WATT - Energous Seeks Approval For A Reverse Split And Increased Share Authorization

2023-05-26 07:04:30 ET

Summary

• Energous is seeking approval for a reverse split (up to 1-for-20) and a  doubling of its authorized shares.
• I believe a 1-for-20 reverse split is necessary to avoid another set of compliance issues in the near-to-medium term.
• Energous may also need to do another equity raise late in 2023.
• It has been adding proof-of-concept customers but will need to prove that it can convert many of these customers into final production customers.

I had previously mentioned that Energous (WATT) was probably going to do a reverse split to regain Nasdaq listing compliance. It is now seeking approval at its June 14th annual meeting for a reverse split (up to a 1-for-20 ratio) and to effectively double its authorized share count (not including the effect of the reverse split).

Energous is expecting 20+% year-over-year revenue growth (weighted to the second half) in 2023, but got off to a slow start with revenue down -55% in Q1 2023. Even if it does achieve its revenue growth target, it will still be burning around $5 million in cash per quarter. At its current share price, it would need to add 17% to its share count just to pay for a quarter's worth of cash burn.

Thus I am maintaining a sell rating for Energous until it can prove that it escape the cycle of heavy cash burn followed by significant dilution . It has made progress with partnerships and proof-of-concept installations, but needs to convert many of those customers to final production in order to meaningfully reduce cash burn.

Reverse Split

I noted before that Energous was likely to do a reverse split in order to maintain its Nasdaq listing. It currently needs to have a closing bid price of at least $1.00 for 10 consecutive trading days before July 19th to be able to regain listing compliance.

Energous currently intends to correct this by implementing a reverse stock split and is asking for approval for a reverse stock split that could be up to a 1-for-20 ratio. It is also asking for approval to essentially double its authorized shares (subject to the reverse split).

Energous currently has 200 million authorized common shares and 91 million outstanding common shares. If it goes with a 1-for-20 reverse split, it would end up with 10 million authorized shares. However, it is also looking to double its authorized shares, so if that proposal is also approved, it would end up with 20 million authorized common shares and 4.55 million outstanding common shares.

I believe Energous is likely to go for a 1-for-20 ratio with a reverse split. Its share price is currently $0.33 per share, which would translate into $6.60 after a 1-for-20 reverse split, although companies that do reverse splits often see their shares perform poorly after the reverse split.

A 1-for-5 reverse split or a 1-for-10 reverse split would leave Energous in danger of needing to do another reverse split within a year or two if it didn't substantially improve its business performance.

Financial Position And Results

Energous provided expectations for 20+% revenue growth year-over-year in 2023, with growth weighted to the second half of the year. This would translate in revenue of at least $1.02 million in 2023. Energous would have shown modest progress if it achieved that revenue growth, although adding a couple hundred thousand in revenue doesn't make too much difference when Energous' cash burn is over $20 million per year.

Energous used $5.4 million in cash for operating activities in Q1 2023, while revenues were only $0.97 million during the quarter, so it has gotten off to a slow start in 2023.

To essentially cover its Q1 2023 cash burn, Energous raised $2.67 million (net of issuance costs) under its ATM program and another $2.68 million (net of related costs) with an underwritten offering. This added 11.9 million shares to Energous' share count, while it also issued 8.25 million warrants (exercisable by 2029) with an exercise price of $0.40.

Energous now has $26.3 million in cash on hand, enough to get it to Q2 2024 at its current rate of cash burn. I'd expect another equity raise later in 2023 though after its reverse split.

Proof-Of-Concept Customers

Energous has managed to convince a number of companies to do test runs of its technology. It reported two of these proof-of-concept customers by Q3 2022, and this increased to 10 proof-of-concept customers by Q4 2022 and 14 total proof-of-concept customers by Q1 2023.

Energous notes that the proof-of-concept phase can integrate up to 100 PowerBridges, and that if the test runs go well and the customer decides to move to the final production phase, it could involve potentially thousands of PowerBridges.

The most common application at this point involves IoT RF tags for asset tracking, including helping with inventory counts and replenishment requirements, as well as providing data about which items are tried on (for a clothing store deployment).

It is uncertain how much revenue could be generated from a proof-of-concept customer moving forward with a larger deployment. However, Energous previously sold evaluation kits (including a PowerBridge transmitter) for $599, which is probably a discounted rate to encourage the evaluation of its products. So perhaps a deployment involving 1000 PowerBridges might generate $1 million in revenue. Energous would thus need a fair number of customers moving forward with larger deployments in order to meaningfully reduce its cash burn.

Conclusion

Energous is looking to gain approval for a reverse split and increased share authorization at its June shareholders meeting. This reverse split is likely to be 1-for-20 when implemented, so that Energous can regain listing compliance and maintain that for a while.

Energous expects a bit of revenue growth this year, but its cash burn rate still appears to be around $5 million per quarter. It has enough cash on hand to last until Q2 2024 currently, but is likely to do another raise by late 2023.

Energous has been working on signing up proof-of-concept customers, but will need to convert many of those customers into final production customers to start making a dent in its rate of cash burn. Due to its likely future of further dilution, I am keeping my sell rating on Energous for now.

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