Louis Basenese runs (or used to run, their website now has Greg Miller as the head) a service he calls VentureCap Strategist for Wall Street Daily, and readers have been writing in with questions about one of his ads off and on for a few weeks now — I don’t know that it’s in circulation right now, but it’s still live (it’s dated May, so perhaps he doesn’t even own the stock today, I dunno), but I thought a quickie weekend solution would taste just about right for some of you today…
…. so we’re going to jump on this one as we enjoy our Saturday morning pancakes. And yes, if you want the short version this was briefly discussed at least once on the site back in the Spring. We’re going to look into the details, but I can’t promise I’m the first to “reveal the secret” this time.
The ad gets our attention with a robot, “Attie”, which, in combination with this “Quark” idea, will put us all at terrible risk… as Basenese puts it:
“A life-altering breakthrough is about to benefit society in the best way imaginable…
“Yet it could also mark the beginning of the end for mankind.”
It’s basically a “rise of the machines” argument — but we’ll get to that in a minute. First he tantalizes:
“Be ready for a success of EPIC proportions.
“This technology is guaranteed to radically alter people’s lives in the most profound way imaginable.
“During testing, I witnessed a 66-year-old man – ‘Chase’ – experience a rush that he never dreamt possible.
“In fact, I can safely say the following…Are you getting our free Daily Update
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“This technology gifted Chase the single greatest moment of his entire life.
“I say that with absolute conviction.
“So consider yourself warned…
“Success is an infinite certainty.”
That’s the kind of argument that people often find compelling, but doesn’t, of course, really hold much water — changing someone’s life with some fantastic invention is great, but it doesn’t mean it will be a great business. Maybe, but not with “infinite certainty” … whatever that means.
Basenese’s reference to a “Quark” is meant to describe that kind of “guaranteed success” idea — here’s how he puts it:
“‘Quark’ is a term that venture capitalists use to describe technologies in which the public has NO CHOICE but to embrace.
“I prefer to call it ‘forced adoption.’
“For example, do you know anyone who enjoys cab rides?
“Therefore, Uber was a quark.”
In case it helps you to understand my viewpoint: I’m one of the idiots who was (and is, I guess) skeptical of the potential of Uber — probably because I get too hung up on the risks, like getting picked up by a predator or having the right insurance or getting shut down by city regulators. But that’s beside the point. Yes, it’s sure a “Quark” now, and is changing transportation in a huge way.
But what stock is Basenese actually talking about? One last bit of hype before we get to the clues:
“In a few moments, I’ll unveil your first opportunity to own a quark.
“Investment proceeds could reach upwards of $227,000 for every reader.
“It’s a technology guaranteed to benefit society in the best way imaginable.
“How radically life-altering is this quark?
“Quarks are regarded as the Crown Jewels of any technology incubator…
“But this one is about to become the Crown Jewel of mine!
“I manage a model portfolio of early-stage companies presently being incubated, and publish my research concerning those companies to an inner circle of readers.
“The criteria for inclusion into my portfolio is pretty straightforward…
“I’m only interested in early-development companies that lie at the perfect point in the Life Cycle. That is, as long as their technologies are regarded as quarks.
“The latest quark to pass muster is a big one.
“In fact, it’s perhaps the biggest quark I’ve witnessed to date.”
So how about some specific clues for the Thinkolator?
“You’ll be invested alongside some big-time venture capitalists on this one.
“Firms like Squarepoint, State Street and Tower Research Capital are well represented.
“Even a few of the Big Boys are involved, like Morgan Stanley and BlackRock….”
And he gets into that “Attie” story — Attie is a DARPA project to build a rescue robot, and the short story is that he thinks Attie could become a “Terminator” kind of killing robot if it got more capabilities, and he stretches to imply that his new “Quark” stock has the technology to give the robot that technology. More from Louis:
“Whether you believe me or not, though, it doesn’t really matter.
“It doesn’t impact our investment cause here one iota.
“This latest quark isn’t bound to the robot market whatsoever…
“Yet DARPA and Attie covet this quark more than anything else in the universe.
“You see, Attie still can’t process information like humans.
“He lacks a neural network.
“His fingers can grab things, but he can’t ‘feel.’
“His eyes display images, but he can’t ‘see.'”
His stock? Something to do with “Cortical Stimulation” — a way to cause the blind to see, the deaf to hear, etc, by stimulating the brain or the nerves directly with some kind of implant. Sound familiar?
A few more hints:
“Already almost 90 patients have successfully received a cortical implant like Chase’s.
“When the FDA gave its blessing, the floodgates officially opened.
“The market for this quark could impact upwards of 5.8 million people, which pegs fair value at no less than $41 billion….
“Cortical implants represent technology’s greatest feat to date.
“This quark is guarded by 300 patents, plus another 170 applications.
“The margins are among the highest in the world, too…
“Already 23 surgical centers are up and running in the United States and Europe. Discussions are under way to add another 33.
“Each center is expected to complete one to two procedures per month at a cost of $110,000 to the patient.
“Yet it only costs the company $30,000 to perform each procedure.
“So with every implant, another $80,000 flows directly to the bottom line!”
Yes, it has indeed come up in these pages, at least briefly — and the answers provided by a reader back then were correct, of course… here Basenese was teasing (and is still teasing, I guess, since the ads are still circulating even though they’ve got a May 2015 date on them) the fairly young startup Second Sight (EYES).
Which is, as you may have guessed, very focused on nerve stimulation to restore eyesight to the visually impaired — the first patients are those who have retinitis pigmentosa. They developed a retinal prosthesis, called the Argus II, that uses a glasses-mounted camera and small computer to process visual signals and send them to an implant in the back of the eye (so it’s not noninvasive, but it’s fairly minimally invasive).
There are a few videos of the system at work on their website, and it seems to work pretty well for at least some people who have lost their sight or lost most light perception — they also just tried it for the first time in a patient with macular degeneration, apparently with good results. Some patients have seen no benefit, but they report that most people have seen improvement after the device was implanted — at least seeing more light or motion.
And yes, it is sold for about $110,000, and it is done in a few dozen centers around the world who are not expected to do much volume in this device — it was approved by the FDA as a humanitarian use device, meaning it didn’t have to pass the same kind of tests as many medical devices because it’s unique and showed reasonable basic safety and effectiveness and treats a very small number of people (maximum of 4,000) who have no other possible treatment.
That’s not enough to build a company on, of course — particularly not if you’ve already got a market cap of $250 million. So far this year, which is really their first year as a public company (they went public last November), they’ve implanted 39 Argus II systems and generated total revenue of $4.4 million and gross profit (revenue minus cost to produce/implant the devices) of $1.5 million. Total expenses were $11.4 million in the first half of the year, so the cash burn was in the neighborhood of $10 million, similar to what it was the prior year (before they went public). They’ve upped the number of centers to 29 now, so if they did two implants per month in each center that would be 600 or so per year — 20X the volume of systems they’re on pace to sell now. They’re going to have to market the heck out of this, and expand to more centers, to get anywhere near that kind of volume, which might perhaps be enough to make them a going concern.
That would likely mean getting real FDA approval, with clinical trials in macular degeneration (an affliction with a much larger number of sufferers), and getting a lot more insurance coverage for potential patients… or, further into the future, moving forward with their next generation device (more on that in a moment). That’s likely to take many years, assuming it works, and they’ll have to scale up pretty quickly and raise a lot more money to get to that point.
Presumably they’ll want to raise a substantial amount of cash within the next six months or so, they’re likely to be running low on cash by next Summer if the cash burn rate remains what it was last quarter. If they are really able to generate a gross profit margin of 72%, which maybe is possible at higher volumes, then that would mean they’d need annual revenue of about $160 million to cover the current level of selling, general and administrative expenses — and we are generously assuming, of course, that those expenses wouldn’t rise to cover the cost of much more selling. They’re on pace for about $10 million in annual revenue this year, maybe $15 million if they’re growing procedure volume steadily, so there is no real possibility of a profitable business unless their procedure growth becomes parabolic. Revenues of $160 million would be about 1,500 implants in a year, they’re on pace for maybe 50.
So it’s not really a story of this limited application of their device — it’s a story of the maybe someday applications, like macular degeneration or, in the further off future, the potential of their direct brain stimulation implant (as oppose to the retinal nerve stimulation implant they have for the Argus II). Their next-generation device that they say is in development, the Orion I, would connect directly to the visual cortex of the brain and bypass the visual nerve entirely — last I saw it had been tested in animals but not yet made it to human trials yet (they’ve predicted early 2017 for the first human implant of the Orion I). That would help folks with damaged or flawed visual nerves, I guess, and it does get further into direct brian stimulation, and maybe that leads to more advancements someday with other kinds of brain stimulation… though the idea that this little company “owns” that kind of stimulation or implant, or that research, is laughable — research about brain implants and electrical stimulation is being done by thousands of scientists around the world, and has been since the 19th century (though it’s come a long way since then, thankfully). Maybe Second Sight has the edge for some sorts of implant technologies, for visual signal processing or whatever else, but I expect we’re probably quite a ways from this being an area that’s defined enough — or lucrative enough — for patent litigation.
Oh, and as far as I can tell this has very little (my guess would be “almost nothing”) to do with robots and their ability to process visual information — there are lots of video-guided robot technologies, and I’m sure more are being developed… the ability to translate visual signals into electrical signals that can be interpreted by the visual nerve or by the brain is presumably much different than the ability of a robot to be directed by visual cues that it identifies. I think we’re a long way from a robot who kills us all because it can see where it’s going — but there are certainly robots who can see where they’re going and what they’re doing just fine already. I’m not worried about Attie and Second Sight teaming up to create Terminator V.
Basenese also takes credit for the huge moves in some past “Quark” companies that he recommended for his “incubator” — he doesn’t mention their names, perhaps because he doesn’t want anyone looking up the share prices today. The one that developed a cheaper touchscreen, and for which he said his entry point was impeccable in early 2013, was Uni-Pixel (UNXL) — which he was actually teasing pretty actively back in 2011, too. I don’t think I ever saw any public comment from him about when he sold, or whether he got out anytime in the $20s or $30s in 2013 as it spiked before collapsing back down (it’s been almost straight down for a couple years the shares are around $1.25 now). The “sound laser” one was Parametric Sound (PAMT), which was absorbed by Turtle Beach (HEAR) after the shares had been decimated (and HEAR went down for quite a while, too — though it has showed some limited signs of life with a new product introduction lately).
Basenese did get in at good entry points on those — assuming that he recognized an exit point at some time during their brief spikes and told his “incubator” readers to sell. He doesn’t mention his “exit points” in the pitch, just the “entry point”… which makes me a little suspicious, but that’s just a feeling.
What did those three stocks have in common? They were brought to market by MDB Capital, which Basenese (and some others, like Nick Hodge at Angel Research) follow closely… sometimes it seems like they tout every single stock taken public by that firm (I know Basenese has also publicly recommended Clearsign (CLIR) and Resonant (RESN), both also MDB Capital companies). MDB Capital likes to say that it’s an investment bank that puts venture stocks on the public exchanges — which means that public investors like you and me can buy shares of these cool “story” stocks that would normally be getting seed funding by big venture capital firms. It works sometimes, and the stocks are often extremely volatile — partly because they are cool stories, and the stories can evoke a great greed response among investors who feel like they “miss out” on the real private companies. But, of course, most venture capital companies fail — and probably most penny stocks that are great stories don’t grow into world-beating companies (or even make any money, save for the most nimble traders — not including me, I’m rarely nimble — who recognize the need to buy the story when it first gets some press and then sell when the lust blinds the markets to reality).
MDB Capital was also teased as the “Midas Supergroup” by Nick Hodge back in February, when he was teasing the “wireless electricity” company Energous (WATT), another MDB IPO — that one hasn’t yet had the “spike” of the smaller guys like Parametric Sound or UNXL, there have been a couple little blips to the upside but it’s been mostly trending down since it went public last year. That wasn’t a Basenese tease, though he has owned and publicly recommended Energous before, including last December when he got a slot on CNBC and pitched it as a top disruptive pick for 2015.
So there’s your “bonus” solution and blatheration for the week — Second Sight Medical (EYES)… which, yes, has had a lousy first year as a public company. It went public last November at $9 and immediately doubled, getting into the $20s for a day or so, but it’s been mostly down since then, with a few news-driven spikes in price along the way to keep things interesting. It closed on Friday at $6.65, with a market cap of about $235 million. It’s an exciting product, the company was founded by a serious entrepreneur in the medical device space (Alfred Mann, who you may know from his company Mannkind, behind the insulin inhaler, or others of the dozen-plus companies he has created — he’s still “Chairman Emeritus” at Second Sight).
It’s an interesting story, I hope it works well — but I can’t make the financials seem viable to me, this isn’t a company or product that’s going to be ready to be judged on their profit and loss performance for at least the next several years… which means, unless the story gets a lot more attention, that it’s going to have to raise lots more money, on probably worse terms, before it gets to any kind of sustaining business. My guess is that they’ll probably require a couple hundred million dollars more, and that sales volume won’t get to a sustaining level for at least five years, assuming (optimistically, perhaps) they’re able to push through a next-generation device by then… but that’s just guessing.
Sometimes I just feel like a curmudgeon… but there you have it.