Brooge Energy Limited (NASDAQ:BROG) Q4 2022 Earnings Call Transcript May 5, 2023

Operator: Greetings and welcome to the Brooge Energy 2022 financial results conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to turn to introduce your host, Valter Pinto, Managing Director for KCSA Strategic Communications. Thank you. You may now begin.

Valter Pinto: Thank you, operator, and good morning. Welcome to the Brooge Energy 2022 financial results conference call. On today’s call will be Lina Saheb, Interim CEO; and Paul Ditchburn, CFO. I would like to remind everyone that this conference call contains forward-looking statements. All statements that address our operating performance, events or developments that we expect or anticipate occurring in the future are forward looking statements. These forward-looking statements are based on management’s beliefs and assumptions and are not on the information currently available to our management team. Our management team believes these forward-looking statements are reasonable when made. However, you should not place any undue reliance on such forward-looking statements, because such statements speak only as of the date when made.

We do not undertake any obligation to publicly update or revise any forward-looking statements, either as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially from our historical experiences or our present expectations or projections. These risks and uncertainties include, but are not limited to those described in risk factors and elsewhere in our annual report on Form 20-F filed with the Securities and Exchange Commission and those described from time to time in other reports we file with the SEC. During today’s call, we will be presenting adjusted EBITDA, which is not a financial measure presented in accordance with IFRS.

Adjusted EBITDA should not be considered in isolation or as a substitute for, or superior to analysis of our results, including net income, prepared in accordance with IFRS, because adjusted EBITDA is a non-IFRS measure and may be defined differently from other companies in our industry. Our definition of this non-IFRS financial measure may not be comparable to similarly titled measures of other companies, thereby diminishing the utility. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure. Management compensates for the limitations of adjusted EBITDA as an analytical tool by reviewing the comparable IFRS measure, understanding the difference between adjusted EBITDA and profit or loss and incorporating this knowledge into its decision-making processes.

We believe that investors benefit from having access to the same financial measures that our management uses in evaluating our operating results. Lastly, on behalf of management, we’d like to thank everyone for providing questions ahead of this morning’s call. After our prepared remarks, we will be going through as many of those questions we received within the timeframe allotted for today’s call. I’d now like to turn the call over to Lina. Lina the floor is yours.

Lina Saheb: Thank you, Valter, and thank you everyone who has joined us on today’s call. We appreciate your interest in our company. As everyone may recall, I was appointed Interim Chief Executive Officer of Brooge Energy and its subsidiaries in December 2022. Mr. Paul Ditchburn was also appointed CFO during that time and is joining me on today’s call. Since our appointments, we, along with the Board of Directors and with the support of our finance team has been working diligently and putting an extraordinary effort to conclude the issuance of six financial statements within the stipulated extension provided by NASDAQ. These financial statements included three audited reinstated financial statements for 2018, 2019 and 2020, two audited financial statements for 2021 and 2022 and the interim financial statement for the period ended June 30, 2022.

These financial statements have been prepared in accordance with the International Financial Reporting Standards or IFRS, which gives a true and fair view of the state of affairs of the Brooge and of the profit and loss for each financial year. We can confirm responsibility for these financial statements which have been prepared in conformity with the statutory requirements and IFRS including selecting the accounting policies and making the judgments underlying these. We also confirm that we have made available all relevant accounting records and information for the preparation of these financial statements. Last week, we were pleased to announce that we are now in compliance with all applicable listing standards and will continue to be listed and traded on the Nasdaq stock market.

In 2022, the Board of Directors welcome the appointment of Mr. Firoze Kapadia as independent board member of the company, bringing financial regulatory insight and leadership which will be invaluable to Brooge Energy as we continue to grow our business. As of December 31, 2022, Brooge Energy’s Board of Directors is comprised of six members including four independent directors. This Board of Directors is responsible for the overall corporate governance of the company, including a proven strategic direction and financial objectives oversight of the performance and operations of the company, establishing goals for management and monitoring the attainment of these goals. The Board and management of Brooge Energy Limited are committed to maintaining and enhancing a robust corporate governance framework that is critical to long-term success.

Today, we have significantly improved the internal controls over financial reporting accounting practices and processes related to our revenue recognition. With that, we are pleased to report 2022 revenue growth of 95% year-over-year to USD81.5 million, adjusted EBITDA of USD54 million and net profit of to USD27.2 million. In 2022, we provided storage capacity of 1,001,388 CBM and related services to numerous oil traders and producers. Revenue growth year-over-year is mainly attributable to the commencement of the Phase II storage and services in September 2021, which were available during the year-end 2022 as well as signing new contracts at higher storage rates. The successful Phase I and II led the company to consider expanding its storage facilities where it has conducted a feasibility study and commenced early preparation works on Fujairah Phase III.

Upon successful expansion of the Phase III facility, this would position the company as one of the largest independent oil storage facility in Fujairah with capacity to store clean products, middle distillates high and low sulphur fuel oil as well as crude oil. We were recently awarded Best Specialist Liquid Bulk Terminal of the Year 2023 and Safe and Secure Terminal of the Year at the Global Ports Forum Award a highly respected ceremony within the global ports and terminal industry in Dubai UAE. We were honored to receive these awards at such a prestigious ceremony. This recognition is a testament to our unwavering commitment to excellence innovation safety and security. We have always tried to set a new benchmark in the terminal industry by delivering world-class infrastructures, state-of-the-art technology and services to our customers.

In addition to our existing Phase I and II operation, we continue to innovate and seek strategic partnerships. We are in the advanced stages of planning a green hydrogen and green ammonia project which aims to produce up to 700,000 metric tonnes of green ammonia per annum once fully completed. The green hydrogen and green ammonia project is one of the first privately owned green ammonia projects in the United Arab Emirates and in the region led by Brooge Energy Limited’s 100% owned subsidiary Brooge Renewable Energy which aims to produce renewable carbon-free fuel using solar power. The company recently announced that the technical study of its plants conducted by Thyssenkrupp has been completed and delivered. We also announced a partnership with Siemens Energy, one of the world’s largest energy technology and one of the largest energy technology companies in the world.

Before I turn the call over to Paul, I would like to provide our shareholders with outlook for 2023. At year-end 2022, we had five oil storage customers providing diversification of revenue with longer-term contracts and renewable options. Based on this information and near 100% take-or-pay contracted storage capacity of Phase I and II during 2023, management is providing revenue guidance for over USD125 million for 2023 an increase of at least 53% year-over-year. With that, I’ll now turn the call over to Paul, our CFO to discuss our financial results. Paul, please go ahead.

Paul Ditchburn: Thank you, Ms. Linda and welcome everyone. Prior to focusing on the 2023 financial results, I would like to first highlight the good news released early this week where Brooge Energy Limited regain NASDAQ compliance with Listing Rule 5250(c)(1) as a result of filing its Form 20-F for the period ended December 31, 2022. This filing contain the restated financial statements for the years 2019 and 2020, and the audited financial statements for 2021 and 2022. As you are probably aware on August 12, 2022, the company announced that the previously issued audited consolidated financial statements as of and for the periods ending December 31, 2020 and 2019 and the previously issued unaudited consolidated financial statements for interim periods therein and the six months ended June 30, 2021 should no longer be relied upon.

In mid-December of 2022, I was appointed by the Board of Directors as Chief Financial Officer, reporting to the audit committee. I mandated amongst other deliverables to conduct comprehensive review of the accounting policies, procedures and internal controls related to revenue recognition, alongside an accounting specialist firm. In addition, all available customer contracts were assessed based on International Financial Reporting Standard 15 revenue from contracts with customers and IFRS 16 leases. This review identified that the funds received from a related party of Brooge International Advisory do not qualify to be recognized as revenue due to insufficient documentation and certain criteria under the accounting standards. It was – qualitative nature of the matters identified in the group’s internal examination including the number of years over which the non-qualified revenue is recognized the Group Chairman that would be appropriate to rectify the misstatements in the previously issued consolidated financial statements by restating such consolidated financial statements.

Accordingly an amount of US$74.3 million, which represents funds received from BIA was reversed in revenue and reclassified as other payable under liabilities for the financial years from 2018 to 2020. Management do not expect to settle these amounts using any of its current assets or any existing returns in the foreseeable future. Pending its potential receipt of confirmation or adequate supporting documentation from the party, the group has taken a conservative approach to recognize this as a liability. I will now focus on the 2022 financial results. In 2022, revenue increased $39.8 million to $81.5 million, as compared to $41.8 million in 2021, primarily due to the availability of Phase II storage capacity and operations during the 2022 year with higher storage rates.

During 2022, Brooge Energy had 14 customers consisting of major oil producers and traders in the region, which represented $76.0 million in storage revenue and $1.9 million in ancillary revenue. As a result of Phase III commencing in September 2021 and operating throughout the 2022 year, there was an increase in total direct costs by $9.7 million from $15 million in 2021 to $24.7 million in 2022, representing an increase of 65% in comparison to 2021. The main reason for this increase was $4.8 million increase in plant property and equipment depreciation, primarily attributable to the depreciation of Phase 2 for the full year of 2022. And secondly, $2.4 million increase in maintenance costs, primarily due to a one-off payment of $1.9 million to the Port of Fujairah for port rack three concession fees.

The company’s gross profit increased to $56.8 million in 2022, up from $26.8 million in 2021. This was mainly due to the availability of Phase 2 storage and operations for the 2020 year and higher average storage rates also contributed. General and administrative expenses increased $8.2 million or 111% from $7.4 million in 2021 to $15.7 million in 2022. The major reasons for this increase are $4.5 million increase in legal and professional fees and there was a $3 million increase in sales and marketing expenses related to professional fees for obtaining new storage customers for the term. The guidance for the 2024 year results from the change in fair value of warrants issued by the company on December 20, 2019. The fair value of the warrants on December 31, 2021 was $0.55, which decreased on December 31, 2022 to $0.20, which resulted in a gain of $7.4 million on 21,228,900 warrants.

Turning to 2022, there was an increase in finance cost by 273% in 2022 as compared to 2021 from $6.8 million in 2021 to $25.4 million in 2022. The main reasons for the increase in finance costs are $7.3 million increase in interest expense on term loans, primarily due to $15.9 million of finance costs being capitalized during construction of Phase 2 in 2021. And there was a one-off payment of $3.7 million paid to bondholders related to the waiver of certain bond financial covenants during 2022. For the year ended — ending December 31, 2022, the company reported net profit of $27.2 million or $0.31 per basic and diluted share, an increase of 6% as compared to $25.7 million or $0.29 per basic and diluted share in 2021, predominantly due to the increase in 2022 revenue and an increase in non-cash change in estimated fair value of derivative warrant liability, which was partially offset by the increase in G&A expenses and increase in finance costs related to Phase 2 construction.

The company’s audited EBITDA increased by $21.6 million in 2022 when compared to 2021 from $32.4 million or 78% of revenue for the year ended December 31, 2021 to $54 million or 66% of revenue for the year ended December 31, 2022. The main reason for increase of adjusted EBITDA in 2022 are there was a net increase in revenue of $39.8 million in 2022, in which was partially offset by the combined increase in direct costs and G&A expenses of $79.9 million. We ended December 31, 2022 with $8.3 million in cash and cash equivalents. Total assets and total liabilities were $473.7 million and $88.5 million respectively. Total equity attributable to the shareholders increased from $78.5 million as of December 31, 2021 to $105.1 million as of December 31, 2022.

With that, I’ll now turn the call over to Valter to moderate the Q&A portion of this morning’s call.

Paul Ditchburn: At 2021 and 2022 audited financials were filed on April 26, 2023, including restatement of prior years. Note, the financial statements are also available on our company website.

Q&A Session

Valter Pinto: Thank you, Paul. And how much cash did Brooge have at the end of 2022?

Paul Ditchburn: As of December 31 2022, the company had $8.3 million in cash and cash equivalents of which $7.3 million was residing in the DSRA account, an account we made monthly transfers to as per the bond terms in order to make the semi-annual bond, redemption amount of $7 million in March and the same amount in September plus attributable interest.

Valter Pinto: Thank you. And how much debt on your balance sheet at the end of 2022?

Paul Ditchburn: As of December 31 2022, the company had $280 million in total current liabilities and $88.5 million in total non-current liabilities. The main decline of the $280 million current liabilities is borrowings, of $171.7 million which are mainly related to the bond. As the company was in technical breach with certain bond terms as on December 31 2022, $157 million which if there was no technical breach would have been classified as non-current liability had to be classified as current liability. The company is in the process of obtaining the relevant waivers from the bondholders in order to reclassify the majority of the bond as non-current liability. In addition, there is $74.3 million in other payable related to the reversal of BIA revenue, which I’ve just covered in detail early on this call.

Valter Pinto: Have the bondholders called an event of default or exercised their put option? If not have you successfully amended the terms of this bond, that you no longer are in breach of covenants?

Paul Ditchburn: Today the bondholders have not called an event of default, and the company has been in constant communication with bondholders. Furthermore, the company is seeking a waiver on certain technical breaches and is in discussion with bondholders alongside, our bond agent and hope to have a resolution soon. For the avoidance of doubt, the company has never defaulted on its payment obligations under the bond terms.

Valter Pinto: Thank you. It is understood that in preparation of the company’s consolidated accounts for the years ended December 31 2019, 2021 and 2022, the company and independent public accounting firm identified two material weaknesses in the company’s internal controls over financial reporting. What steps has the company taken to remedy this?

Paul Ditchburn: The Company is taking identification of these two material weaknesses very seriously, and has already put in place remediation plan, which is in the process of action.

Valter Pinto: Thank you. When do you expect the resolution to the issue with non-compliance with Nasdaq rules?

Paul Ditchburn: As announced earlier this week, the company received formal notice from Nasdaq on April 27 that it has regained compliance with Nasdaq listing rules.

Valter Pinto: In October of 2022, Brooge hired an independent advisor to provide a fairness opinion for a proposed go-private transaction. What is the advice you received from the advisor, and where does the proposal currently stand?

Paul Ditchburn: The company engaged Grant Thornton, as an independent advisor to provide a fairness opinion on the proposed go-private transaction. Any transaction, if entered into will be subject to the receipt of a fairness opinion, approval of the special committee of the Board of Directors and approval of the company’s key stakeholders. There can be no assurance that a transaction will be entered into.

Valter Pinto: Please share the project economics of the PV solar farm and green hydrogen and ammonia plant.

Paul Ditchburn: The company is unable to share project economics due to commercial sensitivity and is not public information at this stage.

Valter Pinto: How will it be financed and what kind of return on investment you expect? When will it payback?

Paul Ditchburn: The projects are still in feasibility stage, and are subject to final investment decisions. Prior to committing to the projects, financing, equity arrangements would need to be in place.

Valter Pinto: Thank you, Paul and thank you everyone for joining us today. This concludes the Q&A portion of today’s call. We’d like to thank everyone for providing questions, for this morning’s call. If we did not get a chance to get to your questions or you have any further questions, please e-mail our Investor Relations team at BROG@kcsa.com. With that, I’d now like to turn the call over to Lina for closing remarks.

Lina Saheb: Thank you all. Thank you to everyone, who joined today’s call. I look forward to providing you with further updates on our progress on future earnings call. Thank you very much.