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 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 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 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 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 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. 23 Basis of Presentation. The accompanying audited financial statements and footnotes for the years ended December 31, 20 2 2 and 20 2 1 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 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 the 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. 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 $12,497,781 and $20,572,580 for 2022 and 2021, 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 2022 and 2021, we had $12,954,895 and $13,820,144, 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, 2022, we had approximately $273,056,000 gross federal net operating loss carryforwards (“NOLs”) and federal and state research and development tax credit carryforwards of approximately $6,373,000 and $5,258,000, respectively. As of December 31, 2022 and 2021, 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 2022 and 2021 was nil. 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. 24 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. 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, 2022 and 2021, 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 2022 and 2021. Results of Operations 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. 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, 2022 and 2021 Revenues. During 2022 and 2021, we recorded revenue of $851,321 and $756,793, respectively. The increase in revenue is primarily from an increase in production-level systems sales volume. Operating 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. 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 $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. 25 Sales and Marketin g Expenses. 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 $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 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. Loss from operations for 2022 and 2021 was $26,686,325 and $41,432,785, respectively. Interest Income. Interest income for 2022 was $411,065, compared to $5,492 for 2021, primarily due to higher interest rates for the savings account. Net Loss. As a result of the above, net loss for 2022 was $26,275,260, compared to $41,427,293 for 2021. Liquidity and Capital Resources During 2022 and 2021, we recorded revenue of $851,321 and $756,793, respectively. We incurred a net loss of $26,275,260 and $41.427,293 for 2022 and 2021, respectively. 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 $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. 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 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 26 $ 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. 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. 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.