Note 2 – Liquidity and Management Plans
During the three and nine months ended September 30, 2018, the Company recorded revenue of $228,000 and $458,773, respectively, and during the three and nine months ended September 30, 2017, the Company recorded revenue of $250,000 and $1,124,874, respectively. During the three and nine months ended September 30, 2018, the Company recorded a net loss of $12,645,291 and $38,387,119, respectively. During the three and nine months ended September 30, 2017, the Company recorded a net loss of $12,748,248 and $38,140,398, respectively. Net cash used in operating activities was $24,398,264 and $26,887,004 for the nine months ended September 30, 2018 and 2017, respectively. The Company is currently meeting its liquidity requirements through an at-the-market (“ATM”) sale of common stock in January 2018, which raised net proceeds of $38,846,815, the sales of shares to a private investor during July 2017, which raised net proceeds of $14,932,547, and payments received under product development projects.
As of September 30, 2018, the Company had cash on hand of $28,551,870. The Company expects that cash on hand as of September 30, 2018, together with anticipated revenues, will be sufficient to fund the Company’s operations into the fourth quarter of 2019.
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, including the net proceeds from the Company’s financings to date, 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 may 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 such financing would be available on terms that it would find acceptable, or at all.
The market for products using the Company’s technology is broad, but 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.
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 (“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, 2017 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 16, 2018. The accounting policies used in preparing these unaudited condensed interim financial statements are consistent with those described in the Company’s December 31, 2017 audited financial statements
.
7
Note 3 – Summary of Significant Accounting Policies, continued
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
On January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), which is described below in Recent Accounting Pronouncements.
In accordance with Topic 606, the Company recognizes revenue using the following five-step approach:
|
1.
|
Identify the contract with a customer.
|
|
2.
|
Identify the performance obligations in the contract.
|
|
3.
|
Determine the transaction price of the contract.
|
|
4.
|
Allocate the transaction price to the performance obligations in the contract.
|
|
5.
|
Recognize revenue when the performance obligations are met or delivered.
|
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 typically requires acceptance by the customer. The payment associated with achieving the milestone is generally commensurate with the Company’s effort or the value of the deliverable and is nonrefundable. The Company records the expenses related to these projects, generally included in research and development expense, in the periods incurred.
The Company records royalty revenue from its manufacturing partner, Dialog, based on the number of shipments from Dialog to its customers.
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 $8,442,698 and $8,743,434 for the three months ended September 30, 2018 and 2017, respectively, and the Company incurred research and development cost of $24,804,224 and $25,788,621 for the nine months ended September 30, 2018 and 2017, 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 compensation costs on a straight-line basis over the requisite service period of the award, which is typically the vesting term of the equity instrument issued.
8
Note 3 – Summary of Significant Accounting Policies, continued
Under the Energous Corporation Employee Stock Purchase Plan (“ESPP”), employees may purchase a limited number of shares of the Company’s 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, 2018, 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 months ended September 30, 2018 and 2017.
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 the enrollment of employees in the ESPP. The computation of diluted loss per share excludes potentially dilutive securities of 6,840,737 and 7,862,420 for the three months ended September 30, 2018 and 2017, respectively, and 6,840,737 and 7,862,420 for the nine months ended September 30, 2018 and 2017, respectively, because their inclusion would be anti-dilutive.
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Financing Warrant to purchase common stock
|
|
-
|
|
|
|
13,889
|
|
|
-
|
|
|
|
13,889
|
|
IPO Warrants to purchase common stock
|
|
|
-
|
|
|
|
11,600
|
|
|
|
-
|
|
|
|
11,600
|
|
Warrant issued to private investors
|
|
|
3,035,688
|
|
|
|
3,035,688
|
|
|
|
3,035,688
|
|
|
|
3,035,688
|
|
Options to purchase common stock
|
|
|
656,494
|
|
|
|
1,149,589
|
|
|
|
656,494
|
|
|
|
1,149,589
|
|
RSUs
|
|
|
2,276,996
|
|
|
|
2,498,037
|
|
|
|
2,276,996
|
|
|
|
2,498,037
|
|
PSUs
|
|
|
871,559
|
|
|
|
1,153,617
|
|
|
|
871,559
|
|
|
|
1,153,617
|
|
Total potentially dilutive securities
|
|
|
6,840,737
|
|
|
|
7,862,420
|
|
|
|
6,840,737
|
|
|
|
7,862,420
|
|
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
9
Note 3 – Summary of
Significant Accounting Policies, continued
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 used the modified retrospective implementation method for all contracts and did not need to record a cumulative effect adjustment to retained earnings as of the date of initial application.
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”. 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 has adopted ASU 2016-01 and its adoption had no material impact on it financial statements.
In January 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. 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 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 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 adoption of the new standard did not have a material impact on our financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (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 adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations.
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 adoption of the new standard did not have a material impact on our financial statements.
In July 2017, the FASB issued a two-part 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 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
10
Note 3 – Summa
ry of Significant Accounting Policies, continued
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.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting.” ASU 2018-07 aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, “Equity – Equity-based Payments to Nonemployees.” It is effective for annual reporting periods beginning after December 15, 2018. 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, 2018, through the date which the financial statements are issued. Based upon the review, 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 with Balzer Family Investments, L.P. (the “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 area. The agreement has a term which expires on June 30, 2019 and a current monthly rent of $6,668 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 $4,578 per month. These leases are subject to certain annual escalations as defined in the agreements.
On May 31, 2017, the Company renewed a lease agreement for the Company’s 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.
The future minimum lease payments for leased locations are as follows:
For the Years Ended December 31,
|
|
Amount
|
|
2018 (Three Months)
|
|
$
|
163,303
|
|
2019
|
|
|
457,585
|
|
Total
|
|
$
|
620,888
|
|
Hosted
Design Solution Agreement
In June 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 in July 2015, the Company is required to remit quarterly payments in the amount of approximately $101,000 with the last payment due in March 2018. In December 2015, the agreement was amended to redefine the hardware and software configuration and the quarterly payments increased to approximately $198,000. In July 2018, the Company renewed the three-year agreement, and
11
Note 4 – Commitments and Contingencies, continued
the Company is required to remit quarterly payments in the amount of approximately $218,000, with the last payment due in March 2021.
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 (“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 (“Board”).
Pursuant to Mr. Rizzone’s prior employment agreement, on December 12, 2013, Mr. Rizzone was granted a 10-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.
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 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, 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, 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 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 Strategic 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 (“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 (“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
12
Note 4 – Commitments and
Contingencies, continued
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.
Note 5 – Stockholders’ Equity
Authorized Capital
The holders of the Company’s 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 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. Prior to its expiration in April 2018, the shelf registration statement allowed 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, in November 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.
Pursuant to the shelf registration, in January 2018, the Company raised $38,846,815 (net of $1,153,715 in underwriter’s discount and issuance costs) from the sale of stock to the public in an “at-the-market” equity offering of its common stock.
On August 9, 2018, the Company filed a shelf registration statement on Form S-3, which became effective on August 17, 2018. This shelf registration statement will allow the Company to sell, from time to time, any combination of debt or equity securities described in the registration statement up to aggregate proceeds of $75,000,000.
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 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
13
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 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).
Effective 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.
Effective on May 16, 2018, 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 1,600,000 shares, bringing the total number of approved shares to 6,085,967 under the 2013 Equity Incentive Plan.
As of September 30, 2018, 2,079,035 shares of common stock remain 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 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.
Effective on May 16, 2018, 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 250,000 shares, bringing the total number of approved shares to 850,000 under the 2014 Non-Employee Equity Compensation Plan.
As of September 30, 2018, 366,829 shares of common stock remain 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 approved the Energous Corporation 2015 Performance Share Unit Plan (“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.
14
Note 6 – Stock Based Compensation,
continued
Effective on May 16, 2018, the Company’s stockholders approved the amendment and restatement of the 2014 Non-employee Compensation Plan to increase the number of shares reserved for issuance thereunder by 1,400,000 shares, bringing the total number of approved shares to 2,710,104 under the 2015 Performance Share Unit Plan.
As of September 30, 2018, 1,431,951 shares of common stock remain available to be issued through equity-based instruments under the Performance Share Unit Plan.
15
Note 6 – Stock Based Compensation,
continued
2017 Equity Inducement Plan
On December 28, 2017, the Board approved the 2017 Equity Inducement Plan. Under the plan, the Board reserved 600,000 shares of common stock for the grant of RSUs. These grants will be administered by a committee of the Board or the Board acting as a committee. These awards will be granted to individuals who (a) are being hired as an employee by the Company or any subsidiary and such award is a material inducement to such person being hired; (b) are being rehired as an employee following a bona fide period of interruption of employment with the Company or any subsidiary; or (c) will become an employee of the Company or any subsidiary in connection with a merger or acquisition.
As of September 30, 2018, 311,000 shares of common stock remain available to be issued through equity-based instruments under the 2017 Equity Inducement Plan.
Employee Stock Purchase Plan
On April 10, 2015, the Company’s Board approved the ESPP, under which 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. 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 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, 2018, 376,463 shares of common stock remain available to be issued under the ESPP. As of September 30, 2018, employees have contributed $179,583 through payroll withholdings to the ESPP for the current eligibility period. Shares will be deemed delivered on December 31, 2018 for the current eligibility period.
Stock Option Activity
The following is a summary of the Company’s stock option activity during the nine months ended September 30, 2018:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life In
Years
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2018
|
|
|
1,037,239
|
|
|
$
|
4.80
|
|
|
|
6.4
|
|
|
$
|
15,198,044
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
(380,745
|
)
|
|
|
3.47
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at September 30, 2018
|
|
|
656,494
|
|
|
$
|
5.57
|
|
|
|
4.9
|
|
|
$
|
2,986,926
|
|
Exercisable at January 1, 2018
|
|
|
1,037,239
|
|
|
$
|
4.80
|
|
|
|
6.4
|
|
|
$
|
15,198,044
|
|
Vested
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
(380,745
|
)
|
|
|
3.47
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercisable at September 30, 2018
|
|
|
656,494
|
|
|
$
|
5.57
|
|
|
|
4.9
|
|
|
$
|
2,986,926
|
|
As of September 30, 2018, the unamortized value of options was $0.
Restricted Stock Units (“RSUs”)
During the nine months ended September 30, 2018, the Compensation Committee of the Board (“Compensation Committee”) granted various directors and consultants RSUs under which the holders have the right to receive an aggregate 175,826 shares of common stock. These awards were granted under the 2014 Non-Employee Equity Compensation Plan. The awards granted vest over terms from one to four years.
16
Note 6 – Stock Based Compensation,
continued
During the nine months ended September 30, 2018, 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 459,550 shares of common stock. The majority of these awards granted vest over terms ranging from one to four years.
During the nine months ended September 30, 2018, the Compensation Committee granted employees RSU awards under the 2017 Equity Inducement Plan under which the holders have the right to receive 289,000 shares of common stock. The awards vest over four years beginning on the anniversary of the grant date
.
T
h
e
Co
m
p
a
n
y
acc
oun
t
s
fo
r
R
SU
s
gr
a
n
t
ed
t
o
c
on
s
u
lt
a
n
t
s
u
s
i
n
g
t
h
e acc
oun
ti
n
g
gu
i
d
a
n
ce
i
n
c
l
ud
ed
i
n
AS
C
505-5
0
“E
qu
it
y-B
a
s
ed
P
a
y
me
n
t
s
t
o
N
on-
Em
p
l
oy
ee
s
”.
I
n
acc
ord
a
n
ce
w
it
h
AS
C
505-50
,
t
h
e
Co
m
p
a
n
y
e
s
ti
ma
t
es
t
h
e
f
a
i
r
v
a
l
u
e
o
f
t
h
e
unv
e
s
t
ed
por
ti
o
n
o
f
t
h
e
R
S
U a
w
a
r
d
each
r
e
por
ti
n
g
p
e
r
i
o
d
u
s
i
n
g
t
h
e c
l
o
s
i
n
g
pr
i
ce
o
f
c
o
mm
o
n
s
t
o
c
k
.
As of
September 30,
2018
,
t
h
e
un
am
or
ti
ze
d
v
a
l
u
e
o
f
t
h
e
R
SUs
w
a
s
$
27,341,086.
T
h
e
un
am
or
ti
ze
d
am
oun
t
w
il
l
b
e
e
xp
e
n
s
e
d
ov
e
r
a
weighted average
p
e
r
i
o
d
o
f
2.5
y
ea
r
s. A summary of the activity related to RSUs for the nine months ended September 30, 2018 is presented below:
|
|
Total
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Outstanding at January 1, 2018
|
|
|
2,274,325
|
|
|
$
|
13.75
|
|
RSUs granted
|
|
|
924,376
|
|
|
$
|
19.54
|
|
RSUs forfeited
|
|
|
(178,058
|
)
|
|
$
|
14.10
|
|
RSUs vested
|
|
|
(743,647
|
)
|
|
$
|
13.80
|
|
Outstanding at September 30, 2018
|
|
|
2,276,996
|
|
|
$
|
16.02
|
|
Performance Share Units (“PSUs”)
Performance share units (“PSUs”) are grants that vest upon the achievement of certain performance goals. The goals are 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 are 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.
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, 2018.
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 this PSU award, a Monte Carlo simulation was used to determine the fair value at each of the five target prices of the Company’s 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 was amortized over the estimated service period from October 24, 2016 through October 30, 2017.
17
Note 6 – Stock Based Compensation,
continued
Amortization for all PSU awards was $207,206 and $399,867 for the three months ended September 30, 2018 and 2017, respectively, and $614,862 and $1,601,160 for the nine months ended September 30, 2018 and 2017, respectively.
At September 30, 2018, the unamortized value of all PSUs was approximately $204,954. The unamortized amount will be expensed over a weighted average period of 0.3 years. A summary of the activity related to PSUs for the nine months ended September 30, 2018 is presented below:
|
|
Total
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Outstanding at January 1, 2018
|
|
|
951,657
|
|
|
$
|
2.65
|
|
PSUs granted
|
|
|
–
|
|
|
|
-
|
|
PSUs forfeited
|
|
|
–
|
|
|
|
-
|
|
PSUs vested
|
|
|
(80,098
|
)
|
|
|
2.65
|
|
Outstanding at September 30, 2018
|
|
|
871,559
|
|
|
|
2.65
|
|
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 the Company’s 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 DSUs and $50,000 of his regular board stipends. The award granted vests fully on the first anniversary of the grant date. There was no amortization for both the three months ended September 30, 2018 and 2017.
Amortization was $0 and $1,362 for the nine months ended September 30, 2018 and 2017, respectively.
As of
September 30
,
2018
,
t
h
e
D
S
Us
were fully amortized
and are no longer outstanding.
Employee Stock Purchase Plan (“ESPP”)
The recently completed offering period for the ESPP was January 1, 2018 through June 30, 2018. During the year ended December 31, 2017, there were two offering periods for the ESPP. The first offering period started on January 1, 2017 and concluded on June 30, 2017. The second offering period started on July 1, 2017 and concluded on December 31, 2017.
The weighted-average grant-date fair value of the purchase option for each designated share purchased under this plan was approximately $9.72 and $5.88 for the nine months ended September 30, 2018 and 2017, 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 $67,174 and $474,920 for the three and nine months ended September 30, 2018, respectively and $79,046 and $266,398 for the three and nine months ended September 30, 2017, respectively.
18
Note 6 – Stock Based Compensation,
continued
The Company estimated the fair value of options granted during the nine months ended September 30, 2018 and 2017 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, 2018
|
|
|
Nine Months Ended
September 30, 2017
|
|
Stock price
|
|
$14.48 - $22.34
|
|
|
$16.08 - $17.59
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
Expected volatility
|
|
72% - 177%
|
|
|
56% - 66%
|
|
|
Risk-free interest rate
|
|
1.61% - 2.14%
|
|
|
0.62% - 1.11%
|
|
|
Expected life
|
|
6 months
|
|
|
6 months
|
|
|
19
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, 2018 and 2017:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
$
|
-
|
|
|
$
|
246,617
|
|
|
$
|
-
|
|
|
$
|
738,599
|
|
RSUs
|
|
|
3,578,276
|
|
|
|
3,843,186
|
|
|
|
11,714,962
|
|
|
|
9,865,351
|
|
PSUs
|
|
|
207,206
|
|
|
|
399,867
|
|
|
|
614,862
|
|
|
|
1,601,160
|
|
ESPP
|
|
|
67,174
|
|
|
|
79,046
|
|
|
|
474,920
|
|
|
|
266,398
|
|
DSU
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,362
|
|
Total
|
|
$
|
3,852,656
|
|
|
$
|
4,568,716
|
|
|
$
|
12,804,744
|
|
|
$
|
12,472,870
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
|
$
|
2,051,986
|
|
|
$
|
2,558,472
|
|
|
$
|
7,594,209
|
|
|
$
|
6,643,094
|
|
Sales and marketing
|
|
|
352,941
|
|
|
|
281,518
|
|
|
|
1,022,832
|
|
|
|
782,366
|
|
General and administrative
|
|
|
1,447,729
|
|
|
|
1,728,726
|
|
|
|
4,187,703
|
|
|
|
5,047,410
|
|
Total
|
|
$
|
3,852,656
|
|
|
$
|
4,568,716
|
|
|
$
|
12,804,744
|
|
|
$
|
12,472,870
|
|
Note 7 – Related Party Transactions
In November 2016, the Company and 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 6.8% of the Company’s outstanding common shares and could potentially own 11.7% of the Company’s outstanding common shares if it exercised all of its warrants for common shares. For the nine months ended September 30, 2018, the Company paid $43,700 to Dialog for chip development costs incurred, which is recorded under research and development expense. Pursuant to the Strategic Alliance Agreement in Note 4 – Commitments and Contingencies, we recorded $5,773 in revenue for the nine months ended September 30, 2018.
Note 8 – Customer Concentration
One customer accounted for approximately 99% and 100% of the Company’s revenue for the three months ended September 30, 2018 and 2017, respectively. The same customer accounted for approximately 98% and 100% of the Company’s revenue for the nine months ended September 30, 2018 and 2017. The same customer accounted for 96% of the accounts receivable balance as of September 30, 2018. As of December 31, 2017, the Company did not have an accounts receivable balance.
20
Item 2. Management’s Discussion and Analysis o
f
Financial Condition and Results of Operations
Forward-Looking Statements
As used in this Quarterly Report on Form 10-Q, 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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, 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 other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding expectations for revenues, liquidity cash flows and financial performance, the anticipated results of our development efforts and the timing for receipt of required regulatory approvals and product launches. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Forward-looking statements 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 our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others: our ability to develop commercially feasible technology; timing of customer implementations of our technology in consumer products; timing of regulatory approvals in the United States and internationally; 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 our most recently filed Annual Report on Form 10-K and subsequently filed Quarterly Reports on Form 10-Q. We undertake no obligation to publicly update any of our forward-looking statements, whether as a result of new information, future developments or otherwise.
Overview
We have developed our WattUp® technology, consisting of proprietary semiconductor chipsets, software, hardware designs and antennas, that enables radio frequency (“RF”) based charging for electronic devices, providing wire-free contact and non-contact charging solutions, with the potential to enable charging with mobility. Dialog Semiconductor plc (“Dialog”) manufactures and distributes integrated circuit (“IC”) products incorporating our charging technology, pursuant to a Strategic Alliance Agreement. Dialog is the exclusive supplier of these IC products for the general market. We believe our proprietary WattUp technology can be utilized in consumer electronics such as 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 other devices with charging requirements that would otherwise require a battery or external power connection.
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, radio frequency energy pocket. We are engineering solutions that we expect to enable the wire-free transmission of energy for contact-based applications, non-contact charging up to approximately three feet, and potentially charging applications of up to 15 feet. We are also developing our transmitter technology to seamlessly mesh (like a network of Wi-Fi routers) to potentially form a wire-free charging network that will allow users to charge their devices as they move 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 utilizing various frequencies. We have also developed multiple receiver prototypes, including smartphone battery cases, toys, fitness trackers, Bluetooth headsets and tracking devices, as well as stand-alone receivers. We are in pre-production and initial production stages with early adopters of the WattUp technology to bring our contact-based transmitters and compatible receivers to market.
In November 2016, we entered into a Strategic Alliance Agreement with Dialog, pursuant to which Dialog manufactures and distributes IC products incorporating our technology. Dialog is our exclusive supplier of these products for the general market. Our WattUp technology will use Dialog’s SmartBond® Bluetooth low energy solution as the out-of-band communications channel between the wireless transmitter and receiver. In most cases, Dialog’s power management technology is used to distribute power from the WattUp receiver IC to the rest of the
21
d
evice while Dialog’s AC/DC Rapid Charge™ power conversion technology delivers power to the wireless transmitter.
On December 26, 2017, we announced Federal Communications Commission (FCC) certification of our first-generation WattUp Mid-Field transmitter, which powers devices at a distance of up to three feet, while charging multiple devices at once. Our WattUp Mid-Field transmitter underwent rigorous, multi-month testing to verify it met consumer safety and regulatory requirements. We believe this achievement represents the first certification of a Part 18 FCC-approved non-contact wireless charging transmitter, and establishes precedents that will streamline our future U.S. and international regulatory approvals, and regulatory approvals for our customers’ end-products.
We believe our seasoned management team has the experience and industry expertise to develop and execute our operating plan. In addition, we believe our engineering resources in the areas of IC development, antenna development, hardware, software and firmware engineering as well as integration and testing, will enable us to continue to expand our technology and intellectual property support 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
On January 1, 2018 the Company adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), which is described in Note 3 of the accompanying financial statements.
In accordance with Topic 606, the Company recognizes revenue using the following five-step approach:
|
1.
|
Identify the contract with a customer.
|
|
2.
|
Identify the performance obligations in the contract.
|
|
3.
|
Determine the transaction price of the contract.
|
|
4.
|
Allocate the transaction price to the performance obligations in the contract.
|
|
5.
|
Recognize revenue when the performance obligations are met or delivered.
|
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 typically requires acceptance by the customer. The payment associated with achieving the milestone is generally commensurate with the Company’s effort or the value of the deliverable and is nonrefundable. The Company records the expenses related to these projects, generally included in research and development expense, in the periods incurred.
The Company records royalty revenue from its manufacturing partner, Dialog, based on the number of shipments from Dialog to its customers.
Results of Operations
Three Months Ended September 30, 2018 and 2017
Revenues.
During the three months ended September 30, 2018 and 2017, we recorded revenue of $228,000 and $250,000, respectively. The decrease was due to the fact that the milestones completed during the three months ended September 30, 2018 generated less revenue than the milestones completed during the three months ended September 30, 2017.
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 three months ended September 30, 2018 and 2017 were $12,651,961 and $12,751,623, respectively.
Research and Development Costs.
Research and development costs, which include costs for developing our technology, were $8,442,698 and $8,743,434, respectively, for the three months ended September 30, 2018 and 2017. The decrease in research and development costs of $300,736 is primarily due to a $909,604 decrease in total compensation costs, including a $506,486 decrease in stock-based compensation and a $291,448 decrease in payroll
22
compensation, which is due a lower
headcount within the department
,
a $315,536 decrease in legal patent costs, partially offset by an $841,726 increase in chip design and packaging costs and a $120,791 increase in regulatory testing.
Sales and Marketing Costs.
Sales and marketing costs for the three months ended September 30, 2018 and 2017 were $1,546,227 and $1,141,852, respectively. The increase in sales and marketing costs of $404,375 is primarily due to a $197,652 increase in total compensation costs, including a $71,423 increase in stock-based compensation, from higher headcount and new equity award grants issued within the department, a $118,928 increase in engineering supplies utilized by the sales and marketing team and an $80,499 increase in promotional, design and website costs.
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, 2018 and 2017 were $2,891,036 and $3,116,337, respectively. The decrease in general administrative costs of $225,301 is primarily due to a $280,997 decrease in stock-based compensation and a $60,750 decrease in legal and accounting expense, partially offset by a $96,255 increase in regular compensation costs.
In
t
e
r
e
s
t
Income
.
In
t
e
r
e
s
t
income
fo
r
t
h
e
three
m
on
t
h
s
e
nd
e
d
September 30, 2018 w
a
s
$6,670
a
s
c
o
m
p
a
r
e
d
t
o
interest income of
$3,375
fo
r
t
h
e
three
m
on
t
h
s
e
nd
e
d
September 30, 2017
.
N
e
t
L
o
ss
.
A
s
a
r
e
s
u
l
t
o
f
t
h
e
a
bov
e
,
n
e
t
l
o
s
s
fo
r
t
h
e
three
m
on
t
h
s
e
nd
e
d
September 30, 2018 was $12,645,291
a
s
c
o
m
p
a
r
e
d
t
o
$12,748,248
fo
r
t
h
e
three
m
on
t
h
s
e
nd
e
d
September 30, 2017
.
Nine Months Ended September 30, 2018 and 2017
Revenues.
During the nine months ended September 30, 2018 and 2017, we recorded revenue of $458,773 and $1,124,874, respectively. The decrease was due to the combination of the number of milestones achieved and the dollar value associated with each milestone.
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, 2018 and 2017 were $38,405,490 and $38,149,015, respectively.
Research and Development Costs.
Research and development costs, which include costs for developing our technology, were $24,804,224 and $25,788,621, respectively, for the nine months ended September 30, 2018 and 2017. The decrease in research and development costs of $984,397 is primarily due to a $1,072,053 decrease in chip design, manufacturing, component and engineering supply costs, a $1,032,414 decrease in payroll compensation from a lower headcount within the department, a $421,327 decrease in legal patent costs, partially offset by a $951,115 increase in stock-based compensation as a result of adding new grants issued during the previous 12 months, a $385,709 increase in related regulatory costs and a $174,101 increase in engineering software costs.
Sales and Marketing Costs.
Sales and marketing costs for the nine months ended September 30, 2018 and 2017 were $4,620,760 and $3,924,617, respectively. The increase in sales and marketing costs of $696,143 is primarily due to an increase of $647,729 in total compensation costs, including a $240,466 increase in stock-based compensation, a $116,641 increase in travel cost, a $99,616 increase in promotional, design and website costs, a $64,556 increase in consulting fees, a $60,000 increase in recruiting cost, partially offset by a $321,179 decrease in tradeshow 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, 2018 and 2017 were $9,439,279 and $9,560,651, respectively. The decrease in general administrative costs of $121,372 is primarily due to an $859,707 decrease in stock-based compensation and an $89,401 decrease in depreciation expense, partially offset by a $308,399 increase in consulting, recruiting, board member, investor relations and other third party service fees, a $280,931 increase in legal, accounting and annual meeting fees, a $202,476 increase in payroll compensation and a $34,791 increase in insurance costs.
23
In
t
e
r
e
s
t
Income
.
In
t
e
r
e
s
t
income
fo
r
t
h
e
nine
m
on
t
h
s
e
nd
e
d
September
30, 2018 w
a
s
$
18,371
a
s
c
o
m
p
a
r
e
d
t
o
interest income of
$
9,343
fo
r
t
h
e
nine
m
on
t
h
s
e
nd
e
d
September
30, 2017
.
N
e
t
L
o
ss
.
A
s
a
r
e
s
u
l
t
o
f
t
h
e
a
bov
e
,
n
e
t
l
o
s
s
fo
r
t
h
e
nine
m
on
t
h
s
e
nd
e
d
September 30, 2018 w
a
s
$38,387,119
a
s
c
o
m
p
a
r
e
d
t
o
$38,140,398
fo
r
t
h
e
nine
m
on
t
h
s
e
nd
e
d
September 30, 2017
.
L
i
q
u
i
d
it
y
a
n
d
Cap
it
a
l
R
e
s
o
ur
ces
During the nine months ended September 30, 2018 and 2017, we recorded revenue of $458,773 and $1,124,874, respectively. We incurred a net loss of $38,387,119 and $38,140,398 for the nine months ended September 30, 2018 and 2017, respectively. Net cash used in operating activities was $24,398,264 and $26,887,004 for the nine months ended September 30, 2018 and 2017, respectively. The Company is currently meeting its liquidity requirements through an at-the-market (“ATM”) sale of common stock in January 2018, which raised net proceeds of $38,846,815, the sales of shares to a private investor during July 2017, which raised net proceeds of $14,932,547, and payments received under product development projects.
A
s
o
f
September 30, 2018
,
w
e
h
a
d
ca
s
h and cash equivalents
o
f
$28,551,870.
We believe our current cash on hand, together with anticipated payments under product development projects entered into with customers, will be sufficient to fund our operations into the fourth quarter of 2019. However, depending on how soon we are able to achieve meaningful revenues, we may require additional financing to fully implement our business plan, the ultimate goal of which is to license our technology to device manufacturers, wireless service providers and other commercial partners to make wire-free charging an affordable, ubiquitous and convenient service for end users. 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 and support functions with a view to capitalizing on the market opportunity we see for our wire-free charging technology. On August 9, 2018, we filed a shelf registration statement on Form S-3, which became effective on August 17, 2018. This shelf registration statement will allow us to sell, from time to time, any combination of debt or equity securities described in the registration statement up to aggregate proceeds of $75,000,000.
During the nine months ended September 30, 2018, cash flows used in operating activities were $24,398,264, consisting of a net loss of $38,387,119, less non-cash expenses aggregating $13,686,046 (representing principally stock-based compensation of $12,804,744 and depreciation expense of $820,714), a $497,684 decrease in prepaid expenses and other current assets, a $296,668 increase in accrued expenses, partially offset by a $204,722 decrease in accounts payable and a $208,773 increase in accounts receivable.
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, 2018 and 2017, cash flows used in investing activities were $561,793 and $515,147, respectively. The cash used in investing activities for the nine months ended September 30, 2018 primarily consisted of the purchase of software and laboratory equipment. The cash used 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.
During the nine months ended September 30, 2018, cash flows provided by financing activities were $40,716,673, which consisted of $38,846,815 in net proceeds from the sale of shares of our common stock to the public in an ATM offering, $1,319,461 in proceeds from the exercises of stock options and $550,397 in proceeds from contributions to the ESPP. 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 exercises of stock options and $696,274 in proceeds from contributions to the ESPP.
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
24
including the net proceeds from our public offerings 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, 2018, 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 nine months ended September 30, 2018.