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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 and our response thereto on our business; 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 semiconductor chipsets, software controls, hardware designs and antennas, that enables 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 IDC (International Data Corporation) November 2021 IoT Spending Guide Forecast, the IoT market is forecasted to grow to nearly 40 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 the 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 wireless charging applications including Bluetooth tracking tags, IoT sensors, ESLs, beacons, stock management devices, security cameras, handheld devices, smart automation, wearables and hearables. 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. 20 Impact of COVID-19 on Our Business We continue to monitor the ongoing effects of COVID-19, including 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. We believe that the COVID-19 pandemic 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 the adoption of our current or future products could result from the ongoing pandemic. At times, certain of our outsourcing partners, component suppliers and logistical service providers have experienced disruptions, resulting in supply shortages that have affected and may continue to affect our sales. Similar disruptions could occur in the future. Critical Accounting Policies and Estimates Revenue Recognition We follow Accounting Standards Codification (“ASC”) 606, "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 or as performance obligations are satisfied. 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 revenue associated with the sale of production-level systems once control over the product is transferred to the customer. We record the expense related to the sales of these systems as cost of revenue during the period delivered. Results of Operations Costs and Expenses Cost of revenue consists of direct materials, direct labor and overhead for our production-level wireless charging systems. Research and development expenses include costs associated with our efforts to develop our technology, including personnel compensation, consulting, engineering supplies and components, intellectual property costs, regulatory expense and general office expenses specifically related to the research and development department. Sales and marketing expenses include costs associated with selling and marketing our technology to our customers, including personnel compensation, public relations, graphic design, tradeshow, engineering supplies utilized by the sales team and general office expenses specifically related to the sale and marketing department. General and administrative expenses include costs for general and corporate functions, including personnel compensation, facility fees, travel, telecommunications, insurance, professional fees, consulting fees, general office expenses, and other overhead. 21 Three Months Ended September 30 , 2022 and 2021 Revenue. During the three months ended September 30, 2022 and 2021, we recorded revenue of $223,201 and $201,364, respectively. The increase of $21,837 is primarily due to an increase in production-level systems sales volume. Costs and Expenses and Loss from Operations. Costs and expenses are made up of cost of revenue, research and development, sales and marketing, general and administrative and severance expense. Losses from operations for the three months ended September 30, 2022 and 2021 were $6,107,715 and $12,465,361, respectively. Cost of Revenue. Cost of revenue was $420,060 and $0, respectively, for the three months ended September 30, 2022 and 2021. For the three months ended September 30, 2022, cost of revenue is for our production-level systems that are sold to customers. We did not incur any cost of revenue during the three months ended September 30, 2021. Research and Development Costs. Research and development costs were $2,885,830 and $4,737,159, respectively, for the three months ended September 30, 2022 and 2021. The decrease of $1,851,329 is primarily due to a $1,385,345 decrease in compensation, consisting of a $933,492 decrease in stock-based compensation, primarily due to equity awards becoming fully vested during the previous year and the transfer of the current CEO to the General and Administrative Department late last year after his promotion and a $451,853 decrease in payroll costs due to a lower headcount within the department, a $336,059 decrease in chip design, engineering supplies and components, a $44,370 decrease in regulatory testing, a $43,165 decrease in patent-related legal fees and a $42,717 decrease in regulatory legal fees. Sales and Marketing Costs. Sales and marketing costs for the three months ended September 30, 2022 and 2021 were $1,093,640 and $1,922,128, respectively. The decrease of $828,488 is primarily due to a $650,293 decrease in compensation, consisting of a $455,665 decrease in stock-based compensation, primarily due to equity awards becoming fully vested during the previous year and a lower headcount within the department and a $194,628 decrease in payroll costs due to a lower headcount within the department, a $114,320 decrease in public relations, consulting and third party services expenses and a $51,605 decrease in marketing and promotional expense. General and Administrative Expenses. General and administrative costs for the three months ended September 30, 2022 and 2021 were $1,931,386 and $1,990,266, respectively. The decrease of $58,880 is primarily due to a $245,166 decrease in recruiting fees, a $134,169 decrease in investor relations, consulting and third-party services and a $40,422 decrease in annual meeting costs, partially offset by a $242,884 increase in compensation, consisting of a $155,834 increase in stock-based compensation from recently granted executive equity awards and an $87,052 increase in payroll costs due to the former CEO and former CFO only receiving partial pro-rated bonus payments during the third quarter of 2021, a $50,286 increase in travel costs, a $30,447 increase in accounting and audit fees, a $25,432 increase in software and training expense and a $15,108 increase in supplies. 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, 2022 w a s $142,840 a s c o m p a r e d t o interest income of $835 fo r t h e three m on t h s e nd e d September 30, 2021 . The increase of $142,005 is primarily due to higher 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 three m on t h s e nd e d September 30, 2022 was $5,964,875 a s c o m p a r e d t o $12,464,526 fo r t h e three m on t h s e nd e d September 30, 2021 . Nine Months Ended September 30, 2022 and 2021 Revenue. During the nine months ended September 30, 2022 and 2021, we recorded revenue of $672,133 and $531,389, respectively. The increase of $140,744 is primarily due to an increase in production-level systems sales volume. Costs and Expenses and Loss from Operations. Costs and expenses are made up of cost of revenue, research and development, sales and marketing, general and administrative and severance expense. Losses from operations for the nine months ended September 30, 2022 and 2021 were $20,328,057 and $32,009,987, respectively. Cost of Revenue. Cost of revenue was $894,693 and $0, respectively, for the nine months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022, cost of revenue is for our production-level systems that are sold to customers. We did not incur any cost of revenue during the nine months ended September 30, 2021. 22 Research and Development Costs. Research and development costs were $ 9,622,886 and $ 15,432,097 , respectively, for the nine months ended September 30, 2022 and 2021 . The de crease of $ 5,809,211 is primarily due to a $ 5,220,092 decrease in compensation, consisting of a $ 3,951,478 decrease in stock-based compensation from the recognition of PSU award expense in 2021 and the transfer of the current CEO to the General and Administrative department towards the end of 2021 after his promotion and $ 1,268,614 decrease in payroll costs from a lower headcount within the department, a $ 514,143 decrease in chip design, engineering supplies and components, a $99,947 decrease in consulting and third party services and an $82,062 decrease in regulatory legal fees, partially offset by a $130,125 increase in recruiting fees and a $124,228 increase in postage from shipping components and demonstration units for customer demonstrations and regulatory testing . Sales and Marketing Costs. Sales and marketing costs for the nine months ended September 30, 2022 and 2021 were $3,865,322 and $6,157,697, respectively. The decrease of $2,292,375 is primarily due to a $2,185,832 decrease in compensation, consisting of a $1,702,250 decrease in stock-based compensation from the recognition of PSU award expense during 2021 and a lower headcount within the department and a $483,582 decrease in payroll costs from a lower headcount within the department, a $270,562 decrease in public relations, consulting and third party services, a $115,238 decrease in marketing and promotional expenses and a $63,091 decrease in legal fees, partially offset by a $234,303 increase in tradeshow expense and an $88,720 increase in recruiting fees. General and Administrative Expenses. General and administrative costs for the nine months ended September 30, 2022 and 2021 were $5,983,845 and $6,934,410, respectively. The decrease of $950,565 is primarily due to a $681,306 decrease in compensation, consisting of a $581,114 decrease in stock-based compensation primarily from company-wide PSU expense during 2021 and a $100,192 decrease in payroll costs from a lower headcount within the department, a $255,009 decrease in legal fees, an $87,202 decrease in recruiting fees, an $83,178 decrease in annual meeting costs and a $65,505 decrease in investor relations, consulting and third party services, partially offset by an $87,564 increase in travel costs, a $72,674 increase in accounting and audit fees, a $47,480 increase in training, dues and subscriptions and a $35,102 increase in insurance premiums. 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, 2022 w a s $192,715 a s c o m p a r e d t o interest income of $3,869 fo r t h e nine m on t h s e nd e d September 30, 2021 . The increase of $188,846 is primarily due to higher 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, 2022 was $20,135,342 a s c o m p a r e d t o $ 32,006,118 fo r t h e nine m on t h s e nd e d September 30, 2021 . 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, 2022 and 2021, we recorded revenue of $672,133 and $531,389, respectively. We incurred net losses of $20,135,342 and $32,006,118 for the nine months ended September 30, 2022 and 2021, respectively. Net cash used in operating activities was $18,838,453 and $22,498,803 for the nine months ended September 30, 2022 and 2021, 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 ESPP and payments received from customers. We believe our cash on hand as of September 30, 2022, together with anticipated revenues, will be sufficient to fund our operations through November 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 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 will be available on terms that we would find acceptable, or at all. During the nine months ended September 30, 2022, cash flows used in operating activities were $18,838,453, consisting of a net loss of $20,135,342, less non-cash expenses aggregating $2,940,282 (principally stock-based compensation of $2,158,915, amortization of operating lease ROU assets of $550,372 and depreciation and amortization expense of $200,995), a $594,703 decrease in operating lease liabilities, a $395,405 decrease in accrued severance expense, a $312,174 decrease in accounts payable, a $230,368 increase in prepaid expenses and other current assets and a $164,426 increase in inventory, partially offset by a $42,477 increase in deferred revenue. 23 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, amortization of operating lease ROU 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, 2022 and 2021, cash flows used in investing activities were $127,198 and $310,718, respectively. The cash used in investing activities for the nine months ended September 30, 2022 consisted of the purchase of new testing equipment and engineering software. The cash used in investing activities for the nine months ended September 30, 2021 consisted of the cost of our new website, as well as the purchases of new testing equipment and engineering software. During the nine months ended September 30, 2022, cash flows provided by financing activities were $249,705, which consisted of entirely of proceeds from contributions to the ESPP. During the nine months ended September 30, 2021, cash flows provided by financing activities were $362,048, which consisted entirely of proceeds from contributions to the ESPP. On October 11, 2019, we entered into the At Market Issuance Sales Agreement between the Company, B. Riley Securities, Inc., Roth Capital Partners LLC and Ladenburg Thalmann & Co. Inc., as amended by that certain Amendment No. 1 to the At Market Issuance Sales Agreement, dated as of September 14, 2022, and that certain Amendment No. 2 to the At Market Issuance Sales Agreement, dated as of October 4, 2021, through which it may offer and sell up to $75,000,000 of shares of our common stock (the “ATM Program”). During the three months ended September 30, 2022, we did not sell any shares under the ATM Program. As of September 30, 2022, $7,088,127 remains available for sale under the ATM Program. We sold 438,411 shares of common stock under the ATM Program during the period from October 1, 2022 through November 7, 2022. Net proceeds from such sales were $453,180, after deducting issuance costs. 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, 2022. See "Quantitative and Qualitative Disclosures about Market Risk" in Part II, Item 7A of our Form 10-K for the year ended December 31, 2021 for a discussion of our exposure to market risk.