Energous Corp 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We have developed our WattUp® wireless power technology, consisting of 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 to enable the next generation of wireless power networks, delivering power and data in a seamless device portfolio. This includes near field and at-a-distance wireless charging with multiple power levels at various distances. We believe our WattUp technologies will help facilitate the deployment of the growing IoT applications. According to the recent report of the International Data Corporation, or the IDC, titled “Worldwide Global DataSphere IoT Device and Data Forecast, 2021–2025,” the IoT market is forecasted to grow to 39.3 billion devices by 2025. The initial IoT applications that we are targeting are in the area of RF tags and electronic shelf labeling (“ESL”) for retail, industrial and healthcare markets. We believe our technology is innovative in its approach, in that we are developing solutions that charge electronic devices using RF. To-date, we have developed multiple transmitters and receivers, including prototypes as well as partner production designs. The transmitters vary based on form factor, power specifications and frequencies, while the receivers support a myriad of applications including Bluetooth tracking tags, IoT sensors, ESLs, beacons, stock management devices, security cameras, handheld devices, smart automation, wearables, hearables, and more. The first end product featuring our technology entered the market in 2019. We started shipping our first at-a-distance WattUp PowerBridge enabled transmitters for commercial IoT applications in the fourth quarter of 2021, and we expect additional WattUp-enabled products to be announced as we move our business forward. Impact of COVID-19 on Our Business 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. Further delays in this or other products could result from the ongoing pandemic. We have implemented moderated work-from-home policies for our employees that will likely be in place through the end of 2022 and possibly longer. 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, mainly due to supply chain shortages, are still uncertain as of the date of this report. 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. 26 Basis of Presentation. The accompanying audited financial statements and footnotes for the years ended December 31, 20 2 1 and 20 20 have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the SEC regarding financial information. Revenue Recognition. We follow Accounting Standards 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 primarily consists of product development projects revenue. We also provided contract services revenue 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. 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. During 2021 and 2020, we recorded revenue of $756,793 and $327,350, respectively. Research and Development. Research and development expenses are charged to operations as incurred. For internally developed patents, all patent application costs are expensed as incurred as research and development expense. Patent application costs, generally legal costs, are expensed as research and development costs until such time as the future economic benefits of such patents become more certain. Also included in research and development costs are payroll costs and stock-based compensation for employees within the department. We incurred research and development costs of $20,572,580 and $17,066,122 for 2021 and 2020, respectively. Income Taxes . We recognize deferred tax assets and liabilities for the expected future tax consequences of items that have been included in or excluded from our financial statements or tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse. For 2021 and 2020, we had $13,820,144 and $12,848,719, respectively, of research and development expenses capitalized for federal income tax purposes, with amortization commencing upon our receiving an economic benefit from the related research. As of December 31, 2021, we had approximately $241,988,000 gross federal net operating loss carryforwards (“NOLs”) and federal and state research and development tax credit carryforwards of approximately $5,748,000 and $4,718,000, respectively. As of December 31, 2021 and 2020, deferred tax assets consisted principally of net operating loss and tax credit carryforwards, the research and development costs and stock-based compensation, and such deferred tax assets were fully reserved. Accordingly, our effective tax rate for 2021 and 2020 was nil. 27 Internal Revenue Code Section 382 imposes limitations on the use of net operating loss carry forward s when the stock ownership of one or more 5% stockholders ( stockholder s owning 5% or more of our outstanding capital stock) has increased on a cumulative basis by more than 50 percentage points. Accordingly, an ownership change could trigger a limitation of the use of the loss carry forward . We completed a Section 382 analysis as of December 31, 20 2 1 and determined that none of our federal net operating loss carry forward s 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. The ultimate realization of deferred tax assets is dependent upon the future generation of taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and taxing strategies in making this assessment. Based on this assessment, management has established a full valuation allowance against all of the net deferred tax assets for each period, since it is more likely than not that all of the deferred tax assets will not be realized. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. As of December 31, 2021 and 2020, no liability for unrecognized tax benefits was required to be reported. The guidance also discusses the classification of related interest and penalties on income taxes. Our policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded for 2021 and 2020. 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, 2021 and 2020 Revenues. During 2021 and 2020, we recorded revenue of $756,793 and $327,350, respectively. The increase in revenue is primarily from an increase in non-recurring engineering revenue and the sales of transmitters. 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 2021 and 2020 were $42,189,578 and $32,226,514, respectively. Research and Development Expenses. Research and development costs for 2021 and 2020 were $20,572,580 and $17,066,122, respectively. The $3,506,458 increase in research and development expenses is primarily due to a $2,642,449 increase in compensation, primarily due to a $2,649,581 increase in stock-based compensation from PSU awards being granted and earned, an $825,569 increase in engineering supplies, components and chip development due to project timing, a $132,309 increase in regulatory testing and a $116,125 increase in consulting and third-party services expense, partially offset by a $126,552 decrease in rent expense and a $116,810 decrease in depreciation expense. 28 Sales and Marketin g Expenses. Sales and marketing expenses for 20 2 1 a nd 20 20 were $ 8,598,343 and $ 5 , 880 , 350 , respectively. The $ 2,717,9 9 3 in crease in sales and marketing expenses is primarily due to a $2,167,906 increase in compensation, consisting of a $1,594,508 increase in stock-based compensation from PSU awards being granted and earned and a $573,398 increase in payroll costs from a higher headcount within the department , a $194,579 increase in marketing and promotional costs, a $118,394 increase in legal fees pertaining to marketing and trademarks , a $77,994 increase in engineering supplies and components used by sales and marketing staff for customer demonstrations and a $70,163 increase in public relations, consulting and third-party services expense . General and Administrative Expenses. General and administrative costs for 2021 and 2020 were $9,001,483 and $9,153,503, respectively. The $152,020 decrease in general and administrative expense is primarily due to a $539,218 decrease in compensation, including a $495,865 decrease in stock-based compensation from equity awards becoming fully vested during the previous year and a $43,353 decrease in payroll costs, a $133,516 decrease in accounting and audit fees, an $87,057 decrease in board stipends and a $50,547 decrease in annual meeting costs, partially offset by a $280,900 increase in recruiting expense, a $247,208 increase in insurance premiums, an $87,033 increase in general corporate legal fees and a $44,706 increase in training, dues and subscriptions. Severance Expense. Severance expense for 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. Cost of Services Revenue. During 2021 and 2020, we recorded cost of services revenue of $0 and $126,539, respectively. These costs were related to our contract services performed for Dialog. Loss from Operations. Loss from operations for 2021 and 2020 was $41,432,785 and $31,899,164, respectively. Interest Income. Interest income for 2021 was $5,492, compared to $71,212 for 2020, primarily due to lower interest rates for the savings account. Net Loss. As a result of the above, net loss for 2021 was $41,427,293, compared to $31,832,086 for 2020. Liquidity and Capital Resources During 2021 and 2020, we recorded revenue of $756,793 and $327,350, respectively. We incurred a net loss of $41,427,293 and $31,832,086 for 2021 and 2020, respectively. Net cash used in operating activities was $28,720,389 and $24,791,545 for 2021 and 2020, respectively. We are currently meeting our liquidity requirements through the proceeds of securities offerings that raised net proceeds of $53,556,202 during 2020 and $27,043,751 during the fourth quarter of 2021, proceeds from contributions to the employee stock purchase plan (“ESPP”), along with payments received from customers. We believe our current cash on hand, together with anticipated revenues, will be sufficient to fund our operations through March 2023. 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 2021, cash flows used in operating activities were $28,720,389, consisting of a net loss of $41,427,293, less non-cash expenses aggregating $12,874,593 (representing principally stock-based compensation of $11,931,188, decrease in right-of-use lease assets of $674,306 and depreciation and amortization expense of $258,249), a $733,473 decrease in operating lease liabilities, a $238,184 increase in prepaid expenses and other current assets and a $218,602 increase in accounts receivable, partially offset by a $975,439 increase in accrued severance expense and a $109,118 increase in accounts payable. 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 29 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 2021 and 2020, cash flows used in investing activities were $365,735 and $136,631, respectively. The cash used in 2021 primarily consisted of the purchases of components to build new testing equipment, new lab equipment purchases, as well as costs incurred for designing a new corporate website. The cash used in 2020 primarily consisted of the purchases of new lab equipment. During 2021, cash flows provided by financing activities were $27,427,877, which consisted of $27,043,751 in net proceeds from the sale of shares of our common stock to the public in an at-the-market (“ATM”) offering and proceeds from contributions to the employee stock purchase program (“ESPP”) of $384,126. 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. 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.