Enwave Corp

XTSX:ENW

Q2-2025 Earnings Call

[Operator]

Good morning, and welcome to EnWave Corporation's Q2 2025 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's CFO. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

Finally, I'd like to remind everyone that this call will be made available for replay via a link in the Investor Relations section of the company's website at www.enwave.net.

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

[Brent Charleton, executive]

Thanks very much, and good morning to everyone who has joined us today for EnWave's Q2 fiscal 2025 quarterly conference call. We had a great quarter, and I'm excited to speak more on our future expectations and the wins we've already announced.

And as always, 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 today will be in Canadian dollars, unless otherwise noted.

EnWave's second quarter fiscal 2025 performance was an improvement from our first quarter and materially better year-over-year. We reported revenue of $3.7 million and $112,000 in adjusted EBITDA. We reported net income of $764,000, mainly due to an employee retention tax credit payment received from the U.S. government regarding our former operating subsidiary. Overall, a very solid quarter. Gross margins also remained strong at 33%.

As we continue to build EnWave's business, I encourage stakeholders to monitor 2 critical metrics: the first is third-party royalties, and the second being a number of large-scale Radiant Energy Vacuum, or REV for short, machines that we sell.

In Q2, our third-party royalties grew to $474,000, up 14% from the prior quarter and the largest base royalties for any quarter historically. We expect royalties to continue to grow in coming quarters due to increased average capacity utilization for deployed REV machinery and additional REV machine sales that we complete.

Up to the date of this call, we've confirmed 2 large-scale REV machines this fiscal year: the first, a 120-kilowatt to be delivered to our Mexican royalty partner Procescir in July for the production of fruit and vegetable products; and the second, a 60-kilowatt machine sold to MicroDried to increase their manufacturing capacity to 4 large-scale REV manufacturing lines.

MicroDried is EnWave's longest-standing royalty partner and has seen great growth in their business recently. Current U.S. tariffs have actually helped their business as importers of foreign food ingredients have been hit, creating a situation where many large food companies are looking for new domestic supply of ingredients.

EnWave needs to sell and deliver 4 large-scale machines a year with the current trailing 12-month royalty run rate to breakeven. Each additional REV machine sale above this minimum, and any incremental increases in royalties collected, will lead to profitability for our business. This also assumes that we keep our current G&A expense structure within its current range, which we intend to do.

And as stated in times past, we have current capacity to produce up to 10 large-scale REV machines per year. Our operating leverage has the potential of increasing materially as each incremental large-scale REV machine sale occurs beyond the first 4 sold each year.

In Q2 and up to the date of this call, we had several material commercial announcements. As discussed moments ago, we sold a large-scale REV machine to MicroDried and consummate the sale of 120-kilowatt unit to Procescir.

We also sold 10-kilowatt REV machines to both Sprouted Proteins of Peru and Hokkai Yamato of Japan. We signed 4 license amendments to allow higher REV machine capacity utilization by several royalty partners, including Creations Foods more recently for pet treats in the U.S., Patatas Fritas of Spain for high protein snack items and we granted BranchOut Food the exclusivity for blueberries in Peru in exchange for a higher minimum annual royalty and also granted processing exclusivity for apple products to MicroDried for the states of Washington, Idaho and Oregon.

Further, a technology evaluation and license option agreement was signed with Solve Solutions of Brazil and a master service agreement with Bio Technique of the U.S. for the continued evaluation of REV technology as a viable drying platform for biopharmaceutical products. Of note, Solve Solutions is a well-capitalized firm that intends to make a go, no-go decision to enter into a royalty-bearing license and buy REV equipment within this fiscal year.

Now Solve Solutions is one of many companies currently in our sales pipeline for fiscal year 2025. We are setting ourselves up to meet the 4 machine minimum target within the year as we've begun to build a 60-kilowatt REV machine for inventory and have opportunistically recently agreed to buy back a 120-kilowatt REV machine from a U.S.-based cannabis company. As we've done in years past with other cannabis companies, our intent is to refurbish this 120-kilowatt machine and resell the unit that is new as soon as possible to more -- a more reliable royalty partner in the food industry. This prospective transaction should yield a margin consistent with new machine sales.

Now our efforts to continue bolstering our sales pipeline has also increased. In the past quarter, we successfully hired a new European business development manager, onboarded her and now have her actively hunting new leads, leveraging her existing network and attending trade shows.

Our existing sales leadership led by Danna Dunnage have also been extremely active, attending Natural Products Expo West, the North American Petfood Form and participating in a federal government trade mission to Australia. Further, we are scheduled to attend the upcoming IFT trade show in Chicago and Supply Side West later in this year.

Now over the past 2 quarters, we've seen an increasing demand for many household name food companies to procure new innovative snack items as well as the demand for healthier ingredients for flavor and color purposes. Consumer trends continue to support the use of REV technology, and the recent more strict rules being enforced by HHS in the U.S. has also stimulated more timely transition from artificial to natural ingredients across the food manufacturing ecosystem.

In many of these interactions, these blue-chip companies have made it clear that they don't intend to invest in CapEx to produce these products internally, but rather prefer to buy from our existing royalty partners who act as co-manufacturers in the food industry supply chain. This is a huge opportunity for EnWave as the potential volume requirements are massive and could drive numerous new large-scale REV machine sales to existing partners. Our 2 most recent large-scale sales are examples of this scenario.

Lastly, REVworx toll manufacturing business was quite busy in Q2, generating $140,000 in revenue for the quarter and $259,000 year-to-date. We are expecting additional contracts for REVworx in the coming months regarding 4 specific projects in negotiation currently. REVworx continues to be a phenomenal showroom for our tech and a critical sales tool used to derisk adoption.

Now with my summarized update complete, I'll now ask Dylan to summarize EnWave's detailed quarterly financial performance. Dylan?

[Dylan Murray, executive]

Thanks, Brent. Good morning, everyone, and thank you for joining us today. Please note that the figures I'll 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 reference to adjusted EBITDA, which is a non-IFRS financial measure, so please refer to the non-IFRS financial measure disclosure and reconciliation to GAAP net income, both in the press release and our MD&A. Also please note that the comparative period I'll refer to throughout this presentation is the prior year Q2 ended March 31, 2025.

Revenues for Q2 were $3.7 million compared to $0.7 million in Q2 2024, an increase of $3 million or 456%. The increase was primarily related to a large-scale machine sale and the commissioning of 2 small-scale machines during the period.

Third-party royalty revenue was $474,000 in Q2 2025 compared to $414,000 in the comparative period, an increase of $60,000 or 14%. Royalties grew due to increased royalty partners, product sales and partner production for the quarter.

And as the royalty partners grow their businesses 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 Q2 2025 was 33% compared to negative 25% in the comparative period. The increase in margin was a result of higher machine sales, royalties and tolling revenue for the quarter.

SG&A expenses, including R&D, were $1.4 million for Q2 2025 and for the comparative period. The company will continue to further invest in sales and marketing activities in the coming quarters.

In April, the company hired another business development manager domiciled in the Netherlands. This new business development manager will play a pivotal role in strengthening the company's international presence and accelerating growth in the European market.

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 adjusted EBITDA of $112,000 for Q2 2025 compared to an adjusted EBITDA loss of $1.3 million for Q2 2024, an improvement of $1.4 million over the comparative period.

The increase in adjusted EBITDA was driven primarily by a large-scale machine sale and the commissioning of 2 small scale-machines, increased royalties and tolling revenue during the period.

We finished Q2 2025 with cash and cash equivalents of $3.8 million and a net working capital surplus of $7.9 million as of March 31. EnWave has a credit facility with Desjardins for growth and working capital purposes. The amount available to the company under the credit facility is calculated as the lesser of $5 million and the function of royalties, receivables and inventory. As of the date of our quarterly filings, approximately $1.5 million is available to the company at a rate of Canadian prime plus 1.5%. The facility remains undrawn today.

The company recognized an USD 836,000 tax refund for NutraDried during the quarter in discontinued operations. The tax refund was 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. NutraDried received USD 460,000 of this ERTC during the quarter. The remaining balance of USD 376,000 was received subsequent to the quarter and is recognized the prepaids and other receivables at March 31. The company does not expect to receive any additional tax refunds or credits related to NutraDried going forward.

Subsequent to the quarter, the company commenced the manufacturing of 2 large-scale 60-kilowatt machines, as Brent indicated. One of the machines as announced in April was sold to MicroDried. The second 60-kilowatt is being manufactured in anticipation of a future machine order.

Additionally, and subsequent to the quarter, the company repurchased a 0-kilowatt machine and 120-kilowatt machine from an Illinois U.S.-based cannabis company. This transaction, along with the manufacturing of a second 60-kilowatt machine on spec, increases inventory levels and strengthens the company's position to deliver on partnership opportunities, expanding the fulfillment and revenue recognition of prospective machine sales.

[Brent Charleton, executive]

Thanks, Dylan. With that, I'd like now to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator]

[Operator Instructions] If there are any outstanding questions at the end of the call, the company will be happy to take them by e-mail at [email protected]. [Operator Instructions] We've reached the end of our question-and-answer session.

I'd like to turn the floor back over to Brent Charleton, CEO, for closing remarks.

[Brent Charleton, executive]

Thanks so much. I did receive one question via e-mail prior to the call, which I'll address right now. And the question was, why were there no exclusivity related royalties paid for Q2?

And the simple answer there is that the majority of our exclusivity top-up royalty payments, this is when a company has a minimum royalty to pay the EnWave to retain their exclusive rights over the technology for a certain product in a certain geography are typically paid in Q1, so the end of each calendar year. And that's why we tend to see a top-up during that time.

Last year, we had another contract being signed where an exclusivity payment was made to retain the rights to potentially operate in a separate country by one of our current royalty partners, and that was completed in Q3. So we do expect the payment to occur in Q3 of -- sorry, Q4, excuse me, of this year as well as Q1 as we've had exclusivity payments in times passed.

And I don't see any other question -- one just came in. What about the pharmaceutical front? So that's quite a broad question. But in short, we continue to operate our joint partnership with GEA Lyophil, who are domiciled in Germany and have purchased a pilot scale unit from EnWave to showcase to their large-scale pharma company partners.

There are several different evaluations ongoing to date with the hope that GEA can attract a consortium or a single pharmaceutical company to make a material investment in the scale-up of a continuous GMP-certified vacuum microwave dryer to displace lyophilization. That takes not only the investment in the CapEx, but it also takes a commitment on the pharmaceutical company side to identify a drug under development to take through that process using vacuum microwave as the core drying platform.

Concurrent to that work, we announced a master service agreement with Bio Technique, who, in fact, were at our facilities this past week, doing a number of trials with a derivative of a flu vaccination. And the results on first glance have been very favorable. So now those results will then be shared with Bio Technique's client. And if that client decides to move forward with this project, the likely next step would be for Bio Techniques to look at purchasing their own pilot scale equipment to have at their facility to continue the trials.

That is the current status of EnWave's participation in the pharmaceutical industry.

And I'll wait 10 seconds more to see if any other questions come in or dial-in questions come up. Okay. And seeing none, I'd like to thank everybody for joining the call today.

As stated by the operator, if you do have questions, please feel free to follow up to discuss with either Dylan or myself. Thanks, everybody. Have a great weekend. Cheers.

[Operator]

Thank you for joining us today for EnWave's Q2 2025 earnings conference call. At this time, you may now disconnect.