Energous Corp 10-Q

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, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 on our business and our response to it; 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 proprietary semiconductor chipsets, software controls, hardware designs and antennas, that enables radio frequency (“RF”) based charging for electronic devices. The WattUp technology has a broad spectrum of capabilities, including contact-based wireless charging and wireless charging at various distances. We have demonstrated that, for non-contact applications, our transmitter technology is able to mesh into a wire-free charging network that is expected to allow users to charge their devices even as the devices are moved about in three-dimensional space (“mobility charging”). In November 2016 we entered into a Strategic Alliance Agreement with Dialog Semiconductor plc (“Dialog”), an industry leader in Bluetooth low energy semiconductors and power management semiconductors. In conjunction with the Strategic Alliance Agreement, Dialog manufactures and is the exclusive distributor of integrated circuit (“IC”) products that incorporate our designs and provides sales and logistic support to customers on a global basis. We believe our proprietary WattUp technology can be utilized in consumer electronics such as wearables, hearing aids, earbuds, Bluetooth headsets, Internet of Things (“IoT”) devices, smartphones, tablets, smartwatches, fitness bands, keyboards, mice, remote controls, rechargeable lights, batteries, medical devices, and other devices with charging requirements that would otherwise require battery replacement or a wired power connection. We believe our technology is innovative in its approach, in that we are developing solutions that charge electronic devices by surrounding them with a focused RF energy pocket. We are engineering solutions that deliver wire-free energy for contact-based charging applications and are also developing non-contact charging at distances up to approximately three feet, as well as low-power charging for distances up to 15 feet and in some use cases mobility charging. 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 for applications including hearing aids, fitness bands, smartwatches, smartphones, smartglasses, sensors, industrial applications, keyboards, mice, headsets, earbuds, headphones, Bluetooth tracking tags and more. We are engaged with several consumer electronics (CE) and medical device companies that are in the pre-production stage of WattUp-based product development. In 2019, our first end customer product entered the market and we expect additional partner products to be announced and launched in 2020. We are also in discussion with potential customers in the consumer and industrial spaces that are considering our solutions to supply low power distance charging for products that could enter the market in 2021. 19 When the company was founded in 2012, we recognized the need to design and build an enterprise-class network management and control software (“NMS”) system that would be integral to supporting our customers’ rapid and cost-effective deployment of our wire-free charging technology. Our NMS system is robust and flexible enough to both scale up to control thousands of devices across an enterprise, or scale down to meet the needs of a home or IoT environment. In December 2017, we announced Federal Communications Commission (“FCC”) certification of our first-generation WattUp Mid Field transmitter, which simultaneously powers multiple devices at a distance of up to three feet. This transmitter underwent rigorous, multi-month testing to verify that it met consumer safety and regulatory requirements. We believe this was the first certification of a Part 18 FCC-approved non-contact wireless charging transmitter, and that it establishes engineering design precedents that can streamline future regulatory approvals for our technology and for our customers’ end-products that employ our technology. In April 2020, we announced an FCC certification for a new over-the-air charging transmitter technology which we believe will offer our partners a lower-cost, smaller size transmitter technology for lower power applications. Our technology solution consists principally of transmitter controller ICs, power amplifier ICs and receiver ICs, as well as novel antenna designs, application prototypes and proprietary software algorithms. We submitted our first IC design for wafer fabrication in 2013 and have developed many generations of transmitter and receiver ICs, antenna designs, and software algorithms. We have endeavored to optimize our technology by reducing size and cost, while at the same time increasing performance which enables our designs to be integrated into a broad range of devices. We have developed a “building block” approach that allows us to scale our product implementations by combining multiple transmitter building blocks or multiple receiver building blocks to meet the power, distance, size and cost requirements of customer applications requirements. Our technology is readily scalable because the same ICs that are used for contact-based charging can be used for distance-based charging solutions. We have developed two classes of chip solutions, a CMOS-based technology focused on low cost, small footprint and low power (less than 5 watts) and a GaAs/GAn-based technology capable of delivering higher power with greater efficiency. We intend to continue to invest in research and development with high power capabilities of 20 watts and beyond at high levels of efficiency. We also intend to continue to invest in improving product performance, efficiency, cost-performance and miniaturization as required to reach multiple markets and expand the power-at-a-distance ecosystem, while maintaining a technology lead on potential competitors. We deliver evaluation kits to potential licensees of our technology, to allow their respective engineering and product management departments to test and evaluate the technology. Our customers’ product development, technology integration and product introduction cycles occur over multiple quarters and generally more than a year can elapse before first evaluation and final shipment of the customer’s product. Once our customers begin to sell products to end customers that incorporate our technology, we would expect the commercialization cycle to shorten over time as the technology matures and market acceptance grows. We generally maintain exclusive rights to all intellectual property in our technology. We have implemented an aggressive intellectual property strategy and are continuing to pursue patent protection for new innovations. As of October 29, 2020, we had more than 122 pending patent applications in the U.S. and abroad. Additionally, the U.S. Patent and Trademark Office and international patent offices have issued 227 patents to us. In addition to the inventions covered by these patents, we have also identified specific inventions that we believe are novel and patentable. In addition to the inventions covered by these patents and patent applications, we have also identified specific inventions that we believe are novel and patentable. We intend to file for patent protection for the most valuable of these, and for other inventions that we expect to develop. This is a significant annual expense and we continually monitor the costs and benefits of each patent application and pursue those that we believe are most protective for our business and expand the core value of the Company. Our seasoned management team has both private and public company experience, as well as relevant industry experience. In addition, we have identified and hired key engineering resources in the areas of IC development, antenna development, hardware, software and firmware engineering as well as integration and testing, which will allow us to continue to expand our technology and intellectual property and to meet our customers’ support requirements. The market for products using our technology is nascent and unproven, so our success is sensitive to many factors, including technological feasibility, regulatory approval, customer acceptance, competition and global market fluctuations. Impact of COVID-19 on Our Business In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. The pandemic continues to affect the United States and the world. We are monitoring the ongoing effects of COVID-19 (including 20 continued outbreaks) and the related business and travel restrictions and changes to behavior intended to reduce its spread, and its 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. The outbreak of COVID-19 has delayed adoption of our technology by potential customers who temporarily shut down their workforce and supply chain based in China, and who continue to evaluate their future prospects and business models, including partnerships with us. For example, in one case, the outbreak delayed the spring launch of a new product that incorporates our technology. Further delays in this or other products could result from the ongoing pandemic. These changes are due in part to changes in how business is conducted as a result of the pandemic, including state executive orders, local shelter-in-place orders, government-imposed quarantines and work-from-home policies in China, the United States, and elsewhere. We have implemented work-from-home policies for our employees that will likely be in place through the end of the year and possibly longer. The effects of state executive orders, local shelter-in-place orders, government-imposed quarantines and our work-from-home policies could negatively impact productivity, disrupt our research and development or other operations, and delay the planned launch of our customers’ new products that incorporate our technology, the magnitude of which will depend, in part, on the length and severity of the continuing restrictions and other limitations on our ability to conduct our business in the ordinary course. Due to the continuing developments and fluidity of this situation, the magnitude and duration of the pandemic and its impact on our operations and liquidity are still uncertain as of the date of this report. Critical Accounting Policies and Estimates Revenue Recognition On January 1, 2018 we adopted Accounting Standards Update No. 2014-09, "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 the performance obligations are met or delivered. Our revenue currently consists of product development projects revenue and royalty revenue from Dialog. We also provide contract services for Dialog. 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 royalty revenue from our manufacturing partner, Dialog, and such royalty revenue is recognized at a point in time based on shipments from Dialog to its customers. We recognize contract services revenue from Dialog over a period of time as the services are performed. The costs associated with this revenue are recognized as the services are performed and are included in cost of services revenue. Results of Operations Operating Expenses 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 21 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 September 30, 2020 and 2019 Revenue. During the three months ended September 30, 2020 and 2019, we recorded revenue of $61,500 and $40,500, respectively. Operating Expenses and Loss from Operations. Operating expenses are made up of research and development, sales and marketing, general and administrative expenses and cost of services revenue. Losses from operations for the three months ended September 30, 2020 and 2019 were $7,560,058 and $8,302,069, respectively. Research and Development Costs. Research and development costs were $4,003,642 and $5,190,056, respectively, for the three months ended September 30, 2020 and 2019. The decrease of $1,186,414 is primarily due to an $444,185 decrease in compensation, consisting of a $212,364 decrease in payroll costs and a $231,822 decrease in stock-based compensation from a lower headcount within the department, a $357,521 decrease in legal costs pertaining to patent and intellectual property management, a $243,629 decrease in engineering supplies, components and chip development costs due to project timing, an $83,995 decrease in depreciation and a $71,655 decrease in regulatory testing expense. Sales and Marketing Costs. Sales and marketing costs for the three months ended September 30, 2020 and 2019 were $1,500,068 and $1,242,105, respectively. The increase of $257,963 is primarily due to a $238,945 increase in payroll costs from a higher headcount within the department, a $111,938 increase in consulting and third party services, partially offset by an $93,185 decrease in travel, meals and entertainment as a result of COVID-19 restrictions. General and Administrative Expenses. General and administrative costs for the three months ended September 30, 2020 and 2019 were $2,117,848 and $1,910,408, respectively. The increase of $207,440 is primarily due to a $109,910 increase in stock-based compensation due to the issuance of equity awards to newly appointed board members during the preceding 12 months, a $346,683 increase in legal expense and an $89,357 increase in insurance premiums, partially offset by a $150,670 decrease in recruiting costs, a $70,581 decrease in accounting and auditing fees, a $54,496 decrease in travel, meals and entertainment as a result of COVID-19 restrictions, a $32,393 decrease in payroll costs and a $22,048 decrease in depreciation. In t e r e s t Income . In t e r e s t income fo r t h e three m on t h s e nd e d September 30, 2020 w a s $3,221 a s c o m p a r e d t o interest income of $117,842 fo r t h e three m on t h s e nd e d September 30, 2019 . The decrease of $114,621 is primarily due to lower savings interest rates and a lower average cash balance. N e t L o ss . A s a r e s u l t o f t h e a bov e , n e t l o s s fo r t h e three m on t h s e nd e d September 30, 2020 was $7,556,837 a s c o m p a r e d t o $8,184,227 fo r t h e three m on t h s e nd e d September 30, 2019 . Nine Months Ended September 30, 2020 and 2019 Revenue. During the nine months ended September 30, 2020 and 2019, we recorded revenue of $237,350 and $154,500, respectively. Operating Expenses and Loss from Operations. Operating expenses are made up of research and development, sales and marketing, general and administrative expenses and cost of services revenue. Losses from operations for the nine months ended September 30, 2020 and 2019 were $24,426,373 and $29,344,266, respectively. Research and Development Costs. Research and development costs were $12,909,378 and $17,505,571, respectively, for the nine months ended September 30, 2020 and 2019. The decrease of $4,596,373 is primarily due to a $2,966,006 decrease in compensation, consisting of a $1,849,434 decrease in payroll costs and an $1,116,573 decrease in stock-based compensation from a lower headcount within the department, an $875,473 decrease in engineering supplies, components and chip development costs due to project timing, a $295,869 decrease in depreciation, a $156,123 decrease in regulatory testing fees, a $144,808 decrease in legal fees pertaining to patents and intellectual property and a $136,101 decrease in consulting fees. Sales and Marketing Costs. Sales and marketing costs for the nine months ended September 30, 2020 and 2019 were $4,386,881 and $3,985,467, respectively. The increase of $401,414 is primarily due to a $390,737 increase in compensation, consisting of a $311,958 increase in payroll costs and an $78,779 increase in stock-based 22 compensation from a higher headcount within the department , a $ 374 , 209 increase in consulting and third party services, a $64,126 increase in recruiting costs and a $47,553 increase in rent expense, partially offset by a $ 244 , 655 decrease in travel, meals and entertainment as a result of COVID-19 restrictions, a $124,394 decrease in engineering supplies and components used by the sales and marketing staff and a $113,522 decrease in tradeshow expenses, General and Administrative Expenses. General and administrative costs for the nine months ended September 30, 2020 and 2019 were $7,240,925 and $8,007,548, respectively. The decrease of $766,623 is primarily due to a $849,438 decrease in compensation, consisting of a $712,258 decrease in stock-based compensation due to certain equity awards reaching full expense amortization during the previous year and a $137,179 decrease in payroll costs, a $196,366 decrease in recruiting costs, a $129,147 decrease in travel, meals and entertainment as a result of COVID-19 restrictions and a $73,431 decrease in general office expenses, partially offset by a $245,011 increase in insurance premiums, a $149,385 increase in consulting fees and a $135,535 increase in accounting and auditing fees. Cost of Services Revenue. During the nine months ended September 30, 2020 and 2019, we recorded cost of services revenue of $126,539 and $0, respectively. These costs are related to our contract services performed for Dialog. In t e r e s t Income . In t e r e s t income fo r t h e nine m on t h s e nd e d September 30, 2020 w a s $67,134 a s c o m p a r e d t o interest income of $336,575 fo r t h e nine m on t h s e nd e d September 30, 2019 . The decrease of $269,441 is primarily due to lower savings interest rates and a lower average cash balance. N e t L o ss . A s a r e s u l t o f t h e a bov e , n e t l o s s fo r t h e nine m on t h s e nd e d September 30, 2020 was $24,359,239 a s c o m p a r e d t o $29,007,691 fo r t h e nine m on t h s e nd e d September 30, 2019 . L i q u i d it y a n d Cap it a l R e s o ur ces During the nine months ended September 30, 2020 and 2019, we recorded revenue of $237,350 and $154,500, respectively. We incurred net losses of $24,359,239 and $29,007,691 for the nine months ended September 30, 2020 and 2019, respectively. Net cash used in operating activities was $19,435,940 and $20,968,817 for the nine months ended September 30, 2020 and 2019, respectively. We are currently meeting our liquidity requirements through the proceeds from securities offerings that raised net proceeds of $23,319,156 in March 2019, $4,557,693 during the fourth quarter 2019, $5,506,880 during the first quarter 2020 and $9,216,611 during the second quarter 2020, along with payments received from customers. We believe our current cash on hand, together with anticipated revenues and funds raised from the at-the-market (“ATM”) finance offering will be sufficient to fund our operations into November 2021. 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 would be available on terms that we would find acceptable, or at all. During the nine months ended September 30, 2020, cash flows used in operating activities were $19,435,940, consisting of a net loss of $24,359,239, less non-cash expenses aggregating $7,209,398 (principally stock-based compensation of $6,318,948, amortization of operating lease right-of-use assets of $570,460 and depreciation and amortization expense of $286,990), an $818,306 decrease in accrued expenses, a $626,053 decrease in accounts payable, $514,167 decrease in operating lease liabilities and a $331,367 increase in prepaid expenses and other current assets. During the nine months ended September 30, 2019, cash flows used in operating activities were $20,968,817, consisting of a net loss of $29,007,691, less non-cash expenses aggregating $9,320,848 (principally stock-based compensation of $8,069,000, depreciation and amortization expense of $652,266 and amortization of operating lease right-of-use assets of $599,582), a $556,150 decrease in accounts payable, a $494,768 decrease in operating lease liabilities and a $174,603 decrease in accrued expenses. During the nine months ended September 30, 2020 and 2019, cash flows used in investing activities were $7,302 and $183,935, respectively. The cash used in investing activities for the nine months ended September 30, 2020 consisted of the purchase of new lab equipment. The cash used in investing activities for the nine months ended September 30, 2019 primarily consisted of leasehold improvements related to the construction of a regulatory testing chamber. During the nine months ended September 30, 2020, cash flows provided by financing activities were $15,062,387, which consisted of $14,723,491 in net proceeds from the sale of shares of our common stock to the public in an ATM offering and $338,896 in proceeds from contributions to the ESPP. During the nine months ended September 30, 2019, cash flows provided by financing activities were $23,846,291, which consisted of $23,319,156 in net proceeds from a private offering 23 of shares and warrants pursuant to a shelf registration, $466,398 in proceeds from contributions to the ESPP and $400,103 in proceeds from the exercise of stock options, partially offset by $339,366 in shares withheld for the payment of payroll taxes for the delivery of RSUs and PSUs. 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. Off Balance Sheet Transactions As of September 30, 2020, we did not have any off-balance sheet transactions. Material Changes in Specified Contractual Obligations A table of our specified contractual obligations was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operation of our most recent Annual Report on Form 10-K. There were no material changes outside the ordinary course of our business in the specified contractual obligations during the three months ended September 30, 2020. Item 3. Quantitative and Qualitative Disclosure About Market Risk There has been no material change in our exposure to market risk during the three months ended September 30, 2020. Please refer to "Quantitative and Qualitative Disclosures about Market Risk" contained in Part II, Item 7A of our Form 10-K for the year ended December 31, 2019 for a discussion of our exposure to market risk.