Enwave Corp

XTSX:ENW

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. Welcome to EnWave Corporation's Q3 2024 Earnings Conference Call. My name is Kevin, and I'll 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] The conference is being recorded.

[Operator Instructions] Finally, I'd 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'd like to turn the call over to EnWave's CEO, Mr. Brent Charleton. Sir, please proceed.

[Brent Charleton, executive]

Thanks to everyone who have joined us today for EnWave's quarterly conference call. Today, we will discuss our Q3 performance and provide a business outlook for the rest of fiscal 2024 and beyond.

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 third fiscal quarter 2024 delivered a much stronger performance than the previous 2, and I expect that Q4 performance should build off of this positive momentum. In Q3, we generated the highest quarterly base royalties ever at $425,000, we reported an adjusted EBITDA profit of $85,000, only the second time in the past 8 quarters, and recognized $2.6 million in quarterly revenue, up $136,000 year-over-year.

Further, our gross margin significantly rebounded from last quarter, improving to 44% due to multiple new large-scale REV machine orders combined with our royalty growth.

Just prior to our Q2 conference call last quarter, we announced 2 material REV equipment sales in Q3, the first being a new 120-kilowatt purchase order from an existing royalty partner to support their needs for increased manufacturing capacity tied to opportunities with several major consumer packaged goods brands. And the second, the sale of the repatriated 100-kilowatt machinery from NutraDried was sold to BranchOut Foods.

During the recent quarter, we also signed a technology evaluation and license option agreement with a North American food company led by a famous chef with Michelin Stars. Now this project continues to advance with several intriguing commercial products under development.

We also signed 2 new commercial licenses, 1 with Bounty Farms in the Philippines, who also purchased a 10-kilowatt REV machine. Bounty has been focused primarily on REV dried meat products, but is also advancing several specific fruit and vegetable items as well. The second license sign is with a current long-standing royalty partner, which allowed them to secure the right to produce several tropical fruits in Central America. EnWave will receive a 6-figure annual fee to secure these rights until the royalty partner elects to purchase additional large-scale REV machinery for use in that region.

Subsequent to the quarter, we negotiated to buy back 1 of the 2 120-kilowatt machines from a multistate cannabis operator given their facility intended to house this machine was never completed. And we had a royalty partner who immediately needed additional REV drying capacity. So the multistate cannabis operator will intend to continue using the installed 120-kilowatt machine for ongoing cannabis production, and we are now able to expedite the fulfillment of the equipment purchase agreement with BranchOut Foods, which was previously announced earlier in 2024, and the machine is expected to be delivered by September or October of this year.

This series of transactions is expected to generate a healthy margin for EnWave, which will be reflected in next quarter's statements.

REVworx, our toll manufacturing service, was very busy throughout Q3 and now into Q4. We've been producing Brussels Sprouts for BranchOut Foods, and we'll also begin the production of cherry tomatoes in September. We also were able to complete a line trial for Yamachan Ramen, another one of our royalty partners, who is focused on the production of shelf-stable, high-quality ramen noodles, and that trial is deemed successful with additional commercial runs being planned for Q4.

Looking forward now, Q4 should be another solid quarter, and we are very encouraged by the information shared with us by several of our larger blue chip royalty partners regarding their future volume forecasts for products that they've already launched to market. We believe there will be the need for many new large-scale REV machines in the coming 12 months to satisfy their projected throughput needs. And additionally, our pipeline of new potential licenses is strong and is set to get even stronger as we strengthen our sales infrastructure to optimize our ability to drive new business and grow.

Last month, we hired a new Vice President, Global Sales and Business Development, Mrs. Danna Dunnage. Danna joins EnWave with a wealth of executive experience, with over 25 years of demonstrated success in sales and strategy roles in the food service, distribution, hospitality and SaaS industries. She previously worked for Gordon Food Service, which is the largest broad-line food distribution company in North America. She worked for more than a decade in sales for GFS before being promoted to President of the British Columbia division, and was responsible for annual revenues of over $1 billion and 900-plus employees, or in other words, she is a proven business builder, and I very much look forward to partnering with her as we build EnWave. Danna is now leading the recruitment of 2 additional sales managers that will be domiciled in Europe and Southeast Asia, respectively, both key global markets for us.

Concurrent with our sales team build-out, we've leveled up our international trade show attendance. We recently attended IFT in Chicago, and FOOMA in Japan, and we will have representation at the upcoming Anuga FoodTec India, SupplySide West in Las Vegas, The FoodTech Summit in Mexico and Gulfood Manufacturing in Dubai, all within the next 3 months. Our team is energized and ready to hit the road.

I've been asked by several investors for an update regarding our joint partnership with GEA Lyophil, a leading global pharmaceutical equipment company, and more generally an update on potential for us in the pharma industry. GEA has been diligent in attracting most of the top global pharma companies to explore REV technology at their R&D center in Germany through the machinery they purchased from us a few years back. This work has resulted in several requests for quotes on pilot-scale REV machinery directly to EnWave, and these quotes are active and could result in sales in fiscal year 2025.

Additionally, updates we're sharing includes the continued success of Dole and the Good Crunch snack line. We're optimistic regarding growth for this relationship in fiscal '25 given that they will likely need increased manufacturing capacity. We've also seen good royalty growth for our MicroDried, [ GEA Ly ], our unnamed Canadian cannabis partner, and several other royalty partners with 10-kilowatt machinery, including Alpina Dairy of Columbia and Dairy Concepts of Ireland, among others.

We're also actively working or continue to work with U.S. Army and now the U.S. Navy to test and develop new military ration inclusions, both directly and through some of our royalty partners who can deliver these quickly. Cheesecake was the first accepted item, but will likely not be the last.

And with my summarized update complete, I'll now ask Dylan to summarize EnWave's detailed quarterly financial performance.

[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 Q3 ended June 30, 2023.

Revenues for Q3 were $2.6 million compared to $2.5 million in Q3 2023, an increase of $136,000 or 5%. The increase was primarily driven by the sale of the repatriated 100-kilowatt NutraDried machine to BranchOut Foods and increased royalties during the period.

Third-party royalty revenue was $425,000 in Q3 2024 compared to $394,000 in Q3 2023, an increase of $31,000 or 8%.

Royalties for the 9 months ended June 30, 2024, were $1.3 million compared to $1.1 million for the 9 months ended June 30, 2023, an increase of $234,000 or 22%. Royalties grew due to increased partner product sales and larger production volumes.

In July 2024, EnWave signed a new commercial license with an existing royalty partner who sells a broad portfolio of fruit and vegetable products globally. The license grants the royalty partner with the rights to use REV technology in an unspecified Central American country for production of several tropical fruit products. In exchange for the rights granted in the license, this royalty partner will pay EnWave a 6-figure annual salary -- fee. And we believe this fee, in conjunction with forecasted base royalties for Q4, will result in approximately $2 million in total royalties for fiscal year 2024, potentially an increase of $535,000 or 37% compared to fiscal 2023.

And as our royalty partners grow their businesses and increased capacity utilization of installed REV equipment, further REV installations will follow from new sales contracts and material royalty growth should occur in the coming quarters.

Gross margin for the company in Q3 2024 was 44% compared to 29% in Q3 2023. As Brent has previously noted, the increase in margin was a result of the higher margin resale of the 100-kilowatt machine to BranchOut and increased royalties.

SG&A expenses, including R&D, were $1.4 million for Q3 2024 compared to $1.2 million for Q3 2023, an increase of $178,000 or 15%. The increase is primarily related to increased personnel costs, legal fees and increased sales efforts, including more frequent attendance at international trade shows. The company intends to make further investments in sales and marketing activities in the coming quarters to drive sales growth.

Adjusted EBITDA is a non-IFRS financial measures, so please refer to our MD&A for the reconciliation from GAAP net income to adjusted EBITDA.

The company reported adjusted EBITDA of $85,000 for Q3 2024 compared to adjusted EBITDA loss of $192,000 for Q3 2022 (sic) [ 2023 ], an increase of $277,000. The increase in adjusted EBITDA was primarily driven by strong margin as a result of the sale of repatriated 100-kilowatt machine from NutraDried and increased royalties during the period.

We finished Q3 2024 with cash and cash equivalents of $3.6 million and a net working capital surplus of $6.5 million as of June 30. Our balance sheet is debt free, and we expect our balance sheet to strengthen during the coming quarter.

[Brent Charleton, executive]

Thanks very much, Dylan. Now the realistic pipeline for multiple new large-scale REV machine sales in the next 12 months is very encouraging to us. Our effort to build a better, stronger global sales team is underway. We have the resources to support this growth, and our entire executive group is enthusiastic about our future after collectively navigating more challenging times in the past few quarters, which now should be behind us.

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

[Operator]

[Operator Instructions] Our first question is coming from Bart Goemaere from BeursTips.

[Bart Goemaere, analyst]

This is Bart Goemaere from BeursTips in Belgium. Congratulations on the results and the new hires. I have a few questions. Can you give me number of the total installed capacity with your clients in kilowatts? And what the average utilization rate of these machines is?

[Brent Charleton, executive]

So right now, we have 3 active [indiscernible] with 10 kilowatts placed at foreign facilities for product development and potential commercialization. Now where we've had an uptick in collaboration with new potential adoptees of REV technology in our pipeline is directly at our innovation center. So in Vancouver, we have an extensive facility, which not only allows folks to come and feel and touch the technology at both pilot scale, lab scale and full commercial scale, but they can work very closely with our food science team to accelerate the product development. So most folks now are deciding to do that, come and work with us for a few weeks and then employ us to continue that product development remotely rather than having to bringing a machine in-house for that evaluation period. And sorry, the follow-up question was?

[Bart Goemaere, analyst]

Well, in fact, I think you misunderstood my question. The question was, what is the total installed capacity with your existing client base? And what is the average utilization rate of these machines in your client base?

[Dylan Murray, executive]

Bart, yes, I don't have total installed REV capacity. We disclose that figure as part of the year-end statements, which we believe is about 2,800 kilowatts as at September 30 and with the new installations that have happened each quarter. So a range of installed capacity would be north of that figure. And then in terms of average capacity utilization, I don't have that figure readily available, too, but there's -- I'd say, Brent can add more commentary on some of these larger conglomerates that are getting close to maxing out their capacity and then lead to large-scale machine orders, but by and large, we're probably between 50% and 100% of existing capacity.

[Brent Charleton, executive]

Yes. And I'll add on to your question or the response there, Dylan. Like Dole, for instance, is close to 100% capacity utilization on their first large-scale machine, as is [ GEA Ly ], which we mentioned in the conference call in Canada [ reduced ] snack production, whereas a company like Orto Al Sole in Italy is working towards higher utilization as they just secured some material and new purchase orders through their distribution network. So it does vary from partner to partner. As Dylan alluded to in our corporate presentation, we do provide a chart with increases in installed kilowatt capacity. And as more come online, we'll continue to update that slide so that investors can track how many machines are installed, and we'll continue to address the royalty growth on each of these conference calls.

[Bart Goemaere, analyst]

Okay. And how many machines are under construction at the end of Q3?

[Brent Charleton, executive]

So as of the end of Q3 right now, we're working to deliver, as aforementioned, the 2 machines, 120- and 100-kilowatt to BranchOut, and there was some subtle change that we needed to be made on those units. And then, of course, building a third machine from scratch, which will be underway, which we previously announced 120-kilowatt sold to an unnamed current royalty partner to support some of their larger consumer packaged good demand for them to be a co-manufacturer. So those are the 3 machines underway right now. 10 kilowatts, we always have in inventory to readily deploy, so we're not building any new ones in that model at this point. And then we'll work towards, again, closing some of these new pharmaceutical pilot-scale opportunities as well as receiving the purchase orders to increase manufacturing capacity from some of the brands that have already given us those volume forecast and so we know what they need for 2025 and 2026.

[Bart Goemaere, analyst]

Okay. And one last question. You gave a target royalty rate for this fiscal year. Can you give us an impression or an ID or a range what the targeted royalty rate for next year is?

[Brent Charleton, executive]

I think it would be foolhardy to provide guidance for that a year out given that we don't know when exactly some of these new purchase orders will be received. As we've experienced in times pass, even if we can build a new machine within 6 months for delivery, the facilities themselves are not already -- always ready to accept those machines. And so in the perfect world, okay, after purchase order, we deliver them after 6 months and then we can incorporate a ramp-up period for certain product development. Or if a product is already in market, and it's just the manufacturing capacity increase, then, of course, we'll get more aggressive with our assumptions for royalty growth. But at this time, guidance for this fiscal year is what we're providing, and then we'll reevaluate after next quarter.

[Operator]

There are no further audio questions. I'm going to turn the floor back over to Brent for any further questions or closing remarks.

[Brent Charleton, executive]

There's one web submitted question, and the first was about medical cannabis research, and how we handle that in the U.S. and Canada now? So collaboration, close collaboration with our current royalty partners is integral for continued process protocol improvement, and we've done so in both countries, and we'll continue to do so in Europe with some of our newer partners as well as in Australia and New Zealand, and that was the follow-up question.

What are our plans to expand our network in other countries for the utilization of this technology in the cannabis space? And so we're open for business. Absolutely, we will partner with any cannabis companies that are operating in a jurisdiction where it's legal to do so.

That being said, and it's no surprise to anyone on the call, cannabis industry is still in a stage of consolidation and cost reduction. So the number of leads that we have in our pipeline, I think would be fair to say, is dominated by large food opportunities at this point, somewhere in the range of like 90% being food opportunities versus 10% being pharmaceutical and cannabis.

And seeing no other submitted questions, I'd like to thank everybody for joining us this morning for EnWave's Q3 conference call. You may disconnect at this time.

[Operator]

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines, and have a wonderful day. We thank you for your participation today.