EnWave Corporation

Good morning, and welcome to NWAVE Corporation's fourth quarter fiscal year 2021 earnings conference call. My name is Melissa, and I will be your operator for today's call. Joining us for today's presentation are the company's president and CEO, Brent Charlton, and Dan Enriquez, NWAVE's CFO and COO of Nutri-Dried. 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.nwave.net. Now, I'd like to turn the call over to NWAVE CEO, Mr. Brent Charlton. Please go ahead, sir.

Thank you, and welcome to everyone on the call today. Before I discuss our recent performance in Q4 and our outlook for fiscal 22, I would like to remind everyone that the information we are about to present contains forward-looking information that 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 NWAVE on CDAR when reviewing this information. Also, all amounts discussed will be in Canadian dollars unless otherwise noted. Now, with the important disclaimer complete, let's discuss the material progress that EnWave has made. For the purpose of this conference call, we refer to our patented vacuum microwave technology business unit, inclusive of our licensing, machine sale, and toll manufacturing service we've dubbed RevWorks, as EnWave, and our operating subsidiary that's leveraging radiant energy vacuum, or RevTechnology, for branded and bulk snack products as NutriDryd. Today I'll first provide an overview of Enwave's corporate progress in fiscal year 21, as well as a summary of the progress we have made with Nutri-Dried following the restructuring. I will also cover our plans in the next fiscal year for both business units, and following my update, Dan, Enwave's CFO and COO of Nutri-Dried, will summarize our Q4 consolidated financial performance and discuss several key financial pillars that give us a strong financial foundation for our company. Enwave delivered a strong Q4, and its best ever financial performance in fiscal year 21. Nutri-Dry performed poorly in the first half of fiscal year 21, with the previous management not adjusting the expense structure to align with the size of the business. This precipitated a major restructuring of the business unit this past February, which yielded immediate positive change and has set up Nutri-Dry for a planned return to growth and profitability in fiscal year 22. During fiscal year 21, EnWave signed the most new commercial agreements that we've ever signed in a 12-month period prior, 19 in all, with 14 new royalty-bearing licenses, five technology evaluation license option deals. We also received purchase orders for an additional 540 kilowatts of REV machinery, with four new large-scale sales and 14 10-kilowatt units being sold. Of these sales, four were repeat purchase orders from existing royalty partners, and three were completed by third-party machine resellers within our global network. We've significantly expanded our rep and reseller network and now have a dozen companies representing our technology, helping us fill our sales pipeline with new opportunities. And we've generated its highest-ever annual revenue of $13.9 million, including royalties from New Jersey Drive, and best-ever net profit of $1.2 million. Third-party royalties increased by $100K in fiscal year 21 to $920,000. We expect all of the previously noted 540 kilowatts of new rep machine orders to be installed, generating royalties by Q3 fiscal 22. Our focus continues to be the building of a diversified royalty portfolio through the commercialization of REV, primarily in the food and cannabis industries. And we've signed several notable deals this past year, including two licenses with US-based multi-state operators in the cannabis industry, including one of the largest MSOs in North America. We will have three large-scale REV machines operational early next year in the cannabis market, generating new royalties for us. Our tech is proven at scale for cannabis applications, retaining at least 20% more terpenes and higher level of cannabinoids than room or rack drying. Thus, we believe that REV could become the industry standard for cannabis drying. We have many active opportunities to pursue, but the value to the sector is clearer than ever. We announced a global strategic partnership with Dole Sunshine Company to develop innovative nutrition solutions. We are currently very active working with Dole on several projects to potentially integrate REV technology into its global production system, and I'm hopeful that we will have material updates to share with the market in the near term. Historically, we haven't had the ability to produce material amounts of REV-derived product for prospective royalty partners to test in market. The build-out of our RevWorks toll manufacturing facility will materially reduce this limitation and lower the risk for companies to commercialize new RevDry applications. Our goal is to accelerate the adoption of Rev technology by eventually converting RevWorks clients into royalty partners after helping them prove their respective business cases. Our RevWorks toll manufacturing facility is almost complete. The Rev machines have been put in place. We have purchased a medium-sized air dryer to complement that function. that will be commissioned in January, and we'll be ready for initial commercial production in the next few months. We expect to confirm our first tolling contracts early in the new year. With RevWorks starting up shortly, and our machine sales and licensing business gaining momentum, I am very bullish on NLA's prospects for fiscal year 22. On to Nutri-Dryd. Following a poor first half of fiscal year 21, we have materially reduced the expense structure at Nutri-Dryd. Our new CEO at Nutri-Dryd, Brad Larman, brings a pragmatic approach to deploying resources and is laser focused on achieving profitability. Brad will work closely with Dan and I to optimize future return on investments made that support key initiatives at Nutri-Dried. Overspending was a habit of past management and we've certainly fixed that. Annual expenses at Nutri-Dried have been reduced by 2.6 million and they are not expected to increase until the business scales revenues for its portfolio of snack products. In order to return back to a growth trajectory and profitability, Nutri-Dried needs to dramatically improve its gross margin improve manufacturing utilization to increase contribution margin, and grow retail distribution. We're on it. Recent efforts to turn around the business should generate momentum starting in fiscal Q2 behind recent customer wins, including distribution of two SKUs and 700 additional Walmart locations, new placement in 1,200 Publix locations, a national promotion with Costco Canada in February, confirmed distribution of three SKUs and 1,300 Target stores, and national distribution in 520 Whole Foods market stores beginning in May for our newest innovation, Moon Cheese Crunchy Cheese Sticks, the first 100% cheese stick snack in the market. We're really excited about the launch of these Moon Cheese Crunchy Cheese Sticks and believe this new line has great potential to grow our distribution. Moon Cheese Crunchy Cheese Sticks will be available in five flavors and offer consumers 14 to 15 grams of protein, only 3 grams of carbs, and 1 gram or fewer of sugar per serving. We've received an overwhelmingly positive response from buyers and believe our new crunchy cheese sticks could be a material driver of growth for Nutri-Dried in fiscal 22. These customer wins have Nutri-Dried tracking towards a 4 to 6 million increase in retail growth, with more hopefully on top of that. In Q3, we enjoyed an uptick in bulk sales, which tempered in Q4. We have a pipeline of prospective bulk customers that we are working to confirm, and we believe that Nutri-Dried's bulk business will be a material part of its future business. We're active on several bulk projects that we're aiming to close over the near term. We expect Nutri-Dried to continue its turnaround in fiscal 22, given the launch of Moon Cheese Crunchy Cheese Sticks, confirmed customer wins, and pending decisions from additional distribution opportunities expected in the coming months. Nutri-Dried is targeting a return to positive adjusted EBITDA in fiscal 22. At EnWave, our fiscal year 22 goals include improving our top-line performance by selling 10 large-scale and 15 10-kilowatt rev machines, building a material book of business for RevWorks, and reaching consistent profitability. The relatively quiet Q1 was not indicative of our pipeline, and I expect the majority of purchase decisions to take place during Q2, Q3 of this year. Of the large-scale Rev machines we hope to sell, 70% are targeted to come from existing royalty partners that are communicating a potential need to scale up their manufacturing capacity to meet the market demand for their RevDry products. It should be a very busy year for us. I'll now turn it over to Dan Henriquez, NWave CFO and Newstride COO, to summarize our Q4 financials.

Thanks, Brent. Good morning, everyone, and thanks for joining us on today's call. I will now take some time to review our Q4 2021 financial results. Please read our MD&A for an analysis of the full year 2021 annual results. Note that the figures I'll be going over today can be found in our press release from this morning and in the financial statements and MD&A filed on CDAR. 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 gap net income in our MD&A. Our Q4 financial results reflect the very strong commercialization progress made by Enwave throughout 2021 and the continued turnaround taking place at NutriDrag. The commercialization of REV technology is ramping up, across the food and cannabis verticals, and our sales of machinery and related margins were robust. Amway's technology division achieved positive net income of $1.2 million for the fiscal year, something we're aiming to repeat as we accelerate the commercialization of REV technology. For Q4, we've reported consolidated revenues of $6.9 million relative to $7.3 million in Q3 of 2021 and $10.7 million in Q4 of 2020. Revenues from NWAVE in Q4 were $3.9 million compared to $3.5 million in Q3, with the growth coming from more REV machinery sales paired with growth in our royalties. Our royalties in Q4 were $245,000 compared to $191,000 in Q3, representing growth of 28% quarter-to-quarter. We recently completed the installation of two large-scale machines, and as we continue to deploy REV machinery for commercial use, our royalties should continue to compound. Revenues from NutriDrive in Q4 were $3 million, compared to $3.7 million in Q3. NutriDrive's revenues were lower than in Q3, primarily due to smaller shipments into the newly penetrated bulk channel, which remains an important channel we're aiming to grow. NutriDrive remains focused on growing the bulk and co-manufacturing channels. NutriDrive's revenues in Q4 were lower than the prior year by $6.1 million, because in Q4 of 2020, we had national shipments to Costco under a buy one get one promotion that was critical to reducing excess inventory at risk of expiry. This was not repeated in Q4 2021. Gross margin in Q4 was 34% relative to 36% in Q3, well above the 20% experienced last year in Q4 2020. We believe that while a gross margin of 34% is strong and reflects the value in our business model, it can be further improved with better plant utilization at NatureDrived in the coming quarters. Q4's gross margin benefited from the buyback and resale of a 120 kilowatt machine for a substantial margin. We are aiming to confirm the resale of a second 120 kilowatt machine for a favorable margin in the near term. Nutri-Dry's margin in Q4 still needed further improvement. We've adjusted our cost structure and are focusing our sales efforts on higher margin opportunities and channels. Our objective is to continue to grow the Nutri-Dry margins through additional usage of the installed plant capacity growing the bulk and co-manufacturing revenue streams and expanding distribution points and sales for our branded products. At EnWave, our objective is to maintain a low and variable overhead cost structure and to deliver our machines to the market in a timely fashion. We also aim to grow our margins by increasing the volume of machines and compounding our royalties. Now turning to selling general and administrative expenses. We took significant steps in February to lower our SG&A spending at NutriDrive to properly align its expenses to the size of the business. Our SG&A expenses for Q4, inclusive of R&D, reflect the cost-saving measures implemented during the second half of the fiscal year. In U.S. dollars, we reduced SG&A expenses at NutriDrive by a million in the second half of the fiscal year and for an annual run rate reduction of $2 million U.S. dollars. In Q4 2021, we reported G&A expenses of $1.7 million relative to $1 million in Q3 of 2021, with the increase to G&A arising from NWAVE. The additional $700,000 of G&A expenses in the period are not anticipated to be recurring and primarily relate to legal expenses, insurance premiums, and year-end adjustments to variable compensation. We do not expect G&A expenses to sustain at this level for Q1 and beyond into 2022. In Q4, Our sales and marketing expenses were $996,000 compared to $831,000 in Q3 and $1.2 million for Q4 of 2020. Sales and marketing expenses increased slightly in the period with some more business travel resuming and costs to attend Expo East, a major CPG trade show. We plan to invest in sales and marketing activities to support the growth and the commercialization at both Enwave and Neutrotride, but do not expect to materially increase these costs in the near term. Adjusted EBITDA is a non-IFRS financial measure. So please refer to our MD&A for the reconciliation from gap net income to adjusted EBITDA. Our adjusted EBITDA was a loss of $223,000 for Q4 relative to an income of $937,000 for Q3 and break even for Q4 of 2020. And we've achieved positive adjusted EBITDA in Q4, which was offset by neutralized EBITDA loss. We firmly believe that with our cost structure and business development pipeline that we can reach consistent quarterly positive adjusted EBITDA in 2022. We'll continue to invest where we need to in order to drive revenue growth and we'll closely control spending at both EnWave and NutriDrive. Our primary objective is to achieve consistent profitability across both segments of our business. Our balance sheet remains strong and we have plenty of cash in the appropriate levels of working capital. As at September 30th, our cash position was $11.8 million and we had net working capital of $17.3 million, despite using $1.8 million of cash to buy back stock using the NCIB. Our inventory includes a fully fabricated 120-kilowatt machine that we are working with several prospects to confirm a near-term order for. This should further bolster our treasury. In fiscal year 2021, we generated just over $2 million in cash from operating activities and used $1.9 million to invest in new plant and equipment, mainly for our RevWorks locations. and used $1.8 million to repurchase and cancel shares under the NCIB. Our balance sheet also has $1.1 million of loans receivable on it, which relates to finance arrangements with our royalty partners for the purchase of machinery that is paid back to the company in blended monthly payments. This has allowed us to generate returns of 8% to 10% on the capital deployed to finance these loans. Lastly, in practical terms, our balance sheet remains debt-free except for facility leases, and a small low-interest COVID-19 relief loan received by NutriDrive. During fiscal year 2021, we used $1.8 million in cash to repurchase and cancel 1.7 million common shares under the normal course issuer bid at a weighted average price of $1.04 per share. We recently obtained TSXV approval to renew our NCIB for another annual term. As our business evolves, if we believe that our share price does not appropriately reflect the value of the company, we will activate the NCIB when not in blackout conditions to return value to our stockholders. With that, I'd like to turn it back to Brent for some closing remarks. Thank you, Dan.