EnWave Corporation

Thank you and good morning to everyone. Before proceeding with our call, I would like to make everybody aware that the information that we are about to present, contains some forward-looking information.

It is based on management's expectations, estimates and projections. These statements are not a guarantee of future performance and involve a number of risks, uncertainties and assumptions.

Please consider the risk factors in the filings made by EnWave on SEDAR when reviewing this information. Also, all amounts will be in Canadian dollars unless otherwise noted.

Now with the disclaimer complete, let's continue. As with all of our conference calls moving forward, we will refer to our patented REV vacuum-microwave technology business unit as EnWave, and our operating subsidiary that produces REV-dried branded and bulk snack products as NutraDried.

I'll begin today's call with an overview of EnWave's corporate progress in Q2, and our plans to stimulate growth in our business through the rest of fiscal 2021 and beyond. Following my update, Dan, our CFO and I would call now veteran COO of NutraDried, will summarize our consolidated financial performance in Q2, as well as provide an update on the positive material changes we've made at NutraDried to correct the business units course.

To say the least, it’s been an eventful year and we are optimistic about the positive momentum we are experiencing in our machine sales and royalty business. And that the changes we stepped in and made at NutraDried in February will lead to a quick return to profitability.

I believe it's important to reiterate and EnWave’s position as the global leader in vacuum microwave technology. Our position continues to be cemented by the scalability and reliability of our processing technology suite, which has now been adopted by 44 active licensees, including one pharmaceutical partner, eight cannabis companies and 35 food manufacturers throughout 20 countries globally.

As we continue to expand our portfolio of royalty paying partners, we could see competition start to emerge. Our proven commercial capabilities set us apart from these wannabe startups and our robust intellectual property relating to both apparatus and process improvements create a wide moat around our business.

We're years ahead of the competition and continue to strengthen our IP. Just this past quarter, we advanced the patent filings of our advanced Terpene Max process for the drying of high quality combustible cannabis bud, as well as develop the application for an apparatus patent filing relating to a dough portioning mechanism that we believe to be critical to the future broad commercialization of yogurt based REV-dried snack products.

Our goal is to continue expanding our patent protection as new, unique and of course, commercially viable product applications are developed using our technology. EnWave’s performance in the first half of fiscal 2021 was resilient, while NutraDried’s performance was more challenged.

Given the very poor results in Q1, Q2 fiscal at NutraDried, we stepped in to control and restructure it, which included decisive cuts to the executive team and broader expenses throughout that business. Since the restructuring, we've also dealt with and rectified inventory issues and freight challenges.

The course of NutraDried has been corrected, with the management changes and expense reductions and we've made quick progress including new distribution wins, such as getting Moon Cheese into select Walmart checkout lanes, obtaining several material bulk cheese orders from large consumer packaged goods companies, and accelerating the new product pipeline in a cost efficient manner, which will include new formats, flavor profiles, mixes, and potentially yogurt snacks in 2022. Next steps include the onboarding of a new CEO for that business unit, who we successfully recruited to join our executive team to lead NutraDried and to be incentivized by total enterprise value improvement.

Our new colleague will start employment in early June and we will share more information regarding this appointment once the plan transition from the current role is complete. As for EnWave, the strategic changes made in fiscal 2020, including a deep expense reduction made at the beginning of COVID, led us to strong results in the first half of fiscal 2021.

EnWave generated a gross margin of 40%, 47% if you include the intercompany royalties and recorded positive adjusted EBITDA and generated cash to support our growth plans. Currently, we have approximately 15.5 million on the balance sheet to-date, even after using 690k our NutraDried correct course.

EnWave was also able to confirm 15 new material agreements in fiscal 2021, including three new technology evaluation license option agreements, seven new commercial license agreements, and five equipment purchase agreements, which will repeat machine orders from current royalty partners. We aim to double the amount of material agreements signed in the second half of the year and are targeting multiple large scale machine sales in both the cannabis and food industries.

The number of commercially successful REV-dried applications is growing. We are seeing many of our royalty partners scaling their manufacturing capacity.

And we are bullish about multiple near-term material commercial relationships that we hope to confirm soon. In regards to improving our royalty generating base, our team has installed nine new 10-kilowatt machines this fiscal year and two 100-kilowatt large scale units.

Our manufacturing team is currently mandated to build two 10-kilowatt REV units per month to keep up with demand, and they are also fabricating three large scale machines simultaneously right now, a 60-kilowatt for BranchOut snacks, a 100-kilowatt for Patatas Fritas of Spain for cheese snack production, and a 120-kilowatt unit for our cannabis partner in Illinois. Our team has done more with less and expanded our supplier relationships to increase outsourcing.

One area that we have grown is sales and marketing. Our internal headcount has increased by two in order to support the number of active leads we are working, as well as our network of external sales reps.

We plan to place 10-kilowatt machinery in both Europe and Australia this year to facilitate more demos, which will be facilitated largely by our sales representatives who have internal engineering expertise. These deployments should act as chokepoints to further accelerate our business development.

We've also progressed well with building our tool manufacturing capability through REVworx, a mechanism that we expect to shorten our business development cycle and get REV products to market faster. Finally, and I mean -- I mean, finally, we received our construction permit from the city of Delta to begin the build out of this manufacturing facility a few weeks back, and constructions been underway.

I mean -- and like I said, we made very good progress. We've hired the general manager for REVworx, who brings a wealth of food manufacturing experience, including the development of standard operating procedures, asset planning, and SQF, which stands for safe, quality, food certification attainment, which is required for supplying food products to large consumer packaged goods companies.

We're also close to hiring a quality assurance and quality control manager and plan to have the facility rate to service our patient customers by the end of summer early fall. Sunrhize Tempeh previously announced is still collaborating with EnWave through Teloa and intends to use REVworx for commercial production as soon as available.

Our sales and business development team has several additional parties interested in REVworx, whom we are working with to finalize the service costs for their bespoke REV-dried applications. EnWave placed in the cannabis industry continues to evolve, as we're strengthening the value proposition for union REV to produce premium dried cannabis.

Our patent pending Terpene Max process is creating value for our partners and the premium drying results are hitting the market. The Green Organic Dutchman gentle dry tech from Oregon and our Illinois partner and Fresh in Switzerland and of course, others are all utilizing the Terpene Max program to produce premium high terpene high cannabinoid combustible product.

All of our royalty partners have allowed for demos to occur their facilities, which we believe will lead to further near-term adoption by new partners. The market for legal cannabis is expected to grow to CAD56 billion by 2026 at a 70% compound annual growth rate, which means there will be an ongoing imminent need for adequate drying capacity.

We feel that REV has the opportunity to win a large share of this opportunity. This year alone, the market is projected to be about CAD27 billion with over 83% of that market in the United States.

Our efforts to win new business in the US has intensified and we've recently signed three new sales rep referral agreements to actively market REVENUE through established cannabis networks. On prior conference calls, I've referenced the target securing five large scale and 12 10 kilowatt per stores to generate profit and our EnWave business segment.

Today, this fiscal year, we've confirmed three large orders and nine 10 kilowatt sales. With four months left, we are confident in our ability to reach our targets.

The time in new orders will obviously affect profitability, hence we are all hands on deck to closer most material near-term deals. And with that, I'll turn it over to Dan Henriques, EnWave's CFO and NutraDried's COO to go through the Q2 financials.

Dan?

Thanks Brent. Good morning everyone and thanks for joining us on today's call.

We'll take a few moments to review the Q2 2021 financial results. Please note the figures I'll be going over today can be found in our press release from this morning and the financial statements and M&NA filed on SEDAR.

All amounts are in Canadian dollars unless otherwise noted. The financial results for Q2 2021 are underscored by two primary themes, EnWave's REV technology business has gained significant momentum and by prudently managing costs, EnWave reported a positive segment net income of 42,000 for Q2, showing strong progress.

This was a result of scaling our machinery sales and controlling expenses. The combination we aim to continue for the remainder of the year.

Conversely, our NutraDried business struggled in Q2 2021 to gain new product distribution from Moon Cheese and to manage costs. As a result, we undertook a management change and restructured the operating subsidiary in February, partway through the second quarter.

As part of the restructuring, we purged non-essential spending on consultants, agencies, non-working marketing spend to reduce overall spending. We expect the benefits of those cost reductions to materialize in the second half of the fiscal year and significant progress has been made as of today's date on that initiative.

Consolidated revenues in Q2 were CAD4.6 million and the breakdown of that was evenly split with CAD2.3 million coming for EnWave's Technology business in CAD2.3 million coming from NutraDried's product sales. Overall, revenues were CAD2.8 million lower in Q2 2021 relative to Q2 of 2020 and CAD2.9 million lower in -- to Q1 2021.

The quarter-to-quarter decrease is primarily attributable to lower Moon Cheese sales to Costco. The impact on the missed volumes to Costco challenged both our revenues and gross margins in Q2.

EnWave's quarterly revenues of CAD2.3 million for Q2 2021 was up from Q2 2020 by CAD179,000 and down from Q1 of 2021 by CAD328,000, not a significant change in revenue relative to the comparative periods. EnWave reported third-party royalties in Q2 2021 of CAD163,000, a slight improvement over the CAD145,000 from Q2 of 2020.

With the recent large machine installations in Peru, in Costa Rica, as well as three pending large scale machines on order, we expect our recurring royalty base to continue to compound over the coming quarters. NutraDried revenue was CAD2.3 million for Q2 of 2021, relative to CAD4.8 million for Q1 2021 and CAD5.3 million for Q2 of 2020.

As previously noted, this decline in sales in NutraDried is reflective of not gaining product rotations at Costco in Q2. Since the restructuring of NutraDried that took place in February, the company is now focused on sourcing multiple new opportunities for product sales, including both ingredient sales and co-manufacturing contracts, both of which are complimentary to our branded product growth.

We started shipping bulk products in Q3 after confirming several new customers. These initial orders are in excess of CAD1.5 million and our strategy at NutraDried is to grow distribution for our Moon Cheese product portfolio, as well as to pursue and confirm new private label in co-manufacturing opportunities to grow our revenues.

Our consolidated gross margin was 10% for Q2, 2021, compared to 25% for Q1 of 2020, a decrease of 15%. The compression is a result of NutraDried weak sales relative to the fixed costs to run that production facility.

This was offset substantially by improved margins yielded from EnWave's technology business, simply put our business model, EnWave is working as planned on the technology side. And we have taken measures we expect to materially improve the margins at NutraDried.

EnWave's gross margin was 40% in Q2, 2021, relative to 37% in Q1 of 2021. We continue to benefit from our lower and variable cost structure to fabricate and deploy REV machine.

We have reduced machined fabrication overheads relative to 2020 and maintained our fabrication capacity through the use of more contractors and outsource suppliers. We have the capacity to continue to deliver the anticipated machine order pipeline for fiscal 2021, without needing to substantially increase our manufacturing overhead.

NutraDried's gross margin was negative 19% for Q2 of 2021, relative to 15% for Q1 of 2021, a significant compression. The compression was due to the low sales volume in the period and under absorption of the fixed manufacturing overhead due to that low volume.

We also wrote off 213,000 of old packaging materials and discontinued products in Q2 due to poor planning by former management, and this contributed also to the negative margin. The result for Q2 is not acceptable, nor sustainable.

And the restructuring in NutraDried is designed to rectify this trend. We believe that by aggressively pursuing new bulk format sales, we can substantially improve the margin profile of NutraDried.

Thus far in Q3, we've already made meaningful progress on that initiative and we expect continued improvement. Our SGA expenses for Q2,2021 were reduced across each function, as we maintained EnWave's cost management program and implemented a new cost control program at NutraDried starting in February, realizing one month of the changes in our fiscal Q2.

We are driving costs out of NutraDried in Q3 and into Q4 and expect the benefits of this initiative to be realized in the later half of the year. We reported G&A expense of CAD 1.2 million for Q2 2021, compared to CAD 1.55 million for Q2 of 2020, a reduction of 335,000.

We reduced G&A expenses for staffing costs, legal fees, investor relations and other non essential services. We do not anticipate increasing G&A spending over the near term, and are very serious on cost control in both segments of our business.

We reported sales and marketing expense of CAD 1.3 million in Q2 of 2021, compared to CAD 1.8 million in Q2 of 2020, a reduction of 500,000. We've taken big steps to reduce sales and marketing expenses at NutraDried now, including the reduce -- reducing the use of expensive external agencies and consultants, reducing staffing levels, and focusing spending in areas that will generate high ROI.

The full benefit from this can be expected by our Q3 of 2021 and into Q4. Our travel spending from both EnWave and NutraDried was reduced along with the cost to attend trade shows.

We hope in a not too distant future to begin traveling again for select high ROI business development purposes. We will continue to operate with strict control over SG&A expenses at both EnWave and now NutraDried, we expect our SG&A expenses to remain at reduced levels for Q3 and for the balance of the fiscal year with a new leaner cost structure, we believe we have the capability to achieve quick commercial growth in both segments of the business and the changes made in NutraDried will help to restore the business unit to being cashflow positive.

I've said before and I'm confident that we now have the right operating cost structure in place to allow us to scale both sides of the business without increasing SG&A in the near term. We incurred a one time restructuring charge of CAD 691,000 in Q2 of 2021, which represents severance and other costs as part of the restructuring and NutraDried.

In total, our staffing was reduced by 24 positions, including several senior positions, including the CEO and CMO in an effort to turn that operating subsidiary around. Our adjusted EBITDA, a non IFRS financial measure with a loss of CAD 1.9 million for Q2 2021 compared to a loss of CAD 1.4 million for Q2 of 2020.

You can refer to our MD&A for a reconciliation between the IFRS accounting net loss and adjusted EBITDA. This adjusted EBITDA loss reflects the challenges previously highlighted that need to drive with inflated SG&A costs in a compress gross margin.

We've taken major steps to correct this trend and expect to realize the benefits of the restructuring at NutraDried in Q3 and Q4 of this year. We expect to be able to grow the top line at NutraDried with tight controls over expenses with a target of returning the business unit to profitability.

EnWave's technology business generated both positive adjusted EBITDA in Q2 and a CAD 42,000 net income. This marks an important milestone for our technology business reporting positive net income.

While we're not satisfied with a small profit, it shows that our strategy to profitably scale the technology side of our business is working. As we grow machinery sales, REVworx tolling revenue and royalties, we expect further bottom line improvement.

Our balance sheet and treasury position at the end of Q2 2021 was robust. We finished march with CAD 15.1 million and cash on hand up from CAD 14.7 million six months earlier at September 30, 2020.

This was after completing the restructuring at NutraDried and advancing our REVworx tolling facility capital project to with EnWave. For year-to-date 2021, our cash flow from operating activities was positive CAD 2.9 million and we invested CAD 1.5 million in capital expenditures for our manufacturing capabilities.

Our net working capital position was CAD 19.2 million on our balance sheet remains -- in practical terms debt free, except for our facility leases and a small low interest COVID-19 relief loan received by NutraDried. In October of 2020, we implemented a normal course issuer bid and obtained TSX Venture approval to repurchase up to 10.9 million common shares.

During Q2, 2021, we repurchased 40,000 common shares at a weighted average price of CAD 1.32 per share or CAD 52,000. We will continue to use the NCID when opportunistic scenarios present themselves and business conditions support further buybacks return value to our stockholders.

With that, I'd like to turn it back to Brent for some closing remarks.

Thanks, Dan. In summary, EnWave had its best first two fiscal quarters in the history of the company and we're bullish about the next several quarters as our business develop pipeline is robust and the startup of REVworx should stimulate even more business.

NutraDried on the opposite end of the spectrum perform very poorly. It was imperative that we stepped in to restructure NutraDried in February and we will start to see the beneficial effects of the changes we've made in Q3 and Q4.

With the hiring of our new CEO at NutraDried and intend to keep expenses at far more reasonable levels, we anticipate a quick return to healthy margins and profitability. In both business segments, we will continue to run lean and capitalize on our growing market opportunities.

And we’ve fiscal 2021 targets include closing five large scale REV machines and 12, 10-kilowatt machines and securing anchor clients for REVworx after a successful startup. Today, we’ve sold three large scale and 19-kilowatt machines.

Our core mission remains the same. EnWave’s mission is to build long-term diversified portfolio of royalties, generated from the commercial success of different REV-dried products, selling in multiple geographies around the world, huge drive in REVworx are platforms to support this mission.

The rate of adoption of REV products and REV technology is accelerating, and we're constantly finding products and opportunities where technology is superior. We now have a broad commercialization strategy that includes the REVworx toll manufacturing division.

The startup of REVworx should accelerate the launch of REV-dried products to market de-risk the adoption of REV technology and ultimately lead to increase machine sales and royalty generation. Again, our target startup timing for REVworx is August or early September.

The opportunity to materially improve our business is present. EnWave’s thriving end the path to growth for NutraDried is clear.

Our teams are lean, enthusiastic, and capable, and we expect material progress this year. I'm excited to close new deals and share more about the relationships we are currently pursuing in the near term.

We will continue to assert ourselves and take control when we are faced with future challenges, no different from our handling of COVID and NutraDried’s recent poor form. And with that, I'm going to end my prepared remarks, and open the call for your questions.

Operator, please provide the appropriate instructions.

Hey. Good morning, guys.

So first off, let's tackle Costco. So I understand obviously, that when you have -- it’s volatiles, you're not in on a regular product, but you're still on rotation.

But how is the relationship, or how should we think about the potential for future orders? Is it still going to be extremely lumpy, like we're seeing right now, or can we expect any kind of smoothness or what kind of visibility do you have with those conversations?

Yes. Neil, it's -- we've always been selling to Costco on a rotational basis.

We've had the odd promotion, which has taken us national through the buyers at Costco. We still have good relationships with the buyers.

Candidly the competition relative to Moon Cheese is picked up, so there has been other all natural cheese snacks that I've had rotations through Costco. So we got to earn back our business there.

So, it's challenging to forecast or provide guidance on where that's going to go. We still have a very strong relationship with them.

They like our products. So, we're confident we will be able to generate future rotations.

But, to give a precision as to when or how big, it's tough for us to do that.

Okay. So the revenues that we're seeing now should basically be -- this is the base of where we are and all the other programs, which are more consistent and, potentially grow.

And then, Costco becomes kind of gravy on top of that when the orders come through?

Yeah. Costco will be opportunistic, it's not part of our long-term strategy.

We've done a number of things to increase that volume that we've missed there. So we started selling bulk to other CPG companies to using ingredients and inclusions.

That will pick up in Q3, we've already started to ship I think I mentioned on the call north of 1.5 million orders for that new channel. So we're looking to offset that volume through other opportunities.

Right. And with the new CEO coming in, I assume that will still be going with the core strategy of more grocery stores, more checkout aisles, more convenience store locations that's continuing to ongoing, right?

Correct. Yeah, we're still very focused on expanding Moon Cheese distribution, retail grocery being the large prize.

We have a new Protein Blitz Mix that's in a different section of the store belongs in the trail mix section as opposed to the crackers or sometimes the chip section. So we think there's an incremental opportunity there.

So there still a lot more work and progress to be made getting grocery distribution for our branded items.

Okay. That's good.

And let me just go into the expense reductions that you were talking about. So if I understood correctly, we saw some of those expense reductions, say in the last month of this quarter, most of the expense reductions are going to come in the latter half of this year, we're still looking at around CAD 2 million annualized, and is most of that going to be in sales and marketing?

It’s going to be -- majority will be in sales and marketing, with some in G&A. And then, we're focused on improving our margins.

So we're looking to take out some costs from manufacturing as well, we've done that. And that'll pick up, we'll start to see the results of that in Q3 into Q4.

But the largest portion will be sales and marketing, where we've cut down the use of expensive agencies and consultants and other fees that weren't generating the returns that they were supposed to.

All right. So but it's only been like one-third of one quarter that we've seen as far as the benefits so far.

So everything was still to come, possibly.

Exactly. Yeah, that all took place.

You may -- it took a little while to unwind things. So there was of course, more in March and then into April, we've -- we're going to -- we've already realized the full benefit in April, so it'll hit Q3.

We're optimistic that Q1 and Q2 will be the worst quarters in the history of NutraDried and that's a primary reason why I interject and say no, stop spending so much money and realign your strategy.

Okay. That's useful.

Okay. Thanks, guys.

That's it.

Thank you.

Yeah. Good morning, guys.

Just a couple for me, if I may. First is on the new bulk opportunities or white label opportunities.

Dan, I think you mentioned 1.5 million orders already secured. I just wanted to clarify some of the timing around those orders and how they should hit the P&L?

And I guess whether or not you expect that to be a single lumpy order, recurring and/or growing as you layer on additional customers just any color around the cadence to that, it would be helpful?

Yeah. So the 1.5 million, I mentioned will show up in Q3.

So we've shipped majority that in May, and we've received PO’s that we expect to ship in June. And we have a few large customers that are taking bulk from us right now, which is a good start.

We think there's a lot more opportunity to grow that. So into July, August, into the fall, we expect that to continue to grow.

We're out -- we've changed our sales tactics and we're now pursuing these opportunities as opposed to just reacting to them when they come in. We think we can do better than the 1.5 million that we've already confirmed for May and June.

And are declining times past like the prior strategy from the CEO initially was not to take on these bulk orders. And we forced the change, and of course, we're reaping the results right now.

And can you just clarify as to how that products being used. I understand that they be integrating it into other products, but is it being used on a trial basis still, is it already going into commercial products, just giving us a sense for how that's actually being deployed, the downstream would be helpful from just understanding the build out?

Yeah, it's being used. The art form of cheese makes a good inclusion in mixes.

So the majority that's being used in different products that have not seeds, and then the cheese components with them for keto friendly, high protein trail mixes, there's a few of them that have done really well in the U.S. gain a lot of distribution, we're happy to be part of that business opportunity.

It's not branded munchies, but it's a lot of volume. And it's a good exposure for our former cheese, which we have a strong moat around.

So as they continue to grow, we think we can win with them.

Okay, that's helpful. And just -- I apologized if I missed it.

But cheese prices have been on decline here recently, is that something that we should expect would help going forward as well?

It will. It's going to start to pick up, or start to show up in the probably the fourth quarter.

So we did a little bit of forward buying, so we've locked in pricing up until, the early summer here. And then we'll start to benefit from lower cheese price and hopefully a more stable cheap price for the rest of the year.

What we're seeing is, futures have started to pick up a little bit after the U.S. economy started to reopen.

Food services coming back on, which is putting a little bit of demand pressure. But we don't expect to go through the roller coaster ride that we did in 2020 on cheese prices.

Again that’s helpful. And just on the REVworx startup, I think Brent you mentioned August, or early September, is there anything -- as I seem to recall the private -- previous guidance it was a month or two prior to that.

So I'm just trying to understand that it’s just regular startup questions, I'm trying to understand what pushed it out a little bit?

I think -- was the construction permit from the City of Delta. That is that, we have our third party contractors lined up and they started the day after we received the permit finally, and the holdup, we're still unsure why it took a bloody long.

Okay. In city terms, it's probably early for them.

But, yeah, I understand the frustration. And just as a follow-up to that then, do you just want to give us a broader sense for how that pipeline looks fulfilling the capacity there.

Just give us a rough sense for the parties that you're still contemplating like the size type, the mixers you're are looking for, you’ve given some description with that before, I'm trying to get some sense if there's been any change in your allocation of that capacity?

It's a balancing act to be to be frank, we've got a number of larger projects that are contemplating REVworx as primary manufacturing capacity to take their initial product to market. Following that they're also planning ahead in terms of in-house manufacturer, procuring their own REV equipment, prospectively, in late 2021, for obviously, installation 2022.

SunRhize Tempeh, which we announced I mentioned on the call has made very good progress in terms of the product development, market trialing, or I should say panel testing, and also great feedback from some larger companies that we may partner with them on this particular deal. So we anticipate SunRhize will be an anchor tenant, if you can refer to them as that for REVworx.

And then we're also dealing with a very, very, very large fruit company that would look to potentially use REVworx as their first step of commercialization, as well as a handful of others, which are, as I mentioned, we're going through the costing process, and determining what the fee per kilogram, per pound will be. So they can work that into their own business models, and then get ready to pull the trigger as soon as we're operational.

So it's strong. It's only actually strengthened since we last spoke about it.

Okay, great. That's actually helpful.

And then just lastly, maybe for me is just on the guidance for the machine orders the year, you're already well advanced in the target, is there a chance to exceed that with time here. I mean, how is the pipeline deal relative to the current book?

We're very confident that we're going to hopefully hit those marks sooner rather than later. And for the fiscal year, there's the prospect of doing it significantly, because there are several companies in the United States in the cannabis industry right now considering the adoption of our technology.

And that would be in the range of 60-kilowatt to 120-kilowatt machines, not simply 10-kilowatt deployments. And then we also have several of our current royalty partners who have had success launching products to market using one or multiple 10-0kilowatts that are now needing to scale up their manufacturing capacity.

So those discussions are ongoing. Understanding the timing of that need, it's likely that we'll see several of those large repeat orders coming from established partners, again, within the fiscal year.

So obviously, five and 12 would be great, will be profitable. But of course, we're aiming for higher.

Okay. Very helpful guys.

Appreciate your time.

Thanks, Steve.

Okay. I'll take two questions, before we go to the next telephone question, Jesse, just two that were submitted through the webcast that I'll address.

And the first is about the 40 royalty agreements, not 44 that we have. Question is, did any of those royalty partners not pay royalties for the last few business quarters, if any, and so Dan, can provide you with a response to that question.

Yeah, of the 44 license agreements we have out there, there's a handful that are dormant companies that years back purchased 10-kilowatt machines, signed a license, so there's probably five or six that aren't paying royalties. And the rest about 10 are large royalty payers.

So companies that have large scale machinery producing commercial products with steady growth quarter-over-quarter, cannabis has picked up in the last couple quarters with the installation of a 60-kilowatt with our key cannabis partner and 10-kilowatt down in the States. So about 10 are large, five or six are dormant and the rest are seeds that we expect to grow into large payers as their products continue to take off.

So I'll add to Dan's response some of those seeds are leveraging large scale manufacturing capacity at some of other licensed partners, so we see collaboration within our licensed partner ecosystem to try and maximize the utilization of existing capacity. The second question here that we'll address is, when will the machines for Aurora Cannabis actually be operating?

And the answer to that is, your guess is as good as mine, we fulfill our responsibilities of building the 220 kilowatts to spec and delivering that to the location, which they had instructed us to do. So, as many of you have likely read, or has pulled back significantly, the growth of facilities and capabilities for manufacturers, we continue to provide them with updates from a technical sense.

And obviously, with Tigard, again, operating and producing about 90% of their cannabis using REV technology now, and high quality, success – and successfully into the marketplace as well as our US partners coming online. I like to think that it's imminent.

And if it isn't, then there's a significant issue with the management of Aurora, not considering something that's going to create value for their business. And will take that question from Eric Pazham [ph] on the telephone line.

Thanks, Brent. Actually, Dan, this one's for you.

The – you seem to be increasingly talking about the royalties. And you talked about the margin for EnWave and then royalty adjusted margin at 47%.

How do you see that margin with the royalties developing over the next few years, as you put so many larger machines online paying royalties? And I'm always worried about the process to make sure our partners are paying us properly.

So I know you guys have some kind of auditing process. But do you mind just reviewing the auditing process you have for the royalties?

Sure. So the first part of your question about how do I see the royalties progressing?

I mean, I see it progressing materially over the next couple of years. If you look at our current basket of royalty companies or royalty partners, it's good.

But there's a lot more in the hopper right now that we're looking to bring online. So we've got three large machines in our – in our order book that are ready to be installed by the end of the calendar year, those have the capability to materially increase our royalty base.

And then, if you look at our pipeline of machine orders that we're working on, you know, the number of machines and the frequency of these orders and licenses is picking up – it’s growing significantly. And so you know, I see that compounding into royalties.

So there's a lag between when we announced the license agreement, or machine purchase. And when it turns into royalties, it takes a few quarters.

So as we continue to deploy machines and signing licenses, I think that's going to pick up and it's a very high margin portion of our revenue base. So it's the mission of the company like we don't want to take away or the some of the things we're doing to accelerate our business development, such as REVworx, our tools to help us build that long-term royalty portfolio to get more companies into our system, using our technology to make products, but the long-term mission and the short-term mission is to build that diversified royalty portfolio.

In terms of the auditing, we have several checks and balances in place, and all of our licenses allow us to monitor the usage of our machinery. So the machines are connected to the internet.

We have data on uptime, power utilization, number of baskets and trays going in and out. So we can we can monitor that through the technology tools that are implemented in the hardware.

And then, as well, we have clauses within our agreements that allow us to audit if we thought there was ever any false reporting or lying on royalty reports. Thankfully, we haven't been in that situation very often.

We have strong partnerships with companies that we do business with, and we really treat them as partners. And I think we have through the tools we have to monitor the usage.

We're fairly comfortable that we're in good stead on that front.

Okay. Thanks.

And just one quick question regarding the REVworx. This is a new concept, a new arm of the company, but have you been revisiting old business leads that just couldn't quite convert to a sale on a machine and seeing if they want to do kind of a little entryway with the REVworx like how it seems like a very easy way to get your product out there for a try.

So have you been going back the pipeline is -- I know you've got lots of excitement with different size partners there, but do you see that as being something that's going to be very popular as the years go by?

Absolutely. Our sales team has already reached out to past companies that we were engaged with that passed on adopting technology due to the upfront capital cost and the risk associated with launching new products to market.

And as we described REVworx is hoping to alleviate that upfront risk, allowing them to get the product to market, justify their business cases and then take manufacturer in-house to enlarge their margins with subsequent products. So I mentioned a few companies that are in line to use REVworx, but there are several more that once the facility has started up, we'll begin an audit to see if they would like to use that tool too.

All right. Thanks a lot guys.

You sound busy, I wish you guys well.

Appreciate it, Eric. Thank you.

Thanks, Eric.

We have one more question on the webcast that we'll address. And this is asking for comment on product revenue excluding Costco referring to NutraDried, looks like it was also down meaningfully year-over-year.

So Dan, can you please comment on that?

Across all channels, not the case in the grocery channel. In NutraDried, we had an increase in product sales, excluding Costco.

It's a modest increase. We're still looking to confirm new grocery distribution.

We have some presentations into key customers we think can move the needle there for us. But no, not -- if you take out Costco revenue, overall revenues not -- is not down year-over-year, NutraDried.

Okay…

Thanks, Jessie. And thanks for everyone for joining us today for EnWave’s second quarterly earnings conference call for 2021.

At this time, you may now disconnect and as Jessie alluded to, if you have further questions or like to have conversation with Dan or myself, or any of our executives, please reach out either phone or email, and we're -- we'll be happy to connect. Thanks so much.