Run time – 19:22 (Transcript below)
Published 6/26/2018
Transcript:
David Kretzmann: I am David Kretzmann, and today I’m joined by two executives from EnWave. I’m joined by John Budreski, Executive Chairman, and Brent Charleton, Senior Vice President of Sales and Business Development. Gentlemen, thanks so much for taking some time to talk to The Fool today. Maybe we can just kick it off by walking us through what REV technology is, and what EnWave does.
John Budreski: REV is an acronym for Radiant Energy Vacuum technology. And what we do is, we dehydrate organic material … we like to think better than anybody else can. The technology is to put the organic material … mostly food, sometimes pharmaceutical, sometimes agricultural … we put it into a vacuum. In a vacuum state, water will turn to gas at room temperature, turn to steam at room temperature.
The process takes a bit of time. If you introduce a microwave, that happens at an accelerated rate. So we can take organic material, remove the water from it quickly, and without heating it or cooling it, and avoiding all the collateral damage that comes with heating and cooling it, and deliver sort of the purest form of dried … as I said … food, pharmaceuticals or plant material.
David Kretzmann: And what is the company’s business model? Because we’ve talked before, earlier this year, but for those who aren’t familiar, how does the company actually make money?
John Budreski: We make money a number of ways, but the primary method for making money is, we manufacture and we sell the equipment to different operators. When we sell the equipment it comes with a territory, and it comes with a product specification. And we undertake to that operator that we will not sell equipment to another operator in that territory to produce the same goods. So we kind of grant a form of monopoly to the operator.
And so in return for granting that exclusivity, and also for the value of the technology, we are paid a licensing fee or a royalty to do that. So we make money first by selling the machine. And then we make money on a continued basis by collecting this royalty off of … based on the [inaudible 00:02:01] that goes through our equipment.
There’s a third way we make money, which is we do some research for people wanting to produce new products. And we rent equipment for people wanting to develop new products. So we have kind of a per-week or per-month, per-hour sort of fee-business that relates to that.
Brent Charleton: And the final prong is that we do have a subsidiary that produces a shelf-stable cheese snack called Moon Cheese, which has propagated the North American market. And that is a cash flow-positive entity that certainly has been a star for … or I should say a showcase of our technology.
David Kretzmann: And this year you … Initially with Moon Cheese, you just had a kind of a joint venture or like a 50/50 ownership of that Moon Cheese subsidiary, but this year you actually took full ownership of it, correct?
John Budreski: Yes we did. We had 51 percent of it, and a private business of food entrepreneurs owned the 49 percent of it. We went in a bit different directions in that we wanted more of it and they wanted less of it. So we bought them out. We think we bought them out at very attractive pricing, about 0.7x revenues, about 6x earnings, and about 4x [EBITDA inaudible 00:03:11] or sort of general cash flow. So we bought them out at the cost that they put in to it when the venture started up four years ago.
David Kretzmann: Great. Well that gives us a nice overview of the technology and the business model, and where you all are coming from this. When did cannabis enter the picture?
John Budreski: We had some experience with leafy greens in the past, but it tended to be edible herbs and spices. When, or as, the cannabis medicinal market in Canada started to propagate, we were approached by a few companies that were looking for ways to speed up the dehydration process while not damaging the THC or CBD retention, and trying to maximize that terpene retention as well for the smokeable product.
So through those initial interactions and early-stage product development, that evolved into collecting enough quantifiable data that proved REV technology can produce [an] extremely high-quality dry cannabis product in far less time than the traditional means. And it also lowers the capex required to scale up production.
David Kretzmann: And what does the process look like for using REV technology versus what the traditional drying process typically looks like?
John Budreski: So there’s two outputs for drying marijuana. One of them is to dry marijuana such that you can put it through a process to remove the oils, and create the extract business. So that’s a very simple drying process for us. Where it would take a marijuana producer five to seven days to dry that, we can do that in about an hour. And so we’re quite immediate in terms of timing, and there’s no need for drying space. You can imagine if you have a marijuana crop and you’re hanging it out to dry, you’re going to need a lot of square feet to do that. So we save space and we save a tremendous amount of time.
If you’re drying for a smoke-able product, again that takes five to seven days, and we can compress that into two hours. Our process is two-step. The first step is to pasteurize it. And if you think back to our early science learnings, pasteurizing is heating something to the point you kill off the bad bugs, the microbes, but not destroying or damaging the fundamental attribute that you’re looking for. In drying marijuana through an air-drying seven-day process, it’s often invaded by microbes and things like that.
People who are smoking marijuana for health concerns have compromised health, and they don’t want to be smoking microbes and things that like. So we take them out by the pasteurization step, and then we go to a drying step to just basically take the water out and make the marijuana into a smoke-able condition. So we work well in both processes. We’re doing a little bit more refining on the drying for smoke-able, the drying for extract is a no-brainer for us.
David Kretzmann: And in February, you announced that the company that you have developed this licensing partnership with is Tilray, which is still a private company but an early mover in the medical cannabis space, the first company in North America to export product over to Europe. So they have some clout within the industry, so how did you develop that relationship with Tilray?
John Budreski: Tilray, by the way, is going public. They filed a prospectus both in America and Canada this week to become a public company. So in addition to the clout that you mentioned, they’re going to have more financial clout through the money that they’re going to raise. But we are prospectors. We don’t wait for people to call us. We go and reach out to various segments of the industry, whether it’s dairy or meat, or vegetables or fruit, or cannabis.
And we reached out to these different operators and started a dialogue and they quickly realized the advantages of our technology. And we quickly realized that they are very astute businesspeople. And so it was a quick friendship, quick building of a relationship. In fact, on page 105 of Tilray’s prospectus, they talk about their technological prowess and favorably mention EnWave as one of the technology partners that they have.
Brent Charleton: And also just to add to John’s point there … The quality of Tilray as a partner led us to slightly augment the structure of our license agreement with them, allowing for sublicensing opportunities to other licensed producers within Canada and now within Portugal. So that further allowed EnWave to deploy more machines, and address a larger share of the potential market here.
David Kretzmann: Now, a question that I’ve had especially mentioning their prospectus … which, that’s one of the reasons I love these conversations. That’s certainly a company we’ll be watching closely. Since this technology could be an advantage for Tilray or any license producer that has access to it, is it in their interests to keep that technology close to the vest? Rather than letting, you know sub-licensing the technology to other producers? Oh, how do you think about that balance, and the incentives that come with it?
John Budreski: It’s in their interest to have the technology propagated. If you’re a very small part of a marketplace and you have a differing technology, it’s hard to have broad public acceptance. So from Tilray’s perspective, if they propagate our license, our technology, through a sublicensing agreement, it makes it more familiar and acceptable for the broad population in Canada.
And we have a financial arrangement with them where they are compensated for propagating our technology, so they don’t have to build the machines, they don’t have to sell machines, they don’t have to maintain the machines. They simply work with us on procuring a new LP, a grower, to get our technology. And they’re going to share in our revenue stream, which is [royalty-type 00:08:43]-based over a long period of time. So a little bit of up-front effort from them yields a small annuity for them. So it works to their interests, it propagates technology, and they get paid for it.
David Kretzmann: Got it. So how does the upcoming legalization date … Oct. 17 … how does that impact the landscape or the strategy for EnWave? Or does it play a role at all?
Brent Charleton: In terms of the strategy of deployment, it doesn’t impact it greatly. It just impacts the market opportunity for our license producers that are partners of EnWave using our technology, which in turn increases the potential for larger royalty generation. So strategically we won’t change the way that we engage with these groups, these companies. But certainly it provides way more upside for our company.
John Budreski: I want to go back to an earlier question you had about what’s the nature of our business. And we could be labeled as a technology company. We could be labeled as a manufacturer of sophisticated equipment. We think that our mission in business is very simple. We’re out to build a portfolio of license fees or royalties.
And so what we want to do is have as many machines, with as many operators, producing as many products as possible, to build that portfolio of royalties. The legalization of marijuana in Canada just simply expands the number of prospective partners, operators, that will use our equipment and pay us a royalty.
David Kretzmann: As much as you’re able to, maybe give us a higher-level look at how the business breaks down. Either in terms of the machines delivered, or the royalties received from some of your different segments. So you primarily are in food, but different categories in there, whether it’s dairy or frozen produce, or whatever it might be. Pharmaceuticals, and now cannabis. Can you give us an idea of how those three categories break down? Maybe a year ago, maybe what that looks like today?
John Budreski: We try and charge a royalty that’s related to the value of the product that’s going through it. If it’s a commodity product, like a food or a vegetable, our royalty rate is lower. We have to respect the fact that the operators have lower margins. So if the operator’s making 10 cents a pound on dried mango, we can’t charge 11 cents a pound on a royalty on it. So the royalty becomes lower.
As the value of the product goes up, typically the value of our technology’s contribution is more important. Drying fruit is something that’s well-established. We can make a small difference in drying fruit. Drying cheese, which nobody can do, we can make a big difference in drying cheese. So we have a higher royalty on the higher-valued products.
Which is why, where you see us in the snack food industry … because what you buy, when you buy cheese at the back of the grocery store, is $2 a pound. When you buy snack cheese through our process, it’s $40 a pound. So we can collect higher royalties on higher-valued things. So the greater the value the greater the royalty that we receive.
Brent Charleton: Yeah, and in regards to the verticals that we’re currently addressing through the 24 licenses that we’ve signed, nine of them are in the dairy vertical, six are in the fruit, and another few in the vegetable. You mentioned frozen vegetables, there’s global license that’s been granted to a company called [inaudible 00:11:50] for their application. Where we’ve seen the most momentum over the past year-and-a-half has been the Canada space, for one. The dairy space, and the fruit-and-vegetable area in the form of snacks where our ingredients has also been accelerating.
David Kretzmann: Got it. And looking out over the next one to three years, what are the expansion priorities? Like what are you really trying to double down, or maybe enter a new vertical, or country, or segment, that you’re not currently in?
Brent Charleton: Our concentration goes back to as many operators, with as many products, in as many countries. So we’re just talking to as many people as we can talk to. So the focus isn’t on something in particular. The focus is on popularizing, and making people aware of, our technology and getting people on board with our technology. And we’re somewhat agnostic about where they are. We’re looking for people that can act quickly and have the capital and business acumen to do so.
David Kretzmann: And how is cannabis different from other verticals, and what … where is it also similar to other verticals?
Brent Charleton: Cannabis is a very attractive, probably the most attractive, segment for us for two or three reasons. One is is that the cannabis operators make decisions quickly. They’re not sort of caught up in large corporate … slower inertia, shall I call it. They can move very quickly. Secondly, they’re very well-funded. They have lots of cash in their bank accounts, so capital equipment is an easy purchase for them. And then thirdly, the cannabis operators aren’t introducing a new product.
Many of the food operators are looking to go into a snack category, and introduce a new snack that’s disruptive and displaces an existing snack. Cannabis operators aren’t thinking about that. What the cannabis operator is doing is switching out a method of putting marijuana into a large room that has low humidity and watching it dry for seven to ten days. And shipping it out for radiation treatment to get rid of the microbes and fungus. Switching that over to two hours in our machine.
I don’t think they’re going to tell the cannabis buyers that they’ve made that switch. They’re just going to put our equipment in and keep selling what they did. So there isn’t going to be a period of experimenting with new formulas, going through staff-testing of a new product. And then small-trial testing and panel-testing and all that, which takes a lot of time. They’re just going to plug our gear in, displace what they’ve been doing previously and sell marijuana in the same old fashion.
So quick decision, easy capital, quick insertion of our equipment into their business line. And the time between first conversation with a cannabis grower and royalties coming in from a cannabis drying machine, is drastically shortened.
David Kretzmann: And, since EnWave has been working closer in the cannabis industry than a lot of other companies … sort of as a picks-and-shovels play, if you will … What do you think are some of the bigger misconceptions about the cannabis industry?
John Budreski: I’m not sure [inaudible 00:14:41]. I don’t know what misconceptions are out there about the cannabis industry.
David Kretzmann: Oh, we can leave it at that. We can actually cut out that question.
Brent Charleton: I can tell you one thing. You mentioned the picks and shovels. Other suppliers in the cannabis industry are supplying commodity-type goods. So their supplying fertilizers or handling things … square footage, ways of doing stuff. And they’re competing against each other for who can be the low-cost provider of soil. Or who can be the low-cost provider of grow-light bulbs or something like that.
We don’t have that. We have a technology. Nobody else has got it. We’re not … you know like in the world of picks and shovels, we got the excavator. We got the advanced technology not the picks and shovels. Although the picks-and-shovels is an apt description of what we’re doing.
David Kretzmann: Got it. Got it. And looking out over the next few years. Are you in conversations with other countries? Are you looking to go through Tilray, to expand the licensing agreement, to cover more countries? I know you mentioned Canada and Portugal. What does that look like, since cannabis is increasingly becoming a global market?
John Budreski: So today, as you know, we do have exclusive licensing arrangements with Tilray for Portugal and Canada. And certainly we’d be open to further discussions, if they expand to additional jurisdictions. That being said, we are active at the moment in multiple international countries that welcome the production of medicinal, and in certain cases recreational, marijuana. We do have active dialogue with other Canadian LPs that potentially could become sub-licensees through Tilray. And we expect here at EnWave that we’ll make further progress over the next few months here.
Brent Charleton: In the Western world of business, no stone shall remain unturned.
David Kretzmann: How do you think about the U.S. market in particular, since it is such a fragmented market. I mean each country at this stage must be a little bit different. So how do you go about thinking about potential relationships?
Brent Charleton: We really like the U.S. marketplace because it’s a state-by-state business. And so from our line of thinking, we’ll be selling a machine in every state because each state becomes a territory unto itself. So we think there’s a prospect for more machine sales in the United States, versus Canada, where it’s a national license that you get. So we could sell a machine to an operator in Alberta who could have their production go to anyone of the 10 provinces, three territories. The United States, we sell equipment to somebody in Nevada. We’re going to have to sell somebody equipment in Colorado and New Mexico, and California, and so forth. So we think there’s a better chance for machine sales there. Americans are quick to do business, so we like that aspect of the business environment there. So we like it. It’s a good marketplace.
John Budreski: Yeah, the only challenge that there is with finding the appropriate partners on a state-by-state basis is, is finding a partner with the appropriate size. As the markets in certain states are very, very fragmented. While others are more concentrated with a few key manufacturers. Therein lies the challenge.
David Kretzmann: Got it. Well I know we’re running up on our time here, so I’ll ask a final two-part question. And the question is, what should investors be watching over the next three to five years? Maybe we can parse it down to, with the cannabis vertical in particular, and then EnWave as a whole. What metrics, what announcements should we be watching for over the next five years?
John Budreski: We do not spend a lot of time on forecasting. We find that to be a bit of a low-value dedication of our resources. We spend a lot of our resources on selling equipment and booking up … we call them “partners” because we work with these people on a continuing basis.
So I would guide investors to watch the rate that we book new partners. We’ve press-released pretty much all of them that we do, when we sell equipment. So I would watch for the rate of partner … I shouldn’t call it partner acquisition … but you know, selling equipment to new operators, to do new things with. And so I would watch for that first.
And then keep an eye on our financials because we’re slowly becoming … not slowly … we’re quickly becoming a bit of a cash machine. We were cash-positive a couple years ago. We were cash-flat last year. We’re getting more cash-positive this year, so I would look to that.
And then as a third thing, watch the Moon Cheese business. It’s accelerating at an increasingly great rate, and that’s a big contributor to our business.
David Kretzmann: Well, thanks so much for taking the time. We’ve been talking to John Budreski and Brent Charleton, from EnWave. I know we’ll continue to follow the story closely and hopefully be able to keep this conversation going in the months and years ahead. But gentlemen, thanks so much for taking some time to talk to The Fool again today.
John Budreski: It’s a pleasure. We’re always happy to help.
David Kretzmann: Thanks and Fool On.