Enwave Corp

XTSX:ENW

Earnings Call Transcript 2020-Q4

[Operator]

Good morning. Welcome to EnWave Corporation's Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. My name is Rob, 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; CFO, Dan Henriques; and Executive Chairman, John Budreski. [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, CEO, President & Director]

Thank you, and good morning to everyone. Before proceeding, I would like to make everybody aware that the information that we're about to present contain some forward-looking information. It is based on management's expectations, estimates and projections. These 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 receiving this information. Also, all amounts will be in Canadian dollars, unless otherwise noted. This is the second year that our company has held an annual conference call to provide a more comprehensive update about our business. We sincerely appreciate our stockholders' past and continued support as we continue to pursue sustainable profitability in both of our business units. In this call, we will refer to our patented REV vacuum-microwave technology business unit as EnWave and our Moon Cheese consumer snack product business as NutraDried. Fiscal 2020 was extremely challenging for both business units, but we engaged these challenges head on, made prudent operational decisions, refined our strategies and demonstrated that we could operate successfully in a leaner fashion. In other words, we did more with less. Our efforts are materializing. We've begun to perform better in Q1 2021 with improving market conditions and are targeting significant improvements in all areas of our business going forward. In regards to EnWave, specifically, the global pandemic led to a significant macroeconomic pullback, which resulted in our pipeline of expected large-scale REV machinery purchase orders to shrink through the year. We had several purchase orders targeted for the spring that were delayed indefinitely due to the uncertainty. Given the bleak outlook in March, we quickly acted to significantly reduce expenses, approximately a 37% reduction, while maintaining EnWave's nimbleness to rebound and respond when the business climate improved. A noticeable improvement didn't begin until September, at which point several REV machine purchase orders that were put on hold began to firm up. Since September, the sales activity in EnWave's business has increased substantially, and our sales pipeline is far more robust than it was in the summer. We essentially had our hands tied by COVID-19 for 8 months of the fiscal year. Travel restrictions reduced our ability to proactively drive business in person and challenged our international commissioning capabilities. To combat the new restrictions, we enhanced and expanded our virtual marketing tools and international sales rep and referral network. We developed installation programs to remotely activate 10-kilowatt machines and started REVworx, a toll manufacturing service that will further diversify our revenue streams and boost the commercialization of REV-dried products. We are confident that REVworx will lead to more REV machines being sold and royalties generated. Despite the challenging circumstances, EnWave's REV technology business generated the second-highest historical annual revenue, $9.9 million or $11.6 million when you include the NutraDried royalty, the highest gross profit in the history of the business unit, and increased our gross margin by 24 percentage points. Additionally, we successfully signed 10 new commercial royalty-bearing licenses, one more than the year prior, and a 24% increase in licenses overall; 6 new technology evaluation license option agreements; and sold 11 new 10-kilowatt machines. The most impactful discrepancy between our fiscal 2020 performance versus our targets was the delay in large-scale REV machine orders, which are now beginning to be realized in Q1 2021, with 2 already announced. These accomplishments contributed to EnWave's current consolidated cash position, which, today, is just over $18 million, which allows us to fund the buildout of REVworx, estimated cost around $1.5 million; offer equipment financing to select partners for the deployment of 10-kilowatt REV machinery; and invest in additional growth opportunities that fit with our businesses' growth plans. One example of our pivoting in challenging times was the establishment of global network of qualified sales representatives and referral partners. This action improved the efficiency of our sales team by leveraging external resources and reduces our dependence on international travel. This network has started to work for us, including helping us secure 2 machine orders this year with Calbee, Japan's largest snack food company. This has not been a small matter. We have successfully signed sales representation and referral agreements with third parties in Japan, Turkey, Scandinavia, Australia, Switzerland, Canada, the United States, Brazil, the UAE, Thailand, Portugal and South Africa. We regularly check in with each company to provide them with translated marketing collateral to support their efforts. They each are required to submit summary reports of their efforts, and each have performance requirements tied to REV purchase orders. This strategy should keep our S&M overhead expenses flat while providing upside to drive more business in 2021 and beyond. We learned quickly when the pandemic started that we cannot address the global market with a sales force located just in Vancouver. And with an expanding sales rep and referral network globally, we're materially extending our reach. At the end of the summer, we announced that we'd be starting a new toll manufacturing operation, it's branded as REVworx. REVworx will be used as a tool to encourage more companies to bring REV-dried products to market, allowing licensee prospects to test market products at scale, avoid upfront sizable CapEx and focus on product success. There are currently no adequate co-manufacturers or tolling operations that possess meaningful REV processing capacity in North America. REVworx will fill this gap. The targeted start-up date is March 2021, and thus far, we are on budget and on time as per our plan. We've had a great amount of interest in this service offering from potential customers, and we expect to confirm our first customers prior to start-up. EnWave's performance in fiscal 2020 was also hindered by the material downturn in the Canadian cannabis industry. Our REV machinery sales in fiscal 2019 were dominated by cannabis royalty partners, and unfortunately, the projected domestic market failed to materialize, which led to many infrastructure projects being placed on hold or terminated, as well as significant belt-tightening around CapEx decisions. Further, the use of REV technology at scale for the dehydration of cannabis was unproven until the late summer of 2020 when we completed the commissioning of the 60-kilowatt REV machine at The Green Organic Dutchman's facility in Ontario. As the cannabis market contracted, it became more difficult to pitch a theoretical value proposition, which it was before the TGOD install. We are far better positioned to sell REV equipment into the legal cannabis industry today than we were even 3 months ago with the TGOD commissioning. High terpene content is a critical selling feature of premium products in the cannabis industry. And prior to the development of our Terpene Max process and its implementation on a commercial scale operating line, we did not have quantitative proof that REV technology preserves higher terpene levels than the industry standard of rack or room drying. We have it now. The recent announced confirmation that we have third-party certificates of analysis showing that Terpene Max can retain at least 10% more terpenes than room or rack drying is a major confirmation of our value proposition to the sector. REV technology is now proven to retain THC, CBD and total terpene levels that are, in many cases, better than the incumbents and, at a minimum, equal. Moving forward, we intend to aggressively pursue legal cannabis opportunities in the U.S. and Canadian markets as well as international jurisdictions. We needed to equip ourselves with the right weaponry to improve our sales of REV into the growing legal cannabis industry. We're now equipped. Overall, EnWave weathered the storm in 2020 and is positioned well for growth. Our strategic priorities for 2021 include: to develop our existing royalty partners' products to grow or the reoccurring royalty revenue streams; to capitalize on the global dairy industry with turnkey solutions for cheese snacks; to attack the alternative protein space by forming strategic partnerships and taking the lead on innovative product development; leverage the cannabis processing data we now have to revitalize commercial momentum; and increase our global reach through sales representation agreements and referral partners. We've had great momentum built in Q1 2021, with the sale of 2 large-scale machines and 4 10-kilowatt orders, and are bullish regarding future REV machine sales, given our robust pipeline of engaged leads. Now on to NutraDried. When it became evident that the pandemic was frustrating the ability to secure meetings with new buyers to expand the number of distribution points from Moon Cheese in 2020, management cut back planned production and lowered marketing spend. We were expecting NutraDried to gain meaningful new grocery and c-store distribution in 2020 to diversify away from Costco, but this did not happen quite as planned. When the pandemic hit, our sales team couldn't secure meetings or get commitments as a new product, and we missed on that target. This, combined with lower overall velocities and targeted rotations in Costco not being realized at the level anticipated, resulted in a glut of inventory. NutraDried pivoted and successfully secured a buy one, get one free promotion with Costco in Q4, which allowed our operating subsidiary to convert dried cheese back into cash. This welcome liquidity provides some runway for the beefed-up sales and marketing team to gain the new distribution that was pushed off in 2020 and execute on their plan to achieve meaningful distribution growth in fiscal 2021. NutraDried accomplished several qualitative improvements in fiscal 2020, including a full brand relaunch, a revamped online presence and sales strategy, the introduction of 3 new flavors of Moon Cheese and the reorganization of their sales function, including the addition of an in-house dedicated sales group and marketing team and a refinement of their broker network. The foundation for future success continued to be built during tough times as NutraDried doubled their online sales, added 322 new retail customers, added over 37,000 new total distribution points, which is the number of SKUs per store multiplied by the number of stores. Some of the notable wins include new 2-ounce distribution at multiple Albertsons, Safeway, Ingles, Lowe's, Hy-Vee, MDI locations; as well as big 1-ounce wins at Albertsons, Safeway enterprise-wide, 650 target stores, Rite Aid, CVS, Wawa, Maverik and Plaid Pantry, a leading convenience store chain. Moving forward into fiscal 2021, NutraDried is focused on growth drivers for top and bottom line improvement, including increasing the product velocities by making improvements to the core product offerings, drive grocery distribution for the 2- and 1-ounce Moon Cheese and the new Protein Blitz Mix launching in Q2, which is a mix of nuts and cheese. This is a clear opportunity for growth. With us currently having less than 25% distribution in U.S. grocery retail, this is a major priority, with 14,000 new stores targeted this upcoming year. They hope to derive more profitability from club stores via every day innovation and deliver regular and more consistent rotations by offering new product formats and exclusive flavors. Another main point is they're going to leverage new products online with key customers. These new product launchings via Amazon and the NutraDried web store will be used as testing grounds to identify long-term winners for brick-and-mortar sales distribution. And lastly, lowering costs and regaining financial leverage. We firmly believe that NutraDried has legitimate potential to grow significantly in the coming 12 to 24 months, and the strategy developed by our management team is sound. The obstacles thrown in front of us in 2020 by the pandemic are behind us, and we're hoping to get commitments from major retailers for new distribution in fiscal 2021. I'll now pass the baton to Dan, who will summarize our financial performance in Q4 and the 2020 fiscal year.

[Daniel Henriques, CFO & Corporate Secretary]

Thanks, Brent. Good morning, everyone, and thanks for joining us on today's call. We'll take a few moments to review the fiscal 2020 and Q4 2020 results. Please note the figures I'll be going over today can be found in our press release this morning, and all amounts are in Canadian dollars, unless otherwise noted. As highlighted by Brent, fiscal 2020 presented EnWave with many challenges that are reflected in our full year financial results. For the full year, we reported consolidated revenue of $32.8 million, of which $9.9 million came from EnWave's technology business and $22.9 million came from NutraDried's product sales. Revenue at EnWave and NutraDried were each lower by 23%, respectively, when compared to the prior year. The hit to our revenue on both sides is reflective of the challenges that Brent previously mentioned. For Q4 2020, we reported consolidated revenues of $10.7 million, a substantial jump compared to the $5.9 million reported in Q3 2020, but lower than the $16.1 million from Q4 of 2019. EnWave had $1.6 million in revenues and NutraDried had $9.1 million in revenues for the fourth quarter. EnWave's revenues are still heavily influenced by our REV machinery sales, and EnWave sold fewer-than-planned large-scale machines in 2020. Many of our royalty partners delayed capital projects to scale up capacity because of the pandemic and the challenging economic environment, with many wanting to wait until conditions improve to launch new products. EnWave's revenues for Q1/Q2 2020 were $6.7 million compared to $3.2 million for Q3/Q4 2020, with the drop in the second half of the year reflecting the impact of COVID-19 on our equipment sales. Our machinery sales process has historically been high-touch and the pandemic, along with the travel restrictions, tied our hands in many ways. That said, since the end of the fiscal year starting in October, we are extremely encouraged by the improved selling conditions and have announced many new machine orders compared to the challenging April to September 2020 time period. EnWave reported third-party royalties of $835,000 for 2020 compared to $735,000 for 2019, a lift of $100,000 or 14%. Our royalties are a function of the amount of REV-dried products sold by our royalty partners. We start generating royalties once the machine is fully installed and commissioned. And the travel restrictions delayed our ability to start-up several international machines during the fiscal year. Looking forward, we have 3 large-scale machines that have been delivered, with installations underway. Once commissioned, these machines will materially increase our royalty base, in addition to several small-scale 10-kilowatt machines that are being remotely commissioned. We're eager for expansion and growth to our royalty streams in 2021. Turning now to NutraDried. NutraDried's revenues were lower primarily due to lower sales to Costco and Starbucks, 2 major accounts. Our sales to Starbucks were materially impacted by the COVID-19 shutdowns, with nearly all Starbucks locations across the U.S. closing for an extended period of time and then reopening under conditions not conducive to Moon Cheese purchases. Our distribution at Costco has never been permanent, and we depend on regional buyers to bring the product in on rotations, which we gained fewer of in 2020 when compared to 2019. The pandemic also caused many of our retailers to temporarily close or remain open under augmented conditions during the peak lockdowns in April to July. Our plan for NutraDried in fiscal 2020 was to achieve meaningful new distribution in the retail grocery and c-store channels. This plan was delayed due to the pandemic, and we're now actively pursuing growth in these priority channels for 2021. We are also aiming to continue to secure product rotations at Costco, a channel that can provide meaningful volumes, although this can be lumpy and hard to predict. There were several bright spots in the year that I'd like to highlight. Our retail grocery sales, which include the natural channel, grew by 18% year-over-year, and our online sales grew by 100% on Amazon in our website. These channels are strategically important and where we plan to pursue even more meaningful growth in the next 12 to 24 months. Our sales team has shown that once we're able to get in the door to pitch the product, we have a very high hit rate. And with this now, getting -- with us now getting more important buyer meetings scheduled in the fall and winter months, we are awaiting commitments early in the new year. In Q4 2020, we executed a national promotion at Costco on a buy one, get one discount, contributing approximately $5 million to NutraDried's Q4 2020 net revenue. The promotion was at a discount to normal rotational margins and served to liquidate a substantial portion of NutraDried's inventory position and bolster the company's treasury. While we do not plan to do this again, almost absolutely necessary, the result was a net positive for the company given the situation. Our consolidated gross margin for 2020 was 27% compared to 32% for 2019, a decrease of 5 percentage points. The primary driver behind this was lower sales volumes and higher trade spending at NutraDried. Broken out by segment, NutraDried's margin was 25% for fiscal 2020, down from 44% in fiscal 2019. NutraDried's margins for 2020 were downwardly impacted by higher block cheese pricing by approximately 19% relative to 2019, lower production volumes in Q2 through Q4, resulting in lower absorption of our fixed manufacturing costs, and more trade spending in the fourth quarter as part of the buy 1, get 1 promotion at Costco in the U.S. We know NutraDried can deliver much better margins when economies of scale are achieved at our manufacturing plant. Our plan for 2021 has us returning to higher production volumes. And if we achieve our targeted sales growth, we expect our gross margins will be in the high 30s percentage range. EnWave's gross margin profile improved substantially in 2020. We increased gross margin to 29% compared to just 5% in 2019, an improvement of 24 percentage points, not including royalties paid by NutraDried to EnWave. The improved margins were achieved through a deliberate strategy that I would like to highlight to our investors. EnWave's was margin improved due to the implementation of a new pricing strategy in January that increased the price of REV machinery by approximately 15%, paired with significant reductions to our fixed manufacturing costs in the year. Brent mentioned, we set out to cut costs and we're aggressive in seeking to improve margin. In Q2 2020, we reduced our manufacturing headcount by 13 personnel, consolidated our manufacturing operations and subleased 3 warehouse space, eliminated the use of contractors and increased the use of outsourced fabricators. The result was approximately $1 million in overhead savings in Q3 Q4 or $2 million on an annualized basis. We are confident we can deliver growth in our REV machinery sales in 2021, while maintaining this new leaner fabrication capability. Our SG&A expenses for 2020 are reflective of higher SG&A spending in Q1 and Q2, offset by cuts to SG&A expenses made in Q3 and Q4 after implementing cost containment measures. At the end of Q2 2020, and in response to the anticipated negative impacts of COVID-19 on both segments of the business, we implemented a cost containment strategy to preserve liquidity and cut costs in a challenging environment. The steps taken to lower SG&A expenses starting in Q3 included: reducing the use of external legal, investor relations and other professional services; eliminating trade shows and employee travel and replacing them with lower-cost digital tools; cutting back on nonessential marketing spending at NutraDried and related agency's fees; and reducing our employee headcount. The objective was to reduce SG&A expenses to critical functions, while maintaining a fully functional sales team to execute against our growth objectives. The savings generated were realized in our Q3 and Q4 results. With our combined SG&A expenses for Q3/Q4 2020 being $2.1 million lower than Q1/Q2 2020, an annualized reduction rate of $4.2 million or 31%. Looking ahead to 2021, we plan to continue to operate with strict control over our expenses and do not plan to significantly increase our SG&A spending from the Q3/Q4 levels. I'm very encouraged to tell you that we continue to operate at these SG&A levels into Q1 2021, and we believe this level of SG&A spending is sustainable and capable of supporting revenue growth in both sides of the business. The company received $1.6 million of government assistance, reported as other income from stimulus programs, launched in response to the COVID-19 pandemic. EnWave received $658,000 of funds under the Canada Emergency Wage Subsidy program, and NutraDried received $961,000 of funds from the U.S. federal government's Paycheck Protection Program. Our adjusted EBITDA, a non-IFRS financial measure, was a loss of $3.2 million for 2020 to a $3.2 million income for 2019. Please refer to disclosures in our annual MD&A regarding non-IFRS financial measures, including a reconciliation between adjusted EBITDA and net loss. In Q4 2020, our adjusted EBITDA rebounded to positive $20,000. For fiscal 2021, we're expecting NutraDried sales volumes to meaningfully increase and return the subsidiary to cash flow positivity. If that target isn't achieved, we'll be looking at additional cost reduction measures to improve profitability. Now turning to our balance sheet. The cost containment measures implemented by the company in Q3/Q4 were intended to preserve liquidity and maintain a strong balance sheet, which we achieved. We finished the year with $14.7 million in cash on hand and a working capital surplus of $24 million. We used $1.7 million in cash from -- in 2020 to fund our operations, not including increases to working capital. Aside from leases and a small line of credit at NutraDried, our balance sheet is largely debt-free, and we have the appropriate financial resources to execute on our growth strategy headed into fiscal 2021. As of today, our cash position is over $18 million, giving us ample resources to complete the build-out for REVworx, which is budgeted at approximately $1.5 million. With that, I'd like to turn it back to Brent for some closing remarks.

[Brent Charleton, CEO, President & Director]

Thanks, Dan. By making decisive prudent decisions early in the pandemic, we preserved cash, allowing us to adapt our tactics and diversify our commercialization strategy through fiscal 2020, setting the stage for us to accelerate growth and financial performance in fiscal 2021. Recently, we instituted a Normal Course Issuer Bid program to buy back common shares if our continued commercial progress does not adequately manifest in our share price. Since September, both NutraDried and EnWave have experienced material upticks in business opportunities, and we anticipate a very busy year ahead. Our plans for 2021 include meaningful growth at NutraDried. And we'll target material distribution increases in the retail grocery, C-store and online channels, the areas we see to be in the most strategically important. We also plan to continue winning the rotations of Moon Cheese in the club channel as part of our broader channel strategy. Sales growth and EBITDA improvement are imperative key productivity indicators for new strive to achieve. EnWave's targets include closing 5 large-scale REV machines and 12 10-kilowatt machines, as well as securing an initial anchor client for REVworx. We will remain focused on top line growth while prudently managing expenses. And if we achieve our targets, we should generate positive adjusted EBITDA in fiscal 2021. The core mission of EnWave is to build a long-term, diversified portfolio of royalties generated from the commercial success of different REV-dried products selling in multiple geographies around the world. The rate of adoption of REV products and REV technology is accelerating, and we're constantly finding products and opportunities where our technology is superior. We now have a broad commercialization strategy that includes the REVworx toll manufacturing division. The startup of REVworx should accelerate the launch of REV-dried products to market, derisk the adoption of REV technology and ultimately lead to increased machine sales and royalty generation. Our management team is confident that we have deployed the right strategies and tactics to maximize and accelerate the monetization of our market-leading patented drying technology. And with that, I'm going to end my prepared remarks and open the call for your questions. Operator, please provide the appropriate instructions.

[Operator]

[Operator Instructions] And our first question is from the line of Steve Hansen with Raymond James.

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

First one, Brent, is on the REVworx opportunity. A couple, actually, related to that, if I may. Just the first is, you mentioned an anchor client that you want to secure here. Can you just give us a sense for what you're looking for in that anchor client? And what sort of, I guess, quantum of customers you're looking to secure ultimately to fill it up? I'm just trying to get a sense for the split of business you might have or the customer mix you might have in there to start?

[Brent Charleton, CEO, President & Director]

Yes. No problem, Steve. Thanks for the question. So initially, our REVworx tolling facility will house a continuous 60-kilowatt quantaREV unit and 3 10-kilowatt batch units. We define an anchor customer or client as one that would make up at least 25% of capacity utilization on that line. And when we're modeling out REVworx, we're targeting profitability on that business unit in 2022 conservatively.

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

Okay. Great. And is this -- I'm just trying to understand the opportunity for you sort of longer term. It clearly makes a lot of sense in short terms of helping commercialize earlier-state brands or even perhaps some larger-state brands. But what is the goal here? Is it to migrate into a larger sort of toll manufacturing business over time, where you commit additional capital beyond the $1.6 million to $1.8 million initially?

[Brent Charleton, CEO, President & Director]

No. So the ideal scenario would be that REVworx is used as a tool to compel additional companies to become long-term royalty partners of EnWave. And so the pricing is structured to, I would say, entice those who leverage REVworx initially to bring products to market, to take a hard look at bringing manufacturer in-house longer term. What we've encountered in times past is companies will step back because they don't want to deploy not just the $2.5 million for a large-scale REV line, but there's also a lot of investment needed to get their facilities to a point to launch new products to market. And with REVworx, they can avoid that upfront, prove out their hypothetical business case, and then, ultimately, again, invest in their own line to be used internally.

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

Okay. That's helpful. Just one, if I may, on thinking about new products. I think you had mentioned earlier in terms of growing, you'd mentioned a couple of priorities for growth. One was capitalizing on the global dairy industry and sort of a broader statement. You also mentioned attacking the alternative protein space. And just want to maybe describe on what that means to sort of the product set going forward? I'm just trying to understand that in sort of a bit more specific terms.

[Brent Charleton, CEO, President & Director]

Yes, absolutely. So we look at the alternative protein space and how fast that is growing. And through traditional formats that are trying to mimic other fresh, true protein products, right? And so what we've done is we've gone out and engaged with some of several of the market leaders, procured their raw materials, run it through our pilot plant as proof-of-concept and have stimulated some intense dialogue. And we anticipate that some of these companies will enter into formal evaluation agreements in the near term here. And ultimately, we'd love to see our first licensees in the space, in North America in 2021.

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

Okay. Great. I'll just do one more and then I'll jump back in the queue to be respectful. But just wanted to think about the NutraDried opportunity a little more specifically in terms of securing this diversification you've mentioned. Are you guys pretty confident in that diversification for the year? It sounds like you are. But I just wanted to get a sense for what the cadence will be around new announcements to sort of give us some clarity on how that diversification rollout is going in terms of c-store, grocery, et cetera? Or do you expect that for Q1, Q2? Is that the right way to think about it?

[Daniel Henriques, CFO & Corporate Secretary]

Yes, Steve, I'll take this one. It's Dan here. We've had -- during the height of the pandemic, we had challenges getting meetings. NutraDried sales team were out, trying to get indoors as a new product. But as a small company, we had challenges in the summer -- spring/summer months. Over the -- in the early fall and up to today, we've had a number of several very important meetings with large retailers in the U.S., specifically in the retail grocery channel and some in the c-store channel. And so we're awaiting commitments for those distribution points, hopefully, early in the new year. So gating it out by quarter, it will be more heavily weighted towards the second half of the year, with some coming on in Q2, and then Q3, Q4 being more meaningful.

[Brent Charleton, CEO, President & Director]

And just a follow-up on that, Steve. We'll have good clarity on what the second half of the year looks like for NutraDried by the end of January into mid-February. Based on commitments to place product in new distribution points.

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

Okay. Great. That's helpful. Good to see the order traction showing up here with the cost discipline. It's a good combination.

[Operator]

Next question is from the line of Bart Goemaere with BeursTips.

[Bart Goemaere]

Brent and Dan, a question about the cash position. You stated that the cash position was $18 million, more or less, how much cash they still need to come in from the Costco action?

[Daniel Henriques, CFO & Corporate Secretary]

As of today, we've collected all of the cash from the Costco orders related to the BOGO that was shipped in September. We've had some more rotations into Costco in Q1. So as a customer, we always have receivables from Costco. But from the promotion in Q4, the balance of that has been collected, Bart.

[Bart Goemaere]

Okay. And then I have a small question about the termination of the delivery license. Does that also mean that the sublicense has been terminated?

[Brent Charleton, CEO, President & Director]

Yes, Bart. The agreement originally with Tilray was one where we got a proof-of-concept to market in regards to cannabis applications. And the way that it was set up originally with the sublicense rates for Tilray, we made it very clear to the market that we anticipated them to be a net-zero royalty period long term based on our acquisition of additional users of REV in cannabis in Canada. So the upside in terms of that carried interest was always going to be minimal. Unfortunately, internally, from an operations standpoint, Tilray was building out GMP facilities and ordered non-GMP machines and didn't conversate with us on that point before committing capital and us delivering those pieces of kit. So ultimately, the termination of our relationship with them is not a reflection of the viability of our tech in the space. It's more so of a business relationship that turned out to be not very strong.

[Bart Goemaere]

Yes. But it means also that any royalties in Canada directly will go to EnWave now?

[Brent Charleton, CEO, President & Director]

Yes, correct. So TGOD and Aurora, with their 220-kilowatt machines, and any others that sign on will go directly to EnWave without any share of future carried interest. And that's the case across the board in different geographies at this point.

[Operator]

Your next question is from the line of Neil Linsdell with Industrial Alliance.

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

Do you mind going into a little bit more detail about -- on the retail side with your Moon Cheese distribution into the new customers that you're talking about? How much more penetration can you get out of existing clients? Can you upsell that with the new flavors, the new products that you're bringing in? Are there additional distribution points in those retailers, like you're in 50% of the stores, you can go to 100%? Or is it all about new customers signing up?

[Brent Charleton, CEO, President & Director]

Thanks, Neil. The answer to that question would be quite complex, and we can certainly move into a follow-up off-line. But in general, yes, there's a huge amount of opportunity to achieve additional distribution points, which we look at as individual formats being sold in perhaps singular locations. So we mentioned in the summary about Safeway, Albertsons, bringing both 2-ounce and 1-ounce into their ecosystem, where 1-ounce has gotten enterprise-wide distribution, whereas Albertsons, Safeway has only taken about, call it, 30% to 40% for the 2-ounce. So there's obviously ample room for growth there. We've also identified the additional 14,000 locations for different grocery store distribution companies, which can be added to increase sales for movies on a go-forward basis. So short answer, yes, at least 3 or 4 placements in-store where Moon Cheese can be sold. It's about the individual buyers within those different grocery companies and whether or not they'll bring on more than one SKU per store.

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

Okay. And Dan just made a comment about not wanting to repeat something with Costco next year, and that's the liquidation of the inventory. But as far as the Costco relationship, you're continuing to expect rotations among the different divisions?

[Daniel Henriques, CFO & Corporate Secretary]

Yes, Neil.

[Brent Charleton, CEO, President & Director]

Go, Dan.

[Daniel Henriques, CFO & Corporate Secretary]

We're continuing to target rotations at Costco. It's part of our core business strategy. We want to maintain our business at Costco. With that said, Costco, we're dealing with individual buyers and individual regions. So our experience is that it's lumpy and sometimes hard to predict when we're going to get those rotations. And sometimes they pile up at particular times of the year and other, it will go a month or 2 without one. So Costco remains an important customer and an important channel for us. And we're going to continue to diversify our sales outside of Costco by growing in those meaningful retail grocery and c-store points of distribution over the next year. But certainly, Costco remains an important customer that we're targeting continued rotations with.

[Brent Charleton, CEO, President & Director]

Yes. And to add to that, with the pipeline of new products that will be taken to market in terms of different flavor profiles and formats, I mentioned the Protein Blitz Mix. Those are the type of unique new offerings that we will be taking to those, such as Costco and others, sometimes on a semi-exclusive basis, to provide them with some unique offering to their customer base. So we're, again, bullish on prospects for '21. We're hampered by 2020 COVID-related cancellations for meetings, and we think that the management team at NutraDried is set up to have some good success.

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

Okay. And just you touched on lessons learned or ways that you've managed to change the business to deal with COVID and the travel restrictions and such. Are there any of these changes that are going to become more permanent or more ingrained than what you're doing? Or as soon as we get the vaccine and the immunity, you're going to be back full force with the trade shows and everything like that?

[Brent Charleton, CEO, President & Director]

No. We're not going to go back to the way things where. We've learned a lot. And a lot of our practices that we're employing now are here to stay, some of which include the 10-kilowatt remote installations. We don't actually have to send personnel internationally to complete those. We've got the necessary collateral to teach and train our new licensees in that respect. The trade show attendance, we're also going to pare back because we see more realistic opportunities to sign licenses coming from our sales and referral partner network. As well as we've been quite, I think, efficient using the virtual tools that we've developed to engage companies online. So I don't imagine us going from zero to another couple of hundred thousand spend on trade shows in 2021 and beyond.

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

Okay. Good. And just really based on what Steve was asking before about the REVworx, with -- I remember when you started up NutraDried, it was really so you can have a proof-of-concept to show Moon Cheese and what acceptance it could have within the retail environment. Obviously, that's been a ridiculous success. Now if I look at REVworx, the way it's being set up as a toll manufacturer, couldn't that still become a very significant piece of the business, and it kind of eclipsed your initial expectations right now? And secondly, would you be using that to basically take any kind of production overflow in heavy times at -- from NutraDried, say?

[Brent Charleton, CEO, President & Director]

So to answer the first question, we certainly hope it becomes such a success that we end up building out that service offering because there's more companies engaged to get new products to market. We are very much opportunists in terms of different product applications that may be first commercialized using REVworx. We may look at that or these types of launches as new NutraDried opportunities for us to participate. We don't know yet, but there are a few things that we're -- or I'd say, clients that we're targeting to get confirmation before March that are bringing new products to market that are intriguing us. In regards to having capacity overrun for NutraDried, probably not at this point. Because we're using a quantaREV 60-kilowatt versus the nutraREV systems, which are being employed at NutraDried now. That's not to say that a year down the line, we may have a nutraREV system at REVworx. And in that case, certainly, we would use that as capacity overrun for them.

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

Okay. And can you touch on a little -- any kind of additional color on the U.S. market for the cannabis? And you started up a new subsidiary, I think, in October to be able to deal with some of those opportunities?

[Brent Charleton, CEO, President & Director]

Yes. We're actually thrilled with the amount of inbound inquiries about our technology from U.S.-based legal cannabis producers. I would anticipate some good momentum going into Q2 in that space. The recent Moore Act, it was just passed by Congress in the U.S., is encouraging. Our fingers are crossed that the Senate races in Georgia here provides the decision-making power to the Democrats, and then we hope that decriminalization and broader legalization for the cannabis industry comes into effect in the U.S. in late 2021. But bottom line, we've done the due diligence legally and feel more than comfortable selling machines into states that are legal to produce cannabis, and we anticipate that being a core piece of our business development next year.

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

Okay. And just -- I promise, one more question here, maybe just out of left field. You used to have a significant development that you're looking at with pharma companies. Has there been any kind of conversations recently about using your technology for any of the vaccines that might be in development? Or any pickup in the pharma business?

[Daniel Henriques, CFO & Corporate Secretary]

I'll take that one, Neil. So as you're aware, we announced a partnership, a joint development agreement with GEA Lyophil out of Germany, the largest equipment manufacturer to the pharmaceutical industry globally. We announced that in January 2020, and we've made a lot of progress under that agreement with GEA throughout the year. Some of that was -- we took -- there was a little bit of a break in the early months of the pandemic. And then kind of in like the late summer, we started to get a number of new inbound inquiries about our technology and how it applies to the dehydration and shelf-stabilization of vaccines. And so we've been working with GEA on that front, and they're handling inbound inquiries. And they purchased a pilot-scale machine, that's headed over to Germany. We're building it now, and it should be there in the spring of 2021 to use as a demonstration machine, to show pharmaceutical companies what REV technology is capable of doing. So the activity has picked up, and we're advancing under this joint partnership with GEA. And we hope to see pharma be a part of the long-term vision of EnWave as a business.

[Brent Charleton, CEO, President & Director]

Yes, I'll just add as well, Neil, so to finish up, that Merck is active right now. They've been -- our announced partner. They hold an R&D license. They own REV equipment for pharmaceutical, more specifically vaccine dehydration, and that project is very active at the moment.

[Operator]

Our next question comes from the line of [ James Billen ] with [ Albaran ] Asset Management.

[Unknown Analyst]

I'm curious about the progress that you have going on with the U.S. Army with regards to using EnWave technology for rations?

[Brent Charleton, CEO, President & Director]

Yes. Thanks for the question. It's progressing very well, all things considered. So they currently own 2 pieces of pilot-scale REV equipment to develop these shelf-stable rations, primarily targeted at close combat solders. That's gone through their system and gotten the green light from several of their personnel. And now they're looking to engage with a third-party industry partner in the U.S. that would prospectively take additional REV equipment and process these rations that have been approved on a larger scale. That company or industry partner would then sell those components to 1 of, I believe, it's 4 or 5 approved vendors of the total military ration pack, AmeriQual is one, and Warren, like, I believe, is another. So right now, we are in talks and discussing how that ecosystem would look from a licensing perspective. And we also understand that the U.S. Army is pursuing funding to expand their REV capacity. So we're bullish on the longer-term future with the U.S. Armed Forces. It's a matter of timing here, I believe.

[Operator]

The next question is from the line of Steve Hansen with Raymond James.

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

Yes, just one follow-up. Brent, how do you think about the optimal capital position for the company here? The $18 million cash pile is obviously very enviable given the current macro backdrop here and can gives you some good strategic flexibility to pursue things like REVworx, but it's probably also not an optimal position. I know you would like to have a large reserve to deal with your counterparties, larger counterparties. But what is the right capitalization here for the company? It's presumably it's not on kind of cash position like this for the long term?

[Brent Charleton, CEO, President & Director]

To answer your question, I think we're well capitalized at the moment. That's why we're considering the usage of NCIB because we have funds available. And if the valuation of our shares go down to a price where we don't feel that our progress is being necessarily valued, that we'll take advantage of that. So our willingness tells you that we feel comfortable with our cash position as well as investing in the $1.5 million of REVworx. Longer term, it's important that we have some strength on the balance sheet. When prospective licenses are looking at our company, they want to be sure that we're going to continue to be a going concern and have some have ability to grow with their businesses, respectively. So I suppose my short answer to you right now is that we're quite comfortable with our cash position to date. Don't feel like we need to add significantly to that to accomplish what we need to, to grow the business, and we'll be opportunistic when the time comes, if it does, with the NCIB.

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

Maybe just a slight clarification. Just what is that cushion that you need to keep those counterparties comfortable? Is it $10 million, $5 million? I mean, I don't know if you actually have a number, but...

[Brent Charleton, CEO, President & Director]

Yes. No, $10 million would be sufficient, Steve.

[Operator]

Our next question is a follow-up from the line of [ James Billen ] with [ Albaran ] Asset Management.

[Unknown Analyst]

Yes. I have a question about your Normal Course Issuer Bid. Your stock went down to CAD 0.56 at some point during, I think it was the third quarter, and yet you didn't buy any shares. I mean, wouldn't you say that share price at that low would be an opportunistic time to buy back shares?

[Daniel Henriques, CFO & Corporate Secretary]

James, absolutely, I would agree with you on that front. And we -- that was the impetus to implement the Normal Course Issuer Bid. So when the share price dipped to that position, we didn't have the NCIB in place. We implemented it in October. So we've had it for about a little over 2 months. And so in the future, as we see the share price not reflecting the value that's been created in the company and the growth prospects, we will use it in those situations.

[Operator]

At this time, we've reached the end of question-and-answer session. I'll turn the call over to Brent Charleton, CEO, for closing remarks.

[Brent Charleton, CEO, President & Director]

Yes. I'll wrap up quickly. Thanks again to everyone for joining us today for our second annual earnings conference call. And at this time, you may now disconnect. If you have any follow-up questions for Dan, myself or John, please do reach out, again, via our e-mail, [e-mail].

[Operator]

Thank you. This will conclude today's conference. Thank you for your participation, and have a wonderful day.