EnWave Corporation (ENW) Earnings Call Transcript & Summary

Joining us for today's presentation are the company's President and CEO, Brent Charlton, Nav Dhami, and [ Wade Ciaffo ]. [Operator Instructions] Finally, I would 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 Charlton. Please go ahead.

Thanks very much, and thanks again to everyone who have joined us today for EnWave's Q3 fiscal 2026 quarterly conference call. Q3 was a much better quarter than the first two fiscal 2026 quarters given we recognized the revenue tied to the sale of a pre-built 120-kilowatt Radiant Energy Vacuum machine to Procesadora, our valued Mexican royalty partner, and we continue to see strong royalty growth led by BranchOut Food and MicroDried. As we continue to work towards securing additional royalty streams and hastening the growth of these carried interests, my team and I are also concurrently planning to reduce internal expenses materially to position the company for sustainable profitability in the coming years. Consistent with our past quarterly conference calls, the information we will present today, including my introductory statements, 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. As we continue to drive the company forward, our priorities remain focused on 4 areas. First, convert our commercial pipeline into equipment sales. That's obvious. It's great to have engagement, but engagement needs to convert into long-term commercial agreements, period. Second, expand our installed base of REV machinery, and we continue to work closely with current royalty partners to help them develop new products and increase their REV machinery utilization. This effort is designed to lead to many more repeat purchasers like the one recently with Procesadora. Third, increase recurring royalty revenue generated by our existing partners. Same support mentioned a moment ago will help drive this growth. And lastly, fourth, continue building relationships with large food companies capable of deploying REV technology at meaningful commercial scale, either themselves directly or by using one of our many royalty partners that offer co-manufacturing services. Either way, we win. We feel we are well on our way to accomplishing these priorities. In Q3, we yielded superior results as noted to the prior two quarters, as quarterly revenue was $3.33 million, up 21% year-over-year, and gross margin in the quarter was 25%, up 6 points year-over-year. Additionally, year-to-date gross margin was 30%, so on target for our traditional gross margin that we approach for machine sales blended with royalties. The royalties were $536,000 in Q3, up 24% in the quarter year-over-year, despite an adjustment of $62,000 tied to an overpayment in Q2 by MicroDried, which was related to a miscalculation on the amount owed. Without this adjustment, the normalized base royalties, which doesn't include any exclusivity payments collected in Q3, would have been approximately $600,000, the most base royalties collected in any quarter by EnWave. There is opportunity for consistent royalty growth in the coming quarters generated from the increased manufacturing capacity utilization of the installed REV machine base. We've been told that there are many new REV product launches planned in the coming quarters, some of which by blue-chip food manufacturers using 1 or more of our established royalty partners. Any of these launches, if successful, could immediately increase our base royalties. Based on information shared with us by current royalty partners, our royalties should push towards $3 million collected in fiscal 2027. I'm thrilled that EnWave is in a position to reach this level of royalties. It's a direct reflection of the efforts from our leadership group and a huge improvement from past years. To better put this into perspective, 3 years ago, we collected a total of $1.5 million in royalties, half of what we anticipate in fiscal 2027. While our quarterly financial performance continues to be influenced by the timing of large-scale REV equipment contracts, we made meaningful progress across several areas that we believe are important indicators of the underlying health and future potential of the business. These areas include the number of active projects with billion-dollar revenue companies, the continued sales pipeline expansion across multiple continents, and the growing success of many REV-dried products in both the North American, Asian, and European markets. Importantly, we are seeing increased engagement from both existing royalty partners and prospective customers, and the quality of our commercial pipeline has continued to improve, particularly among larger organizations evaluating REV as an alternative to incumbent dehydration technologies, whilst also looking to disrupt their respective categories through innovation. From a business development standpoint, we generated 772 new qualified leads in Q3 through strategic targeting and trade show attendance. We held about 120 meetings and sent out about 1,200 nurturing emails through automated sequencing, a big effort from our sales group. In Q3, we exhibited at the Petfood Forum, at the Institute of Food Technologists in the United States, as well as FOOMA in Japan, and Vitafoods in Europe. We're also planning to attend FoodTech Mexico and the upcoming SupplySide West in Las Vegas in the fall. The number of large-scale prospective projects, some of which that were expected to close earlier in fiscal 2026, are numerous. So those projects that we thought would be closed in Q1 and Q2 haven't gone away. They've necessarily been delayed into Q4 coming here. The sales pipeline we have created is a direct result, again, of that effort and leadership through Dan Duguay, our VP of Sales, as well as the rest of our team. This heightened level of interest that we have has yet to directly affect our financial performance in terms of large-scale machine orders, but those purchase decisions and commercial product launches should transpire within the next few quarters. The sales cycle for these larger organizations can be lengthy, as we know, but successful conversion has the potential to materially expand EnWave's installed base and recurring royalty revenue. Currently, we are advancing the sales cycle with several material targets that should convert into long-term royalty partners in fiscal 2027. One of the most important developments in Q3, as noted before, is the continued expansion of our relationship with Procesadora in Mexico. Following the successful deployment of their initial large-scale REV system, Procesadora committed to purchasing a second 120-kilowatt REV machine. This is exactly the type of progression we want to see from our royalty partners. A customer initially adopts REV, validates the economics and product quality at commercial scale, builds demand for the resulting products, and ultimately adds additional capacity. Repeat machine orders are particularly important because they provide tangible validation of both technology and the customer's underlying business case. Also in Q3, and to the date of this report, we signed 3 new licenses, 2 Technology Evaluation and License Option Agreements. The first TELOA we signed was with Rhizome, a company led by multiple Michelin star-winning chef Dan Barber. Rhizome is focused on the development and commercialization of several food applications that are sustainable, innovative, and unique. Part of this deal was the purchase of a pilot-scale REV machine, and I hope to be able to share more details on the potential commercial launch of these products in coming quarters. The second license was signed with DryHub of Egypt, our first foray into the African continent. They also purchased a pilot-scale REV machine, a 10-kilowatt unit. They're busy completing their facility to house this machinery along with our upstream and downstream processes. We hope to have the REV equipment for installation in early fiscal 2027, if not sooner. A most recent new license was signed earlier this month with the University of Limerick, who purchased a lab-scale REV unit to be used for research and development industry engagement in Ireland and the U.K. We hope that this relationship will spawn additional commercial opportunities for EnWave in the future. In regards to the technology evaluation agreements signed, one deal was signed with Swiss Cannabis Selection for further exploration into the use of REV technology for the production of various cannabis-based products. And the second was signed with General Mills, a top 10 global food conglomerate. Both companies are renting 10-kilowatt REV machines to help complete their respective evaluations. Our objective with relationships like the one established with General Mills is not simply to sell a piece of equipment. The larger opportunity is to embed REV into commercial manufacturing platforms where the technology can potentially be deployed across multiple products, facilities, and geographies. We continue to actively support evaluations with several prospective partners and are working to convert successful product development programs into royalty-bearing commercial licenses and equipment purchase agreements. These programs take time, and large multinational food companies have rigorous product development, engineering, procurement, and capital approval processes. But the potential value of converting even a small number of these opportunities is significant. Currently, we are engaged with behemoths in the pet food, seafood, snack, and ingredient industries. Another important part of our strategy is expanding access to REV technology. Over the past several quarters, we have established relationships with commercial processors, research organizations, and innovation centers in most major global markets. These relationships create regional access points where prospective customers can test products, develop processes, and better understand the economic and product quality advantages of REV. This is important because adoption becomes considerably easier when customers can see the technology operating, conduct trials, and develop commercial products without immediately committing to large-scale capital equipment. We believe these hubs can shorten the path between initial interest and commercial adoption. They also support academic and technical research that can further validate the REV value proposition. Our recently established relationship with the University of Limerick highlights this structure. Now, our royalty business remains central to the long-term EnWave investment thesis. That's no surprise to anybody. We have a broad and solid base of royalty partners operating across multiple countries and product categories. The objective is to steadily increase that utilization of this installed base. Some partners are quickly expanding distribution and enjoying immense commercial success. Others are introducing new products, and several are evaluating additional REV capacity at the moment. This creates operating leverage within our business model. EnWave does not need to manufacture another machine to benefit when an existing partner sells more REV-dried product. As partner utilization increases, royalty revenue can grow with very little incremental cost to EnWave. That remains one of the most attractive aspects of our business model, and we're starting to see the real traction. Looking at our total number of active license agreements, 52. 36 companies are actively deploying resources into the growth of REV-dried product sales in market, while 16 companies are still either in the product development or testing phase, or associated with cannabis companies that purchased small 10-kilowatt units and are exploring the technology currently. The vast majority of the REV machine kilowatts deployed are being put to use to produce royalties, meaning most large-scale machines are in action currently. Internally, we have also continued to sharpen our commercial approach. We have become increasingly selective about where we allocate technical and sales resources. Our focus is on opportunities where there is a clearly defined commercial application, sufficient production volume, a credible path to capital deployment, and the potential for meaningful recurring royalties. Simply generating more technology evaluations is not the objective. Our objective is converting the right evaluations into commercial licenses and machine purchases. We believe this discipline is beginning to improve the overall quality of our pipeline. Looking towards the remainder of fiscal 2026 and into fiscal 2027, our outlook is constructive. We have several meaningful opportunities progressing, and we have existing royalty partners evaluating additional production capacity. We have multinational companies conducting product and process evaluations, General Mills and others. And we have a growing international network of REV users, research institutions, and commercial processing hubs supporting the adoption of the technology. Now before I ask Nav to further summarize our financials, I want to reiterate our 4 key priorities moving forward. Conversion of our pipeline opportunities into equipment orders. One, successful execution on the equipment already under contract. Number two, help our royalty partners increase utilization. Three, and lastly, maintaining financial discipline while pursuing these opportunities. It's inevitable that the timing of large equipment orders will continue to make quarterly revenue uneven, but that's inherent to our business. We're driving the underlying indicators that matter instead: installed capacity, repeat equipment purchases, partner utilization, royalty generation, and engagement with larger strategic customers. Before Nav begins her financial statement synopsis, I want to congratulate her publicly for her well-deserved promotion to CFO. Nav, you've earned this opportunity, and I'm excited to work closely with you to drive EnWave to the next level of success. Please take it away.

Thank you for joining us today. Please note that the figures I will be discussing can be found in our press release from yesterday and in the financial statements and MD&A filed on SEDAR+. And all amounts are in Canadian dollars, unless otherwise noted. I will make a reference to adjusted EBITDA in the financial statements and MD&A filed on SEDAR+, which is a non-IFRS financial measure. So please refer to non-IFRS financial measures 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 will refer to throughout this presentation is the prior year Q3, ended June 30, 2025. Revenue for Q3 were $3.3 million compared to $2.7 million in Q3 2025, an increase of $569,421. The increase was primarily related to selling a fully fabricated large-scale machine to Procesadora in the market, and an increase in base royalties. Base royalty revenue were $536,000 in Q3 2026, compared to $432,000 in the comparative period, an increase of $104,000 or 24%. Base royalties in Q3 2026 were reduced by a one-time $60,000 adjustment related to a Q2 overpayment by MicroDried, one of the company's larger royalty-paying licensed partners. Royalties grew due to the increased number of royalty partners, product sales, and product production for the quarter. Additionally, as our royalty partners grow their business, and increased capacity utilization of installed REV equipment. Further REV installations will follow from new sales contracts, and material royalty growth should continue in the coming quarters. Gross margin for the company in Q3 2026 was 25% compared to 19% in the comparative period, with the increase primarily attributable to lower fabrication costs from a large-scale machine sold on a contract, and increased royalties as compared to the prior quarter. SG&A expenses, including R&D, were $1.2 million for Q3 2026 compared to $1.4 million for the comparative. A decrease of $205,000 or 15%, with the decrease primarily related to lower personnel and third-party commission costs. 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. We reported an adjusted EBITDA loss of $93,000 for Q3 2026, compared to an adjusted EBITDA loss of $575,000 for Q3 2025, an improvement of $480,000 over the comparative period. This increase was primarily related to selling a fully fabricated large-scale machine, increased royalties, and lower operating expenses. We finished Q3 2026 with cash and cash equivalents of $2.5 million and a net working capital surplus of $7.1 million as of June 30, 2026. EnWave also has a credit facility with Desjardins for growth and working capital purposes. As of June 30, 2026, the credit facility had a total authorized limit of $2.3 million at a rate of prime plus 1.5%, with $1.9 million drawn and $360,000 remaining undrawn availability. As of June 30, 2026, inventory was $3 million compared to $1.4 million at year-end, an increase of $1.6 million or 118%. The increase in inventory is a result of the manufacturing of large-scale machines, specifically a 100-kilowatt NutriREV machine and 2 small-scale machines that in aggregate were approximately 90% complete by June 30. This investment, combined with an expanded marketing presence through increased trade show attendance and sales personnel, is designed to ensure faster order fulfillment for prospective future machine sales. Off to you, Brent.

Thanks, Nav. Now, I mentioned at the beginning of our call that we are also working towards further significant expense reductions. Our goal is to reduce our expense base by more than $1 million by fiscal 2028, and I will be disclosing the details of this plan in the coming weeks. Stay tuned. Before opening the call to questions, I want to leave shareholders with one final thought. EnWave has spent many years developing REV from an innovative drying technology into a proven commercial platform. Today, our technology is being used commercially across multiple countries, industries, and product categories. The opportunity in front of us is increasingly about scale. Scale the installed base, scale our successful royalty partners, scale our relationships with major food companies, and ultimately scale the recurring royalty revenue generated from this technology. The second 120-kilowatt machine order for Procesadora is a good example of what that model can look like when a partner succeeds. We have cast a massive number of hooks into the pond. We have many fish on the line currently, and now we are really in the mix. We appreciate the continued support of our shareholders, employees, partners, and customers. Now, with that, I'd be happy to open the call to questions. If you have any questions specific to royalty partner progress, please ask. Thank you.

[Operator Instructions] Our first question comes from the line of Noel Atkinson with Clarus Securities. Please proceed with your question.

Hi, Brent and Nav. Well done on a much improved quarter for fiscal Q3. Nice to see that. First off, just in terms of this planned OPEX reduction or expense reduction that you're planning to do over the next 12 months or so, I guess, where does that kind of get you in terms of an overhead? Like, do you get to the point if you think you're going to do $3 million of royalties in fiscal '27, do you kind of get to the point where royalties are almost covering all your kind of cash operating costs?

Yes, you nailed it, Noel. We want to be faster to that particular scenario, and we think that we can get our base expenses down to about $3.5 million from the changes that we're contemplating. And of course, again, like I said, those details will be shared with the markets, investors, and shareholders within the next couple of weeks. And with our royalty expected to reach about $3 million by fiscal 2027, we're going to be ever close to that scenario. And so by 2028, we think that we should be generating royalties well above what our base expenses are to run this business.

Okay, great. Secondly, okay, so it sounds like there's now more of the blue-chip companies, I presume that's blue-chip CPG companies in '27. Can you talk at all about, to the extent that you know or the extent that you can disclose, like geographies? Is it human? Is it pet? Is it snacks, ingredients? Like what is it that's really driving the interest from the blue chips right now?

So yes, your assumption is correct in that it is blue-chip CPG companies in both the pet and human space. And so we are knowledgeable of several of these launches. Information has been shared with us by our royalty partners who are co-manufacturers for these larger organizations. And those larger organizations we're also directly working with on the product development side. So we have insight. That should be in primarily North American launches, albeit some of the co-manufacturers that would be participating in these opportunities may be based outside of North America, say in Europe in certain cases, to help support some of these new products being introduced to market.

Okay, great. Then finally, so, this might be a very similar question here, but as you're going out over the next 12 months or so and you're seeing royalty growth, like we see from BranchOut Food talking about tripling or quintupling their ingredient production for dried pieces that are going into CPG products for flavoring and color and that sort of thing. And we see them doubling their production for new listing wins in U.S. retailers for their own branded products. Are you seeing this fairly broadly across the partners that you're working with? Is it, hey, we've got a couple partners that are just blowing the doors off and are just leading the way for everybody? Or are you also starting to see some of those other commercial licensees that you've had for a while starting to say, okay, this is really starting to pick up and we're really starting to get going with this?

Good question. Also, across the board, I'd say the majority of royalty partners are seeing a rising of tides in overall royalty payments coming through, which is great, indicatively, that REV-dried products are further displacing other alternatives in the market. In terms of leading the way, BranchOut Food and MicroDried are by far showing the most growth in terms of royalty generation. We saw like a 265% increase year-over-year for BranchOut Food as they are ramping up their facility and then landing those deals you've talked about. And then in terms of MicroDried, we saw very healthy growth, like in the 20% to 25% percentile growth year-over-year for them. And from past discussions in the last month, again, we're quite confident with that expectation of $3 million in royalties based on machine utilization that's been shared with us tied to specific projects from some of these larger royalty payers, and the potential for, again, additional repeat purchase orders from these folks sometime in the latter half of fiscal 2027. So we do have better clarity to provide confidence behind that assumption, given, again, the information that was shared with us.

All right, and just one more from me before I get back in the queue. So, this always sounds pretty exciting for '27 if all the stars kind of align here. Are you seeing that the quote-unquote blue-chip CPG companies that are now looking to do these product launches, what's been the sales cycle of them working with you or working with your co-packer partners in terms of getting to the point to say, hey, you know what, I think we want to go launch with this? Has it been like a 2-year cycle or a 1-year cycle? And then for the newer ones that are coming in, are you seeing an acceleration of that decision to say, okay, let's just get going? Like, is there validation that you're seeing in the market that is driving these blue-chip companies to say, okay, vacuum microwave is now something that we can really kind of latch on to?