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NanoTech Entertainment: On The Verge Of Something Big?

Mar. 16, 2015 11:53 AM ET | About: NanoTech Entertainment, Inc. (NTEK), Includes: LGF, NFLX
Disclosure: The author is long NTEK. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.


Summary

UltraFlix 4K set to make significant content announcements via partnerships with major movie studios.
Already undervalued and should be seeing rapid growth.
Plans for 2nd Quarter 4K Live content channel could be first to market.
Obvious risks are associated with a not fully audited OTC company but the upside is remarkable.

This article was sent to 464 people who get email alerts on NTEK.

Recent events have peeked my interest in NanoTech Entertainment (OTCPK:NTEK). Sometimes, the best investing knowledge is that gained by your own interactions in the market. I needed to purchase three new HD televisions due to renovations and remodeling. And much to the chagrin of my significant other, I cannot simply just make a purchase. I must investigate and debate it to the point of exhaustion. Nowadays, there are more questions than ever before in this decision process. Then I discovered several announcements and upcoming news events noted by the company which are expected in the coming days and weeks. This shareholder letter is a must read for those interested in the company.

In my decision making process, I had to consider which TV's to buy and what is 4k and do I need it? 4K is essentially the next generation of high resolution or HDTV. What I found is that the prices associated with these TV's have dropped significantly and are not that much more expensive then the 1080P models. However, despite the widespread adoption of 1080P technology, it seems that cable and satellite content providers have not been opening the floodgates to 1080P content and this new 4K format availability in comparison is minimal at best. For cable providers, the higher the resolution, the higher the bandwidth required which can often be limited. Thus 1080P content and ultimately 4K content is often streamed.

In February, CNET presented an article examining 4K content and identified several main providers and ways to receive 4K content. What I find interesting is that among the very few streaming choices available here (Netflix $26B cap (NASDAQ:NFLX), Amazon $172B cap (NASDAQ:AMZN), Direct TV), one name is placed right alongside the major players but is not well known. This is NanoTech's flagship product known as UltraFlix. NanoTech has a number of revenue generating businesses but from what I can tell, UltraFlix is clearly their key product with the highest ceiling.

UltraFlix brags to have the most 4K content available but a lot of the content may not be exciting enough to differentiate it from the competition. Also as CNET notes there just isn't much content anywhere. However, I am finding that this seems to be changing in a big way. Here is a product, developed by a small company with an approximate $20m market cap being reviewed along with the multi-billion dollar companies in this space. Is UltraFlix for real? Is NanoTech for real? Is there an investment opportunity?

In my research in buying these TV's, I found several other key issues. Not all TVs are smart and not all smart TV's provide the same applications. Many require buying a Roku, Apple TV (NASDAQ:AAPL), Google Chromecast (NASDAQ:GOOG), or smart blu-ray player to get all the content. In my case I wanted MLB.TV and Amazon Prime along with Netflix and receiving all of these automatically on a smart TV was problematic. So where can people get UltraFlix?

Apparently, NanoTech has partnered with almost all of the major TV makers. The list includes Samsung (KRX), Sony (ADR), Vizio, Hi-sense, Seiki, Panasonic, LG and Sharp. It also seems to be available via some of the streaming players like Roku and per the conference call Apple TV in the near future.

UltraFlix will be featured on Hi-Sense TVs with one click access. From my investigation, this is a huge feature because it puts the application one click away and people with these 4K TVs will go here to see their TV perform at a 4K level. Smart TVs are the future as these secondary players often require an additional remote control, changing input selections on the TV menu and other steps. One click functionality will often be the first "go-to" place the 4K user checks for content.
So we know that consumers will have broad access to the UltraFlix application but as the saying goes "Content is King", so where is the content? As I noted, outside of a handful of major releases much of UltraFlix content is not really that exciting. However, it is similar to what I see on the other well-known major providers as well. In fact it is probably better as there is quite a bit of diversity and opportunity to explore and experience 4K. There are some major motion pictures, IMAX films, concerts, sports, and other items. NanoTech does their own conversion to 4K so content for them revolves around licensing. As CNET noted, overall there simply isn't that much content out there. I think that is about to change in a big way for UltraFlix.

The company recently held a quarterly conference call and issued a shareholder letter. In reviewing these and other historical items, it seems that NanoTech is partnered and partnering with many of the major players in the market. Here is a list of these partners which is essentially a "who's who" of movie studios:

Paramount Pictures - Announced on CC - 2015 Academy award winning Film - 3 Month exclusive deal
Warner Brothers / Time Warner (NYSE:TWX) - Announced on Conference call. Additional history with WB
MGM - Major Motion Pictures already partnered
Sony Pictures - Announced on Conference Call
Lions Gate (NYSE:LGF) - Announced on CC
Miramax - Announced on CC
Millenium Films - Entire catalogue to be licensed per the CC
IFC - Announced on the CC
They also noted that they will shortly announce a 3 month exclusive 2015 academy award winning movie from Paramount. I am hoping it is intersteller which was fantastic in IMAX and can make good use of 4K technology. They have submitted the converted film to the director and studio for approval.

The movie offerings are becoming much more recent and more likely to attract new subscribers. It also seems they will be getting the entire catalogue of the Millenium movie library. This "A" list content will give UltraFlix the necessary credibility and desire from consumers in the market. So these partnerships got me thinking about a couple key questions.

How is this small company reaching these partnerships?

The first thing to understand is that NanoTech is really a leader in 4k. They have won several awards over the past couple years at the consumer electronics shows. The latest in January which was the Envisioneering Innovation & Design Award at the CES. NanoTech does the conversion work themselves. They have also reached a significant technological advantage. Apparently, they are able to stream 4K content at less than 8Mbps or up to half the bit rate of the competition. Netflix requirements are 15Mbps and 20 Mbps overall.

Netflix's 4K videos stream at 15 Mbps, and the company requires at least a 20 Mbps connection for the high-resolution stream to come through. Even for users who have a fast enough service plan, 4K streaming could be a problem during peak hours.

This is incredibly significant.

NanoTech's UltraFlix streaming 4K Ultra HD software achieves up to 50 percent better compression than with H.264; effectively delivering the same 4K Ultra HD quality at nearly half the bitrate. With enhanced video compression, adaptive streaming and intelligent bandwidth management technologies, UltraFlix can stream visually lossless 4K video with uninterrupted viewing at under 8Mbps, making 4K Ultra HD available to most North American and European internet subscribers today.

From a personal view, I have a wireless router located in one area of my house. I have multiple TVs, phones, tablets all drawing bandwidth. The further away from your router, and more obstructions, the less bandwidth you will receive as well. So while I purchase 50 Mbps from my internet provider, what I receive is usually far less depending on these factors. In some areas of my house I am lucky to get 10Mbps or less.

NanoTech claims to be able to stream 4K at less than 8Mbps which should give them a competitive advantage. NanoTech has attracted significant senior management and advisory talent which has been key to reaching these partnerships. It is quite impressive for such a little company:
Tim Cosgrove - President and CEO of the Sony, IMAX, and Discovery Communications 3net joint venture
Alan D. Stone - Former President and CEO at Sega Enterprises
Mitch Lowe from Redbox and Netflix
Aaron Taylor - From Roku
It is apparent to me that these folks are looking to turn UltraFlix into a major player in this market and have the experience and contacts to make this happen. Perhaps the Netflix for 4k! Mitch Lowe has seemingly already done this before. It's a big bet on a personal level for these folks but the ceiling is incredible high.

What does this look like as an investment?

As I noted earlier, I am really just focusing on one line of business in NanoTech's overall company. A quick look at the overall financials shows a few different sources of revenue from gaming to simply up-converting 4K to ice sculpting (A remnant from the company's past history). CEO Peter Riordan recently noted that they are seeing exponential increase in UltraFlix subscribers right now.

Here are the basics from the quarter ending Dec 2014. These seem to be relatively similar to the previous quarter. The authorized was recently raised to attract new key employees, raise funds and acquisition. The company recently made several acquisitions as well.

Here are the key metrics from December 2014 Q:

# of Shares O/S - ~725M shares
A/S = 740M Shares - 990m Shares - recent increase
Revenue - ~$2.5m
Profit - ~ $832k
Quarterly earnings - ~.001
Current PPS .025
Current P/E - Annual rate = .004 = P/E of ~6
Positive Cash flow of $270k
Assets of ~$5m
Liabilities of ~$570K
Market cap - ~20m
These numbers are kind of incredible but they are not fully audited. Remember this is a stock trading for .025 on the OTC. Most of these companies barely have revenue, let alone profit and positive cash flow. NanoTech has periodically done stock buybacks as well. However, the best use of this cash is clearly to build their lineup and get UltraFlix to the forefront of the 4K market. Seems that is what they are doing.

With a rapidly growing subscriber base, the best thing they can do is ramp up content with offerings that will get people's attention. It may already be there for early adopters but keeping it there will be the challenge. There seems to be substantial growth ahead. But to be honest, any stock with positive cash flow and a low P/E on OTC is a bit of a revelation.

Risks

Any stock trading for .025 on the OTC has substantial risks.
Financials are not fully audited. This is scary for investors. The company has noted that they are looking to hire a CFO and get the audits done.
Much of the company's ultimate success will depend on the success and penetration of UltraFlix. It is estimated that by 2020, half of the TV's will be 4k. The market is massive. If UltraFlix is not successful, the company has other revenue but this is clearly their flagship product and perhaps the main reason to invest in the company.
Executive retention - The Company has attracted some top talent from a management and advisory perspective. Some seem to be betting heavily on success by bringing their talents, names, business relationships and experience to a small company. Keeping these folks retained, engaged and motivated is key.
Competition - UltraFlix is competing against the biggest players here. Their tech seems to differentiate from the competition and their offerings may also be unique, perhaps even filling a niche but the bottom line is they are a small fish in a big pond. Seems that the major TV manufacturers and movie studios are interested and engaged.
This company has significant risks simply because it is an OTC stock. It is subject to heavy manipulation. There is the typical message board misinformation campaign. And if these message boards are a cesspool, the NTEK boards themselves are the sludge at the bottom. It is so bad that the recorded and posted company conference call included bathroom sounds and other noises and posted to one board claiming it to be the actual conference call. Not sure I have ever seen anything quite like this before.
They need more exposure. Much of their news related items simply do not get widespread distribution to the public. This is likely a cost vs benefit decision.
UltraFlix is more than just a streaming movie service.

Also announced for UltraFlix was a live event 4K channel, a music channel and a 24 hour 4K channel. These are all interesting but the one that stands out is the live event channel. Something occurred to me while thinking about the potential of a live 4K channel.

First, I don't think this currently exists and it would have massive appeal. Think about UFC, WWE and other pay per view sporting events. If you spent the extra money on a 4K TV and wanted to watch the massively anticipated boxing match between Floyd Mayweather and Manny Pacquiao, would you pay a little extra for the 4k version? I believe people absolutely would. This channel is expected to launch in 2nd quarter and if marketed properly could be a massive business by itself. Seems they would be first to market.

NanoTech has a history of sponsoring and being involved with UFC which is a growing sport as well so I would watch this area as well as other sporting events and concerts. There is plenty of money to be made here and NanoTech seems to be on the cutting edge. The bandwidth limitation of 4K should also provide an advantage with live broadcasting.

So you have the subscription based revenues, you have free content, and you have pay per view opportunities. NanoTech should be able to generate revenue from different avenues. Will there be specific movies just out of the theatres but not yet available on Netflix but available on a pay per view basis? Will there be sporting events where the only live 4K feed will be through UltraFlix? Will there be similar content to Netflix? The answer to all these questions is a pretty obvious "yes". There also seems to be some room on the runway here for them to build this business but they are striking now to get the market share.

Summation

NanoTech is clearly a leader in the 4K field, winning awards and delivering content similar to their much larger competitors. UltraFlix is basically a vehicle for all types of 4K content and is going to see rapid expansion. This $20m market cap company is already partnered or partnering with the major television manufacturers as well as the major movie studios. They convert the movies to 4k themselves and have a technological advantage allowing them to deliver 4K content using less bandwidth than their competitors. For a company trading at .025 on the OTC, they have real revenue and a very high ceiling.

There are risks associated with the company especially with unaudited financials and manipulation by outside groups. I believe that the attraction of top talent to the company as well as partnerships with these massive players indicate a level of stability and trust. I think there is both a large market and a niche market and that this possibility of live 4K events and an on demand/pay per view opportunity to be huge.
People spend big money on their TV's and want to use them to the fullest. It seems that NanoTech has an opportunity to capture market share and with only a $20m cap, it is quite undervalued. Also note that I only covered one piece and a couple events regarding this company. There is a significant amount of news out there on this company. You can read through it here.

Here is CEO Peter Riordan's analysis of the upcoming UltraFlix future

UltraFlix is our flagship product. We have been experience exponential growth with thousands of new customers singing up in the past few days. We are continuing to innovate and expand the offerings on the UltraFlix network. We are partnering with multiple TV manufacturers to ensure that UltraFlix is available everywhere. We have had great success with Vizio and Samsung and are about to launch the product with Sony, Hi-Sense, LG, Sharp and Panasonic. We are also adding support for many new devices including an OSX version that will be available on the new 5K iMAC at the end of this month, as well as iOS and Google TV devices.

I am pleased to announce that we have signed a deal with Armada Music and will be offering a dedicated EDM music channel later this month, Armada TV. Beginning in Q2 we will be launching Live 4K events including concerts, music festivals and sporting events. Along with our Live streaming events we will be offering our "All Day 4K" channel featuring a 24 hour stream of 4K content. We have recently singed new technical partnerships. I am happy to announce that as of this week we are an authorized partner with Dolby for both the Dolby Vision and Atmos products, and will soon be offering content featuring both of these technologies. As the saying goes, content is king, and we have been making incredible strides in our content offering.

We will be adding titles from Millennium, IFC and Nu Image this month. We will be making content announcements from studios including Warner Brothers, Sony Pictures, Lionsgate and Miramax in the coming weeks as well. What I'm most excited about is that today I can announce that we have entered into a contract with Paramount Pictures. Our first title from Paramount won an academy award last month. The 4K Digital adaption is currently under review by the films creator and director and once he has approved it we will be the exclusive provider for streaming this movie in 4K Ultra HD. Look for an announcement regarding this title in the coming days.

So what did I end up buying? I bought a smart Samsung 1080P, an LG 1080P Plasma and a Hi-sense 1080P. I have a Blu-ray that delivers content and I also bought a Chromecast. I found great deals as prices on these TVs have dropped incredibly as 4K is starting to take over. I find the Google Chromecast difficult as it requires multiple remotes and another wireless device.

I recently cut most of the premium channels off of my cable bill as my family has become much more interested in streaming content. I am probably not in the key demographic here or have a need to be cutting edge. However, there are tens of millions of early adopters out there and streaming content and 4K is the future. I am making a bet that NanoTech at minimum finds its niche but the ceiling is potentially massive.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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