Enwave Corp

XTSX:ENW

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, and welcome to EnWave Corporation's Q1 2023 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 Dylan Murray, EnWave CFO.

[Operator Instructions] Finally, I would like to remind everyone that this call will be made available for replay via a link in the Investors section of the company's website at www.enwave.net.

Now I'd like to turn the call over to EnWave CEO, Mr. Brent Charleton. Sir, please proceed.

[Brent Charleton, President and Chief Executive Officer]

Thanks very much and hello to everyone who has joined us today for EnWave Corporation's Q1 earnings call. Consistent with our past quarterly earnings calls, the information we will present today 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 on SEDAR when reviewing this information.

Also, all amounts discussed will be in Canadian dollars unless otherwise noted. We will continue to refer to our proprietary vacuum microwave technology business unit, inclusive of machine sales, royalty generation, and toll manufacturing as EnWave and our subsidiary that sells dried cheese snacks, which we recently announced an orderly wind-down of as NutraDried.

Today, we will summarize our consolidated financial performance, highlighting the clear reasoning for beginning the orderly wind down of NutraDried and the choice to allocate existing resources towards our growing technology business.

The NutraDried wind down process and value maximization effort is going according to plan thus far. And we remain optimistic that our efforts will yield a cash neutral or cash positive outcome when complete. EnWave vacuum microwave technology business outlook is materially better.

As I'll discuss in detail, we have several large scale machines starting up in the near term that will enhance our royalty generating potential and some exciting new projects that hopefully will yield new licenses, have assigned additional reference contracts, and witnessed several material product launches this year.

After my update, Dylan Murray, our new CFO, will expand on our Q1 consolidated financials as well as point out the critical metrics that support our recent strategic corporate decision. EnWave's Q1 was light on announced deal flow and heavy on effort behind the scenes.

During the quarter, we agreed to and announced the rental of additional vacuum microwave equipment to Dole. That will provide bridge manufacturing capacity prior to the commissioning of their 120 kilowatt large-scale unit. We opportunistically bought back a 120 kilowatt for less than half of what we sold it for from a US cannabis company and resold that unit subsequently in Q2 to a major Canadian cannabis co, this cannabis company being one of the more respected in the space.

We also signed a technology evaluation and license option agreement with a leading US egg manufacturer. For development of our licensing machine sales and leverage pipeline continued. And we welcome Dylan as our new CFO.

NutraDried's performance continued to deteriorate through Q1 to the point that a decision to begin an orderly wind down in Q2 was a necessity. Dylan and I have been very active executing our wind down and value maximization plan. And overall, the process is going well. We haven't encountered any significant obstacles to date. Working capital has been better than anticipated and are working with several prospective buyers of NutraDried capital assets.

From our efforts, we hope to assign a new license to use radiant energy vacuum equipment to produce cheese snacks in the US, sell the Moon Cheese brand, and begin to generate real cash royalties from a new royalty partner. There is still an immense amount of work that needs to be done in order to complete this process.

But as recently mentioned, we're confident that we should recoup cash back to EnWave after all expenses are paid and liability is settled. Our target timeline to complete this process is within the current fiscal year. Our stock price was already under pressure prior to the NutraDried wind down announcement, but has since fallen to a 52-week low.

Perceived uncertainty around the NutraDried wind down, the slow deal flow in Q1, and cannabis partner delays and missteps have all contributed to investor pessimism. And we intend to address each of these concerns today.

EnWave's gross margin in Q1 was 37%, since Q1 fiscal year 2023 normalizing slowly to where we would expect it to be longer term. We also generated $2.8 million in revenue, with $412,000 of that being third-party royalties, generated a net loss of $466,000.

NutraDried generated negative 11% gross margin in Q1 and produced a net loss of $1.7 million. The oversized infrastructure of NutraDried when combined with declining sales and negative gross margin and the higher than normal input costs created an imminent and material cash need, one that would erode EnWave's capital resources if the decision to begin an orderly wind down was not made.

The lion's share of our operational cash need has been directly attributed to the NutraDried business. We expect our operational cash need to materially reduce going forward after the wind down is complete. Our opportunity in the cannabis sector to materially commercialize REV technology will depend heavily on the maturation of key players in the industry.

To date more times than not licensed royalty partners and prospects have been mismanaged and disorganized. And that being said, we are thankful for the professionalism and commitment demonstrated by TGOD, our Illinois-based partner and our most recent Canadian licensed royalty partner.

There is a silver lining here and the quantitative data collected and shared by these partners continued to advance REV's clear value proposition, which includes lower bioburden, higher cannabinoid and terpene retention as well as positively reviewed smoking experiences.

Continued perceived risk and lack of capital to build out REV infrastructure are present challenges in this space. But I do believe that REV has the opportunity to become a preferred drying method in the future. Now beyond our cannabis potential, the number of high impact REV dried food product launches and/or distribution expansions that are scheduled to take place this fiscal year gets me very excited.

We recently completed the installation of a 120 kilowatt unit for Orto Al Sole, Italy. They have secured meaningful domestic distribution for their ultra-premium fruit and vegetable snack line and are considering future manufacturing needs already. These products are outstanding and have resonated with some of the largest grocery chains in Italy, including Migros, which is one of the larger grocery companies in all of Europe.

Dole's 120 kilowatt will be commissioned in March. The Good Crunch snack product line has officially launched. And I do encourage everyone on this call to Google Dole Good Crunch to view their top-tier marketing materials. And given the size of Dole, additional large-scale REV machinery will be a necessity to address the markets they're pursuing.

Further capital investment will be driven by prospective launch success. And we continue to work with the Dole team to develop new SKUs and improved processing efficiencies. The 60 kilowatt installation for our Japanese royalty partner and the second 120 kilowatt installation for a US cannabis partner are still expected to take place in the latter half of this year, while the 120 kilowatt for our most recent Canadian cannabis partner is scheduled for commissioning this spring.

Additional product launches that are scheduled to occur in fiscal 2023 include a pepperoni meat chip in North America by a currently unnamed partner, a shelf-stable cheesecake snack in June by a REVworx customer; Pure Joy, who is our Costa Rican royalty partner, new distribution of their premium tropical fruit snack in the US; Naera Snacks of Iceland launch their fish, turkey snack in North America. A company called [iCana], who is leveraging Fresh Business, Peru's manufacturing capacity to launch REV dried fruit snacks in Australia and New Zealand among several others.

We are also continuing to work with the US Army through our relationship with Bridger -- Bridgford Food, excuse me, as well as the recently announced major egg manufacturer who signed [LOA]. A large scale purchase order from the US Army is still targeted for this year with cheesecake rations being their focus.

REVworx toll manufacturing contracts are expected to be robust in the latter half of fiscal '23. And we have a clear understanding of the immediate needs of the primary prospects that intend to use REVworx manufacturing. Line trials and sample production have taken place. And we are prepared for more intense, consistent commercial production.

Recall REVworx is an initiative to lower the new product development thresholds for prospective and current royalty partners leading to incremental processing revenues and more REV machine sales for EnWave. And it's working. I look forward to sharing more details regarding these potential contracts in the very near term.

Now the decision to wind down NutraDried was absolutely the right choice. We are optimistic regarding our ability to monetize assets and potentially award a new license to produce Moon Cheese that will pay us cash royalties.

Once we complete the transfer of assets and finalize the orderly wind down, our full energy can be put towards our technology business. Our third party royalties are expected to grow this year. We expect to sell more machinery than the year prior. And we have major food partners that have committed significant resources to grow their respective REV dried businesses. And with that I'll now ask Dylan to summarize our Q1 financial results in more detail.

[Dylan Murray, Chief Financial Officer]

Thanks, Brent. Good morning, everyone, and thank you for joining us today. Please note that the figures I'll be going over today can be found in our press release from yesterday and in the financial statements and MD&A filed on SEDAR. And all amounts are in Canadian dollars unless otherwise noted.

I will make reference to adjusted EBITDA, which is a non-IFRS financial measure. So please refer to the non-IFRS financial measure disclosures and reconciliation to GAAP net income, both in the press release and in our MD&A.

Also, please note that the comparative period I'll refer to throughout this presentation is the prior year Q1 ended December 31, 2021. Consolidated revenues for Q1 were $4.7 million compared to $6.3 million in Q1 2022, a decrease of $1.6 million or 25%. EnWave accounted for 60% and NutraDried for 40% of total Q1 revenue, respectively.

EnWave's revenue was $2.8 million for Q1 2023 compared to $4.1 million for Q1 2022, a decrease of $1.3 million or 32%. The decrease was due to the timing of revenue recognition on large scale machine contracts, a decreased number of small-scale machine sales. And in Q1 2022, we had the benefit of reselling a 120 kilowatt machine, which was purchased back from a cannabis partner.

EnWave had third-party royalty revenue of $413,000 for Q1 2023 compared to $505,000 for Q1 2022, a decrease of $92,000 or 18%. Some partners have higher base royalties during the calendar year, resulting in a smaller royalty obligation during the quarter to meet the minimum annual royalty threshold.

Additionally, some partners decided to forego exclusivity. As our royalty partners grow their business and increased capacity utilization REV equipment alongside new reconciliations arising from new sales, we hope to see royalty growth over the coming quarters.

NutraDried reported revenues of $1.9 million for the three months ended December 31, 2022, compared to $2.2 million for the three months ended December 31, 2021, a decrease of $301,000 or 13%. NutraDried sales decreased due to a decline in overall Moon Cheese sales and an absence of Costco Canada sales in Q1 2023, which is offset by an increase in sale of Moon Cheese crunchy snacks.

Consolidated gross margin for the company in Q1 2023 was 17% compared to 43% in Q1 2022. EnWave generated a Q1 2023 gross margin of 37%, while NutraDried generated a negative gross margin of 11% for the period. The consolidated margin compression is a result of two things. In Q1 2022, there was a fully fabricated large-scale unit that was purchased back from a cannabis partner and resolved, resulting in lower direct costs. And two, NutraDried continued to experience significant margin compression in Q1 2023, but higher cheese prices and trade spending costs.

SG&A expenses, including R&D, were $2.6 million for Q1 2023 compared to $2.8 million for Q1 2022, a decrease of $200,000 or 7%. We reduced G&A costs as part of our continued focus on managing non-revenue generating spending.

Adjusted EBITDA is a non-IFRS financial measure, so please refer to our MD&A for the reconciliation of GAAP net income to adjusted EBITDA. The company reported an adjusted EBITDA loss of $1.2 million for Q1 2023 compared to an adjusted EBITDA profit of $301,000 for Q1 2022, a decrease of $1.5 million.

The performance of the NutraDried business segments, which reported a net loss of $1.7 million for Q1 2023 was the primary driver of decreased EBITDA for this period. We finished Q1 with cash on hand of $4.2 million and a net working capital surplus of $10.1 million.

The increase in inventory was primarily a result of the machinery that was purchased back from a US cannabis licensee and resold in Q2 2023 being included in inventory as at December 31, 2022. Aside from a small COVID-19 relief loan and our facility leases, our balance sheet remains debt-free.

As Brent discussed, NutraDried's financial performance through the past three fiscal years has deteriorated materially. And after assessing the longer-term viability of NutraDried's operations, NutraDried's capital requirements, and other current and expected economic factors, EnWave's Board of Directors and executive management decided to cease funding this loss generating business unit and commence an orderly wind down and value maximization process for the business segments.

NutraDried had revenue of $1.9 million versus $2.2 million in Q1 2022; gross margin of negative 11% versus positive 20% in Q1 2022; and a net loss of $1.7 million versus $900,000 in Q1 2022. By winding down NutraDried, EnWave will materially reduce expenditures, allowing capital to be prioritized towards advancing the core business strategy of the company.

As at December 31, 2022, NutraDried had $3.4 million in inventory, $2 million in plant and equipment, and $1.8 million in trade and other payables. The wind down and value maximization process continues as planned. And management believes completion of this process should be cash neutral or cash positive to EnWave.

[Brent Charleton, President and Chief Executive Officer]

Thanks, Dylan. I'd now like to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator]

[Operator Instructions] Mr. Charleton, we're showing no audio questions at this time.

[Brent Charleton, President and Chief Executive Officer]

Thank you, operator. We do have some submissions on the webcast questions, which I will address one by one now. Now the first question is to the point stock price is at its lowest in 15 years. Does this reflect the financial reality of the company? And my response to that is I do feel that at these current stock prices, our business is undervalued regardless for the wind down process being undertaken for NutraDried. I do see this as a [buy-in] opportunity, given the prospects that our technology business has. And I'll leave it there for now.

Next question. I would like to understand why the company has not made cannabis drying a bigger focus and priority with the length of time for evaluations to start paying a royalty, it seems like cannabis would finance future growth and the time needed to support food and pharma markets?

Good question. So I'll respond by stating the first part of it in that the commitment to trying to drive that business development has been there. We've engaged with every single known cannabis company in North America to try and get them to trial our technology. We've offered them our smaller scale units to be deployed and used at their facilities at no cost in an effort to try and reduce the roadblocks to demonstrating the clear value proposition that our technology provides.

There are multiple continued conversations with some of the bigger players in the US and Canada and for whatever reason are choosing to delay those evaluations and have not yet scheduled the time nor put the effort for an organization to execute that. We will not give up. We will continue to go back and push, push, push, but for whatever reason that particular industry seems to be in disarray at this point in time.

Next question. What about India? When will EnWave machines be sold there? What is EnWave's sales team in India and the pipeline locally? So part of our strategy to broaden our footprint for sales and business development in different continents is to engage with third party machine resellers. We're already known for representing different reputable food manufacturing equipment.

And now in India, we've partnered with a company called Ken Kanchan Metals. They have provided us opportunities to participate in trade shows, which we've gone and done. We've now have a pipeline of about six to eight projects, which seem to be viable that we're hoping to close sometime in the next 12 to 18 months.

And of course, we have an announced partner in India in LD Food who currently have a 10 kilowatt onsite doing product development and are expected to make a decision to scale up or not within this fiscal year. Further, LD Food has been a good partner in the sense that they've allowed other companies that are looking at the tech to visit their facility and to conduct small-scale market trials.

Next question. Can you update us on the cost of the legal challenge with the former directors and what have you budgeted? Rather specific question. So we budgeted several hundred thousand dollars. But we don't believe that we will be spending that much given how things are playing out at this point.

In terms of an update, it is being made aware to us that the defendants have chosen to change counsel, given the multiple setbacks that they've had during this process. We feel that we're in a strong position to defend EnWave's business, the protection of its IP, and ultimately hold these folks accountable for the actions that they took.

Next question. Your R&D costs include cost of trial runs for new candidate clients. If not, are some of the more significant R&D expenses because the REV technology itself is fully mature? Included in R&D. Yes. Included in R&D.

Next question. Will you be providing ongoing updates on the progress of the NutraDried wind down? Or will it only be on a quarterly earnings announcements? And so that, we will announce all material developments that we're hoping will take place in the relative near term during this process. Yeah. And I alluded to it a couple of points in the presentation earlier.

Next question. Could you please explain a little bit why clients do not want to keep exclusivity, i.e., the licenses that we grant to certain food companies. Typically, we'll start with an exclusive right on a product type in a specific geographic region. And in exchange for that exclusivity granted, they pay a minimum royalty per annum. Those minimum royalties aren't meant to be punitive. But they're meant to be put in place to hold the user accountable. So they are materially putting forth an effort to commercialize the products that have been bestowed in their license.

And the reasoning behind that simply put is in some cases, some of the companies have been able to grow as fast as they had hoped. And they looked it as a cost-benefit analysis and determined that exclusivity wouldn't grant them any additional benefit in their respective markets in which they're selling products.

All of our licenses exclusive or non-exclusive do not prohibit the license partner from selling their products wherever there is a buyer. What it does do it restricts the geographic region in which the machinery can be domiciled to produce the products with the hope that it offers some form of economic benefit regarding lower raw material costs, lower labor costs that gives them a competitive edge again in the market they're looking to address.

Next question. I love your sell and resell strategy on the cannabis installs. Do you forecast additional install buybacks and resells? That I mean, these are situations that were opportunistic given the again mismanagement of certain partners. And thankfully, we had interested buyers to take on those assets and we're able to generate healthy margins during those transactions.

When I look at the large-scale machines that have been purchased and are scheduled for installation in our pipeline, I do not foresee any further opportunities for buyback on large-scale equipment and resale, other than obviously the resale of the assets that are currently at NutraDried to new partners to leverage.

[Brent Charleton, President and Chief Executive Officer]

Okay. And with that, I do not see any further questions submitted on the webcast. Thank you for joining us today for EnWave's Q1 earnings call. And at this time, you may now disconnect.

[Operator]

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.