Brand Engagement Network Stock: Cautious Investors Should Wait (NASDAQ:BNAI)

Investment thesis

AI, or artificial intelligence, ideas are popular these days because this new technology is making some investors very wealthy. NVIDIA Corporation stock (NVDA), for example, is up 210.9% in the past year.

Brand Engagement Network, Inc. (NASDAQ:BNAI) began trading as a public company on March 15, and provides an opportunity to invest in the conversational AI niche. Its products go beyond traditional chatbots because they can learn to respond almost like actual humans.

It’s an intriguing niche because of its potential to fill workforce gaps, increase productivity, and enhance user experiences. But potential investors should be cautious.

BEN, as the company is commonly known, is a relatively new company with an emerging technology in a competitive space. Prudent investors need to see multiple quarters of results, especially improving results, before putting out their money.

About Brand Engagement Network

The company started out as Blockchain Exchange Network, or BEN, in Jackson, Wyoming in 2018. In its earnings report for the first quarter of 2024, its first report as a public company, it described itself as an AI platform provider. It added that its applications help firms “improve customer experiences, optimize cost drivers, mitigate risks, and enhance operational efficiency.”

In a recent press release, the firm also called itself a conversational AI technology provider with human-like AI avatars. And it “delivers highly personalized, multi-modal (text, voice, and vision) AI engagement, with a focus on industries where there is a massive workforce gap and an opportunity to transform how consumers engage with networks, providers, and brands.”

How does that all work? In its April 2024 Investor Presentation, the company offered this example of its technology:

As the slide suggests, one of management’s first target markets is health care. On February 27, it announced a pilot partnership with MedAdvisor Solutions, in which the firms expect to deliver enhanced patient experiences at pharmacies. According to a news release announcing the deal, BEN products will replace chatbots to offer a personalized, conversational experience for patients.

And on June 4, a news release announced a collaboration with The Department of Surgery at New York Presbyterian/Weill Cornell Medical Center. In that arrangement, the companies will “will explore the use of BEN’s AI assistants to improve healthcare access and support for patients, as well as ongoing training for the use of new technologies in healthcare settings.”

The goal is to “improve real-world patient outcomes by strategically using BEN’s human-modeled AI avatars, which can see, hear, understand, remember, analyze, speak and gesture in the same way that a person would in human-to-human interactions.”

On the auto market side, the company launched “BENAuto” in partnership with AFG Companies (Auto Financial Group). It’s a deal that will deliver “unique AI Assistants” that will help AFG with various auto financing elements.

Comments: I was encouraged by BEN’s statement above about focusing on industries with “massive workforce gap(s)”. That suggests the company is aligning itself with a macro trend in at least North America, where the retirement of baby boomers and the work/life constraints among some younger people cause problems for employers.

I also found the company more credible because of its partnership with Weill Cornell Medicine, a major and respected healthcare organization. Another partnership is with OSF HealthCare, a system comprising 16 hospitals in Illinois and Michigan.

Marketing and pricing

This slide from the investor presentation shows how BEN plans to generate revenue (ARR refers to Annual Recurring Revenue):

In its first-quarter 2024 earnings report, BEN reported revenue of $49,790, versus zero revenue in the same quarter last year.

Financial results

Against that revenue for Q1-2024, we find the usual expense categories. Most significant among them is general and administrative costs of $6,480,535. That’s obviously many multiples of its revenue, but not unexpected for a small company going public.

As the firm pointed out in its 10-Q for the first quarter, “The increase was primarily due to transaction costs of $3.2 million incurred in connection with the Closing, a $1.5 million increase in employee related costs, a $1.0 million increase in professional fees, a $0.2 million increase in promotional costs, and a $0.1 million increase in insurance costs, all related to the expansion of our operations and including an aggregate of $0.1 million of insurance, professional services and payroll expense as a result of the acquisition of DM Lab Co., LTD [“DM Lab”] in May 2023.”

This abbreviated income statement from the 10-Q compares BEN’s first quarter performance with its non-public predecessor (known as Prior BEN):

Comments: We will need to see significant revenue increases to have confidence in the viability of BEN’s products.

Brand Engagement Network’s Liquidity

At the end of the first quarter, BEN had $3.3 million in cash, derived from proceeds of the deal with AFG, sales of common stock, warrants, and debt issuances. On the liabilities side, it had $20.2 million in debt.

Its finances got a shot in the arm on May 29 when a group of existing shareholders bought another $4.95 million worth of shares and warrants. In addition, the same group agreed to come up with additional funds if the company cannot raise another $3.25 million by October 31. That would take the total to $8.2 million ($8.25 million according to the press release).

Adding the $3.3 million to $8.2 million means the company will have $11.5 million in cash, plus whatever proceeds of debt it uses in the short term. Still, potential investors should be cautious, particularly until we see its cash burn rate in the next quarterly report.

Competition

Given the successes of Nvidia and other major AI players, there’s no shortage of competition in this field. Even in the niche area of conversational AI, a quick search engine scan reveals many firms are also in the race, including such major players as International Business Machines Corporation (IBM) and Google/Alphabet (GOOG)(GOOGL).

If BEN has a competitive advantage with its conversational AI, it will need to exploit it quickly and effectively. Otherwise, it may fail or be bought out by a stronger firm in the same niche.

Growth plans

After its acquisition of DM Lab Co, BEN valued its in-process research and development, an intangible asset, at $17.0 million (10-Q). If the firm can generate 20% internal returns on that asset, for example, then it would produce $3.4 million annually or $850,000 per quarter available in cash flow. That’s not a lot when we consider the ongoing expenses and interest payments.

There are tailwinds that help support visions of strong revenue and cash flows, including demographically driven workforce shortages, the growth in healthcare spending, and competition to provide ever more effective customer service.

Internally, the costs of going public will ease and eventually disappear, helping the company produce dramatically better margins. At the same time, its marketing and sales force should improve, to enhance revenue growth.

However, any estimates of future revenue and earnings must, of necessity, be speculative. We will need to monitor the next few quarters and years to see if BEN can capitalize on that $17 million worth of R&D.

Management and strategy

Chief Executive Officer Michael Zacharski is described in the investor presentation as having held various long-term executive positions, and more than 15 years of experience in the tech industry. He is also said to have expertise in increasing growth, optimizing operations, and leading product/solution initiatives.

Chief Financial Officer Bill Williams has over 20 years of experience in corporate finance, legal, technology, and management consulting. The presentation reports that he has held various executive positions across multiple industries.

That’s an ambitious strategy, and I see tactical challenges. Looking at just the foundational level, can it develop the culture it wants, recruit and keep the talent it needs, and achieve functional excellence in anything less than several years?

On the positive side, both the CEO and CFO have extensive experience, and what appears to be appropriate experience, to drive these tactics forward.

Valuing this startup

BEN has traded publicly for just under three months, and during that time it has been volatile. As this chart shows, it peaked at $13.75 one business day after trading started. It subsequently fell to $1.05 on May 15, before picking up again in the month that followed:

It doesn’t take much news to cause the price to jump around. On May 29, the company announced its private placement of $4.95 million. By closing that day, the price had gone up from $1.27 to $2.64; two days later, on May 31, it rose to $5.44. Then it drifted back and closed at $4.36 on June 6.

That was good news in the sense that it improves BEN’s financial resiliency, but since the offering involved new shares, it also meant some dilution. So, there were big responses to mixed news.

Obviously, investors are trying to assess what it is worth and what can be expected of it.

Where does the price go from here? That’s just about impossible to forecast now, because the publicly traded company has so little history and because of the news effect.

For now, we are in pure speculation territory. I believe BEN products are needed by the markets it now serves and plans to serve in the future. However, other players are also active in those markets and we don’t yet know how well the company will be managed.

For most investors, patience will be the key, waiting to see at least four quarters’ worth of results.

Risk factors

As I’ve just argued, this is a new company in an industry/sector notorious for trial and error. Will BEN be able to turn its intellectual property assets into saleable products and services, are there competitors that are dominating this AI niche, will the conversational niche itself enjoy widespread acceptance?

Conversational AI will engage with users who will provide confidential information, including their health indicators and financial situation. If firms in this business, including BEN, cannot provide strong privacy controls, their futures are limited.

The company’s top managers have experience with other firms, but will they be able to work together to develop an effective team? Will they be able to recruit the types of expertise and experience they need to grow?

We have seen a couple of encouraging partnerships, but don’t yet know if it will find enough other partners and/or customers to make more in earnings than it spends on operating costs.

As the company grows, it will need increasing volumes of cash or debt. But adding equity capital means dilution and debt reduces its financial strength. This is not unusual for young tech companies, but should factor into any investment decision.

Conclusion

Brand Engagement Network, or BEN, offers investors another way to invest in the burgeoning AI industry. It also is an opportunity to get in on the so-called ‘ground floor’.

But unless you are a savvy tech investor or want to put a few shares into a small corner of your portfolio, it’s best to take a wait-and-see approach. While the opportunities are significant, so are the risks; this is a high-risk/high-reward tech case.

I rate it as a Hold, because I don’t yet see a clear path to profitability. It may well be there, but I need to see evidence before upgrading it to a Buy.