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Good morning. Welcome to EnWave Corporation's Q2 2024 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]
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.
Thank you, and thanks to all of you who have joined us today to discuss EnWave Corporation's Q2 performance and our outlook for the rest of fiscal 2024.
Now consistent with 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.
EnWave's second fiscal quarter of 2024 has effectively set the stage for stronger performance throughout the remainder of 2024 and beyond. We continue to achieve positive momentum in our royalty growth, but we were unable to complete new purchase orders for Radiant Energy Vacuum machinery from new or existing royalty partners prior to the completion of the quarter.
However, earlier this week, we confirmed a new 120-kilowatt purchase order from an existing royalty partner to support their need for increased manufacturing capacity tied to opportunities with several major consumer packaged goods brands. And then this morning, we announced a second large-scale REV machine sale, the second in one week. The deal announced this morning is a sale of the 100-kilowatt machine that was previously being used by NutraDried and was not included in the asset sale of the Moon Cheese brand and certain other machinery to Creations Foods earlier this year.
This 100-kilowatt sale for BranchOut Food will yield a very healthy margin profit to EnWave and allow BranchOut to ramp up production capacity for their line of snack products very quickly. BranchOut has enjoyed tremendous sales success in recent months. Further to these 2 deals, we are well advanced on a number of similar opportunities that could be confirmed this fiscal year. If these opportunities come to fruition, we expect to deliver an exceptionally better second half of the fiscal year.
Royalty growth continues to be a strong quarter-over-quarter, and this is the key metric that investors should continue to focus on. As we continue to grow our diversified portfolio of royalty streams, we will get closer to covering our baseline expenses, and we will become less susceptible to machine sales and their impacts on revenue, margins and EBITDA quarter-to-quarter.
In regards to expense control, we've been diligent in maintaining a reasonable structure and have been extremely critical regarding discretionary spending. In Q2 and to the date of this call, we did close 2 new technology evaluation agreements, one with a U.S.-based cannabis company and one with a company led by a Michelin Star chef. The cannabis agreement is expected to conclude in June when the evaluating company will decide to move forward with REV machinery acquisition or not. The valuation associated with the Michelin Star chef is expected to continue through Q4 as they have a more robust new product development plan.
We also signed a new commercial license in Q2 with an established South American food company. They agreed to lease 2 10-kilowatt machines for initial product development and commercial sales. Unfortunately, it took this company until May to coordinate the receipt of these machines due to unforeseen tax issues. We expect this project to intensify in the coming months and the decision from this licensed royalty partner regarding large-scale machinery in calendar 2024.
One additional bright spot in Q2 was the confirmation of a material toll manufacturing contract with BranchOut Food, a current royalty partner who is growing its business significantly to use our REVworx facility to produce Brussels sprouts for their snack portfolio. We have been producing product for BranchOut since March and expect to continue production until August, if not longer. There is a high likelihood that additional orders will be confirmed due to large repeat orders from BranchOut's customers, extending the engagement with REVworx longer term. We have other companies scheduled for line trials this summer, and we are optimistic regarding additional utilization of REVworx beyond this large current contract.
Looking forward now to the rest of Q3 and Q4. The efforts of our team throughout Q2 has laid the groundwork for multiple 10 kilowatts and large-scale machine sale opportunities. Repeat orders from existing royalty partners, new licensees and research and development organizations are all possible. Some of these projects are focused on new commercial product areas, including pet treats, seafood products and cosmetic applications. And as indicated by our royalty growth, several of our key royalty partners are enjoying increased success in market and we believe this should continue.
The aforementioned recently announced 120-kilowatt machine sale to an existing royalty partner and a 100-kilowatt machine sale to BranchOut Food clearly welcome Q3 steps forward in the right direction. Our expectations is that the machine should reach full capacity utilization in 2025 and as the purchaser has many high-volume co-manufacturing projects lined up. This is the 120-kilowatt machine, and it's possible that we could see another large-scale order from that same partner within the next 12 months based on their current pipeline.
Now over the past 3 years, EnWave has sold between 4 and 6 large-scale REV machines per year. With the opportunities identified and sales efforts invested year-to-date, we believe we are well positioned to yield a similar performance in fiscal year 2024.
Events of fiscal Q2 have confirmed for us that the market interest for REV technology is strong and that sales opportunities are therefore robust. It also suggests to me that there may be an opportunity to invest in and potentially expand our internal sales structure to tighten sales cycles and potentially increase EnWave's annual large machine sales cadence from 4 to 6 as it has been historically to 8 to 10 machines.
While more assessment work is required, we've identified certain international markets where we may be able to expedite sales opportunities with strategic end-market hires. I will share more details on the results of our assessment and our growth plans in the coming months.
However, there's no question that now is the time to drive growth and having a more robust sales structure in place should help improve EnWave's future performance. Our technology is advanced, the commercial success of many of our royalty partners is evident and our pipeline of blue-chip prospects is growing.
I'll now ask Dylan to summarize EnWave's detailed quarterly financial performance.
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 and 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 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, 2023.
Revenues for Q2 were $663,000 compared to $4.64 million in Q2 2023, a decrease of $3.97 million or 86%. The decrease was primarily related to fewer machine sales and machines and fabrication during the period and 2 machine flips in the comparative period. The decrease in revenue was partially offset by third-party royalty revenue, which was $414,000 in Q2 2024 compared to $277,000 in Q2 2023, an increase of $137,000 or 49%.
Royalties grew due to increased partner product sales and production. And 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 2024 was negative 25% compared to 49% in Q2 2023. The decrease in margin was a result of no new machine sales and fewer machines and fabrication to absorb fixed overhead costs and 2 strategic machine redeployments in the comparative period.
SG&A expenses, including R&D, were $1.39 million for Q2 2024, which was consistent with the comparable period in the prior year. As Brent mentioned, the company continues to make concerted efforts to manage its discretionary spending.
Adjusted EBITDA is a non-IFRS financial measure, so please refer to our MD&A for a reconciliation from GAAP net income to adjusted EBITDA. The company reported an adjusted EBITDA loss of $1.27 million for Q2 2024 compared to an adjusted EBITDA profit of $1.15 million for Q2 2023, a decrease of $2.42 million. The decrease in adjusted EBITDA was primarily related to no new machine sales and fewer machines and fabrication during the period and the 2 strategic redeployments for the comparative period.
We finished the quarter with cash, cash equivalents of $3.16 million and a net working capital surplus of $6.31 million as of March 31. Our balance sheet remains debt free.
Thank you, Dylan. As I mentioned earlier, there was a lot of positive groundwork and sales efforts completed in fiscal Q2 that are not reflected in today's numbers.
However, Q2 has positioned EnWave for materially better results in the back half of the year. Additionally, we have identified opportunities to expand our sales structure, as mentioned, and increase our sales cadence in the coming quarters.
I'd now like to open up the call for your questions. Operator, please provide the appropriate instructions.
[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 ir@enwave.net. [Operator Instructions]
Our first questions come from the line of Bart Goemaere with BeursTips.
This is Bart Goemaere from BeursTips in Belgium. Congratulations brands with the recent machines. Always feels good to see that the new orders are coming in. And I have some questions as to the MD&A that was stated in the machine fabrication and installation pipeline. You see that multiple listings waiting for installation in the cannabis industry, especially in the United States. Could you shed some light on when do you think those machines are going to be installed?
Sure, Bart. So going from that list of different partners that have machines on hold for commissioning, we recently completed the 120-kilowatt commissioning at Bridgford Foods, which was the machine that was funded by the U.S. Army that is now commercially running not only for the development and future consistent production of cheesecake components for military rations, but it's also now being engaged for some line trial work and potential co-manufacturing from other businesses that we've engaged with, which should, therefore, drive royalty growth over the next 12 months.
The 120-kilowatt that was purchased as a second unit by a U.S. cannabis partner has yet to be installed, and this is tied to their completion of a facility which it was tabbed for. So the determination of where that machine goes at this point is still TBD, and we are waiting for them to provide some further instructions.
Some of the 10-kilowatt units that are still on the commissioning list to be installed in actually Australia for, again, cannabis companies, one of which we just recently got instructions on timing for completion of the install this year. And the other one is undetermined. As you can imagine, some of these companies are struggling financially. I believe I've covered up the main ones, but if there's any specific machine, you'd like more information, and we're happy to provide context.
Okay. And secondly, do you still need to receive money from, let's say, the sale of the machinery and other goods of NutraDried? Or do you still need money from the U.S. government?
So in terms of outstanding money sold from Creations on that repatriated 100-kilowatt machine, there's about USD 500,000 outstanding. And then the second part in terms of expected IRS checks, there's still, call it another $0.5 million, USD 700,000 that is outstanding that we have not received, and we have not recognized for financial reporting purposes until we receive a confirmation directly from the IRS that that's coming.
It looks like Bart did drop out. So I'm going to pass the call back over to Brent Charleton, CEO, to answer any questions submitted via the webcast and for closing remarks.
There's one question that's been submitted via the webcast, and it was a question about buying back shares. Currently, we are not employing a buyback program. We haven't executed any buybacks. So all of the buying right now is through a third party, but we maintain our right to utilize the plan that's been put in place at an appropriate time when we see fit.
And with that, I'll thank everybody for joining us for today's conference call. Again, we're available post call to answer any questions that you may have either via e-mail or telephone call. At this time, you may now disconnect.