Energous(WATT) - 2018 Q4 - Annual Report

PART I Item 1. Business Energous Corporation developed WattUp® wireless power technology for RF-based charging, covering chipsets, software, hardware, and antennas, supporting contact and distance charging up to 15 feet, with key partnerships, extensive IP, and global regulatory approvals - Energous has developed WattUp® wireless power technology for RF-based charging, including semiconductor chipsets, software, hardware designs, and antennas, enabling contact-based and distance charging for electronic devices[12][13][18] - The company entered a Strategic Alliance Agreement with Dialog Semiconductor in November 2016, making Dialog the exclusive manufacturer and distributor of its IC products globally[12][59] - In December 2017, Energous announced FCC certification for its first-generation WattUp Mid Field transmitter, capable of simultaneously powering multiple devices up to three feet away, establishing regulatory precedents[17] - As of February 19, 2019, Energous held 176 issued patents, 26 allowed patents, and over 125 pending patent applications, reflecting an aggressive intellectual property strategy[21][63] - Research and development expenses constituted approximately 64% and 66% of total operating expenses for 2018 and 2017, respectively, totaling $32.9 million and $33.2 million[62] - WattUp technology has received FCC Part 15 and Part 18 approvals and international regulatory approvals, allowing products to ship into 111 countries as of December 31, 2018[65][70] Item 1A. Risk Factors The company faces significant risks including limited revenue, profitability challenges, dependence on a single major customer and Dialog Semiconductor, technology feasibility and market acceptance uncertainties, costly regulatory approvals, intense competition, IP protection difficulties, potential lawsuits, reliance on key personnel, and the need for additional financing - The company has a limited operating history, generated limited revenues, and had an accumulated deficit of approximately $225 million as of December 31, 2018, with no assurance of achieving profitability[73] - A Development and License Agreement with a tier-one consumer electronics company provides a time-to-market advantage, which may deter other potential licensees and negatively impact revenue opportunities[74][75] - The company is highly dependent on its strategic relationship with Dialog Semiconductor for manufacturing and distribution, and failure of this partnership could necessitate seeking new arrangements or developing internal capabilities[79][80] - One customer accounts for the majority of the company's revenues, creating a significant concentration risk[81] - The company may require additional financing to implement its business plans, with no guarantee of availability on acceptable terms, potentially leading to curtailment of operations[82] - The industry is subject to intense competition and rapid technological change, posing a risk that the company's technology may become less useful or obsolete if it fails to keep pace[92][93] - As of December 31, 2018, the company had a Federal net operating loss (NOL) carryforward of approximately $130,590,000, which may be limited by future taxable income levels or ownership changes[131] Item 1B. Unresolved Staff Comments No unresolved staff comments are applicable to the company Item 2. Properties The company leases corporate headquarters and laboratory spaces in San Jose, CA, and an office in Costa Mesa, CA, with main operating leases expiring in 2019 and currently under renewal negotiation - The company's corporate headquarters and research and development efforts are located at 3590 North First Street, Suite 210, San Jose, CA, under a lease expiring in August 2019[136] - Additional laboratory space in San Jose, CA, and office space in Costa Mesa, CA, are leased, with agreements expiring in June 2019 and September 2019, respectively[136] - The company is currently negotiating renewals for its main operating leases[136] Item 3. Legal Proceedings The company is not currently involved in any legal proceedings expected to materially adversely affect its business or financial condition - The company is not currently a party to any pending legal proceedings that are believed to have a material adverse effect on its business or financial conditions[137] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities As of December 31, 2018, the company had 13 common stock holders of record, has never paid cash dividends, and plans to reinvest all future earnings into the business - As of December 31, 2018, there were 13 holders of record of the company's common stock[141] - The company has never paid cash dividends on its securities and does not anticipate paying any in the foreseeable future, planning to reinvest all future earnings[142] Item 6. Selected Financial Data Selected financial data shows significant net losses and operating losses for 2018 and 2017, with decreased revenue in 2018, increased total assets, and no long-term liabilities, preferred stock, or dividends Selected Financial Data | Metric | 2018 | 2017 | | :-------------------------------- | :----------- | :----------- | | Revenue | $514,823 | $1,154,009 | | Loss from operations | $(50,929,410) | $(49,387,828) | | Net loss | $(50,840,122) | $(49,376,875) | | Basic and diluted loss per common share | $(1.99) | $(2.31) | | Total Assets | $22,010,169 | $15,405,445 | - The company reported no long-term liabilities, preferred stock, or dividends declared for the periods presented[145] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The company's 2018 financial performance saw decreased revenue and increased net loss due to milestone timing, with rising operating expenses from sales, marketing, and G&A, partially offset by lower R&D; liquidity is maintained through cash and planned financing into Q2 2020, with success dependent on technology, regulatory approval, and market acceptance Revenue and Net Loss (2018 vs. 2017) | Metric | 2018 | 2017 | Change (YoY) | | :---------------- | :----------- | :----------- | :------------- | | Revenue | $514,823 | $1,154,009 | $(639,186) | | Net Loss | $(50,840,122) | $(49,376,875) | $(1,463,247) | | Loss from Operations | $(50,929,410) | $(49,387,828) | $(1,541,582) | Operating Expenses (2018 vs. 2017) | Expense Category | 2018 | 2017 | Change (YoY) | | :-------------------------- | :----------- | :----------- | :------------- | | Total Operating Expenses | $51,444,233 | $50,541,837 | $902,396 | | Research and Development | $32,871,685 | $33,230,668 | $(358,983) | | Sales and Marketing | $6,185,159 | $5,207,746 | $977,413 | | General and Administrative | $12,387,389 | $12,103,423 | $283,966 | - As of December 31, 2018, cash and cash equivalents totaled $20,106,485. The company expects current cash, anticipated revenues, and new financing to fund operations into the second quarter of 2020[177][178] - A shelf registration statement on Form S-3 allows the company to sell up to $75,000,000 in debt or equity securities, with a firm commitment to raise $23.3 million (net) in February 2019[178] Contractual Obligations as of December 31, 2018 | Obligation | Total | Less than 1 Year | 1 to 3 Years | More than 3 Years | | :------------------------ | :----------- | :--------------- | :------------- | :---------------- | | Operating leases | $457,585 | $457,585 | $— | $— | | Engineering software commitment | $2,175,130 | $870,052 | $1,305,078 | $— | | Total | $2,632,715 | $1,327,637 | $1,305,078 | $— | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's minimal market risk exposures, primarily interest rates, are not expected to materially impact its financial position, results of operations, or cash flows for the next fiscal year - The company's primary market risk exposures, such as interest rates, are considered minimal and are not expected to have a material adverse impact on its financial position, results of operations, or cash flows for the next fiscal year[187] Item 8. Financial Statements and Supplementary Data This section presents audited financial statements for 2018 and 2017, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, with comprehensive notes on accounting policies, liquidity, commitments, stock-based compensation, income taxes, and related party transactions, all supported by an unqualified auditor's opinion - The financial statements for the years ended December 31, 2018 and 2017, include Balance Sheets, Statements of Operations, Statement of Changes in Stockholders' Equity, and Statements of Cash Flows[190] - Marcum LLP, the independent registered public accounting firm, issued an unqualified opinion, stating that the financial statements present fairly, in all material respects, the financial position and results of operations[192] - Key accounting policies include revenue recognition (Topic 606, milestone-based and royalty revenue), expensing research and development costs as incurred, and accounting for deferred tax assets with a full valuation allowance due to historical operating losses[156][157][159][163][221][223] - The company had federal and state net operating loss carryforwards of approximately $130.6 million and $131.1 million, respectively, as of December 31, 2018, with federal R&D tax credits of $3.7 million[321] Stock-Based Compensation Expense (2018 vs. 2017) | Expense Category | 2018 | 2017 | | :-------------------------- | :----------- | :----------- | | Stock options | $— | $764,723 | | RSUs | $15,359,011 | $13,043,171 | | PSUs | $819,816 | $1,661,650 | | DSUs | $— | $1,362 | | ESPP | $574,927 | $331,913 | | Total | $16,753,754 | $15,802,819 | - One customer accounted for approximately 92% and 96% of the company's revenue for 2018 and 2017, respectively, and 56% of accounts receivable as of December 31, 2018[328] - Subsequent to year-end, on February 27, 2019, the company secured a firm commitment to raise $23.3 million (net) from a stock sale[329] Report of Independent Registered Public Accounting Firm Marcum LLP provided an unqualified opinion on the 2018 and 2017 financial statements, affirming fair presentation in all material respects, based on an audit conducted according to PCAOB standards - Marcum LLP provided an unqualified opinion on the financial statements for 2018 and 2017, affirming fair presentation in all material respects[192] - The audit was conducted in accordance with PCAOB standards, assessing risks of material misstatement and evaluating accounting principles and estimates[194] Balance Sheets The balance sheets show an increase in cash and total assets from 2017 to 2018, with stable current liabilities and a growing accumulated deficit, reflecting equity financing activities Balance Sheet Highlights (as of December 31) | Metric | 2018 | 2017 | | :-------------------------- | :----------- | :----------- | | Cash and cash equivalents | $20,106,485 | $12,795,254 | | Total current assets | $20,788,743 | $13,902,348 | | Total assets | $22,010,169 | $15,405,445 | | Total current liabilities | $3,639,734 | $3,646,715 | | Total stockholders' equity | $18,370,435 | $11,758,730 | | Accumulated deficit | $(224,741,571) | $(173,901,449) | Statements of Operations The statements of operations reveal a decrease in revenue and an increase in net loss and loss from operations from 2017 to 2018, alongside higher total operating expenses Statements of Operations Highlights (Year Ended December 31) | Metric | 2018 | 2017 | | :-------------------------------- | :----------- | :----------- | | Revenue | $514,823 | $1,154,009 | | Total operating expenses | $51,444,233 | $50,541,837 | | Loss from operations | $(50,929,410) | $(49,387,828) | | Net loss | $(50,840,122) | $(49,376,875) | | Basic and diluted loss per common share | $(1.99) | $(2.31) | | Weighted average shares outstanding | 25,486,270 | 21,343,001 | Statement of Changes in Stockholders' Equity Stockholders' equity increased from 2017 to 2018, primarily due to net proceeds from common stock sales and stock-based compensation, despite a growing accumulated deficit - Total stockholders' equity increased from $11,758,730 in 2017 to $18,370,435 in 2018, primarily driven by net proceeds from common stock sales ($38,846,815) and stock-based compensation, despite an increased accumulated deficit[204] - Additional paid-in capital significantly increased from $185,659,954 in 2017 to $243,111,741 in 2018, reflecting equity issuances and stock-based compensation[204] Statements of Cash Flows Cash flows from financing activities significantly increased in 2018 due to common stock sales, offsetting cash used in operating and investing activities, resulting in a net increase in cash and cash equivalents Cash Flow Highlights (Year Ended December 31) | Cash Flow Activity | 2018 | 2017 | | :-------------------------------- | :----------- | :----------- | | Net cash used in operating activities | $(32,527,023) | $(34,430,298) | | Net cash used in investing activities | $(859,819) | $(814,648) | | Net cash provided by financing activities | $40,698,073 | $16,781,563 | | Net increase (decrease) in cash and cash equivalents | $7,311,231 | $(18,463,383) | | Cash and cash equivalents - ending | $20,106,485 | $12,795,254 | - Cash flows from financing activities significantly increased in 2018 due to $38.8 million in net proceeds from common stock sales, compared to $14.9 million from private investors in 2017[207] Notes to Financial Statements The notes detail key accounting policies, including revenue recognition under Topic 606, expensing R&D costs, and maintaining a full valuation allowance for deferred tax assets, alongside disclosures on stock-based compensation, NOLs, and related party transactions - The company adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" (Topic 606) on January 1, 2018, using a five-step approach for revenue recognition, primarily from product development milestones and royalties[155][156][221] - Research and development expenses, including patent application costs, are charged to operations as incurred, totaling $32.9 million in 2018 and $33.2 million in 2017[159][223] - The company maintains a full valuation allowance against all net deferred tax assets for 2018 and 2017, as it is more likely than not that these assets will not be realized[163][319][321] - As of December 31, 2018, the unamortized value of Restricted Stock Units (RSUs) was $25,810,914, to be expensed over a weighted average period of 2.3 years[301] - The company recognized total stock-based compensation costs of $16,753,754 in 2018, up from $15,802,819 in 2017[315] - Dialog Semiconductor plc, a related party, owned approximately 6.6% of the company's outstanding common shares as of December 31, 2018, and could own 11.3% if all warrants were exercised[324] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There have been no changes in or disagreements with the company's accountants regarding accounting and financial disclosure matters Item 9A. Controls and Procedures The company's disclosure controls and procedures and internal control over financial reporting were deemed effective as of December 31, 2018, based on the COSO framework, with no material changes during the year - The company's principal executive and financial officers concluded that disclosure controls and procedures were effective as of December 31, 2018[332] - Management assessed and concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[335] - No material changes in internal control over financial reporting occurred during the year ended December 31, 2018[338] Item 9B. Other Information. No other information is required to be disclosed in this item PART III Item 10. Directors, Executive Officers and Corporate Governance. Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the company's proxy statement for the 2019 Annual Meeting of Stockholders[342] Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the company's proxy statement for the 2019 Annual Meeting of Stockholders[342] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters. Details on security ownership of certain beneficial owners and management, along with related stockholder matters, are incorporated by reference from the 2019 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the company's proxy statement for the 2019 Annual Meeting of Stockholders[343] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2019 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the company's proxy statement for the 2019 Annual Meeting of Stockholders[343] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the company's proxy statement for the 2019 Annual Meeting of Stockholders[344] PART IV Item 15. Exhibits, Financial Statements and Schedules This section lists all documents filed as part of the report, including financial statements, schedules (omitted as not applicable or shown in notes), and a comprehensive exhibit index detailing various corporate documents, agreements, and certifications - This item lists the financial statements, financial statement schedules (omitted as not applicable), and a comprehensive exhibit index filed as part of the report[347] - The exhibit index includes corporate governance documents (e.g., Certificate of Incorporation, Bylaws), equity incentive plans, employment agreements, strategic alliance agreements, and various certifications[349][351][352]