What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-28 compared with 2023-03-30 · 61 added, 87 removed, 40 unchanged (79% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

We have developed our wireless power networks technology (“WPNT”), consisting of semiconductor chipsets, software controls, hardware designs and antennas, that enable radio frequency (“RF”) based charging for Internet of Things (“IoT”) devices.

Our WPNT 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 initial IoT applications we are targeting are RF tags for asset tracking and cold chain applications, electronic shelf labeling (“ESL”), and IoT sensors for retail, industrial, healthcare, and logistics markets.

We believe our technology is innovative in its approach, in that we are developing solutions that charge IoT devices using RF technology.

To date, we have developed and released to production multiple transmitters and receivers, including prototypes and partner production designs.

The transmitters vary based on form factor and power specifications and frequencies, while the receivers are designed to support a myriad of wireless charging applications including:

Cold Chain, Asset Tracking, Medical IoT

Cold Chain, Logistics, Asset Tracking

Electronic Shelf Labels

Retail and Industrial IoT

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.

We started shipping our first at-a-distance wireless PowerBridges for commercial IoT applications in the fourth quarter of 2021, and we expect additional wireless power enabled products to be released as we move our business forward.

Impact of Current Global Economic Conditions on Our Business

Uncertainty in the global economy presents significant risks to our business.

We are subject to continuing risks and uncertainties in connection with the current macroeconomic environment, including as a result of inflation and rising interest rates, geopolitical factors, including the ongoing conflict between Russia and Ukraine and the responses thereto, supply chain disruptions and the remaining effects of the COVID-19 pandemic.

We are subject to continuing exposure relating to the current macroeconomic environment, including inflation and rising interest rates, geopolitical factors, including the ongoing conflict between Russia and Ukraine as well as in the Middle East and the responses thereto and supply chain disruptions.

We are closely monitoring the impact of these factors on all aspects of our business, including their impact on our operations, financial position, cash flows, inventory, supply chains, global regulatory approvals, purchasing trends, customer payments, and the industry in general, in addition to the impact on our employees.

We believe that the COVID-19 pandemic delayed adoption of our technology by potential customers who have experienced workforce and supply chain disruptions, and who continue to evaluate their future prospects and business models, including partnerships with us.

Further delays in the adoption of our current or future products could result from the ongoing pandemic and other macroeconomic events.

At times, certain of our outsourcing partners, component suppliers and logistical service providers have experienced disruptions, resulting in supply shortages that have affected and may continue to affect our sales.

Similar disruptions could occur in the future.

Recent Developments

Effective March 24, 2024, Cesar Johnston is no longer serving as President and Chief Executive Officer of the Company.

Johnston will remain a member of the Company’s Board of Directors.

The Board has initiated a search to identify a permanent successor as chief executive officer of the Company.

In addition, as of March 24, 2024, the Board appointed Mallorie Burak to also serve as interim principal executive officer until the appointment of a permanent replacement chief executive officer for the Company.

The Board also established an Office of the Chair, composed of Reynette Au, Chair of the Board, and Ms.

The Office of the Chair will oversee strategic planning and direction of the Company, working closely with the Board, the senior leadership team, and other stakeholders to deliver the strategic mission of the Company.

Critical Accounting Estimates and Policies

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Please see Note 3 to our financial statements for a more complete description of our significant accounting policies.

Basis of Presentation.

The accompanying audited financial statements and footnotes for the years ended December 31, 20 2 2 and 20 2 1 have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.

GAAP”) and applicable rules and regulations of the SEC regarding financial information.

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:

Identify the contract with a customer.

Identify the performance obligations in the contract.

Determine the transaction price of the contract.

Allocate the transaction price to the performance obligations in the contract.

Recognize revenue when the 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.

Research and Development.

Research and development expenses are charged to operations as incurred.

For internally developed patents, all patent application costs are expensed as incurred as research and development expense.

Patent application costs, generally legal costs, are expensed as research and development costs until such time as the future economic benefits of such patents become more certain.

Also included in research and development costs are payroll costs and stock-based compensation for employees within the department.

We incurred research and development costs of $12,497,781 and $20,572,580 for 2022 and 2021, respectively.

Income Taxes .

We recognize deferred tax assets and liabilities for the expected future tax consequences of items that have been included in or excluded from our financial statements or tax returns.

Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse.

For 2022 and 2021, we had $12,954,895 and $13,820,144, respectively, of research and development expenses capitalized for federal income tax purposes, with amortization commencing upon our receiving an economic benefit from the related research.

As of December 31, 2022, we had approximately $273,056,000 gross federal net operating loss carryforwards (“NOLs”) and federal and state research and development tax credit carryforwards of approximately $6,373,000 and $5,258,000, respectively.

As of December 31, 2022 and 2021, deferred tax assets consisted principally of net operating loss and tax credit carryforwards, the research and development costs and stock-based compensation, and such deferred tax assets were fully reserved.

Accordingly, our effective tax rate for 2022 and 2021 was nil.

Internal Revenue Code Section 382 imposes limitations on the use of net operating loss carryforwards when the stock ownership of one or more 5% stockholders (stockholders owning 5% or more of our outstanding capital stock) has increased on a cumulative basis by more than 50 percentage points.

Accordingly, an ownership change could trigger a limitation of the use of the loss carryforward.

We completed a Section 382 analysis as of December 31, 2022 and determined that none of our federal net operating loss carryforwards or federal research and development tax credits are limited.

In assessing the realization of deferred tax assets, management considers whether it is more li kely than not that all or some portion of the deferred tax assets will be realized.

The ultimate realization of deferred tax assets is dependent upon the future generation of taxable income during the periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and taxing strategies in making this assessment.

Based on this assessment, management has established a full valuation allowance against all of the net deferred tax assets for each period, since it is more likely than not that all of the deferred tax assets will not be realized.

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 our tax returns that do not meet these recognition and measurement standards.

As of December 31, 2022 and 2021, no liability for unrecognized tax benefits was required to be reported.

The guidance also discusses the classification of related interest and penalties on income taxes.

Our policy is to record interest and penalties on uncertain tax positions as a component of income tax expense.

No interest or penalties were recorded for 2022 and 2021.

Use of Estimates.

The preparation of financial statements in conformity with U.S.

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.

Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates.

Although we believe 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.

Going Concern.

ASC 205-40 Presentation of Financial Statements - Going Concern , requires management to assess our ability to continue as a going concern.

In accordance with this guidance, we have evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the Financial Statements are issued.

Determining the extent to which conditions or events raise substantial doubt about our ability to continue as a going concern requires significant judgment and estimation by us.

Our significant estimates related to this analysis may include identifying business factors used in the forecasted financial results and liquidity.

We believe that the estimated values used in our going concern analysis are based on reasonable assumptions.

However, such assumptions are inherently uncertain and actual results could differ materially from those estimates.

Results of Operations

Operating Expenses

Cost of revenue consists of direct materials, direct labor and overhead for our production-level wireless charging systems.

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During 2023 and 2022, we recorded revenue of $474,184 and $851,321, respectively.

The increase in revenue is primarily from an increase in production-level systems sales volume.

Operating Expenses and Loss from Operations.

The decrease in revenue in 2023 is primarily due to a decrease in production-level systems sales volume.

Costs and expenses are made up of cost of revenue, research and development, sales and marketing, general and administrative and severance expense.

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Cost of revenue was $279,083 and $1,277,565, respectively, for 2023 and 2022.

For 2022, cost of revenue is for production-level systems that are sold to customers.

We did not incur any cost of revenue during 2021.

The decrease of $998,482 is primarily due to a decrease in sales volume.

Research and Development Expenses.

Research and development costs for 2023 and 2022 were $10,810,570 and $12,497,781, respectively.

The $8,074,799 decrease in research and development expenses is primarily due to a $7,110,400 decrease in compensation, consisting of a $5,448,767 decrease in stock-based compensation primarily from the recognition of PSU award expense during 2021 and the transfer of the current CEO to the General and Administrative department towards the end of 2021 after his promotion and a $1,661,633 decrease in payroll costs from a lower headcount within the department, a $708,682 decrease in engineering supplies, components and chip development due to project timing, a $205,721 decrease in consulting and third-party services and a $113,167 decrease in regulatory legal fees, partially offset by a $152,400 increase in recruiting expense.

Sales and Marketin g Expenses.

Sales and marketing expenses for 20 2 2 a nd 20 2 1 were $4,884,959 and $ 8,598,343 , respe ctively.

The $ 3,713,384 de crease in sales and marketing expenses is primarily due to a $ 3,364,533 de crease in compensation, consisting of a $ 2,650,885 de crease in stock-based compensation primarily from the recognition of PSU award expense during 2021 and a lower headcount within the department and a $ 713,648 de crease in payroll costs from a lower headcount within the department , a $359,870 decrease in public relations, consulting and third-party services expense, a $225,805 decrease in marketing and promotional expense, a $96,451 decrease in engineering supplies and components used by sales and marketing staff for customer demonstrations, partially offset by a $250,941 increase in tradeshow costs and a $93,720 increase in recruiting expense .

The $1,687,211 decrease in research and development expenses in 2023 is primarily due to a $476,065 decrease in stock-based compensation from older awards becoming fully expensed prior to the current year, a $368,844 decrease in engineering supplies, components and chip development due to project timing, a $208,929 decrease in consulting and third-party services, a $147,763 decrease in patent legal fees, a $143,700 decrease in recruiting expense, a $101,972 decrease in postage, a $93,430 decrease in regulatory testing and a $77,992 decrease in regulatory legal fees.

Sales and Marketing Expenses.

Sales and marketing expenses for 2023 and 2022 were $3,852,393 and $4,884,959, respectively.

The $1,032,566 decrease in sales and marketing expenses in 2023 is primarily due to a $366,181 decrease in compensation, consisting of a $286,222 decrease in payroll costs due to a lower headcount within the department and a $79,959 decrease in stock-based compensation, a $188,879 decrease in engineering supplies and components used by sales and marketing staff for customer demonstrations, an $85,280 decrease in tradeshow costs, an $80,720 decrease in recruiting expense, a $65,384 decrease in legal fees, a $61,882 decrease in depreciation, a $53,237 decrease in bad debt expense and a $43,886 decrease in supplies and general office expense.

General and Administrative Expenses.

General and administrative costs for 2023 and 2022 were $7,272,464 and $8,078,950, respectively.

The $922,533 decrease in general and administrative expense is primarily due to a $710,041 decrease in compensation, consisting of an $880,314 decrease in stock-based compensation primarily from the recognition of PSU award expense during 2021, offset by a $170,273 increase in payroll costs, a $184,018 decrease in recruiting expense, a $141,489 decrease in general corporate legal fees, and a $75,806 decrease in annual meeting expense, partially offset by $109,204 increase in travel expense and a $99,485 increase in accounting and audit fees.

The $806,486 decrease in general and administrative expense in 2023 is primarily due to a $722,294 decrease in compensation, consisting of an $432,254 decrease in stock-based compensation primarily due to reduced expense recorded for Board of Directors and executive equity awards and a $290,040 decrease in payroll costs primarily due to the departure of the former Acting Chief Financial Officer during 2023, a $151,844 decrease in recruiting expense, a $144,729 decrease in insurance premiums, a $101,972 decrease in postage, a $62,772 decrease in supplies and general office expense, a $57,258 decrease in training, dues and subscriptions, a $25,285 decrease in travel costs and a $23,110 decrease in Board of Director fees, partially offset by a $263,781 increase in legal fees, a $156,037 increase in investor relations, consulting and third party services expenses, an $83,107 increase in accounting and audit fees and a $41,857 increase in annual meeting expense.

Severance Expense.

Severance expense for 2023 and 2022 was $359,419 and $798,391, respectively.

During 2022, severance expense was incurred in connection with the separation agreement with our former Senior Vice President of Marketing and Business Development, Neeraj Sahejpal and consisted of $545,782 in cash payments and estimated payroll taxes and $252,609 from the early vesting of certain stock award grants.

During 2021, severance expense was incurred in connection with the separation agreement with our former President and Chief Executive Officer, Stephen Rizzone, consisting of cash payments and estimated payroll taxes of $3,732,178 and stock-based compensation of $284,994 from the extension of the exercise period for his stock options.

During 2023, severance expense was incurred in connection with the resignation of the former Acting Chief Financial Officer and the departure of six other employees.

During 2022, severance expense was incurred in connection with the separation agreement with our former Senior Vice President of Marketing and Business Development.

Loss from Operations.

Loss from operations for 2022 and 2021 was $26,686,325 and $41,432,785, respectively.

Loss from operations for 2023 and 2022 was $22,099,745 and $26,686,325, respectively, primarily due to the factors described above.

Offering Costs from Warrant Liability.

Offering costs related to warrant liability were $591,670 during 2023.

We did not have a warrant liability as of December 31, 2022.

Change in Fair Value of Warrant Liability.

Other income resulting from the change in fair value of the warrant liability was $2,515,425 during 2023.

We did not have a warrant liability as of December 31, 2022.

Interest Income.

Interest income for 2022 was $411,065, compared to $5,492 for 2021, primarily due to higher interest rates for the savings account.

As a result of the above, net loss for 2022 was $26,275,260, compared to $41,427,293 for 2021.

Interest income for 2023 was $809,227, compared to $411,065 for 2022, primarily due to higher interest rates for our money market account.

As a result of the factors described above, net loss for 2023 was $19,366,763, compared to $26,275,260 for 2022.

Liquidity and Capital Resources

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Net cash used in operating activities was $19,248,510 and $23,636,747 for 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 and $744,787 during 2022, proceeds from contributions to the employee stock purchase plan (“ESPP”), along with payments received from customers.

We believe our current cash on hand, together with proceeds from the underwritten offering conducted during the first quarter of 2023 and anticipated revenues (See Note 12 – Subsequent Events), will be sufficient to fund our operations through March 2024.

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 $6,916,775 during 2023, along with proceeds of $94,640 from the sale of stock to our CEO Cesar Johnston during 2023, contributions to the ESPP of $72,930 during 2023 and payments received from customers.

We believe our current cash on hand, together with the expected sale of common stock through registered offerings and pursuant to our ATM offering program during 2024, implementation of cost and expense reductions and anticipated revenues, will be sufficient to fund our operations through March 2025.

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.

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There is no assurance that such financing would be available on terms that we would find acceptable, or at all.

$ 246,156 ), a $ 770 , 031 decrease in operating lease liabilities, a $558 ,923 decrease in accrued severanc e , a $305,192 decrease in accounts payable and a $105,821 increase in inventory, partially offset by a $2 6 7,097 increase in accrued expense and a $99,512 decrease in accounts receivable.

D uring 20 21 , cash flows used in operating activities were $ 28,720,389 , consisting of a net loss of $ 41,427,293 , less non-cash expenses aggregating $ 12 , 874 , 593 (representing principally stock-based compensation of $ 11,931,188 , de crease in right-of-use lease assets of $674,306 and depreciation and amortization expense of $ 258,249 ), a $733,473 decrease in operating lease liabilities, a $238,184 increase in prepaid expenses and other current assets and a $218,602 increase in accounts receivable, partially offset by a $975,439 increase in accrued severance and a $109,118 increase in accounts payable.

During 2023, cash flows used in operating activities were $19,248,510, consisting of a net loss of $19,366,763, less adjustments to reconcile net loss to net cash used in operating activities aggregating $816,144 (principally stock-based compensation of $1,677,950, amortization of operating lease ROU assets of $719,827, issuance costs allocated to warrant liability of $591,670, depreciation and amortization expense of $187,209 and inventory net realizable adjustment of $167,413, partially offset by a decrease in fair value of the warrant liability of $2,515,425), a $705,895 decrease in operating lease liabilities, a $536,477 decrease in accrued expenses, a $491,230 increase in inventory and a $282,918 decrease in accrued severance, partially offset by a $978,569 increase in accounts payable, a $288,406 increase in prepaid expenses and other current assets and a $54,299 decrease in accounts receivable.

During 2022, cash flows used in operating activities were $23,636,747, consisting of a net loss of $26,275,260, less non-cash expenses aggregating $3,936,182 (representing principally stock-based compensation of $2,918,817, decrease in right-of-use lease assets of $730,452 and depreciation and amortization expense of $246,156), a $770,031 decrease in operating lease liabilities, a $558,923 decrease in accrued severance, a $305,192 decrease in accounts payable and a $105,821 increase in inventory, partially offset by a $267,097 increase in accrued expense and a $99,512 decrease in accounts receivable.

During 2023 and 2022, cash flows used in investing activities were $187,078 and $164,994, respectively.

The cash used in 2022 primarily consisted of the purchases of components to build new testing equipment and the purchases of engineering software licenses.

The cash used in 2021 primarily consisted of the purchases of components to build new testing equipment, new lab equipment purchases, as well as costs incurred for designing a new corporate website.

During 2022, cash flows provided by financing activities were $1,017,620, which consisted of $744,787 in net proceeds from the sale of shares of our common stock to the public in an at-the-market (“ATM”) offering and proceeds from contributions to the ESPP of $272,833.

During 2021, cash flows provided by financing activities were $27,427,877, which consisted of $27,043,751 in net proceeds from the sale of shares of our common stock to the public in an ATM offering and proceeds from contributions to the ESPP of $384,126.

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.

The cash used in 2022 primarily consisted of the purchases of new testing equipment and website redesign.

The cash used in 2022 primarily consisted of purchases of components to build new testing equipment and the purchases of engineering software licenses.

During 2023, cash flows provided by financing activities were $7,084,345, which consisted of $4,239,584 in net proceeds from the sale of shares of our common stock pursuant to our ATM offering program, $2,677,191 in net proceeds from the issuance and sale of common stock and warrants in registered offerings, $94,640 in net proceeds from the sale of common stock to the Chief Executive Officer and $72,930 in proceeds from the ESPP.

During 2022, cash flows provided by financing activities were $1,017,620, which consisted of $744,787 in net proceeds from the sale of shares of our common stock pursuant to our ATM offering program and proceeds from contributions to the ESPP of $272,833.

Quantitative and Qualitati ve Disclosures About Market Risk.

In the ordinary course of business, we may be exposed to certain market risks, such as interest rates.

However, after an assessment of these risks to our operations, we do not believe that the primary market risk exposures (within the meaning of Regulation S-K Item 305) will have any material adverse impact on our financial position, results of operations or cash flows for the next fiscal year.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis