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Saturday, August 25, 2018

Startup PR 101: Planting Stories and Gaming Data

Given the name of this blog, it's hardly surprising that I spend time talking about how misleading PR from any company can be. Most of the time I don't blame marketing for pushing the best possible narrative they can get, if the product is pretty meaningless and it's really on the press, investors, and public to look at it with a skeptical eye - which sadly is a pretty rare event. Where it gets shady is when the marketing "white-washes" their desired story through a third party, often media looking for the next scoop, to be able to pretend it isn't them making these bold claims, but rather a neutral bystander. Where it gets illegal and immoral is when "facts" are simply fabricated and planted in the media, especially if it's during fundraising or for the purpose of manipulating company share price or valuation. Most of it is pretty blatant, and when you see it up close and personal, it's amazing how easily people fall for it, or even how company "fanboys" evangelize based on this and will not hear otherwise from "heretics". 

While there is a pretty high profile case of this out there right now, since so many column inches are already spent on it, I thought I'd highlight this technique using a recent tweet from VC Josh Wolfe of Lux Capital. For those of you who don't already, I'd recommend following him, he has a lot of very interesting posts and insights that are worth reading. Here's the start of it, the fully unrolled version is at the base of this post

The basic premise is this - the founder of Red Hat (now a ~$25 billion company) needed to gain credibility for his product, so he essentially gamed a 'study' of high Linux user growth, and got a small Linux journal to quote him. Then he managed to get BusinessWeek to quote the Linux journal, and suddenly this made-up statistic had all the authority of being stated in a prestigious national publication. He abused the lack of fact checking and diligence to plant an idea in the media as if it had substance, and used that to help promote his own company.

Is this OK? He didn't really lie, no-one asked him for corroborating evidence, so it mostly falls into the realm of "amusing anecdote".  As the author say "This kind of stuff happens ALL THE TIME" and it's pointless to try to stop it in most cases - press just need to be more careful and the public need to be more skeptical. When the stakes get higher such as with safety, or actual investment, then it's much harder to turn a blind eye to this - if investment was raised based heavily on this, and while specifically quoting that statistic, that is moving towards the illegal.

When it starts to matter is something of a grey area, but sometimes it's just pretty damn clear. Let's take WorldCom, a telecommunications and internet backbone company from the original dot-com era around 20 years ago. By the late 1990's they were claiming that internet usage was growing at 1000% per year, and this widely quoted (though rarely challenged) statistic drove (mal)investment in many other companies. A readable story on this can be found in an industry publication, but to quote from a 2003 Yale Journal on Regulation article:

WorldCom’s false Internet traffic reports and accounting fraud encouraged overinvestment in long-distance capacity and Internet backbone capacity. Because Internet traffic data are proprietary and WorldCom dominated Internet backbone services, and because WorldCom was subject to regulatory oversight, it was reasonable for rival carriers to believe WorldCom’s misrepresentation of Internet traffic growth. WorldCom’s accounting fraud may have destroyed billions of dollars of shareholder value in other telecommunications firms. 

How did this statistic get justified? From the industry publication, Light Reading:

Here's how it worked, according to the former WorldCom employee: WorldCom would hook up new customers with connections capable of handling, say, up to 1.5 Mbit/s of data, knowing that for most of the time the lines would only carry a fraction of this amount. WorldCom would then use the 1.5 Mbit/s figures, not the actual traffic figures, when citing Internet traffic growth statistics...

"The myth of Internet traffic doubling every 100 days seemed to be based on (i) the fact that such growth rates really did hold during the two-year period 1995-1996, and (ii) WorldCom making misleading claims in subsequent years,” 

So like the Red Hat founder, the numbers were essentially made up, and the laziness of readers and media taken advantage of. In this case, that the company was FCC regulated gave the misleading data a stamp of approval it otherwise would not have had - something that 20 years later other technology companies like Energous remember. Now some did call this out, for example here in this 1999 report from AT&T Labs:

"The growth rate of traffic on the public Internet, while lower than is often cited, is still about 100% per year... these claims can be correct only if something unusual is happening to the WorldCom network... Reports, which claim 1,000% growth rates for the Internet, appear to be inaccurate today..."

but no-one listened to the sensible data and fact driven analysis because it wasn't so exciting (I feel their pain). In the end the con at WorldCom, which extended into accounting and beyond just exaggerated PR, resulted in bankruptcy and eventual purchase at a fire-sale price by Verizon. The CEO, Bernie Ebbers, was found guilty of fraud and conspiracy and was sentenced to 25 years in jail (if you're wondering why a white collar crime got punished, see the "may have destroyed billions of dollars of shareholder value" quote above). I do wonder if the willingness of a company to be lax with the truth on smaller details like PR is a more public sign of a willingness to push the limits in accounting and other areas.

Why does this matter? In this case, WorldCom data pushed investment by the public in an area that ended up oversupplied, and when the crash came (it was a dot-com and telecommunications crash back in 2001, not just dot-com) it caused great pain for companies and employees that had to find new businesses and jobs - and to re-re-quote "may have destroyed billions of dollars of shareholder value". Companies in other areas that may have been more viable in the long term didn't get funded, and what they could have done either lost or delayed. Mal-investment has an invisible cost in what doesn't happen, and in the loss of trust in the system. In the end, the system (kinda) worked, but if this had been caught earlier then that pain for others could have been avoided.

What's even more hilarious is when you get two companies in the same industry trying to out-compete each other this way on stats, covering performance that neither can actually achieve. It's like setting two mirrors facing one another, it just reflects off each other into infinity, and ridiculousness. From another post on companies playing the media:

In the past, I've sat inside a company watching the CEO engage in a war of fantasy performance stats and delivery dates with a competing vaporware company, using the tech press to launch salvos of ever increasing capabilities. When the enemy returned fire with a further 'improved' product, there was panic at the top and demands made to engineering that our product get better or timelines be shortened - statements from those trying to be rational, such as "No. Their numbers are just as made up as ours.", garnered a mix of confused and annoyed looks.

Neither company has, to my knowledge, released a product since then and in part this is connected to these inflated performance promises. (And two years later, as of August 2018, still hasn't happened)

So when you read something in the media that seems to be too good to be true, remember that it might be that "truth isn't truth".

Sunday, August 19, 2018

Mailbag: Questions on Energous

I've been asked some questions on Energous and my recent posts, and rather than answer in the slightly-annoying-to-reply-in comments section here, or in private email, I thought I'd just answer them as a post in themselves. Nothing startlingly new here, for those who have read my prior posts, except for one thing. In the earnings call, CEO Rizzone talked about devices at the 5 to 15 Watts level, previously they'd claimed up to 5 Watts and 15 feet, so if he truly meant Watts, that's quite a bold new claim.

1) Has Energous implicitly conceded it cannot generate significant charging power in the near field, ergo its new focus on tertiary products?

I'll start with the most important point - this company has no products, and in my opinion, never will. To say otherwise is to play their game. Everything is turned on its head compared to other companies, all IMO of course. If the thinking of most of Energous' detractors is correct, the goal is not to release a product but to maintain interest in share purchase by large institutions, not to develop technology but to offer the fantasy of safe at-distance wireless charging, that marketing is the true innovation and money earner in the company, and engineering R&D is simply the necessary expense to maintain the illusion it's about products and technology. In summary, it's a very well run marketing company with large R&D expenses that is successfully extracting millions of dollars a year for the insiders.

Now to the 'technology'. I'm going to start covering the 'at a distance' application - basically the non-contact version, since I'm not sure you meant "near field" when you said "near field", and there are multiple definitions of that term being used. In physics terms, near-field and far-field refer to the regions of interference from radiation emitters. In simple terms near-field is close to the emitters where the field varies extensively (it's bumpy) while further out in the far-field it varies inversely with distance (it's smooth) - the image below from Wikipedia shows this. Where this transition happens is relative to the size of the transmitter and the wavelength of the radiation.

So for Energous there is the "contact" version of their charger, the "miniWattUp", which they position as a competitor to Qi, except it's less efficient, slower at charging, has no existing infrastructure, and isn't available (there are multiple product announcements that never make it to market, such as with Myant). Then they have the claim of "at-distance" charging, such as the "long range" device they've been promising for years at 15 feet and up to 5 Watts (now 15 Watts apparently), and the FCC Part 18 approved "mid range" device that will send at best 30 mW at 0.9 meters to a single device, requires a safety cutoff, and also isn't available.

I'm also careless with the use of the terms here, so in part I'm writing this to force myself to be more consistent - the confusion from Energous I think is deliberate, as it helps them with allowing the public to think whatever they want of the technology, rather than making them see it as it is.

Now to actually answering the question:

Energous seem to be careful not to bluntly lie, but let ignorance and laziness of press and investors do the work for them in drawing incorrect conclusions they want from what is said. For years they hinted about a "Tier One" they had a deal with, that they did everything bar say was Apple, until they finally had to give up on that one following AirPower last year - there's a post on some of that here. They deliberately confuse everyone by talking about "WattUp" which is a branding term for all their "products" such as the contact, mid, and far range devices. They also give demonstrations of products that are not FCC approved and exceed the SAR limits to get higher power levels and have people associate with the approved products. I cover some of that here.

In summer 2017 the CEO was already dialing back expectations in specific statements:

“As long as you’re in that 15-foot range, you’ll be charging. Small, small amount of energy. It’s not charging super fast, like you would be plugged in the wall, but a small amount of energy, trickle charging it. And as you put it down closer or farther away, the amount of power changes.”

I cover my opinion of the journalism that let him get away with that statement and no follow up here.

Rizzone says this again in January this year, in a Barron's article

As for five watts, “I don’t see it happening at 15 or 18 feet,” concedes Rizzone. More likely, he thinks Energous will be shipping at the end of 2019 systems that can charge devices such as wearables and smartphones at that distance, but perhaps only with a watt or two, perhaps only hundreds of milliwatts. 

Despite these statements, Rizzone makes claims in the earnings call this month that would lead people to believe 5 to 15 Watts charging is coming. It's no wonder people are still thinking that somehow you'll be charging at the same rate as a wire from the wall. If Energous ever end up in court on fraud claims, they can point to this and say "See, in major interviews we said it was a trickle charge, we never lied, they just interpreted it another way"

Regarding the contact version - The FCC reports for the latest contact device, the 2ADNG-NF130, shows two antenna each able to transmit just shy of 1 Watt. I assume they are at 90 degrees to one another to try to improve performance with receiver position. Given Qi charges at 5 to 7.5W there is literally no way, even at 100% efficiency, for this method to challenge the established market leader. FCC documents show this system charges at a maximum of 300 mW, so a tiny fraction of what is needed, and at no more than about 15% efficiency (Qi is usually 70%ish).

Now does anyone think that the far range transmitter is going to be better than one that's in contact?

So to answer the first question - they seem to almost deliberately confuse terms like feet and Watts, and give differing statements at different times. When Energous have no choice, or are on the record, they downplay performance and obfuscate. They have to know it won't work at the multi-watt level, there is no question there, but what can they badger the FCC into allowing, especially as it seems they have contacts at the top like Chairman Ajit Pai willing to break the normal rules for them. They have to keep this gravy train going for as long as they can, so let the rubes think the next great release is 18 months out perpetually. One thing I'll give to Energous, they are geniuses at how to milk this market.

Next question:

2) Given your assessment of its RF based technology and its limitations re SAR compliance, what could the basis be for Rizzone's claim on the call of achieving 5 to 15 watts for midfield?

Now let's get the first thing out the way - as with all at-a-distance wireless power transfer - is sending 5 to 15 Watts possible? Yes, of course it is. But you do not want to be anywhere near that thing, as it will be hideously dangerous to anyone around, and highly inefficient. So it is possible, just not in any vague sense practical or within SAR limits.

So in the real world, the basis is 'None'. It was always fantasy. This is like me claiming I can run a 3 minute mile, but I just need to train harder and I'll soon get there, maybe another 18 months... Now Energous claimed the 15 feet for the "far range" device in Jan 2015, to my knowledge this is the first time anyone has ever claimed 15 Watts for Energous. Either a slipup by the CEO, or a sudden increase in performance for this so-far nonexistent technology.

The "mid range" device was the one that got Part 18 approval last December, and only goes to ~100mW max, 0.9 meters max, at safety limits, so why would they be able to charge >50x faster at longer ranges? See the quote above where they admit it's less than a wall charger, so not even 5 Watts. Yes, Energous are inconsistent, but that helps them, confusion benefits their message as most people give up.

Looking at the physics, I don't think there's a practical combination of size and safety that results in an even vaguely useful amount of power received (impractical, maybe). That doesn't mean that they won't keep this deception going IMO, and pretend something ridiculous that games the system is coming and will have the fanboys salivating - but in any practical sense it will be pointless. Now, here's what he said in the call:

We expect to see the full impact of this next generation of chips towards the middle of next year, when we anticipate the first product releases to the consumer using our high power WattUp technology for quick charging and applications requiring 5 to 15 watts of charging power.

So that's just not going to happen. It's a year out, minimum, same as all their claims, then it's for applications that require 5 to 15 Watts, he doesn't say they'll actually provide it. Maybe the chips will do 5 to 15 Watts, but the antenna and rest of the system won't. This is definitely a "hopeful" statement and probably can be justified because they keep asking the FCC to approve their 5 to 15 Watt (feet?) device and keep getting told 'No, not safe'. I expect as the end gets closer, the statements will get a little riskier and them less careful about blatantly lying (see recent statements by CEOs of well known tech companies for examples...)

Next question:

3) It seems odd that Dialog would highlight its relationship among others with Energous in its latest press release. Merely justifying its investment and partnership seems unlikely to be the only reason; isn't there something material the partnership could realistically produce?

Yeah. Dialog. No one gets why they did this. I liken them to Safeway and Walgreens with Theranos, where stupidity at the CEO level over-rode all internal advice. They had warned it was possible they were going to lose some of Apple's business, and perhaps were desperate for a 'must have' technology to replace and got suckered, or maybe they knew it was a scam and after the share price hike got their money back out at a profit (looking at their quarterly reports, I don't think they did). I have no idea, it might be a great business school case study when this is all over. As for their statements, note that they make no press releases on Energous since January, and in quarterly reports they say the minimum they can and still be compliant with disclosure rules. This is not a relationship they want to promote right now.

Overall with Dialog I'd say "Stop trying to apply logic and sense to this decision, it's not there". Anyone who has worked in large businesses knows that even when there is a ton of money on the line, what the coal-face workers know are dumb-assed decisions still get made.

4) What do you see Energous doing next?

I see them continuing what they've been doing for the last few years, until the market or the SEC says they can't. What does this mean? Basically, gaming the system and abusing the poor diligence of both investors and press, to raise money from a hopeful public. If I had no scruples, what I'd do is try to find a way to weasel around the FCC rules on Part 18 on my long distance charging to get something that sends 10's of mW over 2 to 3 meters. Perhaps something impossibly large, say a 1 to 2m square array, to keep the W/kg down for SAR, and pushing the far-field boundary out for 'contained' energy. Maybe a safety cutoff variable with charge rate so at any useful rates no-one can be in the room, and if they can it charges at the sub-mW level, but the press and public will not understand that. It would be utterly useless and impractical, something that would never be viable as a product, but the press and investors will believe, because they have no idea what's actually just happened. (Alternatively, I'd get it approved under Part 15 at the sub mW level and then claim Part 18 is coming). Products will be announced for 18 months out, and that they've decided to cancel the contact and mid-range products to concentrate on the long range one, hence managing to excuse how they failed to deliver upon promised products.

At that point, stock price will spike, and they'll a) have the insiders sell their current holdings, b) raise more capital via stock, up to $75 million at the boosted price, to keep this thing going another couple of years, and c) reward themselves with more stock and bonuses. IIRC the CEO gets large bonuses if the market cap spikes beyond $1 billion (a $38.70 stock price assuming no more dilution). We may then see a company with a market cap of >$1 billion, with no products, and revenues in the high 5, low 6 figure range.

Basically, expect something to happen to goose the stock price. This trick worked last year, why not do it again? When someone is rewarded for a set of actions, they are incentivized to repeat. In the end, this stock is going to zero, IMO, but that doesn't mean it's not going to be a rollercoaster until then.

(Repeating the seemingly obligatory statement - I have no financial position, short or long, in Energous or any related company)

Friday, August 10, 2018

Energous Raising $75 Million?

In addition to their standard 10-QEnergous submitted a Form S-3 today, indicating that they are looking to sell up to $75 million of equity in the company, coming barely 6 months after their earlier $40 million raise (from a 2015 S-3 and then an amendment in January 2018). With $37m in the bank as of last month, and a burn rate of near $13m a quarter and statements they will increase R&D spend, I had guessed they'd be raising soon but thought it might be nearer the end of the year. It seems they think now's the right time, perhaps before negative press catches up with them and sours the public. They do not have to raise all this at once, it can be done over time, but given they've set the price at $14.05 I expect much will be done soon.

This likely gives the company another 5 to 6 quarters of operation, which in conjunction with cash in the bank will keep them going until mid 2020. Given that around $4m of equity based compensation goes to the team per quarter, that's another $32m or so of extra cash in their pockets.

Interestingly this comes just after I heard reports of the CFO presenting at Oppenheimer, and apparently he was awful - weak, unenthusiastic, and got ripped to pieces by multiple tough questions after his talk. At least Rizzone is enthusiastic about what he's doing!

A few days ago the company indicated it had revenues of $200,000 per quarter and its major product release was still 18 months out. The 10-Q shows they have debts of just short of $200m to get to this point. Hardly compelling for a company with a $350m market cap.

Last time Raymond James acted as distibutor and made $1,000,000 from the sale (2.5%). Who's making the money this time around? The gravy train keeps rolling for at least another two years...

Wednesday, August 1, 2018

Energous Finally Questioned On Continuous Delays and Poor Performance on Earnings Call

You have no revenues and it’s been quarter-after-quarter and you're not doing any business, so why don’t you just come out and say it’s not working?

Every quarter Energous does their earnings call as publicly traded companies do. And every quarter they talk about the great future, and Wireless Power 2.0 (now at Phase 3.0!), and how next year is the breakout year, and the great game changing product is only 18 months away, perpetually. And after that, the four analysts that are selected each ask a rather boring question, ignoring things like low revenues, excessive executive compensation, departing founders, and missed product deadlines which the CEO gives a bland answer to, and we thank everyone and end the call.

But not this time.

Before we get to that, just a few highlights from the call - you can read the full thing here on Seeking Alpha, or listen to it here, start at 42m 00s for the interesting part.

  • They claim the long range transmitter will be out H1 2020. Time to carrot - 18 months. Again.
  • They claim a product release - near field charging for hearing aids. It'll be out in 90 days. Promise. Will they beat the Myant release...
  • Revenue is up from $25,000 last quarter to $206,000. That's split between services and royalties, they declined to give the split when questioned, so my guess $200k and $6k respectively. If it was big royalties they'd say. This is a company with a $350m market cap.
  • Expenses $12.5m per quarter (61x revenue), with $37.1m in the bank - fundraise needed by Q1 2019
  • Working to get regulatory approval with their Tier One partner in South Korea (Samsung?)
  • Admits their first generation product failed for every single Tier One customer, and this has left a "bad taste in the number of our customer's mouth" (was referencing inductive charging such as Qi, although I think they will be even less enthused about Energous...)

It was the usual ridiculous call, with the CEO and CFO putting lipstick on a pig and everyone else pretending it's a supermodel. Then we get the question from Matthew Winthrop of Aegis Capital Corp.

Matthew Winthrop (Caller) I’m curious on the hearing-aid business because my father was an audiologist and he tells me that you need to keep your hearing aid next to you in a very closed environment that doesn't get any dust or particles. So, I don't understand why you would need a wireless charge system when you have two plug it in right next to your bed? I’m confused.

Steve Rizzone (Energous CEO) Well, perhaps I can help you. Since your father has had experience with the hearing-aid, I am sure you’ve also seen him go through the process of changing these batteries. He has probably dropped one on the floor on more than one occasion.

Now I'm sure at this point the CEO felt he'd given his usual placating answer and it would be time to move on, but Winthrop wasn't having any of it.

Matthew Winthrop ... So, I don't understand, you came out here, got everyone into this, and told us we were going to charge cell phones and Teslas, and now you're telling we're going to do hearing-aids, sorry I know you are the CEO, but you got the whole world watching. You did a couple of hundred thousand of revenue, you have been putting this of quarter-after-quarter, how can you look at people in the eye and say, we're going to be huge, you’re not. You are just coming up and dancing with new products. Show me something, one company, one contract, something I can hang my hat on. I just don't understand what you’re doing.

Steve Rizzone Well, I respect your comments, but you’re wrong. And I think that the way you’re approaching this is incorrect also. I think you need to keep in mind the scope of what we’re looking to do. We are actively…

Unimpressed with this attempt to dodge and run out the clock, Winthrop interrupts Rizzone:

Matthew Winthrop (Exasperated) You have no revenues and it’s been quarter-after-quarter and you're not doing any business, so why don’t you just come out and say it’s not working?

Rizzone then gives a lengthy non-answer answer (he talks about a very clear, undeniable fact, but never says what it is...), talking over the top of Winthrop, claims they have not lied or been misleading - always a good sign when the CEO has to deny they're a fraud on a public earnings call -  and the call is ended.

So, finally, someone 'respectable' is pointing out that the emperor has no clothes, that they've been claiming monster specs and delivering little, that it's a constant push out, and that the revenues don't match the expenses. Importantly they are doing it on an earnings call, a matter of record now.

A questioner on their earnings call tells them to just give him something solid, or admit that it doesn't work as claimed, and they couldn't give that solid response. A dissembling, rambling, politician reply.

Finally. Let's see if it's the start of something. It will be interesting to watch any impact on the share price tomorrow.

Update Aug 2nd - It had a pretty significant effect on the share price, in the first few hours it's down ~20%