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
inability to obtain adequate financing and sustain our status as a going concern; our limited operating history; our
inability to service the debt represented by our $15.0 million principal amount of convertible senior secured notes due 2023
(called for redemption in March 2021); 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, including its
impact on our ability to access the capital markets; 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; contracting with customers and
other parties with greater bargaining power and agreeing to terms and conditions that may adversely affect our business;
risks related to doing business in foreign countries; any security breaches or other disruptions compromising our proprietary
information and exposing us to liability; 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 maintain effective internal control
over financial reporting; and our failure to obtain and 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 our Annual Report on Form 10-K, filed with the SEC on August 21, 2020 (the
“2020 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 product company focused on developing, designing, and manufacturing innovative RF filter solutions
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 XBAW® filters
incorporate optimized high purity piezoelectric materials for high power, high frequency and wide bandwidth operation. 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 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. 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, sampled and
begun commercial shipment of our single-band low- loss BAW filter designs for 4G/LTE frequency bands, 5G frequency bands and
5GHz WiFi bands which are suited to competitive BAW solutions and historically cannot be addressed with low-band, lower power
handling surface acoustic wave (“SAW”) technology.
We own and/or have filed
applications for patents on the core resonator device technology, manufacturing facility and intellectual property (“IP”)
necessary to produce our RF filter chips and operate as a “pure-play” RF filter supplier, providing discrete filter
solutions direct to Original Equipment Manufacturers (“OEMs”) and aligning with the front- end module manufacturers
that seek to acquire high performance filters to expand their module businesses. We believe this business model is the most direct
and efficient means of delivering our solutions to the market.
Technology. Our device
technology is based upon bulk-mode acoustic resonance, which we believe is superior to surface-mode resonance for high-band and
ultra-high- band (“UHB”) applications that include 4G/LTE, 5G, WiFi, and defense applications. Although some of our
target customers utilize or manufacture the RFFE module, they may lack access to critical UHB filter technology that we produce,
which is necessary to compete in high frequency applications.
Manufacturing. We currently
manufacture our 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 (the “NY Facility”), which we acquired in June 2017.
Intellectual Property. As of January 19, 2021,
our IP portfolio included 38 patents, including a blocking patent that we have licensed from Cornell University. Additionally,
as of January 19, 2021, we have 75 pending patent applications. These patents cover our XBAW TM RF filter technology from raw materials
through the system architectures.
By designing, manufacturing,
and marketing our RF filter products to mobile phone OEMs, defense OEMs, network infrastructure OEMs, and WiFi CPE OEMs, we seek
to enable broader competition among the front-end module manufacturers.
Since we own and/or have
filed applications for patents on the core technology and control access to our 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. The Company has incurred
losses, 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.
To succeed, we
must convince mobile phone OEMs, RFFE module manufacturers, network infrastructure OEMs, WiFi CPE OEMs and defense customers
to use our XBAW® 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.
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 measures, daily self-health attestations, and mandatory mask policies
at our locations, including when warranted by state and local guidelines, the implementation of new staffing plans in our facilities
whereby certain employees work remotely and the remaining on-site force is divided into multiple shifts or segregated in different
parts of the facility. Our actions continue to evolve in response to new government measures and scientific knowledge regarding
COVID-19. 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, equipment and services
from suppliers. For example, Executive Orders issued by the Governor of New York introduced potential delays in the procurement
of installation and maintenance services from vendors without personnel located in New York, New Jersey or Connecticut.
These actions and the global
health crisis caused by COVID-19 have negatively impacted business activity across the globe. We have observed declining demand
and price reductions in the electronics industry as business and consumer activity has decelerated. Additionally, we have observed
delays in certain suppliers’ shipment of materials necessary for us to manufacture our products and in certain vendors’
ability to deliver equipment for installation at our facilities. 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 ultimate 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 2021 or beyond.
Recent Developments
On October 13, 2020, the Company announced
it shipped its fourth 5G small cell network infrastructure filter to a tier-1 infrastructure customer, operating in the 5G new
radio band n79.
On October 27, 2020, the Company announced
it was awarded a new DARPA contract to advance XBAW® technology through a direct-to-phase 2 (DP2) program.
On October 29, 2020, Akoustis announced
that it received an order from a Citizen’s Broadband Radio Service (CBRS) equipment OEM for both network and consumer premise
equipment XBAW® filter solutions.
On November 2, 2020, the Company announced
it received an order from a leading RF front end maker for the development of 5G/WiFi mobile coexistence filters.
On December 7, 2020, Akoustis announced
that it issued a redemption notice with respect to $10 million principal amount of the Company’s outstanding 6.5% convertible
senior notes due in 2023.
On December 9, 2020, the Company announced
it was awarded a design win for its 5.2/5.6 GHz WiFi 6 coexistence filters for a new customer. The XBAW® filters will be used
for a tri-band gateway/router using a multi-user, multiple-in, multiple-out (MU-MIMO) architecture.
On December 14, 2020, Akoustis announced
it was awarded a third WiFi 6 design win for a tri-band MU-MIMO bridge product.
On December 16, 2020, the Company announced
it received an order for new 5G mobile XBAW® filters from a tier-1 RF front-end maker for smartphones and other devices.
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,” included in our 2020 Annual Report.
Results of Operations
Three Months Ended December 31, 2020
and 2019
Revenue
The Company recorded revenue of $1.3 million
for the three months ended December 31, 2020 as compared to $0.5 million for the three months ended December 31, 2019. The increase
of $0.8 million was primarily due to an increase in RF product revenue of $0.4 million or 227%. In addition, non-recurring engineering
services increased by $0.4 million or 115%.
Cost of Revenue
Cost of revenue includes direct labor,
material, net realizable value (NRV) adjustments, and facility costs primarily associated with foundry services revenue, manufacturing
of filter products and engineering services. The Company recorded cost of revenue of $2.6 million for the three months ended December
31, 2020 as compared to $0.8 million for the three months ended December 31, 2019. The $1.8 million increase is due to costs associated
with RF product revenue which increased by $0.5 million as well as cost of goods sold associated with net realizable value (NRV)
inventory adjustments totaling $1.2 million for the three months ended December 31, 2020.
Research and Development Expenses
R&D expenses were $5.6 million for
the three months ended December 31, 2020 and were $0.7 million, or 13.7% higher than the prior year amount for the same period
of $4.9 million. The period-over-period increase was primarily in the areas of R&D personnel costs, R&D materials and facility
costs as well as R&D equipment depreciation. Personnel costs, including stock-based compensation, were $2.9 million compared
to $2.7 million in the prior year period, an increase of $0.2 million or 8.5%. The higher personnel cost was primarily due to increased
headcount at both the Huntersville, NC location and the NY Facility. Material and facility costs of $1.9 million primarily associated
with the NY Facility were $0.7 million higher than the prior period. Repairs and maintenance and general expenses were lower than
the prior period by $0.1 million.
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 December
31, 2020 were $3.4 million, which is an increase of $0.6 million compared to the three months ended December 31, 2019. Year over
year changes within G&A expenses include an increase in employee compensation (including stock-based compensation) of $0.6
million which was partially offset by lower general expenses, primarily professional fees.
Other (Expense)/Income
Other expenses for the three months ended December
31, 2020 were $1.7 million, which included debt discount amortization of $1.3 million and interest expense, net of $0.4 million.
Other expenses for the three months ended December 31, 2019 were $1.4 million, consisting of $0.8 million of debt discount amortization
and interest expense, net of $0.3 million, and a change in fair value of our derivative liability of $0.3 million.
Net Loss
The Company recorded a net loss of $11.9
million for the three months ended December 31, 2020, compared to a net loss of $9.3 million for the three months ended December
31, 2019. The period-over-period incremental loss of $2.6 million, or 28%, was primarily driven by an increase in cost of revenue,
R&D expenses and general and administrative expenses of $3.1 million, partially offset by a revenue increase of $0.8 million.
Six Months Ended December 31, 2020 and
2019
Revenue
The Company recorded revenue of $1.9 million
for the six months ended December 31, 2020 as compared to $1.1 million for the six months ended December 31, 2019. The increase
of $0.8 million was primarily due to an increase in RF product revenue of $0.8 million or 223%. In addition, non-recurring engineering
services increased by $0.3 million or 70%. Partially offsetting these increases was a decrease in MEMS revenue of $0.3 million,
a product line that the Company exited during fiscal year 2020.
Cost of Revenue
Cost of revenue includes direct labor,
material, net realizable value (NRV) adjustments, and facility costs primarily associated with foundry services revenue, manufacturing
of filter products and engineering services. The Company recorded cost of revenue of $4.3 million for the six months ended December
31, 2020 as compared to $1.1 million for the six months ended December 31, 2019. The $3.1 million increase is primarily due to
costs associated with RF product revenue which increased by $2.0 million as well as cost of goods sold associated with net realizable
value (NRV) inventory adjustments totaling $1.1 million for the six months ended December 31, 2020.
Research and Development Expenses
R&D expenses were $11.9 million for
the six months ended December 31, 2020 and were $2.0 million, or 20%, higher than the prior year amount for the same period of
$10.0 million. The period-over-period increase was primarily in the areas of R&D personnel costs, R&D materials and facility
costs as well as R&D equipment depreciation. Personnel costs, including stock-based compensation, were $6.4 million compared
to $5.7 million in the prior year period, an increase of $0.7 million or 12.5%. The higher personnel cost was primarily due to
increased headcount at both the Huntersville, NC location and the NY Facility. Material and facility costs of $3.6 million primarily
associated with the NY Facility were $1.2 million higher than the comparative period due to increased R&D activities.
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 six months ended December
31, 2020 were $6.3 million, which is an increase of $0.7 million compared to the six months ended December 31, 2019. Year over
year changes within G&A expenses include an increase in employee compensation (including stock-based compensation) of $0.8
million, which was partially offset by lower general expenses, primarily professional fees as well as a reduction in severance
expense.
Other (Expense)/Income
Other expenses for the six months ended December
31, 2020 were $3.3 million, which included debt discount amortization of $2.3 million, interest expense of $0.8 million, and a
change in fair value of our derivative liability of $0.2 million. Other expenses for the six months ended December 31, 2019 were
$2.7 million, consisting of $1.5 million of debt discount amortization and interest expense, net of $0.6 million, and a change
in fair value of our derivative liability of $0.7 million.
Net Loss
The Company recorded a net loss of $23.9
million for the six months ended December 31, 2020, compared to a net loss of $18.3 million for the six months ended December 31,
2019. The period-over-period incremental loss of $5.6 million, or 31%, was primarily driven by an increase in cost of revenue and
R&D expenses of $5.1 million.
Liquidity and Capital Resources
Financing Activities
The Company had $47.7 million of cash and
cash equivalents on hand as of December 31, 2020, which reflects an increase of $3.4 million compared to $44.3 million as of June
30, 2020. The increase is primarily due to cash proceeds from common stock issuance of $23.2 million which was partially offset
by $16.2 million in net cash used in operating activities and $4.5 million in capital expenditures for the six months ended December
31, 2020. The Company estimates that cash on hand will be sufficient to fund its operations, including current capital expense
commitments beyond the next twelve months from the date of filing of this Form 10-Q. However, the Company has historically incurred
recurring operating losses and will continue to do so until it generates sufficient revenues from operations; as a result, we may
need to obtain additional capital through the sale of additional equity securities, debt, or otherwise, to fund operations past
that date. There is no assurance that the Company’s projections and estimates are accurate. The Company is actively managing
and controlling the Company’s cash outflows to mitigate liquidity risks.
Balance Sheet and Working Capital
December 31, 2020 compared to June 30,
2020
As of December 31, 2020, the Company had
current assets of $50.9 million made up primarily of cash on hand of $47.7 million. As of June 30, 2020, current assets were $46.2
million comprised primarily of cash on hand of $44.3 million.
Property, Plant and Equipment was $25.1
million as of December 31, 2020 as compared to a balance of $23.6 million as of June 30, 2020.
Total assets as of December 31, 2020 and
June 30, 2020 were $77.6 million and $71.4 million, respectively.
Current liabilities as of December 31,
2020 and June 30, 2020 were $15.3 million and $6.1 million, respectively. The increase of $9.2 million was due to the reclassification
of a portion of our loans payable and convertible debt from long term liabilities to current liabilities offset by a decrease in
accounts payable and accrued expenses.
Long-term liabilities totaled $15.8 million
as of December 31, 2020, compared to $23.8 million as of June 30, 2020. The decrease of $8.0 million was due to the reclassification
of a portion of our loans payable and convertible debt from long term liabilities to current liabilities offset by debt discount
amortization related to our convertible notes.
Stockholders’ equity was $46.5 million
as of December 31, 2020, compared to $41.5 million as of June 30, 2020, an increase of $5.0 million, or 12%. This increase was
primarily due to the increase in additional paid-in-capital (“APIC”) of $28.8 million for the six months ended December
31, 2020 which was partially offset by the net loss for the six months ended December 31, 2020 of $23.9 million. The increase in
APIC was primarily due to common stock issued for cash of $23.4 million, common stock issued for services of $4.1 million and stock
options exercised of $0.5 million.
Cash Flow Analysis
Operating activities used cash of $16.2
million during the six months ended December 31, 2020 and $12.1 million during the 2019 comparative period. The $4.1 million period-
over-period increase in cash used was attributable to higher operating expenses associated with the ramp of development and
commercialization activities (primarily R&D and production personnel and material costs).
Investing activities used cash of $4.5
million for the six months ended December 31, 2020 compared to $4.3 million for the comparative period ended December 31, 2019.
The $0.2 million period-over-period increase was primarily due to increased purchases of production equipment.
Financing activities increased cash by $24.0
million during the six months ended December 31, 2020 compared to the same period in 2019 primarily due to proceeds from issuance
of common stock pursuant to the Company’s ATM Equity OfferingSM Sales Agreement with BofA Securities, Inc. and
Piper& Sandler & Co. In addition, stock option grants, warrant exercises and proceeds from our employee stock purchase
plan (“ESPP”) resulted in cash proceeds of $0.8 million.