The following table outlines the minimum
future lease payments for the next five years and thereafter, (in thousands):
On February 27, 2018, the Company entered
into a Lease and Project Agreement (the “Lease and Project Agreement”) and a Company Lease Agreement (the “Company
Lease Agreement” and together with the Lease and Project Agreement, the “Agreements”), each dated as of February
1, 2018, with the Ontario County Industrial Development Agency, a public benefit corporation of the State of New York (the “OCIDA”).
Pursuant to the Agreements, the Company will lease for $1.00 annually to the OCIDA an approximately 9.995 acre parcel of land
in Canandaigua, New York, together with the improvements thereon (including the Company’s New York fabrication facility),
and transfer title to certain related equipment and personal property to the OCIDA (collectively, the “Facility”).
The OCIDA will lease the Facility back to the Company for annual rent payments specified in the Lease and Project Agreement for
the Company’s primary use as research and development, manufacturing, warehouse and professional office space in its business,
and to be subleased, in part, by the Company to various existing tenants. The Company estimates substantial tax savings during
the term of the Agreements, which expire on December 31, 2028. In addition, subject to the terms of the Lease and Project Agreement,
certain purchases and leases of eligible items will be exempt from the imposition of sales and use taxes. Subject to the terms
of the Lease and Project Agreement, the OCIDA has also granted to the Company an exemption from certain mortgage recording taxes
for one or more mortgages securing an aggregate principal amount not to exceed $12.0 million, or such greater amount as approved
by the OCIDA in its sole and absolute discretion. The benefits provided to the Company pursuant to the terms of the Lease and
Project Agreement are subject to claw back over the life of the Agreements upon certain recapture events, including certain events
of default.
On March 23, 2017, we entered into an
Asset Purchase Agreement and a Real Property Purchase Agreement (collectively, the “STC-MEMS Agreements”) with The
Research Foundation for the State University of New York (“RF-SUNY”) and Fuller Road Management Corporation (“FRMC”),
an affiliate of RF-SUNY (collectively, “Sellers”), respectively, to acquire certain specified assets, including STC-MEMS,
a semiconductor wafer-manufacturing and microelectromechanical systems (“MEMS”) operation with associated wafer-manufacturing
tools, and the associated real estate and improvements located in Canandaigua, NY used in the operation of STC-MEMS (the assets
and real estate and improvements referred to together herein as the “STC-MEMS Business”).
In connection with the acquisition of the STC-MEMS Business, the Company agreed to pay to FRMC a penalty,
as set forth below, if the Company sells the property subject to the related Definitive Real Property Purchase Agreement within
three (3) years after the date of such agreement for an amount in excess of $1.75 million, subject to certain enumerated exceptions.
The penalty imposed shall be equivalent to the amount that the sales price of the property exceeds $1.75 million up to the maximum
penalty (“Maximum Penalty”) defined below, (in thousands):
The fair value of the contingent liability was calculated by an independent third-party appraisal firm,
utilizing a present value calculation based on the probability the Company sells the property triggering the contingent penalty
and a discount rate of 14.8%. The 14.8% discount rate was derived from a weighted average cost of capital, modified to include
the effects of the bargain purchase price. As of September 30, 2019, and June 30, 2019, the fair value of the contingent liability
was $0.4 million and $1.2 million, respectively. During the three months ended September 30, 2019 and 2018, the Company marked
the contingent liability to fair value and recorded a loss of $0.02 million and $0.5 million, respectively, relating to the change
in fair value.
From time to time, the Company may become
involved in lawsuits, investigations and claims that arise in the ordinary course of business. The Company believes it has meritorious
defenses against all pending claims and intends to vigorously pursue them. While it is not possible to predict or determine the
outcomes of any pending actions, the Company believes the amount of liability, if any, with respect to such actions, would not
materially affect its financial position, results of operations or cash flows.
Effective November 5, 2018, the employment
by the Company of its former principal financial officer, John T. Kurtzweil (the “Former CFO”), ended, after which
the Former CFO filed for an arbitration hearing pursuant to the terms of his employment agreement and filed a complaint under
the whistleblower provisions of the Sarbanes-Oxley Act of 2002 with the Occupational Safety and Health Administration of
the U.S. Department of Labor. On October 28, 2019, the Company and the Former CFO entered into a Settlement Agreement that
resolved all pending disputes between the parties with no admission of liability by either party. Pursuant to the Settlement Agreement,
following dismissal of the arbitration demand and the complaint filed with the U.S. Department of Labor, the Company will pay
to the Former CFO an undisclosed sum. Additionally, under the Settlement Agreement, all stock options and equity awards issued
to the Former CFO that had not vested as of the end of his employment were acknowledged as forfeited as of such date.
The Company accrues a liability for indirect
tax contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate
the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings,
advice of legal counsel and other relevant information. To the extent new information is obtained and the Company’s views
on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company’s
accrued liabilities would be recorded in the period in which such determination is made.
The Company’s gross unrecognized
indirect tax credits totaled $0.1 million as of September 30, 2019 and $0.1 million as of June 30, 2019 and is recorded on the
Consolidated Balance Sheet as a long-term liability.
Total stock-based compensation expense
related to stock-based awards granted in prior years for consulting services provided by a firm owned by one of the Co-Chairmen
of the Company’s board of directors was $15 thousand and $16 thousand for the three months ended September 30, 2019 and
2018, respectively.
Operating segments are defined as components
of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision
maker, or decision–making group, in deciding how to allocate resources and in assessing performance. The Company’s
chief operating decision maker is its Chief Executive Officer. The Company operates in two segments, Foundry Fabrication Services
which consists of engineering review services and STC-MEMS foundry services, and RF Product which consists of amplifier and filter
product sales, and grant revenue. The Company records all general and administrative costs in the RF Product segment.
The Company evaluates performance of its
operating segments based on revenue and operating profit (loss). Segment information for the three months ended September 30,
2019 and 2018 are as follows (in thousands):
Note 15. Subsequent Events
On November 4, 2019, the Company amended its Certificate
of Incorporation to increase the number of authorized shares of its common stock to 100,000,000, as approved by the Company’s
stockholders at the 2019 annual meeting.
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
References in this report to “Akoustis,”
the “Company,” “we,” “us,” and “our” refer to Akoustis Technologies, Inc. and
its consolidated subsidiary, Akoustis, Inc. each of which are Delaware corporations.
Cautionary Note Regarding Forward-Looking
Statements
This quarterly report on Form 10-Q contains
forward-looking statements that relate to our plans, objectives, estimates, and goals. Any and all statements contained in this
report that are not statements of historical fact may be deemed to be forward-looking statements. Terms such as “may,”
“might,” “would,” “should,” “could,” “project,” “estimate,”
“predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,”
“plan,” “help,” “believe,” “continue,” “intend,” “expect,”
“future,” and terms of similar import (including the negative of any of the foregoing) may be intended to identify
forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking
statements in this report may include, without limitation, statements regarding (i) the plans and objectives of management for
future operations, including plans or objectives relating to the development of commercially viable radio frequency (“RF”)
filters, (ii) projections of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures,
dividends, capital structure or other financial items, (iii) our future financial performance, including any such statement contained
in this management’s discussion and analysis of financial condition or in the results of operations included pursuant to
the rules and regulations of the Securities and Exchange Commission (the “SEC”), (iv) our ability to efficiently utilize
cash and cash equivalents to support our operations for a given period of time, (v) our ability to engage customers while maintaining
ownership of our intellectual property, and (vi) the assumptions underlying or relating to any statement described in (i), (ii)
or (iii) above.
The forward-looking statements are not
meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based
upon our current projections, plans, objectives, beliefs, expectations, estimates, and assumptions and are subject to a number
of risks and uncertainties and other influences, many of which are beyond our control. Actual results and the timing of certain
events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks
and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual
results to differ materially from expected or desired results may include, without limitation, our ability to continue as a going
concern; our inability to obtain adequate financing; our limited operating history; our inability to generate revenues or achieve
profitability; the results of our research and development (“R&D”) activities; our inability to achieve acceptance
of our products in the market; general economic conditions, including upturns and downturns in the industry; our limited number
of patents; failure to obtain, maintain, and enforce our intellectual property rights; our inability to attract and retain qualified
personnel; our reliance on third parties to complete certain processes in connection with the manufacture of our products; product
quality and defects; existing or increased competition; our ability to market and sell our products; our inability to successfully
scale our New York wafer fabrication facility and related operations while maintaining quality control and assurance and avoiding
delays in output; our failure to innovate or adapt to new or emerging technologies; our failure to comply with regulatory requirements;
results of any arbitration or litigation that may arise; stock volatility and illiquidity; our failure to implement our business
plans or strategies; our failure to remediate the material weaknesses in our internal control over financial reporting; and our
failure to maintain the Trusted Foundry accreditation of our New York wafer fabrication facility.
These and other risks and uncertainties,
which are described in more detail in our Annual Report on Form 10-K, filed with the SEC on September 13, 2019 (the “2019
Annual Report”), could cause our actual results to differ materially from those expressed or implied by the forward-looking
statements in this report. Readers are cautioned not to place undue reliance on forward-looking statements because of the risks
and uncertainties related to them. Except as may be required by law, we do not undertake any obligation to update the forward-looking
statements contained in this report to reflect any new information or future events or circumstances or otherwise.
Overview
Akoustis® is an emerging commercial
company focused on developing, designing, and manufacturing innovative RF filter products for the wireless industry, including
for products such as smartphones and tablets, network infrastructure equipment, WiFi Customer Premise Equipment (“CPE”)
and defense applications. Filters are critical in selecting and rejecting signals, and their performance enables differentiation
in the modules defining the RF front-end (“RFFE”). Located between the device’s antenna and its digital backend,
the RF front-end (“RFFE”) is the circuitry that performs the analog signal processing and contains components such
as amplifiers, filters and switches. We have developed a new and proprietary microelectromechanical systems (“MEMS”)
based bulk acoustic wave (“BAW”) technology and a unique manufacturing flow for our filters produced for use in RFFE
modules, called “XBAW”. Our XBAWTM process incorporates optimized high purity piezoelectric materials for
high power, high frequency and wide bandwidth applications.
We believe owning the core resonator device
technology manufacturing facility and intellectual property (“IP”) to produce our designs is the most direct and efficient
means of delivering our solutions to the market. Furthermore, our technology is based upon bulk-mode acoustic resonance, which
we believe is superior to surface-mode resonance for high-band applications that include 4G/LTE, 5G, WiFi, and defense applications.
Although some of our target customers utilize or make the RFFE module, they may lack access to critical ultra-high-band (UHB)
filter technology needed to compete in high frequency applications. We seek to design, manufacture, and market our RF filter products
to mobile phone original equipment manufacturers (“OEMs”), defense OEMs, network infrastructure OEMs, and WiFi CPE
OEM’s to enable broader competition among the front-end module manufacturers. We operate as a “pure-play” RF
filter supplier and align with the front-end module manufacturers who seek to acquire high performance filters to expand their
module business.
We currently build high performance RF filter
circuits, using our first generation XBAWTM wafer process, in our 120,000-square foot wafer-manufacturing facility located
in Canandaigua, New York, which we acquired in June 2017. As of November 01, 2019, our intellectual property (IP) portfolio included
26 patents, including a blocking patent that we have licensed from Cornell University. Additionally, we have 52 pending patent
applications. These patents cover our XBAWTM RF filter technology from the substrate level through the system application
layer. Where possible, we leverage both federal and state level R&D grants to support development and commercialization of
our technology.
We are developing RF filters for 4G/LTE,
5G, WiFi and defense bands using our proprietary resonator device models and product design kits (PDKs). As we qualify our first
RF filter products, we are engaging with target customers to evaluate our filter solutions. Our initial designs target UHB, sub
7 GHz 4G/LTE, 5G, WiFi and defense bands. Since Akoustis owns its core technology and controls access to its intellectual property,
we expect to offer several ways to engage with potential customers. First, we intend to engage with multiple wireless markets,
providing standardized filters that we design and offer as standard catalog components. Second, we expect to deliver unique filters
to customer-supplied specifications, which we will design and fabricate on a customized basis. Finally, we may offer our models
and design kits for our customers to design their own filters utilizing our proprietary technology.
We have earned minimal revenue from operations
since inception, and we have funded our operations primarily with development contracts, RF filter and production orders, government
grants, MEMS foundry and engineering services, and sales of debt and equity securities. We have incurred losses totaling approximately
$76.5 million from inception through September 30, 2019. These losses are primarily the result of material and processing costs
associated with developing and commercializing our technology, as well as personnel costs, professional fees (primarily accounting
and legal), and other general and administrative (“G&A”) expenses. We expect to continue to incur substantial
costs for commercialization of our technology on a continuous basis because our business model involves materials and solid-state
device technology development and engineering of catalog and custom filter design solutions.
Plan of Operation
We plan to commercialize our technology
by designing and manufacturing single-band and multi-band BAW RF filter solutions in our New York wafer fabrication facility.
We expect our filter solutions will address problems (such as loss, bandwidth, power handling, and isolation) created by the growing
number of frequency bands in the RFFE of mobile devices, infrastructure and premise equipment to support 4G/LTE, 5G, and WiFi.
We have prototyped our first single-band low-loss BAW filter designs for 4G/LTE frequency bands, which are dominated by competitive
BAW solutions and historically cannot be addressed with low-band, lower power handling surface acoustic wave (“SAW”)
technology.
To succeed, we must convince mobile phone
OEMs, RFFE module manufacturers, cellular infrastructure OEMs, WiFi CPE OEMs and military customers to use our XBAWTM
filter technology in their systems and modules. However, since there are two dominant BAW filter suppliers in the industry that
have high-band technology, and both utilize such technology as a competitive advantage at the module level, we expect customers
that lack access to high-band filter technology will be open to engage with our pure-play filter company.
We plan to pursue RF filter design and
R&D development agreements and potentially joint ventures with target customers and other strategic partners, although we
cannot guarantee we will be successful in these efforts. These types of arrangements may subsidize technology development costs
and qualification, filter design costs, and offer complementary technology and market intelligence and other avenues to revenue.
However, we intend to retain ownership of our core technology, intellectual property, designs, and related improvements. We expect
to pursue development of catalog designs for multiple customers and to offer such catalog products in multiple sales channels.
As of November 01, 2019, the Company had $21.1
million of cash and cash equivalents to fund our operations, including capital expenditures, R&D, commercialization of our
technology, development of our patent strategy and expansion of our patent portfolio, as well as to provide working capital and
funds for other general corporate purposes. Our anticipated expenses include employee salaries and benefits, compensation paid
to consultants, capital costs for research and other equipment, costs associated with development activities (including travel
and administration), costs associated with the integration and operation of our New York wafer fabrication facility and related
operations, legal expenses, sales and marketing costs, G&A expenses, and other costs associated with an early stage, public
technology company. We anticipate increasing the number of employees; however, this is highly dependent on the nature of our development
efforts, and our success in commercialization. We anticipate adding employees for R&D in both our New York and North Carolina
facilities, as well as G&A functions, to support our efforts. We expect capital expenditures to be between $10 million and
$12 million for the purchase of equipment and software during the next 12 months.
The amounts we actually spend for any specific
purpose may vary significantly and will depend on a number of factors, including, but not limited to, the pace of progress of our
commercialization and development efforts, actual needs with respect to product testing, R&D, market conditions and changes
in or revisions to our marketing strategies.
Commercial development of new technology,
by its nature, is unpredictable. Although we will undertake development efforts with commercially reasonable diligence, there
can be no assurance that our current cash position will be sufficient to enable us to commercialize our technology to the extent
needed to create future sales to sustain operations. If our current cash is insufficient for these purposes, we are unable to
source additional funds on terms acceptable to the Company (or at all), or we experience costs in excess of estimates to continue
our R&D plan, it is possible that we would not have sufficient resources to continue as a going concern and we may be required
to curtail or suspend our operations. Even if we are able to source sufficient funds to continue as a going concern, our technology
may not be accepted, we may never earn revenues sufficient to support our operations, and we may never be profitable.
Recent Developments
On July 16, 2019, the Company announced
a new purchase order from a strategic Defense customer for five new filter solutions in the 2-4 GHz frequency spectrum. In late
July, Akoustis announced its design lock and pre-production of its 5.6GHz WiFi BAW filter solution which complements the Company’s
existing 5.2GHz WiFi filter product.
On August 13, 2019, Akoustis announced
a follow-on order from a tier-1 wireless telecommunications customer to develop two additional 5G Mobile filter solutions. In
early September 2019, The Company announced a first shipment of its pre-production 5.6GHz XBAW filter product to tier-1 WiFi OEM.
On September 19, Akoustis announced its
new n79 RF filter along with shipment of first samples to a new global tier-1 OEM. By the end of September, Akoustis shipped its
first tandem 5.2 GHz/5.6 GHz WiFi BAW filters to an existing tier-1 SoC customer.
Critical Accounting Policies
There have been no material changes to
our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” included in our 2019 Annual Report.
Results of Operations
Three Months Ended September 30,
2019 and 2018
Revenue
The Company recorded revenue of $0.5 million
during the three months ended September 30, 2019 as compared to $0.3 million for the three months ended September 30, 2018. Revenue
recorded during the three months ended September 30, 2019 included $0.2 million of RF filter and amplifier sales, $0.2 million
of foundry services, and $0.1 million of revenue for non-recurring engineering services. The revenue for the three months ended
September 30, 2018 consisted of $0.1 million of revenue for foundry services, $0.1 million of grant revenue and $0.1 million of
RF filter and amplifier sales.
Cost of Revenue
The Company recorded cost of revenue of
$0.3 million in the three months ended September 30, 2019 and $0.1 million in the three months ended September 30, 2018, which
included direct labor, direct materials and facility costs.
Research and Development Expenses
R&D expenses were $5.1 million for
the three months ended September 30, 2019 and were $0.7 million, or 17%, higher than the prior year amount for the same period
of $4.4 million. The period-over-period increase was primarily in the areas of R&D personnel costs, R&D materials and
R&D equipment depreciation. Personnel costs, including stock-based compensation, were $3.2 million compared to $2.8 million
in the prior year period, an increase of $0.4 million or 14%. The higher personnel cost was due to additional R&D headcount
at both the Huntersville, NC location and the NY Facility. Material costs of $0.8 million primarily associated with the NY Facility
were $0.3 million higher than the comparative period due to increased R&D activity.
General and Administrative Expense
General and administrative (“G&A”) expenses include salaries and wages for executive and
administrative staff, stock-based compensation, professional fees, insurance costs and other general costs associated with the
administration of our business. G&A expenses for the three months ended September 30, 2019 were $2.8 million, which is an increase
of $0.3 million compared to the three months ended September 30, 2018. Year over year changes within G&A expenses include an
increase in employee compensation of $0.4 million as well as an increase in professional fees of $0.3 million. Offsetting these
increases was a decrease of $0.4 million, or 37%, in stock-based compensation.
Other (Expense)/Income
Other expenses for the three months ended
September 30, 2019 were $1.3 million, which included debt discount amortization of $0.7 million, interest expense of $0.4 million,
and a change in fair value of our derivative liability of $0.3 million. These expenses were partially offset by interest income
of $0.1 million. Other expenses for the three months ended September 30, 2018 were $0.6 million, consisting of a $0.2 million
change in the fair value of our derivative liability, $0.2 million of debt discount amortization and interest expense of $0.2
million.
Net Loss
The Company recorded a net loss of $9.0 million
for the three months ended September 30, 2019, compared to a net loss of $7.3 million for the three months ended September 30,
2018. The period-over-period incremental loss of $1.7 million, or 23%, was primarily driven by an increase in other expenses of
$0.7 million, increases in R&D related materials of $0.3 million and increases in general expenses, including professional
fees of $0.3 million and compensation increase of $0.4 million.
Liquidity and Capital Resources
Financing Activities
The Company had $22.7 million of cash on hand as of September 30,
2019, which reflects a decrease of $7.4 million compared to $30.2 million as of June 30, 2019. The $7.4 million decrease is primarily
due to $5.8 million in net cash used in operating activities and $1.6 million in capital expenditures for the three months ended
September 30, 2019. The Company estimates that cash on hand will fund its operations, including current capital expense commitments
into the first quarter of fiscal year 2021. As a result, we will need to obtain additional capital through the sale of additional
equity securities, debt and additional grants, or otherwise, to fund operations past that date. There is no assurance that the
Company’s projections and estimates are accurate. Although the Company is actively managing and controlling the Company’s
cash outflows to mitigate these risks, these matters raise substantial doubt about the Company’s ability to continue as a
going concern within one year from the date of this filing.
Balance Sheet and Working Capital
September 30, 2019 compared to June 30, 2019
As of September 30, 2019, the Company had
current assets of $24.4 million made up primarily of cash on hand of $22.6 million. As of June 30, 2019, current assets were $31.7
million comprised primarily of cash on hand of $30.1 million.
Property, Plant and Equipment was $16.0
million as of September 30, 2019 as compared to a balance of $15.2 million as of June 30, 2019. The approximate $0.9 million increase
is primarily due to the purchase of R&D and manufacturing equipment of $1.5 million, offset by depreciation of $0.7 million.
Total assets as of September 30, 2019
and June 30, 2019 were $42.3 million and $47.9 million, respectively.
Current liabilities as of September 30,
2019 and June 30, 2019 were $2.7 million and $3.2 million, respectively.
Long-term liabilities totaled $20.4 million
as of September 30, 2019, compared to $18.8 million as of June 30, 2019. The increase of $1.6 million was due to the increase
in convertible notes, net of debt discount and issuance costs as well as the establishment of a right of use liability upon adoption
of ASC 842 which totaled $0.6 million.
Stockholders’ equity was $19.2 million
as of September 30, 2019, compared to $26.0 million as of June 30, 2019, a decrease of $6.7 million, or 26%. This decrease was
primarily due to the net loss for the three months ended September 30, 2019 of $9.0 million which was partially offset by an increase
in additional paid-in-capital (“APIC”). APIC was $95.6 million as of September 30, 2019 and increased by $2.2 million
from June 30, 2019. The increase was due to stock-based compensation of $1.7 million, vesting of restricted shares of $0.3 million
and common stock issued in payment of convertible note interest of $0.2 million.
Cash Flow Analysis
Operating activities used cash of $5.8
million during the three months ended September 30, 2019 and $4.7 million during the 2018 comparative period. The $1.1 million
period-over-period increase in cash used was attributable to higher operating expenses associated with the ramp up of development
and commercialization activities (primarily R&D personnel and material costs).
Investing activities used cash of $1.6
million for the three months ended September 30, 2019 compared to $1.1 million for the comparative period ended September 30,
2018. The $0.6 million period-over-period increase was primarily due to increased spend on R&D equipment.
Financing activities decreased by $0.1
million during the three months ended September 30, 2019 compared to the same period in 2018 due to a reduction in warrants exercised.