Note 2 – Liquidity and Management Plans
During the three months ended March 31, 2023 and 2022, the Company recorded revenue of $96,676 and $215,961, respectively. During the three months ended March 31, 2023 and 2022, the Company recorded net losses of $6,652,507 and $7,152,718, respectively. Net cash used in operating activities was $5,364,355 and $6,356,971 for the three months ended March 31, 2023 and 2022, respectively. The Company is currently meeting its liquidity requirements through the proceeds of securities offerings that raised net proceeds of $27,043,751 during 2021, $744,787 during 2022 and $5,351,888 during the first quarter of 2023, along with proceeds from contributions to the Company’s employee stock purchase plan (the “ESPP”) and payments received from customers.
As of March 31, 2023, the Company had cash and cash equivalents of $26,339,960. The Company expects that cash and cash equivalents as of March 31, 2023, together with anticipated revenues, will be sufficient to fund the Company’s operations through May 2024.
Research and development of new technologies is by its nature unpredictable. Although the Company intends to continue its research and development activities, there can be no assurance that its available resources and revenue generated from its business operations will be sufficient to sustain its operations. Accordingly, the Company expects to pursue additional financing, which could include offerings of equity or debt securities, bank financings, commercial agreements with customers or strategic partners, and other alternatives, depending upon market conditions. There is no assurance that such financing will be available on terms that the Company would find acceptable, or at all.
The market for products using the Company’s technology is broad and evolving, but remains nascent and unproven, so the Company’s success is dependent upon many factors, including customer acceptance of its existing products, technical feasibility of future products, regulatory approvals, the development of complementary technologies, competition and global market fluctuations.
Note 3 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).
These unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended December 31, 2022 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 30, 2023. The accounting policies used in preparing these unaudited condensed interim financial statements are consistent with those described in the Company’s December 31, 2022 audited financial statements.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported expenses during the reporting periods.
7
Note 3 – Summary of Significant Accounting Policies, continued
The Company’s significant estimates and assumptions include the valuation of stock-based compensation instruments, recognition of revenue, inventory valuation, fair value of warrant liabilities and the valuation allowance on deferred tax assets. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents. The Company maintains cash balances that may be uninsured or in deposit accounts that exceed Federal Deposit Insurance Corporation limits. The Company maintains its cash deposits with major financial institutions.
Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity” (“ASC 480”), and ASC 815, “Derivatives and Hedging” (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s common stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as a liability at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of the warrants is estimated using an appropriate valuation model. Such warrant classification is also subject to re-evaluation at each reporting period.
Offering costs associated with warrants classified as liabilities are expensed as incurred and are presented as offering cost related to warrant liability in the statement of operations. Offering costs associated with the sale of warrants classified as equity are charged against proceeds.
Fair Value
The Company follows ASC 820, Fair Value Measurements (“ASC 820”), which establishes a common definition of fair value to be applied when US GAAP requires the use of fair value, establishes a framework for measuring fair value, and requires certain disclosure about such fair value measurements.
ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about what market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
|
• |
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities to which the Company has access at a measurement date. |
|
• |
Level 2: Observable inputs other than Level 1 quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
• |
Level 3: Unobservable inputs for which little or no market data exists and for which the Company must develop its own assumptions regarding the assumptions that market participants would use in pricing the asset or liability, including assumptions regarding risk. |
8
Note 3 – Summary of Significant Accounting Policies, continued
Because of the uncertainties inherent in the valuation of assets or liabilities for which there are no observable inputs, those estimated fair values may differ significantly from the values that may have been used had a ready market for the assets or liabilities existed.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, cash equivalents, prepaid expenses, other current assets, and accounts payable & accrued expenses, are an approximate of their fair values because of the short maturity of these instruments. The Company’s derivative liabilities recognized at fair value on a recurring basis are a level 3 measurement (see Note 8 – Fair Value Measurement).
Revenue Recognition
The Company follows Accounting Standards Codification (“ASC”) 606, "Revenue from Contracts with Customers" (“Topic 606”).
In accordance with Topic 606, the Company recognizes revenue using the following five-step approach:
|
1. |
Identify the contract with a customer. |
|
2. |
Identify the performance obligations in the contract. |
|
3. |
Determine the transaction price of the contract. |
|
4. |
Allocate the transaction price to the performance obligations in the contract. |
|
5. |
Recognize revenue when or as the performance obligations are satisfied. |
The Company’s revenue consists of its single segment of wireless charging system solutions. The wireless charging system revenue consists of revenue from product development projects and production-level systems. During the three months ended March 31, 2023 and 2022, the Company recognized $96,676 and $215,961, respectively, in revenue.
The Company records revenue associated with product development projects that it enters into with certain customers. In general, these product development projects are complex, and the Company does not have certainty about its ability to achieve the project milestones. The achievement of a milestone is dependent on the Company’s performance obligation and requires acceptance by the customer. The Company recognizes this revenue at the point in time at which the performance obligation is met. The payment associated with achieving the performance obligation is generally commensurate with the Company’s effort or the value of the deliverable and is nonrefundable. The Company records the expenses related to these product development projects in research and development expense, in the periods such expenses were incurred.
Inventory
The Company follows ASC 330, Inventory (“Topic 330”) to account for its inventory, which includes finished goods ready for sale, work in process and raw materials, at the lower of cost or net realizable value. Net realizable value is calculated at the end of each reporting period and adjustment, if needed, is made.
Research and Development
Research and development expenses are charged to operations as incurred. For internally developed patents, all patent costs are expensed as incurred as research and development expense. Patent application costs, which are generally legal costs, are expensed as research and development costs until such time as the future economic benefits of such patents become more certain. The Company incurred research and development costs of $3,078,524 and $3,527,146 for the three months ended March 31, 2023 and 2022, respectively.
Stock-Based Compensation
The Company accounts for equity instruments issued to employees, board members and contractors in accordance with accounting guidance that requires awards to be recorded at their fair value on the date of grant and amortized over the vesting period of the award. The Company amortizes compensation costs on a straight-line basis over the requisite service period of the award, which is typically the vesting term of the equity instrument issued.
9
Note 3 – Summary of Significant Accounting Policies, continued
Under the ESPP, employees may purchase a limited number of shares of the Company’s common stock at a 15% discount from the lower of the closing market prices measured on the first and last days of each half-year period. The Company recognizes stock-based compensation expense for the fair value of the purchase options, as measured on the grant date.
Income Taxes
Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. As of March 31, 2023, no liability for unrecognized tax benefits was required to be reported. The guidance from ASC 740, Income Taxes, also discusses the classification of related interest and penalties on income taxes. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the three months ended March 31, 2023 and 2022. The Company files income tax returns with the United States and California governments.
Net Loss Per Common Share
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method), the vesting of restricted stock units (“RSUs”) and performance stock units (“PSUs”) and the enrollment of employees in the ESPP. The computation of diluted loss per share excludes potentially dilutive securities of 12,890,622 and 5,682,499, as outlined in the table below, for the three months ended March 31, 2023 and 2022, respectively, because their inclusion would be anti-dilutive.
|
|
For the Three Months
Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
Warrants issued to investors |
|
|
9,916,666 |
|
|
|
3,284,789 |
|
|
Options to purchase common stock |
|
|
300,000 |
|
|
|
825,006 |
|
|
RSUs |
|
|
2,673,956 |
|
|
|
1,572,704 |
|
|
Total potentially dilutive securities |
|
|
12,890,622 |
|
|
|
5,682,499 |
|
|
The table above includes 1,666,666 warrants expiring on March 1, 2024, which have an exercise price of $10.00 and 8,250,000 warrants expiring on March 28, 2029, which have an exercise price of $0.40.
Leases
The Company determines if an arrangement is a lease at the inception of the arrangement. The Company applies the short-term lease recognition exemption and recognizes lease payments in profit or loss at lease commencement for facility or equipment leases that have a lease term of 12 months or less and do not include a purchase option whose exercise is reasonably certain. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities.
ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are measured and recorded at the later of the adoption date, January 1, 2019, or the service commencement date based on the present value of lease payments over the lease term. The Company uses the implicit interest rate when readily determinable; however, most leases do not establish an implicit rate, so the Company uses an estimate of the incremental borrowing rate based on the information available at the time of measurement. Lease expense for lease payments is recognized on a straight-line basis over the lease term. See Note 4 – Commitments and Contingencies, Operating Leases for further discussion of the Company’s operating leases.
Management’s Evaluation of Subsequent Events
The Company evaluates events that have occurred after the balance sheet date of March 31, 2023, through the date which the financial statements are available to be issued.
10
Note 4 – Commitments and Contingencies
Operating Leases
San Jose Lease
On May 20, 2022, the Company signed a lease amendment to the existing lease for its office space at its corporate headquarters in San Jose, California, extending the term of the lease for an additional three years. Upon signing the lease amendment, the Company recorded a new ROU lease asset of $2,071,336 and operating lease liability of $2,071,336, using a present value discount rate of 3.0%. Upon expiration of the original lease on September 30, 2022, the new monthly lease payment starting October 1, 2022 is $58,903, subject to annual escalations up to a maximum monthly lease payment of $62,490.
Costa Mesa Lease
On September 22, 2021, the Company signed a new lease for office space for its engineers based in Costa Mesa, California. Per the lease, the lease commencement date is October 1, 2021 and the expiration date is September 30, 2023. The Company did not have control of the new office space until October 2021, at which time the Company recorded a new ROU lease asset of $104,563 and operating lease liability of $104,563. The new Costa Mesa lease has an initial monthly lease payment of $4,369 starting October 1, 2021 and is subject to an annual escalation up to a maximum monthly lease payment of $4,522.
Operating Lease Commitments
The Company follows ASC 842, Leases, (“Topic 842”) and recognizes the required ROU assets and operating lease liabilities on its balance sheet. The Company anticipates having future total lease payments of $1,858,460 during the period from the second quarter of 2023 to the third quarter of 2025. As of March 31, 2023, the Company has total operating lease ROU assets of $1,778,512, current portion of operating lease liabilities of $702,780 and long-term portion of operating lease liabilities of $1,090,639. The weighted average remaining lease term is 2.5 years as of March 31, 2023.
A reconciliation of undiscounted cash flows to lease liabilities recognized as of March 31, 2023 is as follows:
|
|
Amount |
|
|
|
(unaudited) |
|
2023 |
|
|
562,555 |
|
2024 |
|
|
733,497 |
|
2025 |
|
|
562,408 |
|
Total future lease payments |
|
|
1,858,460 |
|
Present value discount (2.9% weighted average) |
|
|
(65,041 |
) |
Total operating lease liabilities |
|
$ |
1,793,419 |
|
Hosted Design Software Agreement
In June 2021, the Company entered into an electronic design automation software in a hosted environment license agreement with a term of three-years under which the Company is required to remit quarterly payments of approximately $233,000 through the second quarter of 2024.
Litigations, Claims, and Assessments
The Company is from time to time involved in various disputes, claims, liens and litigation matters arising in the normal course of business. While the outcome of these disputes, claims, liens and litigation matters cannot be predicted with certainty, after consulting with legal counsel, management does not believe that the outcome of these matters will have a material adverse effect on the Company's combined financial position, results of operations or cash flows.
MBO Bonus Plan
On March 15, 2018, the Company’s Board of Directors (“Board”), on the recommendation of the Board’s Compensation Committee (“Compensation Committee”), approved the Energous Corporation MBO Bonus Plan (“Bonus Plan”) for executive officers of the Company. To be eligible to receive a bonus under the Bonus Plan, an executive officer must be continuously employed throughout the applicable performance period, and in good standing, and achieve the performance objectives selected by the Compensation Committee.
11
Note 4 – Commitments and Contingencies, continued
Under the Bonus Plan, the Compensation Committee is responsible for selecting the amounts of potential bonuses for executive officers, the performance metrics used to determine whether any such bonuses will be paid and determining whether those performance metrics have been achieved.
During the three months ended March 31, 2023 and 2022, the Company recorded $62,001 and $125,468 in expense, respectively, under the Bonus Plan. As of December 31, 2022, $688,364 was accrued and unpaid under the Bonus Plan, of which $560,533 was paid during the three months ended March 31, 2023. The remaining $109,452 from 2022 is expected to be paid during the second quarter of 2023. As of March 31, 2023, the Company had accrued $171,453 under the Bonus Plan, including the $109,452 remaining accrual from 2022 and the additional $62,001 accrued during the first quarter of 2023, which is expected to be paid between the second quarter of 2023 and the first quarter of 2024.
Severance and Change in Control Agreement
On March 15, 2018, the Compensation Committee approved a form of Severance and Change in Control Agreement (“Severance Agreement”) that the Company may enter into with executive officers (each, an “Executive”).
Under the Severance Agreement, if an Executive is terminated in a qualifying change in control termination, the Company agrees to pay the Executive six to 12 months of that Executive’s monthly base salary. If an Executive elects continued coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) the Company will pay the full amount of the Executive’s premiums under the Company’s health, dental and vision plans, including coverage for the Executive’s eligible dependents, for the six to 12 month period following the Executive’s termination.
Executive Employee Agreement – Cesar Johnston
On December 9, 2021, the Company announced that Cesar Johnston had been appointed as the Company’s Chief Executive Officer. In connection with Mr. Johnston’s appointment as Chief Executive Officer, the Company and Mr. Johnston executed an offer letter dated as of December 6, 2021.
Under the terms of his offer letter, Mr. Johnston will receive an annual base salary of $400,000 per year. Beginning in year 2022, he is eligible to receive a discretionary annual bonus of up to 100% of his base salary, at the recommendation of the Company’s Compensation Committee, with the approval of the Company’s Board. In addition, as an inducement to accept his appointment as Chief Executive Officer, Mr. Johnston received, subject to continued employment, (a) a special one-time sign-on bonus in the amount of $120,000, payable in two equal installments of $60,000 each on the first payroll date in 2022 and the first payroll date after December 6, 2022, (b) a grant of 150,000 RSUs to acquire shares of the Company’s common stock, one third of which vested on December 6, 2022 and the remaining two thirds of which vest in eight equal installments of 12,500 each on each quarterly anniversary thereafter and (c) a grant of an option to purchase 300,000 shares of the Company’s common stock at an exercise price equal to the fair market value of the Company’s common stock on the grant date, half of which shall vest on December 31, 2023, a quarter of which shall vest on December 31, 2024 and the remainder of which shall vest on December 31, 2025.
Also pursuant to the terms of his offer letter, Mr. Johnston is eligible for (a) an additional equity award in the amount of 287,000 PSUs to acquire shares of the Company’s common stock, to vest at various amounts to be agreed upon each year by the Board over a three year period commencing January 1, 2022 and ending December 31, 2024, upon the achievement of performance criteria to be mutually established by Mr. Johnston and the Compensation Committee, and (b) an additional equity award of up to 25,000 PSUs per calendar year for each of 2022, 2023 and 2024, based on outperformance of agreed upon goals per calendar year, as determined by the Compensation Committee with approval of the Board. On July 20, 2022, the Board approved, by unanimous written consent, the grant to Mr. Johnston of up to 287,000 PSUs pursuant to the terms of Mr. Johnston’s offer letter. The 287,000 PSUs that have been approved shall vest as follows: (a) up to 187,000 PSU shares shall vest on December 31, 2022, subject to Mr. Johnston’s continued service as Chief Executive Officer and the achievement, to be determined in the Compensation Committee’s sole discretion, by Mr. Johnston of certain performance metrics previously determined by the Compensation Committee and approved by the Board, and (b) up to an additional 50,000 PSU shares shall vest on each of December 31, 2023 and December 31, 2024, subject to Mr. Johnston’s continued service as Chief Executive Officer and the achievement, to be determined in the Compensation Committee’s sole discretion, by Mr. Johnston of certain performance metrics to be recommended by the Compensation Committee and approved by the Board at a subsequent date. As of March 31, 2023, the Board had not yet approved the performance criteria applicable to the up to additional 50,000 PSU shares that will vest on each of December 31, 2023 and 2024; therefore, these PSUs have not been considered granted.
12
Note 4 – Commitments and Contingencies, continued
In connection with Mr. Johnston’s appointment as Chief Executive Officer, the Company and Mr. Johnston additionally entered into an amended and restated severance and change in control agreement, dated as of December 6, 2021. In the event of a termination that is not a change-in-control qualifying termination, Mr. Johnston is entitled to (a) a one-time lump sum payment by the Company in an amount equal to 18 months of his monthly base salary plus an amount equal to 100% of his target bonus plus, if agreed by the Compensation Committee, a discretionary bonus for the year in which the termination occurs, (b) any outstanding unvested equity awards held by Mr. Johnston that would vest in the next 18 months of continuing employment (other than any equity awards that vest upon satisfaction of performance criteria) will accelerate and become vested and (c) if Mr. Johnston timely elects continued coverage under COBRA, the Company or its successor will pay the full amount of Mr. Johnston’s COBRA premiums on his behalf for 18 months.
Mr. Johnston’s agreement additionally provides that, in the event of a change-in-control qualifying termination, Mr. Johnston is entitled to (a) a one-time lump sum payment by the Company in an amount equal to 18 months of his monthly base salary plus an amount equal to 150% of his target bonus plus a prorated bonus for the year in which the termination occurs, (b) any outstanding unvested equity awards held by Mr. Johnston (including any equity awards that vest upon satisfaction of performance criteria) will accelerate in full and become vested and (c) if Mr. Johnston timely elects continued coverage under COBRA, the Company or its successor will pay the full amount of Mr. Johnston’s COBRA premiums on his behalf for 18 months.
Mr. Johnston is also eligible to receive all customary and usual benefits generally available to senior executives of the Company.
Executive Transition Agreement – Stephen Rizzone
On April 3, 2015, the Company entered into an Amended and Restated Executive Employment Agreement with Stephen R. Rizzone, the Company’s former President and Chief Executive Officer (“Employment Agreement”).
The Employment Agreement effective as of January 1, 2015, had an initial term of four years and automatically renewed each year after the initial term. The Employment Agreement provided for an annual base salary of $365,000, and Mr. Rizzone was eligible to receive quarterly cash bonuses from the MBO Bonus Plan with a total target amount equal to 100% of his base salary based upon achievement of performance-based objectives established by the Board.
On July 9, 2021, the Company announced that Stephen R. Rizzone had retired from his position as the Company’s President and Chief Executive Officer and as a member of the Board.
In connection with Mr. Rizzone’s retirement, the Company and Mr. Rizzone entered into an Executive Transition Agreement (the “Separation Agreement”), providing for continued employment through August 31, 2021. Upon his termination of employment, the Separation Agreement provides severance payments and benefits to Mr. Rizzone consistent with the terms of his existing employment agreement with the Company, including without limitation: compensation-based payments of $1,460,000 in the aggregate, payable under a certain payment scheme as set forth therein, an additional lump sum cash payment of $2,000,000, a pro-rated bonus payment for the two months of employment during the current quarterly bonus period payable at the same time bonus payments are made to other executives of the Company, settlement of deferred vested RSUs and an extension of the exercise periods of all stock options held by Mr. Rizzone until the one year anniversary of his termination date, and additional benefits related to Mr. Rizzone’s medical insurance. In addition, the Company agreed to pay-off all amounts owed under a lease agreement relating to a company car and that Mr. Rizzone would receive the title to the vehicle. All compensation under the Separation Agreement has been or will be subject to applicable withholding.
As of March 31, 2023, the Company had unpaid accrued severance expense of $249,610 pertaining to Mr. Rizzone’s Separation Agreement which is expected to be paid through August 31, 2023.
Executive Transition Agreement – Neeraj Sahejpal
On April 29, 2022, the Company announced the departure of Neeraj Sahejpal, former Senior Vice President of Marketing and Business Development, effective April 30, 2022. Pursuant to the terms of Mr. Sahejpal’s severance and change of control agreement with the Company, Mr. Sahejpal received payments and benefits including compensation equal to twelve months of Mr. Sahejpal’s then-current salary of $261,250, twelve months of maximum potential bonus of $261,250, and twelve months of COBRA reimbursements. In addition, all RSUs held by Mr. Sahejpal that were due to vest in the twelve months after his departure, totaling RSUs covering 85,943 shares, were accelerated.
13
Note 4 – Commitments and Contingencies, continued
As of March 31, 2023, the Company had no unpaid accrued severance expense pertaining to Mr. Sahejpal’s agreement.
Strategic Alliance Agreement
In November 2016, the Company and Dialog Semiconductor plc (“Dialog”), a related party (see Note 7—Related Party Transactions), entered into a Strategic Alliance Agreement (“Alliance Agreement”) for the manufacture, distribution and commercialization of products incorporating the Company’s wire-free charging technology (“Licensed Products”). Pursuant to the terms of the Alliance Agreement, the Company agreed to engage Dialog as the exclusive supplier of the Licensed Products for specified fields of use, subject to certain exceptions (the “Company Exclusivity Requirement”). Dialog agreed to not distribute, sell or work with any third party to develop any competing products without the Company’s approval. In addition, both parties agreed on a revenue sharing arrangement and will collaborate on the commercialization of Licensed Products based on a mutually-agreed upon plan. Each party will retain all of its intellectual property.
The Alliance Agreement has an initial term of seven years, with automatic renewal annually thereafter unless terminated by either party upon 180 days’ prior written notice. The Company may terminate the Alliance Agreement at any time after the third anniversary of the Alliance Agreement upon 180 days’ prior written notice to Dialog, or if Dialog breaches certain exclusivity obligations. Dialog may terminate the Alliance Agreement if sales of Licensed Products do not meet specified targets. The Company Exclusivity Requirement had a termination date of the earlier of January 1, 2021 or the occurrence of certain events relating to the Company’s pre-existing exclusivity obligations. The Company Exclusivity Requirement renewed automatically on an annual basis unless the Company and Dialog agree to terminate the requirement.
On September 20, 2021, the Company was notified by Dialog, recently acquired by Renesas Electronics Corporation, that it was terminating the Alliance Agreement between the Company and Dialog. There is a wind down period included in the Alliance Agreement which will conclude in September 2024. During the wind down period, the Alliance Agreement’s terms will continue to apply to the Company’s products that are covered by certain existing customer relationships, except that the parties’ respective exclusivity rights have terminated (see Note 9 – Related Party Transactions for expenses incurred by the Company from Renesas Electronics Corporation).
Note 5 – Stockholders’ Equity
Authorized Capital
The holders of the Company’s common stock are entitled to one vote per share. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board out of legally available funds. Upon the liquidation, dissolution or winding up of the Company, holders of common stock are entitled to share ratably in all assets of the Company that are legally available for distribution.
Financing
On September 15, 2020, the Company filed a shelf registration statement on Form S-3 with the SEC, which became effective on September 24, 2020, and contains two prospectuses: a base prospectus, which covers the offering, issuance and sale by the Company of up to $75,000,000 of its common stock, preferred stock, debt securities, warrants to purchase our common stock, preferred stock or debt securities, subscription rights to purchase its common stock, preferred stock or debt securities and/or units consisting of some or all of these securities; and an at-the-market sales agreement prospectus supplement covering the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $40,000,000 of its common stock that may be issued and sold under the At Market Issuance Sales Agreement, as amended, between the Company, B. Riley Securities, Inc., Roth Capital Partners LLC and Ladenburg Thalmann & Co. Inc. (the “ATM Program”). The $40,000,000 of common stock to be offered, issued and sold under the ATM Program is included in the $75,000,000 of securities that may be offered, issued and sold by the Company under the base prospectus. Pursuant to this shelf registration statement, the Company sold shares which raised net proceeds of $38,832,711 (net of $1,167,289 in issuance costs) during the third and fourth quarters of 2020 under the ATM Program.
14
Note 5 – Stockholders’ Equity, continued
On October 4, 2021, the Company filed a prospectus supplement covering the offering, issuance and sale of up to an additional $35,000,000 of shares of the Company’s common stock pursuant to the ATM Program. The Company raised net proceeds of $27,043,751 (net of $868,122 in issuance costs), during 2021 under the ATM Program. During 2022, the Company raised an additional $744,787 (net of $73,403 in issuance costs) under the ATM Program. During the first quarter of 2023, the Company raised $2,674,697 (net of $68,637 in issuance costs) under the ATM Program. As of March 31, 2023, the Company has $3,526,605 remaining on this shelf registration statement.
On November 15, 2021, the Company filed a shelf registration statement on Form S-3 with the SEC, which became effective on December 16, 2021. This shelf registration statement allows the Company to sell, from time to time, any combination of debt or equity securities described in the registration statement up to aggregate proceeds of $100,000,000. Pursuant to this registration statement, on March 28, 2023, the Company completed an underwritten offering pursuant to which it issued and sold an aggregate of (i) 8,250,000 shares of its common stock (the “Shares”) and (ii) warrants to purchase up to 8,250,000 shares of its common stock (the “2023 Warrants”), for net proceeds of $2,677,191, after deducting underwriting discounts, commission and expenses payable by the Company. The 2023 Warrants were immediately exercisable upon issuance and have a term of six years and an exercise price of $0.40. The Company allocated the proceeds received first to the 2023 Warrants based on the fair value of the 2023 Warrants as determined at initial measurement, with the remaining proceeds allocated to the Shares (see Note 7 – Warrant Liability and Note 8 – Fair Value Measurements).
Common Stock Outstanding
Our outstanding shares of common stock typically include shares that are deemed delivered under US GAAP. Shares that are deemed delivered currently include shares that have vested, but have not yet been delivered, under tax-deferred equity awards, as well as shares purchased under the ESPP where actual transfer of shares normally occurs a few days after the completion of the purchase periods. There are no voting rights for shares that are deemed delivered under US GAAP until the actual delivery of shares takes place. There are currently 200,000,000 shares of common stock authorized for issuance.
Note 6 – Stock-Based Compensation
Equity Incentive Plans
2013 Equity Incentive Plan
Effective on June 16, 2021, the Company’s stockholders approved the amendment and restatement of the 2013 Equity Incentive Plan to increase the number of shares reserved for issuance thereunder by 1,500,000 shares, bringing to 8,785,967 the total number of shares approved for issuance under that plan.
As of March 31, 2023, 1,248,896 shares of common stock remain eligible to be issued through equity-based instruments under the 2013 Equity Incentive Plan.
2014 Non-Employee Equity Compensation Plan
Effective on May 26, 2020, the Company’s stockholders approved the amendment and restatement of the 2014 Non-Employee Equity Compensation Plan to increase the number of shares reserved for issuance through equity-based instruments thereunder by 800,000 shares, bringing to 1,650,000 the total number of shares approved for issuance under that plan.
As of March 31, 2023, 546,238 shares of common stock remain eligible to be issued through equity-based instruments under the 2014 Non-Employee Equity Compensation Plan.
2015 Performance Share Unit Plan
Effective on June 16, 2021, the Company’s stockholders approved the amendment and restatement of the 2015 Performance Share Unit Plan to increase the number of shares reserved for issuance through equity-based instruments thereunder by 1,700,000 shares, bringing to 5,110,104 the total number of shares approved for issuance under that plan.
15
Note 6 – Stock-Based Compensation, continued
As of March 31, 2023, 2,275,438 shares of common stock remain eligible to be issued through equity-based instruments under the 2015 Performance Share Unit Plan.
2017 Equity Inducement Plan
On December 28, 2017, the Board approved the 2017 Equity Inducement Plan. Under the 2017 Equity Inducement Plan, the Board reserved 600,000 shares for the grant of RSUs. These grants will be administered by the Board or a committee of the Board. These awards will be granted to individuals who (a) are being hired as an employee by the Company or any subsidiary and such award is a material inducement to such person being hired; (b) are being rehired as an employee following a bona fide period of interruption of employment with the Company or any subsidiary; or (c) will become an employee of the Company or any subsidiary in connection with a merger or acquisition.
On July 20, 2022, the Board increased the number of shares of common stock reserved and available for issuance under the 2017 Equity Inducement Plan by 2,000,000 shares. As of March 31, 2023, 1,041,170 shares of common stock remain available to be issued through equity-based instruments under the 2017 Equity Inducement Plan.
Employee Stock Purchase Plan
In April 2015, the Company’s Board approved the ESPP, under which 600,000 shares of common stock have been reserved for purchase by the Company’s employees, subject to the approval by the Company’s stockholders. On May 21, 2015, the Company’s stockholders approved the ESPP. Effective on June 16, 2021, the Company’s stockholders approved the amendment and restatement of the ESPP to increase the number of shares reserved for issuance through equity-based instruments thereunder by 700,000 shares, bring to 1,550,000 the total number of shares approved for issuance under that plan. Under the ESPP, employees may designate an amount not less than 1% but not more than 10% of their annual compensation for the purchase of Company shares. No more than 7,500 shares may be purchased by an employee under the ESPP during an offering period. An offering period shall be six months in duration commencing on or about January 1 and July 1 of each year. The exercise price of the option will be the lesser of 85% of the fair market of the common stock on the first business day of the offering period and 85% of the fair market value of the common stock on the applicable exercise date.
As of March 31, 2023, 201,619 shares of common stock remain eligible to be issued under the ESPP. Employees contributed $65,134 through payroll withholdings to the ESPP as of March 31, 2023 for the current offering period which will end on June 30, 2023 with shares deemed delivered on that date.
Stock Option Activity
In February 2022, the Board granted our Chief Executive Officer 300,000 stock options under the 2013 Equity Incentive Plan at an exercise price of $1.27 per share with half of the options vesting on the second anniversary of the vesting start date and a quarter of the options vesting on each of the two following anniversaries.
The Company estimated the fair value of stock options granted during the second quarter of 2022 using the Black-Scholes option pricing model. No stock options were granted during the three months ended March 31, 2023. The fair values of stock options granted during the second quarter of 2022 were estimated using the following assumptions:
|
|
Three Months Ended
June 30, 2022 |
|
|
Stock price |
|
$ |
1.27 |
|
|
Dividend yield |
|
|
0 |
% |
|
Expected volatility |
|
|
108 |
% |
|
Risk-free interest rate |
|
|
1.92 |
% |
|
Expected life |
|
5.6 years |
|
|
16
Note 6 – Stock-Based Compensation, continued
The following is a summary of the Company’s stock option activity during the three months ended March 31, 2023:
|
|
Number of
Options |
|
|
Weighted
Average
Exercise
Price |
|
|
Weighted
Average
Remaining
Life In
Years |
|
|
Intrinsic
Value |
|
Outstanding at January 1, 2023 |
|
|
300,262 |
|
|
$ |
1.27 |
|
|
|
8.9 |
|
|
$ |
– |
|
Granted |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Exercised |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Forfeited |
|
|
(262 |
) |
|
|
2.49 |
|
|
|
– |
|
|
|
– |
|
Outstanding at March 31, 2023 |
|
|
300,000 |
|
|
$ |
1.27 |
|
|
|
8.7 |
|
|
$ |
– |
|
Exercisable at January 1, 2023 |
|
|
262 |
|
|
$ |
2.49 |
|
|
|
0.3 |
|
|
$ |
– |
|
Vested |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Exercised |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Forfeited |
|
|
(262 |
) |
|
|
2.49 |
|
|
|
– |
|
|
|
– |
|
Exercisable at March 31, 2023 |
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
As of March 31, 2023, the unamortized fair value of options was $212,594. The unamortized amount will be expensed over a weighted average period of 2.4 years.
PSUs
PSUs are grants that vest upon the achievement of certain performance goals. The goals are commonly related to the Company’s revenue and achievement of sales and marketing goals.
On July 20, 2022, the Board granted the Company’s Chief Executive Officer, Cesar Johnston, up to 287,000 PSUs under the Company’s 2015 Performance Share Unit Plan pursuant to the terms of Mr. Johnston’s offer letter with the Company (See Note 4 – Commitments and Contingencies). The up to 287,000 PSUs that have been approved shall vest as follows: (a) up to 187,000 PSU shares shall vest on December 31, 2022, subject to Mr. Johnston’s continued service as Chief Executive Officer and the achievement, to be determined in the Compensation Committee’s sole discretion, by Mr. Johnston of certain performance metrics previously determined by the Compensation Committee and approved by the Board, and (b) up to an additional 50,000 PSU shares shall vest on each of December 31, 2023 and December 31, 2024, subject to Mr. Johnston’s continued service as Chief Executive Officer and the achievement, to be determined in the Compensation Committee’s sole discretion, by Mr. Johnston of certain performance metrics to be recommended by the Compensation Committee and approved by the Board at a subsequent date. On December 31, 2022, 135,575 PSUs were achieved, vested and deemed delivered on that date. As of March 31, 2023, the performance criteria for an additional up to 100,000 PSUs had not been approved by the Board.
There was no PSU activity for the three months ended March 31, 2023 and 2022.
RSUs
During the three months ended March 31, 2023, the Compensation Committee granted various employees RSUs covering 48,750 shares of common stock under the 2013 Equity Incentive Plan. The awards vest over four years.
During the three months ended March 31, 2023, the Compensation Committee granted various non-employees RSUs covering 124,452 shares of common stock under the 2014 Non-Employee Equity Compensation Plan. The awards vest over terms ranging from one to four years.
During the three months ended March 31, 2023, the Compensation Committee granted various employees RSUs covering 535,000 shares of common stock under the 2017 Equity Inducement Plan. The awards vest over four years.
17
Note 6 – Stock-Based Compensation, continued
As of March 31, 2023, the unamortized fair value of the RSUs was $2,469,552. The unamortized amount will be expensed over a weighted average period of 2.0 years. A summary of the activity related to RSUs for the three months ended March 31, 2023 is presented below:
|
|
Total |
|
|
Weighted
Average
Grant
Date Fair
Value |
|
Outstanding at January 1, 2023 |
|
|
2,165,132 |
|
|
$ |
1.63 |
|
RSUs granted |
|
|
708,202 |
|
|
|
0.69 |
|
RSUs forfeited |
|
|
(12,500 |
) |
|
|
1.27 |
|
RSUs vested |
|
|
(186,878 |
) |
|
|
2.08 |
|
Outstanding at March 31, 2023 |
|
|
2,673,956 |
|
|
$ |
1.35 |
|
Employee Stock Purchase Plan (“ESPP”)
The current offering period under the ESPP started on January 1, 2023 and will conclude on June 30, 2023. During the year ended December 31, 2022, there were two offering periods. The first offering period began on January 1, 2022 and concluded on June 30, 2022. The second offering period began on July 1, 2022 and concluded on December 31, 2022.
The weighted-average grant-date fair value of the purchase option for each designated share purchased under the ESPP was approximately $0.27 and $0.40 for the three months ended March 31, 2023 and 2022, respectively, which represents the fair value of the option, consisting of three main components: (i) the value of the discount on the enrollment date, (ii) the proportionate value of the call option for 85% of the stock and (iii) the proportionate value of the put option for 15% of the stock. The Company recognized compensation expense for the ESPP of $24,740 and $40,973 for the three months ended March 31, 2023 and 2022, respectively.
The Company estimated the fair value of ESPP purchase options granted during the three months ended March 31, 2023 and 2022 using the Black-Scholes option pricing model. The fair values of ESPP purchase options granted were estimated using the following assumptions:
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Stock price |
|
$ |
0.836 |
|
|
$ |
1.25 |
|
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
59 |
% |
|
|
61 |
% |
Risk-free interest rate |
|
|
4.42 |
% |
|
|
0.19 |
% |
Expected life |
|
6 months |
|
|
6 months |
|
Stock-Based Compensation Expense
The following tables summarize total stock-based compensation costs recognized for the three months ended March 31, 2023 and 2022:
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
Stock options |
|
$ |
21,095 |
|
|
$ |
10,313 |
|
|
RSUs |
|
|
476,242 |
|
|
|
745,620 |
|
|
ESPP |
|
|
24,740 |
|
|
|
40,973 |
|
|
Total |
|
$ |
522,077 |
|
|
$ |
796,906 |
|
|
18
Note 6 – Stock-Based Compensation, continued
The total amount of stock-based compensation was reflected within the statements of operations as:
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
Research and development |
|
$ |
208,731 |
|
|
$ |
353,043 |
|
|
Sales and marketing |
|
|
104,903 |
|
|
|
180,377 |
|
|
General and administrative |
|
|
208,443 |
|
|
|
263,486 |
|
|
Total |
|
$ |
522,077 |
|
|
$ |
796,906 |
|
|
Note 7 – Warrant Liability
2023 Warrants
In March 2023, the Company issued 8,250,000 warrants to purchase up to 8,250,000 shares of its common stock. The 2023 Warrants have a six-year term and were exercisable upon issuance on March 28, 2023. Each 2023 Warrant is exercisable for one share of the Company’s common stock at a price of $0.40 per share (“Exercise Price”), subject to adjustment in certain circumstances including in the event of stock dividends and splits, or a recapitalization, merger, consolidation, tender offer, reorganization, or other change in control of the Company. In the event of certain transactions such as a merger, consolidation, tender offer, reorganization, or other change in control, if holders of common stock are given any choice as to the consideration to be received, the holder of each 2023 Warrant shall be given the same choice of alternate consideration. In the event of certain transactions that are not within the Company’s control, such as a merger, consolidation, tender offer, reorganization, or other change in control of the Company, each holder of a 2023 Warrant shall be entitled to receive the same form of consideration at the Black Scholes value of the unexercised portion of the 2023 Warrant that is being offered and paid to holders of common stock, including the option to exercise the 2023 Warrants on a “cashless basis”.
If the Company issues additional shares of common stock or equity-linked securities for a consideration per share less than the 2023 Warrants Exercise Price, then such Exercise Price will be reduced to a new lower price pursuant to the terms of the 2023 Warrants. Additionally, if the Exercise Price of any outstanding derivative securities is modified by the Company such that such security’s modified exercise price is below the Exercise Price of the 2023 Warrants, the Exercise Price will adjust downward pursuant to the terms of the 2023 Warrant. This provision would not apply for stock or stock equivalents which fall under shares that qualify for exempt issuance, such as if the Company adjusted the option exercise price for an option granted to an employee, officer, or director.
The Company accounted for the 2023 Warrants in accordance with the derivative guidance contained in ASC 815-40, as the warrants did not meet the criteria for equity treatment. The Company believes that the adjustments to the Exercise Price is based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under ASC 815-40, and thus the 2023 Warrants are not eligible for an exception from derivative accounting. As such, the 2023 Warrants were initially measured at fair value and recorded as a liability in the amount of $3,135,000. As of March 31, 2023, all 2023 Warrants were outstanding.
19
Note 8 – Fair Value Measurements
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value:
|
|
Balance as of March 31, 2023 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
26,339,960 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
26,339,960 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability |
|
$ |
– |
|
|
$ |
– |
|
|
$ |
3,135,000 |
|
|
$ |
3,135,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2022 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
26,287,293 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
26,287,293 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability |
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
There were no transfers among Level 1, Level 2, or Level 3 categories during the periods presented.
2023 Warrants
The Company utilizes a Monte Carlo simulation model for the 2023 Warrants at each reporting period, with changes in fair value recognized in the statements of operations. The estimated fair value of the 2023 Warrant liability is determined using Level 3 inputs. Inherent in a Monte Carlo simulation model are assumptions related to expected share-price volatility, expected life, risk-free interest rate, and dividend yield.
The key inputs into the Monte Carlo simulation model for the 2023 Warrants are as follows:
|
|
At March 31, 2023 |
|
Share price |
|
$ |
0.54 |
|
Exercise price |
|
$ |
0.40 |
|
Term (in years) |
|
|
6 |
|
Volatility |
|
|
65 |
% |
Risk-free rate |
|
|
3.6 |
% |
Dividend yield |
|
|
0 |
% |
The change in the fair value of the 2023 Warrant liability was determined to be zero during the three months ended March 31, 2023 (see Note 7 – Warrant Liability).
20
Note 9 – Related Party Transactions
In November 2016, the Company and Dialog entered into the Alliance Agreement for the manufacture, distribution and commercialization of products incorporating the Company’s wire-free charging technology (See Note 4 – Commitments and Contingencies, Strategic Alliance Agreement). On November 7, 2016 and June 28, 2017, the Company and Dialog entered into securities purchase agreements under which Dialog acquired a total of 1,739,691 shares and received warrants to purchase up to 1,417,565 shares. As of March 31, 2023, none of the warrants remain outstanding. As of March 31, 2023, Dialog owns approximately 1.9% of the Company’s outstanding common shares. The Company did not record any revenue during the three months ended March 31, 2023 and 2022. The Company incurred $124,055 and $0 in chip test development expense from Renesas Electronics Corporation, which acquired Dialog in August 2021 (“Renesas”), during the three months ended March 31, 2023 and 2022, respectively.
On September 20, 2021, the Company was notified by Dialog that it was terminating the Alliance Agreement between the Company and Dialog.
Note 10 – Customer Concentrations
Two customers accounted for approximately 84% of the Company’s revenue for the three months ended March 31, 2023, and two customers accounted for approximately 53% of the Company’s revenue for the three months ended March 31, 2022. Two customers accounted for approximately 80% of the Company’s accounts receivable balance as of March 31, 2023. One customer accounted for approximately 87% of the Company’s accounts receivable balance as of December 31, 2022.
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires the terms “we,” “us,” “our,” and “Energous” refer to Energous Corporation, a Delaware corporation. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are intended to be covered by the “safe harbor” created by those sections. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as “believe,” “expect,” “may,” “will,” “would,” “should,” “could,” “seek,” “intend,” “plan,” “continue,” “estimate,” “anticipate” or other comparable terms. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding proposed business strategy; market opportunities; regulatory approval; expectations for current and potential business relationships; the impact of COVID-19 and our response thereto on our business; and expectations for revenues, liquidity cash flows and financial performance, the anticipated results of our research and development efforts, the timing for receipt of required regulatory approvals and product launches. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Forward-looking statements relate to the future and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and generally outside of our control, so actual results and financial condition may differ materially from those indicated in the forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others: our ability to develop commercially feasible technology; timing of customer implementations of our technology in consumer products; timing and receipt of regulatory approvals in the United States and internationally; our ability to find and maintain development partners; market acceptance of our technology; competition in our industry; our ability to protect our intellectual property; competition; and other risks and uncertainties described in the Risk Factors and in Management's Discussion and Analysis sections of our most recently filed Annual Report on Form 10-K and subsequently filed Quarterly Reports on Form 10-Q, including this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update any of our forward-looking statements, whether as a result of new information, future developments or otherwise.
Overview
We have developed our WattUp® wireless power technology, consisting of semiconductor chipsets, software controls, hardware designs and antennas, that enables RF based charging for electronic devices. The WattUp technology has a broad spectrum of capabilities to enable the next generation of wireless power networks, delivering power and data in a seamless device portfolio. This includes near field and at-a-distance wireless charging with multiple power levels at various distances. We believe our WattUp technologies will help facilitate the deployment of the growing IoT applications. According to the International Data Corporation (IDC) August 2022 Market Forecast, the IoT market is forecasted to grow to approximately $1.1 trillion in spending by 2026. The initial IoT applications that we are targeting are in the area of RF tags, ESL) and IoT sensors for the retail, industrial, healthcare and smart home/office markets.
We believe our technology is innovative in its approach, in that we are developing solutions that charge electronic devices using RF. To-date, we have developed multiple transmitters and receivers, including prototypes as well as partner production designs. The transmitters vary based on form factor, power specifications and frequencies, while the receivers are designed to support a myriad of wireless charging applications including Bluetooth tracking tags, IoT sensors, ESLs, beacons, stock management devices, security cameras, handheld devices, smart automation, wearables and hearables.
The first end product featuring our technology entered the market in 2019. We started shipping our first at-a-distance WattUp PowerBridge enabled transmitters for commercial IoT applications in the fourth quarter of 2021, and we expect additional WattUp-enabled products to be announced as we move our business forward.
22
Critical Accounting Policies and Estimates
Warrants
We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity” (“ASC 480”), and ASC 815, “Derivatives and Hedging” (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our common stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as a liability at their initial fair value on the date of issuance, and each balance sheet date thereafter. The liability will be re-measured at each balance sheet date until the warrants are exercised or expire. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of the warrants is estimated using an appropriate valuation model. Such warrant classification is also subject to re-evaluation at each reporting period.
Offering costs associated with warrants classified as liabilities are expensed as incurred and are presented as offering cost related to warrant liability in the statement of operations. Offering costs associated with the sale of warrants classified as equity are charged against proceeds.
Revenue Recognition
We follow Accounting Standards Codification (“ASC”) 606, "Revenue from Contracts with Customers" (Topic 606).
In accordance with Topic 606, we recognize revenue using the following five-step approach:
|
1. |
Identify the contract with a customer. |
|
2. |
Identify the performance obligations in the contract. |
|
3. |
Determine the transaction price of the contract. |
|
4. |
Allocate the transaction price to the performance obligations in the contract. |
|
5. |
Recognize revenue when or as performance obligations are satisfied. |
We record revenue associated with product development projects that we enter into with certain customers. In general, these product development projects are complex, and we do not have certainty about our ability to achieve the project milestones. The achievement of a milestone is dependent on our performance obligation and requires acceptance by the customer. We recognize this revenue at a point in time based on when the performance obligation is met. The payment associated with achieving the performance obligation is generally commensurate with our effort or the value of the deliverable and is nonrefundable. We record the expenses related to these product development projects in research and development expense, in the periods such expenses were incurred.
We record revenue associated with the sale of production-level systems once control over the product is transferred to the customer. We record the expense related to the sales of these systems as cost of revenue during the period delivered.
23
Results of Operations
Costs and Expenses
Cost of revenue consists of direct materials, direct labor and overhead for our production-level wireless charging systems. Research and development expenses include costs associated with our efforts to develop our technology, including personnel compensation, consulting, engineering supplies and components, intellectual property costs, regulatory expense and general office expenses specifically related to the research and development department. Sales and marketing expenses include costs associated with selling and marketing our technology to our customers, including personnel compensation, public relations, graphic design, tradeshow, engineering supplies utilized by the sales team and general office expenses specifically related to the sale and marketing department. General and administrative expenses include costs for general and corporate functions, including personnel compensation, facility fees, travel, telecommunications, insurance, professional fees, consulting fees, general office expenses, and other overhead.
Three Months Ended March 31, 2023 and 2022
Revenue. During the three months ended March 31, 2023 and 2022, we recorded revenue of $96,676 and $215,961, respectively. The decrease of $119,285 is primarily due to a decrease in production-level systems sales volume.
Costs and Expenses and Loss from Operations. Costs and expenses are made up of cost of revenue, research and development, sales and marketing and general and administrative. Losses from operations for the three months ended March 31, 2023 and 2022 were $6,294,059 and $7,155,544, respectively.
Cost of Revenue. Cost of revenue was $138,813 and $203,249, respectively, for the three months ended March 31, 2023 and 2022. The decrease of $64,436 is primarily due to a decrease in sales volume.
Research and Development Costs. Research and development costs were $3,078,524 and $3,527,146, respectively, for the three months ended March 31, 2023 and 2022. The decrease of $448,622 is primarily due to a $320,939 decrease in compensation, consisting of a $176,627 decrease in payroll costs and a $144,312 decrease in stock-based compensation, an $87,786 decrease in consulting and third-party services expenses and a $35,707 decrease in regulatory legal fees.
Sales and Marketing Costs. Sales and marketing costs for the three months ended March 31, 2023 and 2022 were $1,211,938 and $1,613,590, respectively. The decrease of $401,652 is primarily due to a $208,413 decrease in compensation, consisting of a $132,939 decrease in payroll costs and a $75,474 decrease in stock-based compensation, a $101,876 decrease in engineering supplies used by the sales and marketing staff, a $66,739 decrease in tradeshow expense and a $59,214 decrease in public relations, consulting and third-party services expenses, partially offset by a $43,000 increase in recruiting fees.
General and Administrative Expenses. General and administrative costs for the three months ended March 31, 2023 and 2022 were $1,961,460 and $2,027,520, respectively. The decrease of $66,060 is primarily due to a $108,472 decrease in recruiting fees, a $71,048 decrease in investor relations, consulting and third-party services expenses, a $55,043 decrease in stock-based compensation, a $21,605 decrease in training expense and an $18,207 decrease in annual meeting costs, partially offset by a $209,106 increase in legal fees.
Offering costs related to warrant liability. Offering costs related to warrant liability were $591,670 for the three months ended March 31, 2023. We did not incur any such costs for the three months ended March 31, 2022.
Interest Income. Interest income for the three months ended March 31, 2023 was $233,222 as compared to interest income of $2,826 for the three months ended March 31, 2022. The increase of $230,396 is primarily due to higher savings interest rates.
Net Loss. As a result of the above, net loss for the three months ended March 31, 2023 was $6,652,507 as compared to $7,152,718 for the three months ended March 31, 2022.
24
Liquidity and Capital Resources
During the three months ended March 31, 2023 and 2022, we recorded revenue of $96,676 and $215,961, respectively. We incurred net losses of $6,652,507 and $7,152,718 for the three months ended March 31, 2023 and 2022, respectively. Net cash used in operating activities was $5,364,355 and $6,356,971 for the three months ended March 31, 2023 and 2022, respectively. We are currently meeting our liquidity requirements through the proceeds of securities offerings that raised net proceeds of $27,043,751 during 2021, $744,787 during 2022 and $5,351,888 during the first quarter of 2023, along with proceeds from contributions to the ESPP and payments received from customers.
We believe our cash on hand as of March 31, 2023, together with anticipated revenues, will be sufficient to fund our operations through May 2024. Although we intend to continue our research and development activities, there can be no assurance that our available resources will be sufficient to enable us to generate revenues sufficient to sustain operations. Accordingly, we will likely pursue additional financing, which could include offerings of equity or debt securities, bank financings, commercial agreements with customers or strategic partners, and other alternatives, depending upon market conditions. There is no assurance that such financing will be available on terms that we would find acceptable, or at all.
During the three months ended March 31, 2023, cash flows used in operating activities were $5,364,355, consisting of a net loss of $6,652,507, less adjustments to reconcile net loss to net cash used in operating activities aggregating $1,439,420 (principally issuance costs allocated to warrant liability of $591,670, stock-based compensation of $522,077, amortization of operating lease ROU assets of $181,357, inventory net realizable adjustment of $111,019 and depreciation and amortization expense of $45,797), a $420,368 decrease in accrued expenses, a $176,606 decrease in operating lease liabilities and a $166,906 decrease in accrued severance expense, partially offset by a $450,253 increase in accounts payable and a $178,072 decrease in prepaid expenses and other current assets.
During the three months ended March 31, 2022, cash flows used in operating activities were $6,356,971, consisting of a net loss of $7,152,718, less non-cash expenses aggregating $1,053,761 (principally stock-based compensation of $796,906, decrease in amortization of operating lease right-of-use assets of $186,736 and depreciation and amortization expense of $70,119), a $271,044 decrease in accounts payable, a $203,010 decrease in operating lease liabilities and a $180,535 decrease in accrued expenses, partially offset by a $443,216 decrease in prepaid expenses and other current assets.
During the three months ended March 31, 2023 and 2022, cash flows used in investing activities were $0 and $44,489, respectively. The cash used in investing activities for the three months ended March 31, 2022 consisted of the purchase of new engineering software licenses.
During the three months ended March 31, 2023, cash flows provided by financing activities were $5,417,022, which consisted of $2,677,191 in net proceeds from the issuance and sale of common stock and warrants, $2,674,697 in net proceeds from the sale of shares of our common stock in an at-the-market (“ATM”) offering and $65,134 in proceeds from the ESPP. During the three months ended March 31, 2022, cash flows provided by financing activities were $104,217, which consisted entirely of proceeds from contributions to the ESPP.
Research and development of new technologies is, by its nature, unpredictable. Although we intend to continue our research and undertake development activities, there can be no assurance that our available resources will be sufficient to enable us to generate revenues sufficient to sustain operations.
Furthermore, since we have no committed source of financing, there can be no assurance that we will be able to raise capital as and when we need it to continue our operations.