Friday, July 15, 2016

Enwave: Cheese Treats and More

It is always fun due diligence for companies with food products.  Consideration of EnWave Corporation (NWVCF:  OTC or ENW:  V) requires a trip to Starbucks for ‘Moon Cheese’  -  a crunchy, cheese treat made with EnWave’s proprietary knowhow.  So head to the first Starbucks you can find and grab a bag to eat while reading the rest of this post.

Moon Cheese is produced with ‘radiant energy vacuum’ technology that is configured for efficient dehydration of food at low temperatures.  The technology involves a combination of microwave technologies and the right vacuum.  Then its harnessed in modular equipment especially designed for scalability.  EnWave calls its technology 'REV' and has a string of patents to protect their processes and designs from jealous competitors.
Moon Cheese is only one of many applications for EnWave’s equipment.  The tasty snack is produced and marketed by NutraDried LLP, in which EnWave is a significant investor.  Management is not looking to go into the snack business.  However, the all-natural snack with long-shelf life even with no preservatives provides management with a compelling ‘show-and-tell’ prop for sales calls as well as investor presentations.  I recommend the jalapeno and cheddar!
EnWave has chosen to license its dehydration technology into eight different markets, such as snacks, food ingredients, biochemicals and other pharmaceuticals.  Indeed, the company has already signed over a dozen license agreements that will bring in streams of upfront fees and royalty streams based on subsequent production.  The company has developed three different platforms with REV at the core:  nutraREV to dry food products, powderREV for bulk dehydration of food cultures and biochemicals, and quantaREV for dehydrating biopharmaceuticals like vaccines. 
In the last two months alone, EnWave has signed a half-dozen new license agreements and expanded other relationships. 
The most recent licensee is perhaps the highest profile customer EnWave has landed yet.  Perdue Farms has been granted exclusive use of REV dehydration technology to process pet food and treats in the U.S. and Canada.  Known for its chilled chicken and turkey meat products, Perdue will first use a small, REV unit for product development and marketing trials.  The agreement commits Perdue to purchase a larger scale machine to volume production.  Under the agreement EnWave receives a deposit and additional royalty payments based on Perdue’s pet food sales.
Perdue’s bold move might have been triggered by an earlier announcement from EnWave that another unnamed meat processor based in Australia or New Zealand had signed a license option.  EnWave is renting an REV unit to this potential licensee for research and development purposes.  At the time of the announcement, EnWave laid claim to discussions with another six meat processors in Europe and the Americas.  We can assume Perdue was one of them.
Last month Milne Fruit Products ordered an additional 120 kilowatt REV machine to expand production of its ‘Microdried’ line of fruits and vegetables.  The expanded license now includes apples, grapes, kale, green beans, squash among a number of other popular fruits and vegetables.  EnWave is apparently receiving quarterly royalty payments from Milne, which will increase beginning in second quarter 2017 when the new Microdried products begin shipping to customers.
Other new licensees include Kesito LLC, a producer of healthy snacks based in Greece.  Kesito has licensed REV for production of dried cheese snacks.  Merom Farms Ltd. will be using small 20 kilowatt machine with REV technology to product wasabi product.  Wasabi is also called Japanese horseradish that is served as condiment, popular for its pungent aroma and spicy flavor.
Although EnWave has had a string of impressive new and expanded license announcements in recent weeks, its successes will take time to translate into revenue.  Upfront fees help defray the costs of putting new contracts in place but not much more.  Yet if REV licensees meet with commercial success, EnWave could be the recipient of building royalties in the coming years. 
EnWave is not yet profitable.  In the twelve months ending March 2016, the company reported $8 million in total revenue from royalties.  The reported net loss was $2.2 million or $0.07 per share.  The company had to use $162,250 of its cash resources to support operations.  The company has a relatively strong balance sheet to support its business development efforts. 
Cash totaled $4.5 million at the end of March 2016, and there is no long-term debt.  At the recent spending rate, EnWave could survive for some time without new capital.  However, investors should expect an increase in spending in the near-term that could use of cash resources at a faster pace.  The company must deliver new equipment to make good on those new and expanded license agreements.  Also market penetration efforts come with a price tag for marketing and sales personnel, trade show participation and other travel to bring the message to potential customers. 
Priced below one U.S. dollar per share and trading in low volumes with a wide bid-ask spread, EnWave shares may not be appealing for risk adverse investors.  However, even the most cautious investor would have to admit that Moon Cheese is a unique and tasty treat that can only be made with EnWave’s technology.  A packet of Moon Cheese is priced at $4.95 at a Starbuck’s counter.    As wholesalers neither Milne Fruit nor Merom Farms publish prices for their dehydrated products, but it seems likely little can be purchased for less than a dollar.  The question for investors to deliberate is whether EnWave can capture its fair share of the value in the products made with its REV technology. 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

No comments: