Enwave Corp

XTSX:ENW

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, and welcome to EnWave Corporation's First Quarter Fiscal Year 2022 Earnings Conference Call. My name is Donna, and I will be your operator for today's call. Joining us for today's presentation are the company's President and CEO, Brent Charleton; and Dan Henriques, EnWave's CFO and COO of NutraDried. [Operator Instructions] Finally, I would like to remind everyone that this call will be made available for replay via the link in the Investor Relations section of the company's website at www.enwave.net. Now I would like to turn the call over to EnWave's CEO, Mr. Brent Charleton. Thank you, sir. You may now go ahead.

[Brent Charleton, CEO, President & Director]

Thanks so much. And greetings to everyone who have joined us today for our Q1 earnings call. These calls are very important to us as they allow for the delivery of valuable context and critical detail regarding our consolidated financial numbers. And in certain cases, our quarterly numbers don't tell the whole story. And for Q1 2022, this is one of those cases in my opinion. Our outlook is far stronger than the numbers suggest. Following my business unit update and outlook, which is very bullish, Dan will summarize our Q1 consolidated financials as well as point out notable metrics for each respective business unit. Now before I begin, I would like to remind everyone that the information we are about to present contains forward-looking information that is based on our management’s expectations, estimates and projections. Our statements are not a guarantee of future performance and involve a number of risks, uncertainties and assumptions. Please consider the risk factors in the filings made by EnWave over SEDAR when reviewing this information. Also, all amounts discussed will be in Canadian dollars unless otherwise noted.On this call, like others, we will refer to our proprietary vacuum-microwave technology business unit, which generates revenues primarily from machinery sales, royalties and toll manufacturing soon as EnWave and our operating subsidiary that is actively selling branded and bulk shelf-stable cheese snack products as NutraDried. Our consolidated financials in Q1 largely reflect the continued positive commercial progress made by EnWave in the commercialization of our patented rating energy vacuum technology, or commonly referred to as REV for short, into the global food and cannabis industries. Even paired with what we believe is an unusually low quarter of sales recorded by NutraDried, our results for Q1 yielded positive consolidated adjusted EBITDA of just over 300,000, making progress towards the goal of consistent profitable growth. We believe NutraDried’s Q1 performance to be an anomaly due to the fact we dealt with poor weather at the end of Q1 that pushed a material amount of Costco volume into Q2. But on the flip side, NutraDried recently confirmed major new distribution, a credit to the new leadership and reinvigorated team that will hit later this year. This new distribution includes 2,200 Kroger stores for 3 separate SKUs, the expansion of our presence in Target from 500 stores to all 1,800 stores nationally. And equally importantly, we will commence initial distribution for 3 SKUs of the really cool and new Moon Cheese Sticks product nationally in the U.S. This will start at Whole Foods and we expect more sticks wins to follow. Moon Cheese Sticks will be available in 5 flavors, including Cheesy Does It or cheddar, Kick It Up Nacho (sic) [ Kick It Up A Nacho ], Rowdy Ranch, Wild White Chedda’ and Yum Inferno, our spicy version, with an everyday retail price of USD 4.99. Feedback from the buyers we've presented to so far have been overwhelmingly positive. We are also aiming to confirm additional programs with Costco in the coming months, similar to the current promotion running with Costco Canada now. As these become official, we will certainly keep you all informed. Now while COVID lingers, the retail grocery community has largely returned to normal, allowing NutraDried to showcase its full range of products to generally positive reviews. I reiterate firmly that we do not believe the soft Q1 at NutraDried to be indicative of performance for the coming quarters this year. Concurrently with the continued effort to grow the success of NutraDried’s branded portfolio, we are also pursuing new bulk sales opportunities. In fiscal 2021, we sold approximately 180,000 pounds to several new customers. The sales cadence for bulk sales pulled back in Q1, but we remain optimistic about our future in this market. We are now selling bulk dry cheese for ingredients in trail mixes, salad toppings and other applications. We anticipate to confirm additional bulk customers in fiscal 2022, and this remains a focus for our sales team. Momentum is building, but it will take a few months and investors should see results in subsequent quarters. We are working towards sustainable consolidated profitability in our, business. Our EnWave business unit is currently profitable and has never been stronger. This is the fourth consecutive quarter of revenue growth. We earned 505,000 in third party royalties in Q1, the most quarterly royalties ever and that's not even including 137,000 from NutraDried. Additionally, we commissioned 2 new large scale machines in Q1, one 100 kilowatt for cheese snack production in Spain and 120 kilowatt for cannabis production in Illinois. Before the end of Q3 2022, we expect 3 additional large scale REV machines to be commissioned, 2 120 kilowatt machines for U.S cannabis MSOs and a third, a 60 kilowatt for branch out food for the production of avocado and banana snacks. These installations should contribute to fast growth in royalty generation. In Q1 and up to date -- today, we've sold 3 10 kilowatt units and 2 120 kilowatt machines this fiscal year. We are still hunting 8 additional large scale purchase orders and a dozen 10 kilowatt per stores this fiscal year. The opportunities are on the table for us to pursue and hopefully close. Our outlook continues to look very bright with a pipeline of potential repeat machine orders from existing license partners and numerous new prospects actively evaluating our tech. Approximately 60% of our targeted machine sales are anticipated to come from existing license royalty partners. When our royalty partners grow, we grow. The U.S. cannabis market continues to be the most active for us, presenting a significant opportunity. Our current U.S. cannabis partners have communicated their intention to acquire further large scale units, following the completion of new facilities in additional states. We're also pursuing several new cannabis royalty partners and anticipate go/no-go decisions for large scale purchases this year. We have scheduled Q2 trials at the facilities of several cannabis companies in the Western United States and expect to confirm trials at locations in the Eastern United States in Q3. These firsthand demonstrations will be critical to convert these prospects into sales. We will be sending out our in-house processing experts to demonstrate the technology and to prove firsthand the value of our patent pending Terpene Max process, including the retention of 20% more terpenes and room or rack drying which is what of course Terpene Max offers. Given the high probability of additional machine orders coming our way, we need to ensure that we can deliver machines efficiently and on time lines required by our partners. We have started the manufacture of 2 120 kilowatt REV machines on spec in addition to a recent new order from our royalty partner from Italy, Orto Al Sole. We will continue to invest in building inventory in an effort to mitigate supply chain challenges in our fabrication planning. This is a very challenging time globally for supply chains and it’s fiscally and operationally prudent to get ahead of potential delays. Investing working capital and longer lead time parts and machine fabrication will have us ready to address the massive opportunity ahead of us. We are acutely aware of how important the timely delivery of our machinery will be as the orders roll in. With our machine sales and royalty revenue improving, we are looking forward to establishing a third meaningful revenue stream in March through the launch of REVworx, our toll manufacturing business. All interior facility construction is now complete, a REV machinery is commissioned and ready to use, and our upstream, downstream and auxiliary equipment are in place and ready to be turned on. We have initial line trials scheduled in early March. REVworx is scheduled to process tempeh, several thousand kilograms of blueberries from a local company and will conduct a line trial for instant ramen for our current royalty partner, Yamachan.We have the potential of winning some large REVworx contracts from a few of our larger royalty partners in the latter half of this year, and we believe that we will receive many additional inbounds following our marketing launch scheduled in a few days. REVworx will be promoted as the first vacuum microwave toll manufacturing facility of its kind anywhere in the world. We will be leveraging our trade publication contacts, third-party machine resellers and industry partners to promote this exciting new service. With all the business deals we have on the table, the enthusiasm within our team and the measurable value we can create for our current and future royalty partners is high. The rest of this year should be a lot of fun. I'll now turn over to Dan, EnWave's CFO and NutraDried’s COO, to summarize our Q1 financials in more detail.

[Daniel Henriques, CFO & Corporate Secretary]

Thanks, Brent. Good morning, everybody, and thanks for joining us on today's call. I'm going to take some time to review the Q1 2022 financial results. Note the figures I'll go over today can be found in our press release from this morning and in the financial statements and MD&A we filed on SEDAR. All amounts I'll refer to are in Canadian dollars unless otherwise noted. I'll make adjustment EBITDA references throughout my presentation, which is a non-IFRS financial measure. So please refer to the non-IFRS financial measure disclosures and the reconciliation to GAAP net income in both our press release and in the MD&A. Consolidated revenues for Q1 were 6.3 million, relative to 6.9 million in Q4 of 2021 and 7.5 million in Q1 2021. Keep in mind that last year in Q1, we were still running a national buy one, get one promotion at Costco, which drove the top line, but it hammered our margins. EnWave reported strong quarterly revenues this quarter of 4 million, up from 3.8 million for Q4 of last year and just 2.6 million for Q1 of 2021. Q1 2022 was EnWave's best quarter for REV technology, making significant advancements into the U.S. cannabis industry. Our royalty revenue for Q1 was a very notable $505,000. This is the highest quarterly revenue from royalties ever. We are in the business of deploying our machines to generate royalties and the lift in royalty revenue underscores the growth in the number of licenses we've signed. Our royalties in Q1 are also typically stronger due to receipts of annual minimum royalties payable under exclusive licenses to keep those license exclusivities and 240,000 of those payments were booked this quarter. When you exclude the annual minimum payments, our core royalty revenue has still grown at an average of 17% each quarter over the last 4 quarters. This gets us so excited as royalty growth is our primary focus. NutraDried’s revenue for Q1 was 2.2 million compared to 3 million for Q4 of last year. Revenues underperformed in Q1 because of approximately $700,000 in orders that were supposed to be shipped in the last week of December that got delayed into Q2 due to snow and poor weather conditions at Ferndale. Q1 revenues were also challenged by reduced purchasing from our 2 major distributors with them trying to reduce their own inventory levels. Now we believe this to be a temporary event because the shipments from those distributors to the end customers actually increased in the same period. This signals that distributor purchasing will eventually catch up with growing retail sales.Gross margin improved in Q1 to 43% compared to 34% in Q4 of 2021 and just 23% for the prior year comparative. Our gross margin in Q1 benefited from 2 notable factors. First, we redeployed a large scale machine that was repurchased from a Canadian cannabis customer, and we sold it to a U.S cannabis customer for a higher than typical margin. And secondly, our royalties revenues grew significantly and these revenues provide a pure margin with no related costs. This is the fundamental core of our business model. NutraDried’s margin in Q1 still have room to improve through volume and scale. Our manufacturing plant is operating at around 30% of its capacity. And as we build sales volumes in the latter half of this year, we expect better plant utilization and margin growth. The new distribution, Brent mentioned that we've already confirmed, paired with another of -- other programs pending confirmation, have us believe we'll get there this year. Cheese pricing remains stable for Q1, but in more recent months, it has crept up above $2 a pound. We've taken some action in the market to manage this and have rolled out a 6% price increase on most of our products that will take effect in May.Now turning over to SG&A expenses. Our objective with both EnWave and NutraDried is to maintain an appropriate infrastructure to allow both businesses to scale while not overspending in areas that do not provide a viable return. We need to support the marketing of our products and build the top line, but we will keep a prudent eye on the bottom line with each decision. We are on track with the cost containment and restructuring plan implemented at NutraDried in Q2 of last year. NutraDried SG&A expenses have been reduced by 55% compared to Q1 of 2021, which amounts to a little over $850,000 of savings this quarter alone. Our consolidated G&A expense for Q1 2022 was 1.1 million which was the same as Q1 of last year. We incurred some increases to personnel costs, legal fees and insurance premiums at EnWave, which offset the cost savings we experienced in G&A at NutraDried. We expect to maintain a similar G&A run rate for the balance of the year. Our consolidated sales and marketing expense for Q1 was 1.1 million compared to 1.5 million for Q1 of last year and 0.9 million for Q4 of 2021. We reduced our sales and marketing spending relative to the same period in 2021 after restructuring NutraDried and significantly reducing our nonworking marketing spending. When I say nonworking, I refer to expenses that do not target the consumer and those can relate to packaging changes, agency fees and so forth. Adjusted EBITDA, which is a non-IFRS financial measure, so please refer to our MD&A for a reconciliation from GAAP net income to adjusted EBITDA was a positive 301,000 for Q1, reflecting the strong margins generated by the EnWave business unit. This is an improvement over the $911,000 loss for Q1 of 2021 and $223,000 loss for Q4 of 2021. Our goal is to deliver consistent profitability and positive adjusted EBITDA by expanding the commercialization of REV technology and materially growing our royalty portfolio. We are well along that path. We are also seeking to return NutraDried to profitability in the latter half of this year with growing our distribution. We have made significant financial progress over the last year and believe that the strategies in place are the right ones to get us to that sustained profitability. We'll continue to invest where we need to in order to drive growth in both business units, but we will also prudently manage nonrevenue-generating costs to strike the right balance. Our balance sheet remains strong. We have plenty of cash and the appropriate levels of working capital. At December 31, our cash position was 8.4 million, and we had net working capital of 17 million. The REVworx construction is completely finished and we will not require much significant new investment. We anticipate this facility to start generating revenues in the coming months.Our treasury position of 8.4 million is plenty to continue the commercialization of the EnWave technology. We are seeing demand increase for our large scale systems, particularly in the U.S. cannabis sector, so we have made the decision to start deploying some capital into inventory and machine fabrication to shorten the time line from order to installation. This will allow us to add new machines into our royalty portfolio faster. We have not been so active in recent months with our NCIB. We have identified a few high return areas for cash deployment, including parts and machinery to shorten the timeline from sale to royalties. We also need to increase our inventory for critical parts and components to mitigate supply chain challenges. As Brent mentioned, we need to be ready to fill the orders in the pipeline. We are also adding to our equipment loan program with suitable customers, which requires us to fund the equipment fabrication in advance. Both of these will require cash but will advance our business and lead to growth. We do still plan, however, to use the NCIB in situations where it's necessary or where it's viewed as opportunistic to return value to our stockholders. Turn it back to Brent.

[Brent Charleton, CEO, President & Director]

Thank you, Dan. Moving forward, our mission is clear. We need to sign more license deals, sell more machines, build them faster, generate more royalties, earn meaningful toll manufacturing business and keep NutraDried on track to return to profitability. We will continue to innovate, collaborate, aggressively compete to win new business and protect our company's interests. I would like to thank all of our shareholders for your continued support, and I am optimistic that our efforts this year should result in financial performance improvements and ultimately, increase company value. I'd now like to open the call for your questions. Operator, please provide the appropriate instructions. And also operator, it seems that we’re having technical difficulties accessing the question list online. So please read out any questions submitted via webcast.

[Operator]

[Operator Instructions] Our first question is going to be coming from Steve Hansen of Raymond James.

[Steven P. Hansen, MD & Equity Research Analyst]

A couple for me, if I may. Firstly, just on the inventory build situation, just want to get a handle on, is there a rough magnitude, Dan, that you've got in mind in terms of inventory build whether it be on either the machine side and/or the product side as you start to roll out into, I guess, third quarter in particular with some of these larger programs?

[Daniel Henriques, CFO & Corporate Secretary]

For sure, Steve, and thanks for the question. So we won't be looking to build inventory on the Moon Cheese side. We're in a good position there to continue to deliver at our existing inventory levels. That, of course, said until we start to receive some of these Costco programs where we'll build the product. And sometimes it takes a couple months of production to get the volume ready to go out the door in a 1- or 2-month shipment. But what we were talking about was on the EnWave side and with all the challenges in global supply chains and critical components coming from a few key suppliers, some of those parts have started to take longer. And so we want to make sure we can get in front of that. So we'd be looking at -- we've already started to build 220 kilowatt REV systems on spec and started to order the componentry. We anticipate that we'll actually have those systems sold before we finish building them, but we're starting now in preparation for those orders coming in. And we're probably looking at somewhere in the range of $1 million to $1.5 million of additional working capital to build those machines and order those parts. But like I said, the order pipeline is looking very robust. So I think we'll have those machines sold before we actually deploy that with the full amount of that capital and we'll have deposits to cover it. But just to be ready, we're going to start building those now.

[Brent Charleton, CEO, President & Director]

And I'll add to that, Steve, in terms of prospects for sales, we do have sight lines on prospective time lines where those machines will be needed for use, hence the propensity to start building inventory now.

[Steven P. Hansen, MD & Equity Research Analyst]

And do you have a sense for -- it might be hard to quantify, but you described earlier the repeat order side of your business there on the machine side. I'm just curious like if you're looking at the cannabis opportunity where you're the most active, it sounds like in particular, do you have a line of sight into how many machines can go into existing customers versus trying to source out the new incremental lead. Is there -- I'm trying to think about that opportunity specifically can you deploy 2 new more machines into existing customers in the U.S.? 5? I just want to get a sense for the opportunities that might be there.

[Brent Charleton, CEO, President & Director]

If we're talking specifically about cannabis, there is the opportunity to deploy another 4 to our 2 existing licensees potentially here as they build out their infrastructure in multiple states to house and need drying at each respective location. Beyond that, in terms of our goal of getting to that 10 large machine PO mark this year, the remaining 8 at least, call it, 5 to 6 of those are repeat orders, as I just talked about with our cannabis company prospects. That could easily change and be 100% repeat orders. We don't know yet. But we also won't go on and build in 2 large expectation. I think 8 additional is already quite aspirational.

[Steven P. Hansen, MD & Equity Research Analyst]

No, that's helpful. And just jumping back to the Dole relationship that seems to be evolving here incrementally. Just give us a sense for the key milestones that you think the company is looking for before they can start to execute on a PO for larger scale machine. I know there's been talk of trials, market trials for their new product that is, but where do you think that relationship sits and what is the time frame before you think they'll be able to have the confidence to order something larger?

[Brent Charleton, CEO, President & Director]

Well, I do know they're very active right now evaluating the business case for producing a number of products in a certain geographic region and being able to ship globally for the markets that they tend to enter with the innovative snack products and ingredients that they're developing with our tech. The time line for that business case analysis to complete would be within the next month or 2 here. And then in terms of milestone for us, of course, that'd be commitment to the first large scale PO, they've acquired 2 10 kilowatts now to accelerate the production to allow them to do conduct market trials. And if we receive that first large machine, the anticipation is that they'll buy many more large machines in the future to service the volumes that they'll need to address the different markets that they've identified and shared with us. Timing of which I think will be market dependent, but we should see a go/no-go decision from them within the next quarter or 2 here.

[Steven P. Hansen, MD & Equity Research Analyst]

Okay. Great. And then just one last one for me is just on visibility for your REVworx capacity buildup, or I should say filling the capacity. I think you had -- you described a few milestones in your remarks, but I just wanted to begin an understanding for how quickly do you think you can sort of fill up the capacity that you've built to start with your -- I know you've got some of the tempeh products and things to start, but then do you have visibility? Is it going to take a year, 24 months to sort of get that initial baseload capacity built from your perspective? What should we think about?

[Brent Charleton, CEO, President & Director]

To be frank, we don't know yet because there are a few of the larger potential supply deals with some of our current royalty partners that if they come to fruition, alone could eat up close to 50% of the capacity utilization at REVworx. So we've got many irons in the fire. The goal internally is to have at least 60% capacity utilization accounted for by the end of this fiscal year. If it comes in higher than that, fantastic, we're working towards it. But we're also -- we also want to be realistic, right? Like we're just turning on this facility literally in a few days here in March and companies need to come in vet it, audit the facility, make sure that it aligns with all of their QA requirements, and then they'll be negotiating in terms of what the cost is going to be on a per unit production base. So we're optimistic that we'll get meaningful business and be able to use this facility as a key sales tool for us to sell more machines and drive royalty growth in the future. But let's walk before we run here on REVworx.

[Operator]

Our next question is coming from Neil Linsdell of iA Capital Markets.

[Neil Linsdell, Head of Research & Equity Research Analyst]

Just want to make sure I understand something with REVworx. Has your approach changed since we initially started planning this as far as your mix of existing customers trying out new products versus trying to recruit new customers into REVworx to show them the value?

[Brent Charleton, CEO, President & Director]

Hybrid approach still, Neil. Yes, I mean, it's available to both current and potential future royalty partners of ours. There's effort being put forward by our sales group to court new users, those that may not have the capital available to purchase their own equipment upfront, but it certainly will continue to be a hybrid approach.

[Neil Linsdell, Head of Research & Equity Research Analyst]

I'm just trying to remember if there was a difference when you initially started this thinking it was going to be new customers then realizing you've got existing customers that need this service too. Or has it always been the plan?

[Brent Charleton, CEO, President & Director]

Yes. Yes, I'd say more so like on the servicing current partner side, those opportunities that are -- they're now in front of us, weren't the focus when we started the business unit certainly. But now they have arisen and based on proximity to certain raw materials within this particular region of North America, it makes more sense to look at REVworx as a processing option for the companies that are evaluating REVworx versus processing these type of products in Southeast Asia, for instance.

[Neil Linsdell, Head of Research & Equity Research Analyst]

Right. Okay. Yes. So that's more of a business driver that I hadn't really thought about when we initially looked at modeling this out. On the royalties ramp up, so you said, I think there's $240,000 worth of the top up payments that happened in the quarter for clients that wanted to maintain their exclusivity, but haven't generated enough royalties during the period to keep the license they have to do the payment. Has that kind of ratio changed? Have you historically seen more clients that dropped off not wanting to do the payment? Or how does that kind of evolving and does that give you a good indication that these clients are going to be ramping up? Or going to be adding more equipment in the next 12 to 24 months?

[Daniel Henriques, CFO & Corporate Secretary]

Yes, good question, Neil. And it -- we have certain licensees that are adamant that they keep product exclusivity for their products, and they've invested lots of capital into rolling out the product and developing a brand and so forth. So they are consistently paying the top ups if they don't hit their requirements in the license agreement to keep the license exclusive. And then we have a mixed bag of other licensees that get going on a product, but then realize that the manufacturing exclusivity is not as critical for the success of their product. So I would say, we have a few partners consistently each year that need to make a top up payment and have repeatedly for the last few years to keep exclusivity and the rest sort of turnover. So we have some that go nonexclusive, and we have others that decide to pay to be exclusive 1 year and the next year, they might go the other way. But we structure this in all of our licenses. So anytime we give exclusivity to a partner, it comes with performance thresholds. They have to hit certain royalties each year in order to keep the exclusivity and then we'll also put in oftentimes machine purchase requirements. And so it really comes down to each individual partner's business case as to whether they deem that to be a good use of their funds.

[Neil Linsdell, Head of Research & Equity Research Analyst]

So there's no specific change from previous years as far as more clients are now deciding to top up versus previously or anything like that?

[Daniel Henriques, CFO & Corporate Secretary]

Well, we have far more licenses out there. And so each one of -- every one of those licenses will have these top ups. So every year, as we grow our license portfolio, the number of companies that will have to make this decision will go up. And so that should lead to more of these payments coming in the door.

[Neil Linsdell, Head of Research & Equity Research Analyst]

Okay. I kind of have 3 questions. I'm trying to roll into one here. About the sales cycle of the REV unit, if that's changed based on the number that you're seeing now from existing partners, which I assume is not really as long of a sales cycle as it is with a brand new customer. And how that works into some of the things you're doing on the supply chain as far as can you start getting into a kind of a regular production flow as it seems you're doing on some of the larger units? Or is there too much customization required for each customer such that you can't really do that as easily?

[Brent Charleton, CEO, President & Director]

Thanks for the question, Neil. So for our entry-level 10 kilowatt units, we already have a cadence of trying to build 1 to 2 of those machines per month based on anticipated demand. And the deployment of those machines are primarily for new prospective licensees to prove out their product applications take minimum viable product to market and then hopefully have them scale up. For the larger scale units in the food industry, it typically takes the path of 10 kilowatt, again, product being proved out in market and then scaling up over a longer period of time. So for the building of these machines on spec, the 120 kilowatt model seems to be the highest in demand in the cannabis industry, hence our level of comfort to build 2 right now. And we're hopeful that with better clarity on each of these new partners that we hope to land within the next 1 to 2 quarters and to build out their respective facilities, we'll have greater predictability in terms of delivering additional 120 kilowatts through the next few fiscal years, allowing for us to again get ahead of the game on supply chain challenges and build the same cookie-cutter 120 kilowatts that can be deployed readily, not a lot of customization really with those units.

[Neil Linsdell, Head of Research & Equity Research Analyst]

Okay. Is it fair to ask what your maximum number of units you could produce in the next 12 months is?

[Brent Charleton, CEO, President & Director]

We can scale as the machine orders come in. So we're not worried about being able to build 8, 10, 12 large scale machines in any given year. We have third-party suppliers that can scale as we scale in terms of building the componentry to supply to us. And there's ample, I would say, skilled individuals, welders, builders that we can hire either on a consultancy basis or full-time basis to scale again as we get those orders.

[Neil Linsdell, Head of Research & Equity Research Analyst]

Okay. Because I'm looking at some of these opportunities, specifically in the cannabis and Dole, if you start doing the back of the envelope calculations based on their aspirations for zero waste. There's a lot of units that you may have to start delivering and how quickly are they going to want them, is -- it’s going to be, if you do see something in the next couple of quarters, there could be a very significant ramp up? And I guess you’re -- that's what you're looking at as far as being able to address.

[Brent Charleton, CEO, President & Director]

Yes, and ultimately, like having transparent conversations with the key executives in each of those organizations is critical and having sight lines again on their go/no-go decisions like Dole, I got very strong clarity on what their plans are and when it's going to be. So we can plan accordingly internally at EnWave. On the cannabis side with our current partners, yes, like fantastic transparency with the new partners. Of course, we're trying to just close the first deal and to get the first large machine in the door and get those machines commissioned, started up, prove it out at scale for a number of months, and then hopefully they come back with repeat machine orders.

[Neil Linsdell, Head of Research & Equity Research Analyst]

I don't suppose you want to share the number of unit stores looking for in the next 12, 24 months?

[Brent Charleton, CEO, President & Director]

I cannot do that. I think I might get a call from Dole, if I do.

[Operator]

Our next question is coming from Liam Dotchison of Cormark Securities.

[Liam Dotchison, Associate]

Yes, just one question for me. So just looking for any additional guidance on that royalty ramp path for the year and getting to that 3 to 4x kind of 2018 royalty level expectation out in place for 2022. So has there been any push forward in royalty ramping from that guided Q3 inflection point with the 2 large machines commissioned this quarter? Or are we still looking at the main ramping coming in the back half of 2022?

[Daniel Henriques, CFO & Corporate Secretary]

We had good royalty growth this Q1, and we expect that to continue into Q2 because we're about to commission 2 and then possibly a third large scale machine in the next couple of months here that will turn on and add to our royalty portfolio. And then in the latter half of the year, we have our line of sight on, as Brent mentioned, hunting down up to 8 more large scale machines and we should be able to deploy at least a few of those before the end of the fiscal year. So every time we announce the machine sale and installation, think of that as an addition into that royalty portfolio. So we will continue to ramp as we get into the second half and Q4 of this year, undoubtedly. So our guidance and our expectation for the year is for royalties to come in somewhere in the range of 1.5 million to 2 million with obviously a lot of that growth coming in the second half of the year as we deploy more of these cannabis machines. The cannabis machines for us trigger royalties faster than food machines. The products are proven and most of our customers have existing markets where they're selling their products into. And so it's a matter of installing our technology into their operation and producing a more premium flower and delivering it to the market. So they don't have to build that out as is the case with most food operators.

[Operator]

Our next question is coming from Steve Hansen of Raymond James.

[Steven P. Hansen, MD & Equity Research Analyst]

Just a follow up, guys. Just I wanted to think about the cannabis opportunity a little bit more. Are there campaigns that you've had where you've not secured orders in the past? And if so, I'm just curious as to why? Like what it strikes me that the technology is, to your points earlier in your remarks, Brent, extremely effective, 20% greater terpene retention, et cetera. Like is there a reason? Like what are the pushbacks on the machines, is it cost, performance, technical adoption? I'm just trying to get a sense for where the pushbacks might be coming in as you look at the broader opportunity.

[Brent Charleton, CEO, President & Director]

Certainly, Steve. So I mean, I've disclosed in a few other communications over the past 12 months where been transparent. When we first entered the cannabis industry, we knew we had a strong technology that could create value, but we didn't have proof of what that quantum of value might be. Thankfully, we had some companies in Canada that bought machines. And fortunately enough, one of those companies, TGOD, allowed us to do the research necessary to hone in the processing protocols to consistently produce a higher quality and smokeable product in less time at lower cost and with more Terpene and cannabinoid retention. And -- but without that data, of course, there's going to be skeptics, right? You say, better, faster, cheaper, okay, well, show me the actual data for each specific strain. And we didn't have that. So that was, I would say, campaigns during those days often failed because you couldn't prove out the tech. Now it is different. Any pushback that we receive are from folks that already have preconceived notions ingrained in their mind, they’re not willing to change, they're stubborn, they're traditionalist, let's call them. But those who are more, I would say, open to improving their businesses and allowing us to place our 10 kilowatt units in their facility to actually physically show them that it works and getting the [ COAs ] done for their own specific strains. You have 100% hit rate right now, albeit we've only done with 2 companies in the U.S. As I mentioned on the call, we've got many more demos already planned for even this week and next down in California, and then we'll be going to few other states to do some additional trials. And we're hopeful that those trials combined with the third party testimonials from our existing partners and the opportunity to visit large scale machinery and action producing cannabis on a consistent basis, we'll check all the boxes, alleviate any perceived risk and get the majority of these prospects converted into full-blown royalty partners this year.

[Steven P. Hansen, MD & Equity Research Analyst]

Okay. Great. That's super helpful. And just lastly, on the rollout of the new stick product on the NutraDried side, is there any additional capital equipment or modifications required to the equipment to produce the product? I seem to recall thinking you’re already into production now on a trial basis or is semi-production basis for earlier this year, but is there anything that needs to be done to the equipment? I know you said you’re running 30% capacity, but it's not a major overhaul or reset required to produce at scale is there?

[Daniel Henriques, CFO & Corporate Secretary]

No, not on the drying side, Steve. It's the same 200 kilowatt lines we have already installed in Ferndale. So those are what were used to produce this product. We do have some small things that we had to reconfigure on the cubing like the pre-drying step where we take the cheese blocks and cut it into cubes, now we cut it into sticks. So there's some small equipment changes we had to make. And there's a couple of small pieces of equipment we're looking at as potential additions to our plant, but nothing big. We're talking about $60,000 to $100,000 of equipment.

[Operator]

Our next question is coming from [ Robert Fogel ], a private investor.

[Unknown Attendee]

Yes. I just have a question regarding whether or not the equipment can be used for drying grains, grains such as corn. There's a great deal of small equipment doing this all across this country and, of course, it's a huge product, but I have no idea whether the equipment could be used for that purpose.

[Brent Charleton, CEO, President & Director]

Sure. Thanks for the question, [ Robert ]. Yes, I mean, our vacuum-microwave equipment could be used to dry anything, but is it going to be economical? And the value of dried corn in most applications doesn't support the use of vacuum microwave as a commoditized good. Typically, a higher heat drying method or hot air dry, which is less homogeneous certainly and does erode some of the nutritional properties of the corn is oftentimes used in industry. That being said, in terms of new agricultural crops where we do see potential, one of our protein with PiP International out of Lethbridge, Alberta working on high value pea protein isolate. That particular application makes a lot of sense for us. So we're looking forward to continuing that collaboration over the coming quarter and hopefully getting them to scale up this fiscal year.

[Unknown Attendee]

All right. I'm disappointed, of course, it is not economically applicable, but it’s corn. I mean it's even smaller farmers with small amounts of land employ natural gas and furnaces to cool or heat to dry that corn.

[Operator]

Sir, I'd like to turn it over to you for questions submitted via the web.

[Brent Charleton, CEO, President & Director]

Excellent. Thanks so much. So I'll address the first question, which pertains to an update on the current litigation against several former employees of EnWave Corp. So what I can tell you is that the injunction hearing taken place approximately 5 weeks ago, where submissions from both sides were presented to Honorable Justice [ Bazarin ]. He is currently still reviewing the submissions and has not yet ruled on whether or not to uphold the injunction that was put in place up until the injunction hearing. As of today, that injunction is still -- and again in place firmly, which ensures that no further action will be taken by the defendants in pursuit of their efforts. Let’s leave it at that.The second question that's come in has to do with the U.S. Army ration project. So I'll just give you a brief update that the last communication we received from the U.S. Armed Forces was that the funding necessary to acquire additional machinery was approved last year and that they anticipate the funding to be released sometime during this calendar year. We don't know anything more than that. We wait patiently for the phone call or the e-mail, telling us that yes, they've got the dough, and then we'd be happy to deliver them with many more machines given the progress they've made with certain applications internally that could be quickly implemented and provided to their warfighters.The next question online here has to do with suppliers, whether or not we would be willing to go to all U.S. or Canada suppliers to eliminate dependency on suppliers outside North America. Simply put, for a lot of the componentry, yes, we do supply from North America, but in certain cases, critical microwave componentry is not readily available from North American suppliers primarily procured from some critical suppliers in Europe. So that unfortunately will not change for us as we move ahead. And then the last question, I'll turn it over to Dan to field.

[Daniel Henriques, CFO & Corporate Secretary]

We had a question here about the lengthening of lead times from our suppliers and the degree of comfort we have in our inventory buffers, whether or not they're sufficient. So it's not -- the supply chain challenges, it's not all-encompassing. It's not all of our suppliers. It's not all of our components. It's certain things and it's more on the electrical side we're seeing just with increased demand for certain plc componentry that comes from a few key suppliers and as well as some of our third party manufacturing partners, their backlog just increasing. So you put in a PO for an outsourced subassembly for a machine and what used to take 8 weeks will now take 16 weeks, that sort of thing. So it's a combination of both manufacturing partners as well as -- like true componentry suppliers. So some of the steps we're taking is actually more on the manufacturing partner side. So putting in those POs for the subassembly work to be done in advance just to get in front of their backlogs. And then from some of those electrical components that are the parts right now that we're seeing the long lead times with, those are easy things to order so we can get in front of that now and to alleviate those issues. And these are -- all these components have no shelf life. So if we need to stock them for a few extra months, obviously, there's no harm in doing that. So we're very comfortable with the buffers that we've got in our inventory. We've kind of stayed ahead of the curve in trying to figure out where the delays may occur. Obviously, things change and the world changes itself, what is the situation tomorrow could be different from today. But as of right now, there's I think we have an appropriate buffer in our inventory. And as Brent mentioned, we feel confident in the order pipeline. So it's not a big risk for us to deploy a little extra working capital to start building a couple of these machines on spec.

[Operator]

[Operator Instructions]

[Brent Charleton, CEO, President & Director]

Thanks, operator. Just had one more webcast question come in, so I'll address that now and it pertains to the development pharmaceutical application. So as most of our shareholders know we made the strategic decision to embark on a joint development agreement with GEA Lyophil, which is the predominant provider of freeze dryer equipment in the pharmaceutical industry. That collaboration has borne some fruit and that the majority of the top 10 pharmaceutical companies have either scheduled or have already visited GEA in Germany to run trials on the pilot unit they purchased from EnWave. Next steps will include more robust trials with some of those companies with the foresight that GEA may deliver larger scale, continuous vacuum microwave GMP equipment in the future. And if that is the case, then EnWave will receive a percentage of the revenue derived from those machines that are sold. So this is an opportunity to monetize the tech in the pharmaceutical industry with minimal investment. And right now, it's looking quite nice in terms of the pipeline of interest.

[Operator]

We're showing no additional questions in queue at this time. I'd like to turn the floor back over to Mr. Charleton for closing comments.

[Brent Charleton, CEO, President & Director]

Okay. I'll just finish up as an alarm is going off in the background here at our headquarters. So thank everyone for joining us for EnWave's Q1 earnings conference call. At this time, you may disconnect. And if you want to discuss any other matters regarding the business, Dan and I are always readily available. Thanks so much.

[Operator]

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.