Outperforming even GoPro (NASDAQ:GPRO) as the best-performing IPO of the 2014 vintage, Energous Corp. (NASDAQ:WATT) has seen its share price more than double in less than four months of trading. Even more impressive, since the company was seeded with $10,000 out of WATT founder Michael Leabman's parents' house in October, 2012, the value of that initial investment has skyrocketed 25,970% in 19 months to over $25 million in gains. This return compares to outlier best-in-class returns of 4,000% in Apple's (NASDAQ:AAPL) share price and a 1,100% increase in Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) share price over 10 years of booming, profitable growth!
A simple reading of WATT's S-1 shows us that there is very little business here other than a catchy ticker symbol. We agree with WATT's own SEC filings that warn investors that the company's equity may end up being worthless.
WATT claims to be a company that is developing technology that can enable wireless charging or powering of electronic devices at distance. WATT's technology powers devices by surrounding them with a three-dimensional ("3D") pocket of energy formed by radio frequencies.
Sound almost as intriguing as 3D (NYSE:DDD) and 3D printing? As CEO Steve Rizzone describes to Fox Business News, "Energous has the technology that is going to fundamentally change the way the consumer charges their wireless device." In this video, WATT shows an impressive demonstration of how consumers could charge their smartphones wirelessly without any battery pack accessory using WATT's technology.
What are the problems with the WATT wireless charging vision?
- As we learn later in the Fox interview Q&A session with Rizzone, WATT does not actually possess the technology to wirelessly charge devices without a battery pack. Here is a YouTube video where WATT's founder and chief technology officer, Michael Leabman demonstrates what WATT's technology can actually do.
- As we can see, WATT's current prototype, which is not yet commercially available, is expected to cost $75-125 for a battery pack, and an additional $300 for a wireless router with a 15-foot diameter range that will transmit power to the battery pack.
- We wonder why a consumer would pay ~$375-425 for this set of accessories when consumers today already have the following cheaper options to charge their devices:
To be fair to WATT, the company claims that these initial prototypes are just the first step towards the dream of true wireless charging. The company has announced four JDAs (joint-development agreements) with Korean electronic accessory companies, and promises investors more partnership announcements in the future. WATT hopes that some of these partners will develop wireless charging accessories to display at CES in 2015. However, JDAs are common in the consumer electronics industry and do not require partners to make significant investments. Many JDAs do not result in the commercialization of any new products, but end up being merely research & development exercises.
We would not get very excited about JDAs or the next generation of WATT's "technology" for several reasons outlined in WATT's own S-1:
WATT has no working commercial technology:
- "Our efforts may never demonstrate the feasibility of our technology... the technology concepts we are applying to develop commercial applications of wireless power for fixed and mobile low-power rechargeable devices have not been previously successfully applied by anyone else... our business may fail."
- Lack of technology should not be too surprising to investors, since the company has only spent a cumulative $3 million on research and development activities since inception as of March 31, 2014.
WATT has no revenue, yet growing expenses:
- "We have not yet demonstrated our ability to generate revenue, and we may never be able to produce material revenues or operate on a profitable basis. As a result, we have incurred losses since our inception and expect to experience operating losses and negative cash flow for the foreseeable future."
- From the company's first earnings call in May 2014: "We understand that for the first two years we are not going to have EBITDA and earnings growth that you would expect from a public company."
- As of the first quarter 2014, WATT has $2 million of quarterly operating expenses, up 20% quarter-over-quarter, with plans to grow up to 39 employees. At just the current $2MM quarterly burn rate, WATT will have spent all of its cash balance from the IPO in only three years, but the business plan includes increasing expenses, growing the employee count up to 39.
FCC regulatory approval will be required for power transmission for consumer product use cases that have never been granted before in the history of the industry:
- "Our remote charging technology involves the transmission of power using RF energy waves, which are subject to regulation by the Federal Communications Commission ("FCC")... because our technology involves the transmission of power greater than the power threshold limits of Part 15, we also expect to need to obtain FCC Part 18 approval. To our knowledge, the transmission of power using RF energy waves by a consumer product at the ranges we are proposing is novel and there can be no assurance that we will be able to obtain this FCC approval or that other governmental approvals will not be required. Our efforts to achieve required governmental approvals could be costly and time consuming."
To put icing on the cake, WATT is warning equity holders that their investment may be a 0, given the speculative nature of WATT's activities:
- "As an investor you may never recoup all, or even part of, your investment and you may never realize any return on your investment. You must be prepared to lose all of your investment."
- At the current expense run rate, WATT's cash runs out in 3 years, and WATT has plans to increase expense levels from the current run rate. Increased spending would accelerate the timeline to insolvency, unless WATT can succeed in licensing its technology to generate material levels of revenue or complete another capital raise that would likely dilute equity holders.
Perhaps most importantly, even if WATT can defy the odds and reach a technological breakthrough, is it already too late to license wireless charging technology to the industry giants?
- According to VentureBeat, the iPhone 6 from AAPL will include wireless charging capabilities.
- GOOG launched a wireless charging device in November of last year for the Nexus 5
- Duracell, owned by Procter & Gamble (NYSE:PG), is backing PowerMatt to install wireless charging stations in Starbucks.
- And the list of established power electronic and technology companies entering the wireless charging space goes on and on...
So how was this high-tech company formed? For $10,000 out of an LLC based in the founder's parents' house in Colorado a little over a year and a half ago.
Per the S-1:
- From September 2010 to September 2013, Michael Leabman was chief technology officer of a company called TruePath Wireless, a service and equipment provider in the broadband communications industry.
- "On November 8, 2012, DvineWave Holdings LLC, an entity formed by the parents of Michael Leabman, our Chief Technology Officer, to make an investment in the Company, purchased 1,924,812 shares of common stock in exchange for $10,000." DvineWave Holdings address is founder Michael Leabman's parents' house in Denver. So for Leabman's parents' generous investment of $10k, they created their position in WATT at a valuation of half a penny! At a price of $12.99 today, that's a return of $25.9 million, or 25,970% over 20 months!
- Now here comes the even crazier part. On January 23, 2013, MDB Capital entered into a Placement Agent Agreement with the company less than 3 months after the initial $10,000 capital investment. MDB was paid via a "Financing Warrant" for $550,000 that was converted into 152,778 shares at an exercise price of $3.60 at the time of WATT's prospective IPO. Also on January 23, 2013, the company entered into a consulting agreement with MDB to advise on "financial, strategic, and intellectual property advisory services" for 278,228 shares, at a price of $0.005 per share. We have never encountered an investment bank willing to advise a company less than 3 months after its incorporation only capitalized by $10,000. Even more importantly, with less than a year of work by Leabman and only $10,000 invested in the technology at the time of MDB's 2013 involvement, how far along could WATT's wireless charging technology actually be? Our intuition says Apple, Google, Duracell, et al are a lot further along in cracking the wireless charging code than WATT...
What is MDB Capital, and why would it bet on a 3-month old company like WATT?
- According to the company's website, based in the financial mecca of Santa Monica, California, MDB Capital is "Wall Street's only IP-driven public venture bank, with over 15 years of experience launching disruptive technologies into the public markets. We maximize the value of disruptive technology companies by positioning them to attract growth capital, strengthening their IP portfolios to create sustainable competitive advantage, and connecting them with a base of high-quality investors with deep technology expertise."
- MDB's website includes a PowerPoint presentation that highlights the success of this "IP-driven public venture banking approach" taken with Uni-Pixel:
- What the presentation does not show is how Uni-Pixel is down more than 70% since the "Validation" phase highlighted above...
- Moxreports.com memorializes MDB's involvement in Uni-Pixel's fall from grace:
"Two things are contributing to the continuous drop. First, two short biased articles came out questioning Unipixel's technology. Second, immediately after the short articles, MDB Capital removed all of its research reports from its website with no announcement or explanation. These pages had all been available to any reader up until two weeks ago when they were suddenly removed. MDB had also eliminated all reference to a number of former case studies which highlighted 10 bagger stocks which have since imploded to pennies on the pink sheets. Many investors who have become extraordinarily bullish on Unipixel are likely not aware that MDB takes large equity stakes in the low float stocks that it covers (including Unipixel) and then employs... analysts... to write bullish reports on these stocks. MDB then reserves the right to sell these shares as a principal, and even take short positions. MDB stocks have demonstrated a persistent pattern of surging (sometimes by several hundred percent) following MDB's involvement and a flurry of optimistic but vague press releases. The low float of these stocks contributes to the exceptionally sharp rises that can be seen even with the slightest amount of positive news. Yet MDB's deals also have shown a persistent pattern of imploding thereafter, at which time MDB ceases research coverage. By that time MDB has presumably exited the stock."
- WATT currently has a market capitalization of ~$150 million ($12.99 stock price on nearly 12MM of fully diluted shares). While this is small compared to capitalizations of other publicly traded stocks with millions or billions in revenues (WATT has no revenue), it is worth noting that the WATT IPO has been a big success story for MDB. Utilizing Capital IQ, below we pull the list of companies MDB Capital has advised on equity issuances since 2008, and can see that WATT currently has the second-largest market capitalization out of twenty deals, second only to ImageWare (OTCQB:IWSY), which has a $210 million market capitalization.
Now that we have an understanding of MDB Capital, let's return to the steps that led up to the IPO of WATT:
- On January 28, 2013, Leabman made an investment himself, investing a sum of $417 (note that is four hundred seventeen dollars, we are not leaving out a decimal point), also at a half-penny valuation. So Leabman himself has enjoyed a 25,970% return (generating over $1 million in profits) over just 18 months. It is worth noting that Leabman did not invest his $417 until after the company had entered the private placement agreement and consulting agreements with MDB Capital.
- "On March 1, 2013, Absolute Ventures LLC, an affiliate of a director of the Company, Greg Brewer, purchased 668,337 shares of common stock in exchange for $160,000, or a valuation of $0.24. At a price of $12.99, Brewer has generated gains of over $8 million on his initial investment, or 5,326%, in just 16 months." Here is Absolute Ventures LLC's address.
- On May 16, 2013, MDB Capital helps raise a $5.5 million convertible note investment for the company at a conversion price set equal to a 50% discount to the prospective IPO price.
- In October 2013, just six months prior to the March 2014 IPO, WATT added a couple things all publicly traded companies need: a management team and some office space. "We entered into a Standard Industrial/Commercial Multi-Tenant Lease with ProSoft Engineering, Inc. for our principal office space located at 303 Ray Street, Pleasanton, CA 94566... Greg Brewer, a member of our board of directors, is the owner and founder of ProSoft Engineering, Inc." Stephen Rizzone (CEO and chairman), Thomas Iwanski (chief financial officer), and George Holmes (VP of Sales) join the company. Michael Leabman gives himself the title of chief technology officer.
- In addition to its other collected fees and stock ownership, MDB was granted an "Underwriter Warrant" exercisable at $6.00 for 10% of the IPO share amount, effective on the date of an IPO offering and subject to a 180-day lock-up.
- Finally, the IPO was declared effective on March 27, 2014. On April 2, the company consummated the public offering of 4,600,000 shares of common stock (including 600,000 shares issued pursuant to the over-allotment option granted to the underwriter) at $6.00 per share. WATT raised $24.8 million of net proceeds.
What kind of company goes public with an interim CFO that is currently employed as a "full-time" CFO at another publicly traded company that is being accused of accounting fraud?
WATT's S-1 reads:
- "Mr. Iwanski joined the Company in October 2013 as a financial consultant and in December 2013 was appointed Chief Financial Officer"
- WATT is "highly dependent on certain key members of our executive management team. Our inability to retain these individuals could impede our business plan and growth strategies, which could have a negative impact on our business and the value of your investment." WATT lists Iwanski as one of four key executives in this risk factor.
- Amendments to the S-1 filed later subtly mention that Iwanski is "interim" CFO
- There is no mention anywhere in WATT's SEC filings that Iwanski was appointed "full-time CFO" of Medbox (MDBX) as of April 15, 2013.
MDBX followers have poked fun about "fraudulent statements" made by the company regarding when precisely MDBX hired Iwanski as CFO, and WATT seems to be having similar trouble figuring out when exactly Iwanski was hired at WATT and what his role was at the company.
During Iwanski's tenor as "full-time CFO," according to MDBX's original April 2013 press release, Citron Research has accused MDBX for "MULTIPLE FRAUDS," including making the statement that "THE COMPANY LITERALLY HAS 2 Sets of Financials… or maybe 3."
Perhaps what is more telling is that Iwanski has separated ties with WATT to work at MDBX. Does this mean Iwanski sees more upside in MDBX than in WATT?
- "On June 5, 2014, Energous Corporation (the "Company") reported that it has concluded its consulting agreement with interim CFO, Tom Iwanski. The Company has retained Lonergan Partners, a leading Silicon Valley executive search firm, to identify a permanent CFO."
We believe there is significant downside to WATT's share price
The company needs to succeed in achieving an improbable technological breakthrough to commercialize wireless charging, but recall, the business was only funded with $10,000 from Leabman's parents up until January 2013. Even with subsequent funding rounds, WATT has only spent $3 million in research and development since inception as of March 31, 2014. Furthermore, FCC regulatory approval for novel consumer electronic applications is required. Subsequent successful commercialization with technology partners is also needed. We believe that the company will likely fail to generate any revenue, given these hurdles. In the absence of these improbable events, we believe that the equity is likely worthless, and WATT will be required to raise further primary capital to maintain its solvency. We are very wary of the 180-day IPO lock-up that expires at the end of September, in which millions of shares will be eligible for sale. These pre-IPO investors have realized incredible short-term returns on paper by investing in WATT, but have not yet been able to monetize their investments in the public market.
Disclosure: The author is short WATT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author of this article is a private fund manager. At the time of publication, funds and accounts managed by the author were short Energous Corp. (WATT). Such funds and accounts may buy and sell securities of WATT (and other companies mentioned in this article), including by covering short positions in WATT and/or changing to long positions in WATT, both before and after the publication of this article and without giving further notice to any party. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article represents the opinion of the author as of the date of this article. This article contains certain "forward-looking statements," which may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential," "outlook," "forecast," "plan" and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents.