Energous Starts Generating A Small Amount Of Product Revenue (NASDAQ:WATT)

Energous (NASDAQ:WATT) has taken a step forward by finally shipping what it deems as measurable quantities of product ten years after the company was founded. I was previously bearish on Energous due to its inability to generate product sales revenue and its significant cash burn.

While Energous has made a bit of progress with product sales, its revenue from product sales is still not significant (estimated at $0.1 million in the first half of 2022). As well, due to the small volumes, its product gross margins appear to be significantly negative at the moment. Thus Energous has not really made any progress in reining in its cash burn.

I expected Energous to generate $1 million in revenues in 2022 along with $25 million in cash burn. Halfway through the year it has generated $0.45 million in revenues along with $13.4 million in cash burn. Thus it is tracking close to my expectations, although underperforming slightly on both metrics.

Some Product Sales

Energous noted on its Q1 2022 earnings call that it was shipping measurable quantities of product for the first time in its history (it was founded in 2012 and IPOed in 2014). Energous has mentioned powering Wiliot’s IoT Pixel tags in a couple retail stores now for example.

While this is a step forward for Energous, its product revenues still appear to be pretty limited. Energous does not break out product revenues separately, but it did mention that the increase in total revenues for 1H 2022 compared to 1H 2021 was primarily from sales to its production-level customer.

Energous reported $0.45 million in total revenues in 1H 2022 compared to $0.33 million in total revenues in 1H 2021. Thus its product revenues may be approximately $0.1 million for 1H 2022 if we assume that most of the year-over-year increase was due to the product sales.

In addition, Energous’s product margins appear to be highly negative at the moment. It reported $0.47 million in cost of revenue for 1H 2022, which was related to the production-level systems that are sold to customers. If its product revenues were $0.1 million in 1H 2022, its product margins would be estimated at around -370% for 1H 2022.

Margins are negative due to the limited product volumes at the moment, so they should improve in the future. However, Energous doesn’t have an exact gross margin target at this point in time.

The challenge for Energous is that if its product margins are negative (or only slightly positive) increasing product sales doesn’t really help rein in its cash burn.

Continuing Cash Burn

Energous had $49.1 million in cash at the end of 2021 and reported having $35.7 million in cash at the end of Q2 2022. Thus it had approximately $13.4 million in cash burn during the first half of the year. It also has $7.1 million remaining under its $35 million at-the-market equity program (started in October 2021).

Energous doesn’t seem likely to significantly change its rate of cash burn anytime soon. For example, even if it gets up to $2 million per quarter in product revenue with positive 20% product gross margins (a huge improvement from current levels), that would only translate into $1.6 million in gross margin per year, which is around 6% of its current cash burn rate.

Energous currently has enough money (between cash on hand and the remaining availability for its current ATM equity program) to last until the end of 2023, although I think it will probably do another offering around Q2 2023.

Notes On Valuation

Energous does now have some product shipments, although the scope of its deployments (powering low-cost Bluetooth tags in a small number of retail stores) is much different than what the wild speculation (such as partnering with major smartphone manufacturers) around the company envisioned years ago.

I’ve mentioned before that I would reconsider my bearish opinion on Energous once it could generate several million dollars per year in product revenues. It is still only doing a fraction of that amount, while its product margins currently appear to be highly negative.

I am adding the caveat that I will potentially rerate Energous if/when it generates positive product margins along with generating several million dollars per year in product revenue.

Conclusion

Energous appears to have scaled back its near-term ambitions and thus is actually making some progress in shipping out products and getting them deployed. These are still small-scale deployments though, resulting in no positive impact on Energous’s rate of cash burn (around $27 million per year currently).

I do not expect Energous’s rate of cash burn to improve significantly over the next year, so it appears likely to complete its current ATM equity program and then need to raise additional funds around Q2 2023.

I remain negative on Energous’s stock since it is still valued (net of cash) at around 50x revenues, while its cost of revenue in the first half of 2022 exceeded its revenues.