CA - EnWave Corporation (NWVCF) Q4 2023 Earnings Call Transcript

2023-12-15 11:23:08 ET

EnWave Corporation (NWVCF)

Q4 2023 Earnings Conference Call

December 15, 2023 10:00 AM ET

Company Participants

Brent Charleton - President and Chief Executive Officer

Dylan Murray - Chief Financial Officer

Conference Call Participants

Presentation

Operator

Good morning, welcome to EnWave Corporation's Q4 2023 Earnings Conference Call. My name is Darly, and I'll be your operator for today's call.

Joining us for today's presentation are the company's President and CEO, Brent Charleton; and Dylan Murray, EnWave 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 questions. [Operator Instructions] 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.enwave.net.

Now, I'd like to turn the call over to EnWave CEO, Mr. Brent Charleton. Sir, please proceed.

Brent Charleton

Thanks very much and happy holidays to everyone. Greeting all of you who have joined us today to discuss EnWave Corporation’s Q4 results, as well as our fiscal 2023 performance and fiscal 2024 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 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.

EnWave remains at the forefront of vacuum microwave drying innovation and commercialization. We've built a strong foundation of technology partners throughout the world that are holistically increasing the number of REV drying products now being sold to consumers in more than 25 countries. Our royalty portfolio is growing, an indication that many of the individual royalty streams are also expanding, not just the number of partners in our portfolio. This momentum continues into fiscal 2024, as we potentially could see robust growth on an improvement in installed capacity of REV machines.

Our growing royalty portfolio underpins the value of our business. We anticipate several go, no-go, large-scale machine purchase decisions tied to new and existing royalty partners to take place in the next two to three months, and more in the latter half of fiscal 2024. Our REV machine sales continues to be volatile quarter-to-quarter and in certain quarters, you may sell multiple large scale REV machines and some quarters, not at all. There isn't necessarily seasonality associated with this volatility, but every business runs on their own timelines.

In fiscal 2023, we added six new licensed partners, including notable companies like Michael Foods, which is a subsidiary of Post Holdings; Bridgford Foods, a longtime production partner with the U.S. Army, a major Canadian cannabis company and Creations Foods, who acquired most of the assets from NutraDried and continue to sell Moon Cheese in the North American market. We sold four large-scale machines this past fiscal year, and we currently have many more large-scale opportunities to pursue.

Our sales pipeline includes both possible scale-ups with existing technology partners and new deals with companies working through their initial product development evaluations. There is strong internal optimism, but the reality is we need to execute and deliver on these prospects. If we do, our royalty portfolio will continue to grow.

In fiscal 2023, we generated CAD11.3 million in revenue, up CAD300,000 from the year prior, of which a CAD1.5 million was from royalties, up just over CAD100,000 year-over-year. We also reduced our SG&A cost in fiscal ‘23 by about CAD1.7 million year-over-year. It was a gross margin of 39% and produced positive adjusted EBITDA of CAD379,000, a million dollar turnaround from the year prior.

Over the past 12 months, we completed the installation of three new large scale machines. One, at Orto Al Sole of Italy; a second at Dole in Thailand; and a third at one of our Canadian cannabis partners. We will have another two come online before the end of February at Bridgford Foods, a very large snack -- and a very large snack manufacturer in Japan respectively. The potential impact of this increase in manufacturing capacity has not yet been reflected in our royalties. And we assume that through fiscal 2024, royalties should improve by these technology partners execute their planned commercial launches.

Now, a notable difference to EnWave situation today versus the same time last year is the number of blue chip partners that have or are in the process of launching commercial consumer products in market. If any of these product launches are successful, we expect several new large scale machine orders to support the future needed manufacturing capacity tied to growing volume estimates. We are communicating closely with these technology partners and remain optimistic.

Q4 reflected the aforementioned volatility of large scale machine sales, and we are working to achieve more consistent cadence of machine orders in calendar 2024. That being said, the success of existing technology partners and the growth of royalty revenue should be the focus for investors.

I'll now ask Dylan to summarize and with detailed quarterly financial performance.

Dylan Murray

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 in MD&A filed on SEDAR. And all amounts are in Canadian dollars, unless otherwise noted.

I will make reference to adjusted EBITDA, which is non-IFRS financial measure. So please refer to the non-IFRS financial measure disclosures and reconciliation to GAAP 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 30, 2022.

Revenues for Q4 were CAD1.5 million, compared to CAD2.8 million in Q4 2022, a decrease of CAD1.3 million or 48%. The decrease was primarily due to fewer machine contracts during the quarter. The decrease in revenue was partially offset by third-party royalty revenue, which was CAD381,000 in Q4 2023, compared to CAD301,000 in Q4 2022, an increase of 80K or 27%.

Royalty revenue for the year was CAD1.5 million, compared to CAD1.4 million for 2022, an increase of CAD113,000 or 8%. The increase was predominantly a result of an increase in products sold and produced by our royalty partners. And as our royalty partners grow their businesses and increase capacity utilization on web equipment alongside new web installations arriving from new sales. We hope to see material royalty growth over the coming quarters.

As Brent mentioned, there are five large scale machines which have been recently commissioned or will be commissioned soon, but have yet to reach expected royalty generating potential.

Gross margin for the company in Q4 2023 was 29%, compared to 39% in Q4 2022. The decrease in margin was due to the production mixed during the quarter and machine resale in the comparative period. The gross margin for the company remains healthy at 39% for the year ended September 30.

SG&A expenses, including R&D were CAD1 million for Q4 2023, compared to CAD1.4 million for Q4 2022, a decrease of CDA405,000 or 28%. SG&A for the year was CAD5.2 million, compared to CAD6.8 million versus 2022, a decrease of CAD1.7 million or 25%. 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 CAD324,000 for Q4 2023, compared to an adjusted EBITDA loss of CAD27,000 for Q4 2022, an increase of CAD297,000.

Adjusted EBITDA for the year was CAD379,000, compared to a loss of CAD681,000 for 2022, an increase of CAD1 million. 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 Q4 2023 with cash and cash equivalents of CAD4.2 million and a networking capital surplus of CAD8.6 million as at September 30. 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 NutraDried business segment earlier in the year. In Q2, EnWave agreed to sell NutraDried assets including trademarks, auxiliary production equipment, select sale of full inventory, and creations.

Total considerations are the sale of NutraDried assets and the 100 kilowatt unit to creation was $2.6 million, of which $830,000 was outstanding as of September 30. In accordance with IFRS 5, NutraDried has been presented as the single amount in the face of the statement of comprehensive income at discontinued operations.

During Q4 2023, the company reported net income from discontinued operations of CAD707,000, compared to a loss of CAD1.8 million for Q4 2022, an increase of CAD2.6 million. The increase was a result of the wind-down in tax refund in the amount of $0.5 million of an estimated total potential $1.2 million tax refund being recognized 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 and a $0.5 million tax refund was received subsequent to year-end.

As the date of this earnings call there has been no further communication from the IRS related to remaining potential tax refund and the associated receivable has not been recognized as there's no certainty it will be issued.

Brent Charleton

Thanks for your commentary, Dylan. Now [Indiscernible] slower Q4 than we would have liked, we see many opportunities, many of them near-term in fiscal 2024, to expand existing commercial relationships in a number of verticals, including the fruit, vegetable, seafood, pet treat, meat snack, military ration, egg product, and dairy snack areas quite a number of verticals that we're commercializing technology into.

We also have the opportunity to convert a number of new companies into royalty paying partners. We expect our royalty portfolio to grow both in total size and by the number of contributing royalty payers. New REV dried commercial products have or will be hitting the market with meaningful distribution this year, and we need these products to sell well. We will continue to keep our expenses in check and spend strategically in an effort to stimulate greater revenue generation, and our current cash position will adequately support our business needs so long as we sell machines as internally forecasted.

There genuinely seems to be growing interest now in our stock again, stimulated by a recent capital markets effort, and we intend to continue investing time towards investor outreach and awareness concurrent with expected operational execution.

I now like to open the call for your 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] Our first questions come from the line of [Eric Pizin] (ph) with EnWave. Please proceed with your questions.

Unidentified Analyst

Hi. Hi, Brent. Hi, Dylan. I just wanted to congratulate you on the royalty growth, which is as a long time shareholder, something I've been watching for many, many years. And now that we're firmly above CAD1 million. Dylan, you referred to anticipating material increases in royalty. Do you guys have internal measures for that? How do you define material internally when you've really come quite a long way in the last few years for percentage gains? Do you still anticipate single-digit growth on that royalty, or can we expect double-digit growth for a couple years before we lower that down?

Brent Charleton

Hey, yes, thanks for your question as a percentage, you know, our -- we still forecast double-digit royalty growth in the coming periods our last you know quarter here had about CAD400,000 in royalties. So on a go forward basis, management looks at that as our royalty baseline, if you will, for 2024.

Dylan Murray

Yes, I'll just add some additional color to Dylan's response there, Eric, in regards to the products that are going to market or have already gone to market. It's -- there's no lag or delay in the volumes that are hitting the market versus say, partners who typically have sold their products on a business-to-business basis. These business to consumer products are filling the distribution channels and we should immediately see an influx in royalty growth from the likes of, you know, Dole, [Indiscernible], et cetera.

Unidentified Analyst

Yes, I mean, it's that's why I kind of, I wonder where those royalties can go because that really is a, it's kind of a new era for the company. A lot of the partnerships that you guys have currently don't seem to have those kind of volumes and names involved with the production. So, I mean, can we expect, you know, how material is material, I guess, but I guess we're just going to have to wait and see it roll in?

Brent Charleton

You're exactly right. It's always so hard to predict royalty growth, because it's timing based on commissioning of machines and commercial partner success. But we continue to anticipate and project internally that will continue to see strong royalty growth as these machines come online.

Unidentified Analyst

Is that part of the company being recognized in the pursuit that you've had in the capital markets? Is that something that you and your team focus on? Because that has always for me been a key pillar of the company's future. And we really seem to be at a point where it's going to be liftoff here for royalties. And the embedded nature of those royalties is so attractive to the markets. And that’s -- is that something you guys are talking about?

Brent Charleton

Absolutely. That is the keen emphasis in all of our communications to capital markets is the royalty portfolio that we have, the strength in intellectual property, and the projected growth in those royalty streams from blue chip technology partners. This is EnWave with a sort of clean bill of health without having a subsidiary that was hemorrhaging cash. We've cleaned that up and we accomplished that in the first-half of the year and then now with what we see in our pipeline operationally it makes sense for us to spend time to ensure that as we hopefully deliver folks are watching us.

Unidentified Analyst

Yes, well again you've I really am looking forward to 2024. It sounds like you've got a lot on your plate. So I wish you all well, and we'll see what you guys come up with. Thanks again.

Brent Charleton

Thanks, Eric.

Dylan Murray

Great. Thank you.

Operator

Thank you. We have reached the end of the audio portion of the question-and-answer session. Now I'd like to turn the call back over to CEO Brent Charleton to moderate the webcast questions and provide closing remarks.

Brent Charleton

Thanks very much. So there are three questions that I'll answer that are listed here. . First is a question, any updates with the lawsuit to report referring to ongoing civil litigation with some former management employees of EnWave Corporation?

So the updates that I can provide, which have been publicly disclosed, are that we have come to settlements with two of the primary defendants, not including ex-employees of EnWave, and have now received a copious amount of additional communique and evidence to further support our pursuit of justice in this particular case. The court date has now being projected to be scheduled sometime in 2025, given that the primary defendants, the ex-employees of EnWave, changed their counsel halfway through the proceedings here. So they are still under full injunction, can't do anything regarding vacuum microwave. And we're happy to continue to prepare preparation for the eventual court date.

Second question is, how are you managing production personnel, while waiting for machine orders? I guess just the inherent volatility of when we're building machines. There's lots to do in-house, and I think we have a leading up team where we're always kept busy where there's on new innovation with some of the processes and refinements in our machinery. And also, we're still installing machines. Like I said, we have folks that are actually in Japan right now completing that large-scale installation at one of our partners. They're then scheduled for several visits internationally to current technology partners as a preventative maintenance exercise, paid preventative maintenance exercise.

And then ultimately the installation for, I guess the next question on the list here, what's the update for Bridgford Foods in the U.S. Army? In that, that 120 kilowatt machine is scheduled for installation in Q2 fiscal. So we'll have our team out in North Carolina completing that and training up them for the production of cheesecake rations for the U.S. Army to begin. But also Bridgford is currently collaborating with a handful of commercial partners and other folks that are interested in getting into the U.S. Army ecosystem.

And so the next question for Dylan here is do you break out royalties on your income statements?

Dylan Murray

I'm not on the face of the income statements, but in the revenue note, note 18, where we segment the different revenue streams and then additional commentary on royalties in the MD&A.

Brent Charleton

Thanks, Dylan. And then the last question I see here currently on the platform is, was utilization time at REV works and how much time with potential customers?

So the majority of our utilization of that infrastructure has been on the development of new contracts and/or the progress on down sales pipeline with folks that have taken manufacture in-house. We have still several material REV works contracts we're pursuing for fiscal ‘24. If successful, incrementally speaking on revenue would be a maximum of a you know CAD1.5 million. So this is not significantly material in terms of top line growth, but as we've stated time and time and time again, is that, that particular facility is more of a sales tool for us to de-risk the launch of new products to market, and then encourage folks to take, again, manufacture in-house longer term under a licensing royalty agreement.

We'll wait a few seconds here to see if any further questions come in. Okay. All right. Seeing none, we'd like to thank everyone who joined us today for EnWave’s Q4 and fiscal year 2023 earnings conference call. At this time, you may disconnect. Thank you.

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