What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-24 compared with 2020-03-13 · 53 added, 49 removed, 101 unchanged (50% of the section changed)

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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”).

The WattUp technology has a broad spectrum of capabilities, including near field wireless charging and at-a-distance wireless charging at various distances.

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.

We believe our proprietary WattUp technologies are well suited for many applications, including home automation, surface and implanted medical devices, electronic shelf labels, industrial IoT sensors, tracking devices, hearables, wearables, consumer electronics, public safety and military applications.

Potential future applications include smartphones, commercial and industrial robotics, as well as automotive solutions 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 with an RF energy zone.

We are developing solutions that deliver wire-free energy for near field charging applications and are also developing at-a-distance charging at distances up to approximately three feet, as well as low-power charging for distances up to 15 feet and beyond, some of which involve 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.

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.

The transmitters vary based on form factor, power specifications and frequencies, while the receivers are designed for applications including Bluetooth tracking tags, IoT sensors, hearing aids, electronic shelf labels, fitness bands, health sensors and devices, smartwatches, smartphones, smartglasses, industrial applications, keyboards, mice, headsets, earbuds, headphones, and more.

We have engagements with companies in the consumer electronics (CE), industrial, military and medical device markets that are in the both evaluation and product cycle pre-production stages of integrating WattUp-technology into devices being developed for the end-user.

The first end product featuring our technology entered the market in 2019 and we expect additional WattUp enabled products to be announced and launched in 2021.

We are also in discussions 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 2022.

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.

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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 submitted our first IC design for wafer fabrication in 2013 and since then have developed subsequent 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.

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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 t o 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.

We also intend to continue to invest in improving product performance, efficiency, cost-performance, integration 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 sell evaluation kits to potential customers 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 to two years 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 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 February 13, 2020, we had more than 110 pending patent applications in the U.S.

Additionally, the U.S.

Patent and Trademark Office and international patent offices have issued 220 patents to us.

As of March 1, 2021, the Energous IP portfolio contained 231 awarded patents organized along five (5) critical paths to implementation that we believe a competitor may have to navigate to commercialize WPT technology.

The paths are:

Processing Algorithms, Antenna Designs, Transmitter and Receiver ASICs, Other Software Controls (e.g., Bluetooth â Management and Hardware (e.g., Board Layout).

Further, the company has more than 65 pending patent applications in the U.S.

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.

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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.

Critical Accounting Estimates and Policies

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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 development projects are complex, and we do not have certainty about our ability to achieve the project milestones.

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 revenue based on when the performance obligation is met.

However, we do not recognize revenue in excess of an accepted milestone, as there would be uncertainty of payment for work that has not been accepted.

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 projects in research and development expense, in the periods such expenses were incurred.

We record royalty revenue from our manufacturing partner, Dialog, based on shipments from Dialog to its customers.

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.

During 2020 and 2019, we recorded revenue of $327,350 and $200,143, respectively.

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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 $17,066,122 and $23,228,810 for 2020 and 2019, respectively.

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We completed a Section 382 analysis as of December 31, 2020 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 likely than not that all or some portion of the deferred tax assets will be realized.

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.

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As of December 31, 2020 and 2019, no liability for unrecognized tax benefits was required to be reported.

also discusses the classification of re lated interest and penalties on income taxes.

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.

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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 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, 2020 and 2019

During 2020 and 2019, we recorded revenue of $327,350 and $200,143, respectively.

The $314,680 decrease is due to a decrease in engineering services revenue.

Operating Expenses.

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses.

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.

Operating expenses for 2020 and 2019 were $32,226,514 and $39,008,043, respectively.

Research and Development Expenses.

Research and development expenses include costs for developing our technology, such as IC design costs, salaries, software and facility costs.

Research and development costs for 2020 and 2019 were $17,066,122 and $23,228,810, respectively.

The $9,642,875 decrease in research and development expenses is primarily due to a $4,256,529 decrease in stock-based compensation due to a lower headcount and certain equity awards reaching full expense amortization during 2018, a $1,963,313 decrease in chip development, manufacturing and engineering component costs due to project timing, a $1,185,783 decrease in payroll and related compensation expense, as a result of lower average headcount, a $487,764 decrease in regulatory testing costs, a $470,904 decrease in legal patent costs, a $318,508 decrease in legal costs pertaining to obtaining regulatory approvals and a $248,799 decrease in depreciation expense from a full year of depreciation expense in 2018 of older lab equipment and hardware.

The $6,162,688 decrease in research and development expenses is primarily due to a $3,364,132 decrease in compensation, including a $1,877,798 decrease in payroll costs and a $1,486,335 decrease in

stock-based compensation due to a lower headcount, a $1,9 41 , 453 decrease in chip development, manufacturing and engineering component costs due to reduced project costs , a $ 354 , 880 decrease in depreciation , a $ 196 , 701 decrease in regulatory testing fees , a $ 161 , 636 decrease in legal fees pertaining to patents and intellectual property and a $ 104 , 127 decrease in consulting fees, partially offset by an $88,458 increase in legal fees pertaining to regulatory matters .

Sales and Marketing Expenses.

Sales and marketing expenses for 2020 and 2019 were $5,880,350 and $5,418,967, respectively.

The $766,192 decrease in sales and marketing expenses is primarily due to a $510,685 decrease in payroll and related compensation expense due to lower bonus payouts and lower overall headcount within the department, a $189,759 decrease in supplies utilized for customer demonstrations, a $123,881 decrease in promotional and graphic design costs and a $65,000 decrease in recruiting fees, partially offset by a $145,183 increase in stock-based compensation.

The $461,383 increase in sales and marketing expenses is primarily due to a $487,500 increase in compensation, including a $544,095 increase in payroll costs due to a higher headcount, partially offset by a $56,595 decrease in stock-based compensation, a $435,930 increase in consulting and third party services, a $64,771 increase in rent expense and a $64,126 increase in recruiting costs, partially offset by a $369,356 decrease in travel, meals and entertainment as a result of COVID-19 restrictions, a $136,115 decrease in tradeshow expenses and an $88,628 decrease in engineering supplies and components used by sales and marketing staff.

General and Administrative Expenses.

General and administrative expenses include costs for general and corporate functions, including facility fees, travel, telecommunications, insurance, professional fees, consulting fees and other overhead.

General and administrative costs for 2020 and 2019 were $9,153,503 and $10,360,266, respectively.

The $2,027,123 decrease in general and administrative expense is primarily due to a $1,995,828 decrease in stock-based compensation due to certain equity awards reaching full expense amortization during 2018 and a $156,815 decrease in payroll and related compensation expense, primarily from lower bonus payments, partially offset by a $177,199 increase in insurance expense, primarily as a result of higher premiums for directors and officers insurance.

Loss f rom Operations.

The $1,206,763 decrease in general and administrative expense is primarily due to a $1,284,794 decrease in compensation, including a $1,205,680 decrease in stock-based compensation due to certain equity awards becoming fully amortized during 2020 and also forfeited awards as a result of the retirement of certain board members and a $79,114 decrease in payroll costs, a $209,216 decrease in recruiting costs, a $184,914 decrease in travel, meals and entertainment as a result of COVID-19 restrictions and $134,110 decrease in general office expenses, partially offset by a $334,368 increase in insurance premiums, a $149,317 increase in consulting fees, a $114,030 increase in general corporate legal expense and a $71,442 increase in accounting and auditing fees.

Cost of Services Revenue.

During 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.

Loss from Operations.

Loss from operations for 2020 and 2019 was $31,899,164 and $38,807,900, respectively.

Interest Income.

Interest income for 2019 was $416,274, compared to $89,288 for 2018, primarily due to higher interest rates for the savings account.

Interest income for 2020 was $71,212, compared to $416,274 for 2019, primarily due to lower interest rates for the savings account.

As a result of the above, net loss for 2020 was $31,832,086, compared to $38,399,089 for 2019.

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Net cash used in operating activities was $24,791,545 and $26,621,145 for 2020 and 2019, respectively.

Since inception, we have met our liquidity requirements through private placements of convertible notes, our initial public offering of common stock, sale of common stock to a strategic investor, issuance of common stock to our landlord to reduce monthly base rent obligations and pay for tenant improvements, sale of common stock in follow-on public offerings, private placements of common stock to investors, an “at-the-market” equity offering of our common stock, and revenue received under product development projects with customers.

As of December 31, 2019, we had cash and cash equivalents of $21,684,089.

We believe our current cash on hand, together with anticipated revenues and expected financing, will be sufficient to fund our operations into March 2021.

We are currently meeting our liquidity requirements through the proceeds of securities offerings that raised net proceeds of $53,556,202 during 2020 and $4,557,693 during the fourth quarter of 2019, 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 March 2022.

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.

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 2019, cash flows used in operating activities were $26,621,145, consisting of a net loss of $38,399,089, less non-cash expenses aggregating $12,256,613 (representing principally stock-based compensation of $10,646,580, increase in right-of-use lease assets of $786,342 and depreciation expense of $781,228), a $284,748 increase in accrued expenses and a $130,809 decrease in prepaid expenses and other current assets, partially offset by a $662,766 increase in operating lease liabilities and a $189,866 decrease in accounts payable.

During 2018, cash flows used in operating activities were $32,527,023, consisting of a net loss of $50,840,122, less non-cash expenses aggregating $17,889,258 (representing principally stock-based compensation of $16,753,754 and depreciation expense of $1,054,720), a $163,305 decrease in accounts payable, partially offset by a $445,270 decrease in prepaid expenses and other current assets and a $156,324 increase in accrued expenses.

During 2020, cash flows used in operating activities were $24,791,545, consisting of a net loss of $31,832,086, less non-cash expenses aggregating $9,044,076 (representing principally stock-based compensation of $7,897,970, decrease in right-of-use lease assets of $764,285 and depreciation and amortization expense of $356,310), a $722,291 decrease in operating lease liabilities, a $574,680 decrease in accounts payable, a $486,810 decrease in accrued expenses and a $186,471 increase in prepaid expenses and other current assets.

During 2019, cash flows used in operating activities were $26,621,145, consisting of a net loss of $38,399,089, less non-cash

expenses aggregating $12,2 56 ,613 (representing principally stock-based compensation of $10,646,580, increase in right-of-use lease assets of $786,342 and depreciation and amortization expense of $781,228), a $284,748 increase in accrued expenses and a $130,809 decrease in prepaid expenses and other current assets, partially offset by a $662,766 increase in operating lease liabilities and a $189,866 decrease in accounts payable.

During 2020 and 2019, cash flows used in investing activities were $136,631 and $196,199, respectively.

The cash used in 2020 primarily consisted of the purchases of new lab equipment.

The cash used in 2019 primarily consisted of purchased leasehold improvements related to the construction of a regulatory testing chamber within our office space.

The cash used in 2018 consisted of purchases of computer hardware and software for chip development.

During 2019, cash flows provided by financing activities were $28,394,948, which consisted of $23,319,156 in net proceeds from an offering of shares and warrants pursuant to a shelf registration statement, $4,557,693 in net proceeds from the sales of shares to the public in at-the-market (“ATM”) transactions, proceeds from contributions to the employee stock purchase program (“ESPP”) of $457,362 and proceeds from the exercise of stock options of $400,103, offset by $339,366 in shares withheld for the payment of payroll taxes for the delivery of RSUs and PSUs.

During 2018, cash flows provided by financing activities were $40,698,073, which consisted of $38,846,815 in net proceeds from the sale of shares to the public, proceeds from the exercise of stock options of $1,319,461 and proceeds from contributions to the employee stock purchase program (“ESPP”) of $531,797.

During 2020, cash flows provided by financing activities were $53,973,748, which consisted of $53,556,202 in net proceeds from the sale of shares of our common stock to the public in ATM offerings and proceeds from contributions to the employee stock purchase program (“ESPP”) of $417,546.

During 2019, cash flows provided by financing activities were $28,394,948, which consisted of $23,319,156 in net proceeds from an offering of shares and warrants pursuant to a shelf registration statement, $4,557,693 in net proceeds from the sales of shares to the public in ATM offerings, proceeds from contributions to the ESPP of $457,362 and proceeds from the exercise of stock options of $400,103, 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.

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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.

If we are unable to raise sufficient additional

capital, we may be required to delay, reduce or severely curtail our research an d development or other operations, which would have a material adverse effect on our business, operating results, financial condition, long-term prospects and continue to be a viable business.

Off-Balance Sheet Transactions

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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