Energous: Don't Buy The Company's Story Or Stock

Summary

• Energous's claim of creating 3D pockets of energy is pure fiction.
• FCC regulations limit the transmitting of power through radio waves to milliwatt levels. Energous claim of 4W is not possible.
• Energous invents their own tests rather than uses established FCC compliance tests.
• Energous has no competive advantage in the IoT market.
• The executive compensation is simply excessive (CEO makes $2M per year).

Wouldn't it be wonderful if you could place your cell phone or laptop anywhere in your house and it would automatically charge by a small wall mounted remote charging device that uses RF (radio waves) to transfer energy. Energous Corp. (NASDAQ:NASDAQ:WATT) makes this promise and many are willing to fund this dream. Currently, the company is valued for over $50M, which is a lot for a company with almost zero sales, no product, or even public demonstration apart from a carefully controlled "demo" in a hotel room. Yet, if the promises prove to be true, a larger company could easily buy them out for a hefty multiple. Perhaps there is a hidden technology gem here that will revolutionize our world? In this report, we look at the technological feasibility and FCC challenges faced by Energous.

Star Trek technology

Unfortunately, Energous's promises are closer to Star Trek technology than what is possible. And by possible, we are not just referring to technological state-of-the-art but laws of physics. Consider for example the claim that an Energous transmitter "creates a 3D pocket of energy using the 5.8GHz unlicensed ISM RF spectrum." This sounds great but there is a problem: It is simply not possible to create a 3D pocket of energy. Radio waves travel in a straight line and are the strongest near the transmitter. In a way, a radio transmitter is like a loudspeaker. For a single speaker, the sound is always strongest near the loudspeaker and gets weaker away from the speaker. It is possible to steer the radio wave beam by using multiple small antennas (phased array) but the beam is always strongest near the transmitter. Radio waves are beams, not pockets of energy.

One might be forgiving and assuming that the "3D pocket of energy" is just marketing department talk but this is not the case. The idea goes directly to founder, Michael Leabman, who touts the benefits of "pocket of energy." For example, see the following exchange in IEEE Spectrum article:

IEEE Spectrum: How do you plan to achieve that 25% efficiency target?

Michael Leabman: At some point, the pocket will get smaller than the receiver. Right now, it's not. The pocket is bigger than the receiver, and that energy is wasted. But we're working on technology such that in the future, our pocket will get smaller and smaller so that [the receiver] is a lot more efficient at capturing energy. That's probably a year and a half away for us, not today.

To see if Energous has some new type of energy field to generate "3D pockets of energy," I searched their patents. Figure 1 is from Energous patent US Patent Application US 2015/0042265 A1. Do you see a resemblance to Captain Kirk who must have left some amazing sci-fi devices on the table? Beyond some nice images, the patents contain no explanation how the energy is focused to create these fantastic (fantasy) 3D pockets of energy. It is also interesting to note that all Energous patents use the same images and are essentially variations of the same application to boost their claim of having a large number of patents without actually doing any work.

Figure 1: Captain Kirk left some fantastic devices behind. Beam them up Scotty! (Source: US Patent Application US 2015/0042265 A1)

There are other problems with the Energous concept art although these are not quite at Star Trek levels in terms of plausibility:

1. The transmitter needs to locate the devices. Energous claims that the device to be charged makes the request with a radio (for example, Bluetooth) but this does not address how Energous's transmitter locates the device. This is not a trivial issue as anyone who has looked at Bluetooth enabled key finders: You better be able to hear the keys because that is the only way to locate them. Your cell phone cannot point you to the right direction. (If someone is able to come up with a cheap radio locator, say less than $200, for a Bluetooth device, I would buy it in a heartbeat.) In an IEEE Spectrum article cited above, it is implied that the devices are located by "triangulation" which is a process of measuring the direction of signal with multiple receivers. Triangulation with a single transmitter is not physically possible.

In principle, the Energous transmitter with multiple antennas could be used as a directional finder but telling the distance is very difficult. In radars, the distance is obtained by measuring the travel time to and from the target but this only works if the target is far away. For short distances, the radio waves travel just too fast. This is why the Google (GOOG) (GOOGL) car uses laser radar for scanning objects within a small distance.

2. The transmitter consists of "hundreds" of small antennas. This technology is similar to phased arrays used in radars. By precisely controlling the transmitted signal (phase) of each antenna, the transmitter beam can in theory be focused in different directions. In practice, the technology is wonderfully expensive. Each antenna needs a phase shifter and associated control. Even if this is just a few dollars per antenna, a system with hundreds of antennas would be a wonderfully expensive toy. And again, even if this could work, it is still a beam and does not generate "3D pockets of energy."

Figure 2: Patriot missile defense system is a wondrously expensive phased array. Energous proposes to sell a "home version" for a few hundred dollars.

3. Energous proposes to use the 5.8 GHz ISM band for power transmission. As Energous points out, this is the same frequency as used for Wi-Fi but Energous needs to use a lot more power than a Wi-Fi transmitter. In electronic warfare, this is called jamming where you drown a small signal with a more powerful signal. What is the point of wireless charging if you need to use an Ethernet cable to connect to the internet?

4. Energous further claims that they have done independent lab testing to demonstrate charging power of 3.74 watts and a distance of 5 to 10 feet. Let us examine to see how this could work: A competing company Powercast provides a helpful calculator to estimate wireless charging power. The calculator is not complex - it uses Friis equation to estimate the power from radio waves at a given distance. The Friis equation is a direct result of physics with a 100-year history and it cannot be considered "optional."

To use the calculator, we need to figure out the transmitter antenna gain (=how tight the transmitted beam is?). A rule of thumb is that "the number of elements required in an electronically-scanning phased array antenna can be estimated by the gain it must provide. A 30 dB gain array needs about 1000 elements and a 20 dB gain array needs about 100."

Energous has talked about hundreds of small antennas, so let us assume that the system will have 500 elements. Assuming antenna loss of 50% (reasonable at 5.8 GHz), the total antenna gain is 250.

Next, we need the transmitted power. FCC rules state that

"Maximum transmitter output power, fed into the antenna, is 30 dBm (1 watt)."

Using the 1 watt as our transmitter power translates to 0.000507 watt (0.507 milliwatts or 507 microwatts) at the receiving end. Assuming 50% AC to DC conversion efficiency, this is just 237 microwatts and the efficiency is just 0.05%. One may argue about small details of this analysis but changing the efficiency or number of antennas do not affect the outcome too much. Clearly, we are far from 4 watts promised by Energous and nowhere near the 25% efficiency promised by the founder Michael Leabman.

Figure 3. The received power from the transmitter with 500 small antennas 10 feet away is just 237 uW. Not quite 4 watts - we need more power Scotty!

Of course, it is obvious that you cannot get 3.74 watt from 1 watt transmitter and Energous needs to transmit much more than FCC regulations allow. Plugging in the numbers, the transmitter power needs to be closer to 10,000 watts (10 kilowatts)! Think of this as ten microwaves blasting energy to your house. But it gets even worse. Energous claims that their power output is as follows: "2W delivered to 4 devices simultaneously within 5-10 feet." Scaling this, the transmitted power needs to be 20,000 watts. Is this doable? In theory, yes. In practice, it is a toss-up whether you fry your brain or blow your house fuse first. Don't try this at home!

FCC challenge

The last technical challenge leads to the most serious problem with the Energous business, namely, the need to obtain FCC license to transmit the power using radio waves. This is difficult to say the least. Energous admits as much. In their disclaimer, they state.

"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."

This is quite ingenious as it discloses the regulatory issue but still leaves some hope that FCC Part 18 could rescue them. In a Forbes article a year ago, CEO Holmes was quoted to have "hired an experienced regulatory team to work with the FCC, and he provides updates to investors every quarter."

A smart move given the importance of getting FCC approval. CEO Holmes further said "through our engagements with the regulatory bodies to date, we have received no showstoppers that would stand between us and complete certification in 2015."

But by the latest quarterly report, the story has changed:

Lou Basenese

..you mentioned supporting the Tier 1 in the regulatory approval process. Can you just give us some general…?

Stephen Rizzone (CEO)

Yes Lou, we really can't speak to that. It is considered a key competitive advantage and very, very proprietary element of our agreement. As you can appreciate the regulatory issues is one that has loomed large since the beginning of the Company, the fact that our Tier 1 strategic partner who has undergone literally hundreds of Part 15 and Part 18 submissions and approval is taking the lead on this.

As we said in the past, we believe it's substantially derisked the whole thing. We are in a supporting role, our strategic partner is taking the lead and will do the actual submissions. And the good news for us is that as we spoken in the past, once we get our first submission which will be required before we can ship product that are WattUp enabled to the consumer, once we get our first submission all subsequent submissions by other licensees are then by reference. And so it becomes a much easier and much more straightforward and less time consuming process than the initial one.

This is incredible. By the CEO's own admission, the FCC has always been the biggest risk for this technology but instead of clearing this challenge head on, the CEO decides not to worry about it saying that whoever licenses the technology can take care of the issue. And this somehow reduces the risk or is a competitive advantage!

The issue is even more incredible when you consider that there are dozens of FCC authorized laboratories offering to do test measurements for reasonable fees. The FCC has even issued a bulletin to help customers authorize wireless charging devices.

Given that the company is burning through $20M/year, it would make sense to spend thousands to hire an FCC authorized laboratory to test their transmitter. Leaving it to potential customers just seems irresponsible. Reading between the lines, however, it seems clear that CEO Rizzone knows that Energous cannot obtain FCC approval and is trying to hide this fact the best he can.

The problem here is that the FCC will not authorize the transmitter power needed by Energous to achieve the touted power levels. We already see that Part 15 limits the RF power to 1 watt. Part 18 has no such limitation but it is intended for industrial devices (think welding equipment). A requirement there is that the equipment should not intentionally emit radio waves - a total opposite from Energous's system. Moreover, the FCC does limit the RF exposure limits to "safe" level as shown in Figure 3.

Figure 3. The established "safe levels" for electromagnetic radiation.

Doing a back of an envelope calculation, the maximum transmitter power is around 4 watts to meet the MEP level of 1 mW/cm² and the received power would be in the milliwatt level.

Energous's CEO, Rizzone, tries to make it sound like the FCC test is a complicated and expensive process, similar to a new drug approval. The reality is that the FCC testing is easy. There are a large number of new electronic devices launched every year and there is a real industry to do the FCC compliance tests. Getting FCC approval/rejection is not a long and expensive process as Rizzone claims. This is a simple pass/fail test against well-established standards. My personal guess is that they already looked at trying to get FCC approval and failed. Instead of admitting this, they made up their own test according to their own test procedure. This test supposedly shows that they can deliver power wirelessly but not that the system is FCC compliant and transmitter power were not given. When Energous has to invent a test procedure to support their case, you know they are in trouble.

Given the impossibility of obtaining FCC approval, it is not that surprising that the Energous "story" keeps changing. In the latest press release, Energous talks about IoT where the power needed is much smaller. But here the competition is intense. For example, Powercast sells complete receiver systems today, whereas Energous has nothing. In any case, the IoT market is only slowly starting to take off and Energous does not have much runway: With the current burn rate, they will burn through their cash in less than two years. With no assets other than cash, it is difficult to see how they could borrow money. Most likely, they will be issuing further shareholder equity in the next 12 months. In the best case scenario, Energous will succeed in issuing more shares diluting the stock. In the worst-case scenario, sci-fi magic will wear off as investors start asking tough (or even basic) questions. Regardless, it is hard to see much upside for this company.

Oversized employee compensation and burn rate

Energous is essentially an early phase start-up with an interesting but impossible idea pretending to be a public company. With essentially no revenue and limited revenue prospects for the foreseeable future, one would think that managing cash flow should be the most important goal for the company. Think again: from the 10-Q filing, we learn that the CEO Rizzone makes an annual base salary of $365,000 + up to 100% cash bonus. In addition, CEO Rizzone gets 275,689 shares at an exercise price of $1.68 and 496,546 at an exercise price of $6.00 bringing the total compensation to over $2M. This is not an early start-up salary. As Table 1 shows, two other executives made well over $1M.

Table1. Executive compensation for Energous management team is pretty sweet.

The compensation seems extraordinary but so is the path by which Energous went public. Usually start-ups are funded by VCs that keep a close eye on burn rate. Once the business model is more proven, the company goes public and early employees are potentially rewarded. No VC would pay a $2M salary for an early phase start-up.

In the case of Energous, the company skipped the VC phase and went directly public. It seems that the public is less interested in monitoring the executive compensation than private investors.

Summary

Energous's technology is closer to sci-fi than anything commercially viable. With the current burn rate, the company will be asking for more money within the next 12 months. If you are an Energous investor, sell while you can. For the more sophisticated investor, Energous is a wonderful short opportunity.

Disclosure: I am/we are short WATT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.