EnWave Corporation

Good morning, and welcome to NWAVE Corporation's fourth quarter fiscal year 2022 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 Charlton, and Dylan Murray, NWAVE's recently appointed new CFO. 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 to the investor relations section of the company's website at www.nwave.net. Now we'll turn the call over to NWAVE CEO, Mr. Brent Charlton. Sir, please proceed.

Thank you. And hello to everyone who have joined us today for NWAVE Corporation's Q4 earnings call. Today we will summarize the performance of our two business units, N-Wave and Nutri-Dried, and comment on the outlook of our company through the next few quarters. For those who are new to our quarterly calls, we refer to our proprietary vacuum microwave technology business unit, inclusive of machine sales, royalty generation, and tool manufacturing as N-Wave, while we refer to our wholly owned subsidiary that sells branded and bulk shelf-stable cheese snacks as Nutri-Dried. Following an update on our near-term outlook and fiscal 22 performance, Dylan Murray, our new CFO, will speak to our Q4 consolidated financials, as well as point out notable metrics for both EnWave and Neutrideride. Dylan brings a wealth of experience and expertise, being a CPA for almost 10 years, having broad operational responsibilities and prior roles, and having worked in the cannabis industry. Now, consistent with our past quarterly earnings calls, This information we 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 NWAVE on CDAR when reviewing this information. Also, all amounts discussed will be in Canadian dollars unless otherwise noted. At the beginning of fiscal 22, we expected material performance improvement in both business units. In our N-Wave business, we had several current and prospective royalty partners operating in the international cannabis industry communicate intent to purchase large-scale machinery only to backtrack when it became abundantly clear that the global cannabis market was contracting. Additionally, we had three current royalty partners that intended to scale up their cheese snack manufacturing capacities pull back from large-scale machinery decisions due to global increases in cheese commodity pricing. Once again, we saw that unexpected external economic factors can significantly impact expectations. Now, for Nutri-Dry, its primary challenge was the historically high cheese and freight prices, which compressed its margin profile, even though moon cheese continued to exceed velocity expectations in the alternative snacking channel. Now, despite these challenges faced, NWave's technology business performed well, recording positive adjusted EBITDA in back-to-back fiscal years for the first time ever, and producing an all-time best gross margin of 47% in fiscal 22. We also managed cash prudently, maintaining a strong balance sheet. NWAVE continues to track towards breakeven, while NutriDRIVE has primarily accounted for the cash losses in recent quarters. That being said, I'll provide a more optimistic update on NutriDRIVE's business prospects following a summary of NWAVE's performance and near-term opportunities. In fiscal 22, N-Wave signed 10 new material agreements, either technology evaluation license option agreements or commercial licenses, growing the portfolio of companies committed to rev-drying technology. Throughout the year, we sold four large-scale machines and seven 10-kilowatt units, generating about $11 million in revenue on the machine sales. The most encouraging metric for me is our third-party royalty growth year over year. Now, we enjoyed a 47% increase, growing our royalty portfolio from $919,000 to 1.35 million ex-Nutri-Dried in fiscal 22. Now, given that we have four large-scale machines confirmed to be commissioned in fiscal 23 and several potential new near-term large-scale purchase order opportunities, we expect continued royalty growth for the foreseeable future. We expect our team to complete the commissioning of the Dole 120 kilowatt and the Orto Al Sole 120 kilowatt in Q2 fiscal. The 60-kilowatt installation for our Japanese royalty partner and the second 120-kilowatt installation for a U.S. cannabis partner will likely take place in Q4. And all 10-kilowatt machines purchased in fiscal 22 will be commissioned by the end of Q2. There is ample room for Enwave to deliver stronger financial results in fiscal 23. We have completed the facility build-out at RevWorks and are actively working on several projects that should start up in the next calendar year. Our machine sales pipeline is robust, and there is ample opportunity to grow the number of large-scale rev machine orders. The groundwork completed in fiscal 22 in both of these areas should yield results in the coming months. We obtained SQF certification for RevWorks, critical for export of commercially saleable products with large companies, and completed numerous line trials for prospective toll-drying clients. We also expect several new machine orders in the near term as we expect decisions in the upcoming months from current technology evaluation partners and direct to licensed prospects. Based on our current pipeline, we hope to exceed our machine sales performance from fiscal 22 with the majority of sales likely to come from food manufacturing companies. A few projects of importance that we will be monitoring closely this year include Dole's launch of their Good Crunch fruit and vegetable snacking line, the launch of a meat chip snack in the U.S. by an undisclosed partner, a broader domestic snack launch by our largest Japanese royalty partner, and our Italian partner, Orto Al Sole's European launch of their ultra-premium fruit and vegetable snack line. Now, success in any one of these projects could lead to additional large-scale purchase orders and cement our technology's position as a value-add option for major companies in the snacking space. Complementary to our machine sales and third-party royalty generation, we expect to confirm substantial new RevWorks toll manufacturing contracts in fiscal 23. We estimate that a full capacity utilization, RevWorks could generate the neighborhood of $2.5 million in annual revenue. Our strategy is to use RevWorks as a platform for potential royalty partners to bring new RevDrive products to market, prove their business cases, and eventually invest in their own internal Rev manufacturing capacity. We are currently working with 10 qualified potential RevWorks clients, all of whom, have completed product development, have run trials, and are now negotiating contract terms. Of the 10 prospects, two generate more than a billion in annual revenue, one generates more than $300 million in revenue, and the remaining prospects, less than $100 million in revenue to give you an idea of the size of businesses we're dealing with. Now, while we are delighted with the early trials with RevWork's 60-kilowatt production line, there is a limit on processing capacity to service all 10 prospects in short order. And these operators know that, and they're moving quickly towards claiming their needed capacity. Now, before moving on to Nutri-Dry, I want to acknowledge that our news flow hasn't been steady in the past quarters, and that's not a reflection of the business development activity that's taking place. Confidentiality is highly valued, and many of our partners just don't want to share the details of their plans with the public, and we have to respect that. In Q4, Nutri-Dry made additional expense reductions to further reduce discretionary spending. Until the business begins to generate reliable positive cash flows and work itself through the rest of its higher-priced inventory, the expense structure will be tightly monitored and remain consistent. For the grocery channel, we have active opportunities to win an additional 4,000 new stores of distribution ranging from two to four SKUs at each store. As previously mentioned, Moon Cheese Velocities are doing well in the alternative snack category, which lends itself well to the selling story. Alongside potential new distribution, New Moon Cheese packaging will be hitting shelves in the spring. This new design came at a small cost and now unifies the look of all SKUs in Nutri-Dry's portfolio, including the cheese nut mix called Blitz Mix and our Moon Cheese Stix product line. More impactful to a near-term Nutri-Dry turnaround is the possible confirmation of new large bulk sales to companies looking to use our cheese as a snack mix ingredient. The contribution margin associated with bulk sales is vastly superior to traditional grocery sales And the cumulative size of these fiscal 23 bulk opportunities, if won, would instantly change the fortunes of our operating subsidiary. Another variable that bodes well for Nutri-Dried in fiscal 23 is the stabilizing commodity block tease pricing. Currently, the block pricing has come down to just above $2 from the highs of $2.40 to $2.50 in the May-June timeframe of fiscal 22. Nutri-Dried will need additional production and sales volume to return to profitability. Between the bulk opportunities we're pursuing and new grocery distribution targeted, we have enough new volume opportunities that can get us there, but it will take some time. With that, I'll now ask Dylan to summarize our Q4 financial results in more detail. Thanks, Brent.

Good morning, everyone, and thank you for joining us today. It's a pleasure to address the shareholder base for the first time as the company's new CFO. Today, we'll be taking some time to review our Q4 2022 financial results. 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 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, 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 Q4 ended September 30th, 2021. Consolidated revenues for Q4 were $5 million compared to $6.9 million in Q4 2021, a decrease of $1.9 million. EnWave accounted for 57% and NutriDrived for 43% of total Q4 revenue, respectively. Enway's revenue was $2.8 million for Q4 2022 compared to $3.9 million for Q4 2021, a decrease of $1.1 million. The decrease was due to the timing of revenue recognition on large-scale machine contracts, and in Q4 2021, we had the benefit of recording 100% of a 120-kilowatt machine sale, which was not replicated in the current period. During Q4, Enway confirmed a new 120-kilowatt order with Dole, and signed an equipment purchase agreement with an existing royalty partner, a major Japanese snack company, for a 60-kilowatt machine. A large portion of the associated revenues for these sales will be recognized in fiscal 2023. We have many other large-scale opportunities in the sales pipeline that we're aiming to close over the near term. Enway's royalty revenue for Q4 2022 was 290K, up from 245K in Q4 2021, representing growth of 18%. As our royalty partners grow their businesses and increase capacity utilization on REV equipment alongside new REV installations arising from new sales, we hope to continue to see further royalty growth over the coming quarters. For Nutri-Dried, sales were $2.1 million for the quarter, a decrease of $880K from Q4 2021 sales of $3 million. The decrease in revenue was primarily due to lower bulk and ingredient sales compared to the prior period. Consolidated gross margin for the company in Q4 2022 was 15% compared to 34% in Q4 2021. EnWave generated a Q4 2022 gross margin of 39% while NutriDry generated a negative gross margin of 15% for the period. The consolidated margin compression is a result of two things. In Q4 2021, a fully fabricated large scale machine was resold for one time substantial margin that was not repeated in Q4 2022. And two, Nutri-Dried experienced substantial margin compression in Q4 2022 with higher cheese pricing increasing its cost of goods. Cheese pricing for a 40-pound cheddar block in the Chicago Mercantile Exchange averaged $2 a pound for fiscal 2022 and peaked at around $2.40 in May of 2022. In Q4, cheese prices continued to fluctuate in ranges above the historical average, which compressed margins for the period. When possible, NutriDrive uses four contracts to mitigate the impacts of commodity price fluctuations. SG&A expenses, including R&D, were $2.9 million for Q4 2022 compared to $3.2 million for Q4 2021, a decrease of $234K. We reduced G&A costs as part of a continued focus on managing non-revenue generating spending while increasing the investment into S&M to further development the market for EnWave's proprietary REV technology. Adjusted EBITDA is a non IFRS financial measure, so please refer to our MD&A for the reconciliation from gap to net income to adjusted EBITDA. Adjusted EBITDA was a loss of 1.5 million for Q4 2022 compared to a loss of 223K for Q4 2021, a change of just below 1.3 million. The loss generated by NutriDrive's higher cost of goods was the primary driver of decreased EBITDA for the quarter. The consolidated net loss for Q4 2022 was 2.3 million compared to net income of 1.1 million. for Q4 2021. Turning to our balance sheet, we finished Q4 with cash on hand of 6.2 million and a networking capital surplus of 11.4 million. Inventory increased because of an additional 10 kilowatt units in fabrication to match the current sales pipeline, as well as long lead time parts on large scale machines currently being purchased. Aside from a small COVID-19 relief loan and our facility leases, our balance sheet remains debt free.