Quarterly Report (10-q)

Date : 05/10/2019 @ 9:06PM
Source : Edgar (US Regulatory)
Stock : Akoustis Technologies, Inc. (AKTS)
Quote : 5.52  0.07 (1.28%) @ 12:59AM

Quarterly Report (10-q)

 

UNITED STATES

  SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission File Number: 001-38029

 

 

AKOUSTIS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 33-1229046
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

9805 Northcross Center Court, Suite A

Huntersville, North Carolina 28078

(Address of principal executive offices) (Zip Code)

 

704-997-5735

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐   No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.001 par value AKTS The Nasdaq Stock Market LLC

 

As of May 6, 2019, there were 30,056,626 shares of the registrant’s common stock, $0.001 par value per share, issued and outstanding.

 

 

 

AKOUSTIS TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

 

TABLE OF CONTENTS

 

    Page No.
     
  PART I — FINANCIAL INFORMATION    
       
ITEM 1. FINANCIAL STATEMENTS    
       
Condensed Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018 (unaudited)   2
     

Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2019 and 2018 (unaudited)

  3
     
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended March 31, 2019 and 2018 (unaudited)   4
     
Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2019 and 2018 (unaudited)   5
     
Notes to the Condensed Consolidated Financial Statements (unaudited)   6
       
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   19
       
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   26
       
ITEM 4. CONTROLS AND PROCEDURES   27
       
  PART II — OTHER INFORMATION    
       
ITEM 1. LEGAL PROCEEDINGS   27
       
ITEM 1A. RISK FACTORS   27
       
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS   29
       
ITEM 3. DEFAULTS UPON SENIOR SECURITIES   29
       
ITEM 4. MINE SAFETY DISCLOSURES   29
       
ITEM 5. OTHER INFORMATION   29
       
ITEM 6. EXHIBITS   29
     
EXHIBIT INDEX   30
       
SIGNATURES   31

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS .

 

Akoustis Technologies, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

    March 31,     June 30,  
    2019     2018  
             
Assets                
                 
Assets:                
Cash and cash equivalents   $ 34,633,363     $ 14,816,717  
Accounts receivable     159,346       214,659  
Inventory     149,807       57,556  
Prepaid expenses     296,906       305,942  
Other current assets     590,203       484,173  
Total current assets     35,829,625       15,879,047  
                 
Property and equipment, net     15,484,870       12,820,169  
                 
Intangibles, net     351,747       264,295  
                 
Assets held for sale, net     300,000       333,250  
                 
Other assets     198,656       11,155  
Total Assets   $ 52,164,898     $ 29,307,916  
                 
Liabilities and Stockholders’ Equity                
                 
Current Liabilities:                
Accounts payable and accrued expenses   $ 2,800,321     $ 2,593,432  
Deferred revenue     3,920       52,938  
Total current liabilities     2,804,241       2,646,370  
                 
Long-term Liabilities:                
Contingent real estate liability     425,228       1,229,966  
Convertible notes payable, net     19,099,589       11,464,632  
Other long-term liabilities     135,836       117,086  
Total long-term liabilities     19,660,653       12,811,684  
                 
Total Liabilities     22,464,894       15,458,054  
                 
Stockholders’ Equity                
Preferred Stock, par value $0.001: 5,000,000 shares authorized; none issued and outstanding            
Common stock, $0.001 par value; 45,000,000 shares authorized; 30,008,412 and 22,203,437 shares issued and outstanding at March 31, 2019 and June 30, 2018, respectively     30,008       22,203  
Additional paid in capital     91,383,199       52,074,343  
Accumulated deficit     (61,713,203)       (38,246,684 )
Total Stockholders’ Equity     29,700,004       13,849,862  
Total Liabilities and Stockholders’ Equity   $ 52,164,898     $ 29,307,916  

 

See accompanying notes to the condensed consolidated financial statements

 

2

 

Akoustis Technologies, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

   

For the
Three
Months
Ended

March 31,

2019

   

For the
Three
Months
Ended

March 31,

2018

   

For the Nine
Months
Ended
March 31,

2019

   

For the Nine
Months
Ended

March 31,

2018

 
                         
Revenue                                
Revenue with customers   $ 237,463     $ 284,408     $ 764,288     $ 882,669  
Grant revenue                 109,472       147,232  
Total revenue     237,463       284,408       873,760       1,029,901  
                                 
Cost of revenue     299,433       308,288       813,223       831,353  
                                 
Gross profit     (61,970 )     (23,880 )     60,537       198,548  
                                 
Operating expenses                                
Research and development     5,547,341       3,044,957       14,475,770       9,522,353  
General and administrative expenses     2,460,328       2,441,992       6,705,626       6,464,518  
Total operating expenses     8,007,669       5,486,949       21,181,396       15,986,871  
                                 
Loss from operations     (8,069,639 )     (5,510,829 )     (21,120,859 )     (15,788,323 )
                                 
Other (expense) income                                
Interest (expense) income     (780,698 )     139       (2,006,099 )     1,136  
Rental income     69,644       72,637       206,985       244,825  
Other income           352             352  
Change in fair value of contingent real estate liability     905,183       635,061       804,738       555,756  
Change in fair value of derivative liabilities     (1,558,401 )           (1,371,700 )      
Total other (expense) income     (1,364,272 )     708,189       (2,366,076 )     802,069  
Net loss   $ (9,433,911 )   $ (4,802,640 )   $ (23,486,935 )   $ (14,986,254 )
                                 
Net loss per common share - basic and diluted   $ (0.31 )   $ (0.22 )   $ (0.88 )   $ (0.73 )
                                 
Weighted average common shares outstanding - basic and diluted     29,959,908       22,284,528       26,659,999       20,499,917  

 

See accompanying notes to the condensed consolidated financial statements

 

3

 

 

Akoustis Technologies, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)

 

    Common Stock     Additional              
    Shares     Amount     Paid In
Capital
    Accumulated
Deficit
    Stockholders’
Equity
 
                               
Balance, June 30, 2018     22,203,437       22,203       52,074,343       (38,246,684 )     13,849,862  
Cumulative-effect adjustment from adoption of ASC 606                       20,416       20,416  
Common stock issued for cash, net of issuance costs                 (80,944 )           (80,944 )
Common stock issued for services     111,875       112       1,946,916             1,947,028  
Common stock issued for exercise of warrants     19,086       19       70,501             70,520  
Vesting of restricted shares                 351,035             351,035  
Common stock issued in payment of note interest     40,024       40       289,750             289,790  
Net loss                       (7,307,699 )     (7,307,699 )
                                         
Balance, September 30, 2018     22,374,422       22,374       54,651,601       (45,533,967 )     9,140,008  
Common stock issued for cash, net of issuance costs     7,362,365       7,362       28,732,750             28,740,112  
Common stock issued for services     120,744       121       1,044,195             1,044,316  
Common stock issued for exercise of warrants                              
Intrinsic value of beneficial conversion feature                 3,950,839             3,950,839  
Vesting of restricted shares                 177,693             177,693  
Common stock issued in payment of note interest     52,922       53       243,697             243,750  
Net loss                       (6,745,325 )     (6,745,325 )
                                         
Balance, December 31, 2018     29,910,453       29,910       88,800,775       (52,279,292 )     36,551,393  
Common stock issued for cash, net of issuance costs     1,227       1       (1 )            
Common stock issued for services     46,000       46       2,125,610             2,125,656  
Common stock issued for exercise of warrants     15,697       16       (28 )           (12 )
Common stock issued for exercise of options     18,750       19       133,481             133,500  
Vesting of restricted shares                 79,633             79,633  
Common stock issued in payment of note interest     37,410       38       243,707             243,745  
Repurchase of common shares     (21,125 )     (22 )     22              
Net loss                       (9,433,911 )     (9,433,911 )
Balance, March 31, 2019     30,008,412     $ 30,008     $ 91,383,199     $ (61,713,203 )   $ 29,700,004  
                                         
Balance, June 30, 2017     19,075,050     $ 19,075     $ 31,499,889     $ (16,508,057 )   $ 15,010,907  
Common stock issued for cash, net of issuance costs                              
Common stock issued for services     100,000       100       536,895             536,995  
Common stock issued for exercise of warrants     9,533       10       47,655             47,665  
Vesting of restricted shares                 117,045             117,045  
Net loss                       (4,643,198 )     (4,643,198 )
                                         
Balance, September 30, 2017     19,184,583       19,185       32,201,484       (21,151,255 )     11,069,414  
Common stock issued for cash, net of issuance costs     3,183,269       3,183       13,254,880             13,258,063  
Warrants issued to underwriter                 (645,757           (645,757
Common stock issued for services     11,000       11       2,043,816             2,043,827  
Common stock issued for exercise of warrants                              
Vesting of restricted shares                 (254,824           (254,824
Repurchase of common shares     (58,152     (58     58              
Net loss                       (5,540,416 )     (5,540,416 )
                                         
Balance, December 31, 2017     22,320,700       22,321       46,599,657       (26,691,671 )     19,930,307  
Common stock issued for cash, net of issuance costs                 (58,133 )           (58,133 )
Warrants issued to underwriter                              
Common stock issued for services     20,000       20       1,693,246             1,693,266  
Common stock issued for exercise of warrants     2,000       2       2,998             3,000  
Vesting of restricted shares                 (26,552           (26,552
Repurchase of common shares     (110,500     (111     111              
Net loss                       (4,802,640 )     (4,802,640 )
Balance, March 31, 2018     22,232,200       22,232       48,211,327       (31,494,311 )     16,739,248  

   

See accompanying notes to the condensed consolidated financial statements.

 

4

 

 

Akoustis Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

    For the Nine
Months
Ended
    For the Nine
Months
Ended
 
    March 31,
2019
    March 31,
2018
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (23,486,935 )   $ (14,986,254 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     1,814,590       796,258  
Share-based compensation     5,521,980       3,628,331  
Amortization of debt discount     1,346,823        
Change in fair value of derivative liabilities     1,371,700        
Loss on disposal of fixed assets     (38,358 )      
Non cash interest payments     777,285        
Change in fair value of contingent real estate liability     (804,738 )     (555,756 )
Changes in operating assets and liabilities:                
Accounts receivable     55,313       (518,920 )
Inventory     (92,251 )     118,971  
Prepaid expenses     9,036       (71,556 )
Other current asset     (68,478 )     (16,090 )
Other assets     (187,501 )     (1,596 )
Accounts payable and accrued expenses     410,271       407,961  
Change in other long-term liabilities     18,750        
Deferred revenue     (66,154 )     113,438  
Net Cash Used In Operating Activities     (13,418,667 )     (11,085,213 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Cash paid for machinery and equipment     (4,436,485 )     (5,282,617 )
Cash received from sale of assets held for sale     33,250        
Cash paid for intangibles     (91,900 )     (42,123 )
Net Cash Used In Investing Activities     (4,495,135 )     (5,324,740 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from the issuance of common stock     28,659,168       13,199,930  
Proceeds from exercise of warrants     70,508       50,665  
Proceeds from exercise of options     133,500         
Proceeds received from convertible notes, net     8,867,272        
Net Cash Provided By Financing Activities     37,730,448       13,250,595  
                 
Net Increase (Decrease) in Cash     19,816,646       (3,159,358 )
                 
Cash - Beginning of Period     14,816,717       9,631,520  
                 
Cash - End of Period   $ 34,633,363     $ 6,472,162  
                 
SUPPLEMENTARY CASH FLOW INFORMATION:                
Cash Paid During the Period for:                
Income taxes   $     $  
Interest     255,702       199  
                 
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                
                 
Stock compensation payable   $ 203,381     $ 163,746  
ASC 606 transition adjustment     20,416        
Warrants issued for stock issuance costs           645,757  
Convertible Notes – Beneficial Conversion Feature     3,950,839        
Reclassification of fixed assets to assets held for sale, net           117,023  

 

See accompanying notes to the condensed consolidated financial statements

 

5

 

AKOUSTIS TECHNOLOGIES, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited )

 

Note 1. Organization

 

Akoustis Technologies, Inc. (“the Company”) was incorporated under the laws of the State of Nevada on April 10, 2013. Effective December 15, 2016, the Company changed its state of incorporation from the State of Nevada to the State of Delaware. Through its subsidiary, Akoustis, Inc. (a Delaware corporation), the Company, headquartered in Huntersville, North Carolina, is focused on developing, designing, and manufacturing innovative radio frequency (“RF”) filter products for the wireless industry, including for products such as smartphones and tablets, cellular infrastructure equipment, and WiFi Customer Premise Equipment (“CPE”), and, military and defense communication applications. Located between the device’s antenna and its digital backend, the RF front-end (“RFFE”) is the circuitry that performs the analog signal processing and contains components such as amplifiers, filters and switches. To construct the resonator devices that are the building blocks for its RF filters, the Company has developed a family of novel, high purity acoustic piezoelectric materials as well as a unique MEMS wafer process, collectively referred to as XBAW™ technology. The Company leverages its integrated device manufacturing (IDM) business model to develop and sell high performance RF filters using its XBAW TM technology. Filters are critical in selecting and rejecting signals, and their performance enables differentiation in the modules defining the RFFE.

 

Note 2. Liquidity

 

At March 31, 2019, the Company had cash and cash equivalents of $34.6 million and working capital of $33.0 million. The Company has historically incurred recurring operating losses, and has experienced net cash used in operating activities of $13.4 million for the nine months ended March 31, 2019, which raises substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date.

 

However, as of May 6, 2019, the Company had $32.8 million of cash and cash equivalents, which funds are expected to be sufficient to fund our operations beyond the next twelve months from the date of filing of this Form 10-Q. These funds will be used to fund the Company’s 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. However, the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all. If the Company is unable to obtain additional financing in a timely fashion and on acceptable terms, its financial condition and results of operations may be materially adversely affected and it may not be able to continue operations or execute its stated commercialization plan.

  

Note 3. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal accruals) considered necessary for a fair presentation have been included. The Company has evaluated subsequent events through the filing of this Form 10-Q. Operating results for the quarter ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending June 30, 2019 or any future interim period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Form 10-K filed with the SEC on August 29, 2018 (the “2018 Annual Report”).

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Akoustis, Inc. On February 22, 2018, Akoustis Manufacturing New York, Inc. was merged into Akoustis, Inc., with Akoustis, Inc. as the surviving entity. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

6

 

Significant Accounting Policies and Estimates

 

The Company’s significant accounting policies are disclosed in Note 3-Summary of Significant Accounting Policies in the 2018 Annual Report. Since the date of the 2018 Annual Report, other than adopting ASC 606 “ Revenue From Contracts With Customers” discussed in the footnote below, there have been no material changes to the Company’s significant accounting policies. The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and the accompanying notes thereto. The policies, estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions, deferred taxes and related valuation allowances, revenue recognition, contingent real estate liability and the fair values of long-lived assets. Actual results could differ from the estimates.

 

Shares Outstanding

 

Shares outstanding include shares of restricted stock with respect to which restrictions have not lapsed. Restricted stock included in reportable shares outstanding was 311,328 shares and 862,821 shares as of March 31, 2019 and 2018, respectively. Shares of restricted stock are included in the calculation of weighted average shares outstanding.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) , and in May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients . These standards and their effect on the Company’s consolidated financial statements and related disclosures are discussed above under “Revenue Recognition.”

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “ Leases (Topic 842)  and subsequently amended certain aspects during March 2019 with ASU2019-01. The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted, and entities may also elect the optional transition method provided under ASU 2018-11, Leases, Topic 842: Targeted Improvement, issued in July 2018, allowing for application of the standard at the adoption date, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company does not expect the new standard will have a material effect on the consolidated financial statements and related disclosures.

 

In July 2018, the FASB issued ASU 2018-11, “ Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” . Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company elected to early adopt ASU 2018-11 in May 2018, in the recording of the $15.0 million convertible notes.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic718): Improvements to Nonemployee Share-Based Payment Accounting . Under the new standard, companies will no longer be required to value non-employee awards differently from employee awards. Companies will value all equity classified awards at their grant date under ASC 718 and forgo revaluing the award after the grant date. ASU 2018-07 is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted, but no earlier than the Company’s adoption date of Topic 606, Revenue from Contracts with Customers (as described above under “Revenue Recognition”). The Company does not believe the new standard will have a significant impact on its consolidated financial statements.

  

7

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. This update is to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is most important to users of each entity’s financial statements. The amendments in this update apply to all entities that are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating this guidance and the impact of this update on its consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying condensed consolidated financial statements.

 

Note 4. Revenue Recognition from Contracts with Customers

 

Effective as of July 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

 

The Company adopted this guidance and related amendments as of the first quarter of fiscal 2019, applying the modified retrospective transition method. The Company has determined that there was a $20,416 adjustment needed to retained earnings due to the application of the standard on contracts not completed at the date of initial application.

 

To achieve this core principle, the Company applies the following five steps:

 

Step l - Identify the Contract with the Customer - A contract exists when (a) the parties to the contract have approved the contract and are committed to perform their respective obligations, (b) the entity can identify each party’s rights regarding the goods or services to be transferred, (c) the entity can identify the payment terms for the goods or services to be transferred, (d) the contract has commercial substance and (e) it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

 

Step 2 - Identify Performance Obligations in the Contract - Upon execution of a contract, the Company identifies as performance obligations each promise to transfer to the customer either (a) goods or services that are distinct or (b) a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. To the extent a contract includes multiple promised goods or services, the Company must apply judgement to determine whether the goods or services are capable of being distinct within the context of the contract. If these criteria are not met, the goods or services are accounted for as a combined performance obligation. The Company considers the performance obligation in a product sale to be title transfer of the specified product to the customer. The transfer of title occurs according to the purchase order (contract) specification. The Company considers performance obligations related to foundry fabrication services to be title transfer of the specified product or prototype to the customer. The transfer of title occurs according to the purchase order (contract) specification. In the absence of title transfer language, transfer occurs at the time of shipment.

 

Step 3 - Determine the Transaction Price - The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer. Generally, all contracts include fixed consideration. If a contract did include variable consideration, the Company would determine the amount of variable consideration that should be included in the transaction price based on the expected value method. Variable consideration would be included in the transaction price, if in the Company’s judgement, it is probable that a significant future reversal of cumulative revenue under the contract would not occur.

 

8

 

Step 4 - Allocate the Transaction Price - After the transaction price has been determined, the next step is to allocate the transaction price to each performance obligation in the contract. If the contract only has one performance obligation, the entire transaction price will be applied to that obligation. If the contract has multiple performance obligations, the transaction price is allocated to the performance obligations based on the relative standalone selling price (SSP) at contract inception.

 

Step 5 - Satisfaction of the Performance Obligations (and Recognition of Revenue) - When an asset is transferred, and the customer obtains control of the asset (or the services are rendered), the Company recognizes revenue. At contract inception, the Company determines if each performance obligation is satisfied at a point in time or over time. The Company will recognize sales of its product in the period that title of the product is transferred to the customer. The Company will evaluate foundry fabrication services contracts on a case by case basis as they vary with regards to enforceable right and alternative use. If an unrestricted, enforceable right and no alternative use exists, the Company will recognize revenue over time utilizing the input method which the Company considers to be the best method of measuring progress toward complete satisfaction of the performance obligation. However, if either of these does not exist, the Company will recognize revenue at a point in time based on title transfer of the final prototype or specified product.

 

Disaggregation of Revenue

 

The Company’s primary revenue streams include foundry fabrication services and product sales.

 

Foundry Fabrication Services

 

Foundry fabrication services revenue includes microelectromechanical systems (“MEMS”) foundry services and Non-Recurring Engineering (“NRE”). Under these contracts, products are delivered to the customer at the completion of the service which represents satisfaction of the performance obligation. Depending on language with regards to enforceable right to payment for performance completed to date, related revenue will either be recognized over time or at a point in time.

 

Product Sales

 

Product sales revenue consists of sales of RF filters and amps which are sold with contract terms stating that title passes, and the customer takes control at the time of shipment. Revenue is then recognized when the devices are shipped, and the performance obligation has been satisfied. If devices are sold under contract terms that specify that the customer does not take ownership until the goods are received, revenue is recognized when the customer receives the goods.

 

The following table summarizes the revenues of the Company’s reportable segments for the three months ended March 31, 2019:

             
   

Foundry
Fabrication 

Services
Revenue

    Product Sales
Revenue
   

Total Revenue
with

Customers

 
MEMS     $ 30,490           $ 30,490  
NRE - RF Filters       128,628             128,628  
Filters/Amps             78,345       78,345  
Total     $ 159,118     $ 78,345     $ 237,463  

 

The following table summarizes the revenues of the Company’s reportable segments for the nine months ended March 31, 2019:

             
   

Foundry
Fabrication

Services
Revenue

    Product Sales
Revenue
   

Total Revenue
with

Customers

 
MEMS     $ 174,899           $ 174,899  
NRE – RF Filters       392,071             392,071  
Filters/Amps             197,318       197,318  
Total     $ 566,970     $ 197,318     $ 764,288  

 

9

 

Performance Obligations

 

The Company has determined that contracts for product sales revenue and foundry fabrication services revenue involve one performance obligation, which is delivery of the final product.

  

Contract Balances

 

The Company records a receivable when the title for goods has transferred. Generally, all sales are contract sales (with either an underlying contract or purchase order), resulting in all receivables being contract receivables. When invoicing occurs prior to revenue recognition a contract liability is recorded (as deferred revenue on the Condensed Consolidated Balance Sheet).

 

The following table summarizes the changes in revenue recognition for the nine months ended March 31, 2019:

  

    Deferred Revenue  
Balance, June 30, 2018   $ 52,938  
Revenue recognized from prior year     (52,938 )
Year to date invoicing in excess of revenue recognition     3,920  
Balance, March 31, 2019   $ 3,920  

 

Additionally, when revenue recognition occurs prior to invoicing, a contract asset is recognized.

  

The following table summarizes the changes in contract assets, included in Other current assets on the Condensed Consolidated Balance Sheet, for the nine months ended March 31, 2019:

 

    Contract
assets
 
Balance, June 30, 2018   $ 6,612  
YTD revenue recognition in excess of billings     57,459  
Balance, March 31, 2019   $ 64,071  

  

Backlog of Remaining Customer Performance Obligations

  

Revenue expected to be recognized and recorded as sales during this fiscal year from the backlog of performance obligations that are unsatisfied (or partially unsatisfied) was $0.2 million at March 31, 2019.

  

Grant Revenue

  

From time to time the Company applies for grants from various government bodies (state & federal), such as the National Science Foundation (“NSF”), to support research and development. In addition, the Company is eligible for “matching awards” from state boards to provide additional funds to the Company to supplement the funds awarded under the federal grant program. The Company records grant revenue as a part of revenue from operations due to the fact that grant revenue is viewed as an ongoing function of its intended operations. The revenue from grants is not viewed as “incidental” or “peripheral” which would result in the presentation of grant revenue as “Other income”. The Company recognizes nonrefundable grant revenue when the performance obligations have been met, application has been submitted and approval is reasonably assured.

  

Note 5. Common Stock Equivalents

  

The Company had the following common stock equivalents at March 31, 2019 and 2018. These are excluded from the loss per share calculation as they are considered anti-dilutive.

 

    March 31,
2019
   

March 31,

2018

 
Convertible Notes     4,960,800        
Options     2,177,314       1,263,859  
Warrants     708,651       754,809  
Total     7,846,765       2,018,668  

   

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Note 6. Property and Equipment, net

  

Property and equipment, net consisted of the following as of March 31, 2019 and June 30, 2018:

  

   

Estimated 

Useful Life 

 

March 31, 

2019 

   

June 30, 

2018

 
Land   n/a   $ 1,000,000     $ 1,000,000  
Building   11 years     3,000,000       3,000,000  
Equipment   2-10 years     13,360,745       9,126,755  
Other    *     1,260,349       1,057,854  
          18,621,094       14,184,609  
Less: Accumulated depreciation         (3,136,224 )     (1,364,440 )
Total       $ 15,484,870     $ 12,820,169  

 

(*) Useful lives vary from 3-10 years, as well as leasehold improvements which are 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 $623,281 and $313,438 for the three months ended March 31, 2019 and 2018, respectively.

   

The Company recorded depreciation expense of $1,810,142 and $783,857 for the nine months ended March 31, 2019 and 2018, respectively.

   

Note 7. Accounts Payable and Accrued Expenses

  

Accounts payable and accrued expenses consisted of the following at March 31, 2019 and June 30, 2018:

  

    March 31, 2019     June 30, 2018  
Accounts payable   $ 315,015     $ 139,152  
Accrued salaries and benefits     545,921       505,463  
Accrued bonuses     1,133,799       750,442  
Accrued stock-based compensation     192,158       395,539  
Accrued professional fees     203,302       293,024  
Accrued utilities     105,293       103,277  
Accrued interest     135,417       127,292  
Accrued goods received not invoiced     95,423       160,199  
Other accrued expenses     73,993       119,044  
Totals   $ 2,800,321     $ 2,593,432  

 

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Note 8. Derivative Liabilities

 

The Company’s 6.5% Convertible Senior Secured Notes due 2023 issued in May 2018 contain certain derivative features, as described in Note 9 - Convertible Notes. 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 nine months ended March 31, 2019:

  

   

Fair Value
Measurement
Using Level 3
Inputs  

Total  

 
Balance, July 1, 2018   $ 1,104,701  
Change in fair value of derivative liabilities     1,371,700  
Balance, March 31, 2019   $ 2,476,401  

 

The fair value of the derivative features of the convertible note at the balance sheet dates were calculated using the with-and-without method, a form of the income approach, valued with the following weighted average assumptions:

   

    March 31, 2019     

June 30,

2018 

 
Risk free interest rate     2.22 %     2.73 %
Dividend yield     0.00 %     0.00 %
Expected volatility     48.0 %     42.0 %
Remaining term (years)     4.17       4.92  

 

Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Bill with a similar term on the date of the issuance.

   

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 estimated 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 convertible notes’ expected term.

   

Remaining term: The Company’s remaining term is based on the remaining contractual term of the convertible notes.

   

The Company’s 6.5% Convertible Senior Notes due 2023 issued in October 2018 contain certain derivative features, as described in Note 9 - Convertible Notes; however, as of March 31, 2019 the fair value of these components recorded as a debt discount was $0.

   

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Note 9. Convertible Notes

   

Convertible Notes Issued October 2018  

   

On October 23, 2018 the Company completed the offering of $10.0 million principal amount of the Company’s 6.5% Convertible Senior Notes due 2023. The notes are unsecured and rank pari passu with the Company’s outstanding unsubordinated liabilities, including its 6.5% Convertible Senior Secured Notes due 2023 issued in May 2018. The net proceeds of the offering after payment of offering costs were approximately $8.9 million. The notes will mature on November 30, 2023, unless earlier converted, redeemed or repurchased. Interest on the notes accrues at the rate of 6.5% per year and is payable in cash on each February 28, May 31, August 31 and November 30, beginning February 28, 2019. The notes are convertible into common stock at the option of the holder at any time prior to maturity at an initial conversion price of $5.10 per share, subject to adjustment under certain circumstances. 

  

The Company analyzed the components of the convertible notes for embedded derivatives and the application of the corresponding accounting treatment. This analysis determined that certain features of the notes represented derivatives that require bifurcation from the host contract. The fair value of these components of $0 was recorded as a debt discount and will be adjusted to fair value at the end of each future reporting period.

 

As a result of the Company issuing new shares of Common Stock for a price to the public of $4.25 per share, the Company adjusted the conversion price of the convertible notes issued on May 14, 2018 from $6.55 per share to $5.00 per share pursuant to the terms of the Indenture. As a result of this adjustment, the associated beneficial conversion feature was increased by $3,950,839 and recorded as a debt discount with a corresponding credit to additional paid in capital. 

 

The following table summarizes convertible debt as of March 31, 2019: 

 

    Maturity Date   State Interest Rate     Conversion
Price
    Face Value     Remaining
Debt
(Discount)
    Fair Value of
Embedded
Conversion Option
    Carrying Value  
Long Term convertible notes payable                                                    
6.5% convertible senior secured notes   5/31/2023     6.50 %   $ 5.00     $ 15,000,000     $ (7,381,610 )   $ 2,476,401     $ 10,094,791  
6.5% convertible senior notes   11/30/2023     6.50 %   $ 5.10     $ 10,000,000     $ (995,202 )   $     $ 9,004,798  
                                                     
Ending Balance as of March 31, 2019                       $ 25,000,000     $ (8,376,812 )   $ 2,476,401     $ 19,099,589  

 

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Note 10. Concentrations

   

Vendors

   

Vendor concentration as a percentage of purchases for three and nine months ended March 31, 2019 are as follows:

   

      Nine Months     Nine Months     Three Months     Three Months  
      03/31/2019     03/31/2018     03/31/2019     03/31/2018  
Vendor 1           12 %          
Vendor 2                   21 %      

 

Customers

   

Customer concentration as a percentage of revenue for three and nine months ended March 31, 2019 are as follows:

   

      Nine Months
03/31/2019
    Nine Months
03/31/2018
    Three Months
03/31/2019
    Three Months
03/31/2018
 
Customer 1       12 %     44 %            
Customer 2       14 %                  
Customer 3       11 %                  
Customer 4       22 %           28 %      
Customer 5                   21 %      
Customer 6                   23 %      
Customer 7             23 %           44 %
Customer 8                         15 %

 

Note 11. Stockholders’ Equity

   

Underwritten Public Offering of Common Stock

   

During the quarter ended December 31, 2018, the Company sold a total of 7,250,000 shares of its common stock at a price to the public of $4.25 per share for aggregate gross proceeds of $30.8 million before deducting the underwriting discount and offering expenses payable by the Company of approximately $2.1 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.

   

During the nine months ended March 31, 2019, the Company also issued 113,592 shares of its common stock to investors in the Company’s private placement that closed in May 2017. These issuances were made pursuant to the price-protection provisions granted to such investors in their subscription agreements.  

   

Equity Incentive Plans

   

During the nine months ended March 31, 2019, the Company granted employees and directors options to purchase an aggregate of 953,455 shares of common stock with a weighted average grant date fair value of $2.82. The fair values of the Company’s options were estimated at the dates of grant using a Black-Scholes option pricing model with the following weighted average assumptions:

   

     

Nine Months Ended  

March 31, 2019

 
Exercise price     $3.78 – $8.18  
Expected term (years)     4.00 – 7.00  
Risk-free interest rate     2.19 – 3.01%  
Volatility     66 – 69%  
Dividend yield     0%  

Weighted Average Grant Date Fair Value of Options granted during the period 

    $2.82  

 

 

  14

 

 

Expected term: The Company’s expected term is based on the period the options are expected to remain outstanding. The Company estimated this amount utilizing the “Simplified Method” in that the Company does not have sufficient historical experience to provide a reasonable basis to estimate an expected term.

   

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.

   

Volatility: The Company calculates the expected volatility of the stock price using the historical volatilities of the Company’s common stock traded on the Nasdaq Capital Market.

   

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. 

   

During the nine months ended March 31, 2019 the Company awarded certain employees and contractors grants of an aggregate of 676,880 restricted stock units (“RSUs”) with a weighted average grant date fair value of $6.10. The RSUs will be expensed over the requisite service period. The terms of the RSUs include vesting provisions based solely on continued service. If the service criteria are satisfied, the RSUs will generally vest over 4 years.

   

During the nine months ended March 31, 2019 the Company granted 119,500 performance-based restricted stock units (“PBRSU”) to employees with a weighted average grant date fair value per share of $8.30. The PBRSU awards contain performance and service conditions which must be satisfied for an employee to earn the award.

   

Any portion of grants awarded to consultants and other service providers as to which the repurchase option for restricted stock awards has not lapsed or for which an option or restricted stock unit has not vested is accrued on the Condensed Consolidated Balance Sheet as a component of accounts payable and accrued expenses. As of March 31, 2019, and June 30, 2018, the accrued stock-based compensation was $192,158 and $395,539, respectively.

   

Compensation expense related to our stock-based awards described above was as follows:

   

    Three Months Ended March 31,  
    2019     2018  
Share based compensation expense   $ 2,255,301     $ 1,551,500  

 

    Nine Months Ended March 31,  
    2019     2018  
Share based compensation expense   $ 5,521,980     $ 3,628,331  

   

  15

 

   

Unrecognized stock-based compensation expense and weighted-average years to be recognized are as follows:

   

    As of March 31, 2019  
   

Unrecognized stock-   

based compensation  

   

Weighted-
average years

to be recognized

 
Options   $ 3,360,742       2.02  
Restricted stock awards/units   $ 5,070,230       1.94  
Performance based units   $ 423,914       0.43  

 

Note 12. Commitments and Contingencies

   

Operating Leases

   

The Company leased three office locations in Huntersville, NC pursuant to three- and five-year lease agreements, and one month-to-month lease. The three-year lease agreement expired in April 2018 in connection with a move in corporate office location, the month to month lease expired in January 2018, and the five-year lease agreement expires in November 2022. The operating leases provide for annual real estate tax and cost of living increases and contain predetermined increases in the rentals payable during the terms of the leases. The aggregate rent expense is recognized on a straight-line basis over the lease term.

   

The total lease rental expense was $37,000 and $50,000 for the three months ended March 31, 2019 and 2018, respectively. The total lease rental expense was $111,000 and $101,000 for the nine months ended March 31, 2019 and 2018, respectively.

   

The aggregate rent expense on various equipment for the Company’s Huntersville, NC location and the NY Facility is recognized on a straight-line basis over the lease term. The total lease rental expense was $14,000 and $1,000 for the three months ended March 31, 2019 and 2018, respectively. The total lease rental expense was $50,000 and $72,000 for the nine months ended March 31, 2019 and 2018, respectively. 

   

Ontario County Industrial Development Authority Agreement

   

On February 27, 2018, the Company entered into a Lease and Project Agreement (the “Lease and Project Agreement”) and a Company Lease Agreement (the “Company Lease Agreement” and together with the Lease and Project Agreement, the “OCIDA Agreements”), each dated as of February 1, 2018, with the Ontario County Industrial Development Agency, a public benefit corporation of the State of New York (the “OCIDA”). Pursuant to the OCIDA Agreements, the Company will lease for $1.00 annually to the OCIDA an approximately 9.995-acre parcel of land in Canandaigua, New York, together with the improvements thereon (including the NY Facility), and transfer title to certain related equipment and personal property to the OCIDA. The OCIDA will lease such land and improvements back to the Company for annual rent payments specified in the Lease and Project Agreement for the Company’s primary use as research and development, manufacturing, warehouse and professional office space in its business, and to be subleased, in part, by the Company to various existing tenants. The Company expects substantial tax savings during the term of the OCIDA Agreements, which expire on December 31, 2028. In addition, subject to the terms of the Lease and Project Agreement, certain purchases and leases of eligible items will be exempt from the imposition of sales and use taxes. Subject to the terms of the Lease and Project Agreement, the OCIDA has also granted to the Company an exemption from certain mortgage recording taxes for one or more mortgages securing an aggregate principal amount not to exceed $12.0 million, or such greater amount as approved by the OCIDA in its sole and absolute discretion. The benefits provided to the Company pursuant to the terms of the Lease and Project Agreement are subject to claw back over the life of the OCIDA Agreements upon certain recapture events, including certain events of default.

   

Purchase Order  

 

On January 14, 2019, the Company executed a price quotation (the “Purchase Order”) pursuant to which it purchased a semiconductor lithography system (the “System”), which will be used to pattern wafers for use in the production of the Company’s RF filter products, from ASML US, LLC (“ASML”). Upon execution of the purchase order the Company remitted 50% of the Purchase Price and, pursuant to the terms and conditions of the Purchase Order, the remainder of the Purchase Price will be due upon shipment and acceptance of the System. 

 

  16

 

 

Real Estate Contingent Liability

 

In connection with the acquisition of the NY Facility and related assets, including STC-MEMS, a semiconductor wafer-manufacturing and MEMS operation with associated wafer-manufacturing tools, the Company agreed to pay to Fuller Road Management Corporation, an affiliate of The Research Foundation for the State University of New York, a penalty, as set forth below, if the Company sells the property subject to the related Definitive Real Property Purchase Agreement within three (3) years after the date of such agreement for an amount in excess of $1,750,000, subject to certain enumerated exceptions. The penalty imposed shall be equivalent to the amount that the sales price of the property exceeds $1,750,000 up to the maximum penalty (“Maximum Penalty”) defined below:

 

    Maximum
Penalty
Year 3, ending March 23, 2020   $ 425,228  

 

The fair value of the contingent liability was calculated by an independent third-party appraisal firm, utilizing a present value calculation based on the probability the Company sells the property triggering the contingent penalty and a discount rate of 16.8%. The discount rate was derived from a weighted average cost of capital, modified to include the effects of the bargain purchase price, and assumes a percentage chance of real estate sale of 25% in year three. As of March 31, 2019, and June 30, 2018, the fair value of the contingent liability was $425,228 and $1,229,966 respectively. During the three months ended March 31, 2019 and 2018, the Company marked the contingent liability to fair value and recorded a gain of $905,183 and $635,061, respectively, relating to the change in fair value. During the nine months ended March 31, 2019 and 2018, the Company marked the contingent liability to fair value and recorded a gain of $804,738 and $555,756, respectively, relating to the change in fair value.

 

Litigation, Claims and Assessment

 

From time to time, the Company may become involved in lawsuits, investigations and claims that arise in the ordinary course of business, including the matter described below. The Company believes it has meritorious defenses against all pending claims and intends to vigorously pursue them. While it is not possible to predict or determine the outcomes of any pending actions, the Company believes the amount of liability, if any, with respect to such actions, would not materially affect its financial position, results of operations or cash flows.

 

On November 5, 2018 the Company filed a Form 8-K reporting the end of employment of its principal financial officer, John T. Kurtzweil (the “Former CFO”). Mr. Kurtzweil’s employment was terminated for cause unanimously by the Company’s Board of Directors pursuant to the terms of his employment agreement, and not due to any disagreement concerning the Company’s financial statements, accounting policies or accounting practices. The Former CFO disputes the termination for cause and has since filed for an arbitration hearing pursuant to the terms of his employment agreement, and has filed a complaint under the whistleblower provisions of the Sarbanes Oxley Act  of 2002 with the Occupational Safety and Health Administration of the U.S. Department of Labor. The Company has not recorded a loss contingency associated with the Former CFO’s termination. In accordance with the Former CFO’s employment agreement, if it is determined that grounds for termination were for cause then the expense to the Company would be $0. If it is determined that grounds were without cause then it would result in the cash expenditure of approximately $206,000 representing 1 years’ salary, COBRA and cost of living expense, and prorated bonus up to the date of termination. Additionally, the Company would record a non-cash expense of approximately $883,000 representing the immediate full vesting of restricted stock units and stock options on the date of termination.

 

Tax Credit Contingency

 

The Company accrues a liability for indirect tax contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period in which such determination is made.

 

The Company’s gross unrecognized indirect tax credits totaled $0.1 million and $0.1 million as of March 31, 2019 and June 30, 2018, respectively, and is recorded on the Condensed Consolidated Balance Sheet as a long-term liability.

 

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Note 13. Related Party Transactions

 

AEG Consulting, a firm owned by one of the Co-Chairmen of the Company’s Board of Directors, received $0 and $10,245 cash compensation for consulting fees for the nine months ended March 31, 2019 and 2018, respectively. On November 2, 2018, the Company granted the Co-Chairman 5,000 RSUs with a fair value on the grant date of $18,900 and stock options to purchase 10,000 shares of the Company’s common stock with a fair value on the grant date of $25,278 for consulting services provided by AEG Consulting. Both awards vest in four equal installments on each of the first four anniversaries of the grant date. The options carry an exercise price of $3.78 and have a term of 7 years.

 

Total share-based compensation expense related to stock-based awards granted for the Co-Chairman’s consulting services was $31,854 and $8,539 for the nine months ended March 31, 2019 and 2018, respectively. 

 

Note 14. Segment Information

 

Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company operates in two segments, Foundry Fabrication Services which consists of engineering review services and STC-MEMS foundry services, and RF Product which consists of amplifier and filter product sales, and grant revenue. The Company records all general and administrative costs in the RF Product segment.

 

The Company evaluates performance of its operating segments based on revenue and operating profit (loss). Segment information for the three and nine months ended March 31, 2019 and 2018 are as follows: 

 

    Foundry/
Fabrication
Services
    RF Product     Total  
                   
Three months ended March 31, 2019                        
Revenue   $ 159,118     $ 78,345     $ 237,463  
Grant revenue                  
Total Revenue     159,118       78,345       237,463  
Cost of revenue     176,527       122,906       299,433  
Gross margin     (17,409 )     (44,561 )     (61,970 )
Research and development           5,547,341       5,547,341  
General and administrative           2,460,328       2,460,328  
Income (Loss) from Operations   $ (17,409 )   $ (8,052,230 )   $ (8,069,639 )
                         
Three months ended March 31, 2018                        
Revenue   $ 255,160     $ 29,248     $ 284,408  
Grant revenue                  
Total Revenue     255,160       29,248       284,408  
Cost of revenue     304,528       3,760       308,288  
Gross margin     (49,368 )     25,488       (23,880 )
Research and development           3,044,957       3,044,957  
General and administrative           2,441,992       2,441,992  
Income (Loss) from Operations   $ (49,368 )   $ (5,461,461 )   $ (5,510,829 )
                         
Nine months ended March 31, 2019                        
Revenue   $ 566,970     $ 197,318     $ 764,288  
Grant revenue           109,472       109,472  
Total Revenue     566,970       306,790       873,760  
Cost of revenue     665,908       147,315       813,223  
Gross margin     (98,938 )     159,475       60,537  
Research and development           14,475,770       14,475,770  
General and administrative           6,705,626       6,705,626  
Income (Loss) from Operations   $ (98,938 )   $ (21,021,921 )   $ (21,120,859 )
                         
Nine months ended March 31, 2018                        
                         
Revenue   $ 844,893     $ 37,776     $ 882,669  
Grant revenue           147,232       147,232  
Total Revenue     844,893       185,008       1,029,901  
Cost of revenue     827,113       4,240       831,353  
Gross margin     17,780       180,768       198,548  
Research and development           9,522,353       9,522,353  
General and administrative           6,464,518       6,464,518  
Income (Loss) from Operations   $ 17,780     $ (15,806,103 )   $ (15,788,323 )
                         
As of March 31, 2019                        
Accounts receivable   $ 80,995     $ 78,351     $ 159,346  
Property and equipment, net     295,511       15,189,359       15,484,870  
                         
As of June 30, 2018                        
Accounts receivable   $ 191,846     $ 22,813     $ 214,659  
Property and equipment, net     465,360       12,354,809       12,820,169  

 

Note 15. Subsequent Events

 

The Company is not aware of events and/or transactions occurring after the balance sheet date and before the issue date of the financials statements that require adjustment to or disclosure in the financial statements.

 

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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 are Delaware corporations.

 

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 (“RF”) 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 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) or (iii) above. 

 

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The 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; 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 integrate our New York wafer fabrication facility and related operations into our business; 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 weakness 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 our Annual Report on Form 10-K, filed with the SEC on August 29, 2018 (the “2018 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, cellular infrastructure equipment, WiFi Customer Premise Equipment (“CPE”) and military and defense communications applications. Located between the device’s antenna and its digital backend, the RF front-end (“RFFE”) is the circuitry that performs the analog signal processing and contains components such as amplifiers, filters and switches. We have developed a new and proprietary microelectromechanical systems (“MEMS”) based bulk acoustic wave (“BAW”) technology and unique manufacturing flow, called “XBAW”. Our XBAW TM process incorporates optimized high purity piezoelectric materials for high power, high frequency and wide bandwidth applications. Filters are critical in selecting and rejecting signals, and their performance enables differentiation in the modules defining the RFFE.

 

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We believe owning the core resonator technology and manufacturing our designs is the most direct and efficient means of delivering our solutions to the market. Furthermore, our technology is based upon bulk-mode resonance, which we believe is superior to surface-mode resonance for high-band applications that include 4G/LTE, emerging 5G, WiFi, and military applications. Although some of our target customers utilize or make the RFFE module, they may lack access to critical high-band filter technology needed to compete in high-band applications and other traditional surface-mode solutions where higher power performance is required. We intend to design, manufacture, and market our RF filter products to mobile phone original equipment manufacturers (“OEMs”), military and defense OEMs, cellular infrastructure OEMs, and WiFi CPE OEM’s and to 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 currently build high performance RF filter circuits, using our first generation XBAW TM wafer process, in our 120,000-square foot wafer-manufacturing plant located in Canandaigua, New York, which we acquired in June 2018. As of March 31, 2019, our intellectual property (IP) portfolio included 22 patents, including a blocking patent that we have licensed from Cornell University. We also have an option to license two additional blocking patents from the University of California, Santa Barbara. Additionally, we have 37 patent applications active and pending. These patents cover our XBAW TM RF filter technology from the substrate level through the system application layer. 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, emerging 5G, WiFi and military bands and the associated proprietary models and design kits required to design our RF filters. As we qualify our first RF filter products, we are engaging with target customers to evaluate our filter solutions. Our initial designs target high-band, sub 7 GHz 4G/LTE, emerging 5G, WiFi and military 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 filters that we design and offer as standard catalog components. Second, we expect to deliver filters to customer-supplied specifications, which we will design and fabricate for a specific customer. Finally, we will 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 prototype orders, government grants, MEMS foundry and engineering services, sales of our equity securities, and issuance of debt. We have incurred losses totaling approximately $61.7 million from inception through March 31, 2019. 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 designs.  

 

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, emerging 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. During the second half of calendar 2017 we sampled filter product prototypes to prospective customers that cover LTE, Radar and WiFi applications. In March and April of 2018, we announced our first two commercial products, the AKF-1252 and the AKF-1938. In May 2018 we announced a Non-Recurring Engineering (“NRE”) contract and purchase order for a 4G/LTE infrastructure customer and provided initial samples of two Band 25 filters to this customer in October 2018. In June 2018 we announced a 5.2 GHz BAW WiFi filter for the handset market, the AKF-1652. We added our first 5G cellular infrastructure customer for the Citizen’s Broadband Radio Service in August 2018 and announced first samples to our 5G customer in March 2019. We announced a second 5G cellular infrastructure customer in October 2018, with initial samples expected by June 2019. In September 2018, we recorded our first XBAW TM filter revenue from our military customer for pre-production units and received a follow-on order in addition to the original purchase order for production units. In December 2018, we introduced the AKF-1256, a 5.6 GHz BAW filter for the WiFi market and shipped samples to select partners for evaluation and testing. We are currently shipping production units of the AKF-1938 to our military customer and have shipped pre-production units of our AKF-1252 product to multiple WiFi customers, including a new customer that signed a supply agreement with an initial order of more than 80,000 AK-1252 filters, which were delivered in the quarter ended March 31, 2019. As we receive customer evaluations for our growing portfolio, we will do further iterations on the designs and provide next generation samples for evaluation and characterization. 

 

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To succeed, we must convince mobile phone OEMs, RFFE module manufacturers, cellular infrastructure OEMs, WiFi CPE OEMs and military customers to use our XBAW TM 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. 

 

In July 2018, we completed the qualification of our high purity piezoelectric materials process and our XBAW TM manufacturing process to support an initial product family of 4G/LTE, emerging 5G mobile, WiFi and military filter solutions. Now that we have stabilized our process technology in a manufacturing environment, we intend to complete a production release of our high-band filter products in the frequency range from 1 GHz to 7 GHz. The target frequency bands will be prioritized based upon customer priority. We expect this will require recruiting and hiring additional personnel and capital investments.

 

We plan to pursue RF filter design and R&D development agreements and potentially joint ventures with target customers and other strategic partners, but 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 May 6, 2019, the Company had $32.8 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. These funds are expected to be sufficient to fund our operations beyond the next twelve months from the date of filing of this Form 10-Q. 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 approximately $6.0 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, changes in or revisions to our marketing strategies, and the integration of our New York wafer fabrication facility and related operations into our business.

 

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. 

 

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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 2018 Annual Report.

 

Results of Operations

 

Three Months Ended March 31, 2019 and 2018

 

Revenue

 

The Company recorded revenue of $0.2 million during the three months ended March 31, 2019 as compared to $0.3 million for the three months ended March 31, 2018. Revenue recorded during the three months ended March 31, 2019 included $0.1 million of RF filter and amplifier sales, and $0.1 million of revenue for non-recurring engineering services provided at the NY Facility. The revenue for the three months ended March 31, 2018 consisted of $0.3 million of revenue for foundry services provided at the NY Facility.

 

Cost of Revenue

 

The Company recorded cost of revenue of $0.3 million in each of the three months ended March 31, 2019 and 2018, which included direct labor, direct materials and facility costs.

 

Research and Development Expenses

 

R&D expenses were $5.5 million for the three months ended March 31, 2019 and were $2.5 million, or 82%, higher than the prior year amount for the same period of $3.0 million. The period-over-period increase was primarily in the areas of R&D personnel, stock-based compensation, materials and depreciation. Personnel costs were $1.9 million compared to $1.4 million in the prior year period, an increase of $0.6 million or 42%. The higher spend was due to additional R&D headcount at both the Huntersville, NC location and the NY Facility. Stock-based compensation of $1.5 million for the three months ended March 31, 2019 was $0.8 million, or 115%, higher than the three months ended March 31, 2018 mostly due to a change in the fair value of awards from prior periods. Material costs of $0.8 million primarily associated with the NY Facility were $0.6 million higher than the comparative period due to increased R&D activity. Lastly, depreciation expense was $0.6 million compared to $0.2 million in 2018 primarily due to additional capital expenditures made during the year.

 

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 each of three months ended March 31, 2019 and 2018 were $2.4 million. Components within G&A expenses include a $0.3 million, or 39%, increase in personnel costs as a result of additional headcount added throughout the year. Offsetting the personnel increase were decreases in stock compensation of $0.1 million, as well as professional fees and other G&A expenses.

 

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Other (Expense)/Income

 

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. Other income for the three months ended March 31, 2018 was $0.7 million, consisting of a gain of $0.6 million on the change in the fair value of our derivative liability and rental income of $0.1 million.

 

Net Loss

 

The Company recorded a net loss of $9.4 million for the three months ended March 31, 2019, compared to a net loss of $4.8 million for the three months ended March 31, 2018. The period-over-period incremental loss of $4.6 million, or 96%, was primarily driven by a loss on the change in fair value of the derivative liability of $1.6 million, increased net interest expense of $0.8 million, higher personnel costs of $0.8 million, R&D materials $0.6 million and increased stock compensation of $0.7 million.

 

Nine Months Ended March 31, 2019 and 2018

 

Revenue

 

The Company recorded revenue of $0.9 million during the nine months ended March 31, 2019 as compared to $1.0 million for the nine months ended March 31, 2018. Revenue recorded during the nine months ended March 31, 2019 included $0.4 million of revenue for non-recurring engineering services, $0.2 million of foundry services provided at the NY Facility, $0.2 million in RF filter and amplifier sales, and $0.1 million in grant revenue. The revenue for the nine months ended March 31, 2018 included $0.8 million of revenue for foundry services provided at the NY Facility, and $0.1 million in grant revenue.

 

Cost of Revenue

 

The Company recorded cost of revenue of $0.8 million in each of the nine months ended March 31, 2019 and 2018, which included direct labor, direct materials and facility costs.

 

Research and Development Expenses

 

R&D expenses were $14.5 million for the nine months ended March 31, 2019 and were $5.0 million, or 52%, higher than the prior year amount for the same period of $9.5 million. The period-over-period increase was primarily in the areas of R&D personnel, stock-based compensation, and depreciation. Personnel costs were $5.5 million compared to $3.7 million in the comparative period in the prior year, an increase of $1.8 million or 47%. The higher spend was due to additional R&D personnel at both the Huntersville, NC location and the NY Facility. Stock-based compensation of $3.0 million for the nine months ended March 31, 2019 was $1.2 million, or 69%, higher than the nine months ended March 31, 2018 due to change in the fair value of awards from prior periods. In addition, depreciation costs were $1.7 million as compared to $0.5 million in the comparative period ended March 31, 2018, which was an increase of $1.2 million, or 229%, attributed primarily to additional capital expenditures made during the 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, 2019 were $6.7 million versus $6.5 million for the comparative period in the prior year. The increase of $0.2 million, or 3%, was associated mainly with increases in personnel costs and stock-based compensation, offset by decreases in professional fees, depreciation, and other general and administrative expenses. Personnel costs of $2.5 million were higher by $0.6 million, or 29%, compared to the same period in the prior year due to the increase in the number of administrative personnel. Stock-based compensation for the nine months ended March 31, 2019 was $2.5 million, an increase of $0.7 million, or 36%, compared to the same period in the prior year as a result of the recording of the change in the fair value of stock grants issued. Professional fees of $1.0 million, associated with legal, accounting and investor relations, decreased by $0.4 million, or 30%. In addition, depreciation and other general expenses decreased by $0.5 million, or 67%.

 

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Liquidity and Capital Resources

 

Financing Activities

 

Since inception, the Company has recorded approximately $1.1 million of revenue from contract research and government grants, and $1.7 million of foundry services revenue. Our operations thus far have been funded primarily with contract research and government grants, foundry services and sales of our equity and debt securities.

 

The Company had $34.6 million of cash on hand as of March 31, 2019, which reflects an increase of $19.8 million compared to $14.8 million as of June 30, 2018. The $19.8 million increase is primarily due to $13.4 million in net cash used in operating activities and $4.5 million in capital expenditures for the nine months ended March 31, 2019, offset by the receipt of $37.7 million in net proceeds from sales of our common stock and issuance of convertible notes. These funds are expected to be sufficient to fund our operations beyond the next twelve months from the date of filing of this Form 10-Q.

 

Balance Sheet and Working Capital

 

March 31, 2019 compared to June 30, 2018

 

As of March 31, 2019, the Company had current assets of $35.8 million made up primarily of cash on hand of $34.6 million. As of June 30, 2018, current assets were $15.9 million comprised primarily of cash on hand of $14.8 million.

 

Property, Plant and Equipment was $15.5 million as of March 31, 2019 as compared to a balance of $12.8 million as of June 30, 2018. The approximate $2.7 million increase is primarily due to the purchase of R&D and manufacturing equipment of $4.4 million, offset by depreciation of $1.8 million.  

 

Total assets as of March 31, 2019 and June 30, 2018 were $52.2 million and $29.3 million, respectively.

 

Current liabilities as of March 31, 2019 and June 30, 2018 were $2.8 million and $2.6 million, respectively.

 

Long-term liabilities totaled $19.7 million as of March 31, 2019, compared to $12.8 million as of June 30, 2018. The increase of $6.8 million was mainly due to the increase in convertible notes, net of debt discount and issuance costs of $7.6 million offset by a decrease in the real estate contingent liability of $0.8 million.

 

Stockholders’ equity was $29.7 million as of March 31, 2019, compared to $13.8 million as of June 30, 2018, an increase of $15.9 million, or 114%. Additional paid-in-capital (“APIC”) was $91.4 million as of March 31, 2019 and increased by $39.3 million from June 30, 2018. The increase was due to an increase of $28.7 million in common stock issued for cash, $6.7 million of APIC recorded due to the vesting of restricted stock agreements granted to employees and contractors in lieu of cash compensation and common stock issued in payment of note interest and for the exercise of warrants, and $3.9 million from the change in the intrinsic value of the beneficial conversion feature of the $15.0 million principal amount of convertible notes issued in May 2018. The $15.9 million increase in stockholders’ equity consisted of the $39.3 million increase in APIC reduced by the $23.5 million net loss recorded for the nine months ended March 31, 2019. 

 

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Cash Flow Analysis

 

Operating activities used cash of $13.4 million during the nine months ended March 31, 2019 and $11.1 million during the 2018 comparative period. The $2.3 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 $4.5 million for the nine months ended March 31, 2019 compared to $5.3 million for the comparative period ended March 31, 2018. The $0.8 million period-over-period decrease was primarily due to decreased spend on R&D equipment and leasehold improvements.

 

Financing activities provided cash of $37.7 million for the nine months ended March 31, 2019 versus $13.3 million for the 2018 comparative period. Proceeds from the issuance of common stock were $28.7 million in the nine month period ended March 31, 2019 versus $13.2 million in the 2018 comparative period. Additionally, the company received $8.9 million in proceeds from the sale of convertible notes in the nine months ended March 31, 2019.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable to smaller reporting companies.

 

26

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

We conducted an evaluation under the supervision and with the participation of our Chief Executive Officer and our Interim Chief Financial Officer (our principal executive officer and principal financial officer) of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2019. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may have an adverse effect on our business, financial condition or results of operations and prospects. 

 

We are currently not aware of any material pending legal proceedings to which we are a party or of which any of our property is the subject, nor are we aware of any such proceedings that are contemplated by any governmental authority. 

 

ITEM 1A. RISK FACTORS  

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.  Other than as set forth below, there have been no material changes to the risk factors described in Part I, Item 1A, “ Risk Factors ,” included in our 2018 Annual Report.  

 

27

 

Problems in scaling our manufacturing operations could have a material adverse effect on our business.

 

Future customer demand may require us to significantly increase our manufacturing capacity. There are substantial technical challenges to increasing manufacturing capacity, including equipment acquisition lead times, materials procurement, scaling our manufacturing process, manufacturing site expansion, and the need to significantly increase production yields while maintaining or improving quality control and assurance. Developing commercial-scale manufacturing facilities will require the investment of substantial additional funds and the hiring and retention of additional management, quality assurance, quality control and technical personnel who have the necessary manufacturing experience. The scaling of manufacturing capacity is subject to numerous risks and uncertainties and may lead to variability in product quality or reliability, increased construction timelines, as well as resources required to acquire, install and maintain manufacturing equipment, among others, all of which can lead to unexpected delays in manufacturing output. Additionally, the production of our products must occur in a highly controlled and clean environment to minimize particles and other yield- and quality-limiting contaminants. Weaknesses in process control or minute impurities in materials may cause a substantial percentage of defective products. We may not be able to maintain stringent quality controls and contamination problems could arise. Material defects in our products could result in loss or delay of revenues, delayed market acceptance, damage to our reputation, lost customers, legal claims, increased insurance costs or increased service and warranty costs. If we are unable to successfully scale up our manufacturing operations to meet customer demand, our business growth could be materially adversely affected.

 

28

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

Repurchases

 

Unvested restricted stock awards granted under the Akoustis, Inc. 2014 Stock Plan (the “2014 Plan”) and the Akoustis Technologies, Inc. 2015 Equity Incentive Plan (the “2015 Plan”) are subject to repurchase options upon certain terminations of the respective recipient’s service with the Company. Under the terms of the respective award agreements, repurchases will generally be made for no value or for par value. During the third quarter of fiscal 2019, the Company repurchased an aggregate 21,125 shares of restricted stock in connection with the resignation of an employee pursuant to the terms of such employee’s award agreement, as shown in the table below.

 

Period    

Total 
Number of 
Shares (or 

Units) 

Purchased 

   

Average 

Price Paid 

per Share 

(or Unit) 

   

Total Number of 

Shares (or Units) 

Purchased as Part of 

Publicly Announced 

Plans or Programs 

   

Maximum Number (or 

Approximate Dollar Value) of 

Shares (or Units) that May Yet 

Be Purchased Under the Plans 

or Programs (1) 

 
January 2019           $ .001             225,281  
February 2019           $ .001             219,203  
March 2019       21,125     $ .001             195,578  
Total       21,125                     195,578  

  

  (1) As of March 31, 2019, approximately 6,078 shares and 189,500 shares remain subject to repurchase options under the 2014 Plan and the 2015 Plan, respectively. The repurchase options expire as the restricted shares vest and generally extend through August 2020.

 

Unregistered Sales of Equity Securities

 

Other than as previously reported in the Company’s Current Reports on Form 8-K, the Company did not sell any unregistered securities during the period covered by this report.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.  

 

Not applicable. 

 

ITEM 5. OTHER INFORMATION. 

 

None.

 

ITEM 6. EXHIBITS.

 

The exhibits in the Exhibit Index below are filed or furnished, as applicable, as part of this report. 

 

29

 

EXHIBIT INDEX

 

Exhibit
Number
 
  Description
     
3.1   Articles of Conversion of the Company, as filed with the Nevada Secretary of State on December 15, 2016 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 16, 2016)
     
3.2   Certificate of Conversion of the Company, as filed with the Delaware Secretary of State on December 15, 2016 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 16, 2016)
     
3.3   Certificate of Incorporation, as filed with the Delaware Secretary of State on December 15, 2016 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the SEC on December 16, 2016)
     
3.4   Bylaws of the Company (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K filed with the SEC on December 16, 2016)
     

10.1*†   Price Quotation, dated January 14, 2019, by and between the Company and ASML US, LLC
     
31.1*   Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Executive Officer
     
31.2*   Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Financial Officer
     
32.1*   Section 1350 Certification of Principal Executive Officer
     
32.2*   Section 1350 Certification of Principal Financial Officer
     
101*   Interactive Data Files of Financial Statements and Notes
     
101.INS*   Instant Document
     
101.SCH*   XBRL Taxonomy Schema Document
     
101.CAL*   XBRL Taxonomy Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Presentation Linkbase Document

 

* Filed herewith

 

† Confidential portions of this exhibit have been omitted

 

30

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

 

Dated: May 10, 2019 Akoustis Technologies, Inc.
     
  By:   /s/ Kenneth E. Boller
    Kenneth E. Boller
    Interim Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

31

 

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