EnWave Corp All Set For Excellent Second Half of 2017

EnWave Corporation (TSXV:ENW – $1.03 CAD & OTC:NWVCF – $0.75 USD & Frankfurt:E4U – €0.69), which offers industrial-scale dehydration technologies for food and pharmaceutical companies, reported consolidated revenues of $4.18 million for its second quarter of fiscal year 2017, ended March 31, 2017, compared with $4.59 million in the same period last year, a decrease of 9%.

The decline in revenue was entirely due to a blip in NutraDried sales as a result of the slow transition of the customer accounts from Spire Brands to NutraDried. Remember that in December of last year, Spire Brands, which was the master distributor of Moon Cheese, was replaced by Slant Design. Apparently Spire has been somewhat reluctant to turn over all the necessary information, which delayed some of the consistency in orders.

Fortunately, that situation has now been corrected. In addition, significant additional Moon Cheese distribution has been confirmed (see below). Consequently, higher revenues are again expected at NutraDried for the current and following quarters.

For the second quarter of 2017, ended March 31, 2017, EnWave reported a net loss of approximately $779,000, while a small profit of $9,000 was recorded in the same quarter last year. Two non-cash items however were included in the consolidated net loss of the past quarter, a stock based compensation expense of $339,000 and amortization expense related to intangible assets of $220,000.

Radiant Energy Vacuum (REV) machine sales have continued to be very solid. So far in 2017, the Company received the following purchase orders:
• An order for a 100kW large-scale nutraREV machine from Ereğli Agrosan, a Turkish company that produces high value natural products for the food, cosmetic and health sectors. This order will expand Ereğli’s royalty bearing production capacity as it already has one 2kW and two 10kW REV machines up and running;
• An order for a large-scale 60kW nutraREV machine from Van Dyk Specialty Products, a major Canadian producer of wild blueberry products;
• A purchase order for a 10kW small-scale machine for Natural Nutrition. This order represents the third purchase of a 10kW small-scale machine from the Chilean company, and expands its production capacity of high quality fruit products;
• A purchase order for a 10kW small-scale machine for Agricola Industrial La Lydia. This order represents the second purchase of a 10kW small-scale machine by La Lydia for processing in Costa Rica;
• An order for a 10kW small scale REV machine from Ashgrove Cheese, a diversified dairy processor based in Australia; and
• A license agreement with Bare Foods, a leading American snack food company for the production of healthy snacks using REV technology. Bare must submit a purchase order for a 10kW small-scale REV machine within a defined period.

Once installed, these machines will all start to generate recurring royalties for EnWave.

In addition, during the second quarter, the Company made significant progress in the construction of the first commercial powderREV machine for Sutro Biopharma, a U.S. based pharmaceutical partner. The goal is to have the machine, which will be used for the bulk dehydration of temperature sensitive biomaterials, installed before fiscal year end (September 30, 2017). Also development of the first scaled-up GMP freezeREV unit for Merck continues to progress as planned.

Significant Expansion of Moon Cheese Distribution

In August 2015, NutraDried, which is 51% owned by EnWave, appointed Spire Brands as the exclusive distributor of Moon Cheese in the United States. Because Spire however didn’t meet its minimum volume purchase obligations, EnWave terminated the agreement late 2016.

NutraDried subsequently retained Slant Design and Marketing, as a non-exclusive distributor. The two companies knew each other well as Slant had been responsible for the very successful introduction of Moon Cheese at Starbucks.

Although Slant has only taken over the account a few months ago it’s been very successful in expanding the distribution of the dried cheese snack. For example, the snacks will soon be available at 2,000 Rite Aid pharmacy stores, 1,600 CVS stores, and 440 Targets in the United States.

At Starbucks, sales of Moon Cheese seem to have stabilized at a high level. The Company expects them to remain consistent in coming quarters. Also, the new mozzarella flavored Moon Cheese snacks continue to sell well.

Second Quarter Financials and Balance Sheet

EnWave generates revenue from two business segments: EnWave Canada and NutraDried. EnWave Canada sells REV machinery to royalty partners, rents REV units to prospective royalty partners, earns royalties from customers that sell REV dried products. NutraDried, on the other hand, sells Moon Cheese into retail and wholesale distribution channels.

	Three Months Ended March 31		Six Months Ended March 31
Amounts in $000’s	2017	2016	2017	2016
Net Sales	4,183	4,586	7,650	7,190
Direct Costs	3,155	2,911	5,838	4,654
Expenses	1,807	1,580	3,209	2,924
Net Income (Loss)	(779)	95	(1,397)	(388)
Earnings (Loss) Per Share	(0.01)	0.00	(0.02)	(0.00)
Most important income statement data for the quarters and six months ended March 31, 2017 and March 31, 2016. Source: Company Filing

EnWave Canada had revenue of $5.0 million for the six months ended March 31, 2017 as compared to $4.1 million for the six months ended March 31, 2016, an increase of $923,000. EnWave Canada had revenue of $2.8 million for the three months ended March 31, 2017 as compared to $2.7 million for the three months ended March 31, 2016, an increase of $93,000. EnWave Canada’s revenue growth is due to increased commercial REV equipment sale and construction activity. During the second quarter, revenue was generated from commercial equipment sale contracts with Ereğli Agrosan, Sutro Biopharma, Van Dyk Specialty Products, among others.

EnWave Canada earned royalties of $199,000 during the six months ended March 31, 2017 as compared to $111,000 for the six months ended March 31, 2016. EnWave Canada earned royalties of $77,000 during the three months ended March 31, 2017 as compared to $63,000 for the three months ended March 31, 2016.

Revenues from NutraDried were $2.7 million for the six months ended March 31, 2017 as compared to $3.1 million for the six months ended March 31, 2016. Revenues from NutraDried were $1.3 million for the three months ended March 31, 2017 as compared to $1.8 million for the three months ended March 31, 2016.

NutraDried reported net income of $92,000 in the second quarter of 2017 as compared to net income of $159,000 in the second quarter of 2016. The decrease in revenues partially was offset by an increase in the gross margin on Moon Cheese products sold directly to customers, whereas under the previous Master Distribution Agreement product was sold through Spire Brands.

Noteworthy is that direct costs for the six months ended March 31, 2017 increased by almost $1.2 million, or 25%, compared to the six months ended March 31, 2016. The increase was driven by the increase in commercial machine sales from EnWave Canada.

Amounts in $000’s	March 31, 2017	March 31, 2016
Cash and Cash Equivalents	2,769	5,849
Restricted Cash	250	1,530
Trade Receivable	954	740
Due from Customers on Contract	2,988	578
Inventories	2,396	2,167
Total Current Assets	9,832	11,012
Property and Equipment	3,239	3,795
Intangible Assets	1,359	2,352
Total Assets	14,430	17,159
Accounts Payable	1,937	1,494
Total Current Liabilities	3,073	3,339
Long Term Debt	131	514
Total Liabilities	3,204	3,853
Total Stockholder Equity	11,226	13,306
Most important balance sheet data for the periods ended March 31, 2017 and March 31, 2016. Source: Company Filing

A few items on the balance sheet stand out. First, “Due from customers on contract” at March 31, 2017 was close to $3.0 million compared to $578,000 on March 31, 2016. The amounts due from customers on contract are billed and collected when project specific milestones are reached on each project.

Inventories, which include completed machines and machine components, was $2.4 million at March 31, 2017 as compared with $2.2 million at March 31, 2016. EnWave Canada has increased inventory to accommodate the increased sales activity related to commercial machine orders.

Conclusion

EnWave continues to make outstanding progress with its royalty partners by receiving purchase orders for additional REV machinery. No less than 14 REV machines are currently under construction for companies such as Ereğli Agrosan, Van Dyk Specialty Products, Merck and Sutro Biopharma.

The Company is also advancing several prospective royalty partners that are conducting initial testing and product development under Technology Evaluation and License Option Agreements.

We’re confident that Moon Cheese sales in the following quarters will pick up based on the final transition of all the customer accounts from Spire to NutraDried. It’s clear that Slant is doing an excellent job, as it has expanded distribution of Moon Cheese to three major chains in just a few months. We’re hopeful that more distribution agreements are in the pipeline. Moreover, NutraDried is working to launch other snacks.

All of this should help the Company reach being cash flow positive in the second half of fiscal year 2017. Recommendation BUY.

For important disclosures, please read our disclaimer.

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