Energous Corporation (WATT) Q3 2019 Earnings Report, Transcript and Summary

Good afternoon. And welcome to the Energies Corporation's Third Quarter 2019 Financial Results Conference Call. All participants will be in listen only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mike Bishop with Investor Relations. Please go ahead.

Thank you, Kate. And welcome, everyone. Before we begin, I would like to remind participants that during today's call, the company will make forward looking statements. These statements, whether in prepared remarks or during the Q&A session are subject to inherent risks and uncertainties that are detailed in the company's filings with the Securities and Exchange Commission. Except as otherwise required by federal securities laws, Energous disclaims any obligation or undertaking to publicly release updates or revisions to the forward-looking statements contained herein or elsewhere to reflect changes in expectations with regard to those events, conditions or circumstances. Also, please note that during this call, Energous will be discussing non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today's press release, which is posted on the company's Web site. Now, I'd like to turn the call over to Steve Rizzone CEO of Energous. Please go ahead, Steve.

Thank you, Mike. Good afternoon. And welcome to the Energous third quarter conference call. Brian Sereda, our Chief Financial Officer, is also joining me today. I'd like to begin with comments on the company's progress and provide a general business update before turning the call over to Brian for a financial update. We will then open the call to questions. Looking at the third quarter, we are not where we expected to be from a revenue standpoint. However, for reasons we'll expand on in a moment, I remain extremely confident and optimistic about the future of Energous. As we've communicated in the past, our goal has been to establish and launch a new technology on a global basis. We originally focused our attention and resources on high volume opportunities from Tier 1 accounts with a global reach. This ambitious plan was contingent upon regulatory certifications in three major markets; North America, Europe, and Asia. To-date, we've been successful in both North America and Europe, and are making significant progress in Asia, which we will expand on later in the call. The current lack of regulatory approval in Asia has delayed major customer launches, negatively impacting our revenue and growth expectations. Again, we see this as a delay as customer engagements in multiple verticals remains strong. In spite of this, I remain extremely confident and optimistic about the future of energy. And here's why. First, we have been able to prioritize our near term customer projects, focusing on product launches in regions where we already have regulatory certification. This reset has taken some time but we are now seeing the benefits of this change. For example, you saw that our customers, Delight, their Oasis-RC PSAP into the North American market this past quarter. The launch of the Delight PSAP was the first tangible evidence that the WattUp technology from Energous has progressed from the developmental stage to full regulatory certification and commercialization. Also, recently one of our hearing aid partner, NewSound, formally announced the launch of the Primo W next generation hearing aid. The Primo W is an advanced hearing aid that will soon be available from doctors and professional audiologist, initially in the U.S. before expanding to other regional launches. The Primo W incorporates many of the advanced features of our wireless WattUp charging technology, including full Bluetooth communication and WattUp charging management. WattUp improves the Primo W user experience as they can simply place their hearing aids onto the charger at any angle or orientation, and the hearing aids will start charging and then automatically shut off when the batteries are fully charged. This is the first implementation of a Bluetooth controlled integrated power management solution for RF based wireless charging. The user experience is unique and compelling, and has generated serious interest in light implementation from the top hearing aid manufacturers that we estimate represent the majority of the global hearing aid market. In addition, our customer 5th Dimension announced that their upcoming smart glasses will be wirelessly charged by our WattUp technology. These next generation smart glasses are built using a unique artificial intelligence technology dedicated to sound, speech and understanding, developed by 5th Dimensions in partnership with public research institutes and Major French University. These three product launches are important as we validate the applications across three target markets; hearables, hearing aid and smart glasses. They also represent just the beginning of what we expect will be additional WattUp enabled product launches in the coming months. I'd also like to mention one additional customer launch that we expect to take place before the end of the year. Since our customer has reserved the right to formally launch their product, we cannot specifically mention their name. But we can tell you that this will be the first implementation of the WattUp charging technology in the fast growing medical sensor market. The application involves a number of sensors that are placed on the body, which are charged via the WattUp technology between uses. One key technological advancement in this application is that WattUp supports charging of up to five separate sensors from a single charging mat surface, which we all know has been a challenge for competing wireless charging technology. All of these customer opportunities are aligned with our regional strategy, and are expected to launch within the next few months. Additionally, we are tracking a much larger number of product launches for 2020 from customers that have application in our target market, which can be supported by our existing technology and current regulatory certification. Overall, we believe this pipeline is evidence of the increasing momentum to our business, and we will track and report progress on both fronts at our next conference call. The second reason for my optimism is the advancements we've made across our technology portfolio and the commercial readiness of our Near Field charging technology. In the third quarter, we announced the developer kit for hearables, which complements our first developer just launched earlier this year for hearing aids and PSAP. Developer kit availability is significant as each kit contains preconfigured software and production ready just configurations, enabling agile software and hardware designs, along with Energous' high performance, high efficiency antenna design. Each developer kit represents a mature application, which will signal the beginning of a meaningful penetration into a target market. The third reason I'm excited about the future of Energous is that there are strong indications that a transition to underway in the world of wireless charging. There is no doubt that the demand for wireless charging will continue to grow. Multiple reports take the market expansion to over $10 billion by 2023. However, what is not represented in these numbers is what we believe is growing evidence that the needs and requirements to the markets are changing, and cannot be met by current incumbents, such as Chi and other coil-based charging technologies. Clearly, first generation Chi Technology is the current dominant player in wireless charging in terms of product implementation. This is largely based on the fact that after roughly 15 years, a number of smartphones began to adopt and implement Chi wireless charging technology. While still dominance, we are beginning to see evidence that the technology has reached the limitations of its functionality, utility and overall desirability. We believe the signs of this began even before Apple's cancellation of their Chi-based AirPower charging mat. As we've noted in past calls, we are seeing strong interest for our RF based technology as it upgrade an replacement for first generation coil charging technology. Wireless charging interest is also moving in another direction to support smaller footprint with improved efficiency, orientation flexibility and multiple devices charging from a single transmitter, all of which are limitations of coil based charging technology. Despite the delays we have incurred, we believe the deeper anyone dates into wireless charging market the clear they will see that a technology transition is occurring, and no one else is positioned like Energous with the expertise and investment in intellectual property to capture share across a broad spectrum of markets and applications, including both contact and distance space charging. Touching on regulatory certification in China, Korea and Japan. The path to certification in these countries has taken longer than originally anticipated. However, we remain confident and optimistic that we will see regulatory certification of WattUp enabled devices in one or more of these countries, beginning as early as the first half of next year. We also believe there is now a path to global certification for the following reasons. First, Energous and our customers are directly working with all three Asian countries to take tangible steps forward to create a certification process for RF based wireless power transfer or WPT. Second, interest is strong in the global RF launch based wireless charging for consumer products that has fostered direct top tier manufacturers joining alongside us in our regulatory certification efforts. This is strategically important to expedite the approval process in these countries. Finally, international spectrum and standards organizations are now in the formal process of addressing RF based wireless transfer. All of these product indicators lead us to conclude that we can expect to see tangible progress in the first half of 2020 with a goal of global certification, possibly before the end of next year. It is important to note that Energous is the leading RF based charging company driving these worldwide regulatory efforts, and we are recognized as the global leader for WPT. We look forward to sharing more positive developments on our global regulatory efforts in the coming months. I would also like to comment on the recent ZPower partnership announcement. The ZPower, the leading innovator in micro battery technology, has identified our WattUp technology as uniquely capable of meeting all of the functional requirements for charging the next generation of hearing devices, as well as providing a low cost high performance solutions for legacy hearing aids. We believe the technology currently under joint development can be expanded to other markets to the benefit of both companies, including smart glasses, wearables, medical sensors and more. On the topic of partnerships, our relationship with Dialog remains on track. We continue to benefit from Dialog's, global sales presence, as well as their operations expertise. We believe as more customers launch WattUp enabled products and revenues ramp, tangible synergies between Dialog and Energous will come into play contributing to what we hope will be a domino effect in our target market. On a separate note, discussions with our long term partner are continuing, so there is nothing to update on this relationship at this time. Moving on, I would also like to take a moment to welcome our new board members; Rahul Patel, Senior Vice President and General Manager, Connectivity and Networking Business Units at Qualcomm, Mike Noonen, a silicon industry veteran and currently CEO at the semiconductor startup, MixComm; and Reynette Au, a Vice President at Intel. As our company has matured and we started to scale, we have transitioned the board focusing on members who have experience in high growth semiconductor companies. We are very privileged to have these three industry veterans join our board. Finally, looking at the financial picture, we ended last quarter was just under $23 million in cash and for the first time in our history of growing backlog. We also filed an ATM to supplement our working capital, while we work diligently to bring customers currently under engagement to market, enabling a ramp in revenue, which is our top corporate priority. To include, despite the delays we have incurred and the stock price appreciation we have experienced, we believe the deeper anyone digs into the wireless charging market, the clearer they will see that a technological transition is occurring and no other wireless power company has the hardware, software antenna design, qualified silicon ICs, partnerships and active customer engagements with specific applications like Energous. Our optimism and confidence is justified. Our goals leading this company relevance and profitability are clear and well understood. Our determination is unwavering as are our expectations for success. I would like to turn the call over to Brian now for a financial overview. Brian?

Thanks Steve. At the close of market today, we issued our Q3 earnings press release announcing our operating financial results for the third quarter of fiscal 2019 ended September 30. For the quarter, we recognized $41,000 in revenues compared to last quarter's $48,000 and $187,000 lower than $220,000 of revenue in the same quarter last year. As Steve just discussed, we believe we are on track for additional product announcements later this year with more expected for 2020. We are engaged with a wide range of customers from regional companies with a single skew to multinationals with multiple consumer and industrial products. I've also mentioned this before. But similar to other enabling next generation technologies that are disruptive and have gone before us, one of our biggest challenges remain the internal development and integration cycles of customers. However, we are seeing progress as evidenced by recent announcements and customers joining us in the regulatory processes that Steve spoke to. Moreover, the ZPower partnership announced in Q3 reflects the growing confidence of other key technology suppliers in these initial verticals that RF based charging is a significant growth opportunity. Moving to our expenses. Total GAAP expense for the second quarter was $8.3 million, the lowest level in four years. This is $1.7 million below the prior quarter and approximately $4.5 million below the $12.9 million of total GAAP expense in the same quarter last year. The drop over the last quarter and prior year is mainly a result of lower R&D expenditures, such as third party ship and prototype development costs and lower stock compensation expense. We believe we can maintain this range of expenses along with headcount in the 60 plus minus range. We could see occasional quarterly increases in R&D expense to cover chip tape-out requirements as the technology advances and gains traction. But these should not climb to the same levels as in previous quarters in past years. As we've also emphasized, our ability to maintain a consistent and more importantly scalable or leverageable business model, is in part thanks to our relationship with Dialog and working with their global operational and customer facing capabilities. Net loss for the third quarter, on a GAAP basis, was approximately 8.2 million or $0.27 per share on 13.7 million weighted average shares outstanding. This compares to $9.8 million net loss in Q2 or $0.32 per share and $12.6 million net loss or $0.49 per share in Q3 of last year. Now, let me turn to a non-GAAP t view of our numbers for the quarter, as we believe adjusted or net -- or non-GAAP operating results provide a useful comparison for investors, especially for a company of our stage when used together with GAAP information. Excluding $2.3 million of stock compensation and depreciation from our Q3 GAAP expense of $8.3 million, net non-GAAP operating expense totaled $6.1 million, down approximately $900,000 over the prior quarter and $2.7 million below the $8.8 million of non-GAAP expense in Q3 of last year. Net of revenues, our non-GAAP operating loss decreased to in Q3 to $6 million, approximately $0.9 million lower than the prior quarter and $2.5 million better than last year. Non-GAAP engineering expenses of $3.9 million was essentially flat to last quarter and $2.3 million lower than the same period last year. As I discussed earlier, this can be attributed to lower third party expenses associated with chip and prototype development and lower headcount costs. Non-GAAP SG&A decreased by approximately $0.8 million versus the prior quarter, and was $0.4 million lower than the same period last year due to lower legal and headcount costs. Total cash used in the quarter was $6.5 million, ending the quarter with $22.8 million of cash. We continue to remain debt free. During the quarter, we implemented an at-the-market facility to support our working capital requirements, while we remain hyper focused on bringing customers to the market to capitalize on prior year's investment as the leader in next gen RF based charging. In closing, we expect our cash operating expense run rate remain at these new low levels lower than in past quarters. We believe we remain on track beginning in the fourth quarter for additional customer launches and more heading into 2020. As Steve highlighted, the business has operationally transitioned from heavy R&D to customer launches, partnerships being formed along with others being shaped as a result from our progress in our first vertical markets, and also customers joining us in the overseas regulatory approval process for those few remaining key markets. I'd like to thank our investors for their patience and continued support. And I’ll now turn it back to Steve for additional comments.

Thank you. Operator, we will now take questions.

We will now begin the question-and-answer session [Operator instructions] First is a question from William Gibson of ROTH Capital. Please go ahead.

Any sort of range, Steve, on the number of products you would expect to be on the market by the end of next year?

By the end of next year, certainly double digits would be our expectations. I don't think I can give you any more clarity than that. As I said, we have undergone a major refocusing of our efforts understanding the importance of generating revenue as quickly as possible. And with this new regional focus, we are also targeting the key markets that we've talked about of hearables, hearing aids, wearables, medical sensors and smart glasses. And so I think you'll see, as I said, double digit launches across regions where we have certifications in those targeted markets, gaining momentum throughout the year.

And you also mentioned that you expect to have a certification in the three Asian countries by the end of 2020. Could one or two of those hit earlier and would that potentially open up business in advance of all three?

It's our goal to have regulatory certification on a global basis before the end of next year. But as we've always said, in dealing with regulatory agencies, it is impossible to put a specific timeline. I believe the cause for our optimism is justified based on the reasons that I noted in my remarks. I do believe that there's a distinct possibility that one or more of the countries could conceivably certify in the first half of next year. Depending on the country, there is a chance that that will move forward the customer engagements that require a global certification. The top tier customers that we're engaged with, they have a broad spectrum of requirements. Some require certification in all three jurisdictions. Others are limited and require only one or two, because they're not active participants in the respective jurisdiction. So it is possible that a singular launch or a singular certification in a country will open up opportunities to some of the Tier 1 global requirements that have basically have been put on hold until the certification is approved.

I will now turn the conference over to Mr. Rizzone for closing remarks.

All right, thank you. I would like to thank all of you listening today, as well for all of our long term investors who continue to believe in the vision of a second generation wireless charging technology powered by Energous. As significant private holders of Energous' stock, the executive management team and the Board of Directors understands our investors' concerns with the stock price and the delays in the revenue momentum. These delays and delusions affect all of us. However, the company is moving forward. And after considerable revamping of our customer funnel, we have a forecast for revenue in 2020, which does not have any regulatory or technologically related dependencies, leading us to have confidence our revenue will ramp. There is also strong evidence that wireless charging is in a state of transition, and Energous is uniquely positioned to capitalize on these changes in the market for the benefit of all of our constituents. We will be at the ROTH Conference next week in New York, and we look forward to reporting additional progress at our next conference call after the first of the year. Thank you, and good afternoon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.