Description

Introduction

Thin Film (http://thinfilm.no/) is a Norwegian company traded on the Oslo Bourse under symbol THIN (the US sponsored-ADR, TFECY, has insufficient liquidity).  

THIN is the only publicly-available, pure play Internet of Everything (IoE) stock in existence.  

THIN has developed and commercialized printed electronics, using semi-conducting polymers, that were first developed in the latter part of the 20th century, and for which three chemists received the 2000 Nobel Prize in Chemistry.  For many years, while THIN was developing this technology, it was a technology in search of a business application.  The emergence of the IoE is that business opportunity for THIN.  For a brief overview of the IoE and the commerical role THIN hopes to play in its development, see https://www.youtube.com/watch?v=jCL4SR1_So8 .

[NB:  because THIN’s printed electronics technology and business proposition are both novel and relatively complex, I will link often to THIN website and video descriptions in this write up rather than simply rely on textual description.]

For a good recent introduction to THIN’s technology and commercial opportunity, please listen to the Q1 2016 presentation by THIN’s CEO, Davor Sutija, which can be found at https://soundcloud.com/thinfilm, with the accompanying slide deck at http://thinfilm.no/wp-content/uploads/2016/05/20160510_THIN_Q1_2016_Corporate_Presentation_PUBLISHED.pdf .

THIN has developed and owns the technology to print intelligent electronic labels comprising printed nonvolatile rewritable memory, logic and NFC communications, using conductive inks on polymer (flexible/transparent) and similar substrates. THIN has engineered the productive capacity to print its memory labels using roll-to-roll inkjet printing on a continuous basis over a kilometer long form factor, realizing massive unit volume production capacity at very low cost.  THIN is currently engineering the roll-to-roll inkjet production capacity for its more complex products (each having greater functionality), such as its electronic surveillance tags (EAS), open sense systems and smart sensors.

THIN to my knowledge has a unique technological and production capability.  Printed electronics on thin films have been commercialized in areas such as solar cells and OLED displays and lighting, but there is no other company that has demonstrated the ability to print on a massive scale labels or tags that can monitor, detect, track, authenticate, record (ie rewrite to memory) and display important events having significant commercial value.  These events include anything from the life-saving (such as whether a pharmaceutical has been correctly used by a consumer or has been tampered with or exposed to an excessive temperature), to the prosaic but commercially useful (whether a consumer product dispensing device is being refilled with the company’s branded products, or whether governmental tax has been paid and the tax stamps are authentic as opposed to forged).

THIN currently has developed and licensed to Xerox the technology and engineering to print memory tags (to be marketed under Xerox’s brand, as discussed below) on roll-to-roll high speed inkjet printers (printing rolls of nonvolatile organic memory by the kilometer on a single run). Using a single roll-to-roll inkjet printing line, Xerox expects to have the capability to manufacture over 1 billion of its Xerox-branded memory tags using THIN’s technology per year, for use in such applications as product non-piracy and tax stamp payment authentication.

THIN is currently developing the engineering to print its logic, memory and NFC integrated systems on roll-to-roll inkjet printers as well.  THIN faces a production-induced marketing problem, as THIN industry partners (such as Diageo) that have expressed initial interest in THIN’s products want to enter into licensing agreements only when THIN can provide its products in massive quantities to satisfy the partners’ massive unit requirements. THIN has indicated to me that, having developed roll-to-roll printing for the Xerox memory tags, it does not expect to encounter any novel engineering roadblocks in its development of roll-to-roll printing for its EAS, open sense and smart sensor labels, and expects it will require $20 million (in addition to current cash) to build out its additional roll-to-roll inkjet printing capability (an amount THIN is confident it can raise through additional equity issuance).  THIN anticipates leasing an expanded manufacturing facility to locate and develop the engineering production lines for its EAS, open sense and smart sensor systems roll-to-roll printing lines this summer.

My thesis on THIN is the following:  1) THIN has demonstrated a very significant level of commercial interest in its current product portfolio: memory tags, electronic surveillance surveillance tags, speed tap tags, smart label sensors and open sense label products; 2) THIN’s investment potential depends upon its ability to demonstrate its ability to mass produce, and then produce in-house and/or license others to mass produce, many billions of its products for commercial use in various verticals; THIN has already licensed to Xerox for mass distribution its printed memory tags; but THIN needs to demonstrate mass production capability for its other, more integrated and complex products as well; 3) if THIN’s demonstrates its ability to mass produce its other products, likely over the next 18 months, THIN will have established a unique and valuable commercial competency at the core of the emergence of IoE, with a wide competitive moat based both upon its commercialized technology and its lead position with commercial partners (there is a substantial first-to-market advantage available to THIN; there is a long lead time for THIN’s partners to review the technology and test it in the field with pilot orders, and co-develop the application of THIN’s products for their particular use just to arrive at the point where the partner confirms initial interest and contemplates large scale orders; there is no THIN competitor engaged in this marketing process currently, and this lead time advantage for THIN should be a substantial barrier to entry and competitive disadvantage for any new THIN competitors); and 4) if 3 above occurs, THIN stock will represent a valuable call option on the value-added potential of the IoE, assuming the current industry vision for the IoE is even remotely realized in commercial potential.

I am recommending a long position in THIN now, in advance of its prospective ability to mass produce, and license others to mass produce, all of its products on roll-to-roll printing by 2018.  See slide 11 of http://thinfilm.no/wp-content/uploads/2016/05/20160510_THIN_Q1_2016_Corporate_Presentation_PUBLISHED.pdf .

THIN’s largest shareholder is Woodford Investment Management, a well-regarded UK investment firm with 15 billion pounds under management, with about 18% ownership of THIN.  (See background piece on Neil Woodford) THIN has developed its business to date without venture capital investor involvement (which it considers to have been, on balance, a benefit).

THIN is a high risk growth stock.  THIN does have, however, the promise to offer valuable authenticity (anti-piracy and tax payment), anti-theft, and tracking, tracing, reporting, data collection and marketing solutions for the fast consumer goods, pharmaceutical, beverage, retail, clothing, packaging and other industries.  There is no competitive threat that THIN is aware of (but see the discussion of Avery Dennison below), and there is abundant industry market interest, assuming THIN can achieve requisite volume production capability.

The major risks are that 1) THIN won’t be able to execute on its objective to develop roll-to-roll printing of billions of units per year of its more complex and integrated electronic products by 2018 in order to create the commercialized technology and industry partnership barriers to entry discussed above by the end of this decade, as the emergence of substantial THIN competitors can be expected, and 2) notwithstanding substantial initial market interest, companies may discover after having used THIN’s products that the marginal added cost of using THIN’s products does not justify their commercial benefit (that THIN’s value proposition is a mirage and the IoE a passing fad).

THIN Technology

THIN’s printed memory, logic and NFC communications technology is set forth on its website at http://thinfilm.no/technology-printed-electronics/, and THIN’s ability to print its i) memory tags on roll-to-roll inkjet machines, and its ii) integrated memory, logic and communication systems using a sheet-based process, is set forth at http://thinfilm.no/technology-printed-electronics/#manufacturing. As discussed above, THIN will not be able to satisfy customer demand unless it is able to migrate its production capacity from sheet based to roll-to-roll printing, which is expected to be realized over the next 18 months.

The objective of THIN’s technology is to endow conventional and even disposable products with a low form of intelligence that is commercially useful, thereby enabling such smart (enough) products to become ubiquitous.  THIN envisions printing (and eventually licensing the printing to achieve a capex-light business model as a mature company) of tens of billions of tags annually that will permit manufacturers and distributors in various verticals to incorporate various value-added solutions into each item sold.

THIN’s printed memory was developed in-house and patented worldwide over a more than ten year period, initially as a potential replacement for flash memory in electronics.  THIN has maintained a historical close relationship with Linkoping University, one of the pre-eminent universities doing research in organic and printable electronics (http://fe.itn.liu.se/orgel/orgel-homepage?l=en.  The current Linkoping University director of their organic electronics laboratory is the former CTO at THIN http://fe.itn.liu.se/orgel/members/magnus?l=en )

THIN’s printed logic (as opposed to its printed memory) technology is based upon acquired technology from PARC, a Xerox company (see https://www.parc.com/news-release/63/thinfilm-extends-relationship-with-parc-to-accelerate-delivery-of-integrated-printed-electronic-systems.html ) and through the asset acquisition of Kovio (using dopant polysilicon for transistor printing).

THIN acquired its printed NFC communication technology when it purchased the assets of Kovio in 2014.  By incorporating NFC communication into a printed electronic label system that includes printed memory, printed logic, a printed battery and a printed display, THIN is able to present a unique cost-effective packaging solution that enables a manufacturer’s products to achieve at the unit level the special tracking, data collection, environmental monitoring etc functionality that can be integrated into the internet, which is the vision that constitutes the IoE.  See http://thinfilm.no/products-nfc-solutions/ and https://www.brainshark.com/thinfilm/OpenSense?nodesktopflash=1 .  

NFC has emerged as a particularly effective communications solution for THIN as it develops IoE intelligent labels, given its widespread adoption by Android-based smartphones (and its expected adoption by Apple smartphones for uses in addition to Apple Pay).  Essentially, every smartphone user automatically becomes a THIN label target brand consumer by virtue of the ubiquity of NFC-enabled smartphones.  There are many technology companies seeking to participate in the development of the IoE that are adopting bluetooth as the WiFi-to-the-thing connectivity link.  THIN believes that the push characteristic of the bluetooth beacon (in effect, local area broadcasting) is not as effective commercially as the pull characteristic of NFC, with the user choosing to engage with a labeled product, especially as consumers increasingly use their smartphones as an all-purpose personal device.

THIN’s CEO, Davor Sutija, explains THIN’s technology solutions and the history of the company in this video:  https://www.youtube.com/watch?v=IxWyqVw7AzM.  Mr. Sutija discusses the two THIN products currently being shipped, 1) an electronic article surveillance (EAS) tag marketed by Nedap (see http://thinfilm.no/printed-electronics-fashion/) and 2) an anti-counterfeit tag marketed by Xerox (see http://thinfilm.no/printed-electronics-security-labeling/ and http://thinfilm.no/2016/06/08/xerox-demonstrating-printed-memory-product-featuring-thinfilms-technology-at-worlds-largest-printing-equipment-exhibition/ ), and 3) THIN’s third product, its open sense tag, that is going into sheet-based production for the beverage industry with Ferngrove Wines and Diageo spirits (see http://thinfilm.no/printed-electronics-security-labeling/) and in the pharmaceutical industry with Ypsomed (see http://thinfilm.no/printed-electronics-health-wellness/).

A technology overview of the THIN printed electronic system is available at http://embedded-computing.com/articles/printed-intelligence-everywhere/?utm_content=12739458&utm_medium=social&utm_source=twitter# .

The THIN Value Proposition

THIN’s value proposition is to be the sole technology provider to various industries of the ability to pursue valuable safety, marketing, authentication, supply chain tracking, data collection and other business objectives at the product item level, leveraging the availability of the internet and NFC smartphones by transforming the product item into the endpoint of a smart (enough) communications ecosystem.

For example, take the case of marketing solutions, through THIN’s open sense labels.

THIN offers brands the option to bypass normal marketing and advertising channels in order to pursue direct, one-to-one marketing.  For a brand marketer, it has become more difficult to build brand equity through advertising on television, given DVR recording and fast forwarding through commercials, and on the internet, given adblocker use (see http://www.nytimes.com/2016/05/31/business/international/smartphone-ad-blocking-software-mobile.html?_r=0 ).  The holy grail for brand advertising is to convert the product itself into an effective communication solution (and not just a dumb package) in order to move from mass marketing to marketing on an individualized basis, that engages the consumer one-to-one.

THIN has developed a partnership with Leo Burnett (the advertising firm, through its ARC marketing division), and an executive at Leo Burnett explains the paradigm shift presented by using THIN’s open sense label to conduct brand marketing through the product to the consumer’s smartphone:

““The opportunity we saw was for sending pre- and post-purchase messaging to smartphones. If you know the moment when a package has been opened it’s a game-changer for marketers.’’

“For instance, if a shopper picks up a bottle of whiskey that has a NFC chip in it, the shopper can “tap” the bottle (it’s less a tap and more just holding the phone a quarter of an inch away) to activate communication between the bottle and phone. That will then call up a designated website in the phone’s browser with product-specific content of the advertiser’s choosing, whether that’s brand history or recipes.

“We’re interested in delivering content when consumers are deciding on a product, and then following up with great uses for the product,” said Mr. Jones [Arc executive]. “The nice thing about NFC is that by definition it’s opt-in. The shopper has taken a action to tap more. And there’s no reason why we couldn’t use this for coupons, but generally we think the bigger opportunity is creative ideas around the brand and product and how to use it.”

“The draw,” he added, “with Thin Film’s technology is that it enables brands to talk to consumers beyond the one time in the store. So far NFC has been used to offer coupons in store and other simple activations, but there’s more opportunity. You get content at shelf, and then when the product is opened, you actually break a sensor that resets the NFC chip, and that creates an opportunity for for a post-sale message.”

“In theory, such marketing practices would work with any NFC-enabled phone. But for now, it’s mostly limited to Android phones with NFC, though NFC will have to be enabled. Although Apple phones now have NFC, the technology is limited to financial transactions like Apple Pay. Android phones globally dominate the smartphone market with more than 80% market share,” according to IDC.

Mr. Jones said that Arc will be introducing the technology to its clients in the near future, and he expects a much broader adoption of NFC in marketing in the next 12 to 18 months. “We’re on the edge of where we’ll soon see mass adoption with consumers.”

The advantage of this technology over beacons, said Mr. Jones, is that this does not require an app, which beacons generally need to work.”

THIN has partnered with EVRYTHNG (see https://evrythng.com/) to provide the intermediation between the product’s item-level information written to memory (in the THIN open sense label) and the brand’s internet-based marketing program.  When the consumer is in a purchase stage and the consumer taps phone to product, brands can send (by WiFi) one set of pre-purchase marketing information to the consumer’s smartphone based upon the then item status written to the THIN label, and when the consumer has opened the item and the THIN open sense label logic has detected this and rewritten this new product status to the label’s memory and the consumer taps phone to product, the brands can send (by WiFi) another set of post-purchase marketing information to the consumer’s smartphone.  EVRYTHNG connects the item-level identity and status (as it may change and be rewritten at the item level by the THIN label) to the brand’s WiFi based internet marketing programs.  

In addition to brand marketing, THIN’s open sense systems can provide product authentication, an important solution for the retailing and fine wines and spirits industries.  It has been estimated that a sizable majority of the large and growing wine market in China is populated by counterfeit merchandise.  A large Australian wine company has already begun adoption of THIN’s open sense technology for product authentication.

A very promising vertical that THIN is beginning to address is the pharmaceutical and medical products industries.  An important element of product safety and effectiveness is proper medical therapeutic delivery and patient use.  THIN recently announced the formation of a global platform partnership in this vertical.  

THIN’s Valuation

THIN equity (and enterprise) is currently valued at approximately $325 million.  It has approximately $40 million in cash and no debt.  It has stated that in order to achieve roll-to-roll inkjet printing production for its products other than its memory tags (EAS, opens sense and smart sensor products), it will need to deploy that cash and raise and deploy approximately $20 million more.  An example of THIN’s valuation once THIN reaches this production threshold can be illustrated below.

For THIN’s product that can already be mass produced by roll-to-roll inkjet printing (memory tags licensed to Xerox and marketed under the Xerox brand), I believe that Xerox’s price point will be about $.10 per tag, and that THIN’s license revenue will be about $.01 per tag.  Xerox has established a printing facility (previously mothballed) devoted to the production of these memory tags in Webster, NY that is expected to produce one billion tags per year.

Assuming Xerox can sell all tags that it can produce during 2017, this will drop $10 million directly to THIN’s net income (currently loss) line.  While I have not reviewed the THIN/Xerox license agreement, it is my understanding that THIN does not bear any substantial licensor costs.  The Xerox license is nonexclusive, although THIN has indicated to me that it intends to focus its support on the current Xerox license before it contemplates engaging more memory tag licensees.  

Once THIN achieves roll-to-roll inkjet printing capability for its other products (which THIN is targeting for the end of 2017/early 2018) and assuming THIN can negotiate license partnerships for these products with industry participants with the same global industry presence as Xerox, one can see THIN multiplying its very high margin license revenue (derived only from Xerox currently) during the five year period from 2018 to 2023 by multiple fold.  Given the prospective leap in production capacity beginning in 2018, enabling printing both in-house and (preferably for THIN) under licensing by others, of THIN’s complete current product line, past results are not only not comparable to prospective future results, but future results are difficult to forecast, depending upon whether THIN emphasizes in-house or licensee printing (depending on the balance THIN chooses between incurring more or less capex cost, but generating more or less revenue, for in-house vs licensee printing).

As far as I can tell, THIN has no competitor with comparable technology to produce printable electronic tags that offer the functionality of THIN’s products in mass production quantities and at THIN’s price points.  I discussed this point with a senior executive at THIN, who confirmed to me that having technology comparable to THIN’s technology is not something that can normally be developed and produced in stealth mode, and THIN was not aware of anyone in the field that is able to print an electronic tag or label composed of polymer-based memory, and printed ink-based logic and communication.  While there are many printed electronics firms in other industries, such as thin film solar cells and OLED lighting and displays, the technology in these fields does not translate easily into a mature commercial technology that can compete in THIN’s field of engagement.

However, there was a recent announcement by Avery Dennison of its “Janela Smart Products Platform”, which portends potential competition to THIN with a new electronic article surveillance and supply chain management capability in the apparel space.  After discussion with a THIN executive, I dont believe that this is much more than vaporware at this point (the announcement itself refers to a three year roll out).  While Dennison’s partner in this announcement is EVRYTHNG, which is also partnering with THIN, THIN could not get any background intelligence on Dennison’s market readiness.  Moreover, even assuming Dennison’s full capability with a printed communicative digital label for the apparel industry, this would not compete with THIN’s capability to produce labels which have printed rewritable memory, driven by printed logic.

THIN’s products other than its Xerox-licensed memory tags haven’t been licensed yet since the production engineering for roll-to-roll inkjet printing hasn’t been realized yet.  It is my understanding that THIN expects the average selling price for these products to be in excess of that realized for the Xerox memory tags (due to their enhanced functionality), and that THIN’s royalty percentage, if production is leased, will be at least as much as 10%.

Having said this, I am at a loss to offer any financial forecasts in which I would have any degree of confidence. THIN is followed by Edison Research and Cowen, and while Edison has come out recently with a report, there is no research available to produce a useful earnings model, especially relating to the future earnings effect of transition to roll-to-roll printing.  THIN is very cautious about identifying it’s go-to-market partners in advance of large scale development or licensing deals, although THIN has disclosed that Diageo (in spirits) and Ferngrove (in wines) are beyond the market-testing stage and they each have placed significant orders for quantities that can be serviced by THIN’s current sheet processing engineering (which are far much smaller than what can be achieved by roll-to-roll inkjet printing).  Assuming that THIN achieves its roll-to-roll inkjet printing engineering objectives by 2018, then Nedap is expected to substantially increase its orders of EAS, and Diageo and Ferngrove could order well over one billion open sense labels per year themselves for their wine and premium spirits.

The lack of reliable forecasting coupled with a general dearth of public information about THIN is the greatest risk factor associated with THIN.  While THIN’s website is very informative and tHIN is highly promotional (at least for a Norwegian company), THIN’s business prospects are best gauged over time as THIN achieves (or fails to achieve) its milestones.  Generally, THIN has been able to raise financing as it has needed it.  Moreover, THIN has displayed an ability (unusual for many technology companies) to productize its technology in service to the needs of the marketplace.  I have heard, anecdotally, that the THIN open sense product platform that has piqued such interest of global brand marketers was not a “pull product” from the marketplace, but rather a “push product” that arose from bluesky imagineering by THIN’s technologists.  THIN would appear to be a technology company that can develop good working commercial relationships with its target vertical industries.

There is no near term catalyst for THIN (unless you are a patient investor and 18 months is near term for you), as I do not see THIN achieving engineering capability to produce roll-to-roll inkjet manufacturing of its EAS, open sense and smart sensor products before late 2017.  Moreover, one might think that the market for European exchange listed stocks (and perhaps especially for emerging technology stocks) will be lackluster during this period, so that THIN does not appear to be a time-sensitive opportunity.  

However, based upon watching THIN develop over the past decade*, I do believe that THIN has demonstrated the ability to deliver on its technology and engineering objectives, and waiting until THIN announces its roll-to-roll production capacity for EAS, open sense and smart sensor products may be waiting too late.

*  I represented a US institutional investor (as an attorney) over a decade ago in connection with a potential investment in THIN. At the time THIN was exploring a technology development agreement and license with Intel, using THIN’s technology as a potential replacement for flash memory.  Intel declined to proceed with commercialization.  I was very favorably impressed with the technologists that I met, and not impressed with what passed for the then THIN management and business development team.  Since then, THIN has completely turned over its management and refocused its business objective, and is now being led by a capable and deep management team (the quality of THIN’s technologists was never, and still is not, in doubt).

Catalyst

Transitioning from sheet based to roll-to-roll printing of THIN's products in order to scale up production to meet demand, expected to occur over next 18 months.