Good morning, and welcome to EnWave Corporation's third 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 NutraDry. 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'd like to turn the conference over to EnWave's CEO, Mr. Brent Charleton. Thank you. Please go ahead.
Hello to everyone who has joined us today for EnWave's Q3 earnings call. Today, we will summarize our performance in Q3 and provide an overview of what we hope to accomplish in the near term. Following my summary, Dan will go over our Q3 consolidated financials as well as point out notable metrics for each respective business unit. The information we are about to present contains forward-looking information that is based on our management 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 subsidiary that is selling branded and bulk shelf-stable dehydrated snack products as NutraDry. Our business produced mixed results in Q3. Inflationary pressure and recessionary fears presented challenges for us like most other companies globally, and NutraDry did not perform well. However, EnWave did yield several encouraging financial metrics, including a strong gross margin of 50% and close to breakeven. For year-to-date, EnWave is tracking towards breakeven, while NutraDry has primarily accounted for the cash losses. We aren't an anomaly, as numerous industries are dealing with headwinds, and we are making further changes to reduce the cash burn in our business.
At EnWave, optimism remains strong in our technology royalty business as our pipeline for new large-scale REV machine orders is solid, and our REVworx toll manufacturing service has several qualified customers lined up for the next fiscal year. We've experienced 58% growth year-over-year in third-party royalty revenue, collecting just over CAD 1.1 million year to date, and we will have two new large-scale machines begin commercial production before calendar year-end, one in Peru for BranchOut Food Inc. and the other in Italy for our partner, Orto al Sole. We currently have eight active technology evaluation agreements that could evolve into royalty-bearing commercial licenses in the next year, and we're pursuing repeat machine orders from a list of current royalty partners that are looking to scale from their 10 -kilowatt units respectively.
Several potential large-scale orders were delayed this year due to the cannabis market contracting internationally and the price of dairy inputs reaching abnormal highs. In Q3, we sold an additional three 10-kilowatt units, one being GMP, which is about double the value of our standard machinery, and we recently sold a 120-kilowatt machine to Dole in the first few days of Q4. Year to date, we sold six 10-kilowatt units and three 120-kilowatt machines and have signed six technology evaluation and license option agreements. We are working towards prospectively winning additional machine orders this fiscal year, most of which are associated with existing royalty partners who have had initial market success with the launch of their REV-dried food products.
REVworx recently achieved its Safe Quality Food Level two certification, which satisfies a critical requirement for our largest prospects to use this service. We've hosted several dozen companies at REVworx, and many have moved forward with paid product development, line trials, and are considering either using REVworx directly or renting smaller scale REV equipment for use at their own facilities. We expect to announce our first anchor tenant at REVworx later this calendar year, but for now, it continues to act as a showroom of sorts for visiting prospects. We continue to work closely with many of our licensed partners to improve the chances of success, but we are particularly happy with the progress we've seen in our projects with Dole, Calbee, the U.S. Army, Yamachan Ramen, Dairy Concepts Ireland, and TakeOne of Mexico.
Hopefully, there will be more information to share in the coming months regarding each of these opportunities. Our projects with PIP International for the drying of premium pea protein products and Wyckoff Farms for the drying of premium hops are of particular interest to us, as these projects are exploring two new product areas for us, and we believe that the unique drying enabled through our REV machinery could yield superior results to incumbent methods. In fact, the global pea protein market is estimated to be about CAD 844 million in value as of 2021. Big market to go after. We continue to pursue new leads in the cannabis industry as we know our technology will deliver high-quality, economical results.
In Q3, we sold another 10kW GMP, as I alluded to, unit to a European cannabis manufacturer, and we recently announced an evaluation agreement with a major Canadian cannabis cultivator. That being said, as this fiscal year has progressed, it's apparent that in all legal jurisdictions internationally, cannabis companies are dealing with business challenges, including oversaturation of product and market, which is driving down wholesale pricing and supply chain challenges associated with infrastructure buildup. Many cannabis companies are also having challenges securing new forms of capital, as many jurisdictions are in decline. Cannabis will remain a viable market for EnWave to deploy REV technology into, but the number of qualified potential adoptees has shrunk in the present, as many of our leads have shifted their focus to solve the immediate business challenges aforementioned.
NutraDry has not progressed as we wanted, with revenues not meeting expectations and our margins being pressured through the first three quarters by extraordinarily high cheese prices and lower plant utilization. Thankfully, cheese prices have come back from $2.50 a pound to less than $2 a pound recently, and futures indicate they might stay at around this level, which is more in line with historical pricing. Given the cash burn at NutraDry in Q3, we are currently evaluating options to reduce expenses in that business unit. This is essential to pave a sustainable path forward. In the coming quarters, NutraDry aims to expand distribution into large national and regional grocery, as well as natural and mass customers. It takes time to get new distribution, and the retail environment is challenging for new brands.
We aim to leverage the power of Amazon, as it has recently decided to go direct versus through a reseller and direct consumer distribution via its online store. Moon Cheese Sticks is national at Whole Foods currently, and we've received word that Walmart will take Sticks into 300 stores within the spring of 2023. The performance of NutraDry must improve without delay, and we will continue to monitor its performance on a week-to-week basis to ultimately make operational decisions that we feel is in the best interest of protecting shareholder value. I'll now ask Dan to summarize our Q3 financial results in more detail.
Thanks, Brent. Good morning, everyone, and thanks for joining us today. I'll take some time to review our Q3 2022 financial results. Please note the figures I'll go over today can be found in our press release from yesterday and in the financial statements in MD&A filed on SEDAR. All amounts, as Brent mentioned, will be referred to in Canadian dollars unless otherwise noted. I will make reference to adjusted EBITDA, which is a non-IFRS financial measure, so please refer to our non-IFRS financial measure disclosures and the reconciliation to GAAP net income, both in the press release and in the MD&A. Also, please note the comparative period I'll refer to throughout is the prior year Q3 ended June 30, 2021. Let's get started.
Consolidated revenues for Q3 were CAD 5.5 million, compared to CAD 7.3 million in Q3 of 2021, a decrease of CAD 1.8 million. Our revenue split was 52% Moon Cheese sales for CAD 2.8 million and 48% EnWave revenue for CAD 2.7 million. EnWave's revenue from machinery sales alone was CAD 2.1 million for Q3 compared to CAD 3.2 million in the prior year, with the reduction being due to fewer large-scale machines and fabrication for customers under contracts during the quarter. Subsequent to Q3, we did confirm one new 120-kilowatt order for Dole, and we have many other large-scale opportunities in the sales pipeline that we're aiming to close in the near term.
EnWave's royalty revenue for Q3 2022 was CAD 301 thousand, up from just CAD 191 thousand in Q3 of 2021, representing growth of 58%. We're very happy with this result. As our royalty partners grow their businesses and increase capacity utilization on their REV equipment alongside new REV installations arising from sales, we hope to continue to further grow this royalty stream over the coming quarters. The NutraDry segment continued to struggle in Q3. Moon Cheese sales were CAD 2.8 million, with a drop in sales compared to the prior year sales of CAD 3.8 million arising due to lower bulk channel sales in the current period, paired with soft grocery sales in June.
We implemented a price increase in May in an effort to mitigate margin pressure, but we saw many customers stock up right before the price increase, and that effect has carried on from June until now. NutraDry's sales team continues to pursue new distribution opportunities. However, the Q3 results did not reflect any new growth in our distribution footprint. Gross margin for Q3 was 26%, compared to 36% for Q3 of 2021. The drop in gross margin was primarily due to three main factors. In Q3 of 2021, we had that substantial order for bulk cheese sales at NutraDry that significantly benefited NutraDry's margin. That business did not repeat in the current year. The cost of block cheese has risen sharply in 2022, and it's significantly hurt NutraDry's margins.
Our equipment sales in Q3 of 2022 were slightly lower than in Q3 of 2021, and the margin generated from machinery sales is typically better than for NutraDry, so the sales mix plays here. Our cost of goods at NutraDry continues to be a challenge, with increases in input costs of cheese, supplies, freight, and labor, cheese being the largest contributing factor. The NutraDry plant also has a large fixed overhead base, and without top-line revenue growth and sales volumes, the resulting margin is narrow. EnWave's gross margin for fiscal 2022 year to date has remained strong at 50%, with growth in that royalty revenue being a contributing factor. The EnWave business has the capability of delivering strong margins when we close lots of large-scale machine orders, and we've managed our manufacturing costs appropriately despite the challenging economic backdrop.
Adjusted EBITDA is a non-IFRS financial measure, so please refer to the MD&A for a reconciliation from GAAP net income to adjusted EBITDA. Adjusted EBITDA was a loss of CAD 1 million for Q3 of 2022 compared to positive CAD 937,000 for Q3 of 2021, a change of just below CAD 2 million. The primary driver for the swing in profitability was the adjusted EBITDA loss generated by NutraDry in the period compared to the positive EBITDA generated in the prior year. The consolidated net loss for Q3 of 2022 was CAD 2 million compared to a net income of CAD 670,000 for Q3 of 2021. Now turning over to the balance sheet. We finished Q3 with cash on hand of CAD 6.7 million and a net working capital surplus of CAD 12.9 million.
Our inventories increased because of additional 10 kW units being fabricated to match the current to lower pipeline, as well as long lead time parts on large scale machines being purchased. We earned a contract with Dole in July that will utilize much of these longer lead time parts and allow us to deploy that unit on a tight delivery schedule. The capital project to build out the REVworx facility is complete and was funded from our existing cash resources. Aside from the small COVID-19 relief loan and our facility leases, our balance sheet remains largely debt-free. Now I'll turn it back to Brent for some closing remarks.
Thank you, Dan. Moving forward, I think it's important to acknowledge the macroeconomic factors, but there aren't any excuses to make. We need to close more machine sales and sell more dried cheese to better margins. We know this, we understand what needs to be done, and we'll put our best effort to improve shareholder value moving forward. I'd like now to open the call for questions. Operator, please provide the appropriate instructions.
Thank you. 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 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. 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. Once again, that is star one to register a question at this time. The first question today is coming from Neil Linsdell of iA Capital Markets. Please go ahead.
Hey, good morning, guys.
Hey, Neil.
Can we go through just on some of the major customers on Moon Cheese? I mean, you mentioned Walmart, and you speak quicker than I can take notes sometimes. Can we go through like Costco, Canada, US, Walmart? What should we be expecting as far as lumpiness? You talked about inventory builds. Do you have any idea when those inventory builds will kind of be worked through so we can expect more sales, or is it still gonna be kind of patchy or lumpy?
Starting with Costco. Costco, you know, is always inherently lumpy. We are working to earn new Costco business, but in Q3, we didn't have any sales to Costco. There's some proposals out in front of Costco that could materialize probably more likely in fiscal 2023. In terms of other customers, the large stock-up that I mentioned came through mostly distributors. It wasn't so much by retail customers. You know, we put the price increase into effect in May, and we saw a lot of distributors stock up prior to May 'cause they have the ability to carry higher inventory levels to buy on deal. That sort of stock up kinda hurt the subsequent month's sales.
You know, we think based on the intelligence that we have available to us that we're through the worst of it and it could come out, you know, it could shape up better into the fall. It shouldn't be a permanent effect. We do know that, you know, there was a lot of buying in May and April to support the inventory levels in those distributors. It's not gonna last forever, we don't think.
Okay. Along the lines of, you know, you mentioned Walmart again. Are there any kind of lumpy orders we should think about coming in fiscal Q4, more in fiscal Q1, I think you're kind of indicating. Anything we've seen, I guess, Whole Foods. You know, what are we looking for as far as timing on some of these rollouts in Kroger and such?
We've launched into Kroger. We did that in the spring, so that was in our Q3. In terms of Whole Foods, the sticks items launched into Whole Foods, so that was also in Q3. Looking into Q4, it should be. You know, we don't have a lot of new rollouts that are gonna launch in Q4, so you can expect it to be, you know, largely comparable to Q3 for the most part in terms of our customer base. Looking into the new year, we have a commitment from Walmart to take sticks into 300 stores, and we have a couple of private label opportunities that we're gonna start to deliver on in fiscal Q1.
Yeah. There's a list of additional distributors, Neil, that Brad and team are working to secure, but until they're confirmed, we can't speak to.
Yeah, of course. The bulk sales, do you expect that to rebound or pick up, or is that really gonna be lumpy as well? Like, shouldn't expect anything out of it?
It's not gonna be particularly lumpy, but it's taking time to build up. We have a customer base that are using our product as ingredients, and we're, you know, we're going to some ingredient type shows and working on building out that channel. We don't have that. That one major customer we had last year doesn't seem to be a continuing relationship, so we're working to build out new ones.
On the REV units, I mean, you've given guidance before, obviously last few quarters. How does it look as far as we're trying to, you know, finish up the fiscal year, which is, you know, not too far away? With customers such as Dole, it sounds like you're, you know, you're hoping you're gonna be able to make some better announcements soon. Could you give us an update on really some of those key customers' project rollouts? 'Cause I'm thinking about Dole, you've got the snacks, but you've also got the secondary products to other ingredients. So can you give us more clarity on some of the major things we can look forward to?
Sure, Neil. First, again, like, not here to make excuses to state the obvious, that the cannabis market in the U.S. is contracting similar to what we saw in Canada, and that dairy prices which have affected NutraDry also affected our international dairy partners that are prospectively looking at scaling up to larger continuous lines. Hence the push off in some of those decisions until prices normalize, which they're going towards, and hopefully we can then convert them in fiscal 2023. In regards to, you know, being the end of the fiscal year forthcoming, we do have some tangible leads on large scale and small scale machines to hopefully confirm within the next month or so here. In regards to the Dole relationship specifically, obviously they bought their 120-kilowatt machine to support a launch of their new snack program.
There's a few different areas of opportunity outside of that into potentially their ingredient division. Along the snack launch, you know, a major company like Dole, and what we need to see here at EnWave are our marquee royalty partners gaining traction in market with their products, which demands an increase in manufacturing capacity. If we think about how we've seen our royalty partners grow year to date, it's been quite dramatic. I would say that Dole, along with maybe like Calbee and a few of the other dairy companies, are companies that are capable of scaling quickly if there is consumer demand.
That's why the Dole relationship is so very important to us to continue supporting what they're doing, to make sure that we have people on the ground supporting their R&D group as they bring new products to market in the coming quarters here.
Okay. It sounds like you're hopeful that you've got some stuff running that you'd be able to announce before fiscal year-end to hit your guidance.
To continue the pace of closing large deals, associated with current royalty partners who have already had smaller scale machinery with product and market that has, you know, gained enough market data to say, "Yes, now it's time to commit to larger scale machinery and make this more material for their own individual businesses.
Okay, great. You just mentioned the cheese prices. It looks like things, it's hard to tell if we're looking at, you know, further declines in cheese prices or stabilization, but it sounds like for all intents and purposes, you've got stabilization. Do you have any kind of higher cost cheese that's still gonna work its way through in Q4?
Yeah. In our, you know, on our balance sheet at the end of Q3 is cheese that was bought and manufactured leading up to June. You know, that's the highest it peaked. Cheese prices peaked in June, so we're gonna have to work through some higher priced cheese in Q4. That'll, you know, work its way through. Then the cheese we're buying today is coming in at, you know, lower, more reasonable prices. We see some abatement there in the cheese price issue.
Okay. Okay, sounds good. Okay, thanks, guys.
Thank you. Once again, that's star one to register an audio question at this time. At this point, I will turn the floor back over to management for web-based questions.
Thanks, Donna. The first question that I'll address is from Jamie Kozak of Copycat Invest. He asked, "You expect an announcement for an anchor customer of REVworx later this year. Can you describe where you are in the process of signing, how meaningful this customer might be, and why this customer wasn't ready to go upon commissioning?" To answer the question, line trials are absolutely critical to gain commitment long term on the continuous production line. It's one thing to produce a product on our 10 kW units, but it has to be shown that the same quality and consistency of product can be produced in line trials. That's what's been happening over the past month or so, those line trials with several different prospects.
One of the more likely prospects that we hope to confirm, again, in the coming months here, could make up to one-third of capacity utilization in the plant. I know this addresses one of the other questions that I see on the webcast here, is how many companies do you have in line to respectively become REVworx customers? Right now, I would state that eight viable companies, mostly large companies that have the financial wherewithal to engage in this service, are going through the line trial process throughout this month, again, with the hope of confirming several next quarter. Next question that we will address is, the available cash has become less. Are you planning to private placement it in the near future?
For that, you know, right now we have ample cash on our balance sheet, and there's no immediate need to raise dough. That being said, we've gone through NutraDry's financial performance, and given that EnWave is leaning towards break even for the year and NutraDry has lost cash, as mentioned, we're going to be undertaking some expense reduction plans in the business, and hopefully we can get NutraDry back to break even sooner rather than later on that front. Second question from the same contributor was, are you planning to launch a Yolove product later this year, or is it still in the pipeline?
The product itself, yes, certainly is in the pipeline, but the immediate focus at NutraDry is to lower expenses and get back to break even, and following that, with available cash resources, launching new product and innovation to market, 'cause it is risky, of course, always when launching new innovation to market. Question from John Scheibel. When Dole's 120-kilowatt comes online, do you expect EnWave's total royalty revenue to be over CAD 2 million per year? The answer to that is no. Not on a single 120-kilowatt being installed right now. As I said, year to date, we're about CAD 1.1 million in third-party royalties being collected, which is, again, up year-over-year significantly.
For each of our large scale units from experience can generate anywhere between CAD 100,000-CAD 300,000 in royalties per year. It really depends on the product that's being produced and of course, capacity utilization. We do need to close additional large scale POs, as well as getting those two machines that I talked about starting up in Peru and Italy going to move towards a CAD 2 million threshold in the coming quarters. The last question here that I'll address, as seen on the webcast, is has there been any change to anticipated additional machinery purchased by the United States Army rations client? Or more specifically, what is the government saying caused your delay of this purchase?
We've been told that the application for funding has been approved to introduce a cheesecake ration into their programming in 2023, and that the funding is, should be released sometime this calendar year. Of course, the U.S. government works in their own timelines, and we will wait patiently until hopefully that funding gets released and we can move forward with more meaningful production and a fulsome introduction of the first inclusion, REV-dried inclusion into their ration program. Concurrently, we are working with other industry partners of the U.S. Army to develop different prospective inclusions for the military ration packs, which we're hopeful could be the next wave or support system to achieve further funding down the line. With that, I do not see any other webcast questions that we'll be addressing today.
Thank you. Sir, did you have any closing comments for the audience today?
I just wanna thank those who joined us for our Q3 conference call and encourage those who have questions after the fact that maybe weren't addressed on this call to reach out to Dan or I to field in the coming days. 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 enjoy the rest of your day.