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 near field wireless charging and at-a-distance wireless charging at various distances. We believe our proprietary WattUp technologies are well suited for many applications, including building and home automation, electronic shelf labels, industrial IoT sensors, surface and implanted medical devices, tracking devices, hearables, wearables, consumer electronics and public safety 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 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 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 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 as we move our business forward. The first end product 20 featuring our technology entered the market in 2019 and we expect our one Watt Powerbridge enabled transmitters to begin shipping for commercial IOT applications in the fourth quarter of 2021. 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. 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 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. 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 (1 watt) and a GaAs/GaN-based technology capable of delivering higher power (greater than 1 watt) with greater efficiency. We 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 span a period of more than a year to two years and 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 maintain the 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 31, 2021, the Energous IP portfolio contained over 200 awarded patents in the United States, which are 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). In addition to the inventions covered by these patents, 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. 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. 21 On September 20, 2021, the Company was notified by Dialog, recently acquired by Renesas Electronics Corporation, that it was terminating the Alliance Agreement between the Company and Dialog. There is a wind down period included in the Alliance Agreement which will conclude in September 2024. During the wind down period, the Alliance Agreement’s terms will continue to apply to the Company’s products that are covered by certain existing customer relationships, except that the parties’ respective exclusivity rights have terminated. 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 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 COVID-19 pandemic has 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. For example, in one case, the pandemic 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. Several vaccines have been approved for use since the fourth quarter of 2020, with vaccination rates increasing through early 2021. Several new variants of COVID-19 have emerged including the “delta” variant, which is now widespread, and are reported by health authorities to be more transmissible than other variants. Vaccines approved to date have lower efficacy in combating the transmission of some of these new variants, though vaccines appear to protect against severe illness. 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 We follow 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 provided contract services for Dialog in 2020. 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. 22 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 recognized contract services revenue from Dialog over a period of time as the services are performed. The costs associated with this revenue were recognized as the services were performed and were 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 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, 2021 and 2020 Revenue. During the three months ended September 30, 2021 and 2020, we recorded revenue of $201,364 and $61,500, respectively. Operating Expenses and Loss from Operations. Operating expenses are made up of research and development, sales and marketing, general and administrative expenses, severance expense and cost of services revenue. Losses from operations for the three months ended September 30, 2021 and 2020 were $12,465,361 and $7,560,058, respectively. Research and Development Costs. Research and development costs were $4,737,159 and $4,003,642, respectively, for the three months ended September 30, 2021 and 2020. The increase of $733,517 is primarily due to a $317,652 increase in chip design, engineering supplies and components, a $296,335 increase in compensation, consisting of a $284,557 increase in stock-based compensation from the recognition of performance share units (“PSU”) award expense and an $11,778 increase in payroll costs and a $68,824 increase in legal fees associated with patents and intellectual property. Sales and Marketing Costs. Sales and marketing costs for the three months ended September 30, 2021 and 2020 were $1,922,128 and $1,500,068, respectively. The increase of $422,060 is primarily due to a $291,918 increase in compensation, consisting of a $180,196 increase in stock-based compensation from the recognition of performance share units (“PSU”) award expense and a $111,722 increase in payroll costs, a $46,745 increase in marketing and promotional expense and a $23,838 increase in public relations, consulting and third party services. General and Administrative Expenses. General and administrative costs for the three months ended September 30, 2021 and 2020 were $1,990,266 and $2,117,848, respectively. The decrease of $127,582 is primarily due to a $495,425 decrease in compensation, consisting of an $505,950 decrease in stock-based compensation, primarily due to equity awards becoming fully vested during the previous year and from forfeited equity awards, offset by a $10,525 increase in payroll costs, a $180,198 decrease in annual stockholder meeting costs and stock transfer fees as a result of a special shareholder’s meeting being held during the third quarter of 2020, partially offset by a $241,154 increase in recruiting fees, a $208,988 increase in legal and accounting fees, a $57,169 increase in insurance premiums and a $51,348 increase in investor relations, consulting and third party services. Severance Expense. Severance expense for the three months ended September 30, 2021 was $4,017,172 from the separation agreement of former President and Chief Executive Officer, Stephen Rizzone, consisting of expected 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. 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, 2021 w a s $835 a s c o m p a r e d t o interest income of $3,221 fo r t h e three m on t h s e nd e d September 30, 2020 . The decrease of $2,386 is primarily due to lower savings interest rates. 23 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 , 2021 was $ 12 , 464 , 526 a s c o m p a r e d t o $ 7 , 556 , 837 fo r t h e three m on t h s e nd e d September 30 , 2020 . Nine Months Ended September 30, 2021 and 2020 Revenue. During the nine months ended September 30, 2021 and 2020, we recorded revenue of $531,389 and $237,350, respectively. Operating Expenses and Loss from Operations. Operating expenses are made up of research and development, sales and marketing, general and administrative expenses, non-recurring severance expense and cost of services revenue. Losses from operations for the nine months ended September 30, 2021 and 2020 were $32,009,987 and $24,426,373, respectively. Research and Development Costs. Research and development costs were $15,432,097 and $12,909,378, respectively, for the nine months ended September 30, 2021 and 2020. The increase of $2,522,719 is primarily due to a $1,947,909 increase in compensation, consisting of a $1,818,040 increase in stock-based compensation from the recognition of PSU award expense and $129,869 increase in payroll costs, a $562,460 increase in engineering supplies, components and chip development costs due to project timing, a $98,606 increase in consulting and third-party services expense and a $68,891 increase in regulatory testing, partially offset by a $112,522 decrease in rent expense and a $96,989 decrease in depreciation. Sales and Marketing Costs. Sales and marketing costs for the nine months ended September 30, 2021 and 2020 were $6,157,697 and $4,386,881, respectively. The increase of $1,770,816 is primarily due to a $1,424,508 increase in compensation, consisting of an $856,764 increase in stock-based compensation from the recognition of PSU award expense and a $567,743 increase in payroll costs from a higher headcount within the department, a $110,124 increase in legal fees pertaining to marketing and trademarks, a $108,799 increase in marketing and promotional costs, a $91,015 increase in public relations, consulting and third-party services expense and a $58,398 increase in engineering supplies used by the sales and marketing staff for customer demonstrations. General and Administrative Expenses. General and administrative costs for the nine months ended September 30, 2021 and 2020 were $6,934,410 and $7,240,925, respectively. The decrease of $306,515 is primarily due to a $562,873 decrease in compensation, consisting of a $687,657 decrease in stock-based compensation, primarily due to equity awards becoming fully vested during the previous year and from forfeited equity awards, offset by a $124,784 increase in payroll costs, a $152,107 decrease in accounting and audit fees, an $80,334 decrease in board stipends, an $80,192 decrease in annual meeting costs, partially offset by a $241,184 increase in recruiting expense, $190,038 increase in insurance premiums and $161,384 increase in general corporate legal fees. Severance Expense. Severance expense for the nine months ended September 30, 2021 was $4,017,172 from the separation agreement of former President and Chief Executive Officer, Stephen Rizzone, consisting of expected 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. 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, 2021 w a s $3,869 a s c o m p a r e d t o interest income of $67,134 fo r t h e nine m on t h s e nd e d September 30, 2020 . The decrease of $63,265 is primarily due to lower savings interest rates. 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, 2021 was $32,006,118 a s c o m p a r e d t o $24,359,239 fo r t h e nine m on t h s e nd e d September 30, 2020 . 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, 2021 and 2020, we recorded revenue of $531,389 and $237,350, respectively. We incurred net losses of $32,006,118 and $24,359,239 for the nine months ended September 30, 2021 and 2020, respectively. Net cash used in operating activities was $22,498,803 and $19,435,940 for the nine months ended September 30, 2021 and 2020, respectively. We are currently meeting our liquidity requirements through the proceeds from securities offerings that raised net proceeds of $53,556,202 during 2020, an at-the-market (“ATM”) offering during October 2021, proceeds from contributions to the employee stock purchase plan (“ESPP”), along with payments received from customers. 24 On October 4, 2021, the Company filed with the Securities and Exchange Commission (“SEC”) a prospectus supplement covering the issuance and sale of shares of the Company’s common stock having an aggregate offering price up to $35,000,000 pursuant to the Company’s at-the-market offering program (the “ATM”). As of October 31, 2021, the Company has sold 12,229,433 shares for gross proceeds of $27,911,873 under the ATM, and a net of $27,060,301 after approximately $851,572 in broker commissions and issuance costs. We believe our cash on hand as of September 30, 2021, together with anticipated revenues and with ATM financing during October 2021, will be sufficient to fund our operations into November 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 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 the nine months ended September 30, 2021, cash flows used in operating activities were $22,498,803, consisting of a net loss of $32,006,118, less non-cash expenses aggregating $9,391,389 (principally stock-based compensation of $8,591,089, decrease in amortization of operating lease right-of-use assets of $594,089 and depreciation and amortization expense of $195,361) and a $1,102,832 increase in accrued severance expense, partially offset by a $636,984 decrease in operating lease liabilities, a $174,606 decrease in accounts payable, a $111,683 increase in accounts receivable and a $72,074 increase in prepaid expenses and other current assets. 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, 2021 and 2020, cash flows used in investing activities were $310,718 and $7,302, respectively. The cash used in investing activities for the nine months ended September 30, 2021 consisted of the new website, as well as the purchases of new testing equipment and engineering software. The cash used in investing activities for the nine months ended September 30, 2020 consisted of the purchase of new lab equipment. During the nine months ended September 30, 2021, cash flows provided by financing activities were $362,048, which consisted of entirely of proceeds from contributions to the ESPP. 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. 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. 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, 2021. 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, 2020 for a discussion of our exposure to market risk.