The accompanying
condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2016, the Company had a working
capital of $4,219,530 and an accumulated deficit of $12,143,479. The Company has $581,400 revenue from contract research and government
grants and incurred net losses since inception. As of December 31, 2016, the Company had cash and cash equivalents of $5,001,466.
The Company had $11.0 million of cash and cash equivalents on hand as of February 7, 2017, which is sufficient to fund its operations
beyond March 31, 2018. We will need to raise further capital, through the sale of additional equity securities, through additional
grants, or otherwise, to support our future operations. There is no assurance that the Company’s projections and estimates
are accurate. The Company’s primary sources of operating funds since inception have been private equity, note financings,
and grants. The Company needs to raise additional capital to accomplish its business plan objectives and will continue its efforts
to secure additional funds through issuance of debt or equity instruments and/or receipts of grants as appropriate. Management
believes that it will be successful in obtaining additional financing based on its history of raising funds; however, no assurance
can be provided that the Company will be able to do so. There is no assurance that any funds it raises will be sufficient to enable
the Company to attain profitable operations. To the extent that the Company is unsuccessful, the Company may need to curtail or
cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to
support further operations. There can be no assurance that such a plan will be successful.
The Company’s condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“US GAAP”) and the rules and regulations of the SEC.
The unaudited condensed consolidated financial
information furnished herein reflects all adjustments, consisting solely of normal recurring items, which in the opinion of management
are necessary to fairly state the financial position of the Company and the results of its operations for the periods presented.
The Company assumes that the users of the interim financial information herein have read or have access to the audited financial
statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined
in that context. Accordingly, footnote disclosure, which would substantially duplicate the disclosure contained in the Company’s
Transition Report on Form 10-K for the three months and year ended June 30, 2016 filed on October 31, 2016 (the “2016 Annual
Report”) has been omitted from this 10-Q. The results of operations for the interim periods presented are not necessarily
indicative of results for the entire fiscal year ending June 30, 2017 or any other period.
The accompanying condensed consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary, Akoustis, Inc. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The Company’s significant accounting
policies are disclosed in Note 3-Summary of Significant Accounting Policies in the 2016 Annual Report. Since the date of the 2016
Annual Report, there have been no material changes to the Company’s significant accounting policies, except for the change
in accounting policy related to the presentation of contract research and government grants as discussed below. The preparation
of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial
statements and the accompanying notes to the condensed consolidated financial statements. These estimates and assumptions include
valuing equity securities and derivative financial instruments issued in financing transactions, deferred taxes and related valuation
allowances, and the fair values of long lived assets. Actual results could differ from the estimates.
Effective October 1, 2016, the Company changed
its accounting policy for the recognition of grant revenue. The Company believes this change in accounting policy is preferable
due to the fact that grant revenue is viewed as an ongoing function of its intended operations. This change in accounting policy
also enhances the comparability of the Company’s financial statements with many of its industry peers. The adoption of this
accounting policy change has been applied retrospectively to all prior periods presented in this Quarterly Report on Form 10-Q
and has had no impact on net loss or earnings per share.
The Company may generate revenue from product
sales, license agreements, collaborative research and development arrangements, and government grants. To date the Company’s
principal source of revenue consists of government research grants. The Company recognizes nonrefundable grant revenue when it
is received and reports this revenue as “Contract research and government grants” on the condensed consolidated statements
of operations. Contracts executed and monies received prior to the recognition of revenue are recorded as deferred revenue.
Basic net loss per common share is computed
by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the
period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the
period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for
the three and six months ended December 31, 2016 and 2015 presented in these condensed consolidated financial statements, the weighted-average
number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
The Company had the following common stock
equivalents at December 31, 2016 and 2015:
Shares outstanding include shares of restricted
stock with respect to which restrictions have not lapsed. Restricted stock included in reportable shares outstanding was 1,822,055
shares and 1,253,055 shares as of December 31, 2016 and 2015, respectively. Shares of restricted stock are included in the calculation
of weighted average shares outstanding.
Certain prior period amounts have been reclassified
to conform to current period presentation. The reclassifications did not have an impact on net loss as previously reported
.
Management does not believe that any recently
issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated
financial statements.
(*) Amortized on a straight-line basis over
the term of the lease or the estimated useful lives, whichever is shorter.
The Company recorded depreciation expense of
$12,949 and $8,456 for the three months ended December 31, 2016 and 2015, respectively.
The Company recorded depreciation expense of
$25,834 and $12,986 for the six months ended December 31, 2016 and 2015, respectively.
As of December 31, 2016, research and development
fixed assets totaling $432,631 were not placed in service and therefore not depreciated during the period.
The Company recorded
amortization expense of $1,762 and $378 for the three months ended December 31, 2016 and 2015, respectively.
The Company recorded
amortization expense of $3,112 and $1,412 for the six months ended December 31, 2016 and 2015, respectively.
The following table outlines estimated future
annual amortization expense for the next five years and thereafter:
Upon closing of the private placements on May
22, 2015 and June 9, 2015, the Company issued 298,551 and 26,099 warrants, respectively, to purchase the same number of shares
of common stock with an exercise price of $1.50 and a five-year term to the placement agent. Upon closing of a private placement
in April 2016, the Company issued 153,713 warrants to purchase the same number of shares of common stock with an exercise price
of $1.60 and a five-year term to the placement agent. The Company identified certain put features embedded in the warrants that
potentially could result in a net cash settlement, requiring the Company to classify the warrants as a derivative liability.
During the six months ended December 31, 2016,
the Company amended the existing warrant agreements to eliminate the derivative feature. Upon execution of the revised agreements,
a total of 386,476 warrants with a fair value of $1,795,363 were reclassified from liability to equity.
Financial assets and liabilities measured at
fair value on a recurring basis are summarized below and disclosed on the condensed consolidated balance sheet as of December 31,
2016:
Financial assets and liabilities measured at
fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as of June 30, 2016:
The table below provides a summary of the changes
in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) during the six months ended December 31, 2016:
The fair value of the derivative feature of
the warrants on the issuance dates and at the balance sheet date were calculated using a binomial option model valued with the
following weighted average assumptions:
Risk-free interest rate: The Company uses the
risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.
Dividend yield: The Company uses a 0% expected
dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.
Volatility: The Company calculates the expected
volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a period
consistent with the warrants’ expected term.
Remaining term: The Company’s remaining
term is based on the remaining contractual maturity of the warrants.
During the six months ended December 31, 2016
and 2015, the Company marked the derivative feature of the warrants to fair value and recorded a loss of $869,462 and a gain of
$19,429, respectively, relating to the change in fair value.
As of December 31, 2016 and June 30, 2016,
the Company had 16,569,978 and 15,375,981 common shares issued and outstanding, respectively.
As of December 31, 2016, the total intrinsic
value of options outstanding and exercisable was $700,800 and $175,200, respectively. As of December 31, 2016, the Company has
$66,652 in
unrecognized stock-based compensation expense attributable to the outstanding
options which will be amortized over a period of 2.39 years.
For the three months ended December 31, 2016
and 2015, the Company recorded $7,040 and $7,040, respectively, in stock-based compensation related to stock options, which is
reflected in the condensed consolidated statements of operations.
For the six months ended December 31, 2016
and 2015, the Company recorded $14,080 and $14,080, respectively, in stock-based compensation related to stock options, which is
reflected in the condensed consolidated statements of operations.
Restricted stock awards are considered outstanding
at the time of execution by the Company and the recipient of a restricted stock agreement, as the stock award holders are entitled
to dividend and voting rights. As of December 31, 2016, the number of shares granted for which the restrictions have not lapsed
was 1,312,800 shares.
The Company recognizes the compensation expense
for all share-based compensation granted based on the grant date fair value. The grant date fair value of the award is recorded
as share–based compensation expense over the respective restriction period. Any portion of the grant awarded to consultants
as to which the repurchase option has not lapsed is accrued on the Balance Sheet as a component of accounts payable and accrued
expenses. As of December 31, 2016, and June 30, 2016, the accrued stock-based compensation was $309,694 and $179,079, respectively.
The Company has the right to repurchase some or all of such shares upon termination of the individual’s service with the
Company, whether voluntary or involuntary, for 60 months from the date of termination (“repurchase option”). The shares
as to which the repurchase option has not lapsed are subject to forfeiture upon termination of consulting and employment agreements.
In September 2015, the Company amended the
original restricted stock agreement for certain award recipients. According to the amendment, 75% of the shares as to which the
repurchase option had not lapsed as of September 30, 2015, shall be released from the repurchase option on the third anniversary
of the original effective date of the agreement. The remaining 25% of the shares shall be released from the repurchase option on
the fourth anniversary of the original effective date.
In relation to the above restricted stock agreements
for the three months ended December 31, 2016 and 2015, the Company recorded stock–based compensation expense for the shares
that have vested of $1,536,602 and $99,325, respectively.
In relation to the above restricted stock agreements
for the six months ended December 31, 2016 and 2015, the Company recorded stock–based compensation expense for the shares
that have vested of $2,233,782 and $158,010, respectively.
As of December 31, 2016, the Company had $3,033,017
in unrecognized stock based compensation expense related to the unvested shares.
The Company leases office space in Huntersville,
NC pursuant to a three-year lease agreement. The operating lease provides for annual real estate tax and cost of living increases
and contains predetermined increases in the rentals payable during the term of the lease. The aggregate rent expense is recognized
on a straight-line basis over the lease term. The total lease rental expense was $28,404 and $27,576 for the six months ended December
31, 2016 and 2015, respectively.
Total future minimum payments required under
the operating lease are as follows.
AEG Consulting, a firm owned by one of our
Co-Chairmen, received $3,329 and $1,125 for consulting fees for the three months ended December 31, 2016 and 2015, respectively.
The firm received $7,995 and $2,250 for consulting fees for the six months ended December 31, 2016 and 2015, respectively.
The Company’s CEO and Vice President
of Engineering participated in the closing of the 2016-2017 Offering that occurred on November 25, 2016 where they each purchased
20,000 shares of Common Stock at a price of $5.00 per share. The Company’s Vice-President of Operations also purchased 5,000
shares of Common Stock in the closing at an aggregate purchase price of $25,000. The brother of the CEO purchased 14,000 shares
of Common Stock in the closing at an aggregate purchase price of $70,000.
The Company’s second Co-Chairman participated
in the closing of the 2016-2017 Offering that occurred on December 27, 2016 where he purchased 2,000 shares of Common Stock, respectively,
at a price of $5.00 per share for an aggregate purchase price of $10,000. A second brother of the CEO purchased 20,000 shares of
Common Stock in the closing at an aggregate purchase price of $100,000.
Note 11. Subsequent Events
On January 12, 2017, the Board of Directors
(the “Board”) of Akoustis Technologies, Inc. (the “Company”) increased the size of the Board to six directors
and elected John T. Kurtzweil as a director to the Board to fill the new directorship.
On January 18, 2017, the Company held a closing
of the 2016-2017 Offering, in which the Company sold 1,258,996 shares of its Common Stock, at a fixed purchase price of $5.00 per
share. Aggregate gross proceeds of this closing were $6,294,980 before deducting commissions and fees of $605,195.
In connection with the closing, the Company
agreed to pay certain placement agents cash commissions of 10% of the gross proceeds and commission in warrants to purchase a number
of shares of Common Stock equal to 10% of the number of shares of Common Stock sold to investors first contacted by the placement
agents in the Offering. The Company also agreed to pay a lead placement agent an additional cash commission of 1% of gross proceeds
raised by certain of the placement agents and an additional 1% warrant commission. As a result of the foregoing, the placement
agents were issued warrants to purchase an aggregate of approximately 123,900 shares of Common Stock. The warrants have a term
of five years and an exercise price of $5.00 per share.
On January 19, 2017, the Company amended the
remaining derivative liability-warrants to eliminate the derivative feature. The warrants for 85,222 shares of Common Stock, with
a fair value of $396,828 will be reclassified to equity from liability for the quarter ending March 31, 2017.
The Company granted restricted stock awards
under the Akoustis Technologies, Inc. 2016 Stock Incentive Plan to two employees on January 20, 2017. One grant for 100,000 shares
was issued to the Company’s Vice-President of Engineering and has a vesting schedule of 25% on each of four subsequent anniversary
dates. The other grant was issued to a non-executive employee for 5,000 shares and has a vesting schedule of 50% on the second
anniversary of the effective date and 25% on the third and fourth anniversary dates.
During January 2017, the Company granted a
restricted stock award of 35,000 shares of Common Stock to two non-executive employees. The awards vest 50% on the second anniversary
of the effective date of the grant and 25% on each of the third and fourth anniversaries of the effective dates.
During January 2017, the Company issued 30,000
and 20,000 restricted shares of Common Stock to two consultants pursuant to a one-year investor relations agreement with a grant
date fair value of $163,500 and $109,000, respectively. The restricted shares will vest over the life of the consulting agreement.
During January 2017, the Company granted a
restricted stock award of 22,000 shares of Common Stock to a director. The award vests 25% on each of the first, second, third,
and fourth anniversaries of the effective date.
On February 7, 2017, the Company held a closing
of the 2016-2017 Offering, in which the Company sold 130,000 shares of its Common Stock, at a fixed purchase price of $5.00 per
share. Aggregate gross proceeds of this closing were $650,000 before deducting commissions and fees of $40,750.
In connection with the closing, the Company
agreed to pay certain placement agents cash commissions of 10% of the gross proceeds and commission in warrants to purchase a number
of shares of Common Stock equal to 10% of the number of shares of Common Stock sold to investors first contacted by the placement
agents in the Offering. The Company also agreed to pay a lead placement agent an additional cash commission of 1% of gross proceeds
raised by certain of the placement agents and an additional 1% warrant commission. As a result of the foregoing, the placement
agents were issued warrants to purchase an aggregate of 7,350 shares of Common Stock. The warrants have a term of five years and
an exercise price of $5.00 per share.
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ITEM 2.
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MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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References in this report to “Akoustis,”
“we,” “us,” “our” “the Company” and “our Company” refer to Akoustis
Technologies, Inc. and its consolidated subsidiary, Akoustis, Inc.
Cautionary Note Regarding Forward-Looking
Statements
This quarterly report on Form 10-Q contains
forward-looking statements that relate to our plans, objectives, estimates, and goals. Any and all statements contained in this
report that are not statements of historical fact may be deemed to be forward-looking statements. Terms such as “may,”
“might,” “would,” “should,” “could,” “project,” “estimate,”
“predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,”
“plan,” “help,” “believe,” “continue,” “intend,” “expect,”
“future,” and terms of similar import (including the negative of any of the foregoing) may be intended to identify
forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking
statements in this report may include, without limitation, statements regarding (i) the plans and objectives of management for
future operations, including plans or objectives relating to the development of commercially viable radio frequency filters, (ii)
a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends,
capital structure or other financial items, (iii) our future financial performance, including any such statement contained in this
management’s discussion and analysis of financial condition or in the results of operations included pursuant to the rules
and regulations of the SEC, and (iv) the assumptions underlying or relating to any statement descripted in (i), (ii), or (iii)
above.
Forward-looking statements are not meant to
predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our
current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and
uncertainties and other influences, many of which are beyond our control. Actual results and the timing of certain events and circumstances
may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors
that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially
from expected or desired results may include, without limitation,
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our inability to obtain adequate financing,
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our limited operating history,
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our inability to generate revenues or achieve profitability,
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our inability to achieve acceptance of our products in the market,
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upturns and downturns in the industry,
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our limited number of patents,
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failure to obtain, maintain and enforce our intellectual property rights,
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our inability to attract and retain qualified personnel,
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our substantial reliance on third parties to manufacture products,
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existing or increased competition,
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failure to innovate or adapt to new or emerging technologies,
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results of arbitration and litigation,
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stock volatility and illiquidity, and
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our failure to implement our business plans or strategies.
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These and other risks and uncertainties, which
are described in more detail in our Transition Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”)
on October 31, 2016, could cause our actual results to differ materially from those expressed or implied by the forward-looking
statements in this report. Readers are cautioned not to place undue reliance on forward-looking statements because of the risks
and uncertainties related to them. Except as may be required by law, we do not undertake any obligation to update the forward-looking
statements contained in this report to reflect any new information or future events or circumstances or otherwise.
Overview
Akoustis is an early-stage company that designs
and manufactures innovative radio frequency (RF) filters enabling the RF front-end (RFFE) of Mobile Wireless devices, such as smartphones
and tablets. Located between the device’s antenna and its digital backend, the RFFE is the circuitry that performs the analog
signal processing and contains components such as amplifiers, filters and switches. To construct the resonators that are the building
blocks for the RF filter, we have developed a fundamentally new single-crystal acoustic materials and device technology that we
refer to as BulkONE. Filters are critical in selecting and rejecting signals, and their performance enables differentiation in
the modules defining the RFFE.
We believe owning the core resonator technology
and manufacturing our designs is the most direct and effective means of delivering our solutions to the market. Furthermore, our
technology is based upon bulk-mode resonance, which is superior to surface-mode resonance for high band applications and emerging
4G/LTE and WiFi frequency bands. While our target customers utilize or make the RFFE module, several customers lack access to critical
high band technology to compete in high band applications and other traditional surface-mode solutions where higher power performance
is required. We intend to design and manufacture our RF filter products to multiple mobile phone OEM customers and enable broader
competition among the front-end module manufacturers. We plan to operate as a “pure-play” RF filter supplier and align
with the front-end module manufacturers who seek to acquire high performance filters to grow their module business.
We have built prototype resonators and
filters using our proprietary single-crystal materials. We are currently optimizing our BulkONE technology with our
wafer-manufacturing partner under a joint development agreement (JDA) and a manufacturing agreement. We leverage both federal
and state level non-dilutive research and development (“R&D”) grants to support development and
commercialization of our technology. We are developing resonators for 4G/LTE and WiFi bands and the associated proprietary
models and design kits required our RF filters. We are in process of stabilizing the wafer process technology and have
engaged strategic customers to evaluate our resonator and filter prototypes. Our initial designs target high band 4G/LTE and
WiFi frequency bands. Since Akoustis owns its core technology and controls access to its IP, we can offer several ways to
engage with potential customers. First, we are engaging with the mobile wireless market, providing filters that we design and
offer as a standard catalog component to multiple customers. Second, we can start with a customer-supplied filter
specification, which we design and fabricate for a specific customer. Finally, we can offer our models and design kits for
our customers to design their own filter into our proprietary technology.
Although we have received to date $581,000
of the approx. $1.0 million awarded in contract research and government grants since inception, our operations have been funded
with capital contributions, grants, and debt. We have incurred losses totaling approximately $12.1 million from inception through
December 31, 2016. These losses are primarily the result of material and material processing costs associated with developing and
commercializing our technology as well as personnel costs, including stock-based compensation, professional fees, primarily accounting
and legal, cost of director and officer liability insurance and losses due to the change in the fair value of derivatives. We expect
to continue to incur substantial costs for commercialization of our technology on a continuous basis because our business model
involves materials and solid state device technology development as well as engineering of catalog and custom filter designs.
Plan of Operation
We plan to commercialize our technology
by designing and manufacturing single band and multi-band bulk acoustic wave (BAW) filter solutions that address problems
(such as loss, bandwidth, power handling and isolation) created by the growing number of frequency bands in the RFFE of
mobile devices to support 4G/LTE and WiFi. We have prototyped our first series of single-band low-loss BAW filter designs for
4G/LTE frequency bands, which are dominated by competitive BAW solutions and historically cannot be addressed with low band,
lower power handling surface acoustic wave (SAW) technology. Second, we plan to develop, in early 2017, a series of filter
solutions that can cover multiple frequency bands. In order to succeed, we must convince mobile phone OEMs and RFFE module
manufactures to use our BulkONE technology in their modules. However, since there are only two dominant BAW filter suppliers
in the industry that have high band technology, and both utilize such technology as a competitive advantage at the module
level, we expect customers that lack access to high band filter technology will be open to engage with our pure-play filter
company.
We have successfully transferred our BulkONE
wafer process to our manufacturing partner. The BulkONE process uses a range of single-crystal group III-nitride piezoelectric
materials, which were fabricated into BAW resonators and characterized at cellular communication frequencies to determine their
bandwidth. On May 23, 2016, we announced an experimental, 3.4 GHz BAW two-port series-configured resonator device with a high K-squared
of 12.5%, which was modeled near resonance frequency and was constructed from single-crystal undoped aluminum nitride (AlN) material.
On November 1, 2016, we announced improvements to our single-crystal BAW resonator design and process technology to achieve a quality
factor (Q) of 2914, which is suitable for BAW RF filters targeting 4G/LTE, WiFi and emerging 5G and other wireless applications.
These resonators, which are the core building blocks enabling BAW RF filters, were fabricated using our patented BulkONE process.
Our technology development efforts continue to focus on wafer and process optimization, specifically, through targeted activities
for Q-factor and filter-performance improvements.
Once we complete customer validation of our
technology, we expect to complete qualification of our BulkONE process technology in Q3 of calendar 2017 to support
a product family of 4G/LTE filter solutions. Once we have stabilized our process technology in a manufacturing environment, we
will complete a production release of our high-band filter products in the frequency range from 1.5GHz to 4.0GHz. The target frequency
bands will be prioritized based upon customer priority. We expect this will require recruiting and hiring additional personnel.
In August 2016, we signed multiple non-exclusive
collaborative business agreements with a Chinese tier one RFFE module manufacturer to supply its premium RF filter products, as
well an agreement with a distributor who will be responsible for global promotion and selling of our filter products. On December
12, 2016 we received a commercial purchase order from a new OEM customer for development of a band-specific, high-frequency BAW
RF filter for a non-mobile commercial application. The customer is an established OEM specializing in non-mobile communication
systems with annual revenue of more than $1 billion. We will continue discussions with additional prospective customers, although
these discussions may not result in any agreements. We expect to proceed with our plan to develop a family of standard catalog
filter designs regardless of the outcome of these discussions.
We plan to pursue filter design and R&D
development agreements and potentially joint ventures with target customers and other strategic partners. These types of arrangements
may subsidize technology development costs and qualification, filter design costs, as well as offer complementary technology and
market intelligence and other avenues to revenue. However, we intend to retain ownership of our core technology, IP, designs and
related improvements. We expect to pursue development of catalog designs for multiple customers, and offer such catalog products
in multiple sales channels.
The Company had $11.0 million of cash and cash equivalents on hand as of February 7, 2017 to fund our
business and product development, to commercialize our technology, research and development, the development of our patent strategy,
expansion of our patent portfolio, as well as for working capital and other general corporate purposes. Our anticipated expenses
include employee salaries and benefits, compensation paid to consultants, capital costs for research and other equipment, costs
associated with development activities including travel and administration, legal expenses, sales and marketing costs, general
and administrative expenses, and other costs associated with an early stage, public technology company. We anticipate increasing
the number of employees to approximately 25-30 employees; however, this is highly dependent on the nature of our development efforts
and our success in commercialization. We expect capital expenditures to be approximately $2.1-2.5 million for the purchase of R&D
equipment during the next 12 months and are currently reviewing equipment leases or government grant opportunities to fund the
purchase of the equipment. The amounts we actually spend for any specific purpose may vary significantly and will depend on a number
of factors including, but not limited to, the pace of progress of our commercialization and development efforts, actual needs with
respect to product testing, development and research, market conditions, and changes in or revisions to our marketing strategies.
If we are unable to raise the funds that we
believe are needed to develop our technology and enable future sales, we may be required to scale back our development plans by
reducing expenditures for employees, consultants, business development and marketing efforts, and other projected expenditures.
This could reduce our ability to commercialize our technology or require us to seek further funding on less favorable terms than
if we had raised the full amount of any required funds.
Commercial development of new technology, by
its nature, is unpredictable, and we cannot guarantee that our technology will be accepted, that we will ever earn revenues sufficient
to support our operations or that we will ever be profitable. Furthermore, since we have no committed source of financing, we cannot
guarantee that we will be able to raise money as and when we need it to continue our operations. If we cannot raise funds as and
when we need them, we may be required to severely curtail, or even to cease, our operations.
Critical Accounting 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 (“U.S. GAAP”). 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 its 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.
Derivative Liability
The Company evaluates its convertible debt,
options, warrants and other contracts, if any, to determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting
Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market
each balance sheet date and recorded as either an asset or a liability. The change in fair value is recorded in the consolidated
statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument
is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to
equity.
In circumstances where the embedded conversion
option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the
convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single,
compound derivative instrument.
The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting
period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to
liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified
in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected
within 12 months of the balance sheet date.
The Company adopted Section 815-40-15 of the
FASB Accounting Standards Codification (“Section 815-40-15”)
to determine whether an instrument (or an embedded
feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including
evaluating the instrument’s contingent exercise and settlement provisions.
The Company utilizes a binomial option pricing
model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet
date. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements
of operations.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents,
accounts payable, accrued expenses, and convertible notes payable approximate fair value due to the short-term nature of these
instruments.
The Company measures the fair value of financial
assets and liabilities based on the guidance of ASC 820, “Fair Value Measurements and Disclosures,” which defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
Fair value measurements are categorized using
a valuation hierarchy for disclosure of the inputs used to measure fair value, which prioritize the inputs into three broad levels:
Level 1 - Quoted prices are available in active
markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset
or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Pricing inputs are other than quoted
prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date, and include
those financial instruments that are valued using models or other valuation methodologies.
Level 3 - Pricing inputs include significant
inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies
that result in management’s best estimate of fair value.
Equity-based compensation
The Company recognizes compensation expense
for all equity–based payments in accordance with ASC 718 “
Compensation – Stock Compensation
". Under
fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture rate and
recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.
Restricted stock awards are granted at the
discretion of the Company. These awards are restricted as to the transfer of ownership and generally vest over the requisite service
periods, typically over a four-year period (vesting on a straight–line basis). The fair value of a stock award is equal to
the fair market value of a share of Company stock on the grant date.
The fair value of an option award is estimated
on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires
the development of assumptions that are inputs into the model. These assumptions are the value of the underlying share, the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is benchmarked against similar companies in a similar industry over the expected
option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded risk–free
rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends
on its common stock and does not intend to pay dividends on its common stock in the foreseeable future. The expected forfeiture
rate is estimated based on management’s best estimate.
Determining the appropriate fair value model
and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described
above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best
estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change
and the Company uses different assumptions, our equity–based compensation could be materially different in the future. In
addition, the Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected
to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the equity–based compensation
could be significantly different from what the Company has recorded in the current period.
The Company accounts for share–based
payments granted to non–employees in accordance with ASC 505-40, “
Equity Based Payments to Non–Employees
”.
The Company determines the fair value of the stock–based payment as either the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments
issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date
at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the
counterparty’s performance is complete. The fair value of the equity instruments is re-measured each reporting period over
the requisite service period.
Results of Operations
Three Months Ended December 31, 2016
and 2015
Revenue
The Company recorded revenue of $159,068 during
the three months ended December 31, 2016 from contract research and government grants due to the receipt of the second payment
from the National Science Foundation (NSF) for the Phase II grant. The Phase II grant, awarded to the Company in December 2015
in the amount of $737,000, is a two-year program, and we have received $343,402 to date on this award. There was no revenue recorded
in the three month 2015 comparative period.
Expenses
Research and Development Expenses
Research and Development (“R&D”)
expenses were approximately $775,980 for the three months ended December 31, 2016 compared to $351,900 for the three months ended
December 31, 2015, an increase of $424,080 or 121%. The increase was primarily associated with stock-based compensation, which
increased by $268,700 due to new grants of restricted stock awards to R&D employees and contractors, as well as revaluation
of grants issued for contractors in prior periods due to the stock price fluctuation from $1.60 as of December 31, 2015 to $5.88
as of December 31, 2016. Per ASC 505-40, the fair value of the grants issued to consultants is re-measured each reporting period
over the requisite service period.
In addition, we recorded an increase in materials and R&D supplies expense of $74,000,
or 66%, due to a year over year increase in product development activities.
General and Administrative Expenses
General and Administrative (“G&A”)
expenses for the three months ended December 31, 2016 were $2,066,800 as compared to $724,500 for the three months ended December
31, 2015, an increase of $1,342,300, or 185%. The increase occurred mainly in stock-based compensation, which increased by $1,168,600,
or 1099%, over the $106,400 recorded for the three months ended December 31, 2015. The increase was driven by new restricted stock
awards granted to employees and consultants as well as the revaluation of grants issued to consultants in prior periods due to
the stock price fluctuation from $1.60 as of December 31, 2015 to $5.88 as of December 31, 2016.We recorded professional fees of
$334,000, as compared to $114,300 for the three months ended December 31, 2015. The increase of $229,700, or 201%, was mainly due
to increased accounting and legal fees associated with the 2016 annual meeting of stockholders, the filing of post-effective amendments
to two registration statements in connection with the resale of Common Stock issued in our 2015 and 2016 private placements, the
preparation and adoption of the Akoustis Technologies, Inc. 2016 Stock Incentive Plan and the filing of the related registration
statement on Form S-8.
Other Income and Expense
Other Income and Expense for the three months
ended December 31, 2016 was $712,200 and was comprised mainly of the loss related to the change in fair value of derivatives-warrants.
The loss was recorded to reflect the stock price fluctuation from $1.60 per share as of December 31, 2015 to $5.88 per share as
of December 31, 2016. We recorded a gain of $5,400 for the comparative three-month period ended December 31, 2015.
Net Loss
Net Loss was $3.4 million for the quarter ended
December 31, 2016 compared to a net loss of $1.1 million for the quarter ended December 31, 2015. The higher quarter over quarter
loss of $2.3 million, or 217%, was mainly driven by higher stock-based compensation expense for both R&D and G&A employees
and contractors of $268,700 and $1,168,600, respectively, the higher loss recorded for the change in fair value of derivatives-warrants
of $717,700, higher R&D material and supplies expense of $74,000 and higher professional fees of $229,700.
Six months Ended December 31, 2016 and
2015
Revenue
The Company recorded revenue of $159,068
from contract research and government grants due to the receipt of the second payment from the National Science Foundation
(NSF) for the Phase II grant. The Phase II grant which is a two-year program, was awarded to the Company in December 2015 in
the amount of $737,000. We have received $343,402 to date on the Phase II award. There was no revenue recorded in the six
month 2015 comparative period.
Expenses
Research and Development Expenses
R&D expenses for the six-month period ended
December 31, 2016 were $1,428,600 which was an increase of $755,000, or 112%, over the comparative 2015 period. The increase was
primarily associated with salaries and benefits, stock-based compensation, and R&D materials and supplies. Salaries and benefit
costs were $529,600 and were $140,000, or 36%, higher over the comparative six-month period ended December 31, 2015 due to increased
headcount for technical personnel on boarded. Stock-based compensation was $465,000 higher (as compared to $0 as of December 31,
2015) due to new grants awarded to R&D employees and contractors. Per ASC 505-40, the fair value of the grants issued to consultants
is re-measured each reporting period over the requisite service period.
In addition, we recorded an increase in R&D
materials and supplies expense of $107,400, or 49%, due to a year over year increase in product development activities.
General and Administrative Expenses
G&A expenses for the six months ended December
31, 2016 were $3,330,000 compared to $1,485,800 for the six months ended December 31, 2015. The higher spend of $1,844,200, or
124%, was primarily driven by increases in stock-based compensation and professional fees. Stock-based compensation was $1,782,900
versus $172,100 for the comparative six months, an increase $1,610,800, or 936%. The change was due to new awards to employees,
directors, and consultants, as well as the revaluation of the grants issued to consultants in prior periods due to an increase
in price per share of common stock ($5.88 as of December 31, 2016, versus $1.60 as of December 31, 2015). We recorded professional
fees of $611,000 for the six months ended December 31, 2016. This was an increase of $291,000, or 91%, over the comparative six-month
period. The higher professional fee spend was primarily due to accounting and legal fees associated with the 2016 annual meeting
of stockholders, the filing of post-effective amendments to two registration statements for the resale of Common Stock issued in
our 2015 and 2016 private placements, the preparation and adoption of the Akoustis Technologies, Inc. 2016 Stock Incentive Plan
and the filing of the related registration statement on Form S-8.
Other Expense
Other Expense for the six months ended December
31, 2016 was $869,500 due to the loss recorded for the change in the fair value of derivatives-warrants compared to a $19,400 gain
recorded for the 2015 six-month comparative period. The loss recorded was due to the stock price fluctuation from $1.60 per share
as of December 31, 2015 to $5.88 per share as of December 31, 2016.
Net Loss
Net Loss was $5.5 million for the six
months ended December 31, 2016 compared to a net loss of $2.1 million in the comparative six months ended December 31, 2015.
The higher loss of $3.4 million was due to the increases in stock-based compensation expense for R&D and G&A
personnel and contractors of $465,000 and $1,610,800, respectively, the higher loss recorded for the change in fair value of
derivatives-warrants of $889,000, a higher R&D materials and supplies spend of $107,000 and higher professional fees of
$291,000.
Liquidity and Capital Resources
Although we have earned $581,400 from contract
research and grants since inception, our operations have been primarily funded with initial capital contributions, sales of our
equity securities, and debt financing.
As of December 31, 2016, we had current assets
of $5,166,900, primarily made up of cash of approximately $5,001,500. Current liabilities, made up of accounts payable, accrued
liabilities and deferred revenue, were $947,400. Working capital as of the quarter ended December 31, 2016 was $4,219,500. As compared
to June 30, 2016, current assets at December 31, 2016 increased by $913,100, mainly due to the increase of cash on hand. The cash
increase was the result of $3,456,500 net proceeds of the first two closings of the second 2016 private placement offering, which
was offset by $2,126,400 cash used for operations and by $484,000 cash used for equipment purchases. Current liabilities as of
December 31, 2016 increased by $403,700 over June 30, 2016. We saw an increase of $179,000 in accrued bonus payable due to the
additional expense recorded for the six-month period, an increase of $130,600 in accrued stock-based compensation due to additional
restricted stock grants awarded to employees, contractors, directors and consultants and the revaluation of restricted stock grants
issued in prior periods because of the change in the price per share ($5.88 per share as of December 31, 2016 versus $4.18 as of
June 30, 2016). We also recorded a $102,600 increase in accrued expenses mainly due to higher spend on professional fees and R&D
materials and supplies.
Long-term liabilities were $396,828 as of December
31, 2016, and decreased $925,901 from June 30, 2016. The primary driver of the change was the reduction of the balance in the derivative
liability-warrants. The liability was associated with placement agent warrants issued in connection with our 2015 offering and
our first 2016 offering. Of the total warrants outstanding for, warrants for an aggregate of 386,476 shares of Common Stock were
amended as of December 30, 2016 and, as a result, were converted to non-derivative instruments. As a result, $925,901 of the associated
derivative liability-warrants were reclassified as stockholder’s equity. The remaining warrants for 85,222 shares of Common
Stock were amended and converted to non-derivative instruments on January 19, 2017, and the remainder of the accrual, $396,828,
will be reclassified as stockholder’s equity for the quarter ending March 31, 2017.
Stockholder’s equity was $4,576,800 as
of December 31, 2016. The increase over the June 30, 2016 balance of $2,676,400 was the net effect of the net loss for the six-month
period of $5,468,700 offset by the equity change associated with the first two closings of the 2016-2017 Offering. In those two
closings, we sold 733,000 par value $.001 common shares for $5.00 per share with net proceeds of $3,456,500. Stockholder’s
equity also increased over the June 30, 2016 balance due to the reclassification of the derivative liability for warrants in the
amount of $1,795,400.
As referenced above, we held two closings of the 2016-2017 Offering during the quarter ended December
31, 2016. On November 25, 2016, we held a closing on the sale of 322,000 shares of Common Stock at $5.00 per share for aggregate
gross proceeds of $1,610,000. There were no fees associated with this closing. On December 27, 2016, we held a closing for the
sale of 410,997 shares of Common Stock at $5.00 per share for aggregate gross proceeds of $2,055,000 before commissions of $194,500
and legal and other fees of $14,025. In addition to these two closings, on January 18, 2017, we held a third closing of the 2016-2017
Offering for the sale of 1,258,996 shares of Common Stock at the price of $5.00 per share for total aggregate gross proceeds of
$6,294,980 before commissions and fees of $605,195. On February 7, 2017 the Company held a fourth closing of the 2016-2017 Offering
in which the Company sold an additional 130,000 shares of Common Stock at $5.00 per share for gross proceeds of $650,000 before
deducting expenses of $40,750 for commissions and fees. In total as of February 9, 2017, the Company has sold 2,121,993 shares
of Common Stock in the 2016-2017 Offering for total aggregate gross proceeds of $10,610,000 before commissions and fees of $854,010.
In February 2016, we were notified that we
had been awarded a $738,000 National Science Foundation (“NSF”) Small Business Innovative Research Phase II grant,
a two-year program. To date we have received $343,000 of the $738,000 initially awarded. On January 19, 2017, we were notified
by the NSF that we had been awarded an incremental $147,000 on the NSF Phase II grant to be used for technological enhancement
for commercial partnerships. We expect to apply for additional research and development grants that support technology innovation
in line with our business plan. We believe that we have additional opportunities for new grants and matching funds from our current
small business program partnership with NSF, including a Phase IIb award, which has a potential $500,000 award. We expect to receive
notification of the Phase IIb award in the second half of 2017. There can be no assurance, however, that these grants will be received.
As a result of the 2016-2017 Offering, we expect
our existing funds will be sufficient to fund our operations beyond March 31, 2018. There is no assurance that the Company’s
projections and estimates are accurate or that the Company will be able to raise additional capital, if required, on terms favorable
to the Company or at all.
Cash Flow Analysis
Operating activities used cash of $2,126,400,
for the six months ended December 31, 2016 as compared to $1,705,699 for the six months ended December 31, 2015. The net loss of
$5,468,700 recorded for the six months ended December 31, 2016, offset by non-cash items of stock-based compensation of $2,247,900,
change in the fair value of derivatives of $869,500, and an increase in trade payables and accrued expenses of $244,100, were the
primary components of cash used in operating activities for the six-month period.
Investing activities used cash of $484,000
for the six months ended December 31, 2016 due to purchases of R&D machinery and equipment of $444,400 and cash paid for patents
of $39,650. For the six months ended December 31, 2015, investing activities used cash of $140,300 for the purchase of R&D
machinery and equipment of $123,400 and cash paid for patents for $16,900.
Cash flows from financing activities for the
six months ended December 31, 2016, were $3,456,460 from the sale of 732,997 shares of Common Stock less commissions and fees of
$208,525 from the first and second closings of the 2016-2017 Offering on November 25, 2016 and December 27, 2016. There were no
cash flows from financing activities for the comparative six-month period ended December 31, 2015.
Off-Balance Sheet Transactions
The Company did not engage in any “off-balance
sheet arrangements” (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of December 31, 2016.