After reporting the successful closure of a transaction with a Canadian cannabis producer earlier this month, EnWave Corporation (TSXV:ENW – $1.07 CAD & OTC:NWVCF – $0.87 USD & Frankfurt:E4U – €0.74) continues to deliver on its expansion plan with the announcement of two additional new clients this week.
The first of these deals involves AvoChips LLC, a processer within the Snack Food Industry that is developing a new product made from dried avocado slices. EnWave has granted an exclusive license to AvoChips to use its Radiant Energy Vacuum (REV) dehydration technology in the processing of this new snack food.
One appealing aspect to this arrangement is that the use of REV technology ensures that the sliced, ripe avocado chips do not succumb to a bitter flavor when exposed to air, as would occur with other processing options. This represents a proprietary advantage that directly contributes to a premium product made possible by REV processing.
The deal involves the sale of a smaller commercial-scale 10kW unit, which will enable AvoChips to commence production. The machine is scheduled to be installed before the end of 2017. It is notable that a TELOA was never announced for AvoChips. Does that mean that next to the dozens of companies for which a TELOA was announced, that there are many others that may immediately opt for a commercial agreement?
During the early phases AvoChips will evaluate the market response to its avocado chips, prior to launching full production. Within 18 months following the commissioning of the 10kW dryer, AvoChips plans to transition to full production. In that one and a half year time frame, AvoChips is required to purchase at least a 120kW processing unit in order to retain its exclusive license from EnWave. The arrangement allows for further expansion and the potential for several additional units to be purchased over the following six years.
While AvoChips is a new entrant to the Snack Food Industry, the management team has a track record of successful product development and shares a corporate lineage with the No Bake Cookie Company, headquartered in Bend, OR. This contributes a head start for the AvoChips product launch and should help accelerate the distribution and sales process.
Royalty payments from the 120kW machine could mount up to $250,000 per year. AvoChips is now the eighth company involved in fruit/vegetable processing that has completed a license agreement with EnWave Corporation.
The second deal announced is with a major peanut and tree nut producer and processing company, Severn Peanut Company Inc., doing business as Hampton Farms. EnWave has agreed to a Technology Evaluation and License Option Agreement (TELOA), which grants Hampton Farms access to participate in the development of new snack food products based on nuts, which are manufactured using REV technology. This is the first such agreement with a company involved in nut processing, so it represents another breakthrough opportunity for EnWave Corporation to establish further diversification in its client base.
As part of the agreement, Hampton Farms will pay a fee in the range of $1000 per day over a one month term, while the company advances through the testing process. The arrangement is basically a collaboration, as Hampton Farms will be using a pilot plant set up to test and develop new nut-based snacks that were created by EnWave’s food science team. Ideally, at least one successful new product will emerge from this testing, leading to a more lucrative agreement for the longer term.
Hampton Farms is an ideal client to advance product development with EnWave. As the highest rated brand of in-shell peanuts in the United States, the company has the advantages of a strong relationships with suppliers throughout the country, and processing plants already established in North Carolina, Virginia, Massachusetts, New Mexico, and Texas. The brand name recognition in the market place, in addition to the high volume distribution network in place for its products, will improve the odds for a successful launch of a new product line, and provide the prospect of high sales growth thereafter.
Building a Stronger Company With Each Transaction
These transactions represent another step forward in EnWave’s growth plans. The Company earns an estimated gross profit margin of 20-30% for every unit sold. Knowing that even a smaller 10kW REV machine carries a price tag in the range of US$180,000, it’s clear that these sales contribute to a stronger bottom line for the Company.
In addition, the longer term value of these partnership agreements is also important. A royalty is due by EnWave’s partners each time a REV machine is in operation. The royalty may be a gross payment of 3-5% of sales (paid out quarterly), or a fee per kilogram of net production. These royalties contribute recurring revenue streams. As its partners grow, and perhaps order additional machines to increase production, the royalty payments will rise in tandem.
Finally, there are ongoing maintenance commitments included with each unit sold, to ensure the equipment is running properly and to replace and repair components subject to normal wear and tear from ongoing operations. These maintenance contracts generate additional recurring revenue streams for EnWave.
One should note that each new transaction serves as a validation of the REV technology, and paves the way to attract other clients for future deals. The corporate strategy to build new inroads into diverse market sectors enables further growth down the line.
The sales transactions are encouraging from an investor’s point of view because they demonstrate that this technology creates value. The rapid growth rate of new units being installed in the field brings EnWave closer to achieving profitability. Higher unit sales, increasing cash flow and achieving profitability, all contribute to a greater enterprise value for the Company as a whole, and the potential for a rising share price. Recommendation BUY.
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