ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
References in this report to “Akoustis,”
the “Company,” “we,” “us,” and “our” refer to Akoustis Technologies, Inc. and its consolidated
subsidiary, Akoustis, Inc. each of which is a Delaware corporation.
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 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 (“RF”) filters, (ii) projections 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 Securities and Exchange Commission
(the “SEC”), (iv) our ability to efficiently utilize cash and cash equivalents to support our operations for a given
period of time, (v) our ability to engage customers while maintaining ownership of our intellectual property, and (vi) the assumptions
underlying or relating to any statement described in (i), (ii), (iii), (iv) or (v) 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: our ability to continue as a going concern; our inability
to obtain adequate financing; our limited operating history; our inability to generate revenues or achieve profitability; the results
of our research and development (“R&D”) activities; our inability to achieve acceptance of our products in the
market; the impact of the COVID-19 pandemic on our operations, financial condition and the worldwide economy; general economic
conditions, including upturns and downturns in the industry; our limited number of patents; failure to obtain, maintain, and enforce
our intellectual property rights; our inability to attract and retain qualified personnel; our reliance on third parties to complete
certain processes in connection with the manufacture of our products; product quality and defects; existing or increased competition;
our ability to market and sell our products; our inability to successfully scale our New York wafer fabrication facility and related
operations while maintaining quality control and assurance and avoiding delays in output; our failure to innovate or adapt to new
or emerging technologies; our failure to comply with regulatory requirements; results of any arbitration or litigation that may
arise; stock volatility and illiquidity; our failure to implement our business plans or strategies; our failure to remediate the
material weaknesses in our internal control over financial reporting; and our failure to maintain the Trusted Foundry accreditation
of our New York wafer fabrication facility.
These and other risks and uncertainties,
which are described in more detail in the section of this report titled “Risk Factors” and in our Annual Report on Form
10-K, filed with the SEC on September 13, 2019 (the “2019 Annual Report”), 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 emerging commercial
company focused on developing, designing, and manufacturing innovative RF filter products for the wireless industry, including
for products such as smartphones and tablets, network infrastructure equipment, WiFi Customer Premise Equipment (“CPE”)
and defense applications. Filters are critical in selecting and rejecting signals, and their performance enables differentiation
in the modules defining the RF front-end (“RFFE”). 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. We have developed a proprietary microelectromechanical system (“MEMS”) based bulk acoustic wave (“BAW”)
technology and a unique manufacturing process flow, called “XBAW”, for our filters produced for use in RFFE modules.
Our XBAWTM filters incorporate optimized high purity piezoelectric materials for high power, high frequency and wide
bandwidth operation.
We believe owning the core resonator device
technology, manufacturing facility and intellectual property (“IP”) to produce our RF filter designs is the most direct
and efficient means of delivering our solutions to the market. Furthermore, our technology is based upon bulk-mode acoustic resonance,
which we believe is superior to surface-mode resonance for high-band applications that include 4G/LTE, 5G, WiFi, and defense applications.
Although some of our target customers utilize or make the RFFE module, they may lack access to critical ultra-high-band (UHB) filter
technology needed to compete in high frequency applications. We seek to design, manufacture, and market our RF filter products
to mobile phone original equipment manufacturers (“OEMs”), defense OEMs, network infrastructure OEMs, and WiFi CPE OEM’s
to enable broader competition among the front-end module manufacturers. We operate as a “pure-play” RF filter supplier
and align with the front-end module manufacturers who seek to acquire high performance filters to expand their module business.
We currently build high performance RF filter
circuits, using our first generation XBAWTM wafer process, in our 120,000-square foot wafer-manufacturing facility located
in Canandaigua, New York, which we acquired in June 2017. As of April 24, 2020, our intellectual property (IP) portfolio included
31 patents, including a blocking patent that we have licensed from Cornell University. Additionally, as of April 24, 2020, we have
61 pending patent applications. These patents cover our XBAWTM RF filter technology from raw materials through the system
architectures. Where possible, we leverage both federal and state level R&D grants to support development and commercialization
of our technology.
We are developing RF filters for 4G/LTE,
5G, WiFi and defense bands using our proprietary resonator device models and product design kits (PDKs). As we qualify our first
RF filter products, we are engaging with target customers to evaluate our filter solutions. Our initial designs target UHB, sub
7 GHz 4G/LTE, 5G, WiFi and defense bands. Since Akoustis owns its core technology and controls access to its intellectual property,
we expect to offer several ways to engage with potential customers. First, we intend to engage with multiple wireless markets,
providing standardized filters that we design and offer as standard catalog components. Second, we expect to deliver unique filters
to customer-supplied specifications, which we will design and fabricate on a customized basis. Finally, we may offer our models
and design kits for our customers to design their own filters utilizing our proprietary technology.
We have earned minimal revenue from operations
since inception, and we have funded our operations primarily with development contracts, RF filter and production orders, government
grants, MEMS foundry and engineering services, and sales of debt and equity securities. We have incurred losses totaling approximately
$93.5 million from inception through March 31, 2020. These losses are primarily the result of material and processing costs associated
with developing and commercializing our technology, as well as personnel costs, professional fees (primarily accounting and legal),
and other general and administrative (“G&A”) expenses. 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
and engineering of catalog and custom filter design solutions.
Impact of COVID-19 on our Business
Although the ultimate impact of the COVID-19
pandemic on our business is unknown, in an effort to protect the health and safety of our employees, we have taken proactive, precautionary
action and adopted social distancing policies at our locations, including the implementation of new staffing plans in our facilities
whereby many employees work remotely and the remaining on-site force is divided into multiple shifts or segregated in different
parts of the facility. In an effort to contain COVID-19 or slow its spread, governments around the world have also enacted various
measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places
of residence, and practice social distancing when engaging in essential activities. These measures have impacted the method and
timing of certain business meetings and deliverables to certain customers, as well as our ability to obtain certain materials or
equipment from suppliers.
We anticipate that these actions and the global
health crisis caused by COVID-19 will negatively impact business activity across the globe. We have observed declining demand
and price reductions in the electronics industry as business and consumer activity decelerates across the globe. When COVID-19
is demonstrably contained, we anticipate a rebound in economic activity, depending on the rate, pace, and effectiveness of the
containment efforts deployed by various national, state, and local governments; however, the timing and extent of any such rebound
is uncertain.
We will continue to actively monitor the
situation and may take further actions altering our business operations that we determine are in the best interests of our employees,
customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what
the potential effects any such alterations or modifications may have on our business, including the effects on our customers,
employees, and prospects, or on our financial results for the remainder of fiscal year 2020 or beyond.
Plan of Operation
We plan to commercialize our technology
by designing and manufacturing single-band and multi-band BAW RF filter solutions in our New York wafer fabrication facility. We
expect our filter solutions will address problems (such as loss, bandwidth, power handling, and isolation) created by the growing
number of frequency bands in the RFFE of mobile devices, infrastructure and premise equipment to support 4G/LTE, 5G, and WiFi.
We have prototyped our first 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.
To succeed, we must convince mobile phone
OEMs, RFFE module manufacturers, cellular infrastructure OEMs, WiFi CPE OEMs and military customers to use our XBAWTM
filter technology in their systems and modules. However, since there are 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 plan to pursue RF filter design and
R&D development agreements and potentially joint ventures with target customers and other strategic partners, although we cannot
guarantee we will be successful in these efforts. These types of arrangements may subsidize technology development costs and qualification,
filter design costs, and offer complementary technology and market intelligence and other avenues to revenue. However, we intend
to retain ownership of our core technology, intellectual property, designs, and related improvements. We expect to pursue development
of catalog designs for multiple customers and to offer such catalog products in multiple sales channels.
As of April 24, 2020, the Company had $38.4
million of cash and cash equivalents to fund our operations, including capital expenditures, R&D, commercialization of our
technology, development of our patent strategy and expansion of our patent portfolio, as well as to provide working capital and
funds for 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), costs associated with the integration and operation of our New York wafer fabrication facility and related
operations, legal expenses, sales and marketing costs, G&A expenses, and other costs associated with an early stage, public
technology company. We anticipate increasing the number of employees; however, this is highly dependent on the nature of our development
efforts, and our success in commercialization. We anticipate adding employees for R&D in both our New York and North Carolina
facilities, as well as G&A functions, to support our efforts. We expect capital expenditures to be between $8 million and $10
million for the purchase of equipment and software during the next 12 months.
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, R&D, market conditions and changes
in or revisions to our marketing strategies.
Commercial development of new technology,
by its nature, is unpredictable. Although we will undertake development efforts with commercially reasonable diligence, there
can be no assurance that our current cash position will be sufficient to enable us to commercialize our technology to the extent
needed to create future sales to sustain operations. If our current cash is insufficient for these purposes, we are unable to source
additional funds on terms acceptable to the Company (or at all), or we experience costs in excess of estimates to continue our
R&D plan, it is possible that we would not have sufficient resources to continue as a going concern and we may be required
to curtail or suspend our operations. Even if we are able to source sufficient funds to continue as a going concern, our technology
may not be accepted, we may never earn revenues sufficient to support our operations, and we may never be profitable.
Recent Developments
On January 7, 2020, the Company announced that
it had received an order and shipped its 5.2 GHz and 5.6 GHz coexistence WiFi filters to an original equipment manufacturer (OEM).
On January 30, 2020, Akoustis announced that
it had locked the design of its Citizen’s Broadband Radio Service 5G network infrastructure filter and had shipped samples
to three OEM’s.
On February 3, 2020, the Company announced
that it had received its first volume commercial order for 5G network infrastructure filters from a small cell base station provider
focused on markets in Asia.
In mid-February, Akoustis announced the entry
into a new market with an order for the design and development of XBAW filters for a customer for unmanned aircraft systems (UAS),
commonly referred to as drones. The filters will be used for control and non-payload communication links.
On April 8, 2020, the Company announced that
it had achieved its first non-defense commercial design win for XBAW filters in the 5G small cell network equipment market.
Underwritten Public Offering of Common
Stock
During the nine months ended March 31,
2020, the Company sold a total of 5,520,000 shares of its common stock at a price to the public of $6.25 per share for aggregate
gross proceeds of $34.5 million before deducting the underwriting discount and offering expenses payable by the Company of approximately
$2.3 million. The Company expects to use the proceeds of the offering to fund the Company’s operations and growth of its business,
including for capital expenditures, working capital, research and development, the commercialization of its technology and other
general corporate purposes.
Critical Accounting Policies
There have been no material changes to
our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” included in
our 2019 Annual Report.
Results of Operations
Three Months Ended March 31, 2020
and 2019
Revenue
The Company recorded revenue of $0.4 million
during the three months ended March 31, 2020 as compared to $0.2 million for the three months ended March 31, 2019. Revenue recorded
during the three months ended March 31, 2020 included $0.1 million of RF filter and amplifier sales and $0.2 million of non-recurring
engineering services. The RF filters sales were primarily sales of defense filters. Revenue for the three months ended March 31,
2019 consisted of $0.1 million of non-recurring engineering services and $0.1 million of RF filter and amplifier sales.
Cost of Revenue
The Company recorded cost of revenue of
$0.2 million in the three months ended March 31, 2020 and $0.3 million in the three months ended March 31, 2019, which included
direct labor, direct materials and facility costs. The decrease in cost of revenue was primarily related to a lower amount of sales
of WiFi filters during the third quarter of fiscal year 2020.
Research and Development Expenses
R&D expenses were $5.8 million for
the three months ended March 31, 2020 and were $0.3 million, or 5%, higher than the prior year amount for the same period of $5.5
million. The period-over-period increase was primarily due to an increase in parts and equipment expense and equipment depreciation
at the Company’s Canandaigua NY wafer-manufacturing facility (the “NY Facility”).
General and Administrative Expense
General and administrative (“G&A”)
expenses include salaries and wages for executive and administrative staff, stock-based compensation, professional fees, insurance
costs and other general costs associated with the administration of our business. G&A expenses for the three months ended March
31, 2020 were $2.6 million, which is an increase of $0.1 million compared to the three months ended March 31, 2019. Year over year
changes within G&A expenses include an increase in employee compensation, including stock-based compensation of $0.2 million.
In addition, bad debt expense and marketing expenses increased by a total of $0.1 million. These increases were partially offset
by a decrease in professional fees of $0.2 million.
Other (Expense)/Income
Other income for the three months ended
March 31, 2020 was $0.4 million, which was comprised of a gain on the change in the fair value of the derivative liability of $1.1
million and a gain on the change in the fair value of our real estate contingent liability of $0.5 million. Offsetting these income
items was debt discount amortization of $0.8 million and interest expense, net of $0.3 million. Other (expense) for the three months
ended March 31, 2019 was $1.4 million, which included a gain on the contingent real estate liability of $0.9 million, interest
income of $0.2 million and rental income of $0.1 million, offset by $1.0 million of interest expense related to the amortization
of debt issuance costs and interest on the convertible notes and a loss of $1.6 million on the change in the fair value of the
derivative liability related to our convertible senior secured notes.
Net Loss
The Company recorded a net loss of $7.8
million for the three months ended March 31, 2020, compared to a net loss of $9.4 million for the three months ended March 31,
2019. The period-over-period change of $1.7 million, or 18%, was primarily driven by the change in derivative valuation of $2.6
million. This change was partially offset by a change in the gain on real estate liability valuation of $0.4 million and an increase
in interest expense, net of $0.4 million and real estate contingent liability of $0.5 million.
Nine Months Ended March 31, 2020
and 2019
Revenue
The Company recorded revenue of $1.4 million
during the nine months ended March 31, 2020 as compared to $0.9 million for the nine months ended March 31, 2019. Revenue recorded
during the nine months ended March 31, 2020 included $0.5 million of RF filter and amplifier sales, $0.3 million of foundry services,
and $0.6 million of revenue for non-recurring engineering services. The revenue for the nine months ended March 31, 2019 consisted
of $0.4 million of revenue for non-recurring engineering services, $0.2 million of revenue for foundry services, $0.1 million of
grant revenue and $0.2 million of RF filter and amplifier sales.
Cost of Revenue
The Company recorded cost of revenue of $1.3
million in the nine months ended March 31, 2020 and $0.8 million in the nine months ended March 31, 2019, which included direct
labor, direct materials and facility costs. The increase in cost of sales was primarily related to sales of infrastructure and
WiFi filters which was partially offset by a decrease in the cost of foundry services.
Research and Development Expenses
R&D expenses were $15.7 million for the
nine months ended March 31, 2020 and were $1.4 million, or 10%, higher than the prior year amount for the same period of $14.3
million. The period-over-period increase was primarily in the areas of R&D personnel costs and R&D equipment depreciation.
Personnel costs, including stock-based compensation, were $9.2 million compared to $8.5 million in the prior year period, an increase
of $0.7 million or 8%. The higher personnel cost was due to additional R&D headcount at both the Huntersville, NC location
and the NY Facility. R&D and Fabrication materials totaled $2.6 million which represents an increase of $0.5 million over the
prior year. Depreciation expense of $2.1 million was $0.3 million higher than the prior year. These increases were partially offset
by a decrease in facility costs of $0.2 million compared to the prior year.
General and Administrative Expense
G&A expenses include salaries and wages
for executive and administrative staff, stock-based compensation, professional fees, insurance costs and other general costs associated
with the administration of our business. G&A expenses for the nine months ended March 31, 2020 were $8.2 million, which is
an increase of $1.4 million compared to the nine months ended March 31, 2019. Year over year changes within G&A expenses include
an increase in employee compensation including stock compensation of $0.8 million, an increase in professional fees of $0.3 million
and an increase in other administrative expenses of $0.2 million.
Other (Expense)/Income
Other (expense) for the nine months ended
March 31, 2020 was $2.3 million, which included debt discount amortization of $2.3 million and interest expense, net of $1.2 million.
These expenses were partially offset by a reduction in the fair value of our derivative liability of $0.4 million, the expiration
of the real estate contingent liability, resulting in $0.4 million of income, and interest income of $0.3 million. Other (expense)
for the nine months ended March 31, 2019 were $2.4 million, primarily consisting of $1.3 million of debt discount amortization,
interest expense of $1.0 million and an increase to our derivative liability of $1.4 million. These were partially offset by interest
income of $0.3 million and a reduction to our real estate contingent liability of $0.8 million.
Net Loss
The Company recorded a net loss of $26.1
million for the nine months ended March 31, 2020, compared to a net loss of $23.5 million for the nine months ended March 31, 2019.
The period-over-period incremental loss of $2.5 million, or 11%, was primarily driven by an increase in R&D expenses of $1.4
million and an increase in G&A expenses of $1.4 million. These expenses were partially offset by a decrease in other expenses.
Liquidity and Capital Resources
Financing Activities
The Company had $39.6 million of cash and cash equivalents on hand
as of March 31, 2020, which reflects an increase of $9.5 million compared to $30.1 million as of June 30, 2019. The $9.5 million
increase is primarily due to $32.5 million of financing activities, primarily comprised of $32.3 in net cash proceeds from the
December 2019 underwritten offering of common stock. The Company used $16.4 million for operating activities and $6.3 million
in capital expenditures for the nine months ended March 31, 2020. The Company estimates that cash on hand will fund its operations,
including current capital expense commitments, beyond the next twelve months from the date of filing of this Form 10-Q.
Balance Sheet and Working Capital
March 31, 2020 compared to June 30, 2019
As of March 31, 2020, the Company had current
assets of $41.2 million made up primarily of total cash on hand of $39.6 million. As of June 30, 2019, current assets were $31.7
million comprised primarily of total cash on hand of $30.1 million.
Property, Plant and Equipment was $19.9
million as of March 31, 2020 as compared to a balance of $15.2 million as of June 30, 2019. The approximate $4.7 million increase
is primarily due to the purchase of R&D and manufacturing equipment of $6.9 million, offset by depreciation of $2.2 million.
Total assets as of March 31, 2020 and June
30, 2019 were $62.9 million and $47.9 million, respectively.
Current liabilities as of March 31, 2020 and
June 30, 2019 were $3.6 million and $3.6 million, respectively.
Long-term liabilities totaled $20.8 million
as of March 31, 2020, compared to $18.3 million as of June 30, 2019. The increase of $2.5 million was due to the increase in convertible
notes, net of debt discount and issuance costs, as well as the establishment of a right of use liability upon adoption of ASC 842
which totaled $0.5 million.
Stockholders’ equity was $38.5 million
as of March 31, 2020, compared to $26.0 million as of June 30, 2019, an increase of $12.5 million, or 48%. This increase was primarily
due to common stock issued for cash, net of issuance costs of $32.2 million, common stock issued for services of $5.1 million,
vesting of restricted shares of $0.3 million, employee stock purchases of $0.2 million and common stock issued for payment of note
interest of $0.7 million. These were offset by the net loss for the nine months ended March 31, 2020 of $26.1 million.
Cash Flow Analysis
Operating activities used cash of $16.4
million during the nine months ended March 31, 2020 and $13.4 million during the 2019 comparative period. The $3.0 million period-over-period
increase in cash used was attributable to higher operating expenses associated with the ramp up of development and commercialization
activities (primarily R&D personnel and material costs).
Investing activities used cash of $6.5
million for the nine months ended March 31, 2020 compared to $4.5 million for the comparative period ended March 31, 2019. The
$2.0 million period-over-period increase was primarily due to increased spend on R&D equipment.
Cash provided by financing activities was
$32.4 million for the nine months ended March 31, 2020 compared to $37.7 million for the comparative period ended March 31, 2019.
The $5.3 million period-over-period decrease was due a reduction in cash received from equity and convertible note issuances in
the comparative period.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements
as of March 31, 2020.