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Energous Corporation (WATT): Game Over

|Includes: Energous Corp. (WATT)

Today we share our first report on Energous (NASDAQ:WATT), which can be found here:

www.scribd.com/document/337322317/Energo...

Question:

Is WATT not in the iPhone 8, promoting a technology that Apple itself called "inefficient," "complicated," and "hazardous," or are both statements correct?

Answer:

Based on our analysis of the facts (with some directional help from Dialog), we believe the answer is both, and as one bullish stock promoter wrote, the evidence is "hidden in plain sight."

******

There has been no shortage of thoughtful public analysis deconstructing WATT's stock promotion. Skeptical analysts, investors, and industry experts have shared excruciating detail debunking WATT's technology claims. Nonetheless, logic and facts have thus far failed to influence a retail investor base suffering from the most extreme cognitive dissonance we have witnessed since Uni-Pixel or OCZ Technology Group. The WATT bull case has eschewed substance, and instead focused on the "tea leaves" of an Apple iPhone 8 wireless charging design win.

While bulls and bears argue the merits of WATT's technology and whether WattUp demonstrations were conducted fraudulently,[1] Apple's actual wireless charging intentions have continued to crystalize. This report is devoid of our preferred forensic analysis (there are no meaningful financial reports to analyze), and we will not delve into the myriad of existing bull/bear arguments. We will instead focus on the only variable underpinning the WATT promotion - an iPhone 8 wireless charging design win.

But what happens when it becomes indisputably clear that Apple is not using WATT's RF technology for iPhone 8 wireless charging, an opinion we understand executives at BOTH Energous and Dialog Semiconductor are tacitly confirming to institutional investors? What happens when chat rooms and technology stock blogs pick up that Apple itself declared WATT's core technology "inefficient," "complicated," and "hazardous to objects or people" in a patent filing? Will any of that matter? We're about to find out.

Thus far, the bull/bear case has been "Apple hope" vs. factual red flags. Retail investors have extrapolated a series of developments to conclude WATT will win an iPhone design: Energous hiring former Apple employees, the Dialog investment, a [misleading] reference to Apple in SEC filings from 2014, and extreme secrecy about the "Tier 1" consumer partner. Stock promoters and investment websites have speculated that these "dots" must be connected. Bears have raised meaningful red flags, including: the bankruptcy fiasco of CTO Leabman's prior whiz-bang company Wi-Sky (listed in Germany), WATT's repeated failure to hit revenue milestones, meet commercial launch promises and certification targets (consistent with other MDB Capital IPOs), the closed door UL certification, and basic laws of physics that prevent WATT's RF charging within the allowable FCC power thresholds (Bears have yet to discuss "neighborly" institutional investments or the background behind Dialog/Tyndall's "option").

With WATT's investment case squarely anchored to wireless charging for the iPhone 8, we will focus exclusively on what Apple is actually doing. While this factual information has surprisingly been absent from the WATT debate, Apple's wireless charging initiatives are now clear. We believe the WATT debate is effectively over. Who will get caught holding the bag?

1) Apple's recent patent filings center on iPhone inductive charging

Apple has filed more than 16 patent applications covering aspects of inductive charging, which is the magnetic coil based wireless charging used in Samsung phones and Apple Watches. As a reminder, WATT's technology uses RF waves.

The extensive Apple patent portfolio covers both the design and manufacturing of coils, as well as transmitters and receivers. Further, Apple's engineering focus in its patent filings explicitly incorporates inductive charging into handsets. We have presented salient extracts of these patent applications below (a more complete list can be found in the Appendix).

Just one month ago (12/22/16), Apple filed what we believe to be its most significant and relevant patent application for wireless charging (shown below). As clearly seen in the patent details, Apple has developed a platform that incorporates inductive charging coils into a retail table top (similar to those used in Apple stores). Apple's inductive charging platform will allow devices like iPhones to be charged wirelessly anywhere on the table's surface. This novel approach would eliminate today's wireless charging pads that require devices maintain specific points of contact and orientation. Apple diagrams clearly illustrate how iPhones and iPads will elegantly turn an entire surface into an inductive charging platform.

The 12/22/16 patent dovetails with an Apple patent application from 3/31/16 that clearly illustrates an inductive charging coil placed under an iPhone. We would again note Apple's focus on inductive charging as opposed to RF.

Another patent application published in March 2016 (shown below) seeks to protect a method for charging iPhones from other devices. Not only does Apple's description specifically refer to "Inductive Charging," the diagram unequivocally illustrates inductive charging coils in a MacBook charging iPhone handsets.

Apple's recent flurry of inductive charging patents appears to be a methodical evolution of iPhone inductive charging coil designs found in patent applications published in October 2015 (shown below) and April 2014.

As far back as September 2013, Apple was actively filing patents to protect a more comprehensive approach to a desktop/tabletop wireless charging environment. As can be seen below, Apple's incorporation of Near Field Magnetic Resonance (OTC:NFRM) charging technology, which is another variant of magnetic coil based charging, allows devices to be charged wirelessly from greater distances than inductive charging. Apple's patent involved a desktop computer that acted as a power source for nearby devices like keyboards, mice, and unsurprisingly… iPhones.

And to belabor the point, some of Apple's earlier inductive charging patent applications from 2012 (shown below) illustrate a rudimentary charging pad. The commonality across Apple's evolving patent portfolio continues to be a desktop/tabletop charging environment powered by inductive charging.

WATT zealots will undoubtedly retort, "If Apple was so far ahead of the Inductive Wireless Charging curve, why have they not yet incorporated inductive charging into iPhones?"

Those familiar with Apple's DNA widely understand that Apple is rarely the first adopter of a new technology. Competitors often introduce leading edge applications first (frequently with an unsatisfactory user experience), while Apple culturally obsesses over user satisfaction. The original iPod was not the first flash-based MP3 player. Samsung and other OEMs have consistently "beaten" Apple to market incorporating new handset technologies. We are convinced Apple will introduce inductive charging in iPhones, but will do so on its own timeline (iPhone 8) and with its own IP. This latter point is meaningful because of Apple's previously documented concerns around extra circuitry for wireless charging.

In patent application 2016/0094074, published on March 31, 2016 and shown below, Apple unambiguously explained why it had yet to introduce inductive charging. Apple stated that placing an inductive charging system into a phone not only reduced the available area for the battery, but also unnecessarily drained the battery when it was not in use. By using its own IP, as confirmed by the industry's largest supplier of wireless charging silicon (discussed in the next section), Apple appears to have found a viable solution to this conundrum.

2) It appears likely Apple will introduce inductive charging in iPhones using its own technology

WATT's retail investor base seems complacently unaware that IDTI, the dominant supplier of inductive wireless charging chips for Samsung Galaxy phones and Apple Watches, has stated Apple will use an internal solution for iPhone wireless charging. Considering IDTI's incumbent merchant position at Samsung and Apple, it would seem logical IDTI has unique insight into Apple's wireless charging roadmap. IDTI's management has provided concise and specific opinions about Apple's roadmap that are wholly inconsistent with the WATT bull thesis.

After marketing with IDTI in mid-November, Dougherty's semiconductor analyst Charlie Anderson published the following comments on November 14, 2016 (emphasis added):

"Don't bet on IDTI wireless charging on the iPhone, but bet on it many other places (above and beyond expectations). Despite IDTI management warning off the investment community from modeling a 2017 iPhone win, our sense is that some investors may still be holding out hope. On this subject it strikes us as pretty clear that Apple is going down the road of a custom ASIC (similar to how they approach touchscreen controllers), which is low margin business IDTI management has previously indicated they wouldn't even bid on. That said, we would treat wireless charging on the 2017 iPhone (if it happens, which seems likely) as a big positive for IDTI. We believe IDTI has multiple design wins with important OEMs outside of Samsung for 2017 models and that it will be difficult for many handset makers to justify not including the feature if both Apple and Samsung have it. And if Apple goes the custom ASIC route (with someone like TI, Broadcom, etc.), we would not treat this as net new merchant competition since the part would be custom to Apple."

Historically, Apple has used a custom ASIC when its in-house technology exceeds the performance of solutions from merchant suppliers. In these situations, Apple contracts a chip vendor for the relatively basic task of putting the design into an ASIC chip and managing the manufacturing and testing. Apple's patent progressions illustrate a steady refinement and evolution of its inductive charging technology (behind the curtains), which would be consistent with their historical approach to internal silicon and IDTI's public commentary.

Adding further credence to Apple's inductive charging roadmap are the consistent leaks from Asian sources that the next iPhone will feature glass casing. Inductive charging does not penetrate aluminum cases effectively, which is the material for the current iPhone casing. One reason Samsung adopted plastic material for its cases is to improve the performance of wireless charging.

A major misperception among tech blogs and WATT investors is that Apple's switch to a glass casing somehow confirms the inclusion of WATT's charging technology. This is ridiculous. The efficacy of RF wireless charging (WATT's technology) is not affected by aluminum or plastic cases. As such, if Apple's decision to switch to a glass casing was influenced by the wireless charging technology, WATT's RF approach was not the reason.

But all of these arguments are semantics if Apple has no interest in WATT's technology. Even if WATT somehow obtained FCC approval for any of its "novel" wireless charging products (mini WattUp doesn't count), Apple appears to have already said it will never use WATT's RF technology.

3) Apple has dismissed WATT's technology as "inefficient," "complicated," and "hazardous"

When Apple filed its seminal desktop area wireless charging patent application, a detailed analysis of wireless charging alternatives to Near Field Magnetic Resonance (OTC:NFRM) was included. As a reminder, NFRM is a magnetic coil based charging method that can charge at greater distances than traditional inductive. In the patent application, Apple's scientists discussed "radiative" wireless charging, which is the RF wave technology behind the WATT curtain.

Apple could not have been clearer in its critique of WATT's base technology (NYSE:RF) when highlighting:

i) The technology is inherently inefficient delivering energy because massive power is lost in transmission.

ii) The complication of forcing a charging source to track charged devices and steer radiation to them, (which Apple notes still fails if an object blocks the line-of-sight between the transmitter and the device being charged),

iii) The radiation poses hazards to people who find themselves in the path of such directed radiation beams.

Apple's succinct disparagement of WATT's RF technology would seem to upend the bedrock of the bull case. For those who distrust our paraphrasing, the relevant section from Apple's patent application is pasted below.

In black and white - Apple thinks WATT's technology wouldn't work and is a hazard to people!!!

It is worth noting that the same line-of-sight limitations and radiation hazards noted by Apple are also detailed in WATT's own FCC approval petition (shown below). As shown in WATT's own diagram, wireless charging is purportedly halted when a cat walks by or a couch blocks the transmission line-of-sight. A Seeking Alpha article from December 19, 2016 analyzed the FCC petition in great detail, including WATT's ridiculous promise to turn off harmful power transmission if a living object is detected.[2]

4) Lite-On Semi completes the mosaic: Apple is using its own inductive charging solution

On January 19th, it was widely reported that Taiwan-based Lite-On Semi, an existing supplier of components to Apple, will be supplying GPP bridge rectifiers for iPhone 8 wireless charging.[3] Bridge rectifiers are used to convert alternating current (NYSE:AC) to direct current (DC).[4] We believe this is important for two reasons:

1) It confirms Apple is using inductive charging.

This type of AC to DC conversion is used for inductive wireless charging. When electricity is sent thru magnetic coils it arrives at the receiving end as AC and must be converted to DC before being used by the phone's electronics.[5]

2) It confirms Apple is not working with WATT

If Apple were using WATT's solution, we believe the entire transmit and receive modules would need to be purchased. Individual components such as bridge rectifiers from Lite-On Semi would not be procured separately.

The mounting evidence makes it clear that Apple is using a proprietary inductive charging solution, with its own IP (as IDTI suggested), and will outsource production of individual components to merchant vendors.

5) WATT is raising money as if the perpetual motion machine (Apple iPhone 8) is about to die

To be clear, we believe Apple approved an engagement with WATT. But why wouldn't they if the relationship was riskless to Apple?

WATT raised $97.1 million over the last three years and spent the majority of its cash on R&D. WATT's science project has been a free R&D project for Apple, which has been funded by MDB Capital's clients, a generalist hedge fund manager and his family, and Mark Tyndall at Dialog. Apple has lost zilch. Further, in the remote scenario where WATT's technology bends the laws of physics and FCC limitations, Apple would keep the technology away from its competitors (WATT's Tier 1 partner has exclusivity on the primary market segment, i.e. handsets). Apple has no risk and no financial liability engaging with WATT. As long as the general public funds WATT's $9 million quarterly cash burn, there is no incentive for Apple to terminate its "strategic partnership" with WATT.

Does this mean Apple will ever use WATT's technology?

No. Based on the overwhelmingly conclusive mosaic, Apple will deploy in-house inductive charging on the next iPhone. Story over.

We believe WATT's management recognizes its window to raise capital will close once inductive charging is confirmed for the next iPhone. As such, the Company continues to desperately raise capital. In August 2016, WATT raised $20 million, including 100% warrant coverage. In November 2016, WATT raised another $10 million, which again came with penny-stock-esque 100% warrant coverage. In December WATT raised yet another $5 million from Jersey Telecom. Moreover, we recently learned that despite all the "good news" around CES and the cash flow break-even Q3'17 target, management engaged a boutique New York bank within the last few weeks for another meaningful capital raise. The deal subsequently fell through.

So we'll ask again, who will be holding the WATT bag in a few months when ODM and supplier leaks of iPhone 8 inductive wireless charging begin in earnest?

APPENDIX

AAPL's Patent Applications Related to Inductive Wireless Charging

 

Date: December 22, 2016

No.: US 2016/0372961

Title: WIRELESS CHARGING RETAIL SYSTEMS

Description: Retail table top incorporating multiple inductive charging coils

Date: September 8, 2016

No.: US 2016/0256931

Title: POLISHING AND BRUSHING TECHNIQUES FOR CYLINDRICAL AND CONTOURED SURFACES

Description: Metal case housing for inductive charging coil in the charging pad

Date: March 31, 2016

No.: US 2016/0094078

Title: INDUCTIVE COUPLING ASSEMBLY FOR AN ELECTRONIC DEVICE

Description: Inductive charging assembly for iPhone

Date: March 31, 2016

No.: US 2016/0094076

Title: INDUCTIVE CHARGING BETWEEN ELECTRONIC DEVICES

Description: Inductive charging of one device by another device (e.g. MacBook charging an iPhone)

Date: March 31, 2016

No.: US 2016/0094074

Title: METHOD AND APPARATUS FOR INDUCTIVE POWER TRANSFER

Description: Inductive charging system with improved power efficiency

Date: January 7, 2016

No.: US 2016/0006288

Title: INDUCTIVE POWER TRANSMISSION GEOMETRY

Description: Inductive charging power transmitter design

Date: November 5, 2015

No.: US 2015/0318709

Title: SELF-LOCATING INDUCTIVE COIL

Description: Inductive charging coil design

Date: October 29, 2015

No.: US 2015/0311740

Title: ENCAPSULATED INDUCTIVE CHARGING COIL

Description: Inductive charging coil design

Date: October 22, 2015

No.: US 2015/0298207

Title: INDUCTIVE COIL DESIGNS FOR THE MELTING AND MOVEMENT OF AMORPHOUS METALS

Description: Inductive charging coil design

Date: October 22, 2015

No.: US 2015/0302971

Title: INDUCTION COIL HAVING A CONDUCTIVE WINDING FORMED ON A SURFACE OF A MOLDED SUBSTRATE

Description: Inductive charging coil design

Date: October 1, 2015

No.: US 2015/0280483

Title: TEMPERATURE MANAGEMENT FOR INDUCTIVE CHARGING SYSTEMS

Description: Thermal management of inductive charging systems

Date: September248, 2015

No.: US 2015/0270046

Title: MAGNETIC CONNECTION AND ALIGNMENT OF CONNECTABLE DEVICES

Description: Magnetic alignment for inductive charging

Date: September 19, 2013

No.: US 2013/0241308

Title: WIRELESS POWER UTILIZATION IN A LOCAL COMPUTING ENVIRONMENT

Description: Desktop wireless charging environment using Near Field Magnetic Resonance (OTC:NFRM) charging

Date: November 29, 2012

No.: US 2012/0303980

Title: WIRELESS POWER UTILIZATION IN A LOCAL COMPUTING ENVIRONMENT

Description: Wireless charging environment at up to 1 meter distances

Date: September 27, 2012

No.: US 2012/0246374

Title: DEVICE ORIENTATION BASED DOCKING FUNCTIONS

Description: Inductive charging pad

Source: US Patent and Trademark Office (www.uspto.gov)

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[1] seekingalpha.com/article/3960298-stunnin...

[2] seekingalpha.com/article/4031486-energou...

[3] http://www.digitimes.com/news/a20170119PB205.html

[4] http://www.futureelectronics.com/en/diodes/bridge-rectifiers.aspx

[5] http://www.nutsvolts.com/magazine/article/august2013_Bates

Disclosure: I am/we are short WATT.