Energous Corp 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview 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. 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: Device Type Application RF Tags Cold Chain, Asset Tracking, Medical IoT IoT Sensors 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 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 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. Recent Developments Effective March 24, 2024, Cesar Johnston is no longer serving as President and Chief Executive Officer of the Company. Mr. 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. Burak. 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. 31 Critical Accounting Estimates and Policies The following discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Please see Note 3 to our financial statements for a more complete description of our significant accounting policies. 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 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. For the Years Ended December 31, 2023 and 2022 Revenues. During 2023 and 2022, we recorded revenue of $474,184 and $851,321, respectively. The decrease in revenue in 2023 is primarily due to a decrease in production-level systems sales volume. 32 Expenses. Costs and expenses are made up of cost of revenue, research and development, sales and marketing, general and administrative and severance expense. Operating expenses for 2023 and 2022 were $22,573,929 and $27,537,646, respectively. Cost of Revenue. Cost of revenue was $279,083 and $1,277,565, respectively, for 2023 and 2022. 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 $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 $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 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 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 2023 was $809,227, compared to $411,065 for 2022, primarily due to higher interest rates for our money market account. Net Loss. As a result of the factors described above, net loss for 2023 was $19,366,763, compared to $26,275,260 for 2022. 33 Liquidity and Capital Resources During 2023 and 2022, we recorded revenue of $474,184 and $851,321, respectively. We incurred a net loss of $19,366,763 and $26,275,260 for 2023 and 2022, respectively. 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, $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. Accordingly, we may 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 would be available on terms that we would find acceptable, or at all. 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 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. Item 7A. 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.