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 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. 22 Critical Accounting Policies and Estimates Warrants We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity” (“ASC 480”), and ASC 815, “Derivatives and Hedging” (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our common stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as a liability at their initial fair value on the date of issuance, and each balance sheet date thereafter. The liability will be re-measured at each balance sheet date until the warrants are exercised or expire. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of the warrants is estimated using an appropriate valuation model. Such warrant classification is also subject to re-evaluation at each reporting period. Offering costs associated with warrants classified as liabilities are expensed as incurred and are presented as offering cost related to warrant liability in the statement of operations. Offering costs associated with the sale of warrants classified as equity are charged against proceeds. 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. 23 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. Three Months Ended March 31, 2023 and 2022 Revenue. During the three months ended March 31, 2023 and 2022, we recorded revenue of $96,676 and $215,961, respectively. The decrease of $119,285 is primarily due to a decrease 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 and general and administrative. Losses from operations for the three months ended March 31, 2023 and 2022 were $6,294,059 and $7,155,544, respectively. Cost of Revenue. Cost of revenue was $138,813 and $203,249, respectively, for the three months ended March 31, 2023 and 2022. The decrease of $64,436 is primarily due to a decrease in sales volume. Research and Development Costs. Research and development costs were $3,078,524 and $3,527,146, respectively, for the three months ended March 31, 2023 and 2022. The decrease of $448,622 is primarily due to a $320,939 decrease in compensation, consisting of a $176,627 decrease in payroll costs and a $144,312 decrease in stock-based compensation, an $87,786 decrease in consulting and third-party services expenses and a $35,707 decrease in regulatory legal fees. Sales and Marketing Costs. Sales and marketing costs for the three months ended March 31, 2023 and 2022 were $1,211,938 and $1,613,590, respectively. The decrease of $401,652 is primarily due to a $208,413 decrease in compensation, consisting of a $132,939 decrease in payroll costs and a $75,474 decrease in stock-based compensation, a $101,876 decrease in engineering supplies used by the sales and marketing staff, a $66,739 decrease in tradeshow expense and a $59,214 decrease in public relations, consulting and third-party services expenses, partially offset by a $43,000 increase in recruiting fees. General and Administrative Expenses. General and administrative costs for the three months ended March 31, 2023 and 2022 were $1,961,460 and $2,027,520, respectively. The decrease of $66,060 is primarily due to a $108,472 decrease in recruiting fees, a $71,048 decrease in investor relations, consulting and third-party services expenses, a $55,043 decrease in stock-based compensation, a $21,605 decrease in training expense and an $18,207 decrease in annual meeting costs, partially offset by a $209,106 increase in legal fees. Offering costs related to warrant liability. Offering costs related to warrant liability were $591,670 for the three months ended March 31, 2023. We did not incur any such costs for the three months ended March 31, 2022. 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 March 31, 2023 w a s $233,222 a s c o m p a r e d t o interest income of $2,826 fo r t h e three m on t h s e nd e d March 31, 2022 . The increase of $230,396 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 March 31, 2023 was $6,652,507 a s c o m p a r e d t o $7,152,718 fo r t h e three m on t h s e nd e d March 31, 2022 . 24 L i q u i d it y a n d Cap it a l R e s o ur ces During the three months ended March 31, 2023 and 2022, we recorded revenue of $96,676 and $215,961, respectively. We incurred net losses of $6,652,507 and $7,152,718 for the three months ended March 31, 2023 and 2022, respectively. Net cash used in operating activities was $5,364,355 and $6,356,971 for the three months ended March 31, 2023 and 2022, respectively. We are currently meeting our liquidity requirements through the proceeds of securities offerings that raised net proceeds of $27,043,751 during 2021, $744,787 during 2022 and $5,351,888 during the first quarter of 2023, along with proceeds from contributions to the ESPP and payments received from customers. We believe our cash on hand as of March 31, 2023, together with anticipated revenues, will be sufficient to fund our operations through May 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 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 three months ended March 31, 2023, cash flows used in operating activities were $5,364,355, consisting of a net loss of $6,652,507, less adjustments to reconcile net loss to net cash used in operating activities aggregating $1,439,420 (principally issuance costs allocated to warrant liability of $591,670, stock-based compensation of $522,077, amortization of operating lease ROU assets of $181,357, inventory net realizable adjustment of $111,019 and depreciation and amortization expense of $45,797), a $420,368 decrease in accrued expenses, a $176,606 decrease in operating lease liabilities and a $166,906 decrease in accrued severance expense, partially offset by a $450,253 increase in accounts payable and a $178,072 decrease in prepaid expenses and other current assets. During the three months ended March 31, 2022, cash flows used in operating activities were $6,356,971, consisting of a net loss of $7,152,718, less non-cash expenses aggregating $1,053,761 (principally stock-based compensation of $796,906, decrease in amortization of operating lease right-of-use assets of $186,736 and depreciation and amortization expense of $70,119), a $271,044 decrease in accounts payable, a $203,010 decrease in operating lease liabilities and a $180,535 decrease in accrued expenses, partially offset by a $443,216 decrease in prepaid expenses and other current assets. During the three months ended March 31, 2023 and 2022, cash flows used in investing activities were $0 and $44,489, respectively. The cash used in investing activities for the three months ended March 31, 2022 consisted of the purchase of new engineering software licenses. During the three months ended March 31, 2023, cash flows provided by financing activities were $5,417,022, which consisted of $2,677,191 in net proceeds from the issuance and sale of common stock and warrants, $2,674,697 in net proceeds from the sale of shares of our common stock in an at-the-market (“ATM”) offering and $65,134 in proceeds from the ESPP. During the three months ended March 31, 2022, cash flows provided by financing activities were $104,217, which consisted entirely of 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.