Desert Control AS (DSRT) Earnings Call Transcript

Welcome to the Desert Control Q3 2025 Company Update Webcast. Today's presentation will review our Q3 2025 report and financial results for the fiscal period ending September 30, 2025. We will also share selected updates from Q4 2025 to-date. Following the presentation, there will be a Q&A session. We have received many questions today. But of course, you're encouraged to submit questions any time using the Q&A function. And to begin, Lars Eismark, Chair of the Board, will share some opening remarks. And after that, our CEO, James Thomas, will present the Q3 update.

Thank you, Ari. Good morning. Dear shareholders and supporters of Desert Control, I hope that you all are doing well and enjoying the autumn season. My name is Lars Eismark, and I'm the Chairman of Desert Control, and I want to welcome you to this Q3 '25 webcast. Q3 '25 was a very eventful quarter. First of all, we closed the rights issue that has given us capital to pursue our ambitions and strategy. Thank you to all of you who supported the process with positive support and remarks and to those of you who chose to invest. We'll do our utmost to live up to your expectations and belief in us. On the same note, the continued strengthening of our balance sheet is an ongoing effort and the management and the Board see this task as a natural part of our daily sovereign. The Board and management has had organizational build and efficiency on the agenda for some time. Hence, we took the decision to move our R&D in Norway to the U.S. This comes on the back of an acknowledgment that having R&D in different locations was not optimal. Shipments of tests, soil samples, et cetera, was increasingly complicated and the fact that we need proximity to our test facilities to our customers and our partners made the decision necessary. This means goodbye to loyal and valued employees in Norway, and I want to send my gratitude to them for the efforts in taking Desert Control to where we are today. At the same time, we're also saying welcome to new employees in the U.S. We have earlier informed you of our need to execute swiftly on our strategy in the U.S., and we have several ongoing hiring processes. This is primarily within our sales force, the operations team and in R&D. We are helped by professional search firms, and we're excited to announce results in Q1 and Q2 '26. The same goes for 2 additional Board members. I've made it very clear that the new Board members must be rooted in the Southwest of U.S., and they must have a track record within agriculture and Agri-tech. We have currently positive dialogues and I hope to announce the outcome of these in Q1 2026. As you might recall, we underlined the importance of being structured in our go-to-market priorities and hence, being compliant with our strategy. Permanent crops is an instrumental segment for us, and I'm so proud that, we have secured existing pilots -- exciting pilots, sorry, in the very attractive segments, almond and wine. The pilots are leading growers in the segments and needless to say, important for our success in showing the way for their colleagues. Q3 has also given me the opportunity to interact with our license partners, Saudi Desert Control and Soyl. I'm so happy to see their commitment and their investments giving positive results in an environment where you have to be very, very patient and where solid personal relationships are crucial for success. Well done, and good luck with the exciting opportunities that you have in front of us -- in front of you. On an ending note, the rights issue and the organizational changes has taken a lot of attention and massive resources from the management team. It's important that we now get back to normal life and concentrate our efforts on generating a solid pipeline, onboarding new colleagues successfully and staying close to our customers and partners. Before I hand it over to our CEO, James Thomas, I want to wish you and your families a wonderful autumn and winter season. Thank you. James, over to you.

Thank you, Lars. And let me add my note of thanks to our shareholders in every day and in the rights issue. It is, as I said in my letter, fantastic to have a group of shareholders who's so passionate about our mission and our company. And having said that, we actually have some new investors on the call. So, to those of you who know the company so well, I apologize, but I'm going to need to run through some of the basics of the company, and I'll try and do that in some degree of haste, but provide the right overview. So, as I think most of you obviously know on the call, Desert Control is a technology company in the soil health business. And our target markets are agriculture, trees and forest and golf and landscaping. And the company is now really in its early stages of commercial launch in all of those sectors. And it's an exciting time to be part of the journey with Desert Control. Ari, if I can get the next slide. Also, just really as a reminder, the product is delivered on-site and made fresh in a manufacturing facility we essentially bring on-site. And several of you have put in questions on the status of manufacturing, and we will address those through the course of the conversation. But we are in the science business, and we are increasingly in the science business. And we believe this company has a fundamental role in soil science and is the leader for sure in our own technology. All right. We've covered this a lot. One of the things that Lars and I have been very focused on is focus, and so despite the applicability of this technology in many, many parts of the world, we are intensely focused at this time in the U.S. Southwest and with our partners in the Middle East. These markets are very large on their own, and the company needs to execute against the near-term opportunities in each. Next slide. Again, this is a slide you've all seen before or at least most of you have seen before. We are direct in the United States. We are distributor based in the Middle East. Lars has touched on that, and Jan will touch on that later. And we do offer the product in 2 ways. The pay-on-delivery and the Pay-As-You-Save model, which we've executed in the Gulf area and one that I am a big fan of. And our revenues from the Middle East come from licensing and hardware sales, apologize. Go ahead. Next slide, Ari. Sometimes I get questions from investors about why not Spain? Why not Australia? Why not? Why not? And Jan and I get 10 e-mails a week from somebody who wants to bring LNC to their home market. And the answer to all of them is we will get to you. But right now, we are positioned in 2 of the 3 largest markets. And so, we have plenty of opportunity in our core markets, and that is -- will remain our focus in the near-term. So, I'm sorry to all those people who really want us to bring the technology somewhere else, but we have our hands full capturing our own opportunities this time. Ari, next slide. And I think we've covered this, but it's important to kind of come back to it, especially given the recent activity that we're seeing in the pilots. So permanent crops are truly our focus. Trees is where we've had a lot of success. We are seeing success in early trials in vineyards, and we will be doing more of that in the near-term. And on the far right-hand side, we haven't given up on the high-value parts of field crops. We continue to try and find the right application and the right academic groups to work with. But as I think we've all said before, much as there's a lot of acreage in alfalfa and corn and cotton, those are not target markets for us at this time. If the product is not being applied in what's truly a high-value situation, we're not doing that at this time. Next slide, Air. So, I think we've touched on this, and we have news, I think on almost all of these places during this quarter. So, the major turf segments, obviously, parks, and you'll hear from Jan, I think about some work being done in parks. During the quarter, we did additional work with Cal State Fullerton in their fields and expect to do more work with them in coming times. And golf has obviously been our major focus in the turf segment. Go ahead, Ari. So this slide is, again, something many of you have seen before. Our product is very well proven in 80% sandy soils and higher. That is as of today, our core customer. And while that may seem in some ways to limit the technology, which we believe over time will be applicable in soils with lower sand fractions, I just would like to remind all investors that the California market in highly sandy soils is a $500 million market by itself. So, we don't -- at least I don't feel and I don't think the company feels at all constrained by pursuing our highest value opportunities today because they of their own right are very, very large. Obviously, as we can move down the sand fraction towards 60%, the market expands dramatically, and there is ongoing scientific work there, and we'll keep you posted on how we move it. But in the short run, there's more than enough business in the 80% sand and higher. Next slide. You've seen this slide before, many of you, and it's meant to point out kind of the obvious. California is a big market, and we are investing additional resources there. Most of the hiring we're doing is in the California markets. And the pilots that we're doing this week and pilots we have scheduled in coming weeks are all in California. We are not giving up on Arizona. Arizona is a good market for this technology, but the California market is just so much larger and the emphasis on water savings, water subsidies and the price of water are all stronger in California than they are in Arizona at this time. Although, there are some interesting things happening in Arizona around government grants and other opportunities to subsidize technology. So, we may actually see Arizona start to perk up. But for the moment, I want to talk about California. Go ahead, Ari. And equally, the other market I want to talk about or at least make people aware of where we are not yet active because it's 3,000 miles from where we are active, and we are very focused is the Florida market at some point will be very large for this technology. Go ahead, Ari. Okay. So, let's get into the company update. And this is the first slide. So, we called out, I think almost all of these in the letter that we wrote and the report we've just published, but I do want to touch on some of the more significant ones that are of interest to shareholders based on all the questions. So last quarter, we had to talk about kind of where Woodland Hills was after we had our problems with some damage to the irrigation system. And I think it's really good news there. I think a couple of things that we've tried to make clear to the market. The customer is very happy and the customer is happy with the way we handled the issues that were created and those issues are behind us. And the customer is really happy with how the golf course looks and the customer is really happy with their water savings. We are seeing significant water savings in August and September, in particular, 2 of the hottest months in the L.A. market. And the product is performing as hoped. I was going to say as expected, but it's performing better than is expected, and we will be issuing our first invoices to that customer in coming weeks. So Woodland Hills is in good shape. Everybody is happy and the technology is working well. Wood Ranch continues to be very happy with the pilot we've done with them. They look at both the soil sensor data and some drone data, and they're quite happy, and we're in the process of trying to figure out when to do a full application there. We've got a contract after that. We mentioned in the letter, the almonds. This is I think a testament to the demand for the product, frankly. We've talked about adding people to the company, and we've added agricultural sales in the Salinas Valley. And Cord Nunez started 3 weeks ago, and we already have 3 pilots, and we already have 3 pilots in almonds. And almonds is a 200 million tree market. As I say in the letter, we're not going to get 200 million trees out of it. But I think the rapidity with which we were able to get these pilots shows the interest in our technology from some of the large California crop growers. And almonds is the biggest, but pistachios, avocados. Obviously, we've seen success in dates in Arizona. So, I expect to see a lot more activity in the California area. And I touched on this very briefly, but we now see some grant activity in Arizona. They've issued recently a $1.8 million grant for soil health and soil amendments, which we feel we qualify for, and we are working with existing customers to pursue that grant money, and we will know in the first quarter of next year on that. I'm going to let Jan handle the direct slides on the Middle East. He and I were down there 3 weeks ago, or I guess, 4 weeks ago now and spent a bunch of time with our partners and with their customers. And the story is much the same. They are working hard. They are moving the profile of LNC up the value chain and up the government chain. And it's a matter of hunting that elephant and shooting that elephant, catching that elephant, whatever proper term would be used in the Middle East at this moment in time. On the science and technology side, Lars did mention in his opening comments that we have decided to move research and development to the United States, a decision that was not made lightly, but it is really important to move closer to the customers and to the soil types and the water types in the U.S. But despite that move, R&D continues here, R&D at both the very fundamental clay level, R&D at the microbial level and R&D in some of the agronomy aspects, some very interesting work being done both in our own laboratories in Maricopa, continuing work being done here in Norway and work with collaborators in both California and Arizona. I had the pleasure of speaking at function that went on in conjunction with Climate Week, Climate Week in New York a few weeks ago. I was a guest of our partner, Siemens, on a panel discussing how their technologies are influencing climate health. And I have to tell you, the energy at that meeting was fantastic and the solutions being shown by Siemens and by many others. There were probably a 100 exhibitors there. It was really, frankly, somebody who works in climate tech, really exciting to find so many other passionate people and see some of the technologies that are being developed. Next slide, Ari. So, I think I've essentially covered this slide other than to comment on Berkeley. And Berkeley is also quite interested in pursuing further application, and we're in conversations with them about how that would fit into their maintenance cycle because I would want to remind people that we do this during the times when the golf courses are closed for maintenance. So, our applications are not, as I would love them to be uniformly scheduled through the course of the year. They're going to be very heavy in the spring and the fall. Next slide. So, I think I touched on this, too, super exciting, right? And we're going to do a very large pilot with a very sizable commercial grower that will be focused both on water savings, soil health and nutrient use efficiency and importantly, yield. And stay tuned is, I think really the right way to say this. Go ahead. At this point, I'll turn it over to Jan Vader, our Head of International, to speak about our partners in the Middle East.

Thank you, James. I'll touch briefly on the updates on LNC-related activities in the Middle East, starting with United Arab Emirates and Soyl. So, in the UAE, our partner, Soyl is seeing continued strong momentum within the new construction landscaping projects. We're excited to announce that they've been awarded a LNC treatment for the landscaping of the new Al Reem Hills development, which is a very large new residential community centrally in Abu Dhabi. So, this is a large project where we will apply more than 4 million liters of LNC. As for the general sort of new construction projects, we have to do the treatment as the landscaping gets finished. So, it's a project that will go on over several quarters. Soyl has also completed the Connect Park with Masdar City in Abu Dhabi. So, this is a client that we've done a few projects for now and which -- where they have included LNC as a requirement for their new public parks. So, we're quite excited about that. Masdar City also highlighted LNC technology as a model for sustainable technology within landscaping in their recent ESG report. Q3 also saw some very interesting demonstration results. We have had or our partner, Soyl has been running for 1 year a project in the Western region deserts of the U.A.E., very harsh environments, where they've been testing the survivability and growth of newly planted native species trees without regular irrigation. So, we're seeing very encouraging results on this and great interest and involvement from governmental bodies, right, because there is a lot of tree planting initiatives in the region. So, what you can do with limited or less irrigation obviously adds significant value. So, there will be more results coming on that directly from our partner. If we move to the Saudi side, right? Thank you. So, in Saudi, we've had positive progress on validations and collaboration projects. We didn't have any commercial projects in the quarter, but there's more to come there. We have a new research collaboration initiated with the Princess Nourah University to study LNC in high-clay soils. So, this is important in terms of broadening agricultural applicability. Our partner, SDC also continues to receive positive data points from ongoing validation projects, both in terms of water retention, where we're seeing in diverse soil environment still the sort of double the water retention for the LNC treated parts of the validation projects, also seeing significant increase in nutrient holding capacity over time on some of our longer-term validation projects. And we can see in Misk City, which is a very high-profile development in -- within Riyadh, a nonprofit city. You can see the park there where we have been treating sort of desert type environment landscaping with significant water reductions over the harsh summer months, we're still seeing better plant vigor on the LNC treated plants. So very positive news overall. Just hot off the press, last night, they did another trial or yesterday, they finished another trial, which is the first trial in the Eastern region of Saudi. So, where we're doing a landscaping pilot, and we did the first LNC treatment there to initiate a project. This is for Saudi Aramco, which is obviously a large governmental actor in Saudi. So overall, we see SDC continue to build a reputation as a technology and research leader, supporting the Saudi Vision 2030, which is driving a lot of the greening initiatives across the Kingdom. So that's the update from the Middle East. I'll now hand over to our CFO, Leonard Chaparian for the financial updates. Thank you.

Thank you, Jan, and good morning to all of you. So, the figures are shared in detail in the financial report published earlier this morning. These financial key figures will be covered in more detail in the following slides. In Q3, Desert Control continued to make operational progress while maintaining tight cost control. Preparations for upcoming commercial deliveries advanced in both the U.S. and the Middle East. Total revenues remained limited, reflecting the early-stage nature of the market adoption and the time-based recognition of income under performance-linked contracts. Operating expenses increased compared to last year, mainly due to expanded U.S. operations and ramp-up activities, while depreciation decreased in certain legacy assets were fully written off. At the end of Q3, cash and financial assets stood at NOK 8 million prior to receiving the proceeds from the NOK 75 million rights issue in early October. Revenue from sales in Q3 comes from licensing royalties. For further details, please refer to Note 2. Revenue remained modest, reflecting the U.S. PAYS contract structure, where income is recognized only after water -- verified water savings. The company expects revenue realization to begin in the fourth quarter as customer validation milestones are achieved and invoices commences under the PAYS framework. Operating expenses increased. The increase primarily reflects higher field activity in the U.S. production, scaling to support upcoming commercial deliveries and continued investment in organizational capacity to enable future growth. The period also included approximately NOK 2.5 million in one-off restructuring costs with limited remaining effects expected in the fourth quarter of 2025. Excluding these temporary items, the underlying cost base remained broadly stable compared with prior periods, reflecting continued cost discipline. Total equity improved slightly year-over-year, supported by the fully subscribed NOK 75 million rights issue completed before quarter end with cash received in October. Cash decreased during the quarter due to continued investment in product development, commercialization and organizational growth, while the rights issues proceeds received after quarter end have significantly improved liquidity. The proceeds strengthened the company's capital base and will fund operations well into second quarter -- second half of 2026. Operating cash flow now reflects only continued operations adjusted for depreciation and amortization, highlighting the group's disciplined cash focused approach in Q3 2025. Desert Control received NOK 2.3 million in SkatteFUNN grants funding from approved R&D activities, up from the NOK 1.5 million in the same period last year. And then we have recently engaged consultants from Euronext to collect information about our nominees. As required under the EU Shareholder Rights Directive, we have already published an updated shareholder list that you can download on our web page. For more information, it will be available at desertcontrol.com/investors. So back to you, James, if you want to comment on this.

Thanks, Leo. So yes, we're -- we wanted to bring this to all shareholders' attention. We had gotten requests from a couple of shareholders to work to look behind the nominee accounts, and we worked with Euronext and have discovered more than 95% of the nominee shareholdings. And I think the most interesting piece that comes out, if you look at the table is that we have another large shareholder, another individual large shareholder and then a few other meaningful shareholders, and they're from the Middle East or that part of the world. And I find that gratifying with that the Middle East being an important territory for us to see that we're getting shareholder support in those markets, I think is a sign of the penetration, at least from a share of mind that we see there. So as Leo has pointed out, this is available on the website, but I was gratified to see the support coming from the Middle East. Next slide, please. So I use these slides in the last quarterly report, and they're exactly the same. I see the world developing as I did 3 months ago. I think the company is in a very high potential place at this time. We have a lot of incoming inquiry. We have new team members driving us forward. I think the wind remains at our back with regard to the benefits of water saving and soil health that we bring to the party. And we are still a very small company, as you're all aware. But I continue to be more worried at this point in time about our ability to make enough LNC to meet the demand than I do about the demand for LNC. So all of these things remain how we see the world. Next slide, please. And I used this slide last quarter also and also no changes in my expectations with regard to the important milestones in the coming 1.5 years. Obviously, we're 3 months into it, and we are, in fact, seeing better execution in California. We are -- and I will answer this question, I guess, during the Q&A because it's come in and not surprisingly, we are in the final stages, I hope of getting a contract negotiated with our contract manufacturer for new units. We are seeing interest at the golf course level. We're seeing interest in the agricultural area. I really do believe after Jan and I's trip down there that the guys in the Middle East are on the cusp of something big. I know we've felt that for a while, but it's palpable how much progress they're making in laying the groundwork. And I do believe that, the use cases for LNC will continue to expand. I think one of the things that is very important, and I hate to keep saying it, but it's focus, focus, focus. And so, we are trying to build the science cases here in a very measured and thorough way, but I expect that we'll be finding new benefits from this product for years to come. Next slide, please. Next slide, please.

This is the next slide, James, because now we are preparing for our Q&A session.

I think the cautionary statement slide is next. Right?

That is the last slide.

Yes. Exactly. So, I could have concluded on the other page. But let me just say that 6 months into this, I am more convinced than ever that LNC will be an important part of the soil health armamentarium for growers who have very sandy soils, and we are working hard every day to make that true. We are working hard every day to do justice to the product by being able to make it in quantity and quality, to apply it in quantity and quality and to meet customer demands, both for water savings and for nutrient use and ultimately for yield, which as I've said before, yield is important to everybody. Water is important to many of our customers that have high-cost water, for instance, Woodland Hills. I'm very encouraged by what we see at Woodland Hills, and I think that will be a meaningful breakthrough for the company. And I'm encouraged by what I hear from the people we're interviewing because we are doing significant amounts of hiring. And people's passion for this project internally is great. It brings us to work every day, but it's nice to see some of that passion reflected also in applicants. So, with that, I think we're going to go to Q&A. Let me add one last thing. We are currently evaluating the right way to communicate with shareholders. And we want to communicate with shareholders in an open and transparent way, which I think we've tried to bring to the table. But we are evaluating whether quarterly reporting is actually the right way to do that. It is a costly burden, both in actual kroner, where we spend a fair amount of money on it and in the time that we take to get prepared for it. And so we are evaluating the potential to change our reporting to make it, frankly, more relevant for a company at this stage, our financials are of interest, but I think what's more of interest is what we're seeing in the field, what we're seeing with the customers, what we're seeing with the team. So with that, thank you for listening to some of that being repeated to you. And Ari, over to you with questions.

Thank you, James. I will share -- stop share my screen now, so I'm able to read all the questions. And we have received some of them, and we can start now, you're also encouraged to use the Q&A function to have some questions. So question number one, for which species market segments in the U.S. where Desert Control is present in the business for applying LNC, taking current costs and obvious benefits into consideration?

Hopefully, I've covered much of that in the course of the presentation because I tried to. I think -- and you see it in the customer demand. Obviously, turf in California, where water costs are high and turf is thirsty is a target market that I think we've proven at this point. On the agricultural side, I think we have very good results in date palms. And so, we can argue that that's a proven crop type now. And obviously, the focus is heavily on other tree crops, beginning with almonds, but I think we'll do trials, as I said in the letter, in pistachios and hopefully avocado in coming months. And so, it's that nexus of crop type, which permit crops are a thing, sandy soils, which are present in Arizona and Southern California and then water scarcity or water price or both. So, I think that's a core question. Yes.

Next question. Our signing of additional golf resources Pay-As-You-Save model or upfront payment is absent delaying the last ones, Berkeley and Woodlands were almost a year ago?

So right. So let me try and answer that in a few different ways. So obviously, golf is a target market for us. In golf, some golf courses have a lot of money. Some golf courses don't have very much money. And all golf courses that want to talk to us have high-cost water. And so for us, the Pay-As-You-Save model is, as I said before, a great risk-sharing model, one in which we will ultimately receive more payment than we would with an upfront price. I would expect that as we expand into golf, we're going to see some of both. And from a timing standpoint, look, we've been very upfront about it. The issues that we had at Woodland Hills in July and at PGA West in July slowed down the pipeline. But there continues to be incoming interest. And so, I'm quite optimistic about golf for the spring of next year and then for the fall of next year because as I said before, unfortunately, the golf business tends to be very concentrated in spring and fall. Next question.

We continue with golf. And how close are you to concluding the agreement with PGA West? And does the discussion consider one course initially or a contract covering all 12 courses on their own?

Right. So, let's talk about PGA West. I think we've talked about it before, but PGA West is a group of many courses out in Palm Springs, Palm Desert, Palm, whatever you want to all along the Coachella Valley. The work we have been doing, we're doing with PGA West is very much focused. More on the research is too weak word on the water savings in the future is probably a better thing. At the current time, PGA West has an attractively priced water situation. They are very aware that that can change pretty substantially. I think this group is largely aware of something called the law of the river. We've spoken to that before, which governs how water in the Western part of the United States is distributed. It was put in place in 1926 and expires in 2026. And if you're in the American West and you use a lot of water, which PGA West does, you are concerned about your water use. And so, our work with PGA West was very much on the insurance, if you will, side of that. PGA West is a very research-driven place. They have great superintendents and heads of agronomy. And so, I expect that we'll be back at PGA West with our next trial sometime in the spring of next year, but we are certainly not on the cusp of signing a 9 golf course or 10 golf course contract with PGA West. When, and if PGA West finds itself in need of LNC, I would expect it would be pretty typical that we do a course or maybe 2, and they see how it goes. So, I'd hate to take any hopes out of the PGA West story, that PGA West is an important customer, a big reference site, very good guys, Nick and Jeremy. And -- but it's not a 9-course deal for next year.

Okay. Next question is a Citibank account owns approximately 10% of the company. Who is behind?

Okay. I think we answered that earlier with the nominee disclosure. Go ahead.

Okay. When will the new units will be ready for use and there is an immediate need for them to give them a prototype that appears performing well?

Okay. Great question and one, obviously, that Jan and I think about every day. And it's been slow, right? And I think we've said it's been slow. But I do believe that we're in the final stages of a contract with a contract manufacturer. And I think that will get signed this month. And if it wasn't for Christmas next month, I'd say I think we're going to get a unit next month. But I think it's probably safer to say we'll get it sometime early next year. As far as needing it goes, really great question. The answer is we need it. And the prototype is performing well, and we will use the prototype to do the larger of the almond trials. But with the advance into California, the geography is big, just to be perfectly straightforward, right? It's a 10-hour drive from Yuma to the vineyards we're going to be treating in a couple of weeks. And so, we need more equipment, both for geographical dispersion and because we're getting enough interest where even if the jobs aren't big, we can't be in 2 places at the same time. So that's the status of the manufacturing unit.

We had many questions about the specific role of Siemens and what is the position or the rollout that they played in the units?

So, Siemens, the partnership with Siemens has been great. As I mentioned during my presentation, I was with them at Climate Week in New York. The team here in Norway is very close to them. But I do want to at least -- I've heard some people speculating that we're going to have Siemens build the entire unit and maybe take over global manufacturing. And I don't think that will be the case. We are pursuing contract manufacturers in local geographies. And the control systems will be Siemens, but the actual pipe bending and things will take place closer to the customers. So, I just -- I mean, Siemens is great. We're using their technology. I don't think they're going to be building our machines.