Enwave Corp - Amazing risk-reward ratio
It was July, 2010. I remember it very well. I woke up on a beautiful, sunny and clear morning.
I turned 20 some months earlier. This was my first summer after my teenage years. Great memories.
Already back then, the stock market was my biggest passion. I was almost addicted to it. And I started to feel that I was getting better and better with every year of trading.
I grabbed some breakfast and opened the financial newspaper hoping to find new trading ideas. The stock in the spotlight that day was ‚Enwave Corp.‘ - a small Canadian startup trading in Toronto.
Is this the Breakthrough?
The title of that article was ‚Is this the breakthrough?‘.
I learned early that if you think it is the breakthrough - it probably is not. And if it is, it's probably priced in already. Luckily, I didn’t invest in Enwave back then.
It’s extremely hard to find companies for a reasonable price with an acceptable risk-reward ratio. I was well aware of that even at a young age. However, at the same time I was unbelievably scared to miss the train.
Back then Enwave signed a Research and Development Agreement with Nestle SA - the largest food company in the world. Nestle is headquartered in Switzerland and that was probably also the only reason why they even made it into a Swiss newspaper.
Enwave has created a new way for food companies to dry food (f.e. for snack products or muesli) in a fast, gentle and cost-effective way while preserving flavour, colour, and nutrients. Enwave says the process is cheaper and six to ten times faster than other processes in place.
The agreement between Enwave and Nestle turned into - nothing. Today, we are in year 2020 and I finally believe Enwave has broken through. And not only that. The valuation has come down massively.
Enwave is commercializing a new method for dehydrating food.
It sounds a bit boring, I agree - but don’t get tricked here.
The technology is called Radiant Energy Vacuum (REV).
In simple words, it is a rapid and low temperature drying method.
The big advantage is that it maintains the product’s colour, flavour and nutrients a lot better than other drying methods like ‚air drying‘ and ‚freeze drying‘.
Examples of products
Here are some example of products that you can place into the REV machines:
- Food cultures
- Vaccines and antibodies.
Disruptive technology can show up where you least expect it. Let’s have a look into the cannabis sector. For the most part it is air dried.
Enwave believes there is a new way. And they claim that it is possible to retain 100% of the THC and 100% of the CBT in the plant.
In the most simple form we can say Enwave’s machines use a combination of microwave energy and vacuum. Through this way it is possible to dehydrate food, change or maintain its structures and provoke chemical reactions.
By removing water at lower temperatures it is possible to:
I learned that if you put water or organic material into a vacuum environment that water will turn into gas and then you can pull it away through a vacuum process and remove the water quite cleanly.
However, when you dry things, things dry from the outside in. So when you introduce some microwave into that vacuum environment you can help the water molecules jump out.
The game changer
Brent Charleton, the CEO Enwave Corp., said in an interview in 2018:
„We think that we have been a game changer in the industry by accelerating the time between growing and sales. The processing time for REV is dramatically less. It is approximately 1-2 hours in comparison to 16-24 hours for freeze-dry or 6-8 hours for air-dry.“
The most significant financial benefit to cannabis industry customers is that Enwave's technology can reduce drying time from 5-7 days to less than two hours.
But for Enwave it is much more than just speed. Things can either be simply dried as they are, hence room temperature, or heated up first. But it’s also possible to start with frozen materials. The output can be highly detailed and designed. The process can have different components. And this gives so many opportunities for new products.
Enwave is actively supporting other companies to discover new innovative products.
And of course there is a reason for that.
They want to build up a huge royalty stream over the next decades.
Royalty tied to the success
Those royalty agreements will lead to an interesting and steady cash flow in the future.
Enwave has machines deployed to numerous companies spanning Europe, Australia, South America, Central America and North America.
Businesses have secured rights to use Enwave’s REV technology for the exclusive production of specified products within a defined geographic region.
In exchange for these exclusive rights, each commercial licensee has agreed to pay a modest royalty tied to the success of their REV-dried products back to Enwave.
John Budreski, the Executive Chairman of Enwave Corp., said that the plan is that the machine sales should pay the entire cost of the company while the royalty payments will be for the investors.
Today, Enwave has an impressive number of customers all over the world with 37 active royalty partnerships ongoing and dozens more in the pipeline.
The history of Enwave
The market capitalization of Enwave now is around 70mio USD. They have 10 million in cash and assets worth over 20 million USD.
They own 100% of the company behind ‘moon cheese’ - a snack product that is a huge success in the United States.
10 years ago, when I read about Enwave the first time, they were making 0,1 million USD in revenue. Today it is over 30 million USD.
And that’s why I want to find out more about this company. And as always - I will never stop asking.
How big is the market?
Food and Cannabis are two huge multi billion dollar markets. It is possible to create a wide variety of unique new products in both fields.
And since the technology is heavily patented Enwave does have something in hand to grab a big market share if they have superior technology to offer.
In 2010 Enwave estimated that the market for dehydrated products will be around 217 billion USD in 2018. Unfortunately, I didn’t find the actual number for 2018 myself.
However, I found the following quote:
“The international market size for dried products, in general, is estimated at $400 billion. Demand is expected to be driven mainly by the food processing and pharmaceutical industries, while the cannabis and biotechnology markets are expected to be the fastest growers. The legal cannabis market in which Enwave is becoming a big player is forecasted to grow at a CAGR of almost 30% to about $60 billion by 2025.”
There is plenty of competition for drying equipment. Enwave seems to be best in class with regards to drying times. This might be a big advantage, because it saves customers time and money.
Based on the estimation from 2010, assuming a market penetration of 5% and a royalty of 2% Enwave would generate a yearly royalty stream of 217 million USD. A market penetration of 15% and a royalty of 5% would result in juicy revenues of 1,6 billion - per year.
As always, this is speculative and it will take many years or even decades to reach those numbers. But technically, it is possible. And it is huge.
My question is only, how much of a game changer is Enwave’s machinery really?
What machines does Enwave sell?
Let’s look at some older company presentations and announcements and see if and how the company has changed over the last decade.
The technology was originally developed in conjunction with the University of British Columbia.
In 2010, Enwave was developing 4 different technologies:
- Powder REV
Today, Enwave’s focus seems to be on two technologies:
If I am correct, I believe the PowderREV technology is also available. But I am not 100% sure about this.
However, it seems that FreezeREV is also back in the spot light.
Earlier this year Enwave announced that they signed a further agreement with a company called 'GEA Lyophil' to help sell the FreezeREV technology. FreezeREV allows rapid dehydration of pharmaceutical vaccines.
GEA Lyophil is a global manufacturer and marketer of freeze-dry units for the pharmaceutical and biotech industries. Enwave will contribute know-how for the potential scale-up while GEA will lead the project.
The machines sold in the pharmaceutical industry will be built and sold by GEA and a royalty will be paid to Enwave based on revenue. This allows Enwave to focus on core competencies in the food and cannabis industries.
In an interview (September, 2020) with Jochen Staiger from Swiss Resource Capital Enwave's CEO Brent Charleton revealed the following:
"We feel pharmaceutical has a higher likelihood of success in medium to long term than maybe we thought a year ago. Our view has changed in that way only because we have made some very important strategic partnerships. "
What is the difference between NutraREV and QuantaREV?
The NutraREV machine has the shape of a drum. It looks like an oversized laundry machine where you throw all the food inside and wait until it is dried. See the picture below.
With QuantaREV, on the other hand, you put the food on trays first. This is ideal for products that are more fragile or have a higher liquid content.
In 2017, Enwave wrote:
“In regards to our REV platforms, freezeREV and powderREV are still in the developmental phase and both are focused on pharmaceutical and biological material processing.
Our core competency is food processing. We offer nutraREV (drum-based system) and quantaREV (tray-based system) as variations to transport the organic material through a highly-controlled vacuum-microwave environment.”
Where is the focus?
Enwave mainly focuses on those three fields:
- Food & Ingredients
- Flower & Industrial Hemp (Marijuana)
Enwave also writes:
“Other innovative near-term commercial products include bean-based cluster snacks, meat-based ‘chip’ snacks and starch-based, puffed fruit and vegetable snack products.
REV’s unique ability to remove moisture homogeneously from foodstuffs at low, controllable temperatures allows for novel and varied product attributes to be created.”
What are the Benefits?
Here are some benefits of Enwave’s technology:
In my opinion, the biggest benefits are new product opportunities that come with Enwave’s machines. Those would not be possible in the same quality with alternative drying methods like ‚air drying‘ and ‚freeze drying‘. Or at least not that I know. Somebody might come up with a superior technique at some point in the future.
In addition to that, companies can heavily reduce energy costs due to its rapid drying times. At the same time, it is possible to massively increase the output - something that is fairly important in the low margin food industry.
Currently, Enwave sells two types of machinery in different power classes:
- 10 KW Machine
- 60 KW
- 100 KW
- 10 KW
- 60 KW
- 120 KW
NutraREV is suitable for the dehydration of organic materials that don’t break while QuantaRev can transport product loads either via a belt or try system. Both types come in different sizes ranging from 10 kilowatt to 120 kilowatt.
Where was this technology invented?
The technology was originally developed by Dr. Tim Durance. 15 years ago he was doing research at the University of British Columbia when a revelation hit him.
To him it was apparent that microwave-drying's only significant problem was high temperatures that could potentially damage the product.
Dr. Durance made the logical inference that the use of vacuum in the process would reduce the temperature and thus remove the biggest obstacle to large-scale use.
It was originally only designed for food products. The company has since then signed development agreements with various Tier 1 pharmaceutical companies. Today, they have an ongoing partnership with Merck.
On the official website Enwave lists the following benefits using the REV technology:
In August, 2018 Mr Brent Charleton was appointed President as Chief Executive Officer of the company, replacing Dr. Tim Durance due to differences in corporate strategy and direction.
I read that Brent Charleton was a major contributor to the company's commercialization success and has been leading the proactive licensing strategy and deployment of Enwave's REV technology.
Tim Durance has been the guy behind Enwave's technology, and also the co-author of the majority of Enwave's patents.
However, for me it is impossible to judge the track record of those people inside the company.
Move into Cannabis market
In 2018 Tilray, one of the largest and most sophisticated producers of premium medical cannabis in the world, bought three REV machines from Enwave.
Tilray first purchased a small-scale 10kW REV dryer for testing and later ordered a 60kW REV machine for large-scale commercial production.
Under the terms of the deal, Enwave will receive royalties based on the amount of cannabis that is processed using Enwave's technology.
The sub-license rights granted to Tilray allow for the sub-licensing of the technology to additional Canadian licensed producers, with sub-license royalties to be shared between Enwave and Tilray on an undisclosed basis.
In April 2018, Tilray and Enwave expanded their agreement to include rights for processing legalized cannabis in Portugal (Europe). Tilray also submitted a purchase order for a 60 kW REV machine for the Portugal medical cannabis production facility. This was Tilray's third purchase order.
In 2019, Tilray signed a royalty-bearing commercial sublicense with the Green Organic Dutchman Holdings, a major Canadian producer of medical and adult-use cannabis. As part of the agreement, TGOD has purchased a large-scale 50kW commercial REV machine.
Focus on sales
Over the last years, Enwave has also made huge progress in improving its sales process.
The REV machines are scalable from small machines to huge - several meter long - monsters.
However, I detected a big improvement in marketing efforts over the last few years. It is now possible to send samples directly to Enwave’s research lab.
A company can send between 1 kg and 20kg of its raw product to Enwave and Enwave's food science team will produce dried samples in a 10kW pilot scale machine.
This is very convenient for potential customers who are thinking about experimenting with new products.
The company will support startups or established companies with a variety of options. It’s even possible to rent the machines for a trial period of several months to test new products live in local markets.
If this goes well a buyer can scale all the way up to 120 kilowatt machinery or more.
First positive signs
Enwave has managed to sell a lot of those machines lately. But here comes one of the strongest arguments for this stock:
Many of the customers actually upgrade their machines from smaller machines at the very beginning to bigger and stronger ones later on.
Some customers even expand to different markets or fields and make use of the patented technology protection under Enwave’s royalty agreement.
This is a very strong argument that customers are happy.
The pipeline of potential new customers is also growing fast. For some investors maybe not fast enough but there is a clear uptrend visible.
And only during the last 3-4 years Enwave is closing deals in bigger numbers.
However, those machine sales are only one of three pillars of Enwave’s business strategy:
1) Machine sales
Machine sales usually happen once.
However, as described above, it is likely that customers upgrade or scale up at a later point in time. Machine pricing ranges from $230K to $2MM
2) Royalty Revenue
With the second pillar Enwave tries to build a diverse royalty stream portfolio by licensing patented technology to food and cannabis processors.
Third party royalties generated from licensing are based either on a percentage of sales or units produced by the licensee.
Today, Enwave has signed 37 licensees to businesses operating in 16 countries.
3) NutraDried Food
The third pillar of Enwave’s revenue stream is NutraDried Food Company.
It’s a wholly-owned company that might be sold to a major food company at some point in the future.
What is the 'Moon Cheese' story?
Enwave’s flagship product is Moon Cheese, which is available at Starbucks.
It’s a ‘healthy’ snack product made of 100% cheese and full of proteins - thanks to Enwave's drying technique. .
The formation of ‘NutraDried LLP’ and the launch of Moon Cheese was originally an experiment which turned out to be extremely successful.
How did 'Moon Cheese' start?
In 2013, Enwave had only a few installations of REV machines and there was a need to de-risk the technology. Enwave had to build out its own successful production facility to convince potential partners to license REV technology.
Luckily, Moon Cheese was a huge success with annual revenues growing over the past three years from less than $300k to several millions today.
Moon Cheese is now also available in Starbucks, Costco, Whole Foods and many more.
In total Moon Cheese is available in over 25’000 stores across the United States. Enwave claims that they are in discussion with another 61 retailers representing an additional 7’000 stores.
In 2013 the company was established to commercialize ‚Moon Cheese‘ as a proof-of-concept, together with the joint-venture partner ‘Creations’.
On February 21, 2018, Enwave decided to purchase the remaining 49% non-controlling interest in Nutradried from Creations for a total cash consideration of 1.8 million USD.
Since 2019 the business is 100% owned by Enwave.
Will it be a take over?
My prediction is that eventually Enwave will sell this business to a big food company like Kraft Heinz Co., Mondelez International or Nestlé.
Some investors calculated that the price for NutraDried could be around 30 million USD. This number is based on pre covid-19 numbers and doesn’t take into account potential future growth in 2021-2024.
The cash could be fully or partly paid out to investors as a special dividend. Also, the sale could lead to an estimated 4 million USD annually in royalties for the usage of the REV technology.
However, this is also a matter of negotiations. The numbers are highly speculative but in my opinion rather conservative.
Considering Enwave’s current enterprise value of 60 million USD I believe risk / reward is getting more and more interesting.
My question remains, how much of a game changer the REV technology really is? And is Enwave able to find enough buyers?
Looking at the sales in the last three years I believe there is a chance that Enwave is now breaking through.
It could be an interesting long term play in the portfolio and the Covid-19 dip could be an interesting entry point for investors.
However, the stock and the company is also dependent on the overall sentiment and economy.
And there is a danger that the stock gets diluted by a capital increase deal next year if the overall situation doesn’t improve much.
There is one more important thing to mention.
Who owns the intellectual property?
Enwave can keep (in most cases) only 85% of the royalties they receive.
And it seems that this royalty sharing is not going away anytime soon.
You can skip the following part if you are not interested in the details of this agreement.
“INAP is a technology holding company controlled by Mr. Hoen and the Binder family for the primary purpose of generating royalties and licensing fees for the MIVAP™ technology. With the exception of a restrictive MIVAP™ license previously granted to a small plant operator in Germany, under the Licensing Agreement Enwave will secure exclusive global rights for the future licensing of MIVAP™ technology.”
This goes back to 2010 when the following announcement was published:
On December 6, 2010, the Company entered into an Asset Purchase Agreement (the “INAP APA”) to acquire the patents and know-how for the MIVAP vacuum microwave dehydration technology.
On March 28, 2018, the Company renewed its INAP License for the exclusive worldwide rights to the know-how related to the MIVAP Vacuum microwave technology, and agreed to pay minimum annual royalties.
The agreements with INAP cover the US, Canadian and worldwide rights. Pursuant to the INAP APA and INAP License, the Enwave Corporation Company agreed to pay a portion of the license or royalty fees collected from the Company’s customers who purchase Enwave equipment that makes use of the acquired patents and know-how.
For usage in North America, the Company remits 25% for food applications and 12.5% for non-food applications, and the agreement expires on February 3, 2019.
For usage outside of North America, the Company remits 25% for food applications and 12.5% for non-food applications, and the agreement expires on October 15, 2022.
Additionally, the Company agreed to pay INAP a fee equal to 2.5% of the net purchase price of each machine sold that makes use of the acquired patents and know-how
And more detail in the annual report:
"On March 28, 2018, the Company renewed its Patent and Know-How Licensing agreement (the “INAP License”) with INAP GmbH (“INAP”) for an additional five years ending October 15, 2022. The INAP License grants the Company exclusive worldwide rights to INAP’s MIVAP technology, a microwave vacuum dehydration technology.
Pursuant to the INAP License, the Company will pay INAP a 25% share of the royalties received from the Company’s customers making use of the MIVAP technology for food applications outside of North America, and 12.5% of the royalties generated from non-food applications outside of North America. The Company has committed to pay undiscounted minimum annual royalties to INAP during the term of the agreement totalling $617 (US $479). The present value of the expected royalty amounts equal to $511 was recognized as an intangible asset and a corresponding other liability in the consolidated financial statements. The intangible asset is being amortized over the useful life of the INAP License."
How has this deal originiated?
This all dates back to 2007, when co-CEO John McNicol moved Enwave Corp to a royalty and license model that would allow the company to custom-design its technology for corporate partners.
The German company Hans Binder Maschinenbau was the only other microwave-drying technology with commercialization potential in North America.
In 2012, Enwave acquired the company to consolidate with its intellectual property and to drive machine sales.
The IP end of the deal did cost Enwave $2.5 million in cash and shares.
Is Enwave losing money?
Enwave is currently still making losses on both EBIT and EBITDA levels.
However, for 2018 Enwave managed to report positive EBIT numbers for the first since its founding.
In 2016, 2018 and 2019 Enwave reported positive numbers on EBITDA levels.
From the moment Enwave sells a machine until the products are in the stores it can easily take 2-3 years.
Royalties will kick in only at a later point in time and are tied to the success of the product.
Their recurring income stream is very attractive and is mainly based on their customers' revenues with minimums. In other words it is unlimited upside but with a floor.
Cash on the bank
With no debt and over 10 million USD cash in the bank and some assets in hand I am confident Enwave will survive this crisis.
Sales have been picking up all the way until the pandemic hit. Personally, I feel more comfortable investing in a company that has been hit hard hard by outside factors than when a company struggles with home-made problems or industry challenges.
However, outside factors can eliminate a company, too. That’s why we need to be sure that this company survives.
International travel restrictions
In most cases, Enwave’s staff can’t travel overseas and is therefore unable to install the machines for their customers.
For the installation of smaller machines, it is possible to advise some customers remotely but it remains an uncomfortable issue for Enwave.
Potential customers are hesitating to finalize orders for new REV machines and 'Moon Cheese' sales are down as Starbucks and other shops are closed or work on limited capacities.
Enwave pushed online sales for 'moon cheese' which resulted in a 130% increase in revenue. At the same time overhead costs for the mother company reduced by 30%. And lately, many potential deals that were 'on hold' for months are now starting to be reactivated and signed.
There might be some light at the end of the tunnel.
Low revenue big loss
I believe Enwave has enough cash to survive and enough of an interesting technology to secure financing - if needed.
I believe that business will pick up again once the pandemic is over, therefore, I feel fairly comfortable that Enwave will make it through the storm.
However, revenues will be low for some time and the losses big in the next few months.
In regards to the stock and its valuation the question remains how much of the bad news is already priced in?
Between 2017-2019, the company booked major progress in all areas of the business.
Enwave has built a strong foundation and managed to attract many new customers in the cannabis space.
I am confident that Enwave will heavily profit from those new partnerships at some point in the future.
Enwave targets a large addressable market and the deal pipeline seems to have gained momentum - until Covid-19 hit.
Looking at 2010, with only a handful of customers and almost no revenue, Enwave’s technology was not proven.
Today, Enwaves technology works fine and has created a “hit” product with moon cheese.
The valuation today is similar to 2015 and well below 2010. But the risk/reward ratio is substantially better today.
Is it the breakthrough? I believe we are already past the breakthrough.
I will wait for a good opportunity to build a position.
Update 16th August 2021
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