Note 2 - Liquidity and Management Plans
During the three and nine months ended September 30, 2017, the
Company recorded revenue of $250,000 and $1,124,874, and during the three and nine months ended September 30, 2016, the Company
recorded revenue of $1,003,973 and $1,322,155, respectively. During the three and nine months ended September 30, 2017, the Company
recorded net losses of $12,748,248 and $38,140,398, and during the three and nine months ended September 30, 2016, the Company
recorded net losses of $10,125,063 and $31,206,160, respectively. Net cash used in operating activities was $26,887,004 and $24,439,565
for the nine months ended September 30, 2017 and 2016, respectively. The Company is currently meeting its liquidity requirements
through sales of shares to private investors during August 2016, November 2016, December 2016 and July 2017, which raised total
net proceeds of $49,720,858, and payments received under product development projects.
As of September 30, 2017, the Company had cash on hand of $20,223,859.
The Company expects that cash on hand as of September 30, 2017, together with anticipated payments to be received under current
product development projects and anticipated royalties from chip revenue, together with potential new financing activities including
potential sales of stock, will be sufficient to fund the Company’s operations through at least one year from the issuance
of these unaudited condensed interim financial statements.
Research and development of new technologies is, by its nature,
unpredictable. Although the Company will undertake development efforts with commercially reasonable diligence, there can be no
assurance that its available resources will be sufficient to enable it to develop and obtain regulatory approval of its technology
to the extent needed to create future revenues sufficient to sustain its operations. The Company expects to pursue additional financing,
which could include follow-on equity offerings, debt financing, co-development agreements or other alternatives, depending upon
market conditions. Should the Company choose to pursue additional financing, there is no assurance that it would be able to do
so on terms that are favorable to the Company or its stockholders.
Note 3 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements are presented in U.S.
dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”), and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission
(the “SEC”).
These
unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and notes
thereto for the fiscal year ended December 31, 2016 included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2016, filed with the SEC on March 16, 2017. The accounting policies used in preparing these unaudited condensed
interim financial statements are consistent with those described in the Company’s December 31, 2016 audited financial statements
.
Use of Estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent liabilities at the date of the financial statements as well as the reported expenses during the reporting periods.
The Company’s significant estimates and assumptions include
the valuation of stock-based compensation instruments, recognition of revenue, the useful lives of long-lived assets, and income
tax expense. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates.
Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the
time the estimates and assumptions were made. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments
with an original maturity at the date of purchase of three months or less to be cash equivalents. The Company maintains cash balances
that may be uninsured or in deposit accounts that exceed Federal Deposit Insurance Corporation limits. The Company maintains its
cash deposits with major financial institutions.
Revenue Recognition
The Company recognizes revenue when all of the following criteria
have been met: persuasive evidence of an arrangement exists, services have been rendered, collection of the revenue is reasonably
assured, and the fees are fixed or determinable.
The Company records revenue associated with product development
projects that it enters into with certain customers. In general, these projects are associated with complex technology development,
and as such the Company does not have certainty about its ability to achieve the program milestones. Achievement of the milestone
is dependent on the Company’s performance and typically requires acceptance by the customer. Payments associated with milestone
achievements are generally commensurate with the Company’s effort or the value of the deliverable and are nonrefundable.
The Company also receives nonrefundable payments, typically
at the beginning of a customer relationship, which are not based on milestones. The Company recognizes this revenue ratably over
the initial engineering product development period. The Company records the expenses related to product development projects, generally
included in research and development expense, in the periods incurred.
Note 3 - Summary of Significant Accounting Policies, continued
Research and Development
Research and development expenses are charged to operations
as incurred. For internally developed patents, all patent application costs are expensed as incurred as research and development
expense. Patent application costs, generally legal costs, are expensed as research and development costs until such time as the
future economic benefits of such patents become more certain. The Company incurred research and development costs of $8,743,434
and $7,944,465 for the three months ended September 30, 2017 and 2016, and $25,788,621 and $23,080,918 for the nine months ended
September 30, 2017 and 2016, respectively.
Stock-Based Compensation
The Company accounts for equity instruments issued to employees
in accordance with accounting guidance that requires awards to be recorded at their fair value on the date of grant and are amortized
over the vesting period of the award. The Company recognizes stock-based compensation expense, for the portion of the awards that
are ultimately expected to vest, on a straight line basis over the requisite service period of the award, which is typically its
vesting period for those awards.
On April 10, 2015, the Company’s board of directors approved
the Energous Corporation Employee Stock Purchase Plan (the “ESPP”), under which 600,000 shares of common stock were
reserved for purchase by the Company’s employees, subject to approval by the stockholders. On May 21, 2015, the Company’s
stockholders approved the ESPP. Under the plan, employees may purchase a limited number of shares of common stock at a 15% discount
from the lower of the closing market prices measured on the first and last days of each half-year period. The Company recognizes
compensation expense for the fair value of the purchase options, as measured on the grant date.
Income Taxes
Tax benefits are recognized only for tax positions that are
more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount
of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax
benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition
and measurement standards. As of September 30, 2017, no liability for unrecognized tax benefits was required to be reported. The
guidance also discusses the classification of related interest and penalties on income taxes. The Company’s policy is to
record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded
during the three and nine months ended September 30, 2017 and 2016.
Net Loss Per Common Share
Basic net loss per share is computed by dividing net loss available
to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings
per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding
during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options
and warrants (using the treasury stock method), the vesting of restricted stock units (“RSUs”), performance stock units
(“PSUs”) and deferred stock units (“DSUs”) and the enrollment of employees in the ESPP. The computation
of diluted loss per share excludes potentially dilutive securities of 7,862,420 and 5,546,269 shares for the three months ended
September 30, 2017 and 2016, and 7,862,420 and 5,546,269 shares for the nine months ended September 30, 2017 and 2016, respectively,
because their inclusion would be anti-dilutive.
Note 3 - Summary of Significant Accounting Policies, continued
Net Loss Per Common Share, continued
Potentially dilutive securities outlined in the table below
have been excluded from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive.
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Financing Warrant to purchase common stock
|
|
|
13,889
|
|
|
|
13,889
|
|
|
|
13,889
|
|
|
|
13,889
|
|
IPO Warrants to purchase common stock
|
|
|
11,600
|
|
|
|
13,200
|
|
|
|
11,600
|
|
|
|
13,200
|
|
Investor Relations Consulting Warrant
|
|
|
-
|
|
|
|
23,250
|
|
|
|
-
|
|
|
|
23,250
|
|
Investor Relations Incentive Warrant
|
|
|
-
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
15,000
|
|
Warrant issued to private investors
|
|
|
3,035,688
|
|
|
|
1,618,123
|
|
|
|
3,035,688
|
|
|
|
1,618,123
|
|
Options to purchase common stock
|
|
|
1,149,589
|
|
|
|
1,333,357
|
|
|
|
1,149,589
|
|
|
|
1,333,357
|
|
RSUs
|
|
|
2,498,037
|
|
|
|
1,443,529
|
|
|
|
2,498,037
|
|
|
|
1,443,529
|
|
PSUs
|
|
|
1,153,617
|
|
|
|
1,070,968
|
|
|
|
1,153,617
|
|
|
|
1,070,968
|
|
DSUs
|
|
|
-
|
|
|
|
14,953
|
|
|
|
-
|
|
|
|
14,953
|
|
Total potentially dilutive securities
|
|
|
7,862,420
|
|
|
|
5,546,269
|
|
|
|
7,862,420
|
|
|
|
5,546,269
|
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" (Topic 606) (“ASU 2014-09”),
which supersedes the revenue recognition requirements in ASU Topic 605, "Revenue Recognition," and most industry-specific
guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to
obtain or fulfill a contract. Originally, ASU 2014-09 would be effective for the Company starting January 1, 2017 using either
of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients
as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized
at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. In July 2015, FASB
voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt
the standard on the original effective date. The Company is in the process of evaluating the effects, if any, that adoption of
this guidance will have on its financial statements.
In August 2014, FASB issued ASU No. 2014-15, Presentation of
Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern. This standard is intended to define management’s responsibility to evaluate whether there is substantial
doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under US
GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going
concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern
basis of accounting.
Note 3 - Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements, continued
The going concern basis of accounting is critical to financial
reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, US GAAP
lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s
ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s
management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that
are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods
ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. The Company adopted
ASU 2014-15 and management has made the appropriate evaluations and disclosures in Note 2 - Liquidity and Management Plans.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying
the Presentation of Debt Issuance Costs." This standard amends existing guidance to require the presentation of debt issuance
costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge.
It is effective for annual reporting periods beginning after December 15, 2015. The Company has adopted ASU 2015-03, and the adoption
of this standard did not have a material impact on the Company’s financial position and results of operations.
In August 2015, the FASB issued ASU No. 2015-15, “Presentation
and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” - Amendments to SEC Paragraphs
Pursuant to Staff Announcement at June 18, 2015, which clarified the SEC staff’s position on presenting and measuring debt
issuance costs incurred in connection with line-of-credit arrangements. ASU 2015-15 should be adopted concurrently with the adoption
of ASU 2015-03. The Company has adopted ASU 2015-15, and the adoption of this standard did not have a material impact on the Company’s
financial position and results of operations.
In November 2015, the FASB issued ASU No. 2015-17, “Balance
Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The standard requires that deferred tax assets and liabilities
be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for fiscal years and interim
periods within those years, beginning after December 15, 2016. Early adoption is permitted. ASU 2015-17 may be applied either prospectively,
for all deferred tax assets and liabilities, or retrospectively. The Company has early adopted ASU 2015-17 effective December 31,
2015, retrospectively. The adoption of this standard had no impact on the results of operations.
In January 2016, the FASB issued ASU No. 2016-01, “Financial
Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU
2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial
instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.
The Company is currently evaluating the impact the adoption of this new standard will have on its financial statements.
In January 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842)” (“ASU 2016-02”). This standard requires that a lessee recognize the assets and liabilities that
arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments
(the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases
with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not
to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases
at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the impact
the adoption of this new standard will have on its financial statements.
In March 2016, the FASB issued ASU No. 2016-08, “Revenue
from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”
(“ASU 2016-08”). ASU No. 2016-08 maintains the core principles of Topic 606 on revenue recognition, but clarifies
whether an entity is a principal or an agent in a contract and the appropriate revenue recognition principles under each of these
circumstances. The amendments in ASU 2016-08 affect the guidance of ASU 2014-09 which is not yet effective. The Company is in
the process of evaluating the effects, if any, that adoption of this guidance will have on its financial statements.
Note 3 - Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements, continued
In March 2016, the FASB issued ASU No. 2016-09, “Compensation
- Stock Compensation (Topic 718) — Improvements to Employee Share-Based Payment Accounting.” ASU No. 2016-09 includes
provisions to simplify certain aspects related to the accounting for share-based awards and the related financial statement presentation.
This ASU includes a requirement that the tax effect related to the settlement of share-based awards be recorded in income tax benefit
or expense in the statements of earnings. This change is required to be adopted prospectively in the period of adoption. In addition,
the ASU modifies the classification of certain share-based payment activities within the statements of cash flows and these changes
are required to be applied retrospectively to all periods presented, or in certain cases prospectively, beginning in the period
of adoption. ASU No. 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods
within that reporting period. The Company adopted ASU 2016-09 effective January 1, 2017. The adoption of this standard did not
have a material impact on the results of operations.
In April 2016, the FASB issued ASU No. 2016-10, “Revenue
from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing.” ASU No. 2016-10 maintains
the core principles of Topic 606 on revenue recognition, but clarifies identification of performance obligations and licensing
implementation guidance. The amendments in ASU 2016-10 affect the guidance of ASU 2014-09 which is not yet effective. The Company
is in the process of evaluating the effects, if any, that adoption of this guidance will have on its financial statements.
In May 2016, the FASB issued ASU No. 2016-12, “Revenue
from Contracts with Customers (Topic 606) - Narrow- Scope Improvements and Practical Expedients.” ASU No. 2016-12 maintains
the core principles of Topic 606 on revenue recognition, but addresses collectability, sales tax presentation, noncash consideration,
contract modifications at transition and completed contracts at transition. The amendments in ASU 2016-12 affect the guidance
of ASU 2014-09 which is not yet effective. The Company is in the process of evaluating the effects, if any, that adoption of this
guidance will have on its financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments – Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 provides
financial statement reader more decision-useful information about the expected credit losses on financial instruments and other
commitments to extend credit held by a reporting entity at each reporting date. It is effective for annual reporting periods beginning
after December 15, 2019. The Company will evaluate the effects, if any, that adoption of this guidance will have on its financial
statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement
of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU No. 2016-15 addresses eight specific
cash flow issues with the objective of reducing the existing diversity in practice. It is effective for annual reporting periods
beginning after December 15, 2017. The Company is currently evaluating the impact this standard will have on its financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement
of Cash Flows (Topic 230) - Restricted Cash.” ASU No. 2016-18 requires an entity to include amounts described as restricted
cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. It is effective for annual reporting periods beginning after December 15, 2018.
The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of
operations.
In December 2016, the FASB issued ASU No. 2016-20, “Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” ASU No. 2016-20 amends certain aspects
of ASU No. 2014-09 and clarifies, rather than changes, the core revenue recognition principles in ASU No. 2014-09. It is effective
for annual reporting periods beginning after December 15, 2018. The Company is in the process of evaluating the effects, if any,
that adoption of this guidance will have on its financial statements.
Note 3 - Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements, continued
In May 2017, the FASB issued ASU No. 2017-09, “Compensation
– Stock Compensation (Topic 718) – Scope of Modification Accounting.” ASU No. 2017-09 provides clarity and reduces
complexity when applying the guidance in Topic 718 for changes in terms or conditions of share-based payment awards. It is effective
for annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of
this new standard will have on its financial statements.
In July 2017, the Financial Accounting Standards Board (“FASB”)
issued a two-part Accounting Standards Update (“ASU”) No. 2017-11, I. Accounting for Certain Financial Instruments
With Down Round Features and 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 (“ASU 2017-11”).
ASU 2017-11 amends guidance in FASB ASC 260, Earnings Per Share, FASB ASC 480, Distinguishing Liabilities from Equity, and FASB
ASC 815, Derivatives and Hedging. The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked
financial instruments (or embedded features) with down round features. The amendments in Part II of ASU 2017-11 re-characterize
the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a
scope exception. Those amendments do not have an accounting effect. ASU 2017-11 is effective for public business entities for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company
is currently evaluating the impact the adoption of this new standard will have on its financial statements.
Management’s Evaluation of Subsequent Events
The Company evaluates events that have occurred after the balance
sheet date of September 30, 2017, through the date which the financial statements are issued. Based upon the review, other than
events disclosed in Note 8 - Subsequent Events, the Company did not identify any subsequent events that would have required adjustment
or disclosure in the financial statements.
Note 4 - Commitments and Contingencies
Operating Leases
On September 10, 2014, the Company entered into a Lease Agreement
(“Lease”) with Balzer Family Investments, L.P. (“Landlord”) related to space located at Northpointe Business
Center, 3590 North First Street, San Jose, California. The initial term of the lease is 60 months, with initial monthly base rent
of $36,720 and the lease is subject to certain annual escalations as defined in the agreement. On October 1, 2014, the Company
relocated its headquarters to this new location. The Company issued to the Landlord 41,563 shares of the Company’s
common stock valued at $500,000, of which $400,000 will be applied to reduce the Company’s monthly base rent obligation by
$6,732 per month and of which $100,000 was for certain tenant improvements. The Company recorded $400,000 as prepaid rent on its
balance sheet, which is being amortized over the term of the lease and recorded $100,000 as leasehold improvements.
On February 26, 2015, the Company entered into a sub-lease agreement
for additional space in the San Jose, California area. The agreement has a term which expires on June 30, 2019 and a current monthly
rent of $6,493 per month. On August 25, 2015, the Company entered into an additional amended sub-lease agreement for additional
space in San Jose, California. The agreement has a term which expires on June 30, 2019 and a current monthly rent of $4,458 per
month. These leases are subject to certain annual escalations as defined in the agreements.
On July 9, 2015, the Company entered into a sub-lease agreement
for additional space in Costa Mesa, California. The agreement has a term which expired on September 30, 2017 and a monthly rent
of $6,376 per month. On May 31, 2017, the Company entered into a lease agreement for the same space in Costa Mesa, California.
The agreement has a term that expires on September 30, 2019 with initial monthly rent of $9,040 and is subject to certain annual
escalations as defined in the agreement.
Note 4 - Commitments and Contingencies, continued
Operating Leases, continued
The future minimum lease payments for leased locations are as
follows:
For the Years Ended December 31,
|
|
Amount
|
|
2017 (Three Months)
|
|
$
|
158,279
|
|
2018
|
|
|
640,202
|
|
2019
|
|
|
457,585
|
|
Total
|
|
$
|
1,256,066
|
|
Development
and Licensing Agreements
In 2015, the Company signed a development
and licensing agreement with a consumer electronics company to embed WattUp wire-free charging receiver technology in various
products including, but not limited to, certain mobile consumer electronics and related accessories. On March 31, 2016, the
Company received payment of $500,000 pursuant to the February 15, 2016 commencement of the second phase described in the
third amendment of this agreement, of which the Company recorded $0 and $69,573 in revenue during the three months ended
September 30, 2017 and 2016, and $79,824 and $387,755 in revenue during the nine months ended September 30, 2017 and 2016,
respectively. During the three months ended September 30, 2017 and 2016, the Company recognized milestone revenue of $250,000
and $875,000, and during the nine months ended September 30, 2017 and 2016, the Company recognized milestone revenue of
$1,000,000 and $875,000, respectively.
In 2016, the Company entered into an agreement
with a commercial and industrial supply company, under which the Company will develop wire-free charging solutions. The Company
recognized $0 and $44,550 of revenue from this agreement during the three and nine months ended September 30, 2017, respectively.
Hosted
Design Solution Agreement
On June 25, 2015, the Company entered into a
three-year agreement to license electronic design automation software in a hosted environment. Pursuant to the agreement, under
which services began July 13, 2015, the Company is required to remit quarterly payments in the amount of $100,568 with the last
payment due March 30, 2018. On December 18, 2015, the agreement was amended to redefine the hardware and software configuration
and the quarterly payments increased to $198,105.
Amended Employee Agreement - Stephen Rizzone
On April 3, 2015, the Company entered into an Amended and Restated
Executive Employment Agreement with Stephen R. Rizzone, the Company’s President and Chief Executive Officer (“Employment
Agreement”).
The Employment Agreement has an effective date of January 1,
2015 and an initial term of four years (the “Initial Employment Period”). The Employment Agreement provides for an
annual base salary of $365,000, and Mr. Rizzone is eligible to receive quarterly cash bonuses with a total target amount equal
to 100% of his base salary based upon achievement of performance-based objectives established by the Company’s board of directors.
Pursuant to Mr. Rizzone’s prior employment agreement,
on December 12, 2013 Mr. Rizzone was granted a ten year option to purchase 275,689 shares of common stock at an exercise price
of $1.68 vesting over four years in 48 monthly installments beginning October 1, 2013 (“First Option”). Mr. Rizzone
was also granted a second option award to purchase 496,546 shares of common stock at an exercise price of $6.00 (“Second
Option”). The Second Option vests over the same vesting schedule as the First Option.
Note 4 - Commitments and Contingencies, continued
Amended Employee Agreement - Stephen Rizzone, continued
Effective May 21, 2015, with the approval by the Company’s
stockholders of its new performance-based equity plan, the Employment Agreement provided and Mr. Rizzone received, a grant of 639,075
Performance Share Units (the “PSUs”). The PSUs, which represent the right to receive shares of common stock, shall
be earned based on the Company’s achievement of market capitalization growth between the effective date of the Employment
Agreement and the end of the Initial Employment Period. If the Company’s market capitalization is $100 million or less, no
PSUs will be earned. If the Company reaches a market capitalization of $1.1 billion or more, 100% of the PSUs will be earned. For
market capitalization between $100 million and $1.1 billion, the percentage of PSUs earned will be determined on a quarterly basis
based on straight line interpolation. PSUs earned as of the end of a calendar quarter will be paid 50% immediately and 50% will
be deferred until the end of the Initial Employment Period subject to Mr. Rizzone’s continued employment with the Company
(See Note 6).
Mr. Rizzone is also eligible to receive all customary and usual
benefits generally available to senior executives of the Company.
The Employment Agreement provides that if Mr. Rizzone’s
employment is terminated due to his death or disability, if Mr. Rizzone’s employment is terminated by the Company without
cause or if he resigns for good reason, twenty-five percent (25%) of the shares subject to the First Option and the Second
Option shall immediately vest and become exercisable, he will have a period of one year post-termination to exercise the First
Option and the Second Option, and if a Liquidation Event (as defined in the Employment Agreement) shall occur prior to the termination
of the First Option and the Second Option, one hundred percent (100%) of the shares subject to the First Option and Second Option
shall immediately vest and become exercisable effective immediately prior to the consummation of the Liquidation Event. In addition,
any outstanding deferred PSUs shall be immediately vested and paid, but any remaining unearned portion of the PSUs shall immediately
be canceled and forfeited.
Strategic Alliance Agreement
In November 2016, the Company and Dialog, a related party (see
Note 7 - Related Party Transactions), entered into a Strategic Alliance Agreement (“Alliance Agreement”) for the manufacture,
distribution and commercialization of products incorporating the Company’s wire-free charging technology (“Licensed
Products”). Pursuant to the terms of the Alliance Agreement, the Company agreed to engage Dialog as the exclusive supplier
of the Licensed Products for specified fields of use, subject to certain exceptions (the “Company Exclusivity Requirement”).
Dialog agreed to not distribute, sell or work with any third party to develop any competing products without the Company’s
approval (the “Dialog Exclusivity Requirement”). In addition, both parties agreed on a revenue sharing arrangement
and will collaborate on the commercialization of Licensed Products based on a mutually-agreed upon plan. Each party will retain
all of its intellectual property.
The Alliance Agreement has an initial term of seven years and
will automatically renew annually thereafter unless terminated by either party upon 180 days’ prior written notice. The Company
may terminate the Alliance Agreement at any time after the third anniversary of the Agreement upon 180 days’ prior written
notice to Dialog, or if Dialog breaches certain exclusivity obligations. Dialog may terminate the Alliance Agreement if sales of
Licensed Products do not meet specified targets. The Company Exclusivity Requirement will terminate upon the earlier of January
1, 2021 or the occurrence of certain events relating to the Company’s pre-existing exclusivity obligations. The Dialog Exclusivity
Requirement will terminate if no Licensed Products have received the necessary Federal Communications Commission approvals within
specified timeframes.
In addition to the Alliance Agreement, the Company and Dialog
entered into a securities purchase agreement (see Note 5 - Stockholders’ Equity).
Note 5 - Stockholders’ Equity
Authorized Capital
The holders of common stock are entitled to one vote per share.
Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out
of legally available funds. Upon the liquidation, dissolution or winding up of the Company, holders of common stock are entitled
to share ratably in all assets of the Company that are legally available for distribution.
Filing of registration statement
On April 24, 2015, the Company filed a “shelf” registration
statement on Form S-3, which became effective on April 30, 2015. The “shelf” registration statement allows the Company
from time to time to sell any combination of debt or equity securities described in the registration statement up to aggregate
proceeds of $75,000,000.
Pursuant to the shelf registration, on November 17, 2015, the
Company consummated an offering of 3,000,005 shares of common stock at $6.90 per share and received from the underwriters’
net proceeds of $19,333,032 (net of underwriters’ discount of $1,242,002 and underwriters’ offering expenses of $125,000).
The Company incurred additional offering expenses of $284,576, yielding net proceeds from the offering under shelf registration
of $19,048,456.
Private Placements
On August 9, 2016, the Company entered into a securities purchase
agreement with Ascend Legend Master Fund, Ltd. pursuant to which the Company agreed to sell to Ascend Legend Master Fund, Ltd.,
and its affiliates, 1,618,123 shares of common stock at a price of $12.36 per share and a warrant to purchase up to 1,618,123 shares
of common stock at an exercise price of $23.00 per share. The aggregate proceeds from the sale of these shares was $20,000,000.
On November 7, 2016, the Company and Dialog, a related party
(see Note 7 - Related Party Transactions), entered into a securities purchase agreement pursuant to which the Company agreed to
sell to Dialog 763,552 shares of common stock at a price of $13.0967 per share and a warrant to purchase up to 763,552 shares of
common stock that may be exercised only on a cashless basis at a price of $17.0257 per share, and may be exercised at any time
between the date that is six months and a day after the closing date of the transaction and the three-year anniversary of the closing
date. The aggregate proceeds from the sale of these shares was $10,000,011.
On December 30, 2016, the Company and JT Group entered into
a securities purchase agreement pursuant to which the Company agreed to sell to JT Group 292,056 shares of common stock at a price
of $17.12 per share. The aggregate proceeds from the sale of these shares was $4,999,975.
On June 28, 2017, the Company and Dialog Semiconductor entered
into a securities purchase agreement pursuant to which the Company agreed to sell Dialog 976,139 shares of common stock at a price
of $15.3666 per share and a warrant to purchase up to 654,013 shares of common stock that may be exercised only on a cashless basis
at a price of $19.9766 per share, and may be exercised at any time between the date that is six months and one day after the closing
date of the transaction and the three-year anniversary of the closing date. The aggregate proceeds from the sale of these shares,
which were issued on July 5, 2017, was $14,999,935.
Note 6 – Stock-Based Compensation
Equity Incentive Plans
2013 Equity Incentive Plan
In December 2013, the Company’s
board and stockholders approved the 2013 Equity Incentive Plan, providing for the issuance of equity-based instruments covering
up to an initial total of 1,042,167 shares of common stock.
Effective on March 10, 2014, the Company’s
board of directors and stockholders approved the First Amendment to the 2013 Equity Incentive Plan which provided for an increase
in the aggregate number of shares of common stock that may be issued pursuant to the 2013 Equity Incentive Plan to equal 18% of
the total number of shares of common stock outstanding immediately following the completion of the IPO (assuming for this purpose
the issuance of all shares issuable under the Company’s equity plans, the conversion into common stock of all outstanding
securities that are convertible by their terms into common stock and the exercise of all options and warrants exercisable for shares
of common stock and including shares and warrants issued to the underwriters for such IPO upon exercise of its over-allotment options).
As of March 27, 2014, the aggregate
total number of shares which may be issued under the 2013 Equity Incentive Plan was increased to 2,335,967.
Effective on May 19, 2016, the Company’s
stockholders approved the amendment and restatement of the 2013 Equity Incentive Plan to increase the number of shares reserved
for issuance thereunder by 2,150,000 shares, bringing the total number of approved shares to 4,485,967 under the 2013 Equity Incentive
Plan.
As of September 30, 2017, 837,603 shares
of common stock remained available to be issued through equity-based instruments under the 2013 Equity Incentive Plan.
2014 Non-Employee
Equity Compensation Plan
On March 6, 2014, the Company’s
board of directors and stockholders approved the 2014 Non-Employee Equity Compensation Plan for the issuance of equity-based instruments
covering up to 250,000 shares of common stock to directors and other non-employees.
Effective on May 19, 2016, the Company’s
stockholders approved the amendment and restatement of the 2014 Equity Incentive Plan to increase the number of shares reserved
for issuance thereunder by 350,000 shares, bringing the total number of approved shares to 600,000 under the 2014 Non-Employee
Equity Compensation Plan.
As of September 30, 2017, 292,655 shares of common stock remained
available to be issued through equity-based instruments under the 2014 Non-Employee Equity Compensation Plan.
2015 Performance Share Unit Plan
On April 10, 2015, the Company’s
board of directors approved the Energous Corporation 2015 Performance Share Unit Plan (the “Performance Share Plan”),
under which 1,310,104 shares of common stock became available for issuance as PSUs to a select group of employees and directors,
subject to approval by the stockholders. On May 21, 2015, the Company’s stockholders approved the Performance Share Plan.
As of September 30, 2017, 31,951 shares
of common stock remain available to be issued through equity-based instruments under the Performance Share Unit Plan.
Note 6 – Stock-Based Compensation, continued
Equity Incentive Plans, continued
Employee Stock Purchase Plan
On April 10, 2015, the Company’s
board of directors approved the ESPP, under which 600,000 shares of common stock have been reserved for purchase by the Company’s
employees, subject to approval by the stockholders. On May 21, 2015, the Company’s stockholders approved the ESPP. Employees
may designate an amount not less than 1% but not more than 10% of their annual compensation, but for not more than 7,500 shares
during an offering period. An offering period shall be six months in duration commencing on or about January 1 and July 1 of each
year. The exercise price of the option will be the lesser of 85% of the fair market value of the common stock on the first business
day of the offering period and 85% of the fair market value of the common stock on the applicable exercise date.
As of September 30, 2017, 435,001 shares
of common stock remained available to be issued under the ESPP. As of September 30, 2017, employees contributed $224,808 through
payroll withholdings to the ESPP for the current eligibility period. A total of 33,620 shares were purchased during the nine months
ended September 30, 2017.
Stock Option Award Activity
The following is a summary of the Company’s stock option
activity during the nine months ended September 30, 2017:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life In
Years
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2017
|
|
|
1,309,444
|
|
|
$
|
4.55
|
|
|
|
7.1
|
|
|
$
|
16,107,929
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(159,855
|
)
|
|
|
4.62
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2017
|
|
|
1,149,589
|
|
|
$
|
4.54
|
|
|
|
6.4
|
|
|
$
|
9,336,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 1, 2017
|
|
|
1,057,187
|
|
|
$
|
4.55
|
|
|
|
7.1
|
|
|
$
|
12,988,601
|
|
Vested
|
|
|
238,704
|
|
|
|
4.53
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(159,855
|
)
|
|
|
4.62
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercisable at September 30, 2017
|
|
|
1,136,036
|
|
|
$
|
4.54
|
|
|
|
6.6
|
|
|
$
|
9,223,375
|
|
As of September 30, 2017, the unamortized value of options was
$26,351. As of September 30, 2017, the unamortized portion will be expensed over a weighted average period of 0.4 years.
Restricted Stock Units (“RSUs”)
During the first quarter of 2017, the compensation committee
of the board of directors (“Compensation Committee”) granted various directors RSUs under which the holders have the
right to receive an aggregate of 48,844 shares of common stock. These awards were granted under the 2014 Non-Employee Equity Compensation
Plan. The awards vest fully on the first anniversary of the grant date.
During the first quarter of 2017, the Compensation Committee
granted employees inducement RSU awards under which the holders have the right to receive an aggregate of 246,000 shares of common
stock. The awards vest over four years beginning on the anniversary of the employee hire dates.
Note 6 - Stock-Based Compensation, continued
Restricted Stock Units (“RSUs”), continued
During the first quarter of 2017, the Compensation Committee
granted various employees RSU awards under the 2013 Equity Incentive Plan under which the holders have the right to receive an
aggregate of 351,080 shares of common stock. The awards vest over terms from two to four years.
During the second quarter of 2017, the Compensation Committee
granted various consultants RSUs under which the holders have the right to receive an aggregate of 8,400 shares of common stock.
These awards were granted under the 2014 Non-Employee Equity Compensation Plan. The awards vest over terms from two to four years.
During the second quarter of 2017, the Compensation Committee
granted employees inducement RSU awards under which the holders have the right to receive an aggregate of 120,000 shares of common
stock. A majority of the awards vest over four years beginning on the anniversary of the employee hire dates.
During the second quarter of 2017, the Compensation Committee
granted employees RSU awards under the 2013 Equity Incentive Plan under which the holders have the right to receive an aggregate
of 308,059 shares of common stock. The awards vest over terms from two to four years.
During the third quarter of 2017, the Compensation Committee
granted employees RSU awards under the 2013 Equity Incentive Plan under which the holders have the right to receive an aggregate
of 117,514 shares of common stock. The awards vest over terms from two to four years.
The Company accounts for RSUs granted to consultants using the
accounting guidance included in ASC 505-50 “Equity-Based Payments to Non-Employees” (“ASC 505-50”). In
accordance with ASC 505-50, the Company estimates the fair value of the unvested portion of the RSU award each reporting period
using the closing price of common stock.
At September 30, 2017, the unamortized value of the RSUs was
$27,130,326. The unamortized amount will be expensed over a weighted average period of 2.7 years. A summary of the activity related
to RSUs for the nine months ended September 30, 2017 is presented below:
|
|
Total
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Outstanding at January 1, 2017
|
|
|
2,052,223
|
|
|
$
|
11.58
|
|
RSUs granted
|
|
|
1,199,897
|
|
|
$
|
15.12
|
|
RSUs forfeited
|
|
|
(163,546
|
)
|
|
$
|
12.52
|
|
RSUs vested
|
|
|
(590,536
|
)
|
|
$
|
12.07
|
|
Outstanding at September 30, 2017
|
|
|
2,498,038
|
|
|
$
|
13.15
|
|
Performance Share Units (“PSUs”)
Performance share units (“PSUs”) are grants that
vest upon the achievement of certain performance goals. The goals are commonly related to the Company’s market capitalization
or market share price of the common stock.
The PSUs originally issued during 2015 to certain board members
and senior management shall be earned based on the Company’s achievement of market capitalization growth between the effective
date of the Employment Agreement and the end of the Initial Employment Period. If the Company’s market capitalization is
$100 million or less, no PSUs will be earned. If the Company reaches a market capitalization of $1.1 billion or more, 100% of the
PSUs will be earned. For market capitalization between $100 million and $1.1 billion, the percentage of PSUs earned will be determined
on a quarterly basis based on straight line interpolation.
Note 6 - Stock-Based Compensation, continued
Performance Share Units (“PSUs”), continued
The Company determined that the PSUs were equity awards with
both market and service conditions. The Company utilized a Monte Carlo simulation to determine the fair value of the market condition,
as described below. Grantees of PSUs are required to be employed through December 31, 2018 in order to earn the entire award, if
and when vested. No PSUs were granted during the nine months ended September 30, 2017.
|
|
Performance Share Units
(PSUs) Granted During the
Nine Months Ended
September 30, 2016
|
|
Market capitalization
|
|
$
|
102,600,000
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
75
|
%
|
Risk-free interest rate
|
|
|
1.04
|
%
|
The fair value of the grants of PSUs to
purchase a total of 1,342,061 shares of common stock (including 1,278,153 PSUs granted under the 2015 Performance Share Unit Plan
and 63,908 granted as an inducement) was determined to be approximately $3,218,000, and is amortized over the service period of
May 21, 2015 through December 31, 2018, on a straight-line basis.
On October 24, 2016, the Compensation Committee
granted Mr. Rizzone a PSU award under the 2013 Equity Incentive Plan under which Mr. Rizzone has the right to receive 150,000 shares
of common stock. The shares of this award vest upon the Company’s stock price meeting specific targets.
For the PSU award grant issued to Mr. Rizzone,
a Monte Carlo simulation was used to determine the fair value at each of the five target prices of common stock, using a market
capitalization of $298,857,000, dividend yield of 0%, expected volatility of 75% and a risk-free interest rate of 0.66%.
The fair value of the PSUs granted to Mr.
Rizzone under the 2013 Equity Incentive Plan was determined to be $2,332,000, and is amortized over the estimated service period
from October 24, 2016 through October 30, 2017.
Amortization for all PSU awards was $399,867
and $230,276 for the three months ended September 30, 2017 and 2016, respectively, and $1,601,160 and $673,405 for the nine months
ended September 30, 2017 and 2016, respectively.
At September 30, 2017, the unamortized value of all PSUs was
approximately $1,173,346. The unamortized amount will be expensed over a weighted average period of 1.2 years. A summary of the
activity related to PSUs for the nine months ended September 30, 2017 is presented below:
|
|
Total
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Outstanding at January 1, 2017
|
|
|
1,153,617
|
|
|
$
|
3.66
|
|
PSUs granted
|
|
|
-
|
|
|
$
|
-
|
|
PSUs forfeited
|
|
|
-
|
|
|
$
|
-
|
|
PSUs vested
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding at September 30, 2017
|
|
|
1,153,617
|
|
|
$
|
3.66
|
|
Note 6 - Stock-Based Compensation, continued
Deferred Stock Units (“DSUs”)
On January 4, 2016, the Compensation Committee granted to John
Gaulding, Director and Chairman of the Board, DSUs under the 2014 Non-Employee Equity Compensation Plan for which Mr. Gaulding
has the right to receive 14,953 shares of common stock. These shares were issued to Mr. Gaulding in lieu of $125,000 of his anticipated
compensation for his services on the board, including $75,000 worth of RSUs and $50,000 of his regular board stipends. The award
granted vested fully on the first anniversary of the grant date. Amortization was $0 and $31,337 for the three months ended September
30, 2017 and 2016, respectively and $1,362 and $92,307 for the nine months ended September 30, 2017 and 2016, respectively.
At September 30, 2017, the DSUs were fully amortized. A summary
of the activity related to DSUs for the nine months ended September 30, 2017 is presented below:
|
|
Total
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Outstanding at January 1, 2017
|
|
|
14,953
|
|
|
$
|
8.36
|
|
DSUs granted
|
|
|
-
|
|
|
$
|
-
|
|
DSUs forfeited
|
|
|
-
|
|
|
$
|
-
|
|
DSUs vested
|
|
|
14,953
|
|
|
$
|
8.36
|
|
Outstanding at September 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Employee Stock Purchase Plan (“ESPP”)
The recently completed offering period for the ESPP was January
1, 2017 through June 30, 2017. During the year ended December 31, 2016, there were two offering periods for the ESPP. The first
offering period started on January 1, 2016 and concluded on June 30, 2016. The second offering period started on July 1, 2016 and
concluded on December 31, 2016.
The weighted-average grant-date fair value of the purchase option
for each designated share purchased under this plan was approximately $5.88 and $2.57 for the nine months ended September 30, 2017
and 2016, respectively, which represents the fair value of the option, consisting of three main components: (i) the value of the
discount on the enrollment date, (ii) the proportionate value of the call option for 85% of the stock and (iii) the proportionate
value of the put option for 15% of the stock. The Company recognized compensation expense for the plan of $79,046 and $266,398
for the three and nine months ended September 30, 2017, respectively, and $97,830 and $220,546 for the three and nine months ended
September 30, 2016, respectively.
The Company estimated the fair value of options granted during
the nine months ended September 30, 2017 and 2016 using the Black-Scholes option pricing model. The fair values of stock options
granted were estimated using the following assumptions:
|
|
Nine Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2016
|
|
Stock price
|
|
|
$16.08 - $17.59
|
|
|
|
$8.36 - $12.16
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Expected volatility
|
|
|
56% - 66%
|
|
|
|
56% - 100%
|
|
Risk-free interest rate
|
|
|
0.62% - 1.11%
|
|
|
|
0.37% - 0.49%
|
|
Expected life
|
|
|
6 months
|
|
|
|
6 months
|
|
Note 6 - Stock-Based Compensation, continued
Stock-Based Compensation Expense
The following tables summarize total stock-based compensation
costs recognized for the three and nine months ended September 30, 2017 and 2016:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
$
|
246,617
|
|
|
$
|
296,272
|
|
|
$
|
738,599
|
|
|
$
|
842,569
|
|
RSUs
|
|
|
3,843,186
|
|
|
|
1,204,982
|
|
|
|
9,865,351
|
|
|
|
3,577,081
|
|
PSUs
|
|
|
399,867
|
|
|
|
230,276
|
|
|
|
1,601,160
|
|
|
|
673,405
|
|
ESPP
|
|
|
79,046
|
|
|
|
97,830
|
|
|
|
266,398
|
|
|
|
220,546
|
|
DSUs
|
|
|
-
|
|
|
|
31,337
|
|
|
|
1,362
|
|
|
|
92,307
|
|
Total
|
|
$
|
4,568,716
|
|
|
$
|
1,860,697
|
|
|
$
|
12,472,870
|
|
|
$
|
5,405,908
|
|
The total amount of stock-based compensation was reflected within
the statements of operations as:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
2,558,472
|
|
|
$
|
960,362
|
|
|
$
|
6,643,094
|
|
|
$
|
2,628,454
|
|
Sales and marketing
|
|
|
281,518
|
|
|
|
89,072
|
|
|
|
782,366
|
|
|
|
213,842
|
|
General and administrative
|
|
|
1,728,726
|
|
|
|
811,263
|
|
|
|
5,047,410
|
|
|
|
2,563,612
|
|
Total
|
|
$
|
4,568,716
|
|
|
$
|
1,860,697
|
|
|
$
|
12,472,870
|
|
|
$
|
5,405,908
|
|
Note 7 - Related Party Transactions
On July 14, 2014, the Company’s Board of Directors appointed
Howard Yeaton as the Company’s Interim Chief Financial Officer. Howard Yeaton is the Managing Principal of Financial Consulting
Strategies LLC (“FCS”). During the three and nine months ended September 30, 2017, the Company did not incur any fees
for services provided by FCS. During the three and nine months ended September 30, 2016, the Company incurred $0 and $13,306, respectively,
in fees for other financial advisory and accounting services provided by FCS. None of these fees were incurred in connection with
Mr. Yeaton’s services as Interim Chief Financial Officer.
In November 2016, the Company and Dialog Semiconductor plc (“Dialog”)
entered into an Alliance Agreement for the manufacture, distribution and commercialization of products incorporating the Company’s
wire-free charging technology (See Note 4 - Commitments and Contingencies,
Strategic Alliance Agreement
). On November 7,
2016 and June 28, 2017, the Company and Dialog entered into securities purchase agreements under which Dialog acquired a total
of 1,739,691 shares and received warrants to purchase up to 1,417,565 shares (See Note 5 - Stockholders’ Equity,
Private
Placements
). Dialog presently owns approximately 8.2% of the Company’s outstanding common shares, and could potentially
own approximately 14.0% of the Company’s outstanding common shares if it exercised all of its warrants for common shares.
For the nine months ended September 30, 2017, the Company paid $434,650 to Dialog for chip development costs incurred, which is
recorded under research and development expense.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
As used in this report, unless the context otherwise requires
the terms “we,” “us,” “our,” and “Energous” refer to Energous Corporation, a Delaware
corporation. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 that are intended to be covered by the “safe harbor” created by
those sections. Forward-looking statements, which are based on our current beliefs, expectations and assumptions, can generally
be identified by the use of forward-looking terms such as “believe,” “expect,” “may,” “will,”
“should,” “could,” “seek,” “intend,” “plan,” “estimate,”
“anticipate” or other comparable terms. All statements in this report, other than statements of historical facts, about
our strategies, prospects, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples
include our statements about expectations for revenues, cash flows and financial performance, utilization of our proprietary technology,
anticipated results of our development efforts, investments in ICs, timing of regulatory approvals and product launches. Forward-looking
statements are not assurances of future performance, but are subject to inherent uncertainties, risks and changes in circumstances
that are difficult to predict and generally outside of our control, so actual results and financial condition may differ materially
from those indicated in the forward-looking statements. Important factors that could cause actual results and financial condition
to differ materially from what is indicated in the forward-looking statements include, among others: our ability to develop a commercially
feasible technology, and timing of customer implementations of that technology in consumer products; timing of regulatory approvals,
particularly the Federal Communications Commission’s approval of transmitting power at a distance; our ability to find and
maintain development partners; our ability to protect our intellectual property; competition; and other risks and uncertainties
described in the Risk Factors and in Management's Discussion and Analysis sections of the periodic reports we file with the SEC.
We undertake no obligation to update any written or oral forward-looking statement that we may make, whether as a result of new
information, future developments or otherwise.
Overview
We have developed a technology called WattUp® that consists
of proprietary semiconductor chipsets, software, hardware designs and antennas that enables RF-based charging for electronic devices,
providing wire-free charging solutions for contact-based charging as well as at a distance charging, ultimately enabling charging
with mobility under full software control. Pursuant to our Strategic Alliance Agreement with Dialog Semiconductor plc (“Dialog”),
Dialog will manufacture and distribute integrated circuit products (“ICs”) incorporating our RF-based wire-free charging
technology. Dialog will be our exclusive supplier of these ICs for the general market. We believe our proprietary technology can
be utilized in a variety of devices, including wearables, hearing aids, earbuds, Bluetooth headsets, Internet of Things (“IoT”)
devices, smartphones, tablets, e-book readers, keyboards, mice, remote controls, rechargeable lights, cylindrical batteries, medical
devices and any other device with similar charging requirements that would otherwise need a battery or a connection to a power
outlet.
We believe our technology is novel in its approach, in that
we are developing a solution that charges electronic devices by surrounding them with a focused, three-dimensional radio frequency
(“RF”) energy pocket (“RF energy pocket”). We are developing engineering solutions that we expect to enable
the wire-free transmission of energy for contact-based applications and for far field applications in a circular charging envelope
of up to 15 feet in radius. We are also developing our far field transmitter technology to seamlessly mesh (much like a network
of WiFi routers) to form a wire-free charging network that will allow users to charge their devices as they walk from room-to-room
or throughout a large space. To date, we have developed multiple transmitter prototypes in various form factors and power capabilities,
and multiple receiver prototypes, including smartphone battery cases, toys, fitness trackers, Bluetooth headsets, tracking devices
and stand-alone receivers.
When we were first founded, we recognized the need to build
and design an enterprise-class network management and control system (“NMS”) that was integral to the architecture
and development of our wire-free charging technology. Our NMS system can be scaled up to control an enterprise consisting of thousands
of devices or scaled down to work in a home or IoT environment.
The power, distance and mobility capabilities of the WattUp
technology were validated independently by an internationally recognized independent testing lab in October 2015, and the results
are published on our website.
Our technology solution consists principally of transmitter
and receiver ICs and novel antenna designs driven through innovative algorithms and software applications. We submitted our first
IC design for wafer fabrication in November 2013 and have since been developing multiple generations of transmitter and receiver
ICs, multiple antenna designs, as well as algorithms and software designs that we believe, in the aggregate, will optimize our
technology by reducing size and cost, while increasing performance to a level that will enable our technology to be integrated
into a broad spectrum of devices. We have developed a “building block” approach which allows us to scale our product
implementations by combining multiple transmitter building blocks and/or multiple receiver building blocks to provide the power,
distance, size and cost performance necessary to meet application requirements. While the technology is very scalable, in order
to provide us the necessary strategic focus to grow effectively, we have defined our market as devices that require 10 watts or
less of power to charge. We will continue to invest in IC development as well as in the other components of the WattUp system to
improve product performance, efficiency, cost-performance and miniaturization as required to grow the business and expand the ecosystem,
while also distancing us from any potential competition.
We believe that if our development, regulatory and commercialization
efforts are successful, our transmitter and receiver technology will support a broad spectrum of charging solutions ranging from
contact-based charging or charging at distances of a few millimeters (“near field”) to charging at distances of up
to 15 feet (“far field”).
In January 2015, we signed a Development and License Agreement
with one of the top consumer electronic companies in the world based on total worldwide revenues. The agreement is milestone-based
and while there are no guarantees that the WattUp® technology will ever be integrated into our strategic partner’s consumer
devices, we have achieved some milestones, as reflected in our 2016 and 2017 Engineering Services revenues. We expect to make continued
progress toward achievement of significant new milestones that we expect will result in additional Engineering Services Revenue.
Ultimately, if the strategic partner chooses to incorporate our technology into one or more of its consumer electronic products,
we expect to recognize significant revenues based on the WattUp® technology.
Throughout 2016 and 2017, we have delivered
evaluation kits to potential licensees to allow their engineering and product management departments to test and evaluate
our technology. The testing and evaluation kits resulted in shipments of components to customers in the fourth quarter of
2017.
In November 2016, we entered into a Strategic Alliance Agreement
with Dialog, pursuant to which Dialog agreed to manufacture and distribute IC products incorporating our wire-free charging technology.
Dialog is our exclusive supplier of these products for the general market.
We have implemented an aggressive intellectual property strategy
and are continuing to pursue patent protection for new innovations. As of September 30, 2017, we had more than 230 pending patent
and provisional patent applications in the United States and abroad. Additionally, the U.S. Patent and Trademark Office has issued
us 27 patents and notified us of the allowance of 42 additional patent applications. In addition to the inventions covered by these
patents and patent applications, we have identified a significant number of additional specific inventions we believe are novel
and patentable. We intend to file for patent protection for the most valuable of these, as well as for other new inventions that
we expect to develop. Our strategy is to continually monitor the costs and benefits of each patent application and pursue those
that will best protect our business and extend our value proposition.
We have recruited and hired a seasoned management team with
both private and public company experience and relevant industry experience to develop and execute our operating plan. In addition,
we have identified and hired key engineering resources in the areas of IC development, antenna development, hardware, software
and firmware engineering as well as integration and testing which will allow us to continue to expand our technology and intellectual
property as well as meet the support requirements of our licensees.
The market for products using our technology is nascent and
unproven, so the Company’s success is sensitive to many factors, including technological feasibility, regulatory approval,
customer acceptance, competition and global market fluctuations.
Critical Accounting Policies and Estimates
Revenue Recognition
We recognize revenue when the following criteria have been met:
persuasive evidence of an arrangement exists, services have been rendered, collection of the revenue is reasonably assured, and
the fees are fixed or determinable.
We record revenue associated with product development projects
that we enter into with certain customers, including one of the top consumer electronic companies in the world. In general,
these projects involve complex technology development and milestone-based payments, and our ability to achieve the program milestones
is uncertain. Achievement of a milestone depends on our performance and requires customer acceptance. Payments associated with
achieving the milestone are generally commensurate with our effort or the value of the deliverable, and are nonrefundable. We record
the expenses related to these projects, generally included in research and development expense, in the periods incurred.
At the beginning of a customer relationship, we often receive
nonrefundable payments, for which there are no milestones. We recognize this revenue ratably over the initial engineering product
development period. We record the expenses related to these projects, which are generally included in research and development
expense, in the periods incurred.
Results of Operations
Three Months Ended September 30, 2017 and 2016
Revenues.
During the three months ended September
30, 2017 and 2016, we recorded revenue of $250,000 and $1,003,973, respectively. The decrease was due to the timing of the achievement
of development milestones.
Operating Expenses and Loss from Operations.
Operating
expenses are made up of research and development, sales and marketing and general and administrative expenses. Losses from operations
for the three months ended September 30, 2017 and 2016 were $12,751,623 and $10,128,021, respectively.
Research and Development Costs.
Research and development
costs, which include costs for developing our technology, were $8,743,434 and $7,944,465, respectively, for the three months ended
September 30, 2017 and 2016. The increase in research and development costs of $798,969 is primarily due to a $1,994,703 increase
in compensation, which includes a $1,598,110 increase in stock-based compensation and a $396,594 increase in payroll related compensation,
primarily from an increase in headcount within the department, partially offset by a $638,312 decrease in chip design, manufacturing
and component costs, a $351,842 decrease in consulting expense and a $245,117 decrease in engineering software expense.
Sales and Marketing Costs.
Sales and marketing costs
for the three months ended September 30, 2017 and 2016 were $1,141,852 and $736,751, respectively. The increase in sales and marketing
costs of $405,101 is primarily due to an increase of $410,929 in compensation, which includes a $192,446 increase in stock-based
compensation, partially offset by a $54,900 decrease in public relations costs due to most public relations duties now being performed
internally instead of by an outside firm.
General and Administrative Expenses.
General and administrative
expenses include costs for general and corporate functions, including facility fees, travel, telecommunications, insurance, professional
fees, consulting fees and other overhead. General and administrative costs for the three months ended September 30, 2017 and 2016
were $3,116,337 and $2,450,778, respectively. The increase in general administrative costs of $665,559 is primarily due to a $917,463
increase in stock-based compensation, partially offset by a $98,842 decrease in other compensation, primarily from lower executive
bonus expense incurred, an $87,536 combined decrease in postage, communications and supplies expense and a $77,598 decrease in
legal fees and stock registration expense.
Interest Income, Net.
Interest income for the three months
ended September 30, 2017 was $3,375 as compared to interest income of $2,958 for the three months ended September 30, 2016.
Net Loss.
As a result of the above, net loss for the
three months ended September 30, 2017 was $12,748,248 as compared to $10,125,063 for the three months ended September 30, 2016.
Nine Months Ended September 30, 2017 and 2016
Revenues.
During the nine months ended September
30, 2017 and 2016, we recorded revenue of $1,124,874 and $1,322,155, respectively.
Operating Expenses and Loss from Operations.
Operating
expenses are made up of research and development, sales and marketing and general and administrative expenses. Loss from operations
for the nine months ended September 30, 2017 and 2016 were $38,149,015 and $31,215,601, respectively.
Research and Development Costs.
Research and development
costs, which include costs for developing our technology, were $25,788,621 and $23,080,918, respectively, for the nine months ended
September 30, 2017 and 2016. The increase in research and development costs of $2,707,703 is primarily due to a $5,926,863 increase
in compensation, which includes a $4,014,640 increase in stock-based compensation and a $1,912,220 increase in payroll related
compensation, primarily from an increase in headcount within the department, and a $373,892 increase in depreciation expense, partially
offset by a $2,518,549 decrease in chip design, manufacturing and component costs, a $710,109 decrease in engineering software
expense and a $573,215 decrease in consulting expense.
Sales and Marketing Costs.
Sales and marketing costs
for the nine months ended September 30, 2017 and 2016 were $3,924,617 and $2,189,995, respectively. The increase in sales and marketing
costs of $1,734,622 is primarily due to an increase of $1,398,867 in compensation, which includes a $568,524 in stock-based compensation,
and a $243,096 increase in tradeshow expenses, partially offset by a $142,314 decrease in public relations expense.
General and Administrative Expenses.
General and administrative
expenses include costs for general and corporate functions, including facility fees, travel, telecommunications, insurance, professional
fees, consulting fees and other overhead. General and administrative costs for the nine months ended September 30, 2017 and 2016
were $9,560,651 and $7,266,843, respectively. The increase in general administrative costs of $2,293,808 is primarily due to a
$2,528,057 increase in compensation, which includes an increase in stock-based compensation of $2,483,798, and a $113,196 increase
in legal and accounting costs, partially offset by minor decreases in other administrative expenses.
Interest Income, Net.
Interest income for the nine months
ended September 30, 2017 was $9,343 as compared to interest income of $9,441 for the nine months ended September 30, 2016.
Net Loss.
As a result of the above, net loss for the
nine months ended September 30, 2017 was $38,140,398 as compared to $31,206,160 for the nine months ended September 30, 2016.
Liquidity and Capital Resources
We incurred net losses of $38,140,398 and $31,206,160 for the
nine months ended September 30, 2017 and 2016, respectively. Net cash used in operating activities was $26,887,004 and $24,439,565
for the nine months ended September 30, 2017 and 2016, respectively. We are currently meeting our liquidity requirements through
four sales of shares to three different private investors during August 2016, November 2016, December 2016 and July 2017, which
raised net proceeds of $49,720,858, and payments received under product development projects.
As of September 30, 2017, we had cash and cash equivalents of
$20,223,859.
We believe our current cash on hand, together with
anticipated payments to be received under current product development projects and anticipated royalties from chip revenue,
together with potential new financing activities including potential sales of stock, will be sufficient to fund our
operations through at least one year from the issuance of these unaudited condensed interim financial statements. Potential
financing sources could include follow-on equity offerings, debt financing, co-development agreements or other alternatives.
Depending upon market conditions, we may choose to pursue additional financing to, among other reasons, accelerate our
product development efforts, regulatory activities and business development. On April 24, 2015, we filed a
“shelf” registration statement on Form S-3, which became effective on April 30, 2015. The
“shelf” registration statement allows us from time to time to sell any combination of debt or equity securities
described in the registration statement up to aggregate proceeds of $75,000,000. In November 2015, we consummated an offering
under the shelf registration of 3,000,005 shares of common stock through which the Company raised net proceeds of
$19,048,456. In August 2016, we sold shares in a private placement in which we raised net proceeds of $19,890,644. In
November 2016, we sold shares in a private placement in which we raised net proceeds of $9,925,755. In December 2016, we sold
shares in a private placement in which we raised net proceeds of $4,971,912. In July 2017, we sold shares in a private
placement in which we raised net proceeds of $14,932,547.
During the nine months ended September 30, 2017, cash flows
used in operating activities were $26,887,004, consisting of a net loss of $38,140,398, less non-cash expenses aggregating $13,533,580
(representing principally stock-based compensation of $12,472,870 and depreciation expense of $999,396), a $101,000 increase in
accounts receivable, a $2,537,833 decrease in accounts payable, a $209,179 decrease in accrued expenses and a $102,823 decrease
in deferred revenue, partially offset by a $654,654 decrease in prepaid expenses and other current assets. During the nine months
ended September 30, 2016, cash flows used in operating activities were $24,439,565, consisting of a net loss of $31,206,160, less
non-cash expenses aggregating $6,095,109 (representing principally stock-based compensation of $5,405,908 and depreciation expense
of $628,613), a $625,000 increase in accounts receivable, a $484,284 increase in prepaid and other current assets, partially offset
by a $948,700 increase in accounts payable from the timing of invoice payments, a $717,002 increase in accrued expenses and a
$112,245 increase in deferred revenue.
During the nine months ended September 30, 2017 and 2016, cash
flows used in investing activities were $515,147 and $858,455, respectively. The cash used in investing activities for the nine
months ended September 30, 2017 primarily consisted of the purchase of laboratory equipment and engineering software, offset by
$2,800 in proceeds from the sales of property and equipment. The increase for the nine months ended September 30, 2016 consisted
of the purchase of laboratory equipment and building fixtures.
During the nine months ended September 30, 2017, cash flows
provided by financing activities were $16,367,373, which consisted of $14,932,547 in net proceeds from the sale of shares to Dialog,
$738,552 in proceeds from the exercise of stock options and $696,274 in proceeds from contributions to the employee stock purchase
program (“ESPP”). During the nine months ended September 30, 2016, cash flows provided by financing activities were
$20,381,701, which consisted of $19,890,660 in net proceeds from the sale of stock in a private placement with an investor, $533,005
in proceeds from contributions to the ESPP and $270,716 in proceeds from the exercise of stock options, offset by $266,217 in shares
withheld to cover payroll taxes on vested RSUs and $46,463 in shares withheld to cover payroll taxes on vested PSUs.
Research and development of new technologies is, by its nature,
unpredictable. Although we will undertake development efforts with commercially reasonable diligence, there can be no assurance
that our available resources will be sufficient to enable us to develop our technology to the extent needed to create future revenues
to sustain our operations.
We cannot assure that our technology will
be adopted, that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. Furthermore,
since we have no committed source of financing, there can be no assurance that we will be able to raise capital as and when we
need it to continue our operations.
Off-Balance Sheet Transactions
As of September 30, 2017, we did not have any off-balance sheet
transactions.
Material Changes in Specified Contractual Obligations
A table of our specified contractual obligations was provided
in the
Management’s Discussion and Analysis of Financial Condition and Results of Operation
of our most recent Annual
Report on Form 10-K. There were no material changes outside the ordinary course of our business in the specified contractual obligations
during the three and nine months ended September 30, 2017.