EnWave Corporation

Good morning and welcome to NWave Corporation's Q3 2023 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 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 a question. 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'll turn the call over to NWave CEO, Mr. Brent Charlton. Sir, please proceed.

Thanks very much. And greetings to all who have joined us today to discuss NWave Corporation's Q3 performance and future outlook. Now, consistent with our past quarterly earnings calls, the information we will present today contains forward-looking information that is based on our management's expectations, estimates, and projections. Our statements are not a guarantee of future performance and involve a number of risks, uncertainties, and assumptions. Please consider the risk factors in the filings made by NWAVE on CDAR when reviewing this information. Also, all amounts discussed will be in Canadian dollars unless otherwise noted. After a very good Q2, Enwaves Q3 was down, pursuant to lower revenues due to less large-scale machine builds and less than expected new machine sales contracted within the time period. We are hyper aware that our business can be lumpy, hence our expense reductions and thoughtful resource allocation have allowed for us to improve our cash position. Our cash position of $4.47 million at the end of Q3 was up $984K from Q2, and our expense structure has total operating expenses that are 1.3 million less through Q3 2023 when compared to the previous year. We recognize 2.5 million in revenue for the quarter from continuing operations, slightly less when compared to Q3 2022, and through the first three fiscal quarters of 2023, we generated 9.9 million revenue, which is 1.6 million ahead of the prior year. Our third-party royalty revenue, which gets us Very excited. In Q3 was 394K, up about 90K from Q2 2023, and the most quarterly royalties generated from product sales, not including exclusivity top-up payments, would typically come in in Q1 ever in the history of EnWave. This fiscal year, we completed large-scale machine installations in Italy for Orto Al Sole, in Thailand for Dole, of course, in Canada for a very large cannabis-licensed producer, and we will be installing a large-scale machine in Japan later this month for an established partner. Each of these large-scale installations have yet to reach expected royalty-generating potential, leaving future upside to be had, and I didn't even mention the large-scale line slated for Bridgeford later this calendar year early next. Adjusted EBITDA from continuing operations through Q3 2023 was $703,000, $100,000, $1.35 million better than the previous year. Our net loss from continuing operations through Q3 2023 was $1 million, which is $1.2 million better than last year through three quarters. We've had a slow start through the first half of Q4 in regards to news flow, but are working hard to close large-scale orders, several 10-kilowatt sales, and new TLOAs this quarter and into next fiscal year. We are also aiming to confirm material manufacturing capacity utilization at RevWorks for fiscal 2024. The wind down of Nutri-Dried is almost complete. We expect to receive material proceeds from the Employee Retention Tax Credit Program in the near term. The ERTC is a program to provide tax credits to companies who kept employees throughout the COVID-19 pandemic in the US. And to date, the IRS has advised us that about half a million USD will be paid to us in Q4. N-Wave has also successfully been awarded funding through the Food Processing Growth Fund under the Ministry of Agriculture and Food in Canada. Last month, we were approved for a cost-shared funding project that will fund up to 75% of approved project costs for CapEx relating to RevWorks projects to a maximum contribution in the amount of $750,000. We plan to use these funds to complete a more robust retail packaging system and seasoning line specific to projects that we hope to confirm publicly in the coming months. Project funding and spending will be received and incurred over the next 18 months, and we will strategically use these funds when the aforementioned larger RevWorks opportunities are confirmed. To date, we've received the first $300,000 in funding. Collectively, the two programs, ERTC and FPGF, will potentially contribute more than $2 million in value to our business. In Q3, we signed two new commercial license agreements, the first with Pip International to use a 10-kilowatt machine in Canada for the development and production of high-value pea protein derivative products, and the second with Bridgeford Foods, who acquired a 120-kilowatt rev machine through funding provided by the U.S. Army. Both projects could lead to additional rev machine acquisitions in the medium future. In Q4, we signed a TLOA with Molecule of Wales to rent a 10-kilowatt unit for fruit and vegetable processing. And we're also in the deal bunker with a handful of additional companies hoping to close more deals this quarter and improve our second half Q4 financial performance. Looking forward, our pipeline is dominated by potential repeat machine orders from food partners. These potential scale-up projects include fruit, vegetable, meat, snack, seafood, and dairy product commercialization, and we estimate Now that EnWave needs to sell about five large scale machines per year, timing dependent of course, to be bottom line profitable. In the cannabis industry, the most recent large scale installation with a dominant Canadian licensed producer is working very well. The machine has proven to yield high quality smokable product and also has allowed the licensed partner to repurpose several dry rooms in their facility to optimize efficiencies in their operations. we will continue to work with cannabis companies that are sufficiently capitalized and committed to improving their drying protocols. And with that, I'll now ask Dylan to summarize our Q3 financial results in more detail.

Thanks, Brent. Good morning, everyone, and thank you for joining us today. Please note that the figures I'll be going over today can be found in our press release from yesterday and in the financial statements and MD&A filed on 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 Q3 ended, June 30, 2022. Revenues for Q3 were $2.5 million compared to $2.7 million in Q3 2022. a decrease of 0.2 million or 7%. The decrease was primarily due to the timing of fabrication contracts. The decrease in revenue was partially offset by third-party royalty revenue, which was 394K in Q3 2023, compared to 301K in Q3 2022, an increase of 93K or 31%. The increase was predominantly a result of an increase in products sold and produced by our royalty partners. 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 see material royalty growth over the coming quarters. As Brent mentioned, there are four large scale machines which have been recently commissioned or will be commissioned soon that have yet to reach expected royalty generating potential. Gross margin for the company in Q3 2023 was 29% compared to 47% in Q3 2022. The decrease in margin was due to the production mix during the quarter and a machine resale in the prior period. Gross margin for the company remains healthy at 41% for the nine months ended June 30th. Test G&A expenses, including R&D or research and development, were $1.2 million for Q3 2023 compared to $1.8 million for Q3 2022, a decrease of $0.6 million or 32%. We reduced G&A costs as part of a continued focus on managing non-revenue generating spending. Adjusted EBITDA is a non-IFRS financial measure, so please refer to our MD&A for the reconciliation from GAAP net income to adjusted EBITDA. The company reported an adjusted EBITDA loss of $192K for Q3 2023 compared to an adjusted EBITDA loss of $224K for Q3 2022, an improvement of $32K. The increase in adjusted EBITDA was primarily due to the reduction of SG&A expenses, including R&D, offset by lower margins for the period. We finished Q3 2023 with cash and cash equivalents of $4.5 million compared to $3.5 million for Q2 2023, an increase of $1 million. EnWave had a net working capital surplus of $8 million as of June 30th. And aside from our facility leases, our balance sheet remains debt free. As previously announced, EnWave's board of directors and executive management commenced an orderly wind down and value maximization process for the NutriDrive business segment earlier in the year. In Q2, NWAVE agreed to sell certain Nutri-Dried assets, including trademarks, auxiliary production equipment, and select saleable inventory, to Creations. Total consideration for the sale of Nutri-Dried assets in the 100-kilowatt unit to Creations was 2.6 million USD, of which 1 million USD was outstanding as of June 30th. And in accordance with IFRS, Nutri-Dried has been presented as a single amount in the face of the Statement of Comprehensive Income as discontinued operations. During Q3 2023, the company reported a loss from discontinued operations of $1 million compared to $1.2 million for Q3 2022, a decrease in loss of $0.2 million. In August 2023, NutriDrive received correspondence from the IRS advising a $0.5 million USD tax refund of an estimated total potential $1.2 million USD tax refund would be issued to NutriDrive in Q4 2023. The refund is for the Employee Retention Tax Credit, which is a refundable tax credit from the United States government for businesses that were affected during the COVID-19 pandemic, as Brent mentioned. As of the date of this earnings call, there has not been any additional correspondence from the IRS concerning the remaining tax refund, and there is no certainty it will be issued. The majority of the operational work associated with the wind-down has now been completed, and there remains a second 100-kilowatt machine that was repatriated from Nutri-Dried that is included in the inventory, as at June 30th.

Thanks Dylan. Cash has been managed well through a slow summer and we have new companies entering our pipeline monthly. We will continue to closely monitor expenses and only spend when a clear return is present. We recognize the imminent need to sell additional large-scale machinery and have many opportunities to pursue. These sales are the lifeblood of our organization at the moment as we continue to expand our royalty portfolio. We managed the wind down of Nutri-Dried with precision, minimizing financial exposure and finding opportunities to improve our cash position. We are finally starting to see traction in the market for Rev-Dried products, and we see our third party royalties increasing as a result. This should continue through the next several quarters. And with our prepared commentary finished for today, I'd now like to open the call for your questions. Operator, please provide the appropriate instructions.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. One moment, please. Participants using speaker equipment may be necessary to pick up your handset before pressing star one. Once again, that's star one to be placed in the question queue. One moment, please, while we poll for questions. If there are any outstanding questions by the end of the call, the company would be happy to take them by email at irnwave.net. One moment, please, while we poll for questions. Once again, that is star one to be placed into question queue. Our first question is coming from Bart Gomer from Bear Strips. The line is now live.

Hi, Brent. This is Bart Gomer from Bear Strips in Belgium. I have a few questions. First of all, you stated that you needed 1 million from the wind down of neutral drives. Does that include the tax credits of up to 1.5 million? And can that difference between the half a million and the 1.5 million in tax credits still be received?

So just to clarify, it was a $1.2 million USD ERTC tax credit. And this is new for this quarter. 0.5 or half a million dollars we've received correspondence from the IRS that we're expecting that in Q4 2023. And the remaining tax credit as of the date of this conference call, there's been no additional correspondence from the IRS on when or if we'll be receiving the remaining credit.

That being said, getting the good news about just under half of it is a good leading indicator for us to believe that there's a high potential for receiving the remaining amounts.

Okay, but that X credit is not included in the $1 million you still need to receive from the neutral dry transaction?

Correct, correct. That's right. $1 million is still due to creations, from creations.

Okay, okay, thanks. And then I have a second question regarding RevWorks. Can you describe me a bit the evolution of the situation between Q3 to Q3? Meaning, can you give some sort of utilization rate or turnover of Redworks?

Yeah, sure Bart. I'm happy to provide some better color on Redworks utilization at the moment. Primarily through Q2 and Q3, the majority of use in that facility had been for line trials for specific product applications to show that the assumed throughputs would actually be correct as they were inputted into the costing model for more robust contracts for supply through fiscal 2024 in all likelihood. Thankfully, those line trials have yielded positive results, and right now we're in the final stages of negotiating some material contracts that could make up the majority of our capacity utilization next year. Packaging is being designed and ordered by some of these customers, and we're anxious, like many of our shareholders, to be able to discuss the details of these relationships as soon as we can. That being said, we have also had some commercial production in smaller quantities for Western Canada-based snack companies, where they've come in and they've dried various amounts of fruit and vegetables and different confectionery products, and we're talking in the quantums of tens of thousands of dollars from those size of companies versus you know, what we hope to be hundreds of thousands of dollars orders from these other deals that we're working to close.

Okay, thank you. And perhaps one last question on the present royalties that you are receiving. Could you more or less give an indication, let's say the installed base, on average, what kind of utilization rates are they running?

It varies across each partner significantly. And one effort that we've undertaken internally now is to build a register where we can act, I think, more prudently towards the companies that may not be performing as we think they should be, or perhaps with their reporting, pressure testing the accuracy of the reporting. And I believe that's going to be helpful in future reporting each quarter in giving you some more color on utilization rate of those machines But at this point, we have a few leading royalty producers called three, four companies that are dominating the royalty payments to Enwave at this time.

Can you give me an indication on what the royalties this quarter were from the cannabis sector, for example?

Sorry, not off the top of my head, but it's a minority relative to the basis of our total royalty portfolio, the majority of which is in the food space.

Okay. Thanks, and good luck in the coming quarters.

Thank you, Bart. Great. Thank you.

Thank you. We've reached the end of our question and answer session. I'll now turn the call back over to Brent Charlton, CEO, for closing remarks.

Thanks very much, Kevin. There are two questions that come up on the webcast, which I'll address now. before signing off for today. The first is asking how is RevWorks functioning and Bart asked an astute question in terms of current capacity utilization. I just wanna add to that in terms of our certifications, we just passed our SQF level two for the second straight year with a 98% pass rate, which is critical for us servicing some of the larger consumer packaged goods companies. And I think that's gonna be put to good use again in fiscal 2024 with material manufacturer. Second question, any news about the lawsuit? I assume they're referring to the one that was brought through a civil claim against some former employees of NWAVE. There has been progress in the settlement area. Some of that will be made public soon, not with all parties in the civil claim, but with some. And through that, we will be gaining certain materials communications, which will bolster or strengthen our position even more so than it already is from our perspective. And then the second question within that submission was, can you give some more information about Dole, the partnership and development of new products? So far, it's going very well with the launch of the Good Crunch snack line, which utilizes our machinery. And there is a desire to diversify that portfolio, inclusion of different snack products that haven't yet already been hit the market, which right now is bananas and pineapples primarily. We're actively discussing what manufacturing capacity will be needed for them on a go-forward basis in the relative near term. As well, back to Bart's question on capacity utilization, we have certain licensed partners that could make co-manufacturing capacity available in regions that would be more strategically advantageous for Dole, i.e. in North America. versus Southeast Asia as a hub for production of certain additional products into that portfolio. So we're really looking forward to seeing how that continues to evolve through the next few quarters. And with that, there are no other questions submitted on the webcast. So I want to thank everyone for joining us today for NLM's Q3 earnings conference call. And at this time, you may disconnect. If you have further questions after the call, again, please feel free to reach out to Dylan or I, and we'd be happy to have a conversation.

Thank you. That does conclude today's teleconference and webcast. May this connect your line at this time, and have a wonderful day. We thank you for your participation today.