higher-value products at a much higher rate. So at the end of the day, it's actually not going to impact our revenue. Now, I will say that some of the challenges that we've had with conversions – was probably connected to the fact that we only had two real channel partners driving those acres. And I would say that one of the channel partners, I wouldn't say that the quality of the acres that we got was exactly what we were hoping for. And one of the things that we've done with the new partners and that large funnel of acres is do a much better job of working with those channel partners to qualify those customers to make sure that there's a chance to convert them. And when you provide these freemium-style programs, and if you see that in other sectors, you generally hope to get 25% converted over into a paid-for product. And so, you know, we think with the measures that we've taken that we can improve that 60% and drive that up. And if we can drive it up while maintaining the fact that we're increasing the value of the products that we're selling and then layering that some of these new products like insurance, it's going to create a lot more value and revenue. In regards to the competitive nature, to be honest with you, it is a competitive market, but really the most competitive piece is just getting the farmer focused on a digital platform and paying for it. So we're, to a degree, competing against the untreated acre that I'd like to say. But we feel that we're really strongly positioned in the market, and as we start to attach these other value propositions like carbon, which most of our competitors are not doing, it's really going to drive not only sales but conversions going forward. I hope that answers your question.
spk00: I'll leave it there. Thank you, Rick.
spk01: There are no further questions registered at this time. I would like to turn the conference back over to Wade Barnes for any closing remarks.
spk04: Great. Well, thank you, operator. Yeah, we're very excited about what the future holds for the company with the new insurance products and our new smart carbon program and our new partnerships. We feel that we're in a really strong position to
spk01: achieve our goals here in the future so thank you very much and look forward to the next call this concludes today's conference call you may disconnect your alliance thank you for participating and have a pleasant day
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