Summary
- mPhase Technologies is being unfairly valued by the market due to a combination of factors such as scarcity in coverage in the investing community.
- The fundamentals of the company are solid as it repositions itself to take on the exploding rechargeable battery storage market.
- Pending patent approval for its smart drug delivery system likely to result in an upward revision of the company’s valuation.
History
mPhase Technologies (XDSL, Financial) may be a small tech company with virtually no coverage in the main stream media, but the stock definitely warrants a closer look by investors. The company is a pioneer in the revolutionary Smart Surface technology which has been enabled by breakthroughs in nanotechnology, microelctromechanical systems (MEMS, Financial) processing and microfluidics.
By leveraging this technology, mPhase has been on the path to developing not only proprietary smart nanobatteries but also smart drug delivery systems. The company’s Smart Surface technology is based on the phenomenon of electrowetting, which is a process that controls the flow of fluids by manipulating the way liquids behave when in contact with a solid and porous surface. mPhase’s Smart NanoBattery employs a smart surface to control the release of electrolytes into a lithium electrode, which then creates an electrical output.
Droplets on a smart surface which can be individually controlled (Source: mPhase)
While the need for smart nanobatteries may not be immediately apparent to some, the commercialization of this product would essentially change our entire view of energy storage. These Smart nanobatteries provide a wide range of advantages over traditional batteries such as their smaller form factor, compatibility with semiconductor processing (can be integrated directly into an IC), higher power and energy density just to mention a few.
As a matter of fact, the US military backed the research and development for the initial working model of the Smart nanobattery and has since awarded mPhase more than $750,000 in additional funds to drive further research into the technology. So far, the results of the research have been nothing short of impressive if the field tests are anything to go by. The nanobattery was incorporated into a 120mm tank projectile which after firing was able to power a telemetry system that guided it through a trajectory of four miles.
The smart drug delivery system is built on the same nanotechnology platform that powers the Smart nanobattery, and uses electronic or other external stimulus to dispense an unattended, predetermined quantity of drug or medical agent through a smart surface membrane. The system is highly flexible and adaptable allowing for pre-programmed dosing of a drug agent for hospital and outpatient wearable applications. This system allows the dispensing device to be reduced in size and attached to broader areas of the patient’s body for expanded medical applications and treatment.
Financial position
I can definitely appreciate some skepticism among investors in the case of mPhase considering it trades as a sub-penny stock which raises a great deal of red flags. If this were any another company, I wouldn’t even look at it twice, but mPhase’s potential to be a unique gem is due to the fact that it has been generating revenue.
Through its wholly owned subsidiary mPower Technologies, it has introduced a number of innovative emergency based products targeted at improving consumers’ lives. The products which include an array of lithium based jump starters for different vehicle classes are developed under the Jump Line brand and have been enjoying good traction in an already rapidly expanding market.
Also included under the Jump Line brand is the Jump home generator which is capable of running an average U.S household refrigerator for about four to six hours and takes eight hours to recharge via A.C or 10 hours via solar power.
According to the company’s annual report, mPower increased revenue from $1000 back in 2012 to $581,000 by the end of FY2014 based on the sales of the jump starter products. However, in spite of these sales, mPhase has been struggling to grow its bottom line as the need to spend more on R&D to come up with new products has seen a steady rise over the past couple of quarters.
The company’s long term debt is only about $1.5 million which puts total liabilities at about $3.4 million as of the end of 2014. Management has been able to effectively reach a settlement agreement with long term debenture holders which requires them to pay the holders $30,000 in cash on a monthly basis to keep their convertible notes out of the market. According to CEO Ronald Durando, the company is well on track to having a stellar balance sheet more so as it launches new products into the market.
For those who may be concerned about the company’s ability to generate adequate working capital, you should rest easy. Durando revealed to me in an exclusive interview that the firm was working on a financing deal to raise between $2.5 million - $25 million which would be completed in about six months’ time.
He said that once the financing deal was completed, the management would initiate a reverse stock split bringing the number of shares outstanding much lower while propping up the share price at the same price. The market currently values mPhase at about $6.25 million, a figure which I believe doesn’t take into account a number of key factors which I have highlighted below.
Market outlook
While mPhase’s financial position may look a bit shaky at first glance, it is important to carefully consider the nature of the markets the company is targeting in order to gain a better understanding of its future prospects. First, there is a massive opportunity in energy storage systems as confirmed by Tesla’s (NASDAQ: TSLA) entry into the market with its Powerwall home battery which is supposed to be an alternative to grid power. Since the announcement, Tesla’s shares have been trending upwards as can be seen from the chart below.
(Source: Yahoo! Finance)
Although it may be quite easy to get caught up in the hype created by Powerwall, it is important to make note of one thing. This is not new technology and as SolarCity’s (SCTY, Financial) chief technology officer Peter Rive puts it: "I don't believe this product in its first incarnation will be interesting to the average person”. This is because the lithium – ion based Powerwall is designed to be an emergency backup power source during an outage much similar to mPower’s Jump home generator (with the exception of capacity and cost per KWh of course).
Apart from Tesla, there are numerous other companies such as General Electric (GE, Financial) angling for a piece of the market. "GE is committed to the energy storage business," says Jeff Wyatt, general manager of GE's solar and energy storage units. "Our goal is to help our customers provide flexibility across the grid by combining our expertise in plant controls, power electronics, systems engineering and fundamental battery knowledge.”
These comments came in the wake of an announcement which revealed that General Electric had secured a supply contract of 8MWh lithium ion based battery energy storage system for Con Edison Development. This marks the first time that General Electric has introduced lithium ion battery technology in the market as part of its quickly growing energy storage portfolio and with the successful uptake of the system, I think we can all agree that there is massive potential here.
However, the reality is that even as an alternative emergency power backup system lithium-ion based energy storage systems are still more expensive as compared to their natural gas and diesel powered counterparts. The US Department of Energy estimates that in order for energy storage to become competitive, it needs to reduce cost to about $150 per KWh which is a far cry considering that Tesla’s Powerwall current costs stand at about $700 per KWh.
For now, it wouldn’t make much financial sense for consumers to shift all their energy demands to battery storage systems though there is a rapidly expanding market for these systems as forms of emergency backup. I believe that mPhase’s system offers a unique advantage over not only Tesla’s Powerwall but other players in the space in that it costs far less and through smart use consumers can get the most value for their money in times of outages. In my opinion mPhase has a growing brand name and as the market for energy storage continues to rally, we should see the company booking more revenue from the sale of its system.
Utilities will lead demand for energy storage (Source: GTM Research)
Catalysts for upside
While the rechargeable battery storage system market stands to be an extremely lucrative venture for mPhase, there still exists one aspect of the company’s technology that we still haven’t yet talked about. This is the smart drug delivery system. Durando pointed out to me that a patent for this technology was going to be awarded in the next 60 days. The awarding of the patent will be a huge catalyst for the company since some consider smart drug delivery to be an undeniable game changer in the medical field.
According to research from OMICS Group, the global market for business development of drug delivery technology in 2010 was $131.6 billion and is expected to rise at a compounded annual growth rate (CAGR) of 5% and reach nearly $225.8 billion by 2020.
(Source: World Drug Delivery Summit 2015)
One great example of a company that has been reaping big in this multi-million market is Insulet (PODD, Financial) which specializes in the development of insulin delivery systems to manage diabetes. The market values Insulet at about $1.7 billion and was able to rake in $289 million in revenue for FY2015.
While I am in no way suggesting that once mPhase gets its smart drug delivery system patent approved it will enjoy such a valuation, my point is that its valuation will no longer be $6 million as mentioned earlier. Even if mPhase were to choose to license this technology to other OEMs it would still stand to make quite a lot in fees. This is solely due to the fact that mPhase’s smart surface technology will allow the delivery medium to become much smaller while enhancing dosage control in a manner that hasn’t yet been witnessed before.
The fact that Insulet has been able to grow revenue by 36% in a period of three years and also increase margins while focusing on only one treatment means that mPhase’s smart drug delivery approach which will be applicable for an array of treatments may prove to be far more profitable.
Summary
While some may argue that mPhase and other stocks under the $1 mark have been notorious for burning investors and should serve as a cautionary tale, I would beg to differ. Investing in any venture is all based on some degree of risk and due diligence has to be conducted. mPhase may be a high risk investment for now, but the potential reward is also higher.
Based on the outlook of rechargeable battery storage systems market trends and the pending patent approval for the smart drug delivery system, I am inclined to believe that the market currently undervalues mPhase. As a matter of fact, once the lithium ion based home generators begin shipping in summer this year, and the smart drug delivery system patent is granted, we should expect to see a substantial rally in the stock price.
I encourage investors with a high risk appetite to conduct their own research on mPhase. My own conclusion is that the company holds plenty of undiscovered upside potential.
