Enwave Corp

XTSX:ENW

Earnings Call Transcript 2023-Q2

[Operator]

Good morning. Welcome to EnWave Corporation's Q2 2023 Earnings Conference Call. My name is Daryl, 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's CFO. [Operator Instructions] And the conference is being recorded. [Operator Instructions] Finally, I would like to remind everyone that this call will be made available for replay via a 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. Sir, please proceed.

[Brent Charleton, executive]

Hello to everyone who have joined us today for EnWave Corporation's Q2 earnings call. I'm pleased to provide you with an optimistic update today and summarize our strong financial performance from continuing operations. 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.

This morning, I will refer to our continuing operations as EnWave. EnWave is inclusive of our proprietary vacuum-microwave technology business, which generates revenue from machine sales, royalties and toll manufacturing. NutraDried, our operating subsidiary, is now classified as discontinued operations. The orderly wind-down and value maximization process associated with NutraDried has gone better than expected to date, and Dylan will highlight a few important details pertaining to the NutraDried asset sale later in this call.

This quarter, EnWave reported just over $4.6 million in revenue, a 209% increase year-over-year. Quarterly gross margin of 49% compared to 38% year-over-year, an increase in third-party royalties of 13% year-over-year, and we also reduced our SG&A by 24% year-over-year and produced $1.2 million in quarterly adjusted EBITDA, which was up $2.2 million year-over-year. And lastly, we generated net income from continuing operations of $687,000 compared to a $1.7 million net loss year-over-year.

Overall, our Q2 numbers are very encouraging. We strategically resold 2 large-scale REV machines to new royalty partners in Q2. The first was to a major Canadian cannabis producer and the second was to Creations Foods, who will continue the production of Moon Cheese in the U.S. and pay EnWave royalties on a go-forward basis. Both companies will begin to pay EnWave royalties as of Q3, and their machines are commissioned. We also sold 2 additional 10-kilowatt units to a current royalty partner and signed an R&D license agreement with the Danish Technological Institute.

Recently, in Q3, we announced the sale of another 10-kilowatt and the signing of a license agreement with PiP International for the production of yellow pea protein products. That project will hopefully evolve into large-scale REV machine orders in the future as they build out their planned infrastructure. We also completed the installation and start-up of Orto Al Sole's 120-kilowatt machine in Italy for the production of premium fruit and vegetable snacks as well as Dole's 120-kilowatt machine in Thailand for the manufacture of their Good Crunch snack line. And we completed a factory acceptance test for the 60-kilowatt REV line that is scheduled for installation in Japan later this summer for a current multibillion dollar revenue royalty partner. We also look forward to completing the installation of the second 120-kilowatt unit at our U.S. cannabis partners facility later this year. The culmination of these installations should imminently lead to increased royalties.

Moving forward, our focus is to accelerate the commercialization of our vacuum-microwave technology and keep this momentum going. EnWave has several pending large-scale rating energy vacuum-machine orders that we hope to close this fiscal year. These potential opportunities, each one material in their own right, include many repeat or scale-up orders from current royalty partners as well as new prospects that are nearing the end of their respective due diligence. Our understanding is that many of the product launches noted on our previous conference call for Q1 are going well. Fruit, vegetable, meat, seafood and cheesecake snacks seem to be resonating with consumers in multiple markets. And if continued product successes achieved this year, additional REV drawing capacity will be a necessity for many licensees. At the moment, there are more than 20 advanced legitimate commercial opportunities to pursue this fiscal year, whether they be technology evaluation agreements, commercial licenses and/or repeat machine sales. We don't know yet how many will cross the finish line, but we do know they are moving in the right direction.

Our partnership with Dole continues to strengthen. Initial market results have been favorable. The 120-kilowatt, as I mentioned, is now fully functional. And given the size of Dole, additional large-scale REV machines will be needed to address the markets they're pursuing. New Good Crunch products are being perfected and we are optimistic about the future of this commercial relationship. Progress continues with the U.S. Army and Bridgeford Foods. We expect the contract to be awarded by DEVCOM to Bridgeford this fiscal year, which should set the table for a large-scale REV purchase order. Concurrently, we continue to collaborate with other food companies that are focused on developing military rations, one of which being a large egg product manufacturer. If we can successfully enter the U.S. military ration ecosystem through our license partners, we believe multiple additional product introductions could take place thereafter, driving additional large-scale REV machine orders and of course, royalty growth.

Interest levels in REV-dried meat snacks for both human and pet consumption has intensified over the past few months. Two companies, in fact, that we previously announced as royalty partners several years ago, but didn't successfully launch REV-dried meat products at that time to market have recently been very active in new product development and are now realistic targets for us to convert into new machine orders later this year. There is no doubt that our vacuum-microwave technology can be leveraged in this market vertical to create unique snack offerings.

The outlook for our REVworx toll manufacturing service has not changed. Paid line trials continue filling the prospective REVworx client pipeline. And we are presently negotiating contracts and expect significant manufacturing capacity to be allocated this fiscal year to companies that are looking to launch new commercial REV-dried products. 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.

The majority of our near-term expected commercial wins are anticipated to come from agreements with food companies. That being said, our REV technology continues to offer a compelling value proposition to operators in the cannabis industry. We have active discussions with cannabis companies from Europe and the U.S., and we hope to announce our next cannabis royalty partner this fiscal year. The most recent large-scale installation in Canada has clearly demonstrated that REV technology can effectively be used to drive both cannabis plant material destined for extraction and premium smokable flower. This royalty partner has already been able to reallocate several dry rooms to other upstream and downstream processing steps and stated to our team recently that the payback on their investment is likely to be much shorter than anticipated. To date, we've established 5 vacuum-microwave machine designs that can be built over and over again, profitably. Our challenge now is to close more license negotiations, aggressively pursue new projects to reload our pipeline and continue to develop new innovation that will open new market opportunities.

I'll now ask Dylan to summarize our Q2 financial results in more detail.

[Dylan Murray, executive]

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 Q2 ended March 31, 2022.

Revenues for Q2 were $4.6 million compared to $1.5 million in Q1 2022, an increase of $3.1 million or 209%. The increase was primarily due to the resale of 2 large-scale machines during the quarter and the timing of revenue recognition on large-scale machine contracts. EnWave had third-party royalty revenue of $277,000 for Q2 2023 compared to $245,000 for Q2 2022, an increase of $32,000 or 13%. This was a result of an increase in products sold and produced by our royalty partners. As our royalty partners grow their businesses and increase capacity utilization on REV equipment alongside new REV installations arising from new sales, we hope to see material royalty growth over the coming quarters.

Gross margin for the company in Q2 2023 was 49% compared to 38% in Q2 2022. The increase in margin was due to the resale of the 2 large-scale high-margin machines. SG&A expenses, including R&D, were $1.4 million for Q2 2023 compared to $1.8 million for Q2 2022, a decrease of $400,000 or 24%. We reduced G&A costs as part of continued focus on managing nonrevenue generating spending.

Adjusted EBITDA is a non-IFRS financial measure, so please refer to our MD&A for the reconciliation from GAAP net income to adjusted EBITDA. The company reported adjusted EBITDA of $1.2 million for Q2 2023 compared to an adjusted EBITDA loss of $1 million for Q2 2022, an increase of $2.2 million. The increase in adjusted EBITDA was primarily due to the wind down of NutraDried, and its classification as discontinued operations, the resale of 2 large-scale machines and the reduction of SG&A expenses, including R&D.

We finished Q2 2023 with cash on hand of $3.5 million compared to cash on hand of $4.2 million for Q1 2023, a decrease of $700,000. We are pleased with the cash conservation during the quarter given the operational activity associated with the NutraDried wind-down. EnWave had a net working capital surplus of $9.5 million as at March 31.

The increase in trade receivables and decrease in inventory was predominantly due to the sale of NutraDried assets to Creations. The decrease in inventory was partially offset by efforts to mitigate supply chain risks and ensure critical component availability for machine fabrication. Aside from our facility leases, our balance sheet remains debt free.

As previously announced, NutraDried's financial performance through the past 3 fiscal years deteriorated materially and after assessing the longer-term viability of NutraDried's operations, NutraDried's capital requirements in either 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 in value maximization process for the business segment during the quarter. On March 14, 2023, EnWave agreed to sell certain NutraDried assets, including trademarks, auxiliary production equipment and select saleable inventory to Creations for consideration of USD 1.6 million. Additionally, Creations purchased 100-kilowatt REV machine from EnWave Canada installed at the NutraDried facility for consideration of USD 1 million, of which USD 935,000 has been recognized in revenue for continuous operations for the 3 months ended March 31, 2023. The remaining revenue of USD 65,000 will be recognized as interest income over a 25-month payment term.

Total consideration for the sale of NutraDried assets in the 100-kilowatt unit to Creations was USD 2.6 million, of which USD 2.2 million was outstanding as of March 31. Subsequent to March 31 and at the date of this report, USD 814,000 of the outstanding balance has been collected. There is a second 100-kilowatt machine repatriated from NutraDried that remains unsold and is included in inventory at March 31. In accordance with IFRS 5, NutraDried has been presented as a single amount on the face of the statement of comprehensive income as discontinued operations. During Q2 2023, the company reported a loss from discontinued operations of $3.4 million compared to $687,000 for Q2 2022, a decrease of $2.7 million. The decrease is a result of the operational activity of the wind-up, diminished margins relative to the comparative period and associated write-downs.

As of March 31, 2023, and as disclosed in the segmented information note, NutraDried had assets of $3.1 million and liabilities of $1.8 million. Management believes the eventual completion of this process should be cash neutral or cash positive to EnWave. To date, the majority of the operational work associated with the wind down has been completed, and NutraDried employees only 3 people to assist with the remaining items of the orderly wind down.

[Brent Charleton, executive]

Thanks, Dylan. I think that you've made it abundantly clear that the management of the NutraDried wind-down and value maximization process has been done well and that EnWave is trending in the right direction.

With our prepared commentary finished, I'd now like to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator]

[Operator Instructions] If there are any outstanding questions at the end of the call, the company will be happy to take them by e-mail at [e-mail]. [Operator Instructions] At this time, I'd like to hand the call back over to Brent Charleton to address any web-based questions.

[Brent Charleton, executive]

Thank you, operator. There are 2 that have been submitted thus far, and I'll address both of them.

First is a question regarding the number of commercial licenses that we hold. We've been hovering around the 50 mark for a few quarters now. And the question is when realistically could EnWave see the total amount of licensees reaching 60, tied to future exponential royalty growth?

And so earlier in the call, I noted there was more than 20 legitimate commercial opportunities to pursue. And so with that being noted, we believe that within this fiscal year, there is a possibility of adding multiple additional commercial license partners to our portfolio and reaching the 60 mark. Of course, we're not holding ourselves to a specific number, more so is the quality of the companies that we partner with, the scale of machinery that we are deploying even that comes from repeat orders to establish partners because those are the relationships that we know are likely to be successful given products have been in the market and consumer uptake has been positive.

Next question. Are any new products being developed with or for Natick i.e. the U.S. Armed Forces?

So the simple answer to that is yes. Again, as noted on the call, we are currently working with a very prominent egg manufacturer to do 3 specific ration inclusions that have already been presented to the U.S. Army and has favorable feedback. Now we're moving forward, collaborating with those 2 parties to hopefully have a CRADA, which is basically a research agreement in place to secure funding for this third-party egg manufacturer to further the likelihood of new introductions into the ration ecosystem.

Second part to this question, was there any news on the pharma side with regards to partners and prospects or new partners?

And the answer is yes, but that isn't being managed directly by EnWave's management team. It is being managed through a joint partnership that we forged with GEA Lyophil, which is one of the foremost OEMs building lyophilization or freeze drying equipment in the pharmaceutical industry. And this has been positioned as a microwave-assisted lyophilization process, and they have a pilot plant in Germany in which they posted several of the top-tier global pharmaceutical companies to both trials and are looking to progress that to a more meaningful commercial project. And there really isn't any other details we can share at this time.

Next question, do you still plan on buying back shares? If so, when?

At this point, we are -- we have no imminent plans of buying back shares, given that we have good uses of the current capital that we have to grow our royalty generating business. If the opportunity presents itself in the future and management believes that there is value in doing so and executing a share buyback, we'll obviously take into account those variables at that time and make the decision.

Next question, will REVworx financial reporting be consolidated? Or could you provide the results as a separate item?

[Dylan Murray, executive]

It continues to be consolidated at this point until it's a material individual line item.

[Brent Charleton, executive]

Daryl, I'll wait 5 to 10 seconds to see if any other questions are submitted via the web portal to address. And if not, then we will wrap up the call.

Okay. Seeing no additional submissions for questions at this time. We'd like to thank everybody for dialing in for EnWave's Q2 2023 earnings call. If any questions arise after this call, we are readily available, the e-mail or submitting questions through our website. Thanks very much, everyone.

[Operator]

Thank you. This does conclude today's teleconference. We appreciate you joining us today for EnWave's Q2 2023 earnings conference call. At this time, you may now disconnect.