Note 2 – Liquidity and Management Plans
During the three and nine months ended September 30, 2019, the Company recorded revenue of $40,500 and $154,500, respectively, and during the three and nine months ended September 30, 2018, the Company recorded revenue of $228,000 and $458,773, respectively. During the three and nine months ended September 30, 2019, the Company recorded net losses of $8,184,227 and $29,007,691, respectively, and during the three and nine months ended September 30, 2018, the Company recorded net losses of $12,645,291 and $38,387,119, respectively. Net cash used in operating activities was $20,968,817 and $24,398,264 for the nine months ended September 30, 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. Also, the Company expects to receive financing proceeds from an at-market issuance financing facility that was established in October 2019 (see Note 9 – Subsequent Events).
As of September 30, 2019, the Company had cash on hand of $22,800,024. The Company expects that cash on hand as of September 30, 2019, together with anticipated revenues and expected financing, will be sufficient to fund the Company’s operations into the fourth 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 expects to 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 the Company would find acceptable, or at all.
The market for products using the Company’s technology is broad and evolving, but remains 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 approvals, 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.
8
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’s revenue currently consists of services revenue from product development projects and royalty revenue from Dialog.
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. 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.
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 $5,190,056 and $8,442,698 for the three months ended September 30, 2019 and 2018, respectively, and the Company incurred research and development costs of $17,505,751 and $24,804,224 for the nine months ended September 30, 2019 and 2018, respectively.
9
Note 3 – Summary of Significant Accounting Policies, continued
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.
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, 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 or nine months ended September 30, 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 6,876,595 and 6,840,737 for the three months ended September 30, 2019 and 2018, respectively, and 6,876,595 and 6,840,737 for the nine months ended September 30, 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 September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Warrant issued to private investors
|
|
|
4,702,354
|
|
|
|
3,035,688
|
|
|
|
4,702,354
|
|
|
|
3,035,688
|
|
|
Options to purchase common stock
|
|
|
566,753
|
|
|
|
656,494
|
|
|
|
566,753
|
|
|
|
656,494
|
|
|
RSUs
|
|
|
1,607,488
|
|
|
|
2,276,996
|
|
|
|
1,607,488
|
|
|
|
2,276,996
|
|
|
PSUs
|
|
|
-
|
|
|
|
871,559
|
|
|
|
-
|
|
|
|
871,559
|
|
|
Total potentially dilutive securities
|
|
|
6,876,595
|
|
|
|
6,840,737
|
|
|
|
6,876,595
|
|
|
|
6,840,737
|
|
|
10
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 July 2019, the FASB issued ASU No. 2019-07, “Codification Updates to SEC Sections.” ASU 2019-07 updates the SEC portion of the FASB’s codification literature to reflect the changes the SEC made to simplify disclosures. It is effective immediately. The Company adopted ASU 2019-07 and it adoption had no material impact 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, 2019, through the date which the financial statements are issued. See Note 9 – Subsequent Events for the subsequent event disclosed this quarter.
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 was 60 months, with initial monthly base rent of $36,720 and the lease was subject to certain annual escalations as defined in the agreement. 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 expired on September 30, 2019. Effective July 1, 2019 through September 30, 2019, the new monthly rent payment was $48,372.
On February 26, 2015, the Company entered into a sub-lease agreement for space in its San Jose location on the first floor and was amended on August 25, 2015 to include additional space. The sub-lease agreement had a term which expired on June 30, 2019.
On July 1, 2019, the Company signed a new lease agreement for the lease of its office space at its corporate headquarters in San Jose, California for an additional three years. The lease agreement includes space on the first floor of the building that had been previously subleased. Upon expiration of the original lease on September 30, 2019, the new monthly lease payment starting October 1, 2019 is $52,970 and is subject to annual escalations up to a maximum monthly lease payment of $64,941.
On May 31, 2017, the Company renewed a lease agreement for the Company’s space in Costa Mesa, California. The agreement had a term that expired on September 30, 2019 with initial monthly rent of $9,040 and was subject to certain annual escalations as defined in the agreement.
On July 15, 2019, the Company signed a new lease agreement for the lease of office space in Costa Mesa, California for an additional two years. Upon expiration of the original lease on September 30, 2019, the new monthly lease payment starting October 1, 2019 will be $9,773 and is subject to an annual escalation up to a maximum monthly lease payment of $10,200.
11
Note 4 – Commitments and Contingencies, continued
Operating Leases, continued
In 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. The Company anticipates having future total lease payments of $2,429,376 during the period from the fourth quarter of 2019 to the third quarter of 2022. As of September 30, 2019, the company has total operating lease right-of-use assets of $2,244,336, current portion operating lease liabilities of $682,163 and long-term portion of operating lease liabilities of $1,610,319. The weighted average remaining lease term is 2.9 years as of September 30, 2019.
A reconciliation of undiscounted cash flows to lease liabilities recognized as of September 30, 2019 is as follows:
|
|
Amount
|
|
|
|
(unaudited)
|
|
2019 (three months)
|
|
|
189,729
|
|
2020
|
|
|
791,979
|
|
2021
|
|
|
863,199
|
|
2022
|
|
|
584,469
|
|
Total future lease payments
|
|
|
2,429,376
|
|
Present value discount (4% weighted average)
|
|
|
(136,894
|
)
|
Total operating lease liabilities
|
|
$
|
2,292,482
|
|
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 September 30, 2019, the Company accrued $167,740 in expense under the Bonus Plan, which will be paid during the fourth quarter of 2019. During the three months ended September 30, 2018, the Company accrued $445,883 in expense, which was paid during the fourth quarter of 2018. During the nine months ended September 30, 2019 and 2018, the Company incurred $691,928 and $1,205,997 in expense under the Bonus Plan.
12
Note 4 – Commitments and Contingencies, continued
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 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 renews automatically each year after the initial term. The Employment Agreement provides for an annual base salary of $365,000, and Mr. Rizzone is eligible to receive quarterly cash bonuses from the Bonus Plan 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.
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.
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.
13
Note 5 – Stockholders’ Equity, continued
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 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.
Common Stock Outstanding
In August 2019, an aggregate of 38,666 shares of common stock were returned to the Company and retired in connection with the rescission of restricted stock unit agreements.
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 September 30, 2019, 1,697,263 shares of common stock remain available to be issued under the 2013 Equity Incentive Plan.
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 September 30, 2019, 214,057 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 September 30, 2019, 1,431,951 shares of common stock remain available to be issued through equity-based instruments under the 2015 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 the Board or a committee of the Board. 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, 2019, 303,469 shares of common stock remain available to be issued through equity-based instruments under the 2017 Equity Inducement Plan.
14
Note 6 – Stock-Based Compensation, continued
Equity Incentive Plans, continued
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 September 30, 2019, 257,988 shares of common stock remain available to be issued under the ESPP. As of September 30, 2019, employees have contributed $147,809 through payroll withholdings to the ESPP for the current offering period. Shares will be deemed delivered on December 31, 2019 for the current offering period.
Stock Option Activity
The following is a summary of the Company’s stock option activity during the nine months ended September 30, 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
|
|
|
(9,540
|
)
|
|
|
4.23
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at September 30, 2019
|
|
|
566,753
|
|
|
$
|
5.67
|
|
|
|
4.5
|
|
|
$
|
46,320
|
|
Exercisable at January 1, 2019
|
|
|
656,494
|
|
|
$
|
5.57
|
|
|
|
4.6
|
|
|
$
|
252,887
|
|
Vested
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
(80,201
|
)
|
|
|
4.99
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(9,540
|
)
|
|
|
4.23
|
|
|
|
–
|
|
|
|
–
|
|
Exercisable at September 30, 2019
|
|
|
566,753
|
|
|
$
|
5.67
|
|
|
|
4.5
|
|
|
$
|
46,320
|
|
As of September 30, 2019, the unamortized value of options was $0.
Restricted Stock Units (“RSUs”)
During the nine months ended September 30, 2019, the Compensation Committee granted various directors and consultants RSUs covering 288,176 shares of common stock under the 2014 Non-Employee Equity Compensation Plan. The awards vest over terms from one to three years.
During the nine months ended September 30, 2019, the Compensation Committee granted various employees RSUs covering 311,750 shares of common stock under the 2013 Equity Incentive Plan. The awards vest over terms ranging from one to four years.
During the nine months ended September 30, 2019, the Compensation Committee granted employees RSUs covering 40,500 shares of common stock under the 2017 Equity Inducement Plan. The awards vest over four years.
15
Note 6 – Stock Based Compensation, continued
As of September 30, 2019, the unamortized value of the RSUs was $14,201,155. The unamortized amount will be expensed over a weighted average period of 1.8 years. A summary of the activity related to RSUs for the nine months ended September 30, 2019 is presented below:
|
|
Total
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Outstanding at January 1, 2019
|
|
|
2,469,174
|
|
|
$
|
15.07
|
|
RSUs granted
|
|
|
640,426
|
|
|
$
|
5.57
|
|
RSUs forfeited
|
|
|
(598,316
|
)
|
|
$
|
14.38
|
|
RSUs vested
|
|
|
(903,796
|
)
|
|
$
|
14.01
|
|
Outstanding at September 30, 2019
|
|
|
1,607,488
|
|
|
$
|
12.14
|
|
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 $207,206 for the three months ended September 30, 2019 and 2018, respectively, and $0 and $614,862 for the nine months ended September 30, 2019 and 2018, respectively.
At September 30, 2019, all PSUs had either vested or expired and were no longer outstanding.
Employee Stock Purchase Plan (“ESPP”)
The recently completed offering period under the ESPP was January 1, 2019 through 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 $2.05 and $9.72 for the nine months ended September 30, 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 $62,055 and $67,174 for the three months ended September 30, 2019 and 2018, respectively, and $272,629 and $474,920 for the nine months ended September 30, 2019 and 2018, respectively.
The Company estimated the fair value of ESPP purchase options granted during the nine months ended September 30, 2019 and 2018 using the Black-Scholes option pricing model. The fair values of stock options granted were estimated using the following assumptions:
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|
Nine Months Ended
September 30, 2019
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|
|
Nine Months Ended
September 30, 2018
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|
Stock price
|
|
$4.27 - $5.79
|
|
|
$14.48 - $22.34
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
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|
83% - 96%
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|
|
72% - 177%
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|
Risk-free interest rate
|
|
2.10% - 2.51%
|
|
|
1.61% - 2.14%
|
|
Expected life
|
|
6 months
|
|
|
6 months
|
|
16
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, 2019 and 2018:
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|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
RSUs
|
|
|
2,037,620
|
|
|
$
|
3,578,276
|
|
|
|
7,796,371
|
|
|
$
|
11,714,962
|
|
|
PSUs
|
|
|
–
|
|
|
|
207,206
|
|
|
|
–
|
|
|
|
614,862
|
|
|
ESPP
|
|
|
62,055
|
|
|
|
67,174
|
|
|
|
272,629
|
|
|
|
474,920
|
|
|
Total
|
|
$
|
2,099,675
|
|
|
$
|
3,852,656
|
|
|
$
|
8,069,000
|
|
|
$
|
12,804,744
|
|
|
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,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Research and development
|
|
$
|
1,154,680
|
|
|
$
|
2,051,986
|
|
|
$
|
4,172,458
|
|
|
$
|
7,594,209
|
|
|
Sales and marketing
|
|
|
390,192
|
|
|
|
352,941
|
|
|
|
1,111,185
|
|
|
|
1,022,832
|
|
|
General and administrative
|
|
|
554,803
|
|
|
|
1,447,729
|
|
|
|
2,785,357
|
|
|
|
4,187,703
|
|
|
Total
|
|
$
|
2,099,675
|
|
|
$
|
3,852,656
|
|
|
$
|
8,069,000
|
|
|
$
|
12,804,744
|
|
|
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 September 30, 2019, Dialog owns approximately 5.6% of the Company’s outstanding common shares and could potentially own approximately 9.8% of the Company’s outstanding common shares if it exercised all of its warrants for common shares. The Company did not pay Dialog for chip development costs for the three or nine months ended September 30, 2019. For the three and nine months ended September 30, 2018, the Company paid $0 and $43,700, respectively, to Dialog for chip development costs incurred, which is recorded under research and development expense. The Company recorded $0 and $7,100 in revenue pursuant to the Strategic Alliance Agreement for the three and nine months ended September 30, 2019, respectively, and $0 and $5,773 in revenue pursuant to the Strategic Alliance Agreement for the three and nine months ended September 30, 2018, respectively.
Note 8 – Customer Concentrations
Three customers accounted for 100% of the Company’s revenue for the three months ended September 30, 2019 and one customer accounted for approximately 99% of the Company’s revenue for the three months ended September 30, 2018. Three customers accounted for approximately 55% of the Company’s revenue for the nine months ended September 30, 2019 and one customer accounted for approximately 98% of the Company’s revenue for the nine months ended September 30, 2018. Five customers accounted for 100% of the accounts receivable balance as of September 30, 2019. Three customers accounted for approximately 86% of the accounts receivable balance as of December 31, 2018.
Note 9 – Subsequent Events
On October 11, 2019, the Company entered into an at-market issuance sales agreement pursuant to which the Company may offer and sell up to an aggregate of $20.0 million aggregate gross purchase price in shares of its common stock to the public, from time to time. The offer and sale of the shares will be made pursuant to an existing shelf registration statement filed with the Securities and Exchange Commission.
17
Item 2. Management’s Discussion and Analysis of 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. We have demonstrated that, 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 (“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 and in some use cases mobility charging. To-date, we have developed multiple transmitters and receivers, including prototypes as well as partner production designs. The transmitters vary based on form factor, power specifications and frequencies, while the receivers are designed for applications including hearing aids, fitness bands, smartwatches, smartphones, smartglasses, sensors, industrial applications, keyboards, mice, headsets, earbuds, headphones, Bluetooth tracking tags and more. We are engaged with several consumer electronics (CE) and medical device companies that are in the pre-production or initial production stages of development. In 2019, our first customer product entered the market and we expect additional partner products to be announced before the end of 2019 and into 2020. 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 in late 2020.
18
When the company was founded in 2012, we recognized the need to design and build an enterprise-class network management and control software (“NMS”) system that would be integral to supporting our customers’ rapid and cost-effective deployment of our wire-free charging technology. Our NMS system is robust and flexible 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 range 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 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.
We deliver 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 can elapse before first evaluation and final shipment of the customer’s product. Once 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 and market acceptance grows.
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 September 30, 2019, we had 215 patents granted/allowed applications from the U.S. Patent and Trademark Office. In addition to the inventions covered by these patents, we have also identified specific inventions that we believe are novel and patentable. 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.
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 customers’ 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.
19
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 other revenue source is product development projects.
Results of Operations
Three Months Ended September 30, 2019 and 2018
Revenue. During the three months ended September 30, 2019 and 2018, we recorded revenue of $40,500 and $228,000, 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 September 30, 2019 and 2018 were $8,302,069 and $12,651,961, respectively.
Research and Development Costs. Research and development costs were $5,190,056 and $8,442,698, respectively, for the three months ended September 30, 2019 and 2018. The decrease of $3,252,642 is primarily due to a $1,477,479 decrease in engineering supplies, components and chip development costs due to project timing, a $1,445,751 decrease in compensation, consisting of a $548,445 decrease in payroll costs from a lower headcount within the department and lower bonus payments, as well as an $897,306 decrease in stock-based compensation, primarily from a lower headcount within the department, a $183,098 decrease in consulting and third party services costs, an $85,393 decrease in regulatory testing, and a $47,386 decrease in regulatory legal fees, partially offset by a $198,986 increase in legal fees pertaining to patents and intellectual property.
Sales and Marketing Costs. Sales and marketing costs for the three months ended September 30, 2019 and 2018 were $1,242,105 and $1,546,227, respectively. The decrease of $304,122 is primarily due to a $173,127 decrease in compensation, consisting of a $210,377 decrease in payroll costs from a lower headcount within the department, partially offset by a $37,251 increase in stock-based compensation from new employee grants, a $71,749 decrease in supplies utilized for customer demonstrations, and a $37,346 decrease in graphic design and website maintenance expense.
General and Administrative Expenses. General and administrative expenses include costs for general and corporate functions, including personnel compensation, facility fees, travel, telecommunications, insurance, professional fees, consulting fees, general office expenses, and other overhead. General and administrative costs for the three months ended September 30, 2019 and 2018 were $1,910,408 and $2,891,036, respectively. The decrease of $980,628 is primarily due to a $1,012,910 decrease in compensation, consisting of an $892,926 decrease in stock-based compensation due to certain equity awards reaching full expense amortization during the previous year and a $119,984 decrease in payroll costs from lower bonus payments to executives and a $183,837 decrease in legal and accounting fees, partially offset by a $126,950 increase in recruiting expenses relating to appointment of three new board members.
Interest Income. Interest income for the three months ended September 30, 2019 was $117,842 as compared to interest income of $6,670 for the three months ended September 30, 2018. The increase of $111,172 is due to a more favorable interest rate from a short-term certificate of deposit.
20
Net Loss. As a result of the above, net loss for the three months ended September 30, 2019 was $8,184,227 as compared to $12,645,291 for the three months ended September 30, 2018.
Nine Months Ended September 30, 2019 and 2018
Revenue. During the nine months ended September 30, 2019 and 2018, we recorded revenue of $154,500 and $458,773, 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 nine months ended September 30, 2019 and 2018 were $29,344,266 and $38,405,490, respectively.
Research and Development Costs. Research and development costs were $17,505,751 and $24,804,224, respectively, for the nine months ended September 30, 2019 and 2018. The decrease of $7,298,473 is primarily due to a $4,044,361 decrease in compensation from a lower headcount within the department, consisting of a $3,421,751 decrease in stock-based compensation and a $622,610 decrease in payroll costs, a $1,778,916 decrease in engineering supplies, component and chip development costs due to project timing, a $322,826 decrease in legal patent costs, a $305,924 decrease in regulatory testing costs, a $171,884 decrease in legal costs pertaining to obtaining regulatory approvals and a $134,600 decrease in recruiting fees.
Sales and Marketing Costs. Sales and marketing costs for the nine months ended September 30, 2019 and 2018 were $3,985,467 and $4,620,760, respectively. The decrease of $635,293 is primarily due to a $364,131 decrease in compensation costs, consisting of a $452,484 decrease in payroll costs, partially offset by a $88,353 increase in stock-based compensation, a $75,110 decrease in supplies utilized for customer demonstrations, a $93,646 decrease in promotional and graphic design costs, a $60,000 decrease in recruiting fees, and a $53,007 decrease in travel expense.
General and Administrative Expenses. General and administrative expenses include costs for general and corporate functions, including personnel compensation, facility fees, travel, telecommunications, insurance, professional fees, consulting fees, general office expenses, and other overhead. General and administrative costs for the nine months ended September 30, 2019 and 2018 were $8,007,548 and $9,439,279, respectively. The decrease of $1,431,731 is primarily due to $1,574,888 decrease in compensation, consisting of a $1,402,346 decrease in stock-based compensation due to certain equity awards reaching full expense amortization during the previous year, as well as a $172,542 decrease in payroll costs, primarily from lower bonus payments, and a $89,783 decrease in general office expenses, partially offset by a $146,522 increase in recruiting expenses relating to appointment of three new board members.
Interest Income. Interest income for the nine months ended September 30, 2019 was $336,575 as compared to interest income of $18,371 for the nine months ended September 30, 2018. The increase of $318,204 is due to a more favorable interest rate from a short-term certificate of deposit.
Net Loss. As a result of the above, net loss for the nine months ended September 30, 2019 was $29,007,691 as compared to $38,387,119 for the nine months ended September 30, 2018.
Liquidity and Capital Resources
During the nine months ended September 30, 2019 and 2018, we recorded revenue of $154,500 and $458,773, respectively. We incurred net losses of $29,007,691 and $38,387,119 for the nine months ended September 30, 2019 and 2018, respectively. Net cash used in operating activities was $20,968,817 and $24,398,264 for the nine months ended September 30, 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. Also, the Company expects to receive financing proceeds from an at-market issuance financing facility that was established in October 2019 (see Note 9 – Subsequent Events).
We believe our current cash on hand, together with anticipated revenues and expected financing, will be sufficient to fund our operations into the fourth 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 will likely 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 nine months ended September 30, 2019, cash flows used in operating activities were $20,968,817, consisting of a net loss of $29,007,691, less non-cash expenses aggregating $9,320,848 (principally stock-based compensation of $8,069,000, depreciation and amortization expense of $652,266 and amortization of operating lease right-of-use assets of $599,582), a $556,150 decrease in accounts payable, a $494,768 decrease in operating lease liabilities and a $174,603 decrease in accrued expenses.
21
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, 2019 and 2018, cash flows used in investing activities were $183,935 and $561,793, respectively. The cash used in investing activities for the nine months ended September 30, 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 nine months ended September 30, 2018 primarily consisted of the purchase of software and laboratory equipment.
During the nine months ended September 30, 2019, cash flows provided by financing activities were $23,846,291, which consisted of $23,319,156 in net proceeds from a private offering of shares and warrants pursuant to a shelf registration, $466,398 in proceeds from contributions to the ESPP and $400,103 in proceeds from the exercise of stock options, partially offset by $339,366 in shares withheld for the payment of payroll taxes for the delivery of RSUs and PSUs. 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 exercise of stock options and $550,397 in proceeds from contributions to the ESPP.
Research 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 September 30, 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 nine months ended September 30, 2019.