In this month's interview, we talk with Paul Clayson, President & CEO of HzO, Inc. We were delighted to have Mr. Clayson speak at our 11th Annual NanoBusiness Conference in Boston, MA and the Nanotech Commercialization Conference in Durham, NC. HzO is a Salt Lake City, Utah based start-up with cutting-edge, breakthrough technology that makes electronic devices water resistant. Mr. Clayson has been a business owner, global strategic planning expert, financial and investment strategist and senior political advisor for the past 30 years. Mr. Clayson previously served as Chairman and Chief Executive Officer of nCoat, Inc., an award winning nanotechnology materials development and manufacturing company, which he sold in 2010. He has served as President and COO of Sequoia Pacific Research Company.
Previously, Mr. Clayson managed congressional campaigns and served as Chief of Staff to two U.S. Congressmen. He served in the White House as a lead advance agent to two U.S. Presidents. Mr. Clayson served as senior management and operations officer for prominent institutional investment advisory and research firms in Portland, OR, growing assets under management from $400 million to over $2 billion. As a senior officer for a Utah based publicly traded technology company, he developed global marketing, business, product development, and finance strategies and helped grow the company from an R&D base to a globally commercialized firm. Mr. Clayson has served in numerous charitable, civic and political key positions: Chairman of the Utah Nanotechnology initiative, board member of the Utah Technology Industry Council, Chairman of the North Carolina WIRED Action Committee for Advanced Manufacturing and member of the Board of Directors of the Piedmont Triad Entrepreneurial Network. He currently serves as Chairman of the Industrial Advisory Board for the Engineering Resource Center at North Carolina A&T State University.
In our interview, we discuss HzO's innovative nanocoatings technology, its range of applications, and the company's outlook for the year ahead and beyond. We hope you enjoy the interview with Paul Clayson.
- Steve Waite, Director of Research and Strategy
SW: It is a pleasure to speak with you, Paul. We thank you for taking time out of your busy schedule to talk about HzO. Give us a little background on the genesis of HzO.
PC: The genesis of the HzO technology began in Fairhaven, MA. A company that provides professional training for mariners began developing technology to make cellphones that could survive in water after an accident occurred with one of its students. The concept was to find a way to protect the electronic circuitry in the device, even if the circuitry was directly exposed to water. That meant no gaskets, seals, plugs, cases or ziplock bags. After years of development, a novel thin film nano-coating was completed and applied through a chemical vapor deposition (CVD) process. This process allowed the polymeric coating to surround every exposed surface in the electronic assembly and protect the assembly from failure by electrical shorting, even from dendrite growth.
In 2009, ZAGG, Inc., a public consumer products company, saw the product and acquired a controlling interest in the technology. ZAGG spun off a separate privately held company called HzO, assigned the technology to the new entity and continued development toward commercial launch. In 2011, I was introduced to ZAGG and formed an agreement to separately capitalize the company. We launched commercial operations in September, 2011 and today HzO owns 100% of the technology.
SW: What makes HzO's nanotechnology unique and effective at what it does?
PC: HzO will change where people use their technology without fear of loss. Our mission is that simple. The HzO technology protects electronics from damage even when submerged for extended periods of time with the electronic circuitry fully exposed to water. We regularly test electronic devices at one meter for 30 and even 60 minutes. We have targeted as an initial market the consumer smartphone and electronics industry. We have hundreds of YouTube videos that show HzO dunking smartphones, tablets, iPods and other electronics in water while still playing videos, music, or making calls and sending text messages. In many instances, we remove the back cover of the device so there is no question the electronics are exposed to the water.
While there are many market products that repel water, HzO's submersion safe technology has gained very rapid global attention. To get this novel coating formula to market, we built a proprietary high throughput CVD system that produces volumes able to exceed the throughput of the world’s largest phone and device manufacturers. The combination of novel formula process and equipment constitute the HzO intellectual property. We have filed 6 patents and 11 provisional on the IP in the US and in many other countries. I believe that the HzO team now knows more about water failure on smart phones than any company on the planet. When HzO technology is applied to a substrate, angstrom sized particles in a gas state align in a 3-D matrix to create a polymer coating that is transparent, and pinhole free with consistent thickness and universal coverage on all exposed surfaces. We apply no coating to the exterior of the device so it never affects the look and feel. The coating does not retain heat so circuitry does not sustain thermal damage. We simply like to say that HzO provides protection from the inside out.
SW: What kinds of applications do you see for HzO's nanocoatings?
PC: Certainly consumer mobile communication devices are a huge and growing market. Everyone is carrying their computer in their pocket today. And because our "computers" are now with us everywhere we go, they are exposed to damage by water through natural elements like rain and sweat and human accidents. Our research shows the number of devices falling in toilets when skinny jeans are loosened is astounding. Further research shows that over 65% of water damaged devices involve a submersion event. And by the way, the communications market is equally as large in military, commercial, first responders, and a host of other market segments. HzO will enter the mobile laptop market as well. Additionally, we are currently doing applications for massive markets like consumer appliances (think dishwashers, washing machines, refrigerators, kitchen appliances, bathroom appliances, etc.).
Other areas include medical devices, automotive electronics, aerospace, and solar energy. There are scores of other markets like hearing aids, artificial limbs, GPS, exercise equipment, performance racing, recreational vehicles, and freight and transport monitors. Our primary business model is to license our technology to high volume manufacturers for installation at customer facilities. However, we also have installed our high speed equipment at our headquarters and we are doing application coatings jobs daily for customers who do not have volume which warrants an investment in machinery.
SW: Are there any special challenges in bringing HzO's technology to market?
PC: Integration of machinery and process into existing manufacturing equipment is not a trivial endeavor. Adoption of HzO technology into consumer markets requires specifying HzO into production plans for the next generation of devices and working very closely with customer engineering teams. In addition, there are consumer device components, like cameras, that are not built to withstand water. While our technology can protect the component electronics, there can be other issues, like condensation on a camera lens that requires additional engineering. However, we have been jointly developing solutions to those problems for over a year. All can and will be solved in future devices.
Additionally, automotive, medical and other industries electronics usually do not require the same component redesign or do not have components attached. We can bring these applications to market much quicker. In addition, there is an interesting market dynamic that is a minor challenge. A water barrier protocol was developed in Japan several decades back that measured the ability of the case on a device to prevent water ingress inside the chamber holding the electronics. The water ingress (referred to as IPX standard) standard assigns a numerical value to the ability to withstand everything from minor external water exposure (IP1) to submersion at 1 meter for 30 minutes (IP7). This system then allows device manufacturers to claim an IPX rating based on which testing level was met. These IPX ratings are also known as waterproofing standards.
HzO enters the market and everyone is asking which IPX standard we meet with our technology. The practical answer is all of them by performance. The technical answer is none of them, because we allow water ingress around the electronics with no resulting damage. We cannot tell anyone we meet IPX standards. This confuses technical assessment for manufacturers who want to know the IPX rating. If we state we have waterproof technology, it is practically true, but technically incorrect. Because we are changing the paradigm of water protection, we have now developed a new testing standard called the WaterBlock standard, which we are bringing to market with industry players. This new testing standard will measure the ability to protect electronic assemblies even when directly surrounded by water. We believe this will clear up some of the confusion surrounding existing industry standards. In the future, we expect to see a WBX rating for electronics water protection coatings.
Finally, manufacturers have been hesitant to adopt HzO without demand from the carriers and retailers who are buying the devices, because they will sell fewer devices if HzO is protecting against water damage. However, carriers and retailers - not to mention consumers - are growing very weary of being forced to pay the cost to keep loyal customers, because the customer has a dead phone from water damage that is not covered under warranty. Now that carriers and retailers see there is a solution, they are driving the manufacturers to adopt HzO quickly.
SW: The coming year appears to be a breakout year for HzO. How do you see the company's prospects in 2013?
PC: First, we see a strong growth path for coatings application jobs we are doing in-house. We see more and more inquiries weekly. Second, consumers will begin to see HzO on various models of phones, tablets, toys and other consumer products in 2013. Industrial and commercial applications will also be introduced. HzO will enjoy a significant leap in revenue in 2013, but we expect a much steeper growth curve in 2014 and beyond. We believe that while the first applications require long lead times, everyone wants to be second to market. We have planned to capture that ramp.
SW: What does the competitive landscape look like for HzO. Do you see the potential for a lot of competition in the future?
PC: Every emerging technology must plan for competitive entries as time progresses, it is inevitable. To a degree, that is good news for us. Market expansion and adoption will lead to a bigger pie. Currently, there are competitive coating technologies using plasma and silicon based solutions. Our biggest competitor is mechanical seals - gaskets, plugs and the like. Both mechanical seals and external cases change the aesthetics of the device and in some cases the usability. Consumers have been slow to adopt mechanical seals everywhere but Japan. In addition, if a port plug is left out or a case left unsealed, water ingress occurs and the device still dies. Whether HzO is used as stand-alone water protection or as redundant protection with mechanical seals, we win.
SW: Looking out longer term, how do you see HzO evolving over the next 3-5 years?
PC: HzO will begin market adoption with a small number of consumer devices. We will also begin with some commercial applications, some of which are already on the market in emergency response, automotive, military and medical devices. Once early adoption occurs, consumer and user demand for the technology will increase very rapidly. In three years we expect to have a large number of devices and multiple commercial and military applications using HzO and a growing brand focused on HzO and the WBX standard. In five years, we expect very broad use of HzO driven by market success and consumer demand and a widely recognized brand. With time, we eliminate the fear of using technology in environments exposed to moisture and change where people use their technology.
SW: Do you envision HzO becoming a publicly traded company down the road, and if not, why not?
PC: Not if I can help it. Public trading brings so much cost, regulation, headaches and challenges, but certainly it is an option. Despite the negatives, public trading can allow broad ownership and an exit strategy for current shareholders. However, HzO has the great opportunity to drive strong cash flow and pay significant dividends to its current shareholders. We are building the business to make that a reality. I also strongly suspect there will be large multinational companies that will want to acquire HzO. We certainly will assess each opportunity at the correct time in our development.
SW: Last question for you today, Paul. What are some of the key lessons you've learned in working with nanotechnology?
PC: Number one is to balance the need for long and strong research, with the need to fund the research through profits from a commercialized product. The temptation is extraordinarily strong to allow "feature-creep" and the "never-finished" syndrome, which drags projects into financial ruin. Taking a lesson from the software world, we need to drive version one products to market when we are assured they are safe, effective and have markets waiting. Version two can improve the product performance. Of course, that is not always possible, but driving products to market creates more money for development and dramatically creates more knowledgeable workers and jobs for the industry.
The second is to form partnerships with university research labs, which builds the university experience in commercializing products and shortens time to market for companies because of their extensive equipment and impressive brain trust. I believe we need a national - not local or institutional - clearing house for nanotechnology development at all universities. If I could go to one source to find all the available developed technologies from research universities, my time to market would be a fraction of current limits. If entrepreneurs could peruse technologies at one source, many would see opportunity for technologies sitting on the shelf and form businesses to exploit them. Exclusive licensing for vertical applications is as easily fundable as proprietary technologies if the markets are ripe. That assumes the sponsoring university will be reasonable in the technology transfer demands.
Lastly, I would observe that nanotechnology is an enabling technology, not a product. There is so much that nanotechnology as a platform can improve. We need better, understandable public education in schools, business, civic and government venues to drive excitement and research funding. It can all be done on a device while sitting by a pool, in the rain or humidity without fear, because it is protected by HzO from the inside out.
SW: Thanks again for your time, Paul. It was a pleasure speaking with you. We wish you and your colleagues at HzO all the best in the future.