Note 2 – Liquidity and Management Plans
During the three months ended March 31, 2019 and 2018, the Company recorded revenue of $66,500 and $25,000, respectively. During the three months ended March 31, 2019 and 2018, the Company recorded net losses of $11,019,468 and $13,443,457, respectively. Net cash used in operating activities was $7,369,177 and $7,727,711 for the three months ended March 31, 2019 and 2018, respectively. The Company is currently meeting its liquidity requirements through the proceeds of securities offerings that raised net proceeds of $23,319,156 in March 2019 and $38,846,815 in January 2018, along with payments received under product development projects.
As of March 31, 2019, the Company had cash on hand of $36,129,119. The Company expects that cash on hand as of March 31, 2019, together with anticipated revenues, will be sufficient to fund the Company’s operations into the second quarter of 2020.
Research and development of new technologies is by its nature unpredictable. Although the Company intends to continue its research and development activities, there can be no assurance that its available resources and business operations will generate revenues sufficient to sustain operations. Accordingly, the Company may pursue additional financing, which could include offerings of equity or debt securities, bank financings, commercial agreements with customers or strategic partners, and other alternatives, depending upon market conditions. 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 dependent upon many factors, including customer acceptance of our existing products, technical feasibility of future products, regulatory approval, 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, 2018 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 28, 2019. The accounting policies used in preparing these unaudited condensed interim financial statements are consistent with those described in the Company’s December 31, 2018 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.
7
Note 3 – Summary of Significant Accounting Policies, continued
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 development projects are complex, and the Company does not have certainty about its ability to achieve the project milestones. The achievement of a milestone is dependent on the Company’s performance obligation and requires acceptance by the customer. The Company recognizes revenue based on when the performance obligation is met. However, the Company does not recognize revenue in excess of that payable upon achievement of an accepted milestone, as there would be uncertainty of payment for work that has not been accepted. The payment associated with achieving the performance obligation 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 in research and development expense, in the periods such expenses were incurred.
The Company records royalty revenue from its manufacturing partner, Dialog, based on shipments from Dialog to its customers.
Currently, other than royalty revenue from Dialog, the Company’s only revenue source is product development projects.
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, which are 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 $6,800,678 and $8,721,552 for the three months ended March 31, 2019 and 2018, respectively.
Stock-Based Compensation
The Company accounts for equity instruments issued to employees, board members and contractors 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.
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.
8
Note 3 – Summary of Significant Accounting Policies, continued
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 March 31, 2019, no liability for unrecognized tax benefits was required to be reported. 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 March 31, 2019 and 2018.
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 shares issuable from the enrollment of employees in the ESPP. The computation of diluted loss per share excludes potentially dilutive securities of 7,601,654 and 7,420,048 for the three months ended March 31, 2019 and 2018, 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 March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Financing Warrant to purchase common stock
|
|
-
|
|
|
|
13,889
|
|
|
Warrant issued to private investors
|
|
|
4,702,354
|
|
|
|
3,035,688
|
|
|
Options to purchase common stock
|
|
|
576,293
|
|
|
|
857,507
|
|
|
RSUs
|
|
|
2,323,007
|
|
|
|
2,641,405
|
|
|
PSUs
|
|
|
-
|
|
|
|
871,559
|
|
|
Total potentially dilutive securities
|
|
|
7,601,654
|
|
|
|
7,420,048
|
|
|
9
Note 3 – Summary of Significant Accounting Policies, continued
Leases
As of January 1, 2019, the Company determines if an arrangement is a lease at the inception of the arrangement. The Company applies the short-term lease recognition exemption and recognizes lease payments in profit or loss at lease commencement for facility or equipment leases that have a lease term of 12 months or less and do not include a purchase option whose exercise is reasonably certain. Operating leases are included in operating lease right-of-use (ROU) assets and operating lease liabilities.
ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are measured and recorded at the later of the adoption date, January 1, 2019, or the service commencement date based on the present value of lease payments over the lease term. The Company uses the implicit interest rate when readily determinable; however, most leases do not establish an implicit rate, so the Company uses an estimate of the incremental borrowing rate based on the information available at the time of measurement. Lease expense for lease payments is recognized on a straight-line basis over the lease term. See Note 4 – Commitments and Contingencies,
Operating Leases
for further discussion of the Company’s operating leases.
Recent Accounting Pronouncements
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 has adopted ASU 2016-02 and its adoption had no material impact on its 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 Company has adopted ASU 2016-18 and its adoption had no material impact on its 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 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. The Company has adopted ASU 2017-11 and its adoption had no material impact 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 adopted ASU 2018-07 and its adoption had no material impact on its financial statements.
10
Note 3 – Summary of Significant Accounting Policies, continued
Management’s Evaluation of Subsequent Events
The Company evaluates events that have occurred after the balance sheet date of March 31, 2019, 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 February 26, 2015, the Company entered into a sub-lease agreement for additional space in its San Jose location on the first floor. 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 on the first floor. The agreement has a term which expires on June 30, 2019 and a current monthly rent of $4,578 per month.
On March 13, 2019, the Company amended its Lease Agreement with the Landlord which combined both the first floor space and the second floor space for the final three months of the original lease term for the second floor, which expires on September 30, 2019. Effective July 1, 2019 through September 30, 2019, the new monthly rent payment will be $48,372.
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 Company is currently negotiating renewals of its main facility leases.
I
n February 2016, the FASB issued its final standard on lease accounting, ASU No. 2016-02, “Leases (Topic 842),” which superseded Topic 840, “Leases,” which was further modified in ASU No. 2018-10, “Codification Improvements” to clarify the implementation guidance. The new accounting standard was effective for the Company beginning on January 1, 2019 and required the recognition on the balance sheet of right-of-use assets and lease liabilities. The Company elected the optional transition method and adopted the new guidance on January 1, 2019 on a modified retrospective basis with no restatement of prior period amounts. The Company’s adoption of the new standard resulted in the recognition of right-of-use assets of $414,426 and operating lease liabilities of $485,747, with no material cumulative effect adjustment to equity as of the date of adoption. As of March 31, 2019, the Company’s remaining weighted average operating lease terms were approximately 6 months. The weighted average discount rate used to measure the outstanding operating lease liabilities was 10% as of March 31, 2019.
A reconciliation of undiscounted cash flows to lease liabilities recognized as of March 31, 2019 is as follows:
|
|
Amount
|
|
|
|
(unaudited)
|
|
2019
|
|
|
338,871
|
|
Present value discount (10% weighted average)
|
|
|
(7,610
|
)
|
Total operating lease liabilities
|
|
$
|
331,261
|
|
11
Note 4 – Commitments and Contingencies, continued
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 update and redefine the hosted hardware and software licensed by the Company and the quarterly payments increased to approximately $198,000. In July 2018, the Company renewed the three-year agreement, and the Company is required to remit quarterly payments in the amount of approximately $218,000, with the last payment due in March 2021.
Litigations, Claims, and Assessments
The Company is from time to time involved in various disputes, claims, liens and litigation matters arising in the normal course of business. While the outcome of these disputes, claims, liens and litigation matters cannot be predicted with certainty, after consulting with legal counsel, management does not believe that the outcome of these matters will have a material adverse effect on the Company's combined financial position, results of operations or cash flows.
MBO Bonus Plan
On March 15, 2018, the Company’s Board of Directors (“Board”), on the recommendation of the Board’s Compensation Committee (“Compensation Committee”), approved the Energous Corporation MBO Bonus Plan (“Bonus Plan”) for executive officers of the Company. To be eligible to receive a bonus under the Bonus Plan, an executive officer must be continuously employed throughout the applicable performance period, and in good standing, and achieve the performance objectives selected by the Compensation Committee.
Under the Bonus Plan, the Compensation Committee is responsible for selecting the amounts of potential bonuses for executive officers, the performance metrics used to determine whether any such bonuses will be paid and determining whether those performance metrics have been achieved.
During the three months ended March 31, 2019, the Company accrued $314,513 in expense under the Bonus Plan, which will be paid during the second quarter of 2019. During the three months ended March 31, 2018, the Company accrued $267,296 in bonus expense, which was paid during the second quarter of 2018.
Severance and Change in Control Agreement
On March 15, 2018, the Compensation Committee approved a form of Severance and Change in Control Agreement (“Severance
Agreement”) that the Company may enter into with executive officers (“Executive”).
Under the Severance Agreement, if an Executive is terminated in a qualifying termination, the Company agrees to pay the Executive six to 12 months of that Executive’s monthly base salary and bonuses, in under some circumstances. If the Executive elects continued coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) the Company agrees to pay the full amount of Executive’s premiums under the Company’s health, dental and vision plans, including coverage for the Executive’s eligible dependents, for the six to 12 month period following the Executive’s termination.
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 was effective as of January 1, 2015, had an initial term of four years and has been automatically renewed annually thereafter. 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 Board.
Mr. Rizzone is also eligible to receive all customary and usual benefits generally available to senior executives of the Company.
12
Note 4 – Commitments and Contingencies, continued
Strategic Alliance Agreement
In November 2016, the Company and Dialog Semiconductor plc (“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.
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.
Public Offerings
Pursuant to a shelf registration statement on Form S-3 filed on April 24, 2015, 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 in an “at-the-market” 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 allows 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. Pursuant to this registration statement, in March 2019 the Company raised $23,319,156 (net of $1,680,844 in underwriter’s discount and issuance costs) from an offering of shares of its common stock and warrants to purchase 1,666,666 shares of common stock at an exercise price of $10.00 per share.
Note 6 – Stock-Based Compensation
Equity Incentive Plans
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 through equity-based instruments thereunder by 1,600,000 shares, bringing to 6,085,967 the total number of shares approved for issuance under that plan.
As of March 31, 2019, 1,501,148 shares of common stock remain available to be issued under the 2013 Equity Incentive Plan.
13
Note 6 – Stock Based Compensation, continued
Equity Incentive Plans, continued
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 through equity-based instruments thereunder by 250,000 shares, bringing to 850,000 the total number of shares approved for issuance under that plan.
As of March 31, 2019, 208,842 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
Effective on May 16, 2018, the Company’s stockholders approved the amendment and restatement of the 2015 Performance Share Unit Plan to increase the number of shares reserved for issuance through equity-based instruments thereunder by 1,400,000 shares, bringing to 2,710,104 the total number of shares approved for issuance under that plan.
As of March 31, 2019, 1,431,951 shares of common stock remain available to be issued through equity-based instruments under the Performance Share Unit Plan.
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 March 31, 2019, 283,469 shares of common stock remain available to be issued through equity-based instruments under the 2017 Equity Inducement Plan.
Employee Stock Purchase Plan
In April 2015, the Company’s Board approved the ESPP, under which 600,000 shares of common stock were reserved for purchase by the Company’s employees, and on May 21, 2015, the Company’s stockholders approved the ESPP. Under the ESPP, employees may designate an amount not less than 1% but not more than 10% of their annual compensation for the purchase of Company shares. No more than 7,500 shares may be purchased by an employee under the ESPP 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 purchase 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 March 31, 2019, 343,753 shares of common stock remain available to be issued under the ESPP. As of March 31, 2019, employees have contributed $173,167 through payroll withholdings to the ESPP for the current offering period. Shares will be deemed delivered on June 30, 2019 for the current offering period.
14
Note 6 – Stock Based Compensation, continued
Stock Option Activity
The following is a summary of the Company’s stock option activity during the three months ended March 31, 2019:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life In
Years
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2019
|
|
|
656,494
|
|
|
$
|
5.57
|
|
|
|
4.6
|
|
|
$
|
252,887
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
(80,201
|
)
|
|
|
4.99
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at March 31, 2019
|
|
|
576,293
|
|
|
$
|
5.65
|
|
|
|
5.0
|
|
|
$
|
794,214
|
|
Exercisable at January 1, 2019
|
|
|
656,494
|
|
|
$
|
5.57
|
|
|
|
4.6
|
|
|
$
|
252,887
|
|
Vested
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
(80,201
|
)
|
|
|
4.99
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercisable at March 31, 2019
|
|
|
576,293
|
|
|
$
|
5.65
|
|
|
|
5.0
|
|
|
$
|
794,214
|
|
As of March 31, 2019, the unamortized value of options was $0.
15
Note 6 – Stock Based Compensation, continued
Restricted Stock Units (“RSUs”)
During the three months ended March 31, 2019, the Compensation Committee granted various directors and consultants RSUs covering 157,987 shares of common stock under the 2014 Non-Employee Equity Compensation Plan. The awards vest over terms from one to three years.
During the three months ended March 31, 2019, the Compensation Committee granted various employees RSUs covering 310,750 shares of common stock under the 2013 Equity Incentive Plan. The awards vest over terms ranging from one to four years.
During the three months ended March 31, 2019, the Compensation Committee granted employees RSUs covering 25,500 shares of common stock under the 2017 Equity Inducement Plan. The awards vest over four years.
As of
March 31, 2019,
t
h
e
un
am
or
ti
ze
d
v
a
l
u
e
o
f
t
h
e
R
SUs
w
a
s
$
22,695,586.
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
2.1
y
ea
r
s. A summary of the activity related to RSUs for the three months ended March 31, 2019 is presented below:
|
|
Total
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Outstanding at January 1, 2019
|
|
|
2,469,174
|
|
|
$
|
15.07
|
|
RSUs granted
|
|
|
494,237
|
|
|
$
|
6.16
|
|
RSUs forfeited
|
|
|
(205,882
|
)
|
|
$
|
15.28
|
|
RSUs vested
|
|
|
(434,522
|
)
|
|
$
|
15.97
|
|
Outstanding at March 31, 2019
|
|
|
2,323,007
|
|
|
$
|
12.99
|
|
Performance Share Units (“PSUs”)
Performance share units (“PSUs”) are grants that vest upon the achievement of certain performance goals. The performance goals are related to the Company’s market capitalization or market price of the common stock.
Amortization for all PSU awards was $0 and $202,702 for the three months ended March 31, 2019 and 2018, respectively.
At March 31, 2019, all PSUs had either vested or expired and were no longer outstanding.
Employee Stock Purchase Plan (“ESPP”)
The current offering period under the ESPP started on January 1, 2019 and will conclude on June 30, 2019. During the year ended December 31, 2018, there were two offering periods for the ESPP. The first offering period started on January 1, 2018 and concluded on June 30, 2018. The second offering period started on July 1, 2018 and concluded on December 31, 2018.
The weighted-average grant-date fair value of the purchase option for each designated share purchased under this plan was approximately $2.43 and $13.84 for the three months ended March 31, 2019 and 2018, 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 $87,825 and $154,545 for the three months ended March 31, 2019 and 2018, respectively.
16
Note 6 – Stock Based Compensation,
continued
Employee Stock Purchase Plan (“ESPP”), continued
The Company estimated the fair value of ESPP purchase options granted during the three months ended March 31, 2019 and 2018 using the Black-Scholes option pricing model. The fair values of stock options granted were estimated using the following assumptions:
|
|
Three Months Ended
March 31, 2019
|
|
|
Three Months Ended
March 31, 2018
|
|
Stock price
|
|
$
|
5.79
|
|
|
$
|
22.34
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
96
|
%
|
|
|
177
|
%
|
Risk-free interest rate
|
|
|
2.51
|
%
|
|
|
1.61
|
%
|
Expected life
|
|
6 months
|
|
|
6 months
|
|
Stock-Based Compensation Expense
The following tables summarize total stock-based compensation costs recognized for the three months ended March 31, 2019 and 2018:
|
|
Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
RSUs
|
|
|
3,083,567
|
|
|
$
|
4,251,961
|
|
|
PSUs
|
|
|
–
|
|
|
|
202,702
|
|
|
ESPP
|
|
|
87,825
|
|
|
|
154,545
|
|
|
Total
|
|
$
|
3,171,392
|
|
|
$
|
4,609,208
|
|
|
The total amount of stock-based compensation was reflected within the statements of operations as:
|
|
Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Research and development
|
|
$
|
1,656,553
|
|
|
$
|
3,058,530
|
|
|
Sales and marketing
|
|
|
377,048
|
|
|
|
281,358
|
|
|
General and administrative
|
|
|
1,137,791
|
|
|
|
1,269,320
|
|
|
Total
|
|
$
|
3,171,392
|
|
|
$
|
4,609,208
|
|
|
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. As of March 31, 2019, Dialog owns approximately 5.7% of the Company’s outstanding common shares and could potentially own 9.9% of the Company’s outstanding common shares if it exercised all of its warrants for common shares. For the three months ended March 31, 2019 and 2018, the Company paid $0 and $43,700 to Dialog for chip development costs incurred, which is recorded under research and development expense. We recorded $7,100 and $0 in revenue pursuant to the Strategic Alliance Agreement for the three months ended March 31, 2019 and 2018.
17
Note 8 – Customer Concentration
Four customers accounted for approximately 98% of the Company’s revenue for the three months ended March 31, 2019 and one customer accounted for 100% of the Company’s revenue for the three months ended March 31, 2018. Four customers accounted for approximately 98% of the accounts receivable balance as of March 31, 2019. Three customers accounted for approximately 86% of the accounts receivable balance as of December 31, 2018.
18
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® wireless power technology, consisting of proprietary semiconductor chipsets, software controls, hardware designs and antennas, that enables radio frequency (“RF”) based charging for electronic devices. The WattUp technology has a broad spectrum of capabilities, including contact-based wireless charging and wireless charging at various distances, and in some use cases mobility charging. In November 2016 we entered into a Strategic Alliance Agreement with Dialog Semiconductor plc (“Dialog”), an industry leader in Bluetooth low energy semiconductors and power management semiconductors. In conjunction with the Strategic Alliance Agreement, Dialog manufactures and is the exclusive distributor of integrated circuit (“IC”) products that incorporate our designs and provides sales and logistic support to customers on a global basis. 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, smartwatches, fitness bands, keyboards, mice, remote controls, rechargeable lights, batteries, medical devices, and other devices with charging requirements that would otherwise require battery replacement or a wired power connection.
We believe our technology is innovative in its approach, in that we are developing solutions that charge electronic devices by surrounding them with a focused RF energy pocket. We are engineering solutions that deliver wire-free energy for contact-based charging applications and are also developing non-contact charging at distances up to approximately three feet, as well as low-power charging for distances up to 15 feet. We have demonstrated for non-contact applications, our transmitter technology is able to mesh into a wire-free charging network that will allow users to charge their devices even as the devices are moved about in three-dimensional space. To date, we have developed multiple transmitter prototypes and multiple receiver prototypes. The transmitters vary in terms of their form factor, power specification, and frequency. The receivers can be used in a variety of applications, such as smartphone battery cases, toys, fitness trackers, Bluetooth headsets, tracking devices, and stand-alone receivers. We are engaged in pre-production and initial production activity with several consumer electronic, medical device and industrial companies to introduce our contact-based near field transmitters and receivers in products going to market in 2019. We are also in discussion with potential customers in the consumer and industrial spaces that are considering our solutions to supply low power distance charging for products that could enter the market as early as 2019.
19
When the company was founded in 2012, we recogniz
ed the need to design and build an enterprise-class network management and control software (“NMS”) system that w
ould be integral to
supporting our customers’ rapid and cost-effective deployment
of
our wire-free charging technology. Our NMS system is robust enough to scale up to control thousands of devices across an enterprise, or scaled down to meet the needs of a
home or IoT environment.
In December 2017, we announced Federal Communications Commission (“FCC”) certification of our first-generation WattUp Mid Field transmitter, which simultaneously powers multiple devices at a distance of up to three feet. This transmitter underwent rigorous, multi-month testing to verify that it met consumer safety and regulatory requirements. We believe this was the first certification of a Part 18 FCC-approved non-contact wireless charging transmitter, and that it establishes engineering design precedents that can streamline future regulatory approvals for our technology and for our customers’ end-products that employ our technology.
Our technology solution consists principally of transmitter controller ICs, power amplifier ICs and receiver ICs, as well as novel antenna designs, application prototypes and proprietary software algorithms. We submitted our first IC design for wafer fabrication in 2013 and have developed many generations of transmitter and receiver ICs, antenna designs, and software algorithms. We have endeavored to optimize our technology by reducing size and cost, while at the same time increasing performance which enables our designs to be integrated into a broad spectrum of devices. We have developed a “building block” approach that allows us to scale our product implementations by combining multiple transmitter building blocks or multiple receiver building blocks to meet the the power, distance, size and cost requirements of customer applications requirements. Our technology is readily scalable because the same ICs that are used for contact based charging can be used for distance based charging solutions. We have developed two classes of chip solutions, a CMOS-based technology focused on low cost, small footprint and low power (less than 5 watts) and a GaAs/GAn-based technology capable of delivering higher power with greater efficiency. We intend to continue to invest in research and development with high power capabilities of 20 watts and beyond at high levels of efficiency. We intend to continue to invest in improving product performance, efficiency, cost-performance and miniaturization as required to reach multiple markets and expand the power-at-a-distance ecosystem, while maintaining a technology lead on potential competitors.
In 2015 we entered into a milestone-based development and license agreement with a top tier consumer electronics company from which we recognized engineering services revenue over several periods. We are currently not providing them any engineering services and are discussing the future direction of the agreement. As we have stated previously, there are no guarantees that our WattUp technology will ever be integrated into this company’s products.
In February 2016, we began delivering evaluation kits to potential licensees of our technology, to allow their respective engineering and product management departments to test and evaluate the technology. Our customers’ product development, technology integration and product introduction cycles occur over multiple quarters and generally more than a year elapses before first evaluation and final shipment of the customer’s product. Should our customers begin to sell products to end customers that incorporate our technology, we would expect the commercialization cycle to shorten over time as the technology matures.
We generally maintain exclusive rights to all intellectual property in our technology. Our intellectual property strategy includes pursuing patent protection for new innovations. As of February 19, 2019, we had more than 125 pending patent and provisional patent applications. As of that date, the U.S. Patent and Trademark Office and international patent offices had issued 176 patents and had notified us of the allowance of 26 additional patents. In addition to the inventions covered by these patents and patent applications, we have also identified specific inventions that we believe are novel and patentable. We intend to file for patent protection for the most valuable of these, and for other inventions that we expect to develop. This is a significant annual expense and we continually monitor the costs and benefits of each patent application and pursue those that we believe are most protective for our business and expand the core value of the Company.
20
Our seasoned management team has both private and public company experience, as well as relevant industry experience. 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 and to meet our licensees’ support requirements.
Critical Accounting Policies and Estimates
Revenue Recognition
On January 1, 2018 we 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.
|
We record revenue associated with product development projects that we enter into with certain customers. In general, these projects are associated with complex technology development, and as such we do not have certainty about our ability to achieve the program milestones. Achievement of the milestone is dependent on our performance and typically requires acceptance by the customer. The payment associated with achieving the milestone is generally commensurate with our effort or the value of the deliverable and is nonrefundable. We record the expenses related to these projects, generally in research and development expense, in the periods incurred.
We record royalty revenue from our manufacturing partner, Dialog, based on the number of shipments from Dialog to its customers.
Currently, other than royalty revenue from Dialog, our only revenue source is product development projects.
Results of Operations
Three Months Ended March 31, 2019 and 2018
Revenues.
During the three months ended March 31, 2019 and 2018, we recorded revenue of $66,500 and $25,000, respectively.
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 March 31, 2019 and 2018 were $11,095,541 and $13,449,163, respectively.
Research and Development Costs.
Research and development costs were $6,800,678 and $8,721,552, respectively, for the three months ended March 31, 2019 and 2018. The decrease of $1,920,874 is primarily due to a $1,401,977 decrease in stock-based compensation as older equity awards become fully amortized, a $374,249 decrease in legal patent costs, a $171,706 decrease in legal costs pertaining to obtaining regulatory approvals, an $84,543 decrease in regulatory testing expense and a $74,000 decrease in recruiting fees, partially offset by a $236,632 increase in payroll costs.
Sales and Marketing Costs.
Sales and marketing costs for the three months ended March 31, 2019 and 2018 were $1,599,452 and $1,472,396, respectively. The increase of $127,056 is primarily due to a $95,690 increase in stock-based compensation from the grants of new equity awards, a $62,724 increase in engineering supplies utilized by the sales and marketing department and a $59,980 increase in tradeshow expense, partially offset by a $30,700 decrease in graphic design costs and a $30,000 decrease in recruiting fees.
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 March 31, 2019 and 2018 were $2,761,911 and $3,280,215, respectively. The decrease of $518,304 is primarily due to $387,881 decrease in legal and accounting expenses, a $131,529 decrease in stock-based compensation as older equity awards become fully
21
amortized and a $58,211 decrease in general office expenses, partially offset by a $77,040 increase in payroll com
pensation.
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
March 31, 2019 w
a
s
$76,073
a
s
c
o
m
p
a
r
e
d
t
o
interest income of
$5,706
fo
r
t
h
e
three
m
on
t
h
s
e
nd
e
d
March 31, 2018
. The increase of $70,367 is due to a more favorable interest rate from a short-term certificate of deposit.
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
March 31, 2019 was $11,019,468
a
s
c
o
m
p
a
r
e
d
t
o
$13,443,457
fo
r
t
h
e
three
m
on
t
h
s
e
nd
e
d
March 31, 2018
.
L
i
q
u
i
d
it
y
a
n
d
Cap
it
a
l
R
e
s
o
ur
ces
During the three months ended March 31, 2019 and 2018, we recorded revenue of $66,500 and $25,000, respectively. We incurred net losses of $11,019,468 and $13,443,457 for the three months ended March 31, 2019 and 2018, respectively. Net cash used in operating activities was $7,369,177 and $7,727,711 for the three months ended March 31, 2019 and 2018, respectively. The Company is currently meeting its liquidity requirements through the proceeds securities offerings that raised net proceeds of $23,319,156 in March 2019 and $38,846,815 in January 2018, along with payments received under product development projects.
We believe our current cash on hand, together with anticipated revenues, will be sufficient to fund our operations into the second quarter of 2020. Although we intend to continue our research and development activities, there can be no assurance that our available resources will be sufficient to enable us to generate revenues sufficient to sustain operations. Accordingly, we may pursue additional financing, which could include offerings of equity or debt securities, bank financings, commercial agreements with customers or strategic partners, and other alternatives, depending upon market conditions. There is no assurance that such financing would be available on terms that we would find acceptable, or at all.
During the three months ended March 31, 2019, cash flows used in operating activities were $7,369,177, consisting of a net loss of $11,019,468, less non-cash expenses aggregating $3,534,053 (principally stock-based compensation of $3,171,392 and depreciation and amortization expense of $235,368), a $147,413 decrease in prepaid expenses and other current assets and an $80,170 increase in accrued expenses.
During the three months ended March 31, 2018, cash flows used in operating activities were $7,727,711, consisting of a net loss of $13,443,457, less non-cash expenses aggregating $4,928,924 (principally stock-based compensation of $4,609,208 and depreciation expense of $299,520), a $120,659 decrease in accounts payable, a $25,000 increase in accounts receivable, offset by a $560,460 increase in accrued expenses and a $372,021 decrease in prepaid expenses and other current assets.
During the three months ended March 31, 2019 and 2018, cash flows used in investing activities were $161,249 and $238,611, respectively. The cash used in investing activities for the three months ended March 31, 2019 primarily consisted of leasehold improvements related to the construction of a regulatory testing chamber within our office space. The cash used in investing activities for the three months ended March 31, 2018 primarily consisted of the purchase of computer hardware and engineering software licenses.
During the three months ended March 31, 2019, cash flows provided by financing activities were $23,553,060, which consisted of $23,319,156 in net proceeds from a private offering of shares and warrants pursuant to a shelf registration, $400,103 in proceeds from the exercises of stock options and $173,167 in proceeds from contributions to the ESPP, partially offset by $339,366 in shares withheld for the payment of payroll taxes for the delivery of RSUs and PSUs. During the three months ended March 31, 2018, cash flows provided by financing activities were $40,028,803, 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, $981,053 in proceeds from the exercises of stock options and $200,935 in proceeds from contributions to the ESPP.
22
Res
earch and development of new technologies is, by its nature, unpredictable.
Although
we intend to continue our research and
undertake development
activities
, there can be no assurance that
our
available resources will be sufficient to enable
us to generate
revenues sufficient to sustain operations.
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 March 31, 2019, 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 months ended March 31, 2019.