Energous Corporation (WATT) Q1 2020 Earnings Report, Transcript and Summary

Good day and welcome to Energous Corporation First Quarter 2020 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, Energous Investor Relations. Please go ahead.

Thank you, Jason, 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 and 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 website. Now, I would like to turn the call over to Steve Rizzone, CEO of Energous. Please go ahead, Steve.

Thanks, Mike. And welcome to the Energous first quarter 2020 conference call. Clearly these are challenging times for everyone. It is our sincere hope that all of you in attendance today along with your families remain safe and secure from the virus. In today's call, I will cover our recent certification and the WattUp PowerHub developer kit announcement and provide an operational overview of the business, including the impact of the global pandemic on Energous. Brian Sereda, our CFO who is joining us today will provide a financial update, following which we will open the call to questions. I would like to begin with comments on the announcements two weeks ago regarding FCC certification of a completely new groundbreaking WattUp Mid Field Transmitter technology. Since the company's inception, the overwhelming differentiator of the Energous technology has been its ability to support both contact-based charging, as well as charging at a distance. We chose to focus on contact-based charging first, because we believe that it represented the fastest path to both achieving globally the regulatory certifications required to successfully launch a completely new technology and since the contacts-based charging paradigm was already established, it would be easier to foster the customer partnerships necessary to integrate the technology into consumer and industrial applications. We took this path with the clear understanding that in order to develop a true WattUp based wireless power 2.0 ecosystem, both contact and distinct charging capabilities were required. While Energous entered the wireless charging market focusing on contact-based application, the ultimate goal for the company has always been charging at a distance. This is why we are excited by the recent certification from the FCC, and today's WattUp PowerHub developer kit announcement that extends from it. Both are important as they demonstrate significant advancements in our core technology, and extend our leadership in the wireless power 2.0 rollout. Given the response we received from prospective customers, we believe the technology and the PowerHub will have positive implications for Energous and all of its stakeholders. On December 26, 2017, Energous, announced the first FCC Part 18 power-at-a-distance certification of WattUp tech that used beamforming techniques to focus energy in 3 dimensional space. This technology was designed to send higher levels of power at distances up to 15 feet to charge larger consumer devices like smartphones, large headsets, desktop accessories, and other power hungry devices. Since then, through continued work with customers and global regulatory agencies, it became clear that the most expeditious path to obtain global regulatory certification, coupled with the strongest customer support for initial commercialization of RF charging-at-a-distance required a smaller, less complex and lower cost transmitter that could be easily and cost effectively integrated into products such as smart speakers, gaming consoles, clock radios, tabletop lamps, and similar sized products. These transmitters are targeted at charging smaller receivers like hearable, wearable, smart glasses, game controllers and various sensors that benefit from the convenience of distance wireless charging. The Energous development and regulatory team took on the challenge, and the end result is the new technology that was certified by the FCC. The key to the FCC certification is the fact that it does not use beamforming to provide a charging zone of 30 centimeters from the transmitter in a design that meets all of the required FCC Part 18 health and safety standards. The core of the WattUp PowerHub developer kit is based on the FCC certified technology and offers our partners a very scalable, low cost, small footprint transmitter that features a 15 to 17 centimeter charging zone in a simple to integrate form factor. Of course, any fully commercialized product emanating from this developer kit, as is industry standard practice, will need to undergo individual regulatory certification. The interest into WattUp PowerHub developer kit, which is now ready for customer evaluation, has been significant. We are encouraged as there appears to be a number of opportunities for the developer kit and the wireless power distance application resulting in a number of customer engagements already underway. We believe we will see the first regional product launches to consumers of distance transmitters, based on our WattUp PowerHub technology in fiscal 2021. Behind the WattUp PowerHub simplicity is the deployment of a great deal of innovation and invention, which has been appropriately protected by our recently filed patent, which we believe as barriers to competition, as well as increasing the core [Audio Gap] the FCC and the resulting PowerHub developer kit are synergistic with our beamforming platform. This Energous distance charging portfolio now features beamforming for higher power, longer distances out to 15 feet and non-beamforming technology for lower power, shorter distance applications. Despite the disruptions and the delays due to the COVID-19 pandemic, there have been a number of other significant positive announcements made since the last quarterly call. Including the American Equus-28Gorilla announcement of a new customer engagement that is accelerating towards first customer shipments expected before the end of the year. And finally, the Frost & Sullivan award recognizing the leadership position of Energous in the wireless charging 2.0 rollout. Regarding the impact of the global pandemic on our business, certainly there has been and we expect there will continue to be headwind. From the visibility we now have into the next few quarters, the pandemic represents a delay, but not a roadblock to our business or a deterioration in the scope of the opportunity. As with many companies, we acted quickly at the onset of the pandemic to bolster our employees’ work-from-home capabilities. Our operations have remained for the most part functional. However, the majority of our customers and all of our ODM manufacturing facilities began shutting down or scaling back in the first quarter and are now just starting to return to work. The shutdown has had a twofold effect. First, with no way of putting our engineers on site at our customers’ labs and offices, the movement of customer opportunities progressing through the various stages of product development and product launch slot cycles has slowed. And second, chip sales and resulting revenue has been delayed as customers who were planning to move WattUp enabled products into production, and were expecting to be buying Energous chips through our partner Dialog have been stalled until manufacturing ramps back up. A case in point, the wirelessly charged Primo-W hearing aid from NewSound, which represents the first Bluetooth enabled WattUP implementation with app control was originally scheduled to start shipping to consumers in April. When the global pandemic hit, the original schedule was negatively impacted by several months. Fortunately, as a CEO of NewSound, David Yu announced on LinkedIn on Monday, the Primo-W launch is now back on track, and expected to be available to consumers in the next few months. For more information on NewSound and the WattUp enabled Primo-W launch, please refer to the Energous website. While engagements and revenue have been delayed, we have not seen any weakening in our interactions with potential customers. In fact, largely due to the interest and excitement generated by the WattUp PowerHub, the total number of actual customer engagements has actually increased in the last few weeks. We are also tracking more than 10 customers that are in various stages of development, with a goal of shipping WattUp enabled products to consumers before the end of this year. However, given the current uncertainties, we cannot provide any forecasts as to how many of these customers will go into production before the end of the current year. The important takeaway is that the assessments reflect delays in our business but not a decline in sales interests or opportunity. As indicated in an earlier press release, we withdrew our revenue guidance on April 20th. And even though businesses are starting to return to work, there is still a considerable amount of both short-term and long-term uncertainty, which precludes us from offering any revenue guidance at this time. We will update our view on revenue as the picture becomes clearer in future conference calls. In summary, despite the disruptions caused by the pandemic, our customer funnel remains robust. However, like most companies, we're dealing with a very fluid and volatile business environment, where the situation can change quickly. Nonetheless, we believe the business is faring fairly well. Our engineering and customer acquisition teams remain intact and have actually been expanded to meet the increased customer interest. On a side note, I want to extend a heartiest thank you to all of our employees who have maintained their focus, flexibility and continued commitment through these challenging times. Our partnership with Dialog remains solid and is expanding into new areas of customer engagement. While we are realistic that there exists a great deal of uncertainty, we are managing all the factors we can control and attempting to react quickly to new developments as they arise. With the momentum of the contact power business building and the introduction of the charging-at-a-distance Whatup PowerHub, coupled with the resulting customer interest, we believe Energous will emerge from the current crisis in a strong position to extend its leadership role and drive the wireless charging power 2.0 rollout. Brian, I'll now turn the call over to you.

Thanks, Steve. Before I begin, I'd like to remind everyone that at close of market today we issued a press release announcing our financial results for the first fiscal quarter of 2020 ended March 31st. In the first quarter we recognized $61,000 in revenue compared to $47,000 in the prior quarter, and $67,000 in the same quarter last year. Q1 of this year included engineering services perform for Dialog and the accompanying cost of this service is shown as a separate line in our P&L in OpEx. The cost associated with this are internal engineering costs moved out of R&D operating expense, and tied to a project involving the development of new technologies and is expected to wrap up at the end of June. Echoing Steve's earlier discussion, the introduction of PowerHub offers existing and potential partners the first product offering path in contacted distance charging. Although this current pandemic limits our ability to turn customer activities into a forecast, we can share that we are encouraged by the expanded opportunities this announcement has brought and is expected to bring as our funnel of new and current customers moving through design and phases continues to develop. As our visibility improves and macro conditions stabilize, only then we will be in a position to offer more tangible outlook for the balance of 2020. On the expense side, total GAAP spend, including the services cost I just mentioned for the first quarter totaled $8.7 million. Approximately $0.8 million lower than $9.5 million of total expense in the prior quarter, and approximately $2.5 million lower than the same period last year. The improvement in expenses is tied to lower headcount costs including stock compensation and lower overall engineering costs, reflecting a maturing technology portfolio and its impact on reducing ship take up and development expenses and other related R&D expenses. However, we do remain an R&D focused company with over 50% of our total GAAP spend tied to this area. We also expect that our total GAAP expense will trend in this range for the balance of the year and should remain below last fiscal year's expense. We ended Q1 with 52 heads compared to 65 in the same quarter last year and expect that headcount will increase slightly to approximately 55 heads as we move through this year. Our net loss for the first quarter on a GAAP basis was approximately $8.6 million, or $0.25 loss per share on approximately 34.8 million weighted average shares outstanding. This compares to a $9.4 million net loss in the prior quarter or $0.29 loss per share, and an $11 million net loss or $0.39 loss per share in Q1 of last year. Let me now switch over to a non-GAAP view of the numbers for the first quarter as we believe adjusted or non-GAAP EBITDA provides a useful comparison for investors especially for a company of our stage when used together with GAAP information. Excluding $2.4 million of stock compensation and depreciation from our total Q1 GAAP expense of $8.7 million, net non-GAAP operating expenses totaled approximately $6.3 million, down approximately $0.5 million compared to the prior quarter last year and $1.4 million in Q1 of last year. Net of revenues, our adjusted EBITDA or non-GAAP operating loss for Q1 was $6.3 million, approximately $0.5 million better than the prior quarter and $1.4 million better than Q1 last year. Non-GAAP engineering expenses decreased by approximately $1 million in the prior quarter to $3.4 million and was $1.6 million lower than the same period last year. This decrease is mainly attributed to the lower chip development and headcount costs and other third-party chip related costs that are highlighted in the GAAP section. Non-GAAP SG&A increased over the prior quarter by approximately $0.5 million, reflecting higher public company costs which typically peak in the first quarter, but now also reflecting higher costs related to stocks for startup certification and increasing director and officer insurance costs for public companies, which is more than quadrupled for us over the last five years. Compared to the same period last year, Q1 SG&A costs were approximately $0.1 million higher, in part due to the increasing costs associated with being a public company as I just highlighted. We ended the quarter with approximately $20 million in cash. We believe the ATM put in place last October and concluding in the current quarter has provided sufficient low cost capital in our working capital base. And other than the lease liabilities tied to our facilities, we remain debt free. To close, we expect our GAAP and non-GAAP cash operating expenses for the full year to trend lower than the last fiscal year. And despite the uncertainty created by COVID, we also expect to announce additional product and commercial partnerships in the coming months. With that, I'll now turn it back to Steve.

Thanks, Brian. Operator, we will now take questions

[Operator Instructions]. Our first question comes from Suji Desilva from ROTH Capital. Please go ahead.

Hello, Steve, and hello, Brian. Congratulations on the execution in a challenging environment certainly, and the accomplishment. Just a housekeeping question, Brian. For the service revenue cost, is that something we should consider something that cost of goods sold against revenue that impacts that gross margin number, is that below the line? And I wasn’t unclear whether that cost is going to continue and grow, or whether it's kind of a one-time cost?

Yes, last question -- your last part first. It's a one-time cost. That project will conclude in June. It was a unique project, working together with Dialog which is considered a related party. We don't control the intellectual property. So the presentation is shown on the income statement reflects that. So it's not an ongoing cost, or it is certainly not a third-party cost, it's simply just moved cost out of R&D and segregated. So, again, second quarter, we should conclude that project in probably the -- in the last monthly event.

And then going on to -- moving on to the products, now that you’re kind of breaking out kind of at-a-distance, kind of contact, and then kind of close I guess. I'd like to know maybe Stephen, if these three products require a separate regulatory body kind of processes or whether they covered together in single efforts across countries, that kind of color would help as a starting point?

So I just want to be clear, when we talk about the announcements today, we're talking about the WattUp PowerHub developer kit, which is a subset of the FCC certification. So, it's the same technology. So, it is one essential product, if you will. We have contact and we have the short distance technology and then we have the longer distance beamforming technology. Any product that emerges from these developments will have to go through its own regulatory certification process in order to be -- I should say before it can be sold to the public. So, every product has to go through a certification process. These are three separate though global regulatory efforts, the idea -- sorry go ahead.

No, that was what I was looking for. And anything to add that would be great.

We -- as we said that -- go ahead.

Okay. So I guess, given that they are separate, and I just wanted to understand the significance of the new product I guess, the one that no longer needs beamforming for the short distance. In terms of costs and form factors, Stephen, what are the -- kind of now the benefits for the customers they can perhaps go to market faster or better?

Well, as I said, we've learned a lot in talking with customers over the last couple of years. We also understand the global regulatory environment very, very well, exceedingly well, and it's a very conservative environment. And so based on these two factors, we made the determination that the best path for essentially launching at-a-distance technology would be in a smaller transmitter, less expensive, much easier and simpler to integrate. And also certainly as a faster path on a global regulatory track than a much more complex device. The strategy also plays well with our key market efforts so that we're currently focused on with our contact-based product. As you know, with these markets, we're targeting hearables and wearables and smart glasses. And one of the key elements is that, those devices initially shipping with contact-based transmitters will also be compatible with the distance charge that we expect to come to market next year. So that's a very important consideration. And as I said, the customer interest has proven to be very, very strong. And largely because it's less expensive, it's a lot easier. There's a whole plethora of devices that can use the technology and it just represents the fastest way to really bring distance charging to fruition.

It sounds like you have a clear path for the customers to integrate the technology seamlessly. And then maybe lastly on the hearing aid market, I've heard from several other peer companies there that, that could be a challenging market because of obviously the COVID issues for the elderly. I'm wondering if there's a geographic sort of element to it with your customer NewSound and whether you have confidence in that market ramping or whether there could perhaps be a headwind there? That'll be helpful since it seems like one of the first markets coming out of the gate for you guys.

Well, again, we really can't speak to how this is all going to play out. We have very limited visibility. Our engagements continue to move forward and the hearing aid and PSAP markets do represent a significant opportunity for us. But these companies are just starting to get back to work now and we'll have to see how this all plays out. Our visibility is really limited to 30, 60 days out right now.

The next question comes from Jon Hickman from Ladenburg. Please go ahead.

I was wondering if you could opine a little bit about what future cash needs may be to get through this period and into next year when revenue starts to ramp for you?

Yes, hi, Jon. This is -- as I highlighted in my script, the -- our expenses -- we have great visibility into our expenses I believe. And we're expecting the trend below last year. So I think given the success we've had in the ATM, we want the best for shareholders and stakeholders alike and our goal is continue to squeeze operation -- operational execution so that we don't have to continually dip our toe into the market. So I think right now we are -- our cash needs have been met. And we'll continue to take the most prudent course of action when it comes to having to raise additional capital.

Okay. Steve, can you talk a little bit about what's going on regulatory wise in the Asian markets?

Certainly. So we were very pleased with the Japanese certification. The Japanese regulatory agency is highly regarded and well-known as a very, very thorough agency. And so overcoming that hurdle really kind of sets the tone for the follow on approvals. We believe that there are three approvals or certifications that we require now in order to complete the full global regulatory capability or certification process. And those three are Korea, China and India. Unfortunately, when this pandemic broke, those agencies were some of the first to close down. And the visibility that we have now is very limited. We understand that they are starting to open up and reengage in China, less so in India -- excuse me in Korea, and not so in India as we understand. Our regulatory team continues to believe that we have paths to certification in all three jurisdictions. The thing we can't answer now is just how soon these agencies will be back operating at full speed, how soon they'll work through whatever backlog was created as part of the pandemic; and of course, ultimately, how soon we can complete the certification process? I'm sure there's going to be a delay, an impact. We have no ideas to the magnitude yet. But as I said, we remain optimistic that the issue is a question of when and not if. And that once these agencies get back and operational, we will fully engage again.

At this point, I will turn the call back to Mr. Rizzone for closing remarks.

Thank you, everyone for attending today's call. We sincerely hope that you, along with all of our stakeholders and partners, remain safe as we work our way through this pandemic together. Also, thanks to our employees whose safety and well-being will continue to be our top priority and who have shown such tremendous commitment and dedication throughout the past -- through few months. Finally -- and let me say -- and I believe I speak for everyone on the Energous team, we fully expect to emerge from the pandemic in a position of strength as we continue to execute on our top priorities of increasing the numbers of customers shipping WattUp enabled products to consumers, steadily increasing revenues, completing global regulatory certification, as well as launching the first charging-at-a-distance transmitters as quickly as possible. We will look forward to report progress on all four of these goals at the next conference call. Thank you and good bye.

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