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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to EnWave Corporation's Q3 2023 Earnings Conference Call. My name is Kevin, and I'll be your operator for today's call.
Joining us for today's presentation are the company's President and CEO, Brent 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 question. [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'll turn the call over to EnWave's CEO, Mr. Brent Charleton. Sir, please proceed.
Thanks very much, and greetings to all who have joined us today to discuss EnWave Corporation's Q3 performance and future outlook.
Now, consistent with our past quarterly earnings calls, the information we will present today contains forward-looking information that is based on our management's expectations, estimates and projections. Our statements are not a guarantee of future performance and involve a number of risks, uncertainties and assumptions. Please consider the risk factors in the filings made by EnWave on SEDAR when reviewing this information.
Also, all amounts discussed will be in Canadian dollars, unless otherwise noted.
After a very good Q2, EnWave's Q3 was down, pursuant to lower revenues due to less large-scale machine builds and less-than-expected new machine sales contracted within the time period. We are hyper-aware that our business can be lumpy, hence our expense reductions and thoughtful resource allocation have allowed for us to improve our cash position. Our cash position of $4.47 million at the end of Q3 was up $984,000 from Q2, and our expense structure has total operating expenses that are $1.3 million less through Q3 2023 when compared to the previous year.
We've recognized $2.5 million in revenue for the quarter from continued operations, slightly less when compared to Q3 2022. And through the first three fiscal quarters of 2023, we generated $9.9 million revenue, which is $1.6 million ahead of the prior year. Our third-party royalty revenue, which gets us very excited, in Q3, was $394,000, up about $90,000 from Q2 2023, and the most quarterly royalties generated from product sales, not including exclusivity top-up payments would typically come Q1, ever in the history of EnWave.
This fiscal year, we completed large-scale machine installations in Italy for Orto Al Sole; and Thailand for Dole, of course; in Canada, for a very large cannabis licensed producer; and we will be installing a large-scale machine in Japan later this month for an established partner. Each of these large-scale installations have yet to reach expected royalty-generating potential, leaving future upside to be had, and I didn't even mention the large-scale line slated for Bridgford later this calendar year, early next.
Adjusted EBITDA from continuing operations through Q3 2023 was $703,000, $1.35 million better than the previous year.
Our net loss from continuing operations through Q3 2023 was $1 million, which is $1.2 million better than last year through three quarters. We've had a slow start through the first half of Q4 in regards to news flow, but are working hard to close large-scale orders, several 10 kilowatt sales and new TELOA this quarter and into next fiscal year. We are also aiming to confirm material manufacturing capacity utilization at REVworx for fiscal 2024.
The wind down of NutraDried is almost complete. We expect to receive material proceeds from the employee retention tax credit program in the near term. The ERTC is a program to provide tax credits to companies who kept employees throughout the COVID-19 pandemic in the U.S. And to date, the IRS has advised us that about USD0.5 million will be paid to us in Q4.
EnWave has also successfully been awarded funding through the Food Processing Growth Fund under the Ministry of Agriculture & Food in Canada. Last month, we were approved for a cost-shared funding project that will fund up to 75% of approved project costs for CapEx relating to REVworx projects to a maximum contribution in the amount of $750,000. We plan to use these funds to complete a more robust retail packaging system and seasoning line specific to projects that we hope to confirm publicly in the coming months. Project funding and spending will be received and incurred over the next 18 months, and we will strategically use these funds when the aforementioned larger REVworx opportunities are confirmed. To date, we've received the first $300,000 in funding.
Collectively, the two programs, ERTC and FPGF, will potentially contribute more than $2 million in value to our business.
In Q3, we signed two new commercial license agreements: the first with PIP International to use a 10-kilowatt machine in Canada for the development and production of high-value pea protein derivative products; and the second with Bridgford Foods, who acquired a 120-kilowatt REV machine through funding provided by the U.S. Army. Both projects could lead to additional REV machine acquisitions in the medium future.
To date, in Q4, we signed a TELOA with Moleciwl of Welsh to rent a 10-kilowatt unit for fruit and vegetable processing. And we're also in the deal bunker with a handful of additional companies hoping to close more deals this quarter and improve our second half Q4 financial performance.
Looking forward, our pipeline is dominated by potential repeat machine orders from food partners. These potential scale-up projects include fruit, vegetable, meat, snacks, seafood and dairy product commercialization. And we estimate now that EnWave needs to sell about five large-scale machines per year, timing dependent, of course, to be bottom-line profitable.
In the cannabis industry, the most recent large-scale installation with a dominant Canadian license producer is working very well. The machine has proven to yield high-quality smokable product and also has allowed the license partner to repurpose several dry rooms in their facility to optimize efficiencies in their operations. We will continue to work with cannabis companies that are sufficiently capitalized and committed to improving their drying protocols.
And with that, I'll now ask Dylan to summarize our Q3 financial results in more detail.
Thanks, Brent. Good morning, everyone, and thank you for joining us today.
Please note that the figures I'll be going over today can be found in our press release from yesterday and in the financial statements and MD&A filed on SEDAR, and all amounts are in Canadian dollars, unless otherwise noted. I will make reference to adjusted EBITDA, which is a non-IFRS financial measure. So please refer to the non-IFRS financial measure disclosures and reconciliation to 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 Q3 ended June 30, 2022.
Revenues for Q3 were $2.5 million compared to $2.7 million in Q3 2022, a decrease of $0.2 million or 7%. The decrease was primarily due to the timing of fabrication contracts. The decrease in revenue was partially offset by third-party royalty revenue, which was $394,000 in Q3 2023 compared to $301,000 in Q3 2022, an increase of $93,000 or 31%. The increase was predominantly a result of an increase in products sold and produced by our royalty partners.
As our royalty partners grow their businesses and increase capacity utilization on REV equipment alongside new REV installations arising from new sales, we hope to see material royalty growth over the coming quarters. As Brent mentioned, there are four large-scale machines which have been recently commissioned or will be commissioned soon that have yet to reach expected royalty generating potential.
Gross margin for the company in Q3 2023 was 29% compared to 47% in Q3 2022. The decrease in margin was due to the production mix during the quarter and a machine resale in the prior period. Gross margin for the company remains healthy at 41% for the nine months ended June 30.
SG&A expenses, including R&D, or research and development, were $1.2 million for Q3 2023 compared to $1.8 million for Q3 2022, a decrease of $0.6 million or 32%. We reduced G&A costs as part of 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 $192,000 for Q3 2023 compared to an adjusted EBITDA loss of $224,000 for Q3 2022, an improvement of $32,000. The increase in adjusted EBITDA was primarily due to the reduction of SG&A expenses, including R&D, offset by lower margins for the period.
We finished Q3 2023 with cash and cash equivalents of $4.5 million compared to $3.5 million for Q2 2023, an increase of $1 million. EnWave had a net working capital surplus of $8 million as of June 30. And aside from our facility leases, our balance sheet remains debt free.
As previously announced, EnWave's Board of Directors and executive management commenced an orderly wind down and value maximization process for the NutraDried business segment earlier in the year. In Q2, EnWave agreed to sell certain NutraDried assets, including trademarks, auxiliary production equipment and select saleable inventory to Creations. Total consideration for the sale of NutraDried assets in the 100-kilowatt unit to Creations was USD2.6 million, of which USD1 million was outstanding as of June 30. And in accordance with IFRS, NutraDried has been presented as a single amount in the face of the statement of comprehensive income as discontinued operations. During Q3 2023, the company reported a loss from discontinued operations of $1 million compared to $1.2 million for Q3 2022, a decrease in loss of $0.2 million.
In August 2023, NutraDried received correspondence from the IRS, advising a USD0.5 million tax refund of an estimated total potential USD1.2 million tax refund would be issued to NutraDried in Q4 2023. The refund is for the employee retention tax credit, which is a refundable tax credit from the United States government for businesses that were affected during the COVID-19 pandemic, as Brent mentioned. As of the date of this earnings call, there has not been any additional correspondence from the IRS concerning the remaining tax refund and there is no certain deal be issued. The majority of the operational work associated with the wind down has now been completed, and there remains a second 100-kilowatt machine that was repatriated from NutraDried that is included in the inventory as at June 30.
Thanks, Dylan.
Cash has been managed well through a slow summer, and we have new companies entering our pipeline monthly. We will continue to closely monitor expenses and only spend when a clear return is present. We recognize the imminent need to sell additional large-scale machinery and have many opportunities to pursue. These sales are the lifeblood of our organization at the moment as we continue to expand our royalty portfolio.
We managed the wind down of NutraDried with precision, minimizing financial exposure and finding opportunities to improve our cash position. We are finally starting to see traction in the market for REV-derived products and we see our third-party royalties increasing as a result. This should continue through the next several quarters.
And with our prepared commentary finished for today, I'd now like to open the call for your questions. Operator, please provide the appropriate instructions.
Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from [indiscernible]. Your line is now live.
Hi, Brent. This is [indiscernible] in Belgium. I have a few questions. First of all, you stated that you [needed] (ph) USD1 million from the wind down of NutraDried. Does that include the tax credits of up to USD1.5 million? And can that difference between the $0.5 million and the USD1.5 million in tax credit still be received?
So, just to clarify, it was a USD1.2 million ERTC tax credit and this is new for this quarter. USD0.5 million we've received correspondence from the IRS that we're expecting that in Q4 2023, and the remaining tax credit as of the date of this conference call, there's been no additional correspondence from the IRS on when or if we'll be receiving the remaining credit.
That being said, getting the good news about just under half of it is a good leading indicator for us to...
Exactly.
...there's a high potential for receiving the remaining amounts.
Okay. But that tax credit is not included in the USD1 million you still need to receive from the NutraDried transaction?
Correct. That's right. USD1 million is still due to Creations -- from Creations.
Okay. Thanks. And then I have a second question regarding REVworx. Can you describe me a bit the evolution of the situation between [Q3] (ph) to Q3, meaning can you give some sort of utilization rate or turnover of REVworx?
Yes. Sure, Bart. I'm happy to provide some better color on REVworx's utilization at the moment. Primarily through Q2 and Q3, the majority of use in that facility had been for line trials for specific product applications to show that the assumed throughputs would actually be correct as they're inputted into the costing model for more robust contracts for supply through fiscal 2024 in all likelihood. Thankfully, those line trials have yielded positive results. And right now, we're in the final stages of negotiating some material contracts that could make up the majority of our capacity utilization next year.
Packaging is being designed and ordered by some of these customers and we're anxious like many of our shareholders to be able to discuss the details of these relationships as soon as we can. That being said, we have also had some commercial production in smaller quantities for Western Canada-based snack companies where they've come in and they drive various amounts of fruit and vegetables and different confectionery products. And we're talking in the quantums of tens of thousands of dollars from those size of companies versus what we hope to be hundreds of thousands of dollars orders from these other deals that we're working to close.
Okay. Thank you. And perhaps one last question on the present royalties that you are receiving. Could you more or less give an indication, let's say, the installed base? On average, what kind of utilization rate are they running?
It varies across each partner significantly. And one effort that we've undertaken internally now is to build a register where we can act I think, more prudently towards the company that may not be performing as we think they should be or perhaps with their reporting, pressure testing, the accuracy of the reporting. And I believe that's going to be helpful in future reporting each quarter and giving you some more color on utilization rate of those machines. But at this point, we have a few leading royalty producers, call it three, four companies that are dominating the royalty payments to EnWave at this time.
Can you give me an indication on what the royalties this quarter were from the cannabis sector, for example?
Sorry, not off the top of my head, but it's a minority relative to the basis of our total royalty portfolio, the majority of which is in the food space.
Okay. Thanks. And good luck in the coming quarters.
Thank you, Bart.
Great. Thank you.
We've reached the end of our question-and-answer session. I'll now turn the call back over to Brent Charleton, CEO, for closing remarks.
Thanks very much, Kevin. There are two questions that come up on the webcast, which I'll address now before signing off for today.
The first is asking how is REVworx functioning, and Bart asked an astute question in terms of current capacity utilization.
I just want to add to that. In terms of our certifications, we just passed our SQF level 2 for the second straight year with a 98% pass rate, which is critical for us servicing some of the larger consumer packaged goods companies. And I think that's going to be put to good use again in fiscal 2024 with material manufacturer.
Second question, any news about the lawsuit?
I assume they're referring to the one that was brought through a civil claim against some former employees of EnWave. There has been progress in the settlement area. Some of that will be made public soon, not with all parties in the civil claim, but with some. And through that, we will be gaining certain materials communications, which will bolster or strengthen our position even more so than it already is from our perspective.
And then the second question within that submission was, can you give some more information about Dole, the partnership and development of new products.
So far, it's going very well with the launch of the Good Crunch snack line, which utilizes our machinery. And there is a desire to diversify that portfolio, inclusion of different snack products haven't yet already been hit the market, which right now is bananas and pineapples primarily. We're actively discussing what manufacturing capacity will be needed for them on a go-forward basis in the relative near term as well. We -- back to Bart's question on capacity utilization, we have certain license partners that could make co-manufacturing capacity available in regions that would be more strategically advantageous for Dole, i.e., in North America versus Southeast Asia as a hub for production of certain additional products into that portfolio. So, we're really looking forward to seeing how that continues to evolve through the next few quarters.
And with that, there are no other questions submitted on the webcast. So, I want to thank everyone for joining us today for EnWave's Q3 earnings conference call. And at this time, you may disconnect. If you have further questions after the call, again, please feel free to reach out to Dylan or I, and we'd be happy to have a conversation.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.