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Good morning, and welcome to EnWave Corporation's Third Quarter Fiscal Year 2021 Earnings Conference Call. My name is Donna, and I will be your operator for today's call. Joining us for today's presentation are the company's President and CEO, Brent Charleton; Daniel Henriques; EnWave's CFO and COO of NutraDried; and John Budreski, EnWave's Executive Chairman. [Operator Instructions]And the conference is being recorded. [Operator Instructions]Finally, I would like to remind everyone that this call will be made available for replay in the Investor Relations section of the company's website at www.enwave.net. Now I would like to turn the call over to EnWave's CEO, Mr. Brent Charleton. Thank you, sir. Please go ahead.
Thank you, and a warm welcome to everyone on the call. I'm very excited to discuss our performance this quarter and highlight some of the key areas of our business. But before proceeding with our call, 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 wave on SEDAR when reviewing this information. Also, all amounts discussed will be in Canadian dollars unless otherwise noted. Now with the mandatory disclaimer complete, let's proceed to discuss EnWave's best-ever consolidated quarterly financial performance. The turn for both of our primary business units is well underway. As with all of our conference calls, we refer to our patented vacuum microwave technology business unit as EnWave and our operating subsidiary that leverages Rating Energy Vacuum or REV for short for branded and bulk snack products as NutraDried. I'll begin today's call with an overview of EnWave's corporate progress year-to-date and performance in Q3 as well as our plans to accelerate business growth and profitability in Q4 and into fiscal 2022. I'll also highlight several key improvements at NutraDried, which is well on its way through a material turnaround. Following my update, Dan, EnWave's CFO and COO of NutraDried, will summarize our Q3 consolidated financial performance and discuss several key performance indicators that relate to the health of our enterprise. We proactively cut our expenses significantly at EnWave at the onset of the COVID-19 pandemic. This greased the skids for our team to drive efficiencies, thrive in new leadership roles and ultimately innovate to allow our business to accelerate its growth. We're all proud of the success we've had this year, but by no means are we satisfied or complacent. We've begun the process of executing a major turnaround at NutraDried in Q3. The decision to restructure NutraDried and to change management in February 2021 has led to the creation of a sustainable cost structure, the hiring of a new capable leader of the business unit and a far more collaborative environment within our collective enterprise. Brad Lahrman, our new NutraDried CEO, and has been an excellent addition to our team, and Dan continues to shine in his dual role supporting both business units when needed. In Q3, we did what we set out to do, turn EnWave profitable and materially turn around NutraDried. On a consolidated basis in Q3, we had our best-adjusted EBITDA in 2 years and our highest quarterly net profit in the history of the company at $670,000. Segment highlights include NutraDried producing positive adjusted EBITDA in Q3 and about $100,000 in net profit after losing millions in Q1 and Q2 -- and then we have generated over $2 million adjusted EBITDA year-to-date, over $3 million improvement over the year prior and a bottom line net profit of $547,000 year-to-date, $530,000 generated in Q3 alone. Dan will expand upon our improving financial performance later, but it's clear that our prudent expense reductions, improved operational efficiencies and the accelerating commercialization of REV technology promotes sustained profitability. In regards to our year-to-date commercialization progress, we secured 11 new commercial licenses, 4 TELOA's, 3 R&D license agreements and sold 14 10-kilowatt machines, one 60-kilowatt, one 100-kilowatt and one 120-kilowatt for a total of 420 kilowatts of rating energy vacuum machinery sold fiscal year-to-date. More specifically, in Q3, we signed 2 new royalty-bearing commercial licenses. One with Europe Snacks, a large snack food company from France, who will focus on healthy snack innovation and the other with BranchOut Food, a U.S. company who recently in a Small Business Innovation Award at the Sweet and Snack Expo for their truly banana snack products, an innovation developed in-house by our food science team. We also signed a TELOA with Bridgford Foods, who is collaborating with the U.S. Army to scale up the production of closed combat military fuel rations as one of their industry partners. We have been told by our contacts that funding to acquire a large-scale REV machine is approved for 2022, but the purchase order can't be confirmed until the U.S. government officially releases those funds. Our machine sales also improved in Q3 as we sold 2 10-kilowatt machines, one to Dairy Concepts of Ireland, who recently launched their Cheeso's snack product into the U.K. market and the second to NuWave who is focused to shelf-stable baked products. Lastly, we resold one of the 60-kilowatt machines purchased back from Tilray to branch out Foods at a very healthy margin. In Q4, to the date of this call, we signed a material transfer agreement with AstraZeneca to trial the drying of several select monoclonal antibodies. We signed 2 new royalty-bearing licenses with 2 cannabis companies, Medical Kiwi from New Zealand and Cannaponics in Australia. Both Medical Kiwi and Cannaponics purchased 10-kilowatt GMP REV machinery, and both of these deals were generated -- but -- through our exclusive channel partner in that region, a company named Scitek Australia is doing great work for us. This is a clear example that our strategy to leverage international sales reps is starting to pay off. And we signed a fourth agreement with Dole Sunshine Company, one of the largest international fruit and vegetable companies globally. On Thursday, we announced plans for this global strategic partnership with Dole to develop innovative nutrition solutions using fruits and vegetables. Dole purchased a 10-kilowatt machine for accelerated product development as part of this relationship. We have been collaborating with Dole in late 2020 and our relationship is with the most senior executives within their group. We expect to see Dole accelerate market trials through the end of this year, and if successful, acquire meaningful REV manufacturing capacity shortly thereafter. Before committing to a public relationship with us, Dole completed thorough due diligence and evaluated several incumbent technologies. EnWave's patented dehydration technology will assist Dole in bringing better-for-you snacking options to its global customer base as part of Dole's Sunshine for all commitment. I'm very excited about this relationship and the potential positive impact could have on our business, both near and long term. The highly anticipated start-up of our REVworx toll manufacturing facility is now scheduled for Q1 for 2022. There have been several delays in the construction of our facility, all caused by delays in municipal permitting but we're past those now. We expect REVworx to be operational in early October, and the construction of the facility has been well underway. We're currently waiting for the permit to complete the installation of proper drainage in the flooring before we commission the REV machines and start conducting total manufacturing services. We submitted our permit application in City of Delta, and we'll get that final approval any day now. In preparation for commercial production capabilities, we did hire a quality control person and are actively working on setting, up the prerequisite programs for Safe Quality Food System or SQF and [indiscernible] to meet the food safety requirements. Before the end of Q4, we hope to confirm the sale of a new large-scale machines into the cannabis sector and several additional 10-kilowatt sales. If we can get that done, which obviously is within a month's time here, we'll continue to see growth headed into fiscal 2022 with a lot of momentum. Our pipeline is robust beyond these near-term prospective deals, and we hope to double the amount of large-scale REV machines sold in fiscal '21 and fiscal '22. Our outlook regarding the sales mix for our business hasn't changed. We continue to anticipate approximately 60% of new business coming from food licensees and 40% coming from cannabis deals. Given the rapid build-out of infrastructure and the evolving state legalization framework, we view the U.S. cannabis industry as one of the more material near-term opportunities for our company. To provide additional context regarding the size of our current U.S. cannabis opportunities, the 6 largest prospects we are coding collectively operate more than 70 facilities. From our calculations, it would take more than 20 -- 120-kilowatt REV machines to service this cultivation infrastructure. We're confident in the cannabis industry penetration given the recent compelling data that we have generated in collaboration with one of our licensees, gentle Dry Tech, and with a significant prospect in the U.S. The data collected from drying more than 20 separate strains consistently showed a 30% to 50% improvement in terpene retention compared to the room a dried controlled floor. Further, the visual appeal is stellar and the Ashburns Pure White, which is a key indicator of a clean, smooth experience. As more companies discover the clear advantages of EnWave's scalable and reliable vacuum microwave drying option, we believe a Domino effect could occur here in the cannabis industry. Given the substantial commercialization opportunity, we continue to strengthen our intellectual property protection, the moat around our castle per se. Based on our current active apparatus patents, we are well protected until 2030 with our quantaREV platform in 2032 with nutraREV. We have recently filed additional patents regarding integral mechanical component improvements to further layer protection and extend the terms of our existing licenses.As for process patents, our recent patent application to protect our Terpene MAX process for cannabis drying has been filed, and we hope for a favorable review soon. Our intellectual property, which also includes our process know-how, trademarks, patents, confidential information and equipment is integral to our business, and we will protect it at all costs. On July 28, 2021, we filed a lawsuit in the Supreme Court of British Columbia against EnWave's former CEO, Tim Durance, 3 other former EnWave employees, Gary Sandberg, Bino Anand and Reihaneh Noorbakhsh. And 3 companies associated with Mr. Durance, including Dehydration Research, LLC and Durance Technologies, Inc. We are also pursuing claims against Primo Fabrication, LLC, BC Hop Co. Ltd., Dwayne Stewart, who is BC Hop Co., Limited's President, several companies doing businesses, peregrine, precision systems; and Sean McLean, who is a principal of Peregrine Precision systems. In our notice of civil claim, we allege that Tim Durance and other defendants associated with Durance have used and disclosed EnWave's confidential information in a breach of obligations owed to EnWave. The notice of Civil Claims seeks damages in accounting of profits and injunctive relief. On July 30, 2021, we filed an injunction application seeking orders restraining Mr. Durance and his companies from selling or supplying vacuum microwave dryers pending trial. On August 20, 2021, the court granted an order prohibiting Mr. Durance and his companies and anyone acting in conjunction with them from selling, attempting to sell, supplying, delivering or installing vacuum microwave driers, pending the hearing of EnWave's injunction application. The date for that injunction application has not yet been determined, and the order will remain in effect until then. We will show further updates as they become publicly available. NutraDried's turnaround will continue under the new leadership of Brad Lahrman, our new CEO, and with the support and collaboration from EnWave team. Plan is simple, NutraDried is focused on cash flow and managing working capital to ensure sustained financial stability in the near term, while pursuing plans to rapidly increase distribution, improve velocities and launch incremental new annuities products and build out its bulk and private label business to stimulate growth. We've seen growth in velocities across grocery year-over-year of approximately 30% of over the past 24 weeks. NutraDried's innovation pipeline has been activated, and we plan to launch select, well-tested new formats and products in fiscal '22. We've also raised Moon Cheese pricing online and are exploring viable options for brick-and-mortar. We're also looking forward to working with our new grocery broker, Alliance Sales and Marketing to deliver growth and distribution in the coming months. The significant upside in cheese snacking will keep us focused in the space. Americans love Cheese and the U.S. shelf-stable cheese snacks category, which is a $1.2 billion in value is growing mid-single digits each year. Further, the all natural cheese snack is growing at a clip of 35% to 40% per annum. NutraDried plans to be opportunistic with new snack mix introductions as well as new dairy-based product formulations. We plan to dial up promotional efforts to drive trial and velocity in fiscal '22, win meaningful new checkout lane placement and expand the distribution of our core Moon Cheese products in core channels. We recently secured single-serve placement of our 1-ounce items in a subset of Walmart stores in the U.S., signaling the progress is well underway. Club and convenience channels will also be targeted for growth and we hope to announce new wins in the coming months. Our entire team is bullish on the future of NutraDried and prospective performance in fiscal '22. With that, I'll turn it over to Dan Henriques, EnWave's CFO and NutraDried's COO, to summarize our Q3 financials.
Thanks, Brent. Good morning, everyone, and thanks for joining us on today's call. I'd like to take some time to review the Q3 financial results. Please note the figures I'll be going over today can be found press release from this morning and in our financial statements and MD&A that are filed on SEDAR and all amounts will mean Canadian dollars unless otherwise noted. I will also 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 GAAP net income in our MD&A. We are very proud of the financial results achieved for Q3, with both EnWave and NutraDried reporting strength in margins and positive adjusted EBITDA. Last quarter, we communicated our intention to significantly cut spending and turn around NutraDried, and we followed through with that plan. Our results in Q3 reflect a nice combination of revenue growth at NutraDried and a reduction in SG&A spending. In Q3, we reported consolidated net income after taxes of $670,000, marking our highest ever quarterly or net income. For reference, our consolidated net loss for Q2 was $2.2 million and $1.1 million for Q3 2020. There is still plenty of runway for us to continue to grow both business units into consistent profitability but this makes us very confident in the merits of our business model. The financial performance in Q3 is attributable to 3 main trends: First, EnWave's REV machine sales continue to expand and our margins from selling machines improved with a lower manufacturing cost structure. Second, NutraDried's revenues rebounded after securing new opportunities to sell bulk product, improved grocery distribution and co-manufacturing opportunities. Third, we significantly reduced SG&A expenses at NutraDried as part of the restructuring announced in February. We've got the full benefit in Q3 after reducing staffing and purging nonessential spending on consultants and agencies hired by former management. I will now take you through some of the highlights from our Q3 2021 financial results. Consolidated revenues in Q3 were $7.3 million with $3.5 million coming from EnWave's technology business and $3.8 million from NutraDried's product sales. Overall revenues were $1.3 million higher in Q3 2021 relative to Q3 2020 and $2.7 million higher than Q2 2021, a nice improvement. EnWave's quarterly revenues of $3.5 million for Q3 2021 were higher when compared to Q3 2020 by $1.9 million and higher than Q2 by $1.2 million. In Q3, our machinery sales grew with revenue from 3 new large-scale machine orders as well as 3 smaller-scale machines. We continue to see growth in the frequency of machine orders from both new licensees and repeat orders from existing licensees adding capacity, an encouraging trend. NutraDried revenue was $3.8 million for Q3 relative to $2.3 million for Q2, an increase of $1.5 million. Our sales at NutraDried improved relative to Q2 and due to the addition of several new bulk B2B product sales opportunities and incremental new channel NutraDried has begun to aggressively pursue. Over the coming quarters, we expect to continue to grow our bulk sales from our dried cheese products going to complement our branded business. We really like the bulk channel as it yields strong, clean margins for us. We are also pursuing a number of co-manufacturing opportunities at NutraDried as part of the new growth strategy that's in place. Our royalties for Q3 were $191,000 compared to $144,000 for Q3 of 2020, an increase of 47,000 with 2 large machines recently installed, 3 underway, we expect our royalties to continue to grow as our licensees build commercial momentum with their different products. In Q3, we reported a consolidated gross margin of 36%, up from 26% reported in Q3 2020 and just 10% in Q2 2021. Our consolidated gross margin lift in Q3 was driven by higher margins at EnWave and NutraDried. We took significant steps in NutraDried to get costs under control and properly aligned manufacturing resources with demand and the benefit of these cost controls improved our gross margin in Q3. The addition of bulk ingredient sales at NutraDried created incremental sales volume and that added to our margin as well. Over the coming quarters, our objective is to grow NutraDried margins through the use of installed plant capacity, growing the bulk and co-manufacturing revenue streams and expanding the distribution points and sales for our branded wound cheese. The new management team at NutraDried is now laser-focused on managing our production costs and inventories. EnWave's margin profile in Q3 continued to benefit from our lower and variablized cost structure to manufacture and deploy rev machines. We redeployed 2 large-scale machines originally purchased by cannabis customers into new royalty partners for higher margins. And in the near term, we expect our cost structure and wave to remain at current levels and are focused on driving margin growth through the sale of additional red machinery and growing our royalties. Now turning to SG&A expenses. We told you in February when we announced the restructuring of NutraDried that we'd significantly lower SG&A spending in that business unit. Our combined SG&A expenses, inclusive of R&D for Q3 was $2.2 million compared to $2.9 million in Q2, a total reduction of $700,000 in the quarter. We were serious when we said we'd drive unnecessary expenses and staffing out of NutraDried, and we gained the full 3-month benefit of these reductions in Q3. We reported G&A expense of $1 million in Q3 2021 compared to $1.2 million in Q3 2020, a reduction of $200,000. Relative to Q2, our G&A expenses were lower by $179,000. We do not anticipate significant increases to G&A expenses over the near term and now have a sustainable cost structure in place in both business segments. We reported sales and marketing expenses of $831,000 in Q3 compared to $1.5 million in Q3 2020, a reduction of $618,000. Relative to Q2, our sales and marketing expenses were lowered by $473,000. Our biggest area of cost reductions at NutraDried was reducing the use of expensive marketing agencies, consultants and reducing staffing, focusing our marketing spend on working dollars as opposed to agency fees and managerial costs. We've aligned our sales and marketing budget with the size of our business at NutraDried, providing us with the tools we need to grow the business in a profitable manner. As we launch new products and invest in driving velocities where we have distribution, will add in marketing dollars where we can generate strong returns. We also told you last May that we rightsized our SG&A expenses at NutraDried while still investing in areas that will allow us to scale. Now at both EnWave and NutraDried, we have the appropriate infrastructure in place to allow us to scale the businesses while appropriately managing expenses. Our adjusted EBITDA, a non-IFRS financial measure, so please refer to our MD&A for the reconciliation from GAAP net income to adjusted EBITDA, was a profit of $937,000 for Q3, a substantial improvement compared to a loss of $1.9 million for Q2 and a loss of $1.1 million for Q3 of 2020. We also reported a positive GAAP net income of $670,000 in Q3, our highest quarterly positive net income ever. Both EnWave and NutraDried reported positive adjusted EBITDA in Q3. A stark improvement at NutraDried from where we were just 3 months earlier. There's still a lot of work to do as we grow both businesses, but closely controlling spending will be part of each and every decision we make. Turning to the balance sheet. Our balance sheet and treasury position at the end of Q3 continues to be very strong. We're cash strong and using it to invest in growth and buying back stock. Our cash position was $15.3 million, up from the $14.7 million on September 30, 2020. Notably, we reduced our inventory balance at NutraDried and now have much better control over our inventory relative to product sales, something the past management neglected. Through the first 3 quarters of 2021 we generated $3.7 million in cash from operating activities and $780,000 (sic) [ $780 ] alone in Q3. We're using the cash we generate for growth including investing $1.8 million into new plants and equipment, primarily for the new REVworx toll processing facility. Our net working capital position is $19.7 million and our balance sheet remains in practical terms, debt free, except for our facility leases and a small low interest COVID-19 relief loan received by NutraDried. In October 2020, we implemented a normal course issuer bid and obtain TSX Venture Exchange approval to repurchase up to 10.9 million common shares. So far this year, we've repurchased 279,700 common shares at a weighted average price of $1.16 per for a total use of $323,000. We continue to use the NCIB while not in blackout conditions to further return stock value to our shareholders. With that, I'd like to turn it back to Brent for his closing remarks.
Thanks, Dan, and I think you've made it abundantly clear that we have materially improved our performance in Q3 and have set the table for continued growth. Now given our strong consolidated financial performance in Q3 fiscal '21 and anticipated solid consolidated Q4 numbers, we are planning to begin investing again modestly towards Investor Relations to amplify our business progress in the capital markets. We obviously pulled back on a lot of our expenses through COVID to ensure that we have the appropriate cost structure to run our business. We will be conducting several virtual roadshows in September and plan to maintain consistent activity onwards to obviously support the great progress that we hope to be making. If our marketing efforts in the capital markets combined with much improved financial and commercialization progress don't stimulate market capitalization improvement and a fair value from the perspective of EnWave's executive management and Board we will consider using our NCIB to purchase back large amounts of stock. EnWave and NutraDried are operating with appropriate cost structures and collaborating to best improve total enterprise value. Our leadership group is collaborating more than ever before, and our executive management incentives are well aligned. Further, we have multiple employees from both organizations that are working together on projects to either benefit EnWave's Royalty Partners or NutraDried's product portfolio expansion and sales growth. We have made smart opportunistic business decisions year-to-date fiscal '21, which has led to our vastly improved financial performance in Q3. It will take continued prudent management and measured risk to achieve our commercialization goals in fiscal '22 and beyond. And we're committed to remaining fluid and will react appropriately to evolving market opportunities. As we look forward to fiscal '22, both NutraDried and EnWave share strong optimism regarding continued growth and improved financial performance. Our leadership group will continue to execute on our business plans to further expand and accelerate the commercialization of REV technology through machine sales, royalty generation, toll manufacturing and branded consumer packaged goods product sales. With that, I'd now like to open the call for your questions. Operator, please provide the appropriate instructions.
[Operator Instructions] Our first question is coming from Steve Hansen of Raymond James.
Congratulations on the great results, quite the turnaround. Just a couple for me to start with. Brent, can you just reiterate, I think you said in your prepared remarks that you're expecting machine sale to double over the current year with one more large one to come? And I was also wanting to ask you just to clarify some of your comments on the cannabis opportunity. I think you said the 6 largest prospects represent a potential opportunity of X, but I missed it in the commentary, so I apologize?
Yes. No problem at all, Steve. So in terms of performance through the end of Q4 here, we have not just one, but a handful of large-scale sales opportunities, which we're hoping to obviously complete to hit the mark, which we provided as guidance for fiscal '21 of 5 large-scale and 10 kilowatts. We've clearly surpassed the 10-kilowatt mark and hope to obviously meet and/or exceed the large-scale guidance we provided. For fiscal '22 based on the pipeline of anticipated upscaling from several of our current royalty-bearing licensees as well as new license partners from both the cannabis and food space that we're working, a realistic target that our entire group is focused on hitting these 10 large machines. And on the small scale, we'll likely increase that internally to 15 based on the cadence of sales that we're seeing to date. In terms of the companies that we've signed NDAs with and are actively courting in the U.S. cannabis space, I mentioned that they had 70 or more than 70 facilities collectively that they're operating through and that it would take more than 20 large-scale 120-kilowatt machines to satisfy that infrastructure. That's obviously assuming 100% saturation, but that's certainly part of what's played into our guidance for fiscal '22.
Very helpful. That's great to clarify. And just -- if we wanted to take a step back then and think about the cannabis opportunity near term. Is there -- you described that you could see some sort of step change in the acceleration of adoption. But I mean just thus far as you look at the benefits, is it a specific -- what has been the trigger point on the sales? Is this the new data that's coming through, you described the 30% to 50% increase, I think, in terpene retention, for example, like what is it that's really catalyzing the sales in that space right now from your perspective?
I think seen is believing and the ability to collaborate with several of our current license partners in that vertical and allowing prospects to come and see large-scale machinery and operation and run trials themselves on our 10-kilowatt units, and collecting the data that proves out what we're telling them that when we're providing our sales pitch is key. I mean it's almost too good to be true when we're saying, okay, yes, 30% to 50% more terpenes typically and better THC and CBD and the smoke is still as good as it would be if it was [indiscernible]. That's all great to say, but you have to prove it. And we now have all the tools to prove that. And I think that's why we feel confident that once we can push over the next few Domino's that it will become an effect in the U.S., especially with the companies that we're in active dialogue with.
Okay. Helpful. And then just quickly on the Dole relationship because that is a new one that seems to be quite significant. Can you maybe just describe what the milestones are that and you expect to see under this new arrangement that will allow them to accelerate that product opportunity for themselves and then ultimately translate into additional machine fields?
Sure. I have to keep it very high level given the confidentiality requirements between our 2 companies, but I will be forthright in saying that I think that this relationship evolving is something significantly material for EnWave within the next 12 months. They purchased a 10-kilowatt replacement at one of their facilities to allow for production of smaller amounts of product to trial in several different countries globally. And the purpose of that, obviously, is to gain enough confidence to then acquire to be multiple large-scale aligns to satisfy the manufacturing capacity that will be demanded for entering those markets. They have a huge internal push here to diversify into shelf-stable better-for-you snacks. And beyond the snacking project, which hopefully some of their products in the market actually in the North American geography soon. They are interested in ingredient processing, too. So of course, part of our sales pitch, the food -- I'm sorry, fruit and vegetable market is the ability to drive B&C ingredient materials or off-cuts and then convert that into functional ingredients. And so I really do believe that this Dole relationship has massive potential not only on the snack side, but expanding into the ingredient space.
Okay. Great. And then just one last one for me and I'll jump back in the queue. But just on the consolidated financial performance, again Brent, obviously, a strong performance on the EBITDA and the net income side. But is that a trend that can continue here? You're describing growth, but you're also describing some added investments. So I'm just trying to get a sense for whether we can continue to see a positive EBITDA clip going forward?
Yes. I'll take that one, Steve. So we have a very strong Q3. We got the full benefit of the cost reductions we made at NutraDried. So we really pulled out the unnecessary expenses that weren't creating returns on investment. And so we don't intend to add any of those back over the next coming quarters of NutraDried. So that should continue to support strong consolidated financial performance in the next quarters here. We added in the new channels for sales at major drive also. So we started selling our product in bulk format to be used as ingredients and inclusions and other snack items, trail mixes and things like that, and we're continuing to get new wins in that channel. So we expect the turnaround NutraDried to continue, and we don't need to increase spending at NutraDried to achieve growth. We have the tools that we need to go out and address the market opportunities. So short answer, I think we're not entirely around the corner at NutraDried, but we're 80% there. There's still some more work to be done, but we can expect better performance in the next few quarters here.
[Operator Instructions]Our next question is coming from [Joseph Silla ], a Private Investor.
I'd like to know about your finished goods inventory. It seems that sales are made and then it takes months to install the machine. Do you -- can you give any -- shed any light on your finished -- current finished goods inventory and what your prospects are for building, especially if you're expecting to double your machine sales next year?
Sure. I'll answer that one for you. Our revenue recognition policies for machine sales are for large machine orders, we record revenue over time using percentage of completion. So as soon as we get an order and start making progress towards delivering machine revenues start to appear in cost of goods in our P&L. On the 10-kilowatt machines, we get an order, and then we recognize the revenue once we finish installing and training a machine for our partners. So sometimes that can take a couple of months depending on delays in either inflation of the machine, facility readiness and things like that. So sometimes, we'll announce machine orders that we don't book the revenue on for one quarter or maybe even 2 quarters for 10-kilowatt machines. So it can take some time. Those machines will stay in our finished goods until they're installed and the operators trained on how to use them.
Our next question is coming from Neil Linsdell of AI Capital Markets (sic) [ iA Capital Markets ] .
Congratulations on a fantastic quarter. I'm trying to unpack how well you did on the NutraDried side. Obviously, with the loss of cost, the year-over-year numbers are down, but it was kind of a surprising increase even if I backed out the bulk cheese sales, it looks like on Moon Cheese, you probably had to want to share your percentage improvement?
We don't break it down by percentage, but I will tell you that our velocities in regular grocery distribution are improving. The conditions that we had in Q2 in the marketplace have improved heading to Q3. So we're seeing shoppers go back to normal, go to multiple stores to get the goods they want and that's helping improve our velocities in the grocery channel. So yes, we added the bulk channel to our sales, which helped in the quarter, obviously. But if you back that out, we're still seeing velocity improvements. So like the units per store per week are going back up to where they were precoated. So that's an encouraging trend, Neil.
Okay. That's great to hear. And then on the bulk -- sorry, Brent, go ahead.
I was going to say just about margin improvement, too. So obviously, there's a dramatic improvement from Q2 to Q3 up to 20% gross margin. But when we see that business normalizing and hitting what we expect as being a modest manufacturing capacity increase, the gross margin should be somewhere in the range of 30% to 35%. So there's still obviously great room for improvement, both on the operational side and performance side. And we talk about performance. Just a couple of details to add, we got our first purchase order from [indiscernible] which is a good sign, getting to that style of distribution sort of focused on club area. And then one caveat to this growth prospects with NutraDried is hopefully the fourth wave of COVID doesn't install a lot of these means that have already been set up and the momentum that we're currently generating. That would be the one caveat. Other than that, we're incredibly optimistic about NutraDried's future and continued turnaround.
Okay. Sounds good. Would you, at some point, be thinking about breaking out the bulk cheese sales in your revenue breakdown? Or -- can you give us an idea, is that really going to be a new stable business that's going to continue and grow? Or is it more lumpy, do you think?
It's absolutely going to be a new channel that we continue to sell into. In terms of the quantum, we may have ups and downs just like any other channel, but because of the volume going to specific customers and their ordering patterns. So in this quarter, we had 4 big customers that were doing most of the buying. And so if one of those changes, that can affect quarter-to-quarter results in bulk. But over time, if you're to add it all up, we expect the channel to grow. And we're just starting to scratch the surface. There's a lot of interest in the snack marketplace to have healthy inclusions and innovation in things like trail mix and in those types of products has been fairly stable over time. And so this brings something new that's starting to generate some interest. So I think we expect it to grow over time. We'll have -- we may have good quarters and bad quarters in terms of bulk like any other business. But as we add more customers, it will begin to stabilize and it will become unpredictable.
Okay. Great. And then with Walmart, specifically, you talked about that. Could you just explain the number of stores you're going into now? Or what happened in Q3 versus what's going to happen in Q4 and going forward with Walmart? And does that include Sam's Club? Or...
Yes. So we got 2 items, our 1-ounce format into about 400 stores right now. It's going into the checkout lane. So it's at the front of the store. We have been told by the broker that if it's successful, it could expand into 1,300 stores in the U.S. So our -- we've already received the orders and we expect that stuff to be on shelf here in the next, call it, 6 to 8 weeks. And if it does well, we hope it will expand into more parts of the store. And it's a good toehold into that retailer because ultimately, we want to get to the center of the store at Walmart. So we want to be in the snack aisle. And so we're hoping this first entry point could lead to more growth with that retailer.
Okay. I understand. And for the SG&A, you kind of surprised me in talking about you're not going to see increases in SG&A from Q3 into Q4 into Q1, despite all this kind of ramp-up in activity or the new product sales. Is it because we're still not seeing those trade shows or travel that you might otherwise do? Or you just feel like you've got a great platform here and you can really leverage it up?
Yes. We're going to attend trade shows where we can. We've got Expo East coming up at the end of September that by -- what we're being told now is still going ahead in Philadelphia. We don't expect travel to increase over the near term, just yet. We still have a lot of buyers in the U.S. doing things over the phone. They're taking meetings, which is a good step towards reopening. But they're not going places physically like they used to flying around and our sales team will be flying around. So we've been doing this kind of stuff for the last year anyway. So I don't think that we need to add much more expenses to fuel growth. What the expenses we've pulled out aren't things we plan to add back.
Okay. Any thoughts about putting another unit into NutraDried?
Well, there are some opportunities on the horizon that could lead to co-manufacturing growth that could require a third machine. And obviously, if those opportunities materialize, we will install the capacity we need. But it's contingent on growth. So as we continue to grow and win more distribution and grow the co-manufacturing a bulk channel. We'll add in that machine when we need it.
Maybe for '22 given some large, large opportunities that we'll obviously confirm when they're signed, if they're signed.
Great, it's easier. Okay. And just going back to the Dole again. I just want to make sure I understand the. It looks like it could be a potentially huge relationship there going forward. Starting off pretty small with the 10-K unit. Is it all dependent on new products or new channels that Dole is working on? Or would it be something that would be used in existing products? I'm thinking about like the dippers products, you've got some freeze-drying or some freezing there with their banana pieces. Are you trying to integrate any of your technology or anything from Elea into the Dole products? Can you just explain the development of the products and what we should be looking for going forward?
Yes. Sorry, just to clarify. I think you mentioned Elea as well in that question. So Elea is Pulsed Field Technology, which is a pretreatment to vegetables and fruits for certain applications is not being considered for the Dole applications that would be prospectively going to market in the very near term here. In terms of the area or the portfolio, it's an expansion. So they're going into, obviously, shelf-stable better-for-you snacks that are dried versus what we typically would see either can or the small packs in juices and what have you. So that would be relatively new to Dole. That is one part of the project. The other part, as I mentioned earlier, is early-stage engagement with their ingredients division which would be essentially employing REV as a consolidator of processes to get to the point where the off-cuts and our B or C grade materials can be in drive forum, ready for powdering, and then being used as functional ingredients. So it's a twofold project at the moment. In terms of the ongoing collaboration and then there's a question submitted online to you about this, like what does it mean like this global strategic partnership? Is it just you sell the 10-kilowatt license, and that's it? No, no, no. We're heavily intertwined with their leadership in marketing, new product development and senior executives on leveraging our tech as much as they possibly can to carve out a competitive advantage in the marketplace. And so we're talking about weekly calls and commitment from the highest levels in the organization to move quickly. This is not like a 2025 project. This is like a now project, where they're going to commit necessary capital to get the infrastructure in place. They likely leverage some of our current royalty-bearing licensees to get early stage product, but ultimately want to take manufacture in-house, obviously, to better control their cost of goods.
Our next question is a follow-up coming from Steve Hansen of Raymond James.
Just a follow-up on the REVworx start-up and commissioning. Dan, I think you described pretty well the time line to get things going. But I'm just curious if you could remind us where we're at from sort of capacity commitment standpoint and where you're at in the pipeline there to fill that up?
For sure, Steve. So the project was delayed a little bit due to getting some permits from the city here in Delta. We got all the permits we need except for one. So we're just waiting any day now to get the final permit for the modifications we did to the flooring to get the drain, the sloped floors installed, so we can have the best food-grade facility. And so we expect the machine to go in sometime in mid- to late September. So the flooring should be going in, in the next week or 2 here and then there's a hearing of a week, and then we're going to start putting the machine and everything else is pretty much ready. So if things go according to our plan right now, we expect to have the commissioning and startup process completed at some point in October. And then from there, we can start to pursue those certifications. So by all accounts, we should be starting to receive revenue from REVworx at point in Q1 2022, hopefully. It will start out modest as we start to bring customers into that new vertical. But we've already -- we've had tangible interest from a number of companies. We haven't taken the contracts or committed out anything beyond sort of nonbinding capacity offerings just because we don't want to over promise and have our partners make plans to launch products and then have delays in our start-up of our plants and certification. So -- We're getting the interest our sales and business development teams are working on a number of leads to bring products into the pipeline there. So we think we have good prospects to have REVworx up and running and producing revenue for us in 2022.
Thank you. I'd like to turn it over to Mr. Charleton for the web questions today.
Yes. So we have several web questions submitted and we'll go through the ones that haven't already been addressed with the voice questions here. So the first was in reference to licensee activity, one question submitted was asking how many of the 48 current active licenses are actually paying royalties? And how many are what we would consider as dormant or on pause? And so looking at that portfolio of licensees about 10 or so are we classify as being slow in starting their commercialization with smaller-scale machinery and still trying to find their niche. We have about 10 to 11 larger payers that we're seeing rapidly accelerate their royalty quarterly payments. And then the rest have been growing modestly. That all being said, we have 3 large-scale machines set for commissioning within the coming, call it, 2 to 3 months here, which should hypothetically ratchet up the amount of royalty potential for our business immediately. And as I mentioned, we're looking to hopefully secure new large-scale orders before the end of Q4, and there's the prospects of delivering those machines in a very consolidated time frame to again ratchet up the royalty potential for fiscal '22. So as with all projects, some of them will be outstanding and we'll get great success from them. But like anything, some won't be as successful. But that gives you an idea of where we stand today. The second web question submitted was pursuant to our Q3 numbers and asking if those numbers are likely indicator of our performance moving forward through Q4 and into fiscal '22? So as Dan alluded to earlier, our cost structure is relatively stable here, been forthright with our bullishness on near-term opportunities to finish off Q4 and into fiscal '22. And so assume that this pipeline converts into tangible commercial success, we do believe that our numbers going forward should be positive and be moving in the right direction. Dan, do you have any further comment you'd like to share on that?
That sums it up. We put back on expenses at NutraDried, and we have the tools we need to scale the business. Now we've got to go execute. But everything is headed in that direction.
Great. Okay. Another question asked when will the AstraZeneca proof of concept work to be completed? That's underway basically this week. And we anticipate that proof-of-concept work to be completed before the end of calendar year, we may decide to do a few different iterations of the trials, which they're requesting. And then following that, of course, we're hopeful that they'll acquire their own testing machinery or continue testing VR cells or GEA Lyophil, our partner in the pharma space on a basis. More to come on that later, we hope. Next question was asking about the bulk sales manufacturing model at NutraDried? And so I'll pass it over to Dan to just briefly explain the benefit of selling bulk versus some of the branded opportunities.
Yes. It's a pretty simple sales proposition. When we produce our Moon Cheese, the first thing we do after we take it off the drawing line as it gets packed into bulk boxes, and then it will sit there for a few weeks before it heads over to seasoning and packaging for our finished goods. So we now have customers that want that dry cheese and they want to use it for inclusion in snacks, trail mixes, things like that. So it's a typical B2B sales model. We take POs. We don't have long-term contracts in place. But we take POs for bulk from customers that need it. And they pick it up at our facilities, so we don't incur freight. And it's a clean margin when compared to our branded product sales. So we don't incur commissions. We don't have trade spending, we don't have to promote it. It's a clean margin with an invoice and a payment. So that's the general model. There's a lot of interest, I think I mentioned earlier in this kind of inclusion for snacks and mixes and things like that. So we're now out talking about our snack companies, trail mix companies, some of the big players in that space, trying to get their interest in using our format of cheese as part of their innovation pipeline, and we're getting some good results there. So we hope to see that continue.
Thanks, Dan. One of the questions that came through the web portal was do we plan to access -- or increase or improve the access to retail shareholders in the U.S. trade EnWave? And I'll just in short respond that, yes, due diligence is underway, trying to determine the best option to improve the ability for retail shareholders in the U.S. to trade our stock versus over the counter. So more to come on that hopefully in the coming months here. Our next question is to do with expectations, the range from the ongoing litigation? And obviously, I can't comment further than what we've already discussed on the conference call today in terms of an update, as promised, we'll provide pertinent public updates as they come forth. But what I also want to add is that this effort really sets the president that we're not huff and puff and threats that we're going to sue people if we feel that they're in breach of certain agreements. We'll actually follow through. And the reason will follow through is because we absolutely need to protect the cornerstone of our business, which is our intellectual property portfolio. That's what allows us to charge royalties to these large companies leveraging REV technology for their commercial benefit. And then last question that's been submitted that I'll answer today is regarding the U.S. Army asking, okay, it's great. Prospectively, they'll move forward with a large-scale machine if the funding is released as they have communicated to us in fiscal late fiscal '22. How big can this be? How many machines can the industry partners potentially buy for the production of military rations? And so because we don't know how big this is going to get. What we do know is that the 2 primary applications that have already been developed, tested and approved for inclusion would require at a minimum, one large-scale machine likely 2. And so we're talking about 2 components when there's many different ration packs with many different components. And we know that the product application development continues at Natick, where the folks at the U.S. Army are developing other potential inclusions. And in all likelihood, it will be a number of industry partners producing these bespoke inclusions for future use. So in short, we know that there's potentially one coming down the pipe for next year, how big can this be? We don't know.Okay. With that and answering all of the questions submitted through the web portal. I'd like to thank everyone for their participation today and allowing Dan and I and John to provide you with a pertinent update on both business units and the direction of EnWave Corporation is going, reiterate our confidence in how the cost structure has evolved and our outlook with the robust pipeline we have in both businesses. Thanks very much.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and have a wonderful day.