The TSX Venture Exchange is perhaps best known for its seemingly bottomless reservoir of early-stage mining outfits, but is also home to a number of highly promising technology companies. This makes sense given the requirements and structure of the exchange, designed for early-stage companies with potential to attract investors in the public equity markets. In 2011 and 2012, the winner of the TSX Venture's "Pick of the Street" award for the technology and life sciences category was Vancouver-based EnWave Corporation (OTC:NWVCF), a very intriguing niche company that has grown to a market capitalization of over $111 million CAD ($111.4 million USD) despite being at least two years away from its cash flow breakeven point. Impressively, the company also boasts zero debt load, and a cash position and burn rate that would allow for two and a half more years of R&D without having to re-invest any revenue.
So what does EnWave do? They have developed a number of alternative technologies to the spray and freeze drying processes that currently dominate the market. The company's trademarked Radiant Energy Vacuum (REV) platform applies microwave energy in a low-temperature vacuum to dehydrate food and pharmaceutical products. The process is cheaper, six to ten times faster and significantly more energy-efficient than other processes in place. More importantly from a consumer sales perspective, REV also preserves more flavor and nutrients, in the case of food, and more bioactive materials in the case of pharmaceuticals.
The company, which was founded in 1996 and went public three years later, initially tried a retail distribution strategy that proved not to be profitable given the state of the technology and the high scale of distribution channels. In 2007, with the addition of co-CEO John McNicol, EnWave Corp moved to a royalty and license model that would allow the company to custom-design its technology for corporate partners. Five years later, the company acquired German firm Hans Binder Maschinenbau to help drive machine sales revenue and to consolidate with its intellectual property the only other microwave-drying technology with commercialization potential in North America. The IP end of the deal cost $2.5 million in cash and shares and leaves the company in an optimal position to monetize its technology. Binder manufactures industrial drying equipment for a diversified international clientele and will allow EnWave to support its licensing royalty model with deliverable products, in addition to a useful revenue stream.
The technology was originally developed by founder CEO Dr. Tim Durance, who has stated in past interviews that a revelation hit him about 15 years ago while doing research at the University of British Columbia. It was apparent that microwave-drying's only significant problem was high temperatures that could potentially damage the target. A winner of a number of awards for innovation in life sciences and agriculture, Dr. Durance made the logical inference that the use of vacuum to reduce the temperature in the process would remove the biggest obstacle to large-scale use. While initially the platform and its derivatives were considered only for use in food products, research and development has advanced the technologies to the point of potential pharmaceutical applications. The company has since signed a development agreement with Merck (NYSE:MRK) that would give the pharma giant the option for an exclusive license of a particular application of the company's technology. Merck is expected to make a decision on the future of REV technology within their organization by the end of Q2 calendar 2013. The company has received interest from multiple other Tier 1 pharmaceutical companies, but details are still confidential.
In addition, the company has various other agreements in place with companies including Nestle (OTCPK:NSRGY), Kellogg's (NYSE:K), Bonduelle, Hormel Foods (NYSE:HRL), Sun Maid Growers, and most recently, the Gay Lea Foods Cooperative, an association of dairy farmers in Ontario that produces roughly a quarter of all dairy products in the region, which along with Quebec accounts for 80% of Canada's dairy output. With so many potentially lucrative agreements in the pipeline, even a 30% success rate would more than back up some of the company's top-line revenue projections. In addition, various partners' use of technology is user-specific enough that exclusivity arrangements will not limit the upside of the number of commercial license agreements in which the company could engage.
As for near-term profitability, the company expects about CAD $10 million (USD $10.036 million) in revenue in 2013, mostly through Binder, in which it now controls an 86.5% stake and collaboration with Milne which has already launched a product line called Microdried™. Thereafter, the company expects growth for the next two years until it is cash-flow positive in 2015. With a burn rate of $3.5 million per year and a cash position of $10 million, the company should not have trouble reaching that stage. Assuming modest revenue growth for Binder, and a conservative success rate estimate of EnWave's development agreement pipeline, I applied a 15% profit margin to Binder's current product line and a 25% margin to EnWave's offerings. Net profit in that scenario would look something like this:
Applying an equity risk premium-derived Cost of Capital, I've calculated discounted future earnings of CAD $115.8 million (USD $116.22), slightly above the current market cap. However, my model assumes no synergy in terms of either cost or revenue in the future, nor a continued growth in the number of potential Tier 1 companies that has driven expectations for EnWave Corp thus far, nor even an acquisition attempt down the line by a major lyophilization firm such as Gea Niro. While the market has priced in the company's ability to achieve the level of revenue growth described above, it provides intriguing upside such that those outside of Canada and/or the tech space should start to take notice.