Good morning, and welcome to EnWave Corporation's first quarter fiscal year 2022 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, and Dan Henriques, EnWave's CFO and COO of NutraDried. As a reminder, all participants are on a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Finally, I would like to remind everyone that this call will be made available for replay via the link 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. You may now go ahead.
Thanks so much. Greetings to everyone who have joined us today for our Q1 earnings call. These calls are very important to us as they allow for the delivery of valuable context and critical detail regarding our consolidated financial numbers. In certain cases, our quarterly numbers don't tell the whole story. For Q1 2022, this is one of those cases, in my opinion. Our outlook is far stronger than the numbers suggest. Following my business unit update and outlook, which is very bullish, Dan will summarize our Q1 consolidated financials, as well as point out notable metrics for each respective business unit. Now before I begin, I would like to remind everyone that the information we are about to present 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. On this call, like others, we will refer to our proprietary vacuum microwave technology business unit, which generates revenues primarily from machinery sales, royalties, and toll manufacturing as EnWave, and our operating subsidiary that is actively selling branded and bulk shelf-stable cheese snack products as NutraDried. Our consolidated financials in Q1 largely reflect the continued positive commercial progress made by EnWave in the commercialization of our patented radiant energy vacuum technology, or commonly referred to as REV for short, into the global food and cannabis industries.
Even paired with what we believe is an unusually low quarter of sales recorded by NutraDried, our results for Q1 yielded positive consolidated adjusted EBITDA of just over CAD 300,000, making progress towards the goal of consistent profitable growth. We believe NutraDried's Q1 performance to be an anomaly due to the fact we dealt with poor weather at the end of Q1 that pushed a material amount of Costco volume into Q2. On the flip side, NutraDried recently confirmed major new distribution, a credit to the new leadership and reinvigorated team that will hit later this year.
This new distribution includes 2,200 Kroger stores for three separate SKUs, the expansion of our presence in Target from 500 stores to all 1,800 stores nationally, and equally importantly, we will commence initial distribution for three SKUs of the really cool and new Moon Cheese Sticks product nationally in the U.S. This will start at Whole Foods, and we expect more sticks wins to follow. Moon Cheese Sticks will be available in five flavors, including Cheesy Does It or cheddar, Kick It Up a Nacho, Rowdy Ranch, Wild White Cheddar, and Yum Inferno, our spicy version, with an everyday retail price of $4.99. Feedback from the buyers we've presented to so far have been overwhelmingly positive. We are also aiming to confirm additional programs with Costco in the coming months, similar to the current promotion running with Costco Canada now.
As these become official, we will certainly keep you all informed. Now, while COVID lingers, the retail grocer community has largely returned to normal, allowing NutraDried to showcase its full range of products with generally positive reviews. I reiterate firmly that we do not believe the soft Q1 at NutraDried to be indicative of performance for the coming quarters this year. Concurrently, with the continued effort to grow the success of NutraDried's branded portfolio, we are also pursuing new bulk sales opportunities. In fiscal 2021, we sold approximately 180,000 pounds to several new customers. The sales cadence for bulk sales pulled back in Q1, but we remain optimistic about our future in this market. We are now selling bulk dried cheese for ingredients in trail mixes, salad toppings, and other applications.
We anticipate to confirm additional bulk customers in fiscal 2022, and this remains a focus for our sales team. Momentum is building, but it will take a few months, and investors should see results in subsequent quarters. We are working towards sustainable consolidated profitability in our business. Our EnWave business unit is currently profitable and has never been stronger. This is the fourth consecutive quarter of revenue growth. We earned CAD 505,000 in third-party royalties in Q1, the most quarterly royalties ever, and that's not even including CAD 137,000 from NutraDried. Additionally, we commissioned two new large-scale machines in Q1, one 100 kW for cheese snack production in Spain and a 120 kW for cannabis production in Illinois.
Before the end of Q3 2022, we expect three additional large-scale REV machines to be commissioned, two 120 kW machines for U.S. cannabis MSOs, and a third, a 60 kW for BranchOut Food for the production of avocado and banana snacks. These installations should contribute to fast growth in royalty generation. In Q1 and up to today, we have sold three 10 kW units and two 120 kW machines this fiscal year. We are still hunting eight additional large-scale purchase orders and a dozen 10 kW purchase orders this fiscal year. The opportunities are on the table for us to pursue and hopefully close. Our outlook continues to look very bright with a pipeline of potential repeat machine orders from existing license partners and numerous new prospects actively evaluating our tech.
Approximately 60% of our targeted machine sales are anticipated to come from existing licensed royalty partners. When our royalty partners grow, we grow. The U.S. cannabis market continues to be the most active for us, presenting a significant opportunity. Our current U.S. cannabis partners have communicated their intention to acquire further large-scale units following the completion of new facilities in additional states. We are also pursuing several new cannabis royalty partners and anticipate go, no-go decisions for large scale purchases this year. We have scheduled Q2 trials at the facilities of several cannabis companies in the Western United States and expect to confirm trials at locations in the Eastern United States in Q3. These first-hand demonstrations will be critical to convert these prospects into sales.
We will be sending out our in-house processing experts to demonstrate the technology and to prove firsthand the value of our patent-pending Terpene Max process, including the retention of 20% more terpenes than room or rack drying, which is what, of course, Terpene Max offers. Given the high probability of additional machine orders coming our way, we need to ensure that we can deliver machines efficiently and on timelines required by our partners. We have started the manufacture of two 120 kW REV machines on spec in addition to a recent new order from our royalty partner from Italy, Orto Al Sole. We will continue to invest in building inventory in an effort to mitigate supply chain challenges in our fabrication planning. This is a very challenging time globally for supply chains, and it's fiscally and operationally prudent to get ahead of potential delays.
Investing working capital in longer lead time parts and machine fabrication will have us ready to address the massive opportunity ahead of us. We are acutely aware of how important the timely delivery of our machinery will be as the orders roll in. With our machine sales and royalty revenue improving, we are looking forward to establishing a third meaningful revenue stream in March through the launch of REVworx, our toll manufacturing business. All interior facility construction is now complete. Our REV machinery is commissioned and ready to use, and our upstream, downstream, and auxiliary equipment are in place and ready to be turned on. We have initial line trials scheduled in early March. REVworx is scheduled to process tempeh, several thousand kilograms of blueberries from a local company, and will conduct a line trial for instant ramen for our current royalty partner, Yamachan.
We have the potential of winning some large REVworx contracts from a few of our larger royalty partners in the latter half of this year, and we believe that we will receive many additional inbounds following our marketing launch scheduled in a few days. REVworx will be promoted as the first vacuum microwave toll manufacturing facility of its kind anywhere in the world. We will be leveraging our trade publication contacts, third-party machine resellers, and industry partners to promote this exciting new service. With all the business deals we have on the table, the enthusiasm within our team and the measurable value we can create for our current and future royalty partners is high. The rest of this year should be a lot of fun. I'll now turn over to Dan, EnWave CFO and NutraDried's COO, to summarize our Q1 financials in more detail.
Thanks, Brent. Good morning, everybody, and thanks for joining us on today's call. I'm gonna take some time to review the Q1 2022 financial results. Note the figures I'll go over today can be found in our press release from this morning and in the financial statements in MD&A we file on SEDAR. All amounts I'll refer to are in Canadian dollars unless otherwise noted. I'll make adjusted EBITDA references throughout my presentation, which is a non-IFRS financial measure. Please refer to the non-IFRS financial measure disclosures and the reconciliation to GAAP net income in both our press release and in the MD&A. Consolidated revenues for Q1 were CAD 6.3 million, relative to CAD 6.9 million in Q4 of 2021 and CAD 7.5 million in Q1 2021.
Keep in mind that last year in Q1, we were still running a national buy one get one promotion at Costco, which drove the top line but hammered our margins. EnWave reported strong quarterly revenues this quarter of CAD 4 million, up from CAD 3.8 million for Q4 of last year, and just CAD 2.6 million for Q1 of 2021. Q1, 2022 was EnWave's best quarter for REV technology, making significant advancements into the U.S. cannabis industry. Our royalty revenue for Q1 was a very notable CAD 505,000 . This is the highest quarterly revenue from royalties ever. We are in the business of deploying our machines to generate royalties, and the lift in royalty revenue underscores the growth in the number of licenses we've signed.
Our royalties in Q1 are also typically stronger due to receipts of annual minimum royalties payable under exclusive licenses to keep those license exclusivities, and CAD 240,000 of those payments were booked this quarter. When you exclude the annual minimum payments, our core royalty revenue has still grown at an average of 17% each quarter over the last four quarters. This gets us so excited as royalty growth is our primary focus. NutraDried's revenue for Q1 was CAD 2.2 million, compared to CAD 3 million for Q4 of last year. Revenues underperformed in Q1 because of approximately CAD 700,000 in orders that were supposed to be shipped in the last week of December that got delayed into Q2 due to snow and poor weather conditions at Ferndale.
Q1 revenues were also challenged by reduced purchasing from our two major distributors, with them trying to reduce their own inventory levels. Now, we believe this to be a temporary event because the shipments from those distributors to the end customers actually increased in the same period. This signals that distributor purchasing will eventually catch up with growing retail sales. Gross margin improved in Q1 to 43%, compared to 34% in Q4 of 2021, and just 23% for the prior year comparison. Our gross margin in Q1 benefited from two notable factors. First, we redeployed a large-scale machine that was repurchased from a Canadian cannabis customer, and we sold it to a U.S. cannabis customer for a higher than typical margin. Secondly, our royalties revenues grew significantly, and these revenues provide a pure margin with no related costs.
This is the fundamental core of our business model. NutraDried's margin in Q1 still had room to improve through volume and scale. Our manufacturing plant is operating at around 30% of its capacity, and as we build sales volumes in the latter half of this year, we expect better plant utilization and margin growth. The new distribution Brent mentioned that we've already confirmed, paired with other programs pending confirmation, have us believing we'll get there this year. Cheese pricing remained stable for Q1, but in more recent months it has crept up above $2 a pound. We've taken some action in the market to manage this and have rolled out a 6% price increase on most of our products that will take effect in May. Now turning over to SG&A expenses.
Our objective with both EnWave and NutraDried is to maintain an appropriate infrastructure to allow both businesses to scale while not overspending in areas that do not provide a viable return. We need to support the marketing of our products and build the top line, but we will keep a prudent eye on the bottom line with each decision. We are on track with the cost containment and restructuring plan implemented at NutraDried in Q2 of last year. NutraDried's SG&A expenses have been reduced by 55% compared to Q1 of 2021, which amounts to a little over CAD 850,000 in savings this quarter alone. Our consolidated G&A expense for Q1 2022 was CAD 1.1 million, which was the same as Q1 of last year.
We incurred some increases to personnel costs, legal fees, and insurance premiums at EnWave, which offset the cost savings we experienced in G&A at NutraDried. We expect to maintain a similar G&A run rate for the balance of the year. Our consolidated sales and marketing expense for Q1 was CAD 1.1 million, compared to CAD 1.5 million for Q1 of last year and CAD 0.9 million for Q4 of 2021. We reduced our sales and marketing spending relative to the same period in 2021 after restructuring NutraDried and significantly reducing our non-working marketing spending. When I say non-working, I refer to expenses that do not target the consumer, and those can relate to packaging changes, agency fees and so forth.
Adjusted EBITDA, which is a non-IFRS financial measure, so please refer to our MD&A for a reconciliation from GAAP net income to adjusted EBITDA, was a positive CAD 301 thousand for Q1, reflecting the strong margins generated by the EnWave business unit. This is an improvement over the CAD 911,000 loss for Q1 of 2021 and CAD 223,000 loss for Q4 of 2021. Our goal is to deliver consistent profitability and positive adjusted EBITDA by expanding the commercialization of REV technology and materially growing our royalty portfolio. We are well along that path. We are also seeking to return NutraDried to profitability in the latter half of this year with growing our distribution.
We have made significant financial progress over the last year and believe that the strategies in place are the right ones to get us to that sustained profitability. We'll continue to invest where we need to in order to drive growth in both business units, but we will also prudently manage non-revenue-generating costs to strike the right balance. Our balance sheet remains strong. We have plenty of cash and the appropriate levels of working capital. At December thirty-first, our cash position was CAD 8.4 million, and we had net working capital of CAD 17 million. The REVworx construction is completely finished, will not require much significant new investment. We anticipate this facility to start generating revenues in the coming months. Our treasury position of CAD 8.4 million is plenty to continue the commercialization of the EnWave technology.
We are seeing demand increase for our large-scale systems, particularly in the U.S. cannabis sector, so we have made the decision to start deploying some capital into inventory and machine fabrication to shorten the timeline from order to installation. This will allow us to add new machines into our royalty portfolio faster. We have not been so active in recent months with our NCIB. We've identified a few high-return areas for cash deployment, including parts and machinery to shorten the timeline from sale to royalties. We also need to increase our inventory for critical parts and components to mitigate supply chain challenges. As Brent mentioned, we need to be ready to fill the orders in the pipeline. We are also adding to our equipment loan program with suitable customers, which requires us to fund the equipment fabrication in advance.
Both of these will require cash but will advance our business and lead to growth. We do still plan, however, to use the NCIB in situations where it's necessary or where it's viewed as opportunistic to return value to our stockholders. Turn it back to Brent.
Thank you, Dan. Moving forward, our mission is clear. We need to sign more license deals, sell more machines, build them faster, generate more royalties, earn meaningful toll manufacturing business, and keep NutraDried on track to return to profitability. We will continue to innovate, collaborate, aggressively compete to win new business, and protect our company's interests. I would like to thank all of our shareholders for your continued support, and I am optimistic that our efforts this year should result in financial performance improvements and ultimately increased company value. I'd now like to open the call for your questions. Operator, please provide the appropriate instructions. Also, operator, it seems that we're having technical difficulties accessing the question list online, so please read out any questions submitted via webcast.
Certainly. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. For participants participating via the webcast, you may submit your questions using the Ask a Question box located on the side of your screen. Again, phone participants may press star one. Web participants may type their question into the Ask a Question box at any time during the Q&A session.
If there are any outstanding questions at the end of the call, the company will be happy to take them by email at ir@enwave.net. Thank you. Our first question is gonna be coming from Steve Hansen of Raymond James. Thank you, sir. Please go ahead.
Yeah, good morning, guys. A couple for me, if I may. Firstly, just on the inventory build situation, just want to get a handle on, is there a rough magnitude, Dan, that, you know, you've got in mind in terms of inventory build, whether it be on either the machine side and/or, you know, the product side as you start to roll out into, I guess, third quarter in particular with some of these larger programs?
For sure, Steve, and thanks for the question. We won't be looking to build inventory on the Moon Cheese side. We're in a good position there to continue to deliver at our existing inventory levels. That, of course, said until we start to receive some of these Costco programs where we'll build the product, and it sometimes takes a couple months of production to get the volume ready to go out the door in a one- or two-month shipment. What we were talking about was on the EnWave side, and with all the challenges in global supply chains and critical components coming from a few key suppliers, some of those parts have started to take longer. We wanna make sure we can get in front of that.
We'd be looking at. We've already started to build 220 kW REV systems on stack and started to order the componentry. We anticipate that we'll actually have those systems sold before we finish building them, but we're starting now in preparation for those orders coming in. We're probably looking at somewhere in the range of CAD 1 million-CAD 1.5 million of additional working capital to build those machines and order those parts. Like I said, the order pipeline's looking very robust, so I think we'll have those machines sold before we actually deploy that, you know, the full amount of that capital, and we'll have deposits to cover it.
Yeah.
Just to be ready, we're gonna start building those now.
I'll add to that, Steve, you know, in terms of prospects for sales, we do have sight lines on prospective timelines where those machines will be needed for use, hence the propensity to start building inventory now.
Do you have a sense for, it might be hard to quantify, but you know, you described earlier the repeat order side of your business there on the machine side. I'm just curious, like if you're looking at the cannabis opportunity where you're the most active, it sounds like in particular, you know, do you have a line of sight into how many machines can go into existing customers versus, you know, trying to source out the new incremental lead? I'm trying to think about that opportunity specifically. Can you deploy two new machines into existing customers in the U.S.? Five? I'm just wanna get a sense for the opportunity set that might be there.
If we're talking specifically about cannabis, there is the opportunity to deploy another four to our two existing licensees potentially here as they build out their infrastructure in multiple states to house and need drying at each respective location. Beyond that, in terms of our goal of getting to that 10 large machine PO mark this year, the remaining eight, you know, at least call it 5-6 of those are repeat orders, as I just talked about with our cannabis company prospects. That could easily change and be 100% repeat orders. We don't know yet, but we also won't go on and build in two large expectations. I think eight additional is already quite aspirational.
Sure. No, that's helpful. Just jumping back to the Dole relationship that seems to be evolving here incrementally, just give us a sense for the key milestones that you think the company is looking for before they can start to execute on a PO for larger scale machines. I know there's been talk of trials, market trials for their new product that is, you know. But where do you think that relationship sits, and what is the timeframe before you think they'll be able to have the confidence to order something larger?
Well, I do know they're very active right now evaluating the business case for producing a number of products in a certain geographic region and being able to ship globally for the markets that they tend to enter with the innovative snack products and ingredients that they're developing with our tech. The timeline for that business case analysis to complete would be within the next month or two here. In terms of milestone for us, of course, that'd be commitment to the first large scale PO. They've acquired two 10 kW now to accelerate the production to allow them to conduct market trials.
If we receive that first large machine, the anticipation is that they'll buy many more large machines in the future to service the volumes that they will need to address the different markets that they've identified and shared with us. Timing of which I think will be market dependent, but we should see a go, no-go decision from them within the next quarter or two here.
Okay, great. Just one last one for me is just on visibility for your REVworx capacity buildup, or I should say filling the capacity. I think you described a few milestones in your remarks, but I just wanted to get an understanding for how quickly do you think you can sort of fill up the capacity that you've built to start with here. I know you've got some of the tempeh products and things to start. You know, do you have visibility? Is it gonna take a year?
24 months to sort of get that initial baseload capacity built from your perspective, what should we think about?
To be frank, we don't know yet because there are a few of the larger potential supply deals with some of our current royalty partners that if they come to fruition alone could eat up close to 50% of the capacity utilization at REVworx. We've got many irons in the fire. The goal internally is to have at least 60% capacity utilization accounted for by the end of this fiscal year. If it comes in higher than that, fantastic. We're working towards it. We also wanna be realistic, right? Like, we're just turning on this facility literally in a few days here in March.
Companies need to come in, vet it, audit the facility, make sure that it aligns with all of their QA requirements, and then they'll be negotiating in terms of what the cost is going to be on a pre and a production base. We're optimistic that we'll get meaningful business and be able to use this facility as a key sales tool for us to sell more machines and drive royalty growth into the future. You know, let's walk before we run here on REVworx.
Okay. Very good. That's it for me, guys. Appreciate the time.
Thank you. Our next question is coming from Neil Linsdell of iA Capital Markets. Please go ahead.
Hey, good morning, guys. Just wanna make sure I understand something with REVworx. Has your approach changed since we initially started planning this as far as your mix of existing customers trying out new products versus trying to recruit new customers into REVworx to show them the value?
It's a hybrid approach still, Neil. It's available to both current and potential future royalty partners of ours. There's effort being put forth by our sales group to court new users, those that may not have the capital available to purchase their own equipment up front. It certainly will continue to be a hybrid approach.
I'm just trying to remember if there was a difference when you initially started this thinking it was gonna be new customers then realizing you've got existing customers that need this service too. Or has it always been the plan?
Yeah. I'd say more so like on the servicing current partner side. Those opportunities that are now in front of us weren't the focus when we started the business unit, certainly. Now they have arisen and based on proximity to certain raw materials within this particular region of North America, it makes more sense to look at REVworx as a processing option for the companies that are evaluating REVworx versus processing these type of products in Southeast Asia, for instance.
Right. Okay. Yeah. That's more of a business driver that I hadn't really thought about when we initially looked at modeling this out. On the royalties ramp up, you said I think there's CAD 240,000 worth of the top up payments that happened in the quarter for clients that wanted to maintain their exclusivity, but hadn't generated enough royalties during the period. To keep the license, they have to do the payment. Has that kind of ratio changed? Have you historically seen more clients that dropped off not wanting to do the payment? Or, how is that kind of evolving, and does that give you a good indication that these clients are gonna be ramping up or are gonna be adding more equipment in the next 12-24 months?
Yeah. Good question, Neil. We have certain licensees that are adamant that they keep product exclusivity for their products, and they've you know invested lots of capital into rolling out the product and developing a brand and so forth. They are consistently paying the top ups if they don't hit the requirements in the license agreement to keep the license exclusive. We have a mixed you know bag of other licensees that get going on a product but then realize that the manufacturing exclusivity is not as critical for the success of their product.
I would say, you know, we have a few partners consistently each year that need to make a top up payment and have repeatedly for the last few years to keep exclusivity, and the rest sort of turn over. We have some that go non-exclusive, and we have others that decide to pay to be exclusive one year, and the next year they might go the other way. We structure this in all of our licenses. Anytime we give exclusivity to a partner, it comes with performance thresholds. They have to hit certain royalties each year in order to keep the exclusivity, and then we'll also put in oftentimes machine purchase requirements.
It really comes down to each individual partner's business case as to whether they deem that to be a good use of their funds.
there's no specific change from previous years as far as more clients are now deciding to top up versus previously or anything like that?
Well, we have far more licenses out there.
Yeah.
Each one of those, every one of those licenses will have these top ups. Every year, as we grow our license portfolio, the number of companies that will have to make this decision will go up. You know, that should lead to more of these payments coming in the door.
Okay. I kinda have three questions I'm trying to roll into one here. About the sales cycle of the REV unit, if that's changed based on the number that you're seeing now from existing partners, which I assume is not really the as long of a sales cycle as it is with a brand new customer, and how that works into some of the things you're doing on the supply chain as far as can you start getting into a kind of a regular production flow as it seems you're doing on some of the larger units? Or is there too much customization required for each customer such that you can't really do that as easily?
Thanks for the question, Neil. For our entry-level 10 kW units, we already have a cadence of trying to build 1-2 of those machines per month based on anticipated demand. The deployment of those machines are primarily for new prospective licensees to prove out their product applications, take minimum viable product to market, and hopefully have them scale up. For the larger scale units in the food industry, it typically takes the path of 10 kW, again, product being proved out in market and then scaling up over a longer period of time. For the building of these machines on spec, the 120 kW model seems to be the highest in demand in the cannabis industry, hence our level of comfort to build two right now.
We're hopeful that with better clarity on each of these new partners that we hope to land within the next 1- 2 quarters and the build out of their respective facilities, we'll have greater predictability in terms of delivering additional 100 kW through the next few fiscal years, allowing for us to again get ahead of the game on supply chain challenges and build the same cookie cutter 120 kW that can be deployed readily. Not a lot of customization really, with those units.
Okay. Is it fair to ask what your maximum number of units you could produce in the next 12 months is?
We can scale as the machine orders come in, so we're not worried about being able to build eight, 10, 12 large scale machines in any given year. We have third party suppliers that can scale as we scale in terms of building the componentry to supply to us. There's ample, I would say skilled individuals, welders, builders that we can hire, either on a consultancy basis or full-time basis to scale, again, as we get those orders.
Okay. 'Cause I'm looking at some of these opportunities, specifically in the cannabis and Dole. You know, if you start doing the back of the envelope calculations based on their aspirations for zero waste.
Mm-hmm.
There's a lot of units that you may have to start delivering. How quickly are they gonna want them? Is it gonna be? You know, if you do see something in the next couple of quarters, there could be a very significant ramp up, and I guess that's what you're looking at as far as being able to address.
Yep. Ultimately, like, having transparent conversations with the key executives of each of those organizations is critical. Having sight lines again on their go, no-go decisions. Like Dole, I got very strong clarity on what their plans are and when it's gonna be so we can plan accordingly internally at EnWave. On the cannabis side with our current partners, yeah, like, fantastic transparency. With the new partners, of course, we're trying to just close the first deal and to get the first large machine in the door and get those machines commissioned, started up, prove it out at scale for a number of months, and then hopefully they come back with repeat machine orders.
I don't suppose you wanna share the number of units Dole's looking for in the next 12-24 months?
I cannot do that. I think I might get a call from Dole if I do.
All right, that's it for me. Thanks.
Yeah.
Thank you. Our next question is coming from Liam Cuthbertson of Cormark Securities. Please go ahead.
Hi. Yeah, just one question from me. Just looking for any additional guidance on that royalty ramp path for the year and getting to that 3-4 times kinda 2018 royalty level expectation in place for 2022. Has there been any pull forward in royalty ramping from that guided Q3 inflection point with the two large machines commissioned this quarter? Or are we still looking at the main ramping coming in the back half of 2022?
We had good royalty growth this Q1, and we expect that to continue into Q2 'cause we're about to commission two and then possibly a third large scale machine in the next couple of months here that we'll turn on and add to our royalty portfolio. Then in the latter half of the year, you know, we have our line of sight on, as Brent mentioned, hunting down up to eight more large scale machines. We should be able to deploy, you know, at least a few of those before the end of the fiscal year. Every time we announce the machine sale and installation, think of that as an addition into that royalty portfolio.
It will continue to ramp as we get into the second half and Q4 of this year, undoubtedly. Our guidance and our expectation for the year is for royalties to come in somewhere in the range of CAD 1.5 million-CAD 2 million, with obviously a lot of that growth coming in the second half of the year as we deploy more of these cannabis machines. The cannabis machines for us trigger royalties faster than food machines. The products are proven, and most of our customers have existing markets where they're selling their products into, and it's a matter of installing our technology into their operation and producing a more premium flower and delivering it to the market. They don't have to build that out, as is the case with most food operators.
Great. Yeah. Thank you.
No problem.
Thank you. Our next question is coming from Steve Hansen of Raymond James. Please go ahead.
Yeah, just to follow up, guys. I wanted to think about the cannabis opportunity a little bit more. Are there campaigns that you've had where you've not secured orders in the past? If so, I'm just curious as to why. Like, what is it? It strikes me that the technology is, you know, to your point, sir, earlier in your remarks, Brent, extremely effective, 20% greater terpene retention, et cetera. Like, is there reasons? Like, what are the pushbacks on the machines? Is it cost? Performance, technical adoption. I'm just trying to get a sense for where the pushbacks might be coming in as you look at, you know, the broader opportunity.
Certainly, Steve. I mean, I've disclosed in a few other communications over the past 12 months where it's been transparent. When we first entered the cannabis industry, we knew we had a strong technology that could create value, but we didn't have proof of what that quantum of value might be. Thankfully, we had some companies in Canada that bought machines, and fortunately enough, one of those companies in TGOD allowed us to do the research necessary to hone in the processing protocols to consistently produce a higher quality and smokable product in less time, at lower cost, and with more terpene and cannabinoid retention. Without that data, of course, there's gonna be skeptics, right? You say better, faster, cheaper. Okay, well, show me the actual data for each specific strain. We didn't have that.
That was, I would say campaigns during those days often failed because you couldn't prove out the tech. Now it is different. Any pushback that we receive are from folks that already have preconceived notions ingrained in their mind that are not willing to change. They're stubborn. They're traditionalists, let's call them. Those who are more, I would say, open to improving their businesses and allowing us to place our 10 kW units in their facility to actually physically show them that it works and getting the COAs done for their own specific strains, we have a 100% hit rate right now. Albeit we've only done it with two companies in the U.S. As I mentioned on the call, we've got many more demos already planned for, you know, even this week and next down in California.
Then we'll be going to a few other states to do some additional trials. We're hopeful that those trials, combined with the third-party testimonials from our existing partners and the opportunity to visit large-scale machinery in action, producing cannabis on a consistent basis, will check all the boxes, alleviate any perceived risk, and get the majority of these prospects converted into full-blown royalty partners this year.
Okay, great. That's super helpful. Just lastly, on the rollout of the new stick product on the NutraDried side, is there any additional capital equipment or modifications required to the equipment to produce the product? I seem to recall thinking you're already into production now on a trial basis or a semi-production basis for earlier this year, but is there anything that needs to be done to the equipment? I know you said you're running 30% capacity, but it's not a major overall refit required to produce at scale, is there?
No, not on the drying side, Steve. It's the same 200 kW lines we have already installed in Ferndale. Those are what we use to produce this product. We do have some small things that we had to reconfigure on the cubing, like the pre-drying step where we take the cheese blocks and cut it into cubes. Now we cut it into sticks. There are some small equipment changes we had to make. There's a couple of small pieces of equipment we're looking at as potential additions to our plant, but nothing big. You know, we're talking about $60,000-$100,000 of equipment.
Okay, that's great. Thanks for the time, guys. Appreciate it.
Thanks, Steve.
Thank you. Our next question is coming from Robert Fogel, a private investor. Please go ahead.
Yes. I just have a question regarding whether or not the equipment can be used for drying grains such as corn. There's a great deal of small equipment doing this all across this country, and of course, it's a huge product. I have no idea whether the equipment could be used for that purpose.
Sure. Thanks for the question, Robert. Yeah, I mean, our vacuum microwave equipment could be used to dry anything, but is it going to be economical? The value of dried corn in most applications doesn't support the use of vacuum microwave as a commoditized good. Typically, a higher heat drying method, your hot air dryer, which is less homogeneous certainly, and does erode some of the nutritional properties of the corn, is oftentimes used in industry. That being said, in terms of, you know, new agricultural crops where we do see potential, one of our projects with PIP International out of Lethbridge, Alberta, working on high value pea protein isolate, that particular application makes a lot of sense for us. We're looking forward to continuing that collaboration over the coming quarter and hopefully getting them to scale up this fiscal year.
All right, thanks. I'm disappointed, of course, that it's not economically applicable, but it's corn. I mean, it's even smaller farmers with small amounts of land employ natural gas and furnaces to cool or heat and dry that corn.
Thank you. Sir, I'd like to turn it over to you for questions submitted via the web.
Excellent. Thanks so much. I'll address the first question, which pertains to an update on the current litigation against several former employees of EnWave Corp. What I can tell you is that the injunction hearing has taken place approximately five weeks ago, where submissions from both sides were presented to Honorable Justice Basran. He is currently still reviewing the submissions and has not yet ruled on whether or not to uphold the injunction that was put in place up until the injunction hearing. As of today, that injunction is still in place firmly, which ensures that no further action can be taken by the defendants in pursuit of their efforts. Let's leave it at that. The second question that's come in has to do with the U.S. Army ration project.
I'll just give you a brief update that the last communication we received from the U.S. Armed Forces was that the funding necessary to acquire additional machinery was approved last year, and that they anticipate that funding to be released sometime during this calendar year. We don't know anything more than that. We wait patiently for the phone call or the email telling us that, yes, they've got the dough, and then we'd be happy to deliver them with many more machines, given the progress they've made with certain applications internally that could be quickly implemented and provided to their war fighters. The next question on line here has to do with suppliers. Whether or not we would be willing to go to all U.S. or Canada suppliers to eliminate dependency on suppliers outside North America.
Simply put, for a lot of the componentry, yes, we do supply from North America, but in certain cases, critical microwave componentry is not readily available from North American suppliers. Primarily procured from some critical suppliers in Europe. That unfortunately will not change for us as we move ahead. Then the last question, I'll turn it over to Dan to field.
We had a question here about the lengthening of lead times from our suppliers and the degree of comfort we have in our inventory buffers whether or not they're sufficient. It's not, you know, the supply chain challenges. It's not all encompassing. It's not all of our suppliers, it's not all of our components. It's certain things, and it's more on the electrical side we're seeing just with increased demand for certain PLC componentry that comes from a few key suppliers and as well as some of our third-party manufacturing partners, their backlog just increasing. You know, you put in a PO for, you know, an outsourced sub-assembly for a machine, and, you know, what used to take eight weeks will now take, you know, 16 weeks, that sort of thing.
It's a combination of both, manufacturing partners as well as like, true componentry suppliers. Some of the steps we're taking is actually more on the manufacturing partner side. Putting in those POs for the sub-assembly work to be done in advance, just to get in front of their backlogs. And then from some of those electrical components that are the parts right now that we're seeing the long lead times with, those are easy things to order, so we can get in front of that now and to alleviate those issues. And, you know, all these components have no shelf life, so if we need to stock them for a few extra months, obviously there's no harm in doing that. We're very comfortable with the buffers that we've got in our inventory.
We've kind of stayed ahead of the curve in trying to figure out where the delays may occur. Obviously, things change and, you know, the world changes, so, you know, what is the situation tomorrow could be different from today. As of right now, there's, you know, I think we have an appropriate buffer in our inventory. As Brent mentioned, we feel confident in the order pipeline, so it's not a big risk for us to deploy a little extra working capital to start building a couple of these machines on spec.
Thank you. Ladies and gentlemen, just as a reminder, if you do have a question via the phone, you may press star one on your telephone keypad, and participants connected via the webcast may use the ask a question box located on the side of the screen.
Thanks for that.
Gentlemen, we're.
Operator. Just had one more webcast question come in, so I'll address that now, and it pertains to the development of pharmaceutical applications. As most of our shareholders know, we made the strategic decision to embark on a joint development agreement with GEA Lyophil, which is the predominant provider of freeze dryer equipment in the pharmaceutical industry. That collaboration has borne some fruit in that the majority of the top ten pharmaceutical companies have either scheduled or have already visited GEA in Germany to run trials on the pilot unit they purchased from EnWave. Next steps will include more robust trials with some of those companies, with the foresight that GEA may deliver larger scale continuous vacuum microwave GMP equipment in the future.
If that is the case, then EnWave will receive a percentage of the revenue derived from those machines that are sold. This is an opportunity to monetize the tech in the pharmaceutical industry with minimal investment. Right now, it's looking quite nice in terms of the pipeline of interest.
Thank you. We're showing no additional questions in queue at this time. I'd like to turn the floor back over to Mr. Charleton for closing comments.
Okay, I'll just finish up as an alarm's going off in the background here at our headquarters. I want to thank everyone for joining us for EnWave's Q1 earnings conference call. At this time, you may disconnect, and if you want to discuss any other matters regarding the business, Dan and I are always readily available. Thanks so much.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.