EnWave Corporation (OTCPK:NWVCF) Q3 2022 Earnings Conference Call August 25, 2022 10:00 AM ET
Company Participants
Brent Charleton – President and Chief Executive Officer
Daniel Henriques – Chief Financial Officer and Chief Operating Officer, NutraDried
Conference Call Participants
Neil Linsdell – iA Capital Markets
Operator
Good morning, and welcome to EnWave Corporation’s Third Quarter Fiscal Year 2022 Earnings Conference Call. My name is Donna, and I will be your operator for today’s call.
Joining us for today’s presentation are the company’s President and CEO, Brent Charleton; and Dan Henriques, EnWave’s CFO and COO of NutraDried. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
Finally, I would like to remind everyone that this call will be made available for replay via the link in the Investor Relations section of the company’s website at www.enwave.net.
Now, I’d like to turn the conference over to EnWave’s CEO, Mr. Brent Charleton. Thank you. Please go ahead.
Brent Charleton
Hello, everyone, who has joined us today for EnWave’s Q3 earnings call. Today, we will summarize our performance in Q3 and provide an overview of what we hope to accomplish in the near-term. Following my summary, Dan will go over our Q3 consolidated financials as well as point out notable metrics for each respective business unit.
The information we’re about to present 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.
On this call like others, we will refer to our proprietary vacuum-microwave technology business unit, which generates revenues primarily from machinery sales, royalties, and toll manufacturing as EnWave and our subsidiary that is selling branded and bulk shelf-stable cheese snack products as NutraDried.
Our business produced mixed results in Q3, inflationary pressure and recessionary fears presented challenges for us like most other companies globally, and NutraDried did not perform well. However, EnWave did yield several encouraging financial metrics including a strong gross margin of 50% and close to breakeven. For year-to-date, EnWave is tracking towards breakeven, while NutraDried has primarily accounted for the cash losses. We aren’t in an anomaly as numerous industries are dealing with headwinds, and we are making further changes to reduce the cash burn in our business.
At EnWave, optimism remains strong in our technology royalty business as our pipeline for new large scale REV machine orders is solid. And our REV works toll manufacturing services several qualified customers lined up for the next fiscal year. We’ve experienced 58% growth year-over-year in third-party royalty revenue plus in just over CAD1.1 million year-to-date. And we will have 2 new large scale machines begin commercial production before calendar year end: one in Peru for BranchOut Snacks; and the other in Italy for our partner, Orto Al Sole.
We currently have 8 active technology evaluation agreements that could evolve into royalty-bearing commercial licenses in the next year. And we’re pursuing repeat machine orders from a list of current royalty partners that are looking to scale from their 10-kilowatt units respectively. Several potential large scale orders were delayed this year due to the cannabis market contracting internationally and the price of dairy inputs reaching abnormal highs.
In Q3, we sold an additional 3 10-kilowatt units, one being GMP, which is about double the value of our standard machinery. And we recently sold a 120-kilowatt machine to Dole in the first few days of Q4. Year-to-date, we sold 6 10-kilowatt units, and 3 120-kilowatt machines and have signed 6 technology evaluation and license option agreements.
We are working towards prospectively winning additional machine orders this fiscal year, most of which are associated with existing royalty partners, who have had initial market success with the launch of the REV-dried food products.
REVworx recently achieved its Safe Quality Food Level 2 Certification, which satisfies a critical requirement for largest prospects to use this service. We’ve hosted several dozen companies that REVworx, and many have moved forward with paid product development line trials, and are considering either using REVworx directly or renting smaller scale REV equipment for use at their own facilities. We expect to announce our first anchor tenants at REVworx later this calendar year. But for now it continues to act as a showroom of sorts for visiting prospects.
We continue to work closely with many of our licensed partners to improve the chances of success, but we are particularly happy with the progress we’ve seen in our projects with Dole, Calby [ph], the U.S. Army, Yamachan noodle, Dairy Concepts Ireland, and Pick-One of Mexico. And hopefully, there’ll be more information to share in the coming months regarding each of these opportunities.
Our projects with PiP International for the drying of premium pea protein products and Wyckoff Farms for the drying of premium hops are in particular interest to us as these projects are exploring 2 new product areas for us, and we believe that the unique drying enabled through our REV machinery can yield superior results to incumbent methods. In fact, the global pea protein market is estimated to be about CAD844 million in value, as of 2021, big markets go after.
We continue to pursue new leads in the cannabis industry, as we know our technology will deliver high quality economical results. In Q3, we sold another 10-kilowatt GMP as I alluded to a European cannabis manufacturer, and we recently announced an evaluation agreement with a major Canadian cannabis cultivator.
That being said, at this fiscal year has progressed, it’s apparent that in all legal jurisdictions internationally, cannabis companies are dealing with business challenges including oversaturation of product and market, which is driving down wholesale pricing and supply chain challenges associated with infrastructure build out. Many cannabis companies are also having challenges securing new forms of capital, as many jurisdictions are in decline.
Cannabis will remain a viable market for EnWave to deploy REV technology into, but the number of qualified potential adoptees has shrunk in the present as many of our leads have shifted their focus to solve the immediate business challenges aforementioned.
NutraDried has not progressed as we wanted. The revenue is not meeting expectations and our margins being pressured through the first 3 quarters by extraordinarily high cheese prices and lower plant utilization. Thankfully, cheese prices have come back from CAD250 a pound less than CAD2 a pound recently and futures indicate they might stay at around this level, which is more in line with historical pricing. Given the cash burn at NutraDried in Q3, we are currently evaluating options to reduce expenses in that business unit. This is essential to pave a sustainable path forward.
In the coming quarters NutraDried aims to expand distribution into large national and regional grocery as well as natural and mass customers. It takes time to get new distribution and the retail environment is challenging for new brands. We aim to leverage the power of Amazon has recently decided to go direct versus through a reseller, and direct consumer distribution its online store.
Moon Cheese Stick is national a Whole Foods currently, and we’ve received award that Walmart will take sticks into 300 stores in the spring of 2023. The performance of NutraDried must improve without delay, and we will continue to monitor its performance on a weekly basis, ultimately make operational decisions that we feel is in the best interest of protecting shareholder value.
With that, Dan will summarize our Q3 financial results in more detail.
Daniel Henriques
Thanks, Brent. Good morning, everyone, and thanks for joining us today. I’ll take some time to review our Q3 2022 financial results. Please note the figures I’ll go over today can be found in our press release from yesterday and in the financial statements and MD&A filed on SEDAR. All amounts, as Brent mentioned, will be referred to in Canadian dollars unless otherwise noted.
I will make reference to adjusted EBITDA, which is a non-IFRS financial measure. So please refer to our non-IFRS financial measure disclosures and a reconciliation to GAAP net income, both in the press release and in the MD&A. Also, please note the comparative period I’ll refer to throughout is the prior year Q3 ended June 30, 2021.
So let’s get started. Consolidated revenues for Q3 were CAD5.5 million compared to CAD7.3 million in Q3 of 2021, a decrease of CAD1.8 million. Our revenue split was 52% Moon Cheese sales for CAD2.8 million and 48% EnWave’s revenue for CAD2.7 million. EnWave’s revenue for machinery sales alone was CAD2.1 million for Q3 compared to CAD3.2 million in the prior year with the reduction being due to fewer large scale machines and fabrication for customers under contracts during the quarter.
Subsequent to Q3, we did confirm one new 120-kilowatt order for Dole. And we have many other large scale opportunities in the sales pipeline that we’re aiming to close in the near-term. EnWave’s royalty revenue for Q3 2022 was CAD301,000, up from just CAD191,000 in Q3 of 2021, representing growth of 58%. We’re very happy with this result. As our royalty partners grow their businesses and increase capacity utilization on their REV equipment alongside new REV installations arising from sales, we hope to continue to further grow this royalty stream over the coming quarters.
The NutraDried segment continues to struggle in Q3. Moon Cheese sales were CAD2.8 million with a drop in sales compared to the prior year sales of CAD3.8 million arising the lower bulk channel sales in the current period paired with soft grocery sales in June. We implemented a price increase in May in an effort to mitigate margin pressure, but we saw many customers stock up right before the price increase, and that effect is carried on from June until now. NutraDried’s sales team continues to pursue new distribution opportunities. However, the Q3 results did not reflect any new growth in our distribution footprint.
Gross margin for Q3 was 26% compared to 36% for Q3 of 2021. The drop in gross margin was primarily due to 3 main factors. In Q3 of 2021, we had that substantial order for bulk cheese sales at NutraDried that’s significantly benefited NutraDried’s margin that business does not repeat in the current year. The cost of block cheese has risen sharply in 2022. And it’s significantly hurt NutraDried’s margins. And our equipment sales in Q3 of 2022 were slightly lower than in Q3 of 2021 and the margin generated from machinery sales is typically better than for NutraDried, so the sales mix in place here.
Our cost of goods at NutraDried continues to be a challenge, with increases – input costs of cheese, supplies, freight and labor, cheese being the largest contributing factor. The NutraDried’s plant also has a large fixed overhead base without top-line revenue growth and sales volumes, resulting margin is narrow.
EnWave’s gross margin for fiscal 2022 year-to-date has remained strong at 50%, the growth from that royalty revenue being a contributing factor. EnWave’s business has the capability of delivering strong margins, only closed large scale machine orders. And we’ve managed our manufacturing costs appropriately despite the challenging economic backdrop.
Adjusted EBITDA is a non-IFRS financial measures so please refer to the MD&A for a reconciliation from GAAP net income to adjusted EBITDA. Adjusted EBITDA was a loss of CAD1 million for Q3 of 2022 compared to positive CAD937,000 for Q3 of 2021, a change of just below CAD2 million. The primary driver for the swing in profitability was the adjusted EBITDA loss generated by NutraDried compared to the positive EBITDA generated in the prior year. The consolidated net loss for Q3 of 2022 was CAD2 million compared to a net income of CAD670,000 for Q3 of 2021.
Now, turning over to the balance sheet. We finished Q3 with cash on hand of CAD6.7 million and a net working capital surplus of CAD12.9 million. Our inventories increased because of additional 10-kilowatt units being fabricated to match the current total pipeline, as well as long lead time parts on large scale machines being purchased. Here under contract within July that will utilize much of these longer lead time parts and allow us to deploy that unit on a tight delivery schedule.
The capital project to build out the REVworx facilities complete and was funded from our existing cash resources. Aside from a small COVID-19 relief loan, and our facility leases, our balance sheet remains largely debt free.
Now, I’ll turn it back to Brent, for some closing remarks.
Brent Charleton
Thank you, Dan. Moving forward, I think it’s important to acknowledge the macroeconomic factors, but there aren’t any excuses to make we need to close more machine sales and sell more dried cheese to better margins. We know this, we understand what needs to be done, and we’ll put our best effort to improve shareholder value moving forward.
I’d now like to open the call for questions. Operator, please provide the appropriate instructions.
Question-and-Answer Session
Operator
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question today is coming from Neil Linsdell of iA Capital Markets. Please go ahead.
Neil Linsdell
Hey, good morning, guys.
Brent Charleton
Hi, Neil.
Neil Linsdell
So can we go through just on some of the major customers on the cheese, and you mentioned Walmart, and just be quicker than I can take note sometimes? So can we go through like Costco Canada, the U.S. Walmart? Where should be expecting as far as lumpiness and you talked about inventory builds? Do you have any idea when those inventory builds will kind of be worked through so we can expect more sales? Or is it still going to be kind of patchy or lumpy?
Brent Charleton
So starting with Costco. Costco is always inherently lumpy. We are working to earn new Costco business, but in Q3, we didn’t have any sales to Costco. There’s some proposals out in front of Costco that that could materialize, probably more likely in fiscal 2023. In terms of other customers, the largest stock up that I mentioned, came through mostly distributors wasn’t so much by retail customers. And it has – put the price increasing to effect in May. And we saw a lot of distributors stock up prior to May, because they have the ability to carry higher inventory levels to buy on deal. And that sort of stock up kind of hurt the subsequent month sales.
But, we think based on the intelligence that we have available to us that we’re through the worst of it, and it could come out, could shape up better into the fall, shouldn’t be a permanent effect. And we do know that there was a lot of buying in May and April to support the inventory levels and as distributors, so it’s not going to last forever, we don’t think.
Neil Linsdell
Okay. And along the lines of, you mentioned Walmart again. So are there any kind of lumpy orders? We should think about coming in fiscal Q4, or more in fiscal Q1? I think you’re kind of indicating and anything we’ve seen, I guess, Whole Foods. What are we looking for as far as timing on some of these rollouts in Kroger as such?
Brent Charleton
So we’ve launched into Kroger, we did that in the spring. So that was in our Q3. And then, in terms of Whole Foods, the stick items launch into Whole Foods, so that was also in Q3. Looking into Q4, it should be – we don’t have a lot of new rollouts. They’re going to launch in Q4. So you can expect it to be largely comparable to Q3 for the most part in terms of our customer base. And then looking into the new year, we have a couple of – we have effective [ph] from Walmart to take sticks into 300 stores. And we have a couple of private label opportunities that we’re going to start to deliver on in fiscal Q1.
Daniel Henriques
There’s a list of additional distributors, Neil that Brad and team are working to secure, but until they’re confirmed, we can’t speak to.
Neil Linsdell
Yeah, of course. And the bulk sales you expect that to rebound or pickup? Or is that really going to be lumpy as well, like shouldn’t expect anything out of it?
Brent Charleton
It’s not going to be particularly lumpy, but it’s going to – it’s taking time to build up. So we have a customer base that are using our product as ingredients. And we’re going to some ingredient type shows and working on building out that channel. We don’t have that that one major customer we had last year doesn’t seem to be continuing relationship. So we’re working to build out new ones.
Neil Linsdell
And then on the REV units, I mean, you’ve given guidance before, obviously, last few quarters, how does it look as far as we’re trying to finish up the fiscal year, which is not too far away, and let them new – with customers such as Dole Worldwide, it sounds like you’re hoping you’re going to be able to make some better announcements soon. But how is – could you give us an update on really some of those key customers, project rollouts? Because I’m thinking about Dole, you’ve got the snacks, but you’ve also got the secondary products to other ingredients. Can you give us more clarity on some of the major things we can look forward to?
Brent Charleton
Sure, Neil. So first, again, state like who’s not here to make excuses, just state the obvious, that the cannabis market in the U.S. is contracting similar to what we saw in Canada. And the dairy prices which are affected NutraDried also affected our international dairy partners that are prospectively looking at scaling up to larger continuous lines. Hence, the push-off in some of those decisions until prices normalize, which they’re going towards, and hopefully we can then convert them in fiscal 2023.
In regards to being the end of the fiscal year forthcoming, we do have some tangible leads on large scale and small scale machines to hopefully confirm within the next month or so here. In regards to the Dole relationships, specifically, obviously, they bought their 120-kilowatt machine to support a launch of their new snack program. There’s a few different areas of opportunity outside of that into potentially in the ingredient division. And along the snack launch, major, major company like Dole, and what we need to see here at EnWave, our marquee royalty partners gaining traction in market with their products, which demands an increase in manufacturing capacity.
And if we think about how we’ve seen our royalty partners grow year-to-date, it’s been quite pragmatic. And I’d say that Dole along with maybe like Calby and a few other dairy companies, or companies are capable of scaling quickly if there is consumer demand. So that’s why the Dole relationship is so very important to us to continue supporting what they’re doing to make sure that we have people on the ground supporting their R&D group as they bring new products to market in the coming quarters here.
Neil Linsdell
Okay. So it sounds like you’re hopeful that you’ve got some stuff running that you’d be able to announce before fiscal year end to hit your guidance?
Brent Charleton
To continue that the pace of closing large deals associated with current royalty partners, who have already had smaller scale machinery product and market that has gained enough market data to say, yes, now it’s time to commit to large scale machinery and make this more material for their own individual businesses.
Neil Linsdell
Okay, great. And you just mentioned the cheese prices. It looks like things it’s hard to tell if we’re looking at you know, further declines in cheese prices or stabilization, but it sounds like for all intensive purposes, you’ve got stabilization. Do you have any kind of higher cost cheese? Is it still going to work its way through in Q4?
Daniel Henriques
Yeah. So on our balance sheet at the end of Q3 is cheese that was bought and manufactured leading up to June. So, that’s the highest peak cheese prices peaked in June. So we’re going to have to work through some higher price cheese in Q4, that’ll work its way through and then the cheese we’re buying today is coming in more reasonable prices. So we see some abatement there and the cheese price issue.
Neil Linsdell
Okay. Sounds good. Okay. Thanks, guys.
Operator
At this point, I will turn the floor back over to management for web-based questions.
Brent Charleton
Thanks. So the first question that I’ll address is from Jamie Kozak of CopyCat Invest. Yeah, you expected announcement for an anchor customer REVworx later this year. Can you describe where you are in the process of signing how meaningful this customer might be? And why this customer wasn’t ready to go upon commissioning?
So to answer the question, line trials are absolutely critical to gain commitment long-term on the continuous production line. It’s one thing to produce a product on our 10-kilowatt units. But it has to be shown that the same quality and consistency of product can be produced in line trials, and that’s what’s been happening over the past month or so, are those line trials with several different prospects.
One of the more likely prospects that we hope to confirm again in the coming months here could make up to one-third of capacity utilization in the plant. In addition to address, one of the other questions I see on the webcast here, is how many companies do you have in line to prospectively become REVworx customers?
Right now, I would say that 8 viable companies, most of the large companies that have the financial wherewithal to engage in the service are going through the line trials throughout this month, again, with the hope of confirming several next quarters.
Next question that we will address is the available cash has become less inclined to private placement in the near future. And so for that, right now, we have ample cash on our balance sheet, and there’s no immediate need to raise though. That being said, we’ve gone through new strides financial performance. And given that EnWave is leaning towards breakeven for the year and NutraDried has lost cash. As I mentioned, we’re going to be undertaking some expense reduction plans in the business and hopefully we can get NutraDried back to break even sooner rather than later on that front.
Second question from the same contributor was already planning to launch yogurt product later this year. It’s still in the pipeline. The product itself, yes, certainly is in the pipeline. But the immediate focus and NutraDried is to lower expenses and get back to breakeven. And following that with available cash resources, wanting new product, new innovation to market. It is risky, of course, always when launching new innovation to market.
Question from [John Schabel] [ph]. When Dole’s 120-kilowatt comes online, do you expect EnWave’s core royalty revenue to be over CAD2 million per year?
The answer to that is no. Not a single 120-kilowatt being installed, right now. As I said, year-to-date, we’re about CAD1.1 million in third-party royalties being collected, which is up year-over-year significantly. For each of our large scale units from experience, can generate anywhere between 100- to 300-grand in royalties per year really depends on the product that’s being produced, and, of course, capacity utilization. So we do need to close additional large scale POs, as well as getting those two machines that I talked about starting up in Peru and Italy going to move towards CAD2 million threshold in the coming quarters.
And the last question here that I’ll address – the webcast is, has there been any change to anticipated additional machinery purchased by the U.S. Army Ration’s client or more specifically, what is the government saying cause for delay of this purchase?
So we’ve been told that the application for funding has been approved to introduce a cheesecake ration into their programming in 2023. And that the funding is should be released sometime this calendar year. Of course, the U.S. government works in their own timelines. And we will wait patiently until hopefully that funding gets released. And we can move forward with more meaningful production and fulsome introductions, the first inclusion REV-dried inclusion into their ration program.
Concurrently, we are working with other industry partners of the U.S. Army to develop different perspective inclusions for the military ration packs, which we’re hopeful could be the next wave or support system to achieve further funding down the line.
And with that, I do not see any other webcast questions that we will be addressing today.
Operator
Thank you. Sir, did you have any closing comments for the audience today?
Brent Charleton
I want to thank those who joined us for our Q3 conference call and encourage those who have questions after the fact that maybe weren’t addressed on this call to reach out to, Dan or I, to field in the coming days. Thanks very much.
Operator
Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines at this time and enjoy the rest of your day.
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