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Item 7. Management’s Discussion and Analysis

2023-03-30 compared with 2022-03-23 · 43 added, 41 removed, 84 unchanged (50% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

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.

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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.

According to the International Data Corporation (IDC) August 2022 Market Forecast, the IoT market is forecasted to grow to approximately $1.1 trillion in spending by 2026.

The initial IoT applications that we are targeting are in the area of RF tags, ESL) and IoT sensors for the retail, industrial, healthcare and smart home/office 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 transmitters vary based on form factor, power specifications and frequencies, while the receivers are designed to 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.

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.

Impact of Current Global Economic Conditions on Our Business

Uncertainty in the global economy presents significant risks to our business.

We are subject to continuing risks and uncertainties in connection with the current macroeconomic environment, including as a result of inflation and rising interest rates, geopolitical factors, including the ongoing conflict between Russia and Ukraine and the responses thereto, supply chain disruptions and the remaining effects of the COVID-19 pandemic.

We are closely monitoring the impact of these factors on all aspects of our business, including their 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 and other macroeconomic events.

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 Estimates and Policies

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Revenue Recognition.

We follow Accounting Standards Update No.

2014-09, "Revenue from Contracts with Customers" (Topic 606).

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:

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Allocate the transaction price to the performance obligations in the contract.

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.

Recognize revenue when the performance obligations are satisfied.

We record revenue associated with product development projects that we enter into with certain customers.

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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.

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.

Research and Development.

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Accordingly, our effective tax rate for 2022 and 2021 was nil.

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.

Internal Revenue Code Section 382 imposes limitations on the use of net operating loss carryforwards when the stock ownership of one or more 5% stockholders (stockholders 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 carryforward.

We completed a Section 382 analysis as of December 31, 2022 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 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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Operating 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.

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During 2022 and 2021, we recorded revenue of $851,321 and $756,793, respectively.

The increase in revenue is primarily from an increase in non-recurring engineering revenue and the sales of transmitters.

The increase in revenue is primarily from an increase in production-level systems sales volume.

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.

Costs and expenses are made up of cost of revenue, research and development, sales and marketing, general and administrative and severance expense.

Operating expenses for 2022 and 2021 were $27,537,646 and $42,189,578, respectively.

Cost of Revenue.

Cost of revenue was $1,277,565 and $0, respectively, for 2022 and 2021.

For 2022, cost of revenue is for production-level systems that are sold to customers.

We did not incur any cost of revenue during 2021.

Research and Development Expenses.

Research and development costs for 2022 and 2021 were $12,497,781 and $20,572,580, 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.

The $8,074,799 decrease in research and development expenses is primarily due to a $7,110,400 decrease in compensation, consisting of a $5,448,767 decrease in stock-based compensation primarily from the recognition of PSU award expense during 2021 and the transfer of the current CEO to the General and Administrative department towards the end of 2021 after his promotion and a $1,661,633 decrease in payroll costs from a lower headcount within the department, a $708,682 decrease in engineering supplies, components and chip development due to project timing, a $205,721 decrease in consulting and third-party services and a $113,167 decrease in regulatory legal fees, partially offset by a $152,400 increase in recruiting expense.

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 .

Sales and marketing expenses for 20 2 2 a nd 20 2 1 were $4,884,959 and $ 8,598,343 , respe ctively.

The $ 3,713,384 de crease in sales and marketing expenses is primarily due to a $ 3,364,533 de crease in compensation, consisting of a $ 2,650,885 de crease in stock-based compensation primarily from the recognition of PSU award expense during 2021 and a lower headcount within the department and a $ 713,648 de crease in payroll costs from a lower headcount within the department , a $359,870 decrease in public relations, consulting and third-party services expense, a $225,805 decrease in marketing and promotional expense, a $96,451 decrease in engineering supplies and components used by sales and marketing staff for customer demonstrations, partially offset by a $250,941 increase in tradeshow costs and a $93,720 increase in recruiting expense .

General and Administrative Expenses.

General and administrative costs for 2022 and 2021 were $8,078,950 and $9,001,483, 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.

The $922,533 decrease in general and administrative expense is primarily due to a $710,041 decrease in compensation, consisting of an $880,314 decrease in stock-based compensation primarily from the recognition of PSU award expense during 2021, offset by a $170,273 increase in payroll costs, a $184,018 decrease in recruiting expense, a $141,489 decrease in general corporate legal fees, and a $75,806 decrease in annual meeting expense, partially offset by $109,204 increase in travel expense and a $99,485 increase in accounting and audit fees.

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.

Severance expense for 2022 and 2021 was $798,391 and $4,017,172, respectively.

During 2022, severance expense was incurred in connection with the separation agreement with our former Senior Vice President of Marketing and Business Development, Neeraj Sahejpal and consisted of $545,782 in cash payments and estimated payroll taxes and $252,609 from the early vesting of certain stock award grants.

During 2021, severance expense was incurred in connection with the separation agreement with our former President and Chief Executive Officer, Stephen Rizzone, consisting of 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.

Loss from Operations.

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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.

Interest income for 2022 was $411,065, compared to $5,492 for 2021, primarily due to higher interest rates for the savings account.

As a result of the above, net loss for 2022 was $26,275,260, compared to $41,427,293 for 2021.

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Net cash used in operating activities was $23,636,747 and $28,720,389 for 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 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.

We are currently meeting our liquidity requirements through the proceeds of securities offerings that raised net proceeds of $27,043,751 during 2021 and $744,787 during 2022, 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 proceeds from the underwritten offering conducted during the first quarter of 2023 and anticipated revenues (See Note 12 – Subsequent Events), will be sufficient to fund our operations through March 2024.

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.

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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

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 2022, cash flows used in operating activities were $23,636,747, consisting of a net loss of $26,275,260, less non-cash expenses aggregating $3,936,182 (representing principally stock-based compensation of $2,918,817, decrease in right-of-use lease assets of $730,452 and depreciation and amortization expense of

$ 246,156 ), a $ 770 , 031 decrease in operating lease liabilities, a $558 ,923 decrease in accrued severanc e , a $305,192 decrease in accounts payable and a $105,821 increase in inventory, partially offset by a $2 6 7,097 increase in accrued expense and a $99,512 decrease in accounts receivable.

D uring 20 21 , 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 , de crease 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 and a $109,118 increase in accounts payable.

During 2022 and 2021, cash flows used in investing activities were $164,994 and $365,735, respectively.

The cash used in 2022 primarily consisted of the purchases of components to build new testing equipment and the purchases of engineering software licenses.

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.

During 2022, cash flows provided by financing activities were $1,017,620, which consisted of $744,787 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 ESPP of $272,833.

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 ATM offering and proceeds from contributions to the ESPP of $384,126.

Research and development of new technologies is, by its nature, unpredictable.

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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