UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 20172018
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number:001-38029
AKOUSTIS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 33-1229046 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| 9805 Northcross Center Court, Suite | |
| Huntersville, NC | 28078 |
| (Address of principal executive offices) | (Postal Code) |
Registrant’s telephone number, including area code: 1-704-997-5735
Securities registered under Section 12(b) of the Act: | |
Title of Each Class: Common Stock, $0.001 par value | Name of each exchange on which registered: The NASDAQ Stock Market LLC (NASDAQ Capital Market) |
Securities registered under Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated Filer |
| Non-Accelerated Filer ☐ | Smaller reporting company ☒ |
| (Do not check if a smaller reporting company) | Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock, par value $0.001 per share (“Common Stock”), held by non-affiliates on December 31, 201629, 2017 was approximately $52,512,000.$106.9 million. For purposes of this computation, shares of Common Stock held by all officers, directors, and beneficial owners of 10% or more of the outstanding Common Stock were excluded because such persons may be deemed to be affiliates of the registrant. Such determination should not be deemed an admission that such persons are, in fact, affiliates of the registrant.
As of September 8, 2017,August 22, 2018, there were 19,084,583 22,222,523shares of Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days after the end of the fiscal year ended June 30, 2018. Portions of such proxy statement are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
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TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K (this “Report”) contains forward-looking statements, including, without limitation, in the sections captioned “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere. Any and all statements contained in this Report that are not statements of historical fact may be deemed 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) a projection 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 a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the SEC,Securities and Exchange Commission (“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 points (i), (ii) or (iii)through (v) 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 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 integrate our STC-MEMS Business (as defined below under “Business —- Recent Developments —- Business Developments”) in our business, 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 maintain effective internal control over financial reporting, and our failure to maintainobtain the Trusted Foundry accreditation of our New York fabrication facility. A description of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this Report appears in the section captioned “Risk Factors” and elsewhere in this Report.
Readers are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them and to the risk factors. 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.
DEFINITIONS
When used in this Report, the terms, “we,” “Akoustis,” the “Company,” “our,” and “us” refers to Akoustis Technologies, Inc., a Delaware corporation, and its wholly owned consolidated subsidiaries,subsidiary, Akoustis, Inc. and Akoustis Manufacturing New York, Inc., each of which arealso a Delaware corporations.corporation.
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Overview
AkoustisAkoustis® is an early stagea development-stage company focused on developing, designing, and manufacturing innovative radio frequency (RF)RF filter products for the mobile wireless device industry. We use a patented fundamentally new piezoelectric resonator technologyindustry, including for products such as smartphones and tablets, cellular infrastructure equipment, and WiFi premise equipment. Located between the device’s antenna and its digital backend, the RF front-end (“RFFE”) is the circuitry that we call BulkONE® inperforms the manufacturing of bulk acoustic wave (BAW)analog signal processing and contains components such as amplifiers, filters and switches. To construct the resonators that are the building blocks for the RF filter, we have developed a new and proprietary MEMS-based BAW technology and unique manufacturing flow, called XBAW. Our XBAW process incorporates high purity piezoelectric materials to explore high power, high frequency and wide bandwidth applications. Filters are critical in selecting and rejecting signals, and their performance enables differentiation in the modules defining the RFFE
We believe owning the core resonator technology and manufacturing our designs is the most direct and efficient means of delivering our solutions to the market. Furthermore, our technology is based upon bulk-mode resonance, which is superior to surface-mode resonance for high-band applications that include 4G/LTE, emerging 5G, WiFi, and military applications. While some of our target customers utilize or make the RFFE module, they may lack access to critical high-band filter technology to compete in high-band applications and other traditional surface-mode solutions where higher power performance is required. We intend to design, manufacture, and market our RF filter products to mobile phone original equipment manufacturers (“OEMs”), military and defense OEM’s, cellular infrastructure OEMs, and WiFi premise equipment customers and to enable broader competition among the front-end module manufacturers. We plan to operate as a “pure-play” RF filter supplier and align with the front-end module manufacturers who seek to acquire high selectivity “RF”performance filters to grow their module business.
We currently build pre-production RF filter circuits, using our first generation XBAW wafer process, in our 122,000-square foot wafer-manufacturing plant located in Canandaigua, New York, which we acquired in June 2017. To date, we have been awarded 17 patents including two blocking patents that we have licensed from Cornell University and the University of California, Santa Barbara and we have over 28 additional patents pending. These patents cover our XBAW process and 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, emerging 5G, military and WiFi bands and the associated proprietary models and design kits required to route signals in a smartphone or other mobile or wearable device, cellular infrastructure and WiFi routers. Filters are a critical component of thedesign our RF front-end (RFFE), and their use has multipliedfilters. As we qualify our first RF filter products, we plan to engage with the launch and licensing oftarget customers to evaluate our filter solution. Our initial designs will target high-band 4G/LTE, emerging 5G, and WiFi frequency bands. TheySince 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 filters that we design and offer as standard catalog components. Second, we expect to deliver filters to customer-supplied specifications, which we will design and fabricate for a specific customer. Finally, we will offer our models and design kits for our customers to design their own filter 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 prototype orders, government grants, MEMS foundry and engineering services, sales of our equity securities, and issuance of debt. We have incurred losses totaling approximately $38.2 million from inception through June 30, 2018. These losses are usedprimarily 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 definecontinue 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 designs.
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, emerging 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. During the second half of calendar 2017 we sampled filter product prototypes to prospective customers that cover LTE, Radar and WiFi applications. In March and April of 2018, we announced our first two commercial products, the AKF-1252 and the AKF-1938, which we are currently sampling with customers involved in the WiFi market and military market, respectively. In May we announced a Non Recurring Engineering (“NRE”) contract and purchase order for a 4G/LTE infrastructure customer that we expect will ship in early calendar 2019. Additionally, in June 2018 we announced a 5.2 GHz BAW WiFi filter for the handset market, the AKF-1652. We expect to begin commercial production for one or more customers in the second half of calendar 2018. As we receive customer evaluations, we will do further iterations on the designs and provide next generation samples for evaluation and characterization.
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To succeed, we must convince mobile phone OEMs, RFFE module manufacturers, cellular infrastructure OEMs, and WiFi premise equipment OEMs to use our XBAW 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.
In June 2018 we completed the qualification of our high purity piezoelectric materials process and our XBAW manufacturing process to support an initial product family of 4G/LTE, emerging 5G mobile, military and WiFi filter solutions. Now that we have stabilized our process technology in a manufacturing environment, we intend to complete a production release of our high-band filter products in the frequency range of frequencies of radio signals that are transmitted (the “passband”)from 2 GHz to 6 GHz. The target frequency bands will be prioritized based upon customer priority. We expect this will require recruiting and simultaneously reject unwanted signals.hiring additional personnel and capital investments.
We plan to use single-crystal piezoelectric materials to develop a new class of BAW RF filters with a fundamental advantage to reduce losses over existing thin filmpursue RF filter technologies.design and R&D development agreements and potentially joint ventures with target customers and other strategic partners, but 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 believeexpect to pursue development of catalog designs for multiple customers and to offer such catalog products in multiple sales channels.
As of June 30, 2018, the Company had $14.8 million of cash and cash equivalents to fund our operations, including 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. These funds are expected to be sufficient to fund our operations into the fourth quarter of fiscal 2019. However, there is no assurance that the Company’s projections and estimates are accurate. 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, our success in commercialization, and our ability to source additional funds. 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 approximately $4.1 million for the purchase of equipment and software during the next 12 months, and we are currently investigating the feasibility of using equipment leases, or government grants to fund all or part of the purchase of the equipment.
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, changes in or revisions to our marketing strategies, and the integration of our New York wafer fabrication facility and related operations into our business.
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 disruptivesufficient to enable us to commercialize our technology to the RFFE market throughextent 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 following expected advantages: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.
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Once our technology is qualified for mass production, we expect to design and sell single-crystal BAW RF filter products using our BulkONE® technology. Our product focus is on innovative single-band filter products for the growing smartphone and RFFE module market, which can be used to make duplexer or multiplexer filter products necessary for the mobile market. These products present the greatest near-term potential for commercialization of our technology. According to a Mobile Experts May 2016 report, the mobile filter market is expected to grow from $8.2 billion in 2017 to greater than $12 billion by 2021.Recent Developments
Recent Developments
Business DevelopmentsNew York Manufacturing Facility
In August 2016, we announced our first customer engagementwhen we entered into multiple non-exclusive agreements with a Chinese tier one RFFE module manufacturer to supply it with our premium RF filter products for next-generation high-band RFFE modules for 4G, emerging 4.5G and 5G mobile - targeting the China and India OEM markets. In December 2016, we announced our second customer engagement, this time for the development of a band-specific, high-frequency (above 3.5 GHz) BAW RF filter for a non-mobile commercial application with a well-established OEM, specializing in non-mobile defense systems, with annual revenues of more than $1 billion. In May 2017, we announced our third customer engagement, this time for the development of high-performance BAW duplexers for non-mobile communication systems with a multi-billion dollar U.S. Fortune 500 company that provides systems, products and solutions to government and commercial customers worldwide.
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)(“MEMS”) operation with associated wafer-manufacturing tools, and the associated real estate and improvements located in Canandaigua, New York used in the operation of STC-MEMS (the assets and real estate and improvements referred to together herein as the “STC-MEMS Business”). Pursuant to the STC-MEMS Agreements, the Company also agreed to assume post acquisition date substantially all of the ongoing obligations of the STC-MEMS Business incurred in the ordinary course of business.
We completed the acquisition of the STC-MEMS Business through our wholly-owned subsidiary, Akoustis Manufacturing New York, Inc., a Delaware corporation formed in connection with the acquisition, on June 26, 2017 for an aggregate purchase price of $2.8 million in cash. The Company recorded net assets acquired of $6.3 million for purchase consideration of $4.6 million (includes $2.85 million of cash paid at closing plus $1.7m$1.7 million real estate contingent liability), which resulted in the recording of a bargain purchase gain of $1.7 million. The Company reviewed what factors might contribute to a bargain purchase to determine if it was reasonable for a bargain purchase to occur. We determined the factors that contributed to the bargain purchase price were:
Based upon these factors, the Company concluded that the occurrence of a bargain purchase was reasonable.
The STC-MEMs acquisition allows the Company to internalize manufacturing, increase capacity and control its wafer supply chain for single crystal BAWits XBAW based RF filters. We have nowIn January 2018, we successfully transferred our R&D resonator filter process flow into the facility, and we plan to utilize the facility to optimize our BulkONE®XBAW technology and to consolidateconsolidated all aspects of wafer manufacturing for our disruptive and patented high band BAW RF filters targeting the multi-billion dollar mobile and other wireless markets. This plannedOur consolidation of the Company’s supply chain into the STC-MEMS Business started on June 26, 2017 and is expected to shorten time-to-market for our RF products, greatly enhancing our ability to service customers upon completion of development and design specifications. Furthermore, we believe that shorter time-to-market cycles provide us with the opportunity to increase the number of our potential customers.
On February 27, 2018, we entered into a Lease and Project Agreement and a Company Lease Agreement with the Ontario County Industrial Development Agency (the “OCIDA”), pursuant to which we will lease for $1.00 annually to the OCIDA a portion of the real property, including the improvements thereon, acquired in connection with the purchase of the STS MEMS Business and the OCIDA will lease such real property and improvements back to us for annual rent payments specified in such agreements. See Note 12.
Business Developments
In August 2017, we announced our first shipment of premium high-band BAW RF filter prototypes manufactured using our patented single-crystal BulkONE® technology to the aforementioneda Chinese tier one customer. The shipment included high performance, LTE-TDD Band 41, 2.6 GHz BAW RF filters that we believe will satisfyaddress the challenging filter requirements in the high growth 4G LTE mobile market in China. Shortly thereafter, we announced our first 3.5GHz3.8GHz RF filter shipments to our second customer for a key Radar application.
In March and April of 2018, we announced our first two commercial products, the AKF-1252 and the AKF-1938, which we are currently sampling with customers involved in the WiFi market and military radar market, respectively. In May we announced an NRE contract and purchase order for a 4G/LTE infrastructure customer that we expect will ship in early calendar 2019. Additionally, in June 2018 we announced a 5.2 GHz BAW WiFi filter for the handset market, the AKF-1652. We expect to begin commercial production for one or multiple markets in the second half of calendar 2018. As we receive customer evaluations, we will do further iterations on the designs and provide next generation samples for evaluation and characterization.
In June 2018 we completed the qualification of our XBAW RF filter wafer manufacturing process to support an initial product family of 4G/LTE, 5G mobile, military and WiFi filter solutions. Now that we have stabilized our process technology in a manufacturing environment, we intend to complete a production release of our high-band filter products in the frequency range from 2 GHz to 6 GHz.
Organizational Developments
On August 11, 2016, we changed our fiscal year from a fiscal year ending on March 31 of each year to one ending on June 30 of each year, effective for the fiscal year ended June 30, 2017. On October 31, 2016, we filed a transition report on Form 10-K for the transition period from April 1, 2016 to June 30, 2016.
Following stockholder approval at our 2016 annual stockholders’ meeting, we changed our state of incorporation from the State of Nevada to the State of Delaware on December 15, 2016.
On February 22, 2018, Akoustis Manufacturing New York, Inc. was merged into Akoustis, Inc., with Akoustis, Inc. as the surviving entity.
Financing Developments
On May 14, 2018 the Company completed the offering of $15.0 million principal amount of the Company’s 6.5% Convertible Senior Secured Notes due 2023. The net proceeds of the offering after payment of offering costs were approximately $13.1 million. The notes will mature on May 31, 2023, unless earlier converted, redeemed or repurchased. Interest on the notes accrues at the rate of 6.5% per year and is payable at the Company’s option quarterly in cash and/or freely tradable shares of the Company’s common stock, subject to certain limitations. The notes may be converted into common stock at the option of the holder at any time prior to maturity at an initial conversion price of $6.55 per share, subject to adjustment under certain circumstances. If the holder elects to convert the notes at any time on or after the date that is one year after the last date of original issuance of the notes and prior to May 31, 2021, the holder will also receive a make-whole payment equal to the remaining scheduled interest payments that would have been made on the notes converted had such notes remained outstanding through May 31, 2021 (the “put date”). At the Company’s option, make-whole payments may be paid in cash and/or freely tradable shares of the Company’s common stock.
Glossary
The following is a glossary of technical terms used herein:
| ● | Acoustic wave | |
| ● | ||
| ● | ||
| Acoustic wave filter |
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| ● | Band, channel or frequency band | |
| ● | Bulk acoustic wave (BAW) | |
| ● | Digital baseband | |
| ● | Duplexer | |
| ● | Filter |
| ● | Group III element nitrides | |
| ● | Insertion Loss |
| ● | ||
| Lossy |
| ● | Metrology |
| ● | Monolithic topology | |
| ● | Power Amplifier Duplexer (PAD) | |
| ● | Piezoelectric materials |
| ● | Quality factor, or Q | |
| ● | Resonator | |
| ● | RF | |
| ● | RF front-end (RFFE) | |
| ● | RF spectrum |
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| ● | Surface acoustic wave (SAW) | |
| ● | TDD LTE |
| ● | Tier one |
| ● | Tier two |
| ● | Trusted Foundry |
| ● | Wafer |
Our Technology
Current RF filters utilize a technology that is limited by the material properties of the base filter component. Existing BAW filters use an “acoustic wave ladder” that is based on a monolithic topology approach using lossy polycrystalline materials. By contrast, our BulkONE®XBAW technology uses a single-crystal material,high purity materials, which provides up to 30% higher piezoelectric properties, compared to conventional polycrystalline materials used in the industry today. We have fabricated R&D resonators that demonstrate the feasibility of our approach and believe our technology will yield a new generation of filter products.
BulkONE®XBAW technology consists of novel single-crystalhigh purity piezoelectric materials, which are fabricated into bulk-mode, acoustic wave resonators and RF filters. Our patented piezoelectric materials contain high-purity Group III element nitride materials and possess a unique signature, which can be detected by conventional material metrology tools. We utilize analytical modeling techniques to aid in the design of our materials, and our raw material specifications are typically outsourced to a third party for manufacturing. Once our materials are ready for processing, we supply our NY fabrication facility raw materials, a mask design file, and a unique process sequence in order to fabricate our resonators and filters. Our wafer process flow is compatible with wafer level packaging (WLP) that allows for low profile, cost effective filters to be produced.
Challenges Facing the Mobile Device Industry
Rising consumer demand for always-on wireless broadband connectivity is creating an unprecedented need for high performance RFFE for mobile devices. Mobile devices such as smartphones and tablets are quickly becoming the primary means of accessing the Internet, thereby driving the Internet of Things (IoT). The rapid growth in mobile data traffic is testing the limits of existing wireless bandwidth. Carriers and regulators have responded by opening new spectrums of RF frequencies, driving up the number of frequency bands in mobile devices. This substantial increase in frequency bands has created a demand for more filters, as well as a demand for filters with higher selectivity. The global transition to LTE and adoption of LTE-Advanced with more sophisticated carrier aggregation and multiple-input, multiple-output (MIMO) techniques will continue to push the requirements for increased supply of high performance filters. Furthermore, the introduction of 5G mobile technologies and their associated frequencies over the next several years will create an even greater need for high-performance, high-frequency filters as the bands being auctioned have primarily been in the 3-6 GHz range, well above current networks.
Furthermore, theThe new spectrum introduced by 4G/LTE and emerging 5G is driving spectrum licensing at higher frequencies than previous 3G smartphone models. For example, new TDD LTE frequencies allocated for 4G wireless cover frequencies nearly twice as high as those covered in previous generation phones. As a result, the demand for filters represents the single largest growth opportunity in the RFFE industry, according to a Mobile Experts May 20162017 report. For traditional “low band” frequencies, SAW filters have been the primary choice, while high band solutions have utilized BAW filters due to their performance and yield. While there are multiple sources of supply for SAW technology, the source of supply for BAW filters is more limited and essentially dominated by two manufacturers worldwide. See “Competition” below.
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In addition, signal loss of current generation acoustic wave filters is excessively high, and up to half of the transmit power is wasted as heat, which ultimately constrains battery life. Another challenge is that the allocated spectrum for mobile communication bands requires high bandwidth RF filters, which, in turn, requires wide bandwidth core resonator technology. In addition, filters with inferior selectivity either reduce the available operating bands the mobile device can support or increase the noise in the operating bands. Each of these problems negatively impacts the end-user’s experience when using the mobile device.
The RFFE must meet growing data demands while reducing cost and improving battery life. Our solution involves a new approach to RFFE component manufacturing, enabled by BulkONE®XBAW technology. We expect our technology to produce filters that will reduce the overall system cost and improve performance of the RFFE.
Our Solutions
Our immediate focus is on the commercialization of wide bandwidth RF filters operating in the high frequency portion ofspectrum known as the RFFE (called high band).sub 6 GHz bands. Using our BulkONE®XBAW technology, we believe these filters enable new PAD module or RFFE competition for high band modules as well as performance-driven low band applications. Initially, we expect to target select strategic RFFE market leaders as well as tier two mobile phone original equipment manufacturers (“OEMs”) and/or RFFE module suppliers. Longer term, our focus will be to expand our market share by engaging with multiple mobile phone OEMs and RFFE module manufacturers. We have transitioned our technology to our Canandaigua, NY facility and continue to focus on the commercialization of our filters using our BulkONE®XBAW technology. This will be the first in a series of R&D activities that will set the foundation for filter products that we believe can disrupt the high band filter market. We will develop a series of filter designs to be used in the manufacturing of duplexers or more complex multiplexers targeting the 4G/LTE, and emerging 5G, military and WiFi frequency bands. We believe our filter designs will create an alternative for, and replace, filters currently manufactured using materials with fundamentally inferior performance. Figure 1 below illustrates characterization plots that represent the high power, high bandwidth and high frequency capability of our essential single crystal materials.
Figure 1-Characteristics of our essentially single crystal materials used to fabricate our BAW RF filters.
Single-Band Designs for Duplexers and Multiplexers
SAW filters have been preferred in modern RFFE because of their high performance, small size and low cost. However, traditional SAW ladder designs do not perform well in high frequency bands or bands with closely spaced receive and transmit channels, typical of many new bands. Therefore, BAW filters are needed for these bands. We have demonstrated in a development environment our NY wafer fab an ability to fabricate BAW resonators, the building block of BAW filters, that are more efficient than existing available BAW resonators, andresonators. Furthermore, we believe the improved efficiency will reduce the total cost of RFFE as well as reduce the battery demand for mobile devices. Additionally, we believe that our BulkONE® filtersXBAW technology will allow for a single manufacturing method that will support all of the BAW filter band range and a significant portion of the SAW band range. Figure 2 below illustrates what we believe will be the frequency range of our BulkONE®XBAW technology.
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Figure 2- The potential range of our technology
Pure-Play Filter Provider Enables New Module Competition
Given the high sound velocity in our piezoelectric materials, our technology allows for a wide range of frequency coverage, and we plan to supply filters that will support 4G/LTE, emerging 5G, military and WiFi bands. We have successfully demonstrated resonators that will support the design and fabrication of 4G/LTE filters, WiFi filters and our current focus is on completingmilitary radar filters, with frequencies adjacent to the emerging 5G mobile auctions. We completed the development required to transition this single-crystal BAWour XBAW technology to high volume manufacturing.manufacturing in June 2018. We will be a pure-play filter supplier that will address the increasing RF complexity placed on RFFE manufacturers supporting 4G/LTE and WiFi. Figure 3 illustrates the historical growth in RF complexity.
Figure 3- Increase in Filter content in Mobile Phone Front End Modules (FEMs) from 2015 - 2021 (Source: EricssonMobile Experts 2016)
Commercialization
Our immediate focus is on the commercialization of wide bandwidth RF filters to address the RFFE with innovative single-band designs using our BulkONE® high band spectrumXBAW sub 6 GHz RF filter technology. We are currently developing our first commercial single-band filterfilters through our STC-MEMS Business wafer fabrication facility. We are focused on developing fixed-band filters because we believe these designs present the greatest near-term potential for commercialization of our technology, and that once demonstrated, the STC-MEMS facility can be more efficiently readied for production compared to alternative technologies.
Our technology development plan containsprocess consists of the following milestones:five phases:
| 2. | Alpha – Develop stable recipe (Process freeze) with limited production development |
| 3. | Beta – Complete technology qualification (Process qualification) in factory to enable product design |
| 4. | Pre-Production – Demonstrate lead product production capabilities, release final design tools |
| 5. | Production – Continual improvement of process and |
In March 2018, we announced the completion of the alpha-phase for our first generation XBAW process technology called XB1. In July 2018 we announced the completion of the beta-phase for both the XB1 and our single-crystal materials process. This shortens the development cycle time for new catalog and custom components as each new product will start in the pre-production phase and will not require end-to-end qualification.
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Milestones 1, 2 and 3 are complete. We continue to make progress on Milestones 4 and 5. We expect to generate revenues from the sale of our filters in the first half of the 2018 calendar year, after completion of Milestones 4 and 5.
Research and Development
Since inception, the Company’s focus has been on developing an innovative mobile-wireless filter technology with a compelling value proposition to our potential customers and a significant and noticeable impact to the end user. Whereas today’s polycrystalline material (used to manufacture RF resonators and filters) is sputtered on a metal-coated carrier, our patented BulkONE®XBAW technology employs high quality, single-crystal resonatorand near single-crystal piezoelectric films in our resonators, which are used as the enabler to create high performance BAW RF filters. This single-crystal material isOur high purity piezoelectric materials are a key differentiator when compared to the incumbent amorphous thin-film technologies because it increases the acoustic velocity, and the electromechanical coupling coefficient in the resonator which results in higherand high power performance. These technology features allow Akoustis to engineer RF filter efficiencies and lower power consumption, leading to simplified RFFEs, longer battery life, reduced tissue heating, and ultimately lower manufacturing costs.solutions for a broad spectrum for multiple end markets. Research and development expense totaled $ 4,425,778$13,266,975 for the year ended June 30, 20172018 and $1,758,701$5,013,260 for the year ended June 30, 2016.2017. These R&D activities focused on single-crystal materialhigh purity piezoelectric materials development and resonator demonstration. Current R&D investments include single-crystal materials advancement, technology transfer to our manufacturing partner and resonator development, RF filter design and filter design.high yield wafer manufacturing.
As a result of our efforts, we have developed and recently published a measured filter designed for 3.5GHz to 3.9GHz applications.introduced several new filters which are currently sampling with multiple customers across multiple markets. Our focus is nowremains on improving the electromechanical coupling and quality factor of our resonator technology and the performance of our fabricated filters through design improvements and process optimization experiments.
In addition, we are developing technology for filters applications at frequencies greater than 5GHz. The performance of early work on resonators resonating at 5.798GHz was presented atWe announced our first filter in March, the AKF-1252, a technical conference showing an electromechanical coupling coefficient (k2eff ) of 6.5%, obtained after de-embedding resonator characteristics from measured data.
Figure 4- Akoustis’ single crystal undoped AIN piezoelectric technology based 3.7GHz5.2 GHz filter performance. The plot shows measured narrow band S21 and S11 for the fabricated 3.7GHzWiFi premise equipment market. The AKF-1252 is a wideband filter showing minimumfor the U-NII-1&2A bands with typical insertion loss of approximately 2.dB.
less than 1dB, high rejection and a high power rating in an ultra-small footprint module. Our product is the first BAW RF filter targeting the 5.2 GHz WiFi band and is 23 times smaller than the current technology in use today.
Following the AKF-1252, we also announced the AKF-1652, a 5.2 GHz filter for the WiFi device market, with lower insertion loss. We are currently working on the development of the small footprint, flip-chip packaging that will be required before the expected uptake of 5.2 GHz WiFi in cellular handsets and other devices. We believe that handset makers are still a year away from including tri-band WiFi in smartphones, tablets and other mobile devices, and expect to complete the packaging development ahead of the market.
In April 2018 we announced the AKF-1938 filter in the 3.8 GHz band, adjacent to emerging 5G mobile frequency auctions. In early July, we announced that we have signed our first customer, a large military OEM with annual revenue of over $1 billion. We expect to see revenue from this product begin in the second quarter of fiscal 2019, with follow-on orders expected in calendar 2019 and beyond.
We have also announced a 4G LTE infrastructure win for two adjacent filters, with engineering revenue attached and follow on production filter revenue expected upon completion of the design. Moving forward, we expect to deliver new catalog components based on the frequencies in highest demand from our customers and will announce additional products as we continue to benefit from our research and development efforts.
Raw Materials
Within its internal manufacturing operation, Akoustis sources raw materials, process gases, metals and other miscellaneous supplies to fabricate its BAW RF filter circuits. Materials range from substrates (used to deposit key piezoelectric materials) to standard dielectric-based laminates (used for packaging of the RF filter circuits). The Company sources at least two types of substrate materials for its BAW process and the Company haswe have more than one supplier for eachone material type.and a single source for the other. Multiple process gases are used for material synthesis, process etching and wafer treatment. While there is more than one supplier for most process gases, the purity levels of such gases may change by source. Hence, either purification or process requalification may be required, as purchasepurchasing from a second source is required. Akoustis sources various high purity metals for electrode formation and interconnect layers for its RF circuits. Such metals are available in various purity levels and are available from more than one supplier. Other process handling hardware common to the semiconductor industry is available in abundance from multiple suppliers. Consistent with other semiconductor manufacturers, the Company may have to work with all its suppliers to ensure adequate supply of raw materials, process gases and metals as the Company ramps from R&D into high volume manufacturing.
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Intellectual Property
We rely on a combination of intellectual property rights, including patents and trade secrets, along with copyrights, trademarks and contractual obligations and restrictions to protect our core technology and business.
In the United States and internationally we have fourteen (14) patents, of whichin addition to twenty eight (28) pending patent applications and three (3) patents that are the subject to a license agreement requiring further negotiation, in addition to sixteen (16) pending patent applications.negotiation. Our intellectual property relates directly to our single-crystal BAWXBAW technology, including materials and device designs, methods of manufacture, integrated circuit designs, wafer packaging, and point of use (to include mobile applications). Our patents expire between 2031 and 2033.2035. We intend to continue to innovate and expand our patent portfolio, and when appropriate, we will look to purchase license(s) that grant access to additional intellectual property that enables, enhances or further expands our technical capabilities and/or product.
We believe that it is likely that Akoustis will have competitive advantages from rights granted under our patent applications. Some applications, however, may not result in the issuance of any patents. In addition, any future patent may be opposed, contested, circumvented or designed around by a third party or found to be unenforceable or invalidated. Others may develop technologies that are similar or superior to our proprietary technologies, duplicate our proprietary technologies or design around patents owned or licensed by us.
We generally control access to, and use of, our confidential information through the use of internal and external controls, including contractual protections with employees, contractors and customers. We rely in part on the United States and international copyright laws to protect our intellectual property. All employees and consultants are required to execute confidentiality and intellectual property assignment agreements in connection with their employment and consulting relationships with us. We also require them to agree to disclose and assign to us all inventions conceived or made in connection with the employment or consulting relationship.
Akoustis and BulkONE are trademarks of Akoustis, Inc.
Competition
The RF filter market is controlled by a relatively small number of RF component suppliers. These companies include, among others, Broadcom, (previously known as Avago Technologies Ltd.), Murata Manufacturing Co., Ltd., Qorvo, Inc., Skyworks Solutions Inc., Taiyo Yuden, and TDK Epcos.Qualcomm. Broadcom and Qorvo, Inc. dominate the high band BAW filter market, controlling a significant portion of the customer base and are increasing capacity to meet the growing RF filter demand of the 4G/LTE market.
Upon completion of our product development, we will compete directly with these companies to secure design slots inside RFFE modules - targeting companies that procure filters or internally source filters. While many of our competitors have more resources than we have, we believe that our filter designs will be superior in performance, and we will approach prospective customers as a pure-play filter supplier, offering advantages in performance over the full frequency range at competitive costs. Our challenge will be to convince our customers that we have a strong intellectual property position, we will be able to deliver in volume, that we will meet their price targets, and that we can satisfy reliability and other requirements. For a list of other competitive factors, see “Item 1A. Risk Factors —- We are still developing our products, and they may not be accepted in the market.”
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Employees
Employees
We place an emphasis on hiring the best talent at the right time to enable our core technology and business growth. This includes establishing a competitive compensation and benefits package, thereby enhancing our ability to recruit experienced personnel and key technologists. We currently haveAs of June 30, we had a total of 5869 full-time employees plus 56 part-time employees, including 33 full-time employees located in the Canandaigua NY facility and 25 full-time and 5 part-time employees in our North Carolina facility.employees. We will continue to hire specific and targeted positions to further enable our technology and manufacturing capabilities as and when appropriate.
Government Regulations
Our business and products in development are subject to regulation by various federal and state governmental agencies, including the radio frequency emission regulatory activities of the Federal Communications Commission (“FCC”), the consumer protection laws of the Federal Trade Commission, the import/export regulatory activities of the Department of Commerce, the product safety regulatory activities of the Consumer Products Safety Commission, and the environmental regulatory activities of the Environmental Protection Agency.
The rules and regulations of the FCC limit the RF used by, and level of power emitting from, electronic equipment. Our RF filters, as a key element enabling consumer electronic smartphone equipment, are required to comply with these FCC rules and may require certification, verification or registration of our RF filters with the FCC. Certification and verification of new equipment requires testing to ensure the equipment’s compliance with the FCC’s rules. The equipment must be labeled according to the FCC’sFCC���s rules to show compliance with these rules. Testing, processing of the FCC’s equipment certificate or FCC registration and labeling may increase development and production costs and could delay the implementation of our BulkONE®XBAW acoustic wave resonator technology for our RF filters and the launch and commercial productions of our filters into the U.S. market. Electronic equipment permitted or authorized to be used by us through FCC certification or verification procedures must not cause harmful interference to licensed FCC users, and may be subject to RF interference from licensed FCC users. Selling, leasing or importing non-compliant equipment is considered a violation of FCC rules and federal law, and violators may be subject to an enforcement action by the FCC. Any failure to comply with the applicable rules and regulations of the FCC could have an adverse effect on our business, operating results and financial condition by increasing our compliance costs and/or limiting our sales in the United States.
The semiconductor and electronics industries also have been subject to increasing environmental regulations. A number of domestic and foreign jurisdictions seek to restrict the use of various substances, a number of which have been used in our products in development or processes. While we have implemented a compliance program to ensure our product offering meets these regulations, there may be instances where alternative substances will not be available or commercially feasible, or may only be available from a single source, or may be significantly more expensive than their restricted counterparts. Additionally, if we were found to be non-compliant with any such rule or regulation, we could be subject to fines, penalties and/or restrictions imposed by government agencies that could adversely affect our operating results. Our cost to maintain compliance with existing environmental regulations is expected to be nominal based on our structure in which we outsource a majority of our operations to suppliers that are responsible for meeting environmental regulations. We will continue to monitor our quality program and expand as required to maintain compliance and ability to audit our supply chain.
Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, or injunctions. An adverse outcome in any such litigation could require us to pay contractual damages, compensatory damages, punitive damages, attorneys’ fees and costs. These enforcement actions could harm our business, financial condition and results of operations. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, financial condition and results of operations could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees.
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An investment in shares of our Common Stock is highly speculative and involves a high degree of risk. We face a variety of risks that may affect our operations or financial results, and many of those risks are driven by factors that we cannot control or predict. Before investing in our Common Stock, you should carefully consider the following risks, together with the financial and other information contained in this Report. If any of the following risks actually occurs, our business, prospects, financial condition and results of operations could be materially adversely affected. In that case, the trading price of our Common Stock would likely decline and you may lose all or a part of your investment. Only those investors who can bear the risk of loss of their entire investment should invest in our Common Stock.
Prospective investors should consider carefully whether an investment in the Company is suitable for them in light of the information contained in this Report and the financial resources available to them. The risks described below do not purport to be all the risks to which the Company or the Company could be exposed. This section is a summary of the risks that we presently believe are material to the operations of the Company. Additional risks of which we are not presently aware or which we presently deem immaterial may also impair the Company’s business, financial condition or results of operations.
Risks Related to our Business and the Industry in Which We Operate
We have a limited operating history upon which investors can evaluate our business and future prospects.
We are an early stage company that has not yet begun anyfull scale commercial operations. Historically, we were a shell company with no operating history and no assets other than cash. Upon consummation of a merger with Akoustis, Inc. in May 2015, we redirected our business focus towards the development of advanced single-crystal BAW filter products for RFFEs for use in the mobile wireless device industry. Although Akoustis, Inc. since its inception has focused its activity on R&D of high efficiency acoustic wave resonator technology utilizing single-crystal piezoelectric materials, this technology has not yet obtained marketing approval or been verified in commercial manufacturing, and its RF filters have not generated any material level of sales.
Since our expectations of potential customers and future demand for our products are based on estimates of planned operations rather than experience, it is difficult for our management and our investors to accurately forecast and evaluate our future prospects and our revenues. Our proposed operations are therefore subject to all of the risks inherent in light of the expenses, difficulties, complications and delays frequently encountered in connection with the formation of any new business and the development of a product, as well as those risks that are specific to our business in particular. An investment in an early stage company such as ours involves a degree of risk, including the possibility that your entire investment may be lost. The risks include, but are not limited to, our reliance on third parties to complete some processes for the manufacturing of our product, the possibility that we will not be able to develop functional and scalable products, or that although functional and scalable, our products and/or services will not be accepted in the market. To successfully introduce and market our products at a profit, we must establish brand name recognition and competitive advantages for our products. There are no assurances that the Company can successfully address these challenges. If it is unsuccessful, the Company and its business, financial condition and operating results will be materially and adversely affected.
We may not generate revenues or achieve profitability.
We have incurred operating losses since our inception and expect to continue to have negative cash flow from operations. We have only generated minimal revenues from shipment of product while our primary sources of funds have been R&D grants, MEMS foundry services, private placements of our equity, and debt. We have experienced net losses of approximately $15.8$38.2 million for the period from May 12, 2014 (inception) to June 30, 2017.2018. Our future profitability will depend on our ability to create a sustainable business model and generate revenues, which is subject to a number of factors, including our ability to successfully implement our strategies and execute our R&D plan, our ability to implement our improved design and cost reductions into manufacturing of our RF filters, the availability of funding, market acceptance of our products, consumer demand for end products incorporating our products, our ability to compete effectively in a crowded field, our ability to respond effectively to technological advances by timely introducing our new technologies and products, and global economic and political conditions.
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Our future profitability also depends on our expense levels, which are influenced by a number of factors, including the resources we devote to developing and supporting our projects and potential products, the continued progress of our research and development of potential products, our ability to improve R&D efficiencies, license fees or royalties we may be required to pay, and the potential need to acquire licenses to new technology, the availability of intellectual property for licensing or acquisition, or the use of our technology in new markets, which could require us to pay unanticipated license fees and royalties in connection with these licenses.
Our development and commercialization efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues to offset higher expenses. These expenses, among other things, may cause our net income and working capital to decrease. If we fail to generate revenue and manage our expenses, we may never achieve profitability, which would adversely and materially affect our ability to provide a return to our investors.
The industry and the markets in which the Company operates are highly competitive and subject to rapid technological change.
The markets in which we intend to compete are intensely competitive. We will operate primarily in the industry that designs and produces semiconductor components for wireless communications and other wireless devices, which is subject to rapid changes in both product and process technologies based on demand and evolving industry standards. The intended markets for our products are characterized by:
| ● | rapid technological developments and product evolution, | |
| ● | rapid changes in customer requirements, | |
| ● | frequent new product introductions and enhancements, | |
| ● | continuous demand for higher levels of integration, decreased size and decreased power consumption, | |
| ● | short product life cycles with declining prices over the life cycle of the product, and | |
| ● | evolving industry standards. |
The continuous evolutions of these technologies and frequent introduction of new products and enhancements have generally resulted in short product life cycles for wireless semiconductor products, in general, and for RFFEs, in particular. Our R&D activity and resulting products could become obsolete or less competitive sooner than anticipated because of a faster than anticipated change in one or more of the above-noted factors. Therefore, in order for our RF filters to be competitive and achieve market acceptance, we need to keep pace with rapid development of new process technologies, which requires us to:
| ● | respond effectively to technological advances by timely introducing new technologies and products, | |
| ● | successfully implement our strategies and execute our R&D plan in practice, | |
| ● | improve the efficiency of our technology, and | |
| ● | implement our improved design and cost reductions into manufacturing of our RF filters. |
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We are still developing our products, and they may not be accepted in the market.
Although we believe that our BulkONE®XBAW acoustic wave resonator technology that utilizes single-crystal piezoelectric materials will provide material advantages over existing RF filters and are currently developing various methods of integration suitable for implementation of this technology to RF filters, we cannot be certain that our RF filters will be able to achieve or maintain market acceptance. While we have fabricated R&D resonators that demonstrate the feasibility of our BulkONE®XBAW technology, we are still in the process of stabilizing this technology into our NY fabrication facility for manufacturing of our RF filters, and this technology is not verified yet in practice or on a commercial scale. There are also no records that can demonstrate our ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields. In addition to our limited operating history, we will depend on a limited number of manufacturers and customers for a significant portion of our revenue in the future and we cannot guarantee their acceptance of our products. Each of these factors may adversely affect our ability to implement our business strategy and achieve our business goals.
The successful development of our BulkONE®XBAW technology and market acceptance of our RF filters will be highly complex and will depend on the following principal competitive factors, including our ability to:
| ● | comply with industry standards and effectively compete against current technology for producing RF acoustic wave filters, | |
| ● | differentiate our products from offerings of our competitors by delivering RF filters that are higher in quality, reliability and technical performance, | |
| ● | anticipate customer and market requirements, changes in technology and industry standards and timely develop improved technologies that meet high levels of satisfaction of our potential customers, | |
| ● | maintain, grow and manage our internal teams to the extent we increase our operations and develop new segments of our business, | |
| ● | develop and maintain successful collaborative, strategic, and other relationships with manufacturers, customers and contractors, | |
| ● | protect, develop or otherwise obtain adequate intellectual property for our technology and our filters; and |
| ● | obtain strong financial, sales, marketing, technical and other resources necessary to develop, test, manufacture, commercialize and market our filters. |
If we are unsuccessful in accomplishing these objectives, we may not be able to compete successfully against current and potential competitors. As a result, our BulkONE®XBAW technology and our RF filters may not be accepted in the market and we may never attain profitability.
We will face intense competition, which may cause pricing pressures, decreased gross margins and loss of potential market share and may materially and adversely affect our business, financial condition and results of operations.
We will compete with U.S. and international semiconductor manufacturers and mobile semiconductor companies of all sizes in terms of resources and market share, some of whom have significantly greater financial, technical, manufacturing and marketing resources than we do. We expect competition in our markets to intensify as new competitors enter the RF component market, existing competitors merge or form alliances, and new technologies emerge. Our competitors may introduce new solutions and technologies that are superior to our BAW technology, are verified on a commercial scale, and have achieved widespread market acceptance. Certain of our competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products than we can. This implementation may require us to modify the manufacturing process for our filters, design new products to more stringent standards, and redesign some existing products, which may prove difficult for us and result in delays in product deliveries and increased expenses.
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Increased competition could also result in pricing pressures, declining average selling prices for our RF filters, decreased gross margins and loss of potential market share. We will need to make substantial investments to develop these enhancements and technologies, and we cannot assure investors that we will have funds available for these investments or that these enhancements and technologies will be successful. If a competing technology emerges that is, or is perceived to be, superior to our existing technology and we are unable to adapt to these changes and to compete effectively, our market share and financial condition could be materially and adversely affected, and our business, revenue, and results of operations could be harmed.
Changes in general economic conditions, together with other factors, cause significant upturns and downturns in the industry, and our business, therefore, may also experience cyclical fluctuations in the future.
From time to time, changes in general economic conditions, together with other factors, may cause significant upturns and downturns in the semiconductor industry. These fluctuations are due to a number of factors, many of which are beyond our control, including:
| ● | levels of inventory in our end markets, | |
| ● | availability and cost of supply for manufacturing of our RF filters using our design, | |
| ● | changes in end-user demand for the products manufactured with our technology and sold by our prospective customers, |
| ● | exposure to foreign currency exchange rates, import duties and tariffs, |
| ● | industry production capacity levels and fluctuations in industry manufacturing yields, | |
| ● | market acceptance of our future customers’ products that incorporate our RF filters, | |
| ● | the gain or loss of significant customers, | |
| ● | the effects of competitive pricing pressures, including decreases in average selling prices of our RF filters, | |
| ● | new product and technology introductions by competitors, | |
| ● | changes in the mix of products produced and sold, and | |
| ● | intellectual property disputes. |
As a result, the demand for our products can change quickly and in ways we may not anticipate, and our business, therefore, may also experience cyclical fluctuations in future operating results. In addition, future downturns in the electronic systems industry could adversely impact our revenue and harm our business, financial condition and results of operations.
If we are unable to attract and retain qualified personnel to contribute to the development, manufacture and sale of our products, we may not be able to effectively operate our business.
As the source of our technological and product innovations, our key technical personnel represent a significant asset. We believe that our future success is highly dependent on the continued services of our current key officers, employees, and Board members, as well as our ability to attract and retain highly skilled and experienced technical personnel. The loss of their services could have a detrimental effect on our operations. Specifically, the loss of the services of Jeffrey Shealy, our President and Chief Executive Officer, John Kurtzweil, our Chief Financial Officer, David Aichele, our Vice President of Business Development, Richard Ogawa, our Special Legal Advisor, any major change in our Board or management, or our inability to attract, retain and motivate qualified personnel could have a material adverse effect on our ability to operate our business. The competition for management and technical personnel is intense in the wireless semiconductor industry, and therefore, we cannot assure you that we will be able to attract and retain qualified management and other personnel necessary for the design, development, manufacture and sale of our products.
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Product defects could adversely affect the results of our operations and may expose us to product liability claims.
The fabrication of RF filters is a complex and precise process. If we or any of our manufacturers fails to successfully manufacture wafers that conform to our design specifications and the strict regulatory requirements of the FCC, it may result in substantial risk of undetected flaws in components or other materials used by our manufacturers during fabrication of our filters and could lead to product defects and costs to repair or replace these parts or materials. Any such failure would significantly impact our ability to develop and implement our technology and to improve performance of our RF filters. Our inability to comply with such requirements could result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products.
We also could be subject to product liability lawsuits if the wireless devices containing our RF filters cause injury. Recently interest groups have requested that the FCC investigate claims that wireless communications technologies pose health concerns and cause interference with airbags, hearing aids and medical devices. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product or inadequate disclosure of risks related to the use of our product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts.
If we are unable to establish effective marketing and sales capabilities or enter into agreements with third parties to market and sell our RF filters, we may not be able to effectively generate product revenues.
We have limited experience selling, marketing or distributing products and currently have a small internal marketing and sales force. In order toTo launch and commercialize our technology and our RF filters, we must build on a territory-by-territory basis marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so. Therefore, we may choose to collaborate, either globally or on a territory-by-territory basis, with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems. If so, our success will depend, in part, on our ability to enter into and maintain collaborative relationships for such capabilities, such collaborator’s strategic interest in the products under development and such collaborator’s ability to successfully market and sell any such products.
If we are unable to enter into such arrangements when needed on acceptable terms or at all, we may not be able to successfully commercialize our filters. Further, to the extent that we depend on third parties for marketing and distribution, any revenues we receive will depend upon the efforts of such third parties, and there can be no assurance that such efforts will be successful. If we decide in the future to establish an internal sales and marketing team with technical expertise and supporting distribution capabilities to commercialize our RF filters, it could be expensive and time consuming and would require significant attention of our executive officers to manage. We may also not have sufficient resources to allocate to the sales and marketing of our filters. Any failure or delay in the development of sales, marketing and distribution capabilities, either through collaboration with one or more third parties or through internal efforts, would adversely impact the commercialization of any of our products that we obtain approval to market. As a result, our future product revenue would suffer, and we may incur significant additional losses.
Risks Related to Our Intellectual Property
If we fail to obtain, maintain and enforce our intellectual property rights, we may not be able to prevent third parties from using our proprietary technologies.
Our long-term success largely depends on our ability to market technologically competitive products which, in turn, largely depends on our ability to obtain and maintain adequate intellectual property protection and to enforce our proprietary rights without infringing the proprietary rights of third parties. While we rely upon a combination of our patent applications currently pending with the United State Patent and Trademark Office (“USPTO”), our trademarks, copyrights, trade secret protection and confidentiality agreements to protect the intellectual property related to our technologies, there can be no assurance thatthat:
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| ● | our currently pending or future patent applications will result in issued patents, | |
| ● | our limited patent portfolio will provide adequate protection to our core technology, | |
| ● | we will succeed in protecting our technology adequately in all key jurisdictions, |
| ● | we will be able to finalize negotiations to enter into agreements pursuant to which we will license certain patents, or | |
| ● | we can prevent third parties from disclosure or misappropriation of our proprietary information which could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding any competitive advantage we may derive from the proprietary information. |
In addition, we intend to expand our international presence, and effective patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries.
We have a limited number of patent applications, which may not result in issued patents or patents that fully protect our intellectual property.
In the United States and internationally we have sixteen (16)twenty-eight (28) pending patent applications; however, there is no assurance that any of the pending applications or our future patent applications will result in patents being issued, or that any patents that may be issued as a result of existing or future applications will provide meaningful protection or commercial advantage to us.
The process of seeking patent protection in the United States and abroad can be long and expensive. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain at the time of filing that we are the first to file any patent application related to our single-crystal acoustic wave filter technology. In addition, patent applications are often published as part of the patent application process, even if such applications do not issue as patents. When published, such applications will become publicly available, and proprietary information disclosed in the application will become available to others. While at present we are unaware of competing patent applications, competing applications could potentially surface.
Even if all of our pending patent applications are granted and result in registration of our patents, we cannot predict the breadth of claims that may be allowed or enforced, or that the scope of any patent rights could provide a sufficient degree of protection that could permit us to gain or keep our competitive advantage with respect to these products and technologies. For example, we cannot predict:
| ● | the degree and range of protection any patents will afford us against competitors, including whether third parties will find ways to make, use, sell, offer to sell or import competitive products without infringing our patents; | |
| ● | if and when patents will be issued; | |
| ● | if third parties will obtain patents claiming inventions similar to those covered by our patents and patent applications; | |
| ● | if third parties have blocking patents that could be used to prevent us from marketing our own patented products and practicing our own technology; or | |
| ● | whether we will need to initiate litigation or administrative proceedings (e.g. at the USPTO) in connection with patent rights, which may be costly whether we win or lose. |
As a result, the patent applications we own may fail to result in issued patents in the United States. Third parties may challenge the validity, enforceability or scope of any issued patents or patents issued to us in the future, which may result in those patents being narrowed, invalidated or held unenforceable. Even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from developing similar products that do not infringe the claims made in our patents. If the breadth or strength of protection provided by the patents we hold or pursue is threatened, we may not be able to prevent others from offering similar technology and products in the RFFE mobile market and our ability to commercialize our RF filters with technology protected by those patents could be threatened.
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If we fail to obtain issued patents outside of the United States, our ability to prevent misappropriation of our proprietary information or infringement of our intellectual property rights in countries outside of the United States where our filters may be sold in the future may be significantly limited. If we file foreign patent applications related to our pending U.S. patent applications or to our issued patents in the United States, these applications may be contested and fail to result in issued patents outside of the United States or we may be required to narrow our claims. Even if some or all of our patent applications are granted outside of the United States and result in issued patents, effective enforcement of rights granted by these patents in some countries may not be available due to the differences in foreign patent and other laws concerning intellectual property rights, a relatively weak legal regime protecting intellectual property rights in these countries, and because it is difficult, expensive and time-consuming to police unauthorized use of our intellectual property when infringers are overseas. This failure to obtain or maintain adequate protection of our intellectual property rights outside of the United States could have a materially adverse effect on our business, results of operations and financial conditions.
We may be involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our patents or the patents of our potential licensors. To attempt to stop infringement or unauthorized use, we may need to file infringement claims, which can be expensive and time consuming and distract management.
If we pursue any infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable or may refuse to stop the other party from using the relevant technology on the grounds that our patents do not cover the technology in question. Additionally, any enforcement of our patents may provoke third parties to assert counterclaims against us. Some of our current and potential competitors have the ability to dedicate substantially greater resources to enforcing their intellectual property rights than we have. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, which could reduce the likelihood of success of, or the amount of damages that could be awarded resulting from, any infringement proceeding we pursue in any such jurisdiction. An adverse result in any infringement litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable, or interpreted narrowly and could put our patent applications at risk of not issuing, which could limit the ability of our filters to compete in those jurisdictions.
Interference proceedings could be provoked by third parties or brought by the USPTO to determine the priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to use it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms, or at all.
We need to protect our trademark rights and disclosure of our trade secrets to prevent competitors from taking advantage of our goodwill.
We believe that the protection of our trademark rights is an important factor in product recognition, protecting our brand, maintaining goodwill, and maintaining or increasing market share. We currently have two trademarks that we have filed to register with the USPTO —- the Akoustis and BulkONE®BulkONE marks —- and we may expend substantial cost and effort in an attempt to register new trademarks and maintain and enforce our trademark rights. If we do not adequately protect our rights in our trademarks from infringement, any goodwill that we have developed in those trademarks could be lost or impaired.
Third parties may claim that the sale or promotion of our products, when and if we have any, may infringe on the trademark rights of others. Trademark infringement problems occur frequently in connection with the sale and marketing of products in the RFFE mobile industry. If we become involved in any dispute regarding our trademark rights, regardless of whether we prevail, we could be required to engage in costly, distracting and time-consuming litigation that could harm our business. If the trademarks we use are found to infringe upon the trademark of another company, we could be liable for damages and be forced to stop using those trademarks, and as result, we could lose all the goodwill that has been developed in those trademarks.
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In addition to the protection afforded by patents and trademarks, we seek to rely on copyright, trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our processes that involve proprietary know-how, information or technology that is not covered by patents. For Akoustis, this includes chip layouts, circuit designs, resonator layouts and implementation, and membrane definition. Although we require all of our employees and certain consultants and advisors to assign inventions to us, and all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, our trade secrets and other proprietary information may be disclosed, or competitors may otherwise gain access to such information or independently develop substantially equivalent information. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or maintain the competitive advantage that we believe is provided by such intellectual property, which would weaken our competitive market position, and materially adversely affect our business and operational results.
Development of certain technologies with our manufacturers may result in restrictions on jointly-developed intellectual property.
In order to maintain and expand our strategic relationship with manufacturers of our filters, we may, from time to time, develop certain technologies jointly with these manufacturers and file for further intellectual property protection and/or seek to commercialize such technologies. We may enter into joint development agreements with manufacturers to provide for joint development works and joint intellectual property rights by us and by such manufacturer. Such agreements may restrict our commercial use of such intellectual property, or may require written consent from, or a separate agreement with, that manufacturer. In other cases, we may not have any rights to use intellectual property solely developed and owned by such manufacturer or another third party. If we cannot obtain commercial use rights for such jointly-owned intellectual property or intellectual property solely owned by these manufacturers, our future product development and commercialization plans may be adversely affected.
We may be subject to claims of infringement, misappropriation or misuse of third party intellectual property that, regardless of merit, could result in significant expense and loss of our intellectual property rights.
The semiconductor industry is characterized by the vigorous pursuit and protection of intellectual property rights. We have not undertaken a comprehensive review of the rights of third parties in our field. From time to time, we may receive notices or inquiries from third parties regarding our products or the manner in which we conduct our business suggesting that we may be infringing, misappropriating or otherwise misusing patent, copyright, trademark, trade secret and other intellectual property rights. Any claims that our technology infringes, misappropriates or otherwise misuses the rights of third parties, regardless of their merit or resolution, could be expensive to litigate or settle and could divert the efforts and attention of our management and technical personnel, cause significant delays and materially disrupt the conduct of our business. We may not prevail in such proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If such proceedings result in an adverse outcome, we could be required to:
| ● | pay substantial damages, including treble damages if we were held to have willfully infringed; | |
| ● | cease the manufacture, offering for sale or sale of the infringing technology or processes; | |
| ● | expend significant resources to develop non-infringing technology or processes; | |
| ● | obtain a license from a third party, which may not be available on commercially reasonable terms, or may not be available at all; or | |
| ● | lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others. |
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In addition, our agreements with prospective customers and manufacturing partners may require us to indemnify such customers and manufacturing partners for third party intellectual property infringement claims. Pursuant to such agreements, we may be required to defend such customers and manufacturing partners against certain claims that could cause us to incur additional costs. While we endeavor to include as part of such indemnification obligations a provision permitting us to assume the defense of any indemnification claim, not all of our current agreements contain such a provision and we cannot provide any assurance that our future agreements will contain such a provision, which could result in increased exposure to us in the case of an indemnification claim.
Defense of any intellectual property infringement claims against us, regardless of their merit, would involve substantial litigation expense and would be a significant diversion of resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, obtain one or more licenses from third parties, limit our business to avoid the infringing activities, pay royalties and/or redesign our infringing technology or alter related formulations, processes, methods or other technologies, any or all of which may be impossible or require substantial time and monetary expenditure. The occurrence of any of the above events could prevent us from continuing to develop and commercialize our filters and our business could materially suffer.
Risks Related to our Financial Condition
We have a history of losses, will need substantial additional funding to continue our operations and may not achieve or sustain profitability in the future.
Our operations have consumed substantial amounts of cash since inception. We have incurred losses since our incorporation and formation in 2014. Although our newly acquired STC-MEMS Business has a potential revenue stream estimation of $1.5 million in the current fiscal year, (which are not guaranteed), and although weWe plan to apply for additional grants in the calendar years 20172018 and 2018,2019 and we do not expect meaningful revenues from our resonator technology until at least the firstsecond half of the calendar year 2018. There is no guarantee that the grants we apply for will be awarded to us, and if our forecasts for the Company prove incorrect, the business, operating results and financial condition of the Company will be materially and adversely affected. We anticipate that our operating expenses will increase in the foreseeable future as we continue to pursue the development of our patent-pending single-crystal acoustic wave filter technology, invest in marketing, sales and distribution of our RF filters to grow our business, acquire customers, commercialize our technology in the mobile wireless market and continue the transition ofto invest in our manufacturing to our STC-MEMS Business.facility in Canandaigua, NY. These efforts may prove more expensive than we currently anticipate, and we may not succeed in generating sufficient revenues to offset these higher expenses. In addition, we expect to incur significant expenses related to regulatory requirements and our ability to obtain, protect, and defend our intellectual property rights.
We may also encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may increase our capital needs and/or cause us to spend our cash resources faster than we expect. Accordingly, we will need to obtain substantial additional funding in order to continue our operations.
To date, we have financed our operations through a mix of investments from private investors, the incurrence of debt, foundry services revenue, and grant funding, and we expect to continue to utilize such means of financing for the foreseeable future. Additional funding from those or other sources may not be available when or in the amounts needed, on acceptable terms, or at all. If we raise capital through the sale of equity, or securities convertible into equity, it would result in dilution to our then existing stockholders, which could be significant depending on the price at which we may be able to sell our securities. If we raise additional capital through the incurrence of indebtedness, such as our issuance of senior secured convertible notes in May 2018, we would likely maybecome subject to additional covenants restricting our business activities, and holders of debt instruments may have rights and privileges senior to those of our equity investors. In addition, servicing the interest and principal repayment obligations under debt facilities could divert funds that would otherwise be available to support research and development, or commercialization activities. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our R&D programs for our acoustic wave filter technology or any future commercialization efforts. Any of these events could materially and adversely affect our business, financial condition and prospects, and could cause our business to fail.
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Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern.
The Company’s historical financial statements have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued a report that included an explanatory paragraph referring to our recurring net losses and accumulated deficit and expressing substantial doubt in our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity financing or other capital, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. However, if adequate funds are not available to us when we need them, and we are unable to commercialize our products giving us access to additional cash resources, we will be required to curtail our operations, which would, in turn, further raise substantial doubt about our ability to continue as a going concern.
Servicing our debt requires a significant amount of cash or Common Stock, and we may not have sufficient cash flow from our business or have the ability to issue the necessary number of shares of Common Stock to pay our substantial debt.
We have the ability, at our option, to pay accrued interest on our 6.5% Convertible Senior Secured Notes due 2023 in cash or freely tradable shares of Common Stock. Our ability to make scheduled payments of interest depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt in cash and make necessary capital expenditures. Furthermore, we may not issue Common Stock to make payments of interest to the extent such issuance would violate NASDAQ Marketplace Rule 5635(d), which limits the amount of Common Stock that we may privately issue without prior stockholder approval. Therefore, our ability to repay our debt with Common Stock will depend on the capital markets and whether we have obtained stockholder approval for such issuances of Common Stock.
If we are unable to generate sufficient cash flow or issue Common Stock to satisfy payment obligations under our convertible notes, we may be required to adopt one or more alternatives, such as selling assets or obtaining additional equity capital on terms that may be onerous or highly dilutive. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
We are subject to a number of restrictive covenants, which may restrict our business and financing activities.
The indenture governing our convertible notes imposes operating and other restrictions on us. Such restrictions may affect, and in many respects limit or prohibit, among other things, our ability to:
| ● | incur or guarantee additional indebtedness; |
| ● | issue preferred stock or stock of any subsidiary; |
| ● | make investments or acquisitions; |
| ● | merge, consolidate, dissolve or liquidate; |
| ● | engage in certain asset sales (including the sale of stock of our subsidiary); |
| ● | grant liens (except permitted liens); |
| ● | pay dividends; |
| ● | engage in transactions with our affiliates; and |
| ● | enter into a new line of business. |
The restrictions in the indenture governing the promissory notes may prevent us from taking actions that we believe would be in the best interests of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We also may incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. Our ability to comply with these covenants in future periods will largely depend on the pricing of our products and services, and our ability to successfully implement our overall business strategy. We cannot assure you that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements. The breach of any of these covenants and restrictions could result in a default under the indenture governing the promissory notes, which could result in an acceleration of our indebtedness.
Risk Related to Managing Any Growth We May Experience
We may engage in future acquisitions that could disrupt our business, cause dilution to our shareholders and harm our financial condition and operating results.
While we currently have no specific plans to acquire any other businesses, we may, in the future, make acquisitions of, or investments in, companies that we believe have products or capabilities that are a strategic or commercial fit with our current business or otherwise offer opportunities for our company. In connection with these acquisitions or investments, we may:
| ● | issue Common Stock or other forms of equity that would dilute our existing shareholders’ percentage of ownership, | |
| ● | incur debt and assume liabilities, and | |
| ● | incur amortization expenses related to intangible assets or incur large and immediate write-offs. |
We may not be able to complete acquisitions on favorable terms, if at all. If we do complete an acquisition, we cannot assure you that it will ultimately strengthen our competitive position or that it will be viewed positively by customers, financial markets or investors. Furthermore, future acquisitions could pose numerous additional risks to our expected operations, including:
| ● | problems integrating the purchased business, products or technologies, | |
| ● | challenges in achieving strategic objectives, cost savings and other anticipated benefits, | |
| ● | increases to our expenses, | |
| ● | the assumption of significant liabilities that exceed the limitations of any applicable indemnification provisions or the financial resources of any indemnifying party, | |
| ● | inability to maintain relationships with prospective key customers, vendors and other business partners of the acquired businesses, | |
| ● | diversion of management’s attention from its day-to-day responsibilities, |
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| ● | difficulty in maintaining controls, procedures and policies during the transition and integration, | |
| ● | entrance into marketplaces where we have no or limited prior experience and where competitors have stronger marketplace positions, | |
| ● | potential loss of key employees, particularly those of the acquired entity, and | |
| ● | historical financial information may not be representative or indicative of our results as a combined company. |
Our business and operations would suffer in the event of system failures, and our operations are vulnerable to interruption by natural disasters, terrorist activity, power loss and other events beyond our control, the occurrence of which could materially harm our business.
Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage from computer viruses, unauthorized access as well as telecommunication and electrical failures. While we have not experienced any such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our R&D. If any disruption or security breach resulted in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and/or the further development of our technology for RF filters could be delayed.
We are also vulnerable to accidents, electrical blackouts, labor strikes, terrorist activities, war and other natural disasters and other events beyond our control, and we have not undertaken a systematic analysis of the potential consequences to our business as a result of any such events and do not have an applicable recovery plan in place. We currently do not carry other business interruption insurance that would compensate us for certain actual losses from interruptions of our business that may occur, andhowever that may not fully cover all losses incurred, any losses or damages incurred by us could cause our business to materially suffer.
We may be unable to successfully integrate the STC-MEMS Business with our current operations and strategic business plan.
We will be required to devote significant management attention and resources, including expenses to integrating the STC-MEMS Business with our current operations and to developing the integrated operations in accordance with our strategic business plan. There is no guarantee that we will maintain existing customer/other relationships or the revenue stream of the STC-MEMS Business. We may fail to realize some or all of the anticipated benefits of the acquisition of the STC-MEMS Business if the integration and development process takes longer than expected or is costlier than expected. Such failure may have a material adverse effect on our stock price, business, plan of operation, and results of operations.
Risks Related to Regulatory Requirements
We could fail to maintain ourobtain Trusted Foundry accreditation in our New York Fabrication Facility.
AlthoughWe are in the process of applying for Trusted Foundry accreditation in our New York fabrication facility has not generated any revenue to date from its Trusted Foundry accreditation, afollowing our acquisition of the facility in June 2017. A failure to maintaintimely obtain that accreditation in the future could hamper our ability to generate product and foundry services revenue related to potential Aerospace and Defense customers.customers, which could adversely affect our business, financial condition and prospects.
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We may incur substantial expenses in connection with regulatory requirements, and any regulatory compliance failure could cause our business to suffer.
The wireless communications industry is subject to ongoing regulatory obligations and review. See “Business —- Government Regulations” above. Maintaining compliance with these requirements may result in significant additional expense to us, and any failure to maintain such compliance could cause our business to suffer.
Noncompliance with applicable regulations or requirements could also subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, or injunctions. An adverse outcome in any such litigation could require us to pay contractual damages, compensatory damages, punitive damages, attorneys’ fees and costs. These enforcement actions could harm our business, financial condition and results of operations. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, financial condition and results of operations could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees.
Compliance with regulations regarding the use of “conflict minerals” could limit the supply and increase the cost of certain metals used in manufacturing our products.
Regulations in the United States require that we determine whether certain materials used in our products, referred to as conflict minerals, originated in the Democratic Republic of the Congo or adjoining countries, or originated from recycled or scrap sources. We anticipate that we will first be required to comply with the SEC’s conflict minerals rules for the 2017 calendar year, and we expect to incur costs associated with implementing policies and procedures to comply with the applicable rules and due diligence procedures. In addition, the verification and reporting requirements could affect the sourcing and availability of minerals that are used in the manufacture of our products, and we may face reputational and competitive challenges if we are unable to sufficiently verify the origins of all conflict minerals used in our products. We may also face challenges with government regulators, potential customers, suppliers and manufacturers if we are unable to sufficiently verify that the metals used in our products are conflict free. We are currently in compliance with this requirement after filing our initial report in May 2018.
There could be an adverse change or increase in the laws and/or regulations governing our business.
We and our operating subsidiary are subject to various laws and regulations in different jurisdictions, and the interpretation and enforcement of laws and regulations are subject to change. We also will be subject to different tax regulations in each of the jurisdictions where we will conduct our business or where our management or the management of our operating subsidiary is located. We expect that the scope and extent of regulation in these jurisdictions, as well as regulatory oversight and supervision, will generally continue to increase. There can be no assurance that future regulatory, judicial and legislative changes in any jurisdiction will not have a material adverse effect on us or hinder us in the operation of our business. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations applicable to us.
These current or future laws and regulations may impair our research, development or production efforts or impact the research activities we pursue. Our failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions, which could cause our financial condition to suffer.
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Investment Risks
You could lose all of your investment.
An investment in our securities is speculative and involves a high degree of risk. Potential investors should be aware that the value of an investment in the Company may go down as well as up. In addition, there can be no certainty that the market value of an investment in the Company will fully reflect its underlying value. You could lose your entire investment.
Our stock trades in low volumes, which may make it more difficult for investors to sell their shares quickly.
Our Common Stock trades on the NasdaqNASDAQ Capital Market, but it trades in low volumes, which may make it more difficult for investors to sell their shares quickly. This situation may be attributable to a number of factors, including but not limited to the fact that we are a development-stage company that is relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investor community. In addition, investors may be risk averse to investments in development-stage companies. As a consequence, it may be more difficult for investors to sell their shares quickly and our stock price may be more sensitive to sales of our Common Stock in the market. The low trading volume is outside of our control and may not increase or, if it increases, may not be maintained.
YouStockholders may experience dilution of yourtheir ownership interests because of the future issuance of additional shares of our common or preferred stock or other securities that are convertible into or exercisable for our common or preferred stock, including as a result of triggering price protection rights held by certain investors.
In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our stockholders. The Company is authorized to issue an aggregate of 45,000,000 shares of Common Stock and 5,000,000 shares of preferred stock. We may issue additional shares of our Common Stock or other securities that are convertible into or exercisable for our Common Stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. In addition, as of September 8, 2017,August 22, 2018, warrants and options to purchase 602,632728,493 and 160,0001,338,859 shares, respectively, of our Common Stock remained outstanding. Additionally, our outstanding convertible senior secured notes were convertible into approximately 2.3 million shares of Common Stock on such date. In addition, investors in the May 2017 Offering (asand December 2017 Offering (each as defined under “Management’s Discussion and Analysis —- Liquidity and Capital Resources —- Financing Activities” below) have certain price protection rights. PursuantThe price-protected anti-dilution rights of investors in the May 2017 Offering were triggered by the December 2017 Offering conducted at $5.50 per share and, as a result, in December 2017 the Company issued an additional 542,450 shares to such rights, ifinvestors in the May 2017 Offering for no additional consideration. If we issue shares of our Common Stock (subject to customary exceptions, including issuances of awards under Company employee stock incentive programs and certain issuances in connection with credit arrangements) at a price less than $9.00$5.50 per share, investorswith respect to the May 2017 Offering, or less than $5.00 per share (or $4.40 in the case of one investor), with respect to the December 2017 Offering, the respective investors will be entitled to receive (for no additional consideration) additional shares of our Common Stock in an amount such that, when added to the number of shares of Common Stock they initially purchased in the May 2017 Offering or December 2017 Offering, as applicable, will equal the number of shares of Common Stock that their investment in the 2017 Offeringsuch offering would have purchased at 90% of the lower purchase price.price, with respect to the May 2017 Offering, or at the lower purchase price, with respect to the December 2017 Offering. The future issuance of additional shares of our Common Stock may create downward pressure on the trading price of the Common Stock. We will need to raise additional capital in the near future to meet our working capital needs, and there can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with these capital raising efforts, including at a price (or exercise prices) below the price you paid for your stock.
The ability of our Board of Directors to issue additional stock may prevent or make more difficult certain transactions, including a sale or merger of the Company.
Our Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock with powers, rights and preferences designated by it. Shares of voting or convertible preferred stock could be issued, or rights to purchase such shares could be issued, to create voting impediments or to frustrate persons seeking to effect a takeover or otherwise gain control of the Company. The ability of the Board to issue such additional shares of preferred stock, with rights and preferences it deems advisable, could discourage an attempt by a party to acquire control of the Company by tender offer or other means. Such issuances could therefore deprive stockholders of benefits that could result from such an attempt, such as the realization of a premium over the market price for their shares in a tender offer or the temporary increase in market price that such an attempt could cause. Moreover, the issuance of such additional shares of preferred stock to persons friendly to the Board of Directors could make it more difficult to remove incumbent managers and directors from office even if such change were to be favorable to stockholders generally.
We do not anticipate paying dividends on our Common Stock.
Cash dividends have never been declared or paid on our Common Stock, and we do not anticipate such a declaration or payment for the foreseeable future. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares of Common Stock. If we do not pay dividends, our Common Stock may be less valuable because a return on your investment will only occur if our stock price appreciates. We cannot assure stockholders that our stock price will appreciate or that they will receive a positive return on their investment if and when they sell their shares.
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We are an emerging growth company, and the reduced disclosure requirements applicable to emerging growth companies willmay make our Common Stock less attractive to investors.
We are an emerging growth company under the JOBS Act. For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation and any golden parachute payments not previously approved, exemption from the requirement of auditor attestation in the assessment of our internal control over financial reporting and exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board. If we do, the information that we provide stockholders may be different than what is available with respect to other public companies. We cannot predict if investors will find our Common Stock less attractive because we will rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock price may be more volatile.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to take advantage of this extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with the effective dates of those accounting standards.
We will remain an emerging growth company until the earliest of (1) the end of the fiscal year in which the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of the end of the second fiscal quarter, (2) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (3) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (4) June 30, 2019, the end of the fiscal year following the fifth anniversary of the date of the first sale of our common stockCommon Stock pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (the “Securities Act”). Decreased disclosures in our SEC filings due to our status as an “emerging growth company” may make it harder for investors to analyze our results of operations and financial prospects.
Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation. Some investors may find our Common Stock less attractive because we rely on these exemptions, there may be a less active trading market for our Common Stock and our stock price may be more volatile.
Being a public company is expensive and administratively burdensome.
As a public reporting company, we are subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other federal securities laws, rules and regulations related thereto, including compliance with the Sarbanes-Oxley Act. Complying with these laws and regulations requires the time and attention of our Board of Directors and management, and increases our expenses. Among other things, we are required to:
| ● | maintain and evaluate a system of internal control over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; | |
| ● | maintain policies relating to disclosure controls and procedures; | |
| ● | prepare and distribute periodic reports in compliance with our obligations under federal securities laws; | |
| ● | institute a more comprehensive compliance function, including with respect to corporate governance; and |
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| ● | involve, to a greater degree, our outside legal counsel and accountants in the above activities. |
The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders is expensive and much greater than that of a privately-held company, and compliance with these rules and regulations may require us to hire additional financial reporting, internal controls and other finance personnel, and will involve a material increase in regulatory, legal and accounting expenses and the attention of management. There can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all. In addition, being a public company makes it more expensive for us to obtain director and officer liability insurance. In the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain this coverage. These factors could also make it more difficult for us to attract and retain qualified executives and members of our Board of Directors, particularly directors willing to serve on the Audit Committee of our Board of Directors.
If we fail to remediate theany identified material weakness and maintain effective controls and procedures, we may not be able to accurately report our financial results, which could have a material adverse effect on our operations, financial condition, and the price of our Common Stock.
We are required to maintain disclosure controls and procedures and internal control over financial reporting. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include in our annual reports on Form 10-K an assessment by management of the effectiveness of our internal control over financial reporting. As disclosed in Item 9A of this Report, our management identified a material weakness in our internal control over financial reporting, causing our disclosure controls and procedures and our internal control over financial reporting to be ineffective as of June 30, 2017. A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Remediation of theany material weakness willmay require extensive management attention and cause the Company to incur additional expenses. If we fail to remediate theany material weakness, or if we are unable to maintain effective controls and procedures in the future, our ability to record, process, summarize, and report financial information accurately and within the time periods specified in the rules and forms of the SEC could be adversely affected, we could lose investor confidence in the accuracy and completeness of our financial reports, and we may be subject to investigation or sanctions by the SEC. Any such consequence or other negative effect could adversely affect our operations, financial condition, and the price of our Common Stock.
In addition, at such time, if any, as we are no longer a smaller reporting company or an emerging growth company, our independent registered public accounting firm will have to attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting. If and when we are required to have our independent registered public accounting firm attest to management’s assessment of the effectiveness of our internal control over financial reporting, if our independent registered public accounting firm is not satisfied with the adequacy of our internal control over financial reporting, or if the independent auditors interpret the requirements, rules, or regulations differently than we do, then they may decline to attest to management’s assessment or may issue a report that is qualified. Any of these events could result in a loss of investor confidence in the reliability of our financial statements, which could negatively affect the price of our Common Stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our current headquarters in Huntersville, NC, is a 4,800-square foot facility that we lease for base rent of $4,700 per month, with a term expiring in April 2018; however, due to increased headcount hired to support business operations in North Carolina, we have executed a new 60-month lease for an adjoining facility which is expected to commence on or about November 1, 2017. The new facility is 10,400 square feet, and its base rent is $9,800$9,880 per month.month with a term expiring December 2022. The currentprior headquarters, a 4,800-square foot facility will bewas vacated at the commencement of the new lease.in April 2018. On June 26, 2017, the Company acquired a 120,000122,000 square foot MEMS fabrication facility in Canandaigua, New York.York which currently houses 42 employees (the “NY Facility”). In connection with the offering and sale of senior secured convertible notes on May 14, 2018, the Company granted a first priority lien to The Bank of New York Mellon Trust Company, N.A. on substantially all of its current and future assets, including a mortgage on the NY facility houses approx. 35 employeesFacility. Additionally, the Company has entered into a Lease and is only 15% utilized.Project Agreement and a Company Lease Agreement with the OCIDA covering the NY Facility, pursuant to which the Company leases the NY Facility to the OCIDA for nominal consideration and the OCIDA leases the NY Facility back to the Company for annual rent payments set forth in such agreements. The Company believes the new 10,400-square foot facility in Huntersville, NC, once occupied, along with the recently acquired facility in New YorkNY Facility will be suitable and sufficient to meet the Company’s needs for the next three to fiveseveral years.
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From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in any such matters may arise from time to time that may have an adverse effect on our business, financial condition, results of operations and prospects.
We are currently not aware of any material pending legal proceedings to which we are a party or of which any of our property is the subject, nor are we aware of any such proceedings that are contemplated by any governmental authority.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
Our Common Stock is currently traded on the NASDAQ Capital Market under the symbol “AKTS.” Prior to March 13, 2017, our Common Stock was quoted on the OTC Market (OTCQB) under the same symbol. There has been limited trading in our Common Stock to date.
As of September 8, 2017, 19,084,583 August 22, 2018, 22,222,523shares of our Common Stock were issued and outstanding and were held by approximately 151152 stockholders of record.
The following table sets forth the high and low sales prices (or closing bid prices with respect to periods prior to March 13, 2017) for our Common Stock for the fiscal quarters indicated, as reported on NASDAQ (or on OTC Markets with respect to closing bids for periods prior to March 13, 2017). OTC Market quotations for periods prior to March 13, 2017 reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
| Period | High | Low | High | Low | |||||||||||||
| Quarter ended September 30, 2015 | $ | 5.00 | $ | 2.75 | |||||||||||||
| Quarter ended December 31, 2015 | 4.15 | 1.55 | |||||||||||||||
| Quarter ended March 31, 2016 | 2.00 | 1.50 | |||||||||||||||
| Quarter ended June 30, 2016 | 4.40 | 1.90 | |||||||||||||||
| Quarter ended September 30, 2016 | 4.49 | 3.50 | 4.50 | 3.49 | |||||||||||||
| Quarter ended December 31, 2016 | 5.85 | 3.91 | 6.30 | 3.91 | |||||||||||||
| Quarter ended March 31, 2017 | 12.90 | 5.44 | 14.00 | 5.25 | |||||||||||||
| Quarter ended June 30, 2017 | 12.21 | 8.40 | 13.01 | 8.35 | |||||||||||||
| Quarter ended September 30, 2017 | 8.77 | 5.11 | |||||||||||||||
| Quarter ended December 31, 2017 | 7.30 | 4.91 | |||||||||||||||
| Quarter ended March 31, 2018 | 7.13 | 5.43 | |||||||||||||||
| Quarter ended June 30, 2018 | 8.64 | 4.86 | |||||||||||||||
Dividends
We have never paid any dividends on our capital stock and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements. Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant.
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Warrants and Options
As of June 30, 2017,2018, there were outstanding warrants and options to purchase 612,165748,572 shares of our Common Stock and 160,0001,338,859 shares of our Common Stock, respectively. There are no other outstanding convertible securities of the Company.
Equity Compensation Plan Information
The following table provides information as of June 30, 2017,2018, relating to our equity compensation plans, under which grants of options, restricted stock, and other equity awards may be made from time to time:
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted- average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by security holders | 160,000 | (1) | $ | 1.50 | 2,728,000 | (2) | ||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 160,000 | (1) | 2,728,000 | (2) | ||||||||
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted- average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by security holders - options | 1,338,859 | (1) | $ | 6.06 | 738,247 | (3) | ||||||
| Equity compensation plans approved by security holders – restricted stock units | 879,494 | (2) | $ | 0.00 | - | |||||||
| Total | 2,218,353 | 738,247 | (3) | |||||||||
| (1) |
| (2) |
| (3) | As of June 30, |
Recent salesSales of unregistered securitiesUnregistered Securities
We have not sold any equity securities during the fiscal year ended June 30, 20172018 that were not registered under the Securities Act, other than as previously reported in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed with the SEC.
Purchases of Equity Securities
Unvested restricted stock grants awarded under the 2014 Plan and the 2015 Plan are subject to Company repurchase options upon certain terminations of the recipient’s service with the Company. As of June 30, 2017, 1,352,265,2018, 434,561, shares of restricted stock remained subject to repurchase options, which are scheduled to expire between JanuaryJuly 2018 and December 2020. We did not repurchase anyrepurchased 168,652 shares of our equity securities pursuant to these repurchase options or otherwise during the fiscal year ended June 30, 2017.2018.
Transfer Agent
The transfer agent for our Common Stock is Globex Transfer, LLC. The transfer agent’s address is 780 Deltona Blvd., Suite 202, Deltona, FL 32725 and its telephone number is 813-344-4490.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to a smaller reporting company.applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis should be read in conjunction with the historical financial statements and the related notes thereto contained in this Report. See also the “Cautionary Note Regarding Forward-Looking Information” on page 1 of this Report.
The following discussion highlights the results of operations and the principal factors that have affected our financial condition, as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on the audited financial statements contained in this Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.
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Overview
AkoustisAkoustis® is an early-stagea development-stage company focused on developing, designing, and manufacturing innovative RF filter products for the mobile wireless device industry, including for products such as smartphones and tablets, cellular infrastructure equipment, and WiFi premise equipment. Located between the device’s antenna and its digital backend, the RFFERF front-end (“RFFE”) is the circuitry that performs the analog signal processing and contains components such as amplifiers, filters and switches. To construct the resonators that are the building blocks for the RF filter, we have developed a fundamentally new single-crystal acousticand proprietary MEMS-based BAW technology and unique manufacturing flow, called XBAW. Our XBAW process incorporates high purity piezoelectric materials to explore high power, high frequency and device technology that we refer to as BulkONE®.wide bandwidth applications. Filters are critical in selecting and rejecting signals, and their performance enables differentiation in the modules defining the RFFE. RFFE
We believe owning the core resonator technology and manufacturing our designs is the most direct and effectiveefficient means of delivering our solutions to the market. Furthermore, our technology is based upon bulk-mode resonance, which is superior to surface-mode resonance for high bandhigh-band applications that include 4G/LTE, emerging 5G, WiFi, and WiFi 5GHz frequency bands.military applications. While some of our target customers utilize or make the RFFE module, several customersthey may lack access to critical high bandhigh-band filter technology to compete in high bandhigh-band applications and other traditional surface-mode solutions where higher power performance is required. We intend to design, manufacture, and market our RF filter products to multiple mobile phone OEM,original equipment manufacturers (“OEMs”), military and defense OEM’s, cellular infrastructure OEMs, and WiFi routerpremise equipment customers and to enable broader competition among the front-end module manufacturers. We plan to operate as a “pure-play” RF filter supplier and align with the front-end module manufacturers who seek to acquire high performance filters to grow their module business.
We have built prototype resonatorscurrently build pre-production RF filter circuits, using our proprietary single-crystal materials. We are currently optimizing our BulkONE® technologyfirst generation XBAW wafer process, in our 120,000 sq. ft.122,000-square foot wafer-manufacturing plant located in Canandaigua, New York. WeYork, which we acquired in June 2017. To date, we have been awarded 17 patents including two blocking patents that we have licensed from Cornell University and the University of California, Santa Barbara and we have over 28 additional patents pending. These patents cover our XBAW process and technology from the substrate level through the system application layer. Where possible, we leverage both federal and state level, non-dilutive R&D grants to support development and commercialization of our technology.
We are developing resonatorsRF filters for 4G/LTE, emerging 5G, military and WiFi bands and the associated proprietary models and design kits required to design our RF filters. OnceAs we have stabilized the wafer process technology,qualify our first RF filter products, we plan to engage with strategictarget customers to evaluate first our resonators and then our filter prototypes.solution. Our initial designs will target high bandhigh-band 4G/LTE, emerging 5G, and WiFi frequency bands. Since Akoustis owns its core technology and controls access to its intellectual property, we canexpect to offer several ways to engage with potential customers. First, we canintend to engage with the mobilemultiple wireless market,markets, providing filters that we design and offer as a standard catalog component to multiple customers.components. Second, we can start with aexpect to deliver filters to customer-supplied filter specification,specifications, which we will design and fabricate for a specific customer. Finally, we canwill offer our models and design kits for our customers to design their own filter intoutilizing our proprietary technology.
In December 2014, Akoustis, Inc. was awarded its first small business innovative research (“SBIR”) R&D grant with the National Science Foundation (“NSF”). The NSF program, which increases the incentive and opportunity for startups and small businesses to undertake cutting-edge, high-quality scientific research and development, requires that the grantee have full responsibility for the conduct of the project or activity supported and the adherence to the award conditions. Total funds received from the NSF and matching funds from North Carolina Science, Technology & Innovation Department of Commerce since inception through September 8, 2017 total $892,000.
Our partnership with NSF has strengthened since the start of our engagement, and its support has accelerated our technology commercialization as well as funded technical jobs. We have additional opportunities for new grants and matching funds from our current small business program partnership with NSF including the Phase IIb award.
We have earned minimal revenue from operations since inception, and we have funded our operations have been fundedprimarily with capital contributions,development contracts, RF filter prototype orders, government grants, MEMS foundry and engineering services, sales of our equity securities, and issuance of debt. We have incurred losses totaling approximately $15.8$38.2 million from inception through June 30, 2017.2018. These losses are primarily the result of material and material processing costs associated with developing and commercializing our technology, as well as personnel costs, professional fees (primarily accounting and legal) as well as, and other general and administrative expenses offset by the $1.7 million gain from the bargain acquisition of the STC-MEMS Business in June 2017.(“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 as well asand engineering of catalog and custom filter designs.
As of September 8, 2017, the Company had $6.7 million of cash and cash equivalents. The Company believes this is sufficient to cover our cost of operations including anticipated capital expenditures through December 31, 2017. 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. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
Plan of Operation
We plan to commercialize our technology by designing and manufacturing single-band and multi-band BAW RF filter fromsolutions in our NYNew York wafer fabrication facility. OurWe 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, emerging 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,low-band, lower power handling SAWsurface acoustic wave (SAW) technology. During the second half of calendar 2017 we plan to samplesampled filter product prototypes to prospective customers that cover LTE-Band 41,LTE, Radar and 5GHz WiFi frequency bands.applications. In March and April of 2018, we announced our first two commercial products, the AKF-1252 and the AKF-1938, which we are currently sampling with customers involved in the WiFi market and military market, respectively. In May we announced a Non Recurring Engineering (“NRE”) contract and purchase order for a 4G/LTE infrastructure customer that we expect will ship in early calendar 2019. Additionally, in June 2018 we announced a 5.2 GHz BAW WiFi filter for the handset market, the AKF-1652. We expect to begin commercial production for one or more customers in the second half of calendar 2018. As we receive customer evaluations, we will do further iterations on the designs and provide next generation samples for evaluation and characterization.
In order toTo succeed, we must convince mobile phone OEMs, RFFE module manufacturers, cellular infrastructure OEMs, and WiFi routerpremise equipment OEMs to use our BulkONE®XBAW filter technology in their systems and modules. However, since there are only two dominant BAW filter suppliers in the industry that have high bandhigh-band technology, and both utilize such technology as a competitive advantage at the module level, we expect customers that lack access to high bandhigh-band filter technology will be open to engage with our pure-play filter company.
OnceIn June 2018 we complete customer validation of our technology, we expect to completecompleted the qualification of our BulkONE®high purity piezoelectric materials process technology in the second half of calendar 2017and our XBAW manufacturing process to support aan initial product family of 4G/LTE, emerging 5G mobile, military and WiFi filter solutions. OnceNow that we have stabilized our process technology in a manufacturing environment, we willintend to complete a production release of our high bandhigh-band filter products in the frequency range from 2.5GHz2 GHz to 6.0GHz.6 GHz. The target frequency bands will be prioritized based upon customer priority. We expect this will require recruiting and hiring additional personnel and capital investments.
We plan to pursue RF filter design and R&D development agreements and potentially joint ventures with target customers and other strategic partners.partners, but we cannot guarantee we will be successful in these efforts. These types of arrangements may subsidize technology development costs and qualification, filter design costs, as well asand 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.
We have successfully transferred our BulkONE® wafer process to our STC-MEMS Business. The BulkONE® process uses a range of single-crystal group III-nitride piezoelectric materials, which were fabricated into BAW resonators and characterized at cellular communication frequencies to determine their bandwidth. On May 23, 2016, we announced an experimental, 3.4 GHz BAW two-port series-configured resonator device with a high K-squared of 12.5%, which was modeled near resonance frequency and was constructed from single-crystal undoped aluminum nitride (AlN) material. On August 8, 2016, we announced improvements to our single-crystal BAW resonator design and process technology to achieve a quality factor (Q) of 2090, which is suitable for BAW RF filters targeting 4G/LTE, WIFI and emerging 5G and 5G WIFI mobile wireless applications. These resonators, which are the core building blocks enabling BAW RF filters, were fabricated using our patented BulkONE® process. Technology development efforts continue on wafer and process optimization, specifically, through targeted activities for Q-factor improvements.
As referenced in the Business section, in August 2016, Akoustis announced its first customer engagement signing multiple non-exclusive agreements with a Chinese tier one RF front end (RFFE) module manufacturer to supply the Company’s premium RF filter products for next-generation high-band RFFE modules for 4G, emerging 4.5G and 5G mobile - targeting the China and India OEM markets. In December 2016, the Company announced its second customer engagement, for the development of a band-specific, high-frequency (above 3.5 GHz) BAW RF filter for a non-mobile commercial application with a well-established OEM specializing in non-mobile communication systems with annual revenue of more than $1 Billion. In May 2017, the Company announced its third customer engagement for the development of high-performance BAW diplexers for non-mobile communication systems with a multi-billion dollar, Fortune 500 U.S. company, which provides systems, products and solutions to government and commercial customers worldwide.
In August 2017, the Company announced its first shipment of premium high-band BAW RF filter prototypes manufactured using its patented single-crystal BulkONE® technology to the aforementioned Chinese tier one customer. The shipment included high performance, LTE-TDD Band 41, 2.6 GHz BAW RF filters that will satisfy the challenging filter requirements in the high growth 4G LTE mobile market in China.
We will continue discussions with additional prospective customers, although these discussions may not result in any agreements. We expect to proceed with our plan to develop a family of standard catalog filter designs regardless of the outcome of these discussions.
As of September 8, 2017, weJune 30, 2018, the Company had approximately $6.7$14.8 million of cash and cash equivalents to fund a majorityour operations, including R&D, commercialization of the foregoing milestones, for product development to commercialize our technology, research and development, the development of our patent strategy and expansion of our patent portfolio, as well as forto provide working capital and funds for other general corporate purposes. These funds are expected to be sufficient to fund our activities through December 2017.operations into the fourth quarter of fiscal 2019. However, there is no assurance that the Company’s projections and estimates are accurate. Our anticipated costsexpenses include employee salaries and benefits, compensation paid to consultants, capital costs for research and other equipment, costs associated with development activities including(including travel and administration,administration), costs associated with the integration and operation of our New York wafer fabrication facility and related operations, legal expenses, sales and marketing costs, general and administrativeG&A expenses, and other costs associated with an early stage, publicly-tradedpublic technology company. We anticipate increasing the number of employees by approximately 15 to 20 employees in the next twelve months;employees; however, this is highly dependent on the nature of our development efforts, our success in commercialization, and our ability to raisesource additional funding.funds. We anticipate adding employees for research and developmentR&D in both our New York and North Carolina facilities, as well as general and administrativeG&A functions, to support our efforts. We expect to incur consulting expenses related to technology development and other efforts as well as legal and related expenses to protect our intellectual property. We expect capital expenditures to be approximately $7.5$4.1 million for the purchase of equipment and software during the next 12 months, and we are currently investigating the feasibility of using debt facilities, equipment leases, or government grants to fund all or part of the purchase of the equipment.
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. In addition, we may use a portionstrategies, and the integration of any net proceeds to acquire complementary products, technologies or businesses; however, we do not have plans for any acquisitions at this time.our New York wafer fabrication facility and related operations into our business.
Commercial development of new technology, is, 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 as contemplated herein.operations. If our current cash is insufficient for these purposes, orwe are unable to source additional funds on terms acceptable to the Company does not receive anticipated proceeds from research grants(or at all), or such grant payments are delayed, or the Company experienceswe experience costs in excess of estimates to continue its research and developmentour R&D plan, it is possible that the Companywe would not have sufficient resources to continue as a going concern for the next year, and we will consider other options to continue our path to commercialization, including, but not limited to, additional financing through follow-on stock offerings, debt financing, co-development agreements, curtailment of operations, suspension of operations, sale or licensing of developed intellectual or other property, or other alternatives.
If we are unable to obtain the funds that we believe are needed to develop our technology and enable future sales, we may be required to scale backcurtail or suspend our development plans by reducing expenditures for employees, consultants, business development and marketing efforts, and other envisioned expenditures. This could reduce our abilityoperations. Even if we are able to commercializesource sufficient funds to continue as a going concern, our technology or require us to seek further funding earlier, or on less favorable terms.
We cannot assure you that our technology willmay not be accepted, that we will ever generatemay never earn revenues sufficient to support our operations, or thatand we will evermay never be profitable. Furthermore, since we have no committed source of financing, there is no assurance that we will be able to obtain sufficient capital as and when we need it to continue our operations. If we cannot obtain sufficient capital as and when we need it, we may be required to severely curtail, or even to cease, our operations.
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Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate.
Derivative Liability
The Company evaluates its options, warrants, convertible notes, and other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. The change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.
The Company utilizes a binomial option pricing model to compute the fair value of the derivative liability and to mark to market the fair value of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements of operations.
The Company utilizes the with-and-without method, a form of the income approach model to compute the fair value of its embedded derivatives associated with its convertible note. The fair value of the embedded derivatives represents the difference in the present value of anticipated cash flows assuming the feature is present as compared to a security without the same feature. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements of operations.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and accounts payable approximate fair value due to the short-term nature of these instruments.
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820, “Fair“Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
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Fair value measurements are categorized using a valuation hierarchy for disclosure of the inputs used to measure fair value, which prioritize the inputs into three broad levels:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date, and include those financial instruments that are valued using models or other valuation methodologies.
Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Equity-based compensation
The Company recognizes compensation expense for all equity–basedequity-based payments in accordance with ASC 718 “Compensation –- Stock Compensation"”. Under fair value recognition provisions, the Company recognizes equity–basedequity-based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.
Restricted stock awards and restricted stock units are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a four-year period (vesting on a straight–linestraight-line basis). The fair value of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The fair value of an option award is estimated on the date of grant using the Black–ScholesBlack-Scholes option valuation model. The Black–ScholesBlack-Scholes option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the value of the underlying share, the expected stock volatility, the risk–freerisk-free interest rate, the expected life of the option, and the dividend yield on the underlying stock and the expected forfeiture rate.stock. Expected volatility is benchmarked against similar companies in a similar industry overcalculated using the expected option life and other appropriate factors. Risk–freehistorical volatilities of the Company’s common stock traded on the Nasdaq Capital Market. Risk-free interest rates are calculated based on continuously compounded risk–freerisk-free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common Stock and does not intend to pay dividends on its Common Stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best estimate.Company accounts for the impact of forfeitures as they occur.
Determining the appropriate fair value model and calculating the fair value of equity–basedequity-based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–basedequity-based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, our equity–basedequity-based compensation could be materially different in the future. In addition, the Company is required to estimateaccount for the expected forfeiture rate and recognize expense onlyimpact of forfeitures as the forfeitures for those shares expected to vest.occur. If the Company’s actual forfeiture rate is materially different from its estimate,forfeitures are material, the equity–basedequity-based compensation could be significantly different from what the Company has recorded in the current period.
The Company accounts for share–basedshare-based payments granted to non–employeesnon-employees in accordance with ASC 505-40, “Equity Based Payments to Non–EmployeesNon-Employees”. ”. The Company determines the fair value of the stock–basedstock-based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments is re-measured each reporting period over the requisite service period.
34
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Results of Operations
Our results of operations are presented for the yearfiscal years ended June 30, 2018 and June 30, 2017.
Year Ended June 30, 2018 Compared to Year Ended June 30, 2017
Revenue
The Company recorded revenue of $1.2 million for the year-ended June 30, 2018 as compared to the year ended June 30, 2016. Our results of operations$486,000 for the year ended June 30, 2017 include five days of operations of our STC-MEMS Business, which we acquired on June 26, 2017.
Year Ended June 30, 2017 Compared to Year Ended June 30, 2016
The Company Revenue recorded revenue of $486,000 for the year-ended June 30, 2017 as compared to $255,000 forduring the year ended June 30, 2016.2018, included $1.0 million of revenue for foundry services provided at the NY Facility, with the remaining revenue consisting primarily of grant revenue. The revenue for the fiscal year ended June 30, 2017 was made upconsisted primarily of grant revenue.
Cost of Revenue
The Company recorded cost of revenue fromof $1,019,000 in fiscal 2018 which includes direct labor, material, and facility costs primarily associated with the National Science Foundation for the Phase II grant. Thefoundry services revenue, recordedas compared to $0 in the comparative fiscal year was also made up primarily of grant revenue from the National Science Foundation ($50,000 from Phase I2017.
Research and $192,000 for Phase II).Development Expenses
R&D expenses consist of costs for technical and engineering personnel, travel expense for R&D personnel and costs to develop and commercialize our technology including materials, material processing, and contractors. R&D expenses were $4.4$13.3 million for the year-ended June 30, 20172018 and were $2.7$8.3 million, or 151.6%165%, higher than the prior year.year amount of $5.0 million. The year-over-year increase was due to the ramp up of R&D activityprimarily in the Company’s third year of operations. The increased expenditures occurred primarily in areas of R&D personnel, stock-based compensation, depreciation, and materialfacility costs. Personnel costs were $1.4$5.0 million compared to $717,000$1.4 million in the comparative period, an increase of $654,000$3,592,000 or 91%262%. The increase included five days of costs associated with the New York foundryhigher spend was due to R&D personnel (approximately $ 127,000), costs for the addition of technical and engineering hires in the North Carolina facility in the 2017 fiscal year, and the full year effect of N.C. new hires made in the prior fiscal year.our acquired NY Facility, as well as incremental R&D hires. Stock-based compensation of $1.3$2.4 million for the year ended June 30, 20172018 was $1.1 million,$501,000, or 566%26%, higher than the year ended June 30, 20162017 due to new restricted stock awards made to R&D personnel and the change in the fair market value of awards made to technical and engineering contractors infrom prior periods. Facility and material costs of $4.5 million primarily associated with the NY Facility acquired in June 2017, include utilities of $983,000, repair and maintenance costs of $1,182,000, and supplies, materials and parts costs of $2,166,000. In addition, material and material processdepreciation costs were $1.4$1.1 million as compared to $670,000$0.1 million in the comparative period ended June 30, 20162017 which was an increase of $681,000,$963,000, or 102.0%. The year-over-year cost increase was975% due to the ramp of raw material purchasesNY Facility acquisition and material processing costs for product development activities.additional capital expenditures made during the year.
General and Administrative Expenses
General and administrative (“G&A”) costs 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. General and administrative expenses for the year ended June 30, 20172018 were $6.0$8.8 million versus $2.9$6.2 million for the comparative period. The increase of $3.1$2.6 million, or 105.0%43%, was associated mainly with increases in personnel costs, professional fees, insurance expense, stock-based compensation and travel. Personnel costs of $1.4$2.8 million were higher by $231,000,$1,380,000, or 20.1%97%, due to the increase in the number of administrative personnel, while professional fees of $1.2$1.6 million, associated with legal, accounting and investor relations, were higher by $645,000,$352,000, or 113%29%. The legal, accounting and investor relations fees incurred in the year ended June 30, 2017 ramped up as the result of Company’s second year of being a public reporting company; first on the OTC Market and then on NASDAQ. Stock-based compensation for the year ended June 30, 20172018 was $2.6$3.1 million and higher by $1.9 million,$358,000, or 295%13%, as a result of the issuance of new awards for G&A personnel granted after June 2016 and the recording of the change in the fair market value of stock grants issued to investor relations consultants. Additionally, G&A costs for the year ended June 30, 2018 included travel costs of $351,000, insurance of $317,000, and depreciation of $200,000.
Other Operating Expenses
Other operating expenses for the year ended June 30, 2018 included a $0.4 million loss on the impairment of assets held for sale and asset disposals, which were $0 for the year ended June 30, 2017.
Other Income/(Expense)
Other income for the year ended June 30, 2018 was $539,000 and included a $0.5 million gain on change in fair value of our contingent real estate liability, and rental income of $0.3 million, offset by $0.3 in interest expense related to the amortization of debt issuance costs on the convertible note. Other income for the year ended June 30, 2017 was $850,000 and included a $1.7 million gain on bargain purchase related to the acquisition of the STC-MEMS Business, offset by an $877,000$0.9 million loss on the fair value of derivatives for placement agent warrants issued in connection with private placements in 2015 and 2016. These warrants were amended in December 2016 and January 2017 to remove the derivative feature and are now classified as equity. Other expense was $967,000 for the year ended June 30, 2016 and was primarily related to the loss on fair value of derivatives recorded for the placement agent warrants referenced above.
Net Loss
The Company recorded a net loss of $9.1$21.7 million for the year ended June 30, 2017,2018, compared to a net loss of $5.4$9.8 million for the year ended June 30, 2016.2017. The year-over-year incremental loss of $3.7$11.9 million, or 68%121%, was driven by higher personnel costs of $5.0 million, primarily in the NY Facility, increased stock compensation costs of $0.9 million, decreased other income (net) of $0.3 million, increased facility and material costs of $3.2 million, and depreciation of $1.2 million.
| 33 |
Liquidity and Capital Resources
Financing Activities
Since inception, the Company has recorded approximately $1.0 million and $1.1 million of revenue from contract research and government grants, and foundry services revenue, respectively. Our operations thus far have been funded primarily with contract research and government grants, foundry services, sales of our equity securities, and debt.
��
The Company has $14.8 million of cash on hand as of June 30, 2018, which reflects an increase of $5.2 million compared to $9.6 million as of June 30, 2017. The $5.2 million increase is primarily due to the ramp up of research$14.2 million in net cash used in operating activities and development activities, higher professional fees due$6.9 million in capital expenditures from July 1, 2017 to the costs associated with the Company’s second year of being a public reporting company, higher personnel costs for both R&D and administrative headcount, including increased costs for stock-based compensation,June 30, 2018, offset by the $1.7receipt of $13.2 million gainin net proceeds from sales of our common stock and $13.1 million in net proceeds received from our convertible note during the twelve months ended June 30, 2018. The Company estimates that cash on bargain purchase price recorded duehand will fund its operations, including current capital expense commitments into the fourth quarter of fiscal 2019. We will need to obtain additional capital through the acquisitionsale of additional equity securities, debt and additional grants, or otherwise, to fund operations past that date. There is no assurance that the STC-MEMS Business.
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.
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Liquidity and Capital Resources
Financing Activities
We have earned minimal revenue from operations since inception, and our operations have been funded with capital contributions, private placements of stock, grants and debt.
On March 10, 2016, we held a closing of a private placement offering (the “March 2016 Offering”) in which we sold 494,125 shares of our Common Stock to accredited investors at a fixed purchase price of $1.60 per share (the “2016 Offering Price”), for aggregate gross proceeds of $790,600 (before deducting expenses of the March 2016 Offering). On April 14, 2016, we held a closing of a private placement offering (the “April 2016 Offering,” and together with the March 2016 Offering, the “2016 Offering”) in which we sold 1,741,185 shares of our Common Stock at the “2016 Offering Price, for aggregate gross proceeds of $2.8 million (before deducting expenses of the April 2016 Offering).
With closings in each of November and December 2016 and January and February 2017, the Company sold a total of 2,142,000 shares of Common Stock in a private placement offering (the “2016-2017 Offering”) at a fixed purchase price of $5.00 per share (the “2016-2017 Offering Price”). Aggregate gross proceeds were $10.7 million (before deducting commissions and expenses of the offering).
In May 2017, the Company held a closing of a private placement offering (the “2017 Offering”) in which it sold an aggregate of 663,000 shares of Common Stock at a fixed purchase price of $9.00 per share to accredited investors, for aggregate gross proceeds of $5,967,000 (before deducting commissions and expenses of the offering).
Since inception throughDuring the year ended June 2017, we received $892,00030, 2018, the Company sold a total of 2,640,819 shares of its common stock at $5.50 per share in funds from NSF/SBIR grantsa private placement for aggregate gross proceeds of $14.5 million before deducting commissions and NC matching funds.expenses of approximately $1.3 million. The proceeds of the offering will be used to fund development and commercialization of the Company’s technology, capital expenditures and general corporate expenditures. In addition to the commissions and expenses paid, the Company issued to the placement agents warrants to purchase 154,177 shares of the Company’s common stock.
TheOn May 14, 2018 the Company estimatescompleted the $6.7offering of $15.0 million principal amount of cash on hand as of September 8, 2017 will fund its operations, including current capital expense commitments through December 2017. 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 projections6.5% Convertible Senior Secured Notes due 2023. The net proceeds of the offering after payment of offering costs were approximately $13.1 million. The notes will mature on May 31, 2023, unless earlier converted, redeemed or repurchased. Interest on the notes accrues at the rate of 6.5% per year and estimates are accurate. Although the Company is actively managing and controllingpayable at the Company’s option quarterly in cash outflows to mitigate these risks, these matters raise substantial doubt aboutand/or freely tradable shares of the Company’s abilitycommon stock, subject to continue ascertain limitations. The notes may be converted into common stock at the option of the holder at any time prior to maturity at an initial conversion price of $6.55 per share, subject to adjustment under certain circumstances. If the holder elects to convert the notes at any time on or after the date that is one year after the last date of original issuance of the notes and prior to May 31, 2021, the holder will also receive a going concern.make-whole payment equal to the remaining scheduled interest payments that would have been made on the notes converted had such notes remained outstanding through May 31, 2021 (the “put date”). At the Company’s option, make-whole payments may be paid in cash and/or freely tradable shares of the Company’s common stock.
Balance Sheet and Working Capital
June 30, 20172018 Compared to June 30, 20162017
As of June 30, 2017,2018, the Company had current assets of $10.0$15.9 million made up primarily of cash on hand of $9.6$14.8 million. As of June 30, 2016,2017, current assets were $4.3$10.0 million comprised primarily of cash on hand of $4.2$9.6 million. The $5.54$5.2 million increase in cash year over year was due to net proceeds from private placement offerings and convertible note issuance of $15.3$26.3 million offset by the cash expended for operations of $5.59$14.2 million and the investment in machinery and equipment of $1.6 million as well as the $2.8 million cash paid at the June 2017 closing of the acquisition for the STC-MEMS Business. The Company also saw a year over year increase in inventory of $145,000, mainly due to the purchase of inventory ($96,000) associated with the STC-MEMS acquisition, an increase in prepaid expenses of $103,000 due to the annual service fee payment for NASDAQ ($35,000) and new license fees for Cornell University for $45,000.
$6.9 million.
Property, Plant and Equipment was $7.9$12.8 million as of June 30, 20172018 as compared to a balance of $207,000$7.8 million as of the year ended June 30, 2016.2017. The approximate $7.6$5.0 million year-over-year increase is primarily due to the purchase of equipment building and land acquired with the STC-MEMS Business (cumulative recorded valueleasehold improvements of $6.1 million) as well as an additional investment$6.9 million, offset by depreciation of $1.7$1.3 million, in fixedand assets primarily equipment for researchimpairment and development.disposals of $0.5 million.
Total assets as of June 30, 20172018 and June 30, 20162017 were $29.3 million and $18.1 million, and $4.5 million, respectively.
Current liabilities as of June 30, 20172018 were $1.4$2.6 million and increased year-over-year by $816,000.$1.3 million. We saw an increase in accounts payable and accrued expenses of $793,000$1.3 million due mainly to the ramp up of both R&D activities and administrative and support costs including additional personnel, material spend, and professional fees.
Long-term liabilities totaled $1.7$12.8 million as of June 30, 2017,2018, compared to $1.3$1.7 million for the prior year period. The increase of $408,000$11.1 million was mainly due to the decrease in the derivativereal estate contingent liability recorded for warrants issued to placement agents in connection with private placements in 2015 and the 2016 Offering. During December 2016 and January 2017, the Company amended these warrant agreements to eliminate the derivative feature, and as a result, the liability was fully reclassed to stockholder’s equity in the year ended June 30, 2017. This decrease in long-term liability wasof $0.5 million, offset by an increase in other long term liabilities of $1.7$0.1 million, which was a long-term contingent real estate liability associated with the acquisitionand convertible notes of the STC-MEMS Business that closed on June 26, 2017.
$11.5 million, net of debt discount and issuance costs.
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Stockholders’ equity was $13.8 million as of June 30, 2018, compared to $15.0 million as of June 30, 2017 compared to $2.7a decrease of $1.2 million. Additional paid-in-capital (“APIC”) was $52.1 million as of June 30, 2016.
Additional paid-in-capital (“APIC”) was $30.8 million as of June 30, 20172018 and increased by $21.4$20.6 million. The year-over-year increase was due to: (1)to an increase from net proceeds of $15.4$13.2 million for the issuance of Common Stock induring the 2016-2017 Offering and the 2017 Offering,year, less $992,000$0.6 million for the fair value of warrants issued to placement agents for a total of 291,000154,177 shares of Common Stock, (2)an increase of $4.8$6.1 million of APIC recorded due to the vesting of restricted stock agreements granted to employees and contractors in lieu of cash compensation, and (3) an increase due to the releaseintrinsic value of derivative liabilities associated with warrants issuedthe beneficial conversion feature of the convertible notes of $1.8 million. The $1.2 million decrease in 2015 and 2016 offering for $2.2 million afterstockholders equity consisted of the warrant agreements were amended to eliminate the derivative feature in December and January 2017. The $21.4$20.6 million increase in stockholder’s equity wasAPIC reduced by the $9.1$21.7 million net loss recorded for the year ended June 30, 2017.2018.
Working capital as of June 30, 2017 was $8.7 million, compared to $3.7 million as of June 30, 2016.
Cash Flow Analysis
Year Ended June 30, 20172018 Compared to the Year Ended June 30, 20162017
Operating activities used cash of $5.5$14.2 million during the year ended June 30, 20172018 and $3.3$5.5 million for the 20162017 comparative period. The $2.2$8.7 million year-over-year 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), higher spend on G&A costs for support personnel and professional fees.fees and increase in depreciation expense.
Investing activities used cash of $4.5$7.0 million for the year ended June 30, 20172018 compared to $204,000$4.5 million for the comparative year ended June 30, 2016.2017. The $2.5 million year-over-year increase was primarily due to the $2.8 million cash paid at closing for the acquisition of the STC-MEMS Business, as well as increased spend on R&D equipment (higher by $1.5 million).and leasehold improvements.
Financing activities provided cash of $15.6$26.4 million for the year ended June 30, 20172018 versus $3.3$15.6 million for the 20162017 comparative period. The $12.3$10.8 million increase was due to additional proceeds from funds raised incommon stock and convertible notes issued during the 2016-2017 Offering andperiod compared to the 2017 Offering.prior period.
Off-Balance Sheet Transactions
The Company did not engage in any “off-balance sheet arrangements” (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of June 30, 2017.2018.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to a smaller reporting company.applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
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INDEX TO FINANCIAL STATEMENTS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Akoustis Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Akoustis Technologies, Inc. and Subsidiary (the “Company”) as of June 30, 2018 and 2017, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended June 30, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audited consolidated financial statements asaudits included performing procedures to assess the risks of and for the fiscal years ended June 30, 2017 and June 30, 2016 are included beginning on Page F-1 immediately following the signature page to this Report. See Item 15 for a listmaterial misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included herein.examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ Marcumllp | |
| Marcumllp |
We have served as the Company’s auditor since 2015.
New York, NY
August 29, 2018
| F-2 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREAkoustis Technologies, Inc.
Consolidated Balance Sheets
None.
| June 30, | June 30, | |||||||
| 2018 | 2017 | |||||||
| Assets | ||||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | 14,816,717 | $ | 9,631,520 | ||||
| Accounts receivable | 214,659 | - | ||||||
| Inventory | 57,556 | 188,476 | ||||||
| Prepaid expenses | 305,942 | 158,457 | ||||||
| Other current assets | 484,173 | 42,808 | ||||||
| Total current assets | 15,879,047 | 10,021,261 | ||||||
| Property and equipment, net | 12,820,169 | 7,853,814 | ||||||
| Intangibles, net | 264,295 | 206,527 | ||||||
| Assets held for sale, net | 333,250 | — | ||||||
| Other assets | 11,155 | 10,715 | ||||||
| Total Assets | $ | 29,307,916 | $ | 18,092,317 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 2,593,432 | $ | 1,336,368 | ||||
| Deferred revenue | 52,938 | 14,500 | ||||||
| Total current liabilities | 2,646,370 | 1,350,868 | ||||||
| Long-term Liabilities: | ||||||||
| Contingent real estate liability | 1,229,966 | 1,730,542 | ||||||
| Convertible notes payable, net of debt discount and issuance costs | 11,464,632 | — | ||||||
| Other long term liabilities | 117,086 | — | ||||||
| Total long-term liabilities | 12,811,684 | 1,730,542 | ||||||
| Total Liabilities | 15,458,054 | 3,081,410 | ||||||
| Stockholders' Equity | ||||||||
| Preferred Stock, par value $0.001: 5,000,000 shares authorized; none issued and outstanding | — | — | ||||||
| Common stock, $0.001 par value; 45,000,000 shares authorized; 22,203,437 and 19,075,050 shares issued and outstanding at June 30, 2018 and June 30, 2017, respectively | 22,203 | 19,075 | ||||||
| Additional paid in capital | 52,074,343 | 31,499,889 | ||||||
| Accumulated deficit | (38,246,684 | ) | (16,508,057 | ) | ||||
| Total Stockholders' Equity | 13,849,862 | 15,010,907 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 29,307,916 | $ | 18,092,317 | ||||
See accompanying notes to the consolidated financial statements.
| F-3 |
Consolidated Statements of Operations
For the Year June 30, 2018 | For the Year June 30, 2017 | |||||||
| Revenue | $ | 1,207,865 | $ | 486,496 | ||||
| Cost of revenue | 1,019,490 | — | ||||||
| Gross profit | 188,375 | 486,496 | ||||||
| Operating expenses | ||||||||
| Research and development | 13,266,975 | 5,013,260 | ||||||
| General and administrative expenses | 8,804,103 | 6,156,807 | ||||||
| Loss on disposal of fixed assets | 45,454 | — | ||||||
| Impairment of assets held for sale | 349,571 | — | ||||||
| Total operating expenses | 22,466,103 | 11,170,067 | ||||||
| Loss from operations | (22,277,728 | ) | (10,683,571 | ) | ||||
| Other (expense) income | ||||||||
| Other income | 352 | — | ||||||
Interest (expense) income | (329,422 | ) | 1,936 | |||||
| Bargain purchase | — | 1,725,881 | ||||||
| Rental income | 313,496 | — | ||||||
| Change in fair value of contingent real estate liability | 500,576 | — | ||||||
| Change in fair value of derivative liabilities | 54,099 | (877,490 | ) | |||||
| Total other income | 539,101 | 850,327 | ||||||
| Net loss | $ | (21,738,627 | ) | $ | (9,833,244 | ) | ||
| Net loss per common share - basic and diluted | $ | (1.04 | ) | $ | (0.58 | ) | ||
| Weighted average common shares outstanding -basic and diluted | 20,928,235 | 16,990,536 | ||||||
See accompanying notes to the consolidated financial statements.
| F-4 |
Consolidated Statement of Changes in Stockholders’ Equity
For the Years Ended June 30, 2018 and 2017
| Common Stock | Additional | |||||||||||||||||||
| Shares | Amount | Paid In Capital | Accumulated Deficit | Stockholders’ Equity | ||||||||||||||||
| Balance, June 30, 2016 | 15,375,981 | 15,376 | 9,335,801 | (6,674,813 | ) | 2,676,364 | ||||||||||||||
| Common stock issued for cash, net of issuance costs | 2,805,000 | 2,805 | 15,381,966 | — | 15,384,771 | |||||||||||||||
| Warrants issued to underwriter | — | — | (991,767 | ) | — | (991,767 | ) | |||||||||||||
| Common stock issued for services | 783,000 | 783 | 4,967,318 | — | 4,968,101 | |||||||||||||||
| Common stock issued for exercise of warrants | 111,069 | 111 | 171,649 | — | 171,760 | |||||||||||||||
| Vesting of restricted shares | — | — | 434,703 | — | 434,703 | |||||||||||||||
| Transfer of warrants from liability to equity classification | — | — | 2,200,219 | — | 2,200,219 | |||||||||||||||
| Net loss | — | — | — | (9,833,244 | ) | (9,833,244 | ) | |||||||||||||
| Balance, June 30, 2017 | 19,075,050 | 19,075 | 31,499,889 | (16,508,057 | ) | 15,010,907 | ||||||||||||||
| Common stock issued for cash, net of issuance costs | 3,183,269 | 3,183 | 13,196,747 | — | 13,199,930 | |||||||||||||||
| Warrants issued to underwriter | — | — | (645,757 | ) | — | (645,757 | ) | |||||||||||||
| Common stock issued for services | 131,000 | 131 | 5,617,343 | — | 5,617,474 | |||||||||||||||
| Common stock issued for exercise of warrants | 17,770 | 18 | 74,923 | — | 74,941 | |||||||||||||||
| Intrinsic value of beneficial conversion feature | — | — | 1,809,161 | — | 1,809,161 | |||||||||||||||
| Vesting of restricted shares | — | — | 521,833 | — | 521,833 | |||||||||||||||
| Repurchase of common shares | (203,652 | ) | (204 | ) | 204 | — | — | |||||||||||||
| Net loss | — | — | — | (21,738,627 | ) | (21,738,627 | ) | |||||||||||||
| Balance, June 30, 2018 | 22,203,437 | $ | 22,203 | $ | 52,074,343 | $ | (38,246,684 | ) | $ | 13,849,862 | ||||||||||
See accompanying notes to the consolidated financial statements.
| F-5 |
Consolidated Statements of Cash Flows
| For the Year Ended | For the Year Ended | |||||||
| June 30, 2018 | June 30, 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (21,738,627 | ) | $ | (9,833,244 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 1,247,518 | 102,876 | ||||||
| Amortization of intangibles | 15,078 | 7,208 | ||||||
| Share-based compensation | 5,490,517 | 4,631,115 | ||||||
| Loss on disposal of assets | 45,454 | — | ||||||
| Impairment on assets held for sale | 349,571 | |||||||
| Change in fair value of derivative liabilities | (54,099 | ) | 877,490 | |||||
| Amortization of debt discount | 204,581 | — | ||||||
| Change in fair value of contingent real estate liability | (500,576 | ) | — | |||||
| Bargain purchase | — | (1,725,881 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (214,659 | ) | — | |||||
| Inventory | 130,920 | (48,883 | ) | |||||
| Prepaid expenses | (147,485 | ) | (103,639 | ) | ||||
| Other current asset | (441,365 | ) | (42,808 | ) | ||||
| Other assets | (440 | ) | — | |||||
| Accounts payable and accrued expenses | 1,258,106 | 572,644 | ||||||
| Change in other long term liabilities | 117,086 | — | ||||||
| Deferred revenue | 38,438 | 14,500 | ||||||
| Net Cash Used In Operating Activities | (14,199,982 | ) | (5,548,622 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash paid for machinery and equipment | (6,942,148 | ) | (1,625,055 | ) | ||||
| Cash paid for acquisition of STC-MEMS | — | (2,846,049 | ) | |||||
| Cash paid for intangibles | (72,846 | ) | (60,729 | ) | ||||
| Net Cash Used In Investing Activities | (7,014,994 | ) | (4,531,833 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common stock | 13,199,930 | 15,384,771 | ||||||
| Proceeds from exercise of warrants | 74,941 | 171,760 | ||||||
| Proceeds received from convertible notes, net | 13,125,302 | — | ||||||
| Net Cash Provided By Financing Activities | 26,400,173 | 15,556,531 | ||||||
| Net Increase (Decrease) in Cash | 5,185,197 | 5,476,076 | ||||||
| Cash - Beginning of Period | 9,631,520 | 4,155,444 | ||||||
| Cash - End of Period | $ | 14,816,717 | $ | 9,631,520 | ||||
| SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
| Cash Paid During the Period for: | ||||||||
| Income taxes | $ | — | $ | — | ||||
| Interest | $ | — | $ | — | ||||
| SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Stock compensation payable | $ | 3,033 | $ | 654,781 | ||||
| Warrants issued for stock issuance costs | $ | 645,757 | $ | 991,767 | ||||
| Reclassification of derivative liability to additional paid in capital | $ | — | $ | 2,200,219 | ||||
| Contingent liability | $ | 1,229,966 | $ | 1,730,542 | ||||
| Reclassification of fixed assets to assets held for sale, net | $ | 682,821 | $ | — | ||||
| Debt issuance costs included in accounts payable and accrued expenses | $ | 29,824 | $ | — | ||||
| Intrinsic value of beneficial conversion feature | $ | 1,809,161 | $ | — | ||||
| Derivative liability of convertible notes | $ | 1,104,701 | $ | — | ||||
See accompanying notes to the consolidated financial statements.
| F-6 |
Notes to the Consolidated Financial Statements
Note 1. Organization
Akoustis Technologies, Inc (“the Company”) was incorporated under the laws of the State of Nevada on April 10, 2013. Effective December 15, 2016, the Company changed its state of incorporation from the State of Nevada to the State of Delaware. Through its subsidiary, Akoustis, Inc. (a Delaware corporation), the Company, headquartered in Huntersville, North Carolina, is focused on developing, designing, and manufacturing innovative RF filter products for the mobile wireless device industry, including for products such as smartphones and tablets, cellular infrastructure equipment, and WiFi premise equipment. 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. To construct the resonators that are the building blocks for the RF filter, we have developed a fundamentally new single-crystal acoustic materials and device technology manufactured with our proprietary XBAW process. Filters are critical in selecting and rejecting signals, and their performance enables differentiation in the modules defining the RFFE.
On August 11, 2016, the Company changed its fiscal year from the period beginning on April 1 and ending on March 31 of each year to the period beginning on July 1 and ending on June 30 of each year, effective for the fiscal year ended June 30, 2017.
The Company’s common stock is listed on the Nasdaq Capital Market under the symbol AKTS.
Note 2. Going Concern and Management Plans
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2018, the Company had working capital of $13.2 million and an accumulated deficit of $38.2 million. Since inception, the Company has recorded approximately $1.0 million and $1.1 million of revenue from contract research and government grants, and microelectromechanical systems (“MEMS”) foundry and engineering review services, respectively. As of August 21, 2018, the Company had cash and cash equivalents of $12.1 million. The Company estimates that cash on hand is sufficient to fund its operations into the fourth quarter of fiscal 2019. The Company will need to obtain additional capital to fund operations past that date. The Company is actively managing and controlling cash outflows to mitigate this risk, however, this matter raises substantial doubt about the Company’s ability to continue as a going concern within one year from the date of this filing. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
There is no assurance that the Company’s projections and estimates are accurate. The Company’s primary sources of funds for operations since inception have been contract research and government grants, MEMS Foundry and Engineering services revenue, sales of our equity securities, and issuance of debt. The Company needs to obtain additional capital to accomplish its business plan objectives and will continue its efforts to secure additional funds. However, the amount of funds raised, if any, may not be sufficient to enable the Company to attain profitable operations. To the extent that the Company is unsuccessful in obtaining additional financing, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.
ITEM 9A. CONTROLS AND PROCEDURES
Note 3. Summary of significant accounting policies
EvaluationBasis of Disclosure Controls and Procedurespresentation
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as definedThe Company’s consolidated financial statements have been prepared in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by usaccordance with accounting principles generally accepted in the reports that we file or submit underUnited States of America (“GAAP”) and the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We conducted an evaluation under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2017. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of such date due to the material weakness described below with respect to our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control Integrated Framework (2013). Based on that evaluation under this framework, our management concluded that our internal control over financial reporting was not effective.
During its assessment of internal control over financial reporting, management identified a material weakness in the design of controls over it acquisition accounting and reporting practices as it relates to the acquisition of the STC-MEMS Business. The effectiveness of controls surrounding the acquisition accounting processing, review of external advisors work and subsequent compilation and reporting has the potential, when taken together, to represent a more than remote likelihood that a material misstatement could occur and not be prevented or detected. Therefore, management has determined this has risen to the level of a material weakness. To remediate this material weakness, management intends to increase the size and capabilities of its accounting department and place less reliance on external consultants.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness as to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
This Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rulesregulations of the Securities and Exchange Commission that permit the Company (as a smaller reporting company) to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
Except for the material weakness described above, there have been no changes in our internal control over financial reporting during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(“SEC”).ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCEPrinciples of Consolidation
DirectorsThe accompanying consolidated financial statements include the accounts of the Company and Executive Officersits wholly-owned subsidiary, Akoustis, Inc. On February 22, 2018, Akoustis Manufacturing New York, Inc. was merged into Akoustis, Inc., with Akoustis, Inc. as the surviving entity. All significant intercompany accounts and transactions have been eliminated in consolidation.
BelowUse of estimates and assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s).
| F-7 |
Critical accounting estimates are estimates for which (a) the namesnature of the estimate is material due to the levels of subjectivity and certain information regarding, our current executive officersjudgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and directors.(b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements were:
| (1) | ||||||||
Directors are elected to serve until their successors are elected and qualified. Directors are elected by a plurality of the votes cast at the meeting of stockholders at which they are elected and hold office until the expiration of the term for which he or she was elected or until a successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum of the Board of Directors for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board of Directors individually or collectively consent in writing to the action.
Executive officers are appointed by the Board of Directors and serve at its pleasure.
The principal occupation and business experience during the past five years for our executive officers and directors is as follows:
Arthur E. Geiss, Co-Chairman of the Board, founded AEG Consulting, LLC in 2003 and currently serves as its Owner and CEO. AEG Consulting offers guidance concerning manufacturing, operations, and process development to technology companies. Prior to establishing AEG Consulting, Mr. Geiss served as Vice President of Wafer Fab Operations at RF Micro Devices, Inc. (“RFMD”) (now Qorvo, Inc.). He was responsible for the start-up and operations of Gallium Arsenide epitaxial-growth and wafer-fabrication. Previous to RFMD, Mr. Geiss held management positions with Alpha Industries, Inc. (purchased by Skyworks Solutions, Inc.) and before that at ITT Gallium Arsenide Technology Center (purchased by Cobham plc). At both companies, he was responsible for process and device development and wafer fabrication operations. Prior to these, Mr. Geiss held a research position at the Xerox Palo Alto Research Center (now PARC, Inc.). At PARC he investigated the structure of vitreous materials and amorphous thin-films using Raman spectroscopy. Mr. Geiss has served as a Member of the Executive Committee of the IEEE GaAs IC Symposium (now CSICS) and as a Member of the Executive Committee of the GaAs Manufacturing Technology Conference (now CS Mantech). He has numerous patents and publications on electronic devices, processing, and manufacturing. Mr. Geiss earned a B.S. degree at Lafayette College and M.S. and Ph.D. degrees at Brown University, all in physics. We believe that Mr. Geiss adds value to our Board of Directors based on his extensive experience with technology companies, his executive leadership and management experience and his research background.
Jerry D. Neal, Co-Chairman of the Board, founded RFMD (now, Qorvo, Inc.) in 1991 and served as its Executive Vice President of Marketing and Strategic Development from January 2002 to May 31, 2012. Dr. Neal served as a Vice President of Marketing of RFMD, from May 1991 to January 2000 and its Executive Vice President of Sales, Marketing and Strategic Development from January 2000 to January 2002. Prior to joining RFMD, he was employed for 10 years with Analog Devices, Inc., including as Marketing Engineer, Marketing Manager and Business Development Manager. Dr. Neal also founded Moisture Control Systems for the production of his patented electronic sensor for measurement of soil moisture for research, which was later sold to Hancor, Inc. He has been a Director of Jazz Semiconductor, Inc. since November 2002. Dr. Neal served as a Director of RFMD from February 1992 to July 1993. He also held various positions at Hewlett-Packard. Dr. Neal received his Associate’s Degree in Electrical Engineering from Gaston Technical Institute and North Carolina State University and his doctor of business management degree from Southern Wesleyan University. We believe that Dr. Neal adds value to our Board of Directors based on his extensive executive leadership and management experience and his sales, marketing and product development background.
Jeffrey B. Shealy is our President and Chief Executive Officer, as well as one of our directors. He has over 20 years of experience in the RF/Wireless industry focused on building businesses around solid-state materials and electron device innovation. He held the position of Vice President and General Manager at RFMD from 2001 until 2014. Mr. Shealy is a Howard Hughes Doctoral Fellow and spent 7 years with Hughes Electronics at Hughes Research Labs (now HRL Labs) and Hughes Network Systems (now Hughes). He previously founded RF Nitro, a RF Power Amplifier high-tech venture, which was acquired by RFMD in 2001. Mr. Shealy holds an MBA degree from Wake Forest University, Master of Science and Doctorate degrees in Electrical and Computer Engineering from University of California at Santa Barbara (UCSB), and a Bachelor’s of Science degree in Electrical and Computer Engineering from North Carolina State University (NCSU). We believe that Mr. Shealy adds value to our Board of Directors based on his intimate knowledge of our business plans and strategies, his experience with high tech startup ventures and his years of experience in the RF/Wireless industry.
John T. Kurtzweil, has served as our Chief Financial Officer and Chief Accounting Officer since July 14, 2017, and he served as a director on the Board from January 12, 2017 to July 14, 2017. He served as VP Finance of Cree, Inc., a company that develops, manufactures, and sells lighting-class light emitting diode, lighting, and semiconductor products for power and radio-frequency applications, and Chief Financial Officer of Wolfspeed, a Cree Company, from 2015 until March 2017. He is currently providing consulting services to a limited number of businesses. Prior to his employment at Cree, Mr. Kurtzweil was an independent consultant beginning in 2014. From 2012 until 2014, Mr. Kurtzweil served as Senior Vice President, Chief Financial Officer and Special Advisor to the Chief Executive Officer of Extreme Networks, Inc., a provider of high-performance, open networking innovations for enterprises, services providers, and Internet exchanges, and also served as its Chief Accounting Officer. From 2006 to 2012, Mr. Kurtzweil served as Executive Vice President, Finance and as Chief Financial Officer and Treasurer of Cree, Inc. From 2004 to 2006, Mr. Kurtzweil was Senior Vice President and Chief Financial Officer at Cirrus Logic, Inc., a fabless semiconductor company. Mr. Kurtzweil currently serves as a director of Axcelis Technology, Inc., and was appointed Chairman of its Audit Committee in February 2017. Mr. Kurtzweil served as a board member for Meru Networks, Inc. for a portion of 2015 prior to its sale.
David M. Aichele is Vice President of Business Development responsible for leading the sales and marketing efforts of the Company. Mr. Aichele joined the company in May 2015, bringing over 20 years of international sales, business development, and marketing experience with him. Prior to Akoustis, Mr. Aichele was EVP Sales & Marketing for T1Visions, a high-tech software startup company ranking among the 2014 INC 500 fastest growing private companies in the U.S from 2013 to May 2015. Mr. Aichele held director positions at RFMD from 2005 to 2015, where he was responsible for the business development and launch of new RF semiconductor products targeting the cellular market, and senior management positions at Tessera and TE Connectivity, where he led business development and sales teams. Mr. Aichele holds a BSEE from Ohio University and an MBA from the Leeds School of Business at the University of Colorado.
Cindy C. Paynehas served as our Vice President of Finance, Corporate Controller, and Treasurer since July 14, 2017. Ms. Payne previously served as our Chief Financial Officer and Treasurer from 2015 to July 14, 2017. Ms. Payne brings to the Company over 20 years of experience in financial management. Prior to joining Akoustis, Ms. Payne most recently served as the CFO for Amerock LLC from 2014-2015, a private equity owned hardware distributor in Mooresville, NC. Prior to joining Amerock, Ms. Payne held the position of CFO for Tolt Service Group, a private equity owned technology services provider, from 2010 until the company’s sale in 2014. Her experience prior to Tolt included the role of Director of Financial Planning and Analysis in the Soft Trim Division of International Automotive Components, a Tier I supplier to the automotive industry and the role of Controller of NewBold Corporation. NewBold Corporation, located in the Roanoke, Virginia area, offers both manufactured products and technology services to retail and healthcare markets. Ms. Payne graduated Magna Cum Laude from Western Carolina University with a Bachelor of Science in Business Administration and is a Certified Public Accountant, licensed in the Commonwealth of Virginia.
Steven P. DenBaars is a Professor of Materials and Co-Director of the Solid-State Lighting Center at University of California at Santa Barbara. Professor DenBaars joined UCSB in 1991 and currently holds the Mitsubishi Chemical Chair in Solid State Lighting and Displays. He is also a co-founder and current board member of two privately held GaN startup companies, Soraa Inc. and Soraa Laser Inc. Dr. DenBaars has been in the LED business for over 25 years starting with his prior work at Hewlett-Packard Optoelectronics division in 1988 and involvement in more than two LED companies and one laser diode company. Professor DenBaars’ specific research interests include growth of wide-band gap semiconductors (GaN based), and their application to Blue LEDs and lasers and energy efficient solid-state lighting. This research has led to over 750 scientific publications and over 160 U.S. patents on electronic materials and devices. He has been awarded a NSF Young Investigator award, Young Scientist Award of the ISCS, IEEE Aron Kressel Award, and he is an IEEE Fellow and a Visiting Professor at the Institute for Advanced Studies (IAS) HKUST. He was recently elected to the National Academy of Engineering (2012), and elected Fellow of the National Academy of Inventors (2014). We believe that Professor DenBaars adds value to our Board of Directors based on his years of experience in the LED industry and his extensive research involving wide-based gap semiconductors and their application to high power electronic devices.
Jeffrey K. McMahon has been employed by North Highland, a global management consulting firm, since 2003. He has held the position of Managing Director since 2014 and is the current Market Lead for North Highland’s largest market. He has an extensive background in business and information technology consulting in the financial services, energy, and telecommunications industries. He has 20 years of experience helping Fortune 100 companies drive revenue, optimize processes, improve customer experience and manage risk. His areas of expertise include marketing, strategy articulation and realization, strategic execution, business process management and merger integration. Prior to joining North Highland, Mr. McMahon was a Manager in Accenture’s process practice area. Mr. McMahon received a Bachelor of Science degree in Civil Engineering from North Carolina State University. We believe that Mr. McMahon adds value to our Board of Directors based on his extensive experience in business and technology consulting and his marketing and strategizing expertise.
Steven P. Miller served as a Board Advisor to the Board from January 2017 to June 2017. He is the President of Via Capri Inc., the general partner of Via Capri Investment L.P., a limited partnership formed by Mr. Miller in 1996. Mr. Miller is also the President of Sawmill Inc., the general partner of Sawmill Investment L.P., another limited partnership formed by Mr. Miller in 1996. From 2001 to 2003, Mr. Miller served as a director for TriQuint Semiconductor, Inc. (TriQuint), then a leading supplier of high-performance components and modules for communications applications before merging with RFMD to form Qorvo, Inc. in 2015. Prior to that, Mr. Miller held several positions at Sawtek Inc. from 1979 until his retirement in 1999, including Co-Founder, President, Chief Executive Officer, and Chairman of Sawtek’s Board of Directors. Sawtek Inc. merged with TriQuint in 2001. Prior to co-founding Sawtek Inc. in 1979, Mr. Miller was Manager of the SAW Development Laboratory in the Defense Group at Texas Instruments Incorporated. Mr. Miller brings to the Board familiarity with the Company, its operations, finances, and strategic plan through his experience as a Board Advisor, as well as industry expertise, public company leadership experience, and his experience and skills in strategic growth and business development, including capital formation.
Suzanne Rudymost recently served as Vice President of Tax & Corporate Treasurer, Compliance Officer and Assistant Secretary of Qorvo, Inc., a publicly-traded company and leading supplier of semiconductor solutions for the wireless communications market, until November 2015. In addition to her treasury and compliance duties, Ms. Rudy served as a director for various subsidiaries of Qorvo, Inc. Prior to joining Qorvo, Inc. predecessor, RMFD, in 1999, Ms. Rudy was the Controller for Precision Fabrics Group, Inc., a textile spin-off of the Fortune 500 Company, Burlington Industries. In addition, she spent six years as a Certified Public Accountant and Manager for BDO Seidman, LLP, an international accounting firm. From 2012 to 2016, Ms. Rudy served as a director for Delta Apparel, Inc., a publicly-traded apparel manufacturer, where she served on the Audit and Compensation Committees. From 2008 to 2011, Ms. Rudy served as a director for First National Bank United Corporation, serving as Chair of the Audit Committee and the Assets and Liability Committee. Since 2006, Ms. Rudy has served on the Board of Visitors for Guilford College. She was also a Board Leadership Fellow in 2013, as designated by the National Association of Corporate Directors. Ms. Rudy brings to our Board extensive expertise in public company financial, compliance, and related strategic matters.
Director Independence
Our Board has determined that Ms. Rudy and Messrs. Geiss, Neal, DenBaars, McMahon, and Miller are independent directors under the applicable standards of The NASDAQ Stock Market. In reaching this determination, the Board considered Mr. Geiss’ relationship with AEG Consulting, a firm owned and operated by Mr. Geiss, which provides consulting services to the Company, as discussed below under “Certain Relationships and Related Person Transactions.” After consideration, the Board determined that this relationship did not impact Mr. Geiss’ ability to serve as an independent director.
Family Relationships
There are no family relationships among our directors or executive officers.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has been involved in any of the following events, or any of the other events specified in Item 401(f) of Regulation S-K, during the past ten years:
| (5) | Estimates and assumptions used in business combinations: The accounting for business combinations requires estimates and judgments as to |
Board CommitteesThese significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Revised Prior Period Amounts
The Board maintains three standing committees: the Audit Committee, the Compensation CommitteeCompany identified and the Nominating Committee. Each committee operates under a written charter and reports regularlyrecorded an out-of-period adjustment related to the Board. A copy of each of these committee charters is availablestock-based compensation that should have been recorded in the “Investors” section of our website under the heading “Governance Documents” at http://www.akoustis.com and may also be obtained by submitting the “Contact Us” form at the website address set forth above. Each member of the Audit Committee, the Compensation Committee and the Nominating Committee must satisfy membership requirements imposed by the applicable committee charter and, where applicable, NASDAQ listing standards and SEC rules and regulations. Each of the members of the Audit Committee, the Compensation Committee and the Nominating Committee has been determined by the Board to be independent under applicable NASDAQ listing standards and, in the case of the Audit Committee and the Compensation Committee, under the independence requirements established by the SEC. A brief description of the responsibilities of each of these committees and their current membership follows.
Audit Committee
The Audit Committee is a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee is appointed by the Board to assist the Board in its duty to oversee our accounting, financial reporting and internal control functions and the audit of our financial statements. The current members of the Audit Committee are Suzanne Rudy (Chair), Jerry Neal and Jeffrey McMahon, each of whom is independent under existing NASDAQ listing standards and SEC requirements. The Board has examined the SEC’s definition of “audit committee financial expert” and determined that Ms. Rudy is an audit committee financial expert.
Compensation Committee
The Compensation Committee is appointed by the Board to assist the Board in overseeing and reviewing information from management regarding compensation and human capital issues within the Company. The Compensation Committee also has specific responsibilities regarding performance reviews and compensation of the Company’s executive officers. The Compensation Committee regularly consults with members of our executive management team regarding our executive compensation program. The current members of the Compensation Committee are Messrs. McMahon (Chairman) and Neal and Ms. Rudy, each of whom is independent under existing NASDAQ listing standards, SEC requirements, and the requirements of Section 162(m) of the Internal Revenue Code (the “Code”).
Nominating Committee
The Nominating Committee is appointed by the Board to assist the Board in identifying individuals qualified to become Board and committee members and to recommend to the Board director nominees. The current members of the Nominating Committee are Messrs. Neal (Chairman) and DenBaars and Ms. Rudy.
Other Committees
Our Board of Directors may designate from among its members one or more other committees in the future, and in July 2017, our Board designated a Technology Committee to assist the Board and the Company’s senior management in overseeing technology development initiatives and to advise the Board regarding new technology development and execution of technology initiatives. The current members of the Technology Committee are Messrs. Geiss, DenBaars, and Miller.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee are Messrs. McMahon (Chairman) and Neal and Ms. Rudy. Mr. Geiss also served as a member of the Compensation Committee for a portion of the fiscal year ended June 30, 2017. No memberThe adjustment was reflected as a $725,004 increase in additional paid in capital and corresponding increase in accumulated deficit. Tabular summaries of the Compensation Committee has ever served as an officerrevisions are presented below:
Consolidated Balance Sheet June 30, 2017 | ||||||||||||
| Previously Reported | Revisions | Revised Reported | ||||||||||
| Additional paid in capital | $ | 30,774,885 | $ | 725,004 | $ | 31,499,889 | ||||||
| Accumulated deficit | (15,783,053 | ) | (725,004 | ) | (16,508,057 | ) | ||||||
| F-8 |
Consolidated Statement of Operations Year ended June 30, 2017 | ||||||||||||
| Previously Reported | Revisions | Revised Reported | ||||||||||
| Net loss | $ | (9,108,240 | ) | $ | (725,004 | ) | $ | (9,833,244 | ) | |||
| Net loss per ordinary share: | ||||||||||||
| Basic | $ | (0.54 | ) | $ | (0.04 | ) | $ | (0.58 | ) | |||
The Company analyzed the revisions under SEC Staff Accounting Bulletin No. 108 and determined that the revisions are immaterial on a quantitative and qualitative basis and that it is probable that the judgment of a reasonable person relying upon the financial statements would not have been changed or employeeinfluenced by the inclusion or correction of Akoustis or had any relationship during the fiscalitems in the year ended June 30, 2017. Therefore, amendment of the 2017 requiredAnnual Report is not considered necessary. However, if the adjustments to correct the errors were recorded in the first quarter of 2018, the Company believes the impact would have been significant to the first quarter and would impact comparisons to prior periods. The Company has also revised in this annual report on Form 10-K the previously reported annual consolidated balance sheet as of June 30, 2017 on Form 10-K for these amounts.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be disclosed pursuantcash equivalents. Financial instruments that potentially subject the Company to Item 404concentrations of Regulation S-K, other than consulting fees paid to AEG Consulting, LLC, Mr. Geiss’ consulting firm. No executive officercredit risk consist primarily of cash deposits. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, the Company’s cash and cash equivalent balances may be uninsured or in amounts that exceed the FDIC insurance limits; as of June 30, 2018 and 2017 approximately $14.6 million and $9.4 million, respectively, was uninsured.
Inventory
Inventory is stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) valuation method. Inventory was comprised of the Company has served as a director or memberfollowing at June 30, 2018 and 2017:
| June 30, 2018 | June 30, 2017 | |||||||
| Finished goods held for resale | $ | 23,441 | $ | 49,374 | ||||
| Raw materials | 34,115 | 139,102 | ||||||
| $ | 57,556 | $ | 188,476 | |||||
Property and equipment, net
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight–line method on the various asset classes over their estimated useful lives, which range from two to eleven years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs, which do not extend the economic useful life of the Compensation Committee (or other committee serving an equivalent function)related assets, are charged to operations as incurred. The Company records gains or losses on the disposal of any other entity, oneassets as the difference between net book value of whose executive officers servedassets and cash received less costs to dispose of assets. Gains or losses on the disposal of assets, as directorwell as impairment of assets held for sale are recorded in operating expenses.
Intangible assets, net
Intangible assets consist of patents, trademarks and customer relationships. Applicable long–lived assets are amortized over the shorter of their estimated useful lives, the estimated period that the assets will generate revenue, or the statutory or contractual term in the case of patents. Estimates of useful lives and periods of expected revenue generation are reviewed for appropriateness and are based upon management’s judgment. Patents are amortized on the straight-line method over their useful lives of 15 years.
Impairment of Long-Lived Assets
The Company assesses the recoverability of its long-lived assets, including property and equipment, when there are indications that the assets might be impaired. When evaluating assets for potential impairment, the Company compares the carrying value of the asset to its estimated undiscounted future cash flows. If an asset’s carrying value exceeds such estimated undiscounted cash flows, the Company duringrecords an impairment charge for the difference between the carrying amount of the asset and its fair value.
Based on its assessments of equipment that is no longer needed as part of the XBAW single crystal manufacturing process, the Company recorded impairment charges on assets held for sale of $349,571 for the year ended June 30, 2018, and $0 for the year ended June 30, 2017.
CodeFair Value of EthicsFinancial Instruments
The carrying amounts of cash and cash equivalents and accounts payable approximate fair value due to the short-term nature of these instruments.
The Company has adoptedmeasures the fair value of financial assets and liabilities based on the guidance of ASC 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a Codeframework for measuring fair value, and expands disclosures about fair value measurements.
| F-9 |
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of Ethicsobservable inputs and Conduct that applies to our directors, officers, and employees. A copyminimize the use of unobservable inputs when measuring fair value.
Fair value measurements are categorized using a valuation hierarchy for disclosure of the Code of Ethics and Conduct is posted oninputs used to measure fair value, which prioritize the Company’s website at www.akoustis.com. In the event that we amend anyinputs into three broad levels:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the provisionsreporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the Code of Ethicsreported date, and Conductinclude those financial instruments that requires disclosure under applicable laware valued using models or SEC rules, we intend to disclose such amendment on our website. Any waiver of the Code of Ethics and Conduct must be approved by the Board of Directors. Any waivers granted to our CEO or CFO will be disclosed on our website within four business days.other valuation methodologies.
Stockholder CommunicationsLevel 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with the Board
Stockholders may communicate with the Boardinternally developed methodologies that result in management’s best estimate of Directors, members of particular committees or individual directors, by sending a letter to such persons in care of our Chief Executive Officer at our principal executive offices. The Chief Executive Officer has the authority to disregard any inappropriate communications or to take other appropriate actions with respect to any inappropriate communications. If deemed an appropriate communication, the Chief Executive Officer will submit the correspondence to the Chairman of the Board or to any committee or specific director to whom the correspondence is directed. Please note that all such communications must be accompanied by a statement of the type and amount of our securities that the person holds; any special interest, meaning an interest that is not derived from the proponent’s capacity as a shareholder, of the person in the subject matter of the communication; and the address, telephone number and e-mail address, if any, of the person submitting the communication.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Exchange Act requires the directors, certain officers, and beneficial owners of more than 10% of a class of securities registered under Section 12 of the Exchange Act to file reports with the SEC indicating their holdings of and transactions in such securities and to provide copies of such reports to the issuer of such securities.Based solely upon a review of the copies of the reports furnished to the Company, the Company believes all such reporting persons complied with such reporting obligations during the fiscal year ended June 30, 2017, except for a Form 3 filed on March 13, 2017 by Mark N. Tompkins.fair value.
ITEM 11. EXECUTIVE COMPENSATIONDerivative Liability
Summary Compensation TableThe Company evaluates its options, warrants, convertible notes, or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. The change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.
On August 11, 2016, we changed our fiscal year fromIn circumstances where the embedded conversion option in a fiscal year ending on March 31convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each yearreporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”)to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.
The Company utilizes a binomial option pricing model to compute the fair value of the derivative liability and to mark to market the fair value of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements of operations.
The Company utilizes the with-and-without method, a form of the income approach model to compute the fair value of its embedded derivatives associated with its convertible note. The fair value of the embedded derivatives represents the difference in the present value of anticipated cash flows assuming the feature is present as compared to a fiscal year ending on June 30security without the same feature. The Company records the change in the fair value of each year, effectivethe derivative as other income or expense in the consolidated statements of operations.
Revenue Recognition
Change in Accounting Policy for Revenue Recognition
Effective October 1, 2016, the Company changed its accounting policy for the fiscal year ended June 30, 2017. Accordingly,recognition of grant revenue. The Company believes this change in accounting policy is preferable due to the following table sets forth information concerningfact that grant revenue is viewed as an ongoing function of its intended operations. This change in accounting policy also enhances the total compensation awardedcomparability of the Company’s financial statements with many of its industry peers. The adoption of this accounting policy change has been applied retrospectively to earned by or paid to our named executive officers during (i) the fiscal year ended June 30, 2017; (ii) the three-month transition period (“TP”) from April 1, 2016 to June 30, 2016;all prior periods presented in this Annual Report on Form 10-K and (iii) the year ended March 31, 2016 (our prior fiscal year).has had no impact on net loss per share.
| Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) (3) | All Other Compensation ($)(4) | Total ($) | ||||||||||||||||
| Jeffrey Shealy, | 2017 (1) TP 2016 | 154,327 42,484 | 92,700 — | 151,200 — | 9,801 2,815 | 407,938 45,299 | ||||||||||||||||
| CEO | 2016 (2) | 150,000 | 30,000 | — | 5,077 | 185,077 | ||||||||||||||||
| Mark Boomgarden, | 2017 (1) TP 2016 | 139,923 36,615 | 42,024 — | 84,000 — | 6,631 2,009 | 272,578 38,624 | ||||||||||||||||
| VP of Operations (5) | 2016 (2) | 117,692 | 13,600 | 67,450 | 17,653 | 216,395 | ||||||||||||||||
| Cindy Payne, | 2017 (1) TP 2016 | 149,183 39,038 | 44,805 — | 126,000 — | 7,760 2,113 | 327,748 41,151 | ||||||||||||||||
| VP of Finance (6) | 2016 (2) | 114,327 | 13,775 | 217,500 | 4,462 | 350,064 | ||||||||||||||||
| Dave Aichele, | ||||||||||||||||||||||
| VP of Business | 2017 (1) TP 2016 | 139,923 37,143 | 42,024 — | 84,000 — | 7,278 2,009 | 273,225 39,152 | ||||||||||||||||
| Development | 2016 (2) | 121,876 | 13,600 | 165,000 | 4,603 | 305,079 | ||||||||||||||||
| F-10 | |
| Fiscal Year | 401K Contribution ($) (a) | Contractor Compensation | Total ($) | |||||||
| Jeffrey Shealy, | 2017 TP 2016 | 9,801 2,815 | 9,801 2,815 | |||||||
| CEO | 2016 | 5,077 | 5,077 | |||||||
| Mark Boomgarden, | 2017 TP 2016 | 6,631 2,009 | 6,631 2,009 | |||||||
| VP of Operations | 2016 | 4,603 | 13,050 | 17,653 | ||||||
| Cindy Payne, | 2017 TP 2016 | 7,760 2,113 | 7,760 2,113 | |||||||
| VP Finance | 2016 | 4,462 | 4,462 | |||||||
| David Aichele, VP of Business | 2017 TP 2016 | 7,278 2,009 | 7,278 2,009 | |||||||
| Development | 2016 | 4,603 | 4,603 |
Except as indicated below under “Employment Agreements,” we have no contracts, agreements, plans or arrangements, whether written or unwritten, that provide for payments to the named executive officers listed above.
Outstanding Equity Awards at Fiscal 2017 Year-EndContract Research and Government Grants
We have equity awards outstanding under three compensation plans approved by our stockholders:The Company may generate revenue from product sales, license agreements, collaborative research and development arrangements, and government grants. The Company recognizes nonrefundable grant revenue when it is received. Contracts executed and monies received prior to the 2014 Stock Plan, the 2015 Equity Incentive Plan (the “2015 Plan”) and the 2016 Stock Incentive Plan (the “2016 Plan). However, no further grants will be made under the 2014 Plan or the 2015 Plan. The following table provides information about outstanding equity awards held by our named executive officersrecognition of revenue are recorded as of June 30, 2017.
| Stock Awards | ||||||
| Name | Grant Date (1) | Number of shares or units of stock that have not vested (#) | Market value of shares or units of stock that have not vested ($) (2) | |||
| Jeffrey Shealy, CEO | 8/11/2016 (3) | 36,000 | 314,640 | |||
| Mark Boomgarden, VP of Operations (5) | 6/16/2014 (4) | 16,204 | 141,623 | |||
| 9/9/2014 (4) | 72,918 | 637,303 | ||||
| 10/5/2015 (3) | 38,000 | 332,120 | ||||
| 8/11/2016 (3) | 20,000 | 174,800 | ||||
| Cindy Payne, VP of Finance (6) | 10/5/2015 (3) | 145,000 | 1,267,300 | |||
| 8/11/2016 (3) | 30,000 | 262,200 | ||||
| David Aichele, VP of Business Development | 10/5/2015 (3) | 110,000 | 961,400 | |||
| 8/11/2016 (3) | 20,000 | 174,800 | ||||
Employment Agreementsdeferred revenue.
Jeffrey B. ShealyMEMS Fabrication Services
On June 15, 2015, we entered into a three-year employment agreement with our Chief Executive Officer, Jeffrey B. Shealy. AfterThe Company generates revenue from MEMS fabrication services at its Canandaigua, New York fabrication facility. Fabrication services revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the initial three-year term, the agreement will be automatically renewed for successive one-year periods unless terminated by either party on at least 30 days’ written notice priorfee is fixed or determinable, and collectability is reasonably assured. The Company includes fabrication services revenue as revenue from operations due to the endfact that these services revenue are viewed as an ongoing function of the then-current term. Mr. Shealy’s annual base salary was $150,000, subject to increase or decrease annually as determined by our Board of Directors. Effective July 4, 2016 the Board increased Mr. Shealy’s salary to $154,500. Mr. Shealy’s base salary was further increased to $163,770, effective September 11, 2017. Mr. Shealy is eligible, at the discretion of our Board of Directors, to receive an annual cash bonus of up to 100% of his annual base salary, which may be based on us achieving certain operational, financial or other milestones (the “Milestones”) that may be established by our Board of Directors. Mr. Shealy is entitled to receive stock options or other equity incentive awards under the 2016 Plan as and when determined by the Board,its intended operations and is entitled to receive perquisites and other fringe benefits that may be provided to, and is eligible to participate in any other bonusnot considered as “incidental” or incentive program established by us for, our executives. Mr. Shealy and his dependents are also entitled to participate in any of our employee benefit plans subject to the same terms and conditions applicable to other employees. Mr. Shealy will be entitled to be reimbursed for all reasonable travel, entertainment and other expenses incurred or paid by him in connection with, or related to, the performance of his duties, responsibilities or services under his employment agreement, in accordance with policies and procedures, and subject to limitations, adopted by us from time to time.
In the event that Mr. Shealy is terminated by us without Cause (as defined in his employment agreement) or he resigns for Good Reason (as defined in his employment agreement) during the term of his employment, Mr. Shealy“peripheral” which would be entitled to (x) an amount equal to his annual base salary then in effect (payable in accordance with the Company’s normal payroll practices) for a period of 24 months commencing on the effective date of his termination (the “Severance Period”) (in the case of termination by the executive for Good Reason, reduced by any cash remuneration paid to him because of any other employment or self-employment during the Severance Period), (y) if and to the extent the Milestones are achieved for the annual bonus for the year in which the Severance Period commences (or, in the absence of Milestones, our Board of Directors has,result in its sole discretion, otherwise determined an amount of Mr. Shealy’s annual bonus for such year), an amount equal to such annual bonus pro-rated for the portion of the performance year completed before Mr. Shealy’s employment terminated, and (z) any unvested stock options, restricted stock or similar incentive equity instruments will vest immediately. For the duration of the Severance Period, Mr. Shealy will also be eligible to participatepresentation being included in our benefit plans or programs, provided Mr. Shealy was participating in such plan or program immediately prior to the date of employment termination, to the extent permitted under the terms of such plan or program (collectively, the “Termination Benefits”). If Mr. Shealy’s employment is terminated during the term by us for Cause, by Mr. Shealy for any reason other than Good Reason or due to his death, then he will not be entitled to receive the Termination Benefits, and shall only be entitled to the compensation and benefits that shall have accrued as of the date of such termination (other than with respect to certain benefits that may be available to Mr. Shealy as a result of a Permanent Disability (as defined in his employment agreement))“Other income”.
John T. KurtzweilEngineering Review Services
On July 14, 2017, the Board named John T. Kurtzweil as our new Chief Financial Officer who would also serve as the Company’s Chief Accounting Officer, effective as of the same day. In connection with the election of the new Chief Financial Officer of the Company, the Company entered into an employment agreement, dated July 14, 2017 (the “CFO Agreement”), with the Chief Financial Officer, pursuant to which Mr. Kurtzweil will receive an annual base salary of $151,000, monthly living expenses of $1,600, three weeks of paid vacation each year, and reimbursement of all reasonable business, promotional, travel, and entertainment expenses incurred in the performance of his duties. In addition, Mr. Kurtzweil is also eligible to earn a target annual bonus each fiscal year equal to 70% of his annual base salary, based on certain Company operation, financial, and other milestones set by the Board and/or its Compensation Committee. Mr. Kurtzweil is also entitled to participate in any employee benefit plans and programs generally provided by the Company to its senior executives from time to time. In addition, as an inducement to employment, Mr. Kurtzweil will receive a restricted stock award for 100,000 shares of Common Stock and options for 75,000 shares of Common Stock during the Company’s next open trading window. These awards will be granted under the 2016 Plan and will vest 25% on each of the first four anniversaries of the grant date, subject to Mr. Kurtzweil’s continued employment and the terms and conditions of the 2016 Plan and the applicable award agreements.
The termCompany records Engineering Review Services revenue (“ERS”) which is for providing design and development services whereby the Company’s R&D personnel deliver simulations/models and demonstration units (low volume) for evaluation by the customers. The Company recognizes revenue when there is persuasive evidence of an arrangement, the CFO Agreement extends through July 31, 2018,service has been provided to the customer, the amount of fees to be paid by the customer is fixed or determinable, and the CFO Agreement will automatically renewcollection of fees is reasonably assured.
Revenue Recognition for successive one-year periods unless either party givesFacility Rental Income
Effective June 26, 2017, the Company records rental income for the tenants at least 30 days written notice of non-renewalthe Company’s NY fabrication facility. The Company recognizes rental income in the period the rental services are delivered to the other party prior to the end of the then applicable term.lessee; rent is received on a monthly, straight-line basis and is included in Other income.
If Mr. Kurtzweil’s employment is terminated by theResearch and Development
Research and development expenses are charged to operations as incurred.
Equity–based compensation
The Company without “cause” or by Mr. Kurtzweilrecognizes compensation expense for “good reason” (each as defined in the CFO Agreement), Mr. Kurtzweil will be entitled to receive: (1) continued payment of his base salary, payable in bi-weekly installments, for 12 months; (2) his annual bonus for the preceding year, if and to the extent earned and not already paid; (3) any other compensation and benefits accrued through the date of termination; and (4) reimbursement for one year after the date of termination for the cost of committed living allowance expenses and any COBRA continuation of health coverage if he elects such coverage. Any unvested stock options, restricted stock awards, or other equity awards granted by the Company to Mr. Kurtzweil will vest or be forfeitedall equity–based payments in accordance with ASC 718 “Compensation – Stock Compensation”. Under fair value recognition provisions, the termsCompany recognizes equity–based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the applicable award agreement(s).award.
If Mr. Kurtzweil’s employment is terminated due to his death or “disability” (as defined in the CFO Agreement), if the Company terminates Mr. Kurtzweil’s employment for “cause,” or if Mr. Kurtzweil voluntarily terminates his employment without “good reason,” Mr. Kurtzweil, his designated beneficiary, or his estate, as applicable, will be entitled to receive his base salary accrued through the date of termination. In the case of termination due to “disability” or Mr. Kurtzweil’s voluntary termination of employment, he will also be entitled to receive his annual bonus for the preceding year, if and to the extent earned and not already paid. Any unvested stock options, restrictedRestricted stock awards or other equity awardsare granted by the Company to Mr. Kurtzweil will vest or be forfeited in accordance with the terms of the applicable award agreement(s).
Other
On June 15, 2015, the Company also entered into two-year employment agreements with each of the Vice President of Business Development, the Vice President of Operations, and the then Chief Financial Officer. Each of these employment agreements had substantially the same terms as that of the CEO described above. These agreements expired on June 15, 2017, and each of these officers continue to serve in their respective positions, with the exception of Ms. Payne who now serves as Vice President of Finance, effective upon her voluntary resignation from the Chief Financial Officer position on July 14, 2017.
Each named executive officer’s salary is subject to increase or decrease annually as determined by our Board of Directors. Effective June 15, 2017 the Board increased the salaries of Mr. Aichele, Mr. Boomgarden and Ms. Payne to $141,080, $141,080 and $150,350, respectively. Effective September 11, 2017, Mr. Aichele’s and Ms. Payne’s base salaries were increased to $148,134 and $154,860.50, respectively.
Change in Control Arrangements
2015 Plan
In the event of a merger or change in control of the Company, the treatment of each outstanding restricted stock award granted under the 2015 Plan will be determined by the administrator of the 2015 Plan, including whether each such award will be assumed or an equivalent option or right substituted by the successor corporation. The administrator will not be required to treat all awards similarly in the transaction. In the event that the successor corporation does not assume or substitute the awards, all restrictions on the awards will lapse.
2016 Plan
Under the terms of the 2016 Plan, the following provisions will apply to the restricted stock awards granted under the 2016 Plan in the event of a change of control (except to the extent, if any, otherwise required under Code Section 409A):
Director Compensation
We do not have a formal director compensation program, and our directors have historically received compensation at the discretion of the BoardCompany. These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a four-year period (generally vesting either ratably over the first four years or on a tier basis of 50% on the second anniversary of the effective date and 25% on the third and fourth anniversary dates). The fair value of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the value of the underlying share, the expected stock volatility, the risk–free interest rate, the expected life of the option, and the dividend yield on the underlying stock. Expected volatility is calculated using the historical volatilities of the Company’s common stock traded on the Nasdaq Capital Market. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common stock and does not intend to pay dividends on its Common stock in the foreseeable future. The Company accounts for the impact of forfeitures as they occur.
Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, equity–based compensation could be materially different in the future. In addition, the Company is required to account for the impact of forfeitures as the forfeitures for those shares occur. If the Company’s actual forfeitures are material, the equity–based compensation could be significantly different from what the Company has recorded in the current period.
The Company accounts for share–based payments granted to non–employees in accordance with ASC 505-40, “Equity Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments is re-measured each reporting period over the requisite service period.
| F-11 |
Income taxes
In determining income for financial statement purposes, the Company must make certain estimates and judgments in the calculation of tax expense, the resultant tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense.
As part of the financial process, the Company assesses on a tax jurisdictional basis the likelihood that the Company’s deferred tax assets can be recovered. If recovery is not more likely than not (a likelihood of less than 50 percent), the provision for taxes must be increased by recording a reserve in the form of equity awards granted under the 2015 Plan and the 2016 Plan. We also reimburse our directors for reasonable out-of-pocket expenses related to their role on our Board. We intend for our director compensation to align the interests of our non-employee directors with the interests of our stockholders and plan to implement a formal director compensation programvaluation allowance for the fiscal year endingdeferred tax assets that are estimated not to ultimately be recoverable. In this process, certain relevant criteria are evaluated including: the amount of income or loss in prior years, the existence of deferred tax liabilities that can be used to absorb deferred tax assets, future expected taxable income, and prudent and feasible tax planning strategies. Changes in taxable income, market conditions, U.S. or international tax laws, and other factors may change the Company’s judgment regarding whether the Company will be able to realize the deferred tax assets. These changes, if any, may require material adjustments to the net deferred tax assets and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made.
As part of the Company’s financial process, the Company also assess the likelihood that the Company’s tax reporting positions will ultimately be sustained. To the extent it is determined it is more likely than not (a likelihood of more than 50 percent) that some portion or all of a tax reporting position will ultimately not be recognized and sustained, a provision for unrecognized tax benefit is provided by either reducing the applicable deferred tax asset or accruing an income tax liability. The Company’s judgment regarding the sustainability of the Company’s tax reporting positions may change in the future due to changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to the related deferred tax assets or accrued income tax liabilities and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made.
Loss Per Share
Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the years ended June 30, 2018.2018 and 2017 presented in these consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
The table below summarizes all compensation received by each ofCompany had the Company’s non-employee directors for services as a director performed during the fiscal year endedfollowing common stock equivalents at June 30, 2017.2018 and 2017:
| Name | Stock awards ($)(1) | All other compensation ($) | Total ($) | |||||||||
| Arthur E. Geiss (1)(2) | 92,400 | 16,995 | 109,395 | |||||||||
| Jerry D. Neal (1) | 92,400 | — | 92,400 | |||||||||
| Steven P. DenBaars (1) | 92,400 | — | 92,400 | |||||||||
| Jeffrey K. McMahon (1) | 92,400 | — | 92,400 | |||||||||
| John Kurtzweil (3) | 126,500 | — | 126,500 | |||||||||
| June 30, 2018 | June 30, 2017 | |||||||
| Options | 1,338,859 | 160,000 | ||||||
| Warrants | 748,572 | 612,165 | ||||||
| Total | 2,087,431 | 772,165 | ||||||
Shares Outstanding
Shares outstanding include shares of restricted stock with respect to which restrictions have not lapsed. Restricted stock included in reportable shares outstanding was 734,561 shares and 1,460,632 as of June 30, 2018 and 2017, respectively. Shares of restricted stock are included in the calculation of weighted average shares outstanding.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation. The reclassifications did not have an impact on net loss as previously reported.
Recently Issued Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards Update (ASU) No. 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). The amendments in this Update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASU 2015-11 did not have a material effect on the consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”, which will require entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU simplifies the current guidance, which requires entities to separately present deferred tax assets and deferred tax liabilities as current and noncurrent in a classified balance sheet. The ASU may be applied either prospectively or retrospectively. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual period. The adoption of ASU 2015-17 did not have a material effect on the consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain portions of the ASU related to financial liabilities. The Company does not believe it will have a significant impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”(Topic 842). The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company does not expect it will have a material effect on the consolidated financial statements and related disclosures.
In April 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation” (Topic 718). The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The adoption of ASU 2016-09 did not have a material effect on the consolidated financial statements and related disclosures. The Company has adopted the policy to account for the impact of forfeitures as they occur in determining compensation cost.
In April 2016, the FASB issued ASU No. 2016-10,“Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (Topic 606)”.In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (Topic 606)”.In May 2016, the FASB issued ASU No. 2016-12,“Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”,which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09,“Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; and the treatment of shipping and handling costs. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The Company will adopt the standard in the first quarter of fiscal 2019 using the modified retrospective approach, under which the cumulative effect of adoption is recognized at the date of initial application. The Company has evaluated the impact of the standard and does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements. The Company does not expect these changes to be material and are implementing changes to its accounting policies, internal controls and disclosures to support the new standard.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”. This update provides guidance on how to record eight specific cash flow issues. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted and a retrospective transition method to each period should be presented. The Company does not believe it will have a significant impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,“Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company does not believe it will have a significant impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”, which provides further guidance for evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017. The Company does not believe it will have a material effect on the consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,”which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The Company does not believe it will have a significant impact on its consolidated financial statements.
| F-13 | ||
In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is evaluating the effect that ASU 2017-11 will have on its financial statements and related disclosures.
In September 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-13,Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606).The new standards, among other things, provide additional implementation guidance with respect to Accounting Standards Codification (ASC) Topic 606. ASU 2017-13 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company does not expect it to have a material impact on its implementation strategies or its consolidated financial statements upon adoption.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSIn March 2018, the FASB issued ASU 2018-05,"Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118."The amendments incorporate into the ASC the recent SEC guidance related to the income tax accounting implications of the Tax Cuts and Jobs Act (the “Tax Act”). See Note 14 for further disclosures.
Beneficial ownershipIn June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-07,Compensation – Stock Compensation (Topic718): Improvements to Nonemployee Share-Based Payment Accounting. Under the new standard, companies will no longer be required to value non-employee awards differently from employee awards. Companies will value all equity classified awards at their grant-date under ASC718 and forgo revaluing the award after the grant date. ASU 2018-07 is determinedeffective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted, but no earlier than the Company’s adoption date of Topic 606, Revenue from Contracts with Customers.The Company does not believe it will have a significant impact on its consolidated financial statements.
Note 4. Acquisition of STC-MEMS
Acquisition of STC-MEMS
On March 23, 2017, the Company entered into the Agreements with RF-SUNY, a New York State education corporation, on behalf of The State University of New York Polytechnic Institute, and FRMC, an affiliate of RF-SUNY to acquire the STC-MEMS Business. The acquisition will allow the Company to internalize manufacturing, increase capacity and control its wafer supply chain for single crystal BAW RF filters. Akoustis will utilize the NY Facility to consolidate all aspects of wafer manufacturing for its high-band RF filters.
Smart Systems Technology & Commercialization Center (STC-MEMS) was created in 2010 to form a vertically integrated “one-stop-shop” in smart system and smart-device innovation and manufacturing. The facility was designed to provide its customers the capacity, infrastructure and operational capabilities in all areas of semiconductor and advanced manufacturing, while covering a diverse number of markets including aerospace, biomedical, communications, defense, and energy. Located in Canandaigua, New York, just outside of Rochester, the STC-MEMS facility includes certified cleanroom manufacturing, advanced test and metrology, as well as a MEMS and optoelectronic packaging facility.
Post-acquisition date, the Company also agreed to assume substantially all the on-going obligations of the STC-MEMS Business incurred in the ordinary course of business, including with respect to the 29 employees employed by RF-SUNY. The purchase closed on June 26, 2017.
Acquisition Price
The purchase price paid for the transaction was an aggregate of approximately $4.58 million consisting of (i) $2.75 million in cash consideration, (ii) $96,000 in inventory, and (iii) a contingent real estate liability of approximately $1.73 million.
Recognizing and measuring the identifiable assets acquired and the liabilities assumed
The fair value of the purchase consideration issued to the sellers of the STC-MEMS Business was allocated to the net tangible and intangible assets acquired. The Company accounted for the STC-MEMS Business acquisition as the purchase of a business under GAAP under the acquisition method of accounting, as specified in ASC 805 “Business Combinations”, and the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company. The fair value of the net assets acquired was approximately $6.3 million. The excess of the aggregate fair value of the net tangible and intangible assets over the consideration paid has been treated as a gain on bargain purchase in accordance with the rulesASC 805. The purchase price allocation was based, in part, on management’s knowledge of the SECSTC-MEMS Business and generally includes votingthe results of a third-party appraisal commissioned by management.
The Company utilized the services of an independent appraisal company to assist it in assessing the fair value of the assets and liabilities acquired. This assessment included an evaluation of the fair value of the real estate and fixed assets in addition to the intangibles acquired. The real estate was valued utilizing a combination of the income and cost approaches. The fixed assets were valued utilizing a combination of the market and cost approaches. The intangible asset, customer relationships, was valued utilizing the income approach. The valuation process also included discussion with management regarding the history and business operations of the STC-MEMS Business, a study of the economic and industry conditions in which the STC-MEMS Business competes and an analysis of the historical and projected financial statements and other records and documents.
| F-14 |
Recognizing and measuring goodwill or investment powera gain from a bargain purchase
Management reviewed the assets and liabilities acquired and the assumptions utilized in estimating their fair values. Further revisions to the estimates were not deemed necessary and after identifying and valuing all assets and liabilities of the STC-MEMS Business, the Company concluded that recording a bargain purchase gain was appropriate and required under GAAP.
| Purchase Consideration | ||||
| Amount of consideration: | $ | 4,576,591 | ||
| Assets acquired and liabilities assumed at fair value | ||||
| Land | $ | 1,000,000 | ||
| Building | 3,000,000 | |||
| STC-MEMS equipment | 2,124,650 | |||
| Inventory | 96,049 | |||
| Customer relationships | 81,773 | |||
| Net assets acquired | $ | 6,302,472 | ||
| Total net assets acquired | $ | 6,302,472 | ||
| Consideration paid | 4,576,591 | |||
| Gain on bargain purchase | $ | 1,725,881 | ||
Prior to this transaction, none of the parties negotiating on behalf of the Company had met any of the individuals negotiating on behalf of the sellers. Further, there were no agreements signed with respect to securities. In accordanceany individuals negotiating this deal. Additionally, there were no related parties associated with SEC rules, shares of our Common Stock that may be acquired upon exercise of stock options or warrants that are currently exercisable or that become exercisable within 60 days after September 8, 2017 (the “Determination Date”) are deemed beneficially owned by the holders of such options and warrants and are deemed outstanding for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage of ownership of any other person. Subject to community property laws, where applicable, the persons or entities named in the tables below have sole voting and investment power with respect to all shares of our Common Stock indicated as beneficially owned by them.this transaction.
The following table sets forthpresents the unaudited pro-forma combined results of operations of the Company with the STC-MEMS Business as if the entities were combined on July 1, 2016.
| Year Ended | ||||
| June 30, | ||||
| 2017 | ||||
| Revenues, net | $ | 4,195,374 | ||
| Net (loss) allocable to common shareholders | $ | (13,907,072 | ) | |
| Net (loss) per share | $ | (0.82 | ) | |
| Weighted average number of shares outstanding | 16,990,536 | |||
The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisitions been completed as of July 1, 2015 or to project potential operating results as of any future date or for any future periods.
The estimated useful life remaining on equipment and building acquired with respectthe STC-MEMS Business is 2 to the beneficial ownership of our Common Stock5 years and 11 years, respectively.
The Company consolidated Akoustis NY as of the Determination Date by (i) each stockholder known by us to be the beneficial owner of more than 5% of our Common Stock (our only class of voting securities), (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as a group. To our knowledge, noneclosing date of the shares listed below are held under a voting trust or similar agreement, except as noted.
Name and address of beneficial owner | Amount and nature of beneficial ownership(1)(2) | Percent of class(3) | ||||||
| Jeffrey B. Shealy, Chief Executive Officer, Director(4) | 3,300,725 | 17.3 | % | |||||
| David M. Aichele, Vice President of Business Development(5) | 134,250 | * | ||||||
| Mark Boomgarden, Vice President of Operations(6) | 178,441 | * | ||||||
| Cindy C. Payne, VP Finance(7) | 184,375 | 1.0 | % | |||||
| Steven P. DenBaars, Director(8)(9) | 285,858 | 1.5 | % | |||||
| Arthur E. Geiss, Director, Co-Chairman of the Board(8)(10) | 76,306 | * | ||||||
| Jeffrey K. McMahon, Director(8) (11) | 551,888 | 2.9 | % | |||||
| Jerry D. Neal, Director, Co-Chairman of the Board(8) (11) | 367,000 | 1.9 | % | |||||
| John T. Kurtzweil, Chief Financial Officer(12) | 22,000 | * | ||||||
| Suzanne Rudy, Director | 30,000 | * | ||||||
| Steven Miller, Director | 50,000 | * | ||||||
| All directors and executive officers as a group (11 persons)(13) | 5,180,843 | 27.12 | % | |||||
| Mark Tompkins | ||||||||
| App 1, Via Guidino 23 | ||||||||
| Lugano 6900, Switzerland | 2,349,906 | 12.3 | % | |||||
*Less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
SEC rules require us to disclose any transaction or currently proposed transaction in which the Company is a participantinclude that of Akoustis NY. The Company recognized net revenues attributable to Akoustis NY of $0 and in which any related person has or will have a direct or indirect material interest involving the lesserrecognized net losses of $120,000.00 or one percent (1%) of the average of the Company’s total assets as of the end of last two completed fiscal years. A related person is any executive officer, director, nominee for director, or holder of 5% or more of the Company’s Common Stock, or an immediate family member of any of those persons. Set forth below is a description of such related-party transactions that occurred$171,000 during the transition period.
Certain of our directors and officers participated in the 2016-2017 Offering. Specifically:
In addition, James R. Shealy, brother of our Chief Executive Officer, purchased 14,000 shares of Common Stock for an aggregate purchase price of $70,000 in the 2016-2017 Offering. Michael J. Shealy, a second brother of our Chief Executive Officer, purchased 20,000 shares of Common Stock for an aggregate purchase price of $100,000 in the 2016-2017 Offering.
AEG Consulting, a firm owned and operated by Arthur Geiss, Co-Chairman of the Board, received $15,195 for consulting fees for the year endedperiod June 30, 2017.
Steve Miller, one of our directors, served as a Board Advisor to the Board from January26, 2017 through June 2017, prior to joining the Board in July 2017. In connection with his service as a Board Advisor, the Board has approved a restricted stock award for 11,000 shares of Common Stock to be granted to Mr. Miller during the next open trading window.
The Board of Directors considered the above transactions in reaching its determination regarding the independence of our directors, See “Director Independence” under “Item 10-Directors, Executive Officers and Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees
The aggregate fees billed to us by Marcum LLP, our independent registered principal accounting firm, for services rendered for (i) the fiscal year ended June 30, 2017; (ii) the transition period from April 1, 2016 to June 30, 2016;driven by wages and (iii) our prior fiscal year ended March 31, 2016 are set forth in the table below:
Fee Category | Fiscal Year ended June 30, 2017 | Transition Period ended June 30, 2016(1) | Fiscal year ended March 31, 2016 | |||||||||
| Audit fees (2) | $ | 121,495 | $ | 65,611 | $ | 109,458 | ||||||
| Audit-related fees (3) | 40,757 | 13,692 | 26,583 | |||||||||
| Tax fees (4) | 10,341 | 16,276 | 34,037 | |||||||||
| All other fees | — | — | — | |||||||||
| Total fees | $ | 172,593 | $ | 95,579 | $ | 170,078 | ||||||
Pre-Approval Practice
The Board established an Audit Committee in February 2017. The Audit Committee’s responsibilities include establishing policies and procedures for the review and pre-approval by the Audit Committeefringe benefits of and approving or pre-approving, all auditing services and permissible non-audit services to be performed by the independent registered public accounting firm, and any non-audit services to be performed by any other accounting firm. Our Audit Committee has adopted procedures for the pre-approval of services to be performed by the independent public accountants. Pursuant to this pre-approval policy, the Audit Committee considers, at least annually, and approves the terms of the audit engagement. At each regularly scheduled Audit Committee meeting, the committee members review both a report summarizing the services, provided or anticipated to be provided by the auditor and the related fees and costs, and a listing of newly requested services subject to pre-approval since its last regularly scheduled meeting. Any proposed engagement relating to permissible non-audit services must be presented to the Audit Committee and pre-approved on a case-by-case basis, prior to the performance of the auditor. In addition, particular categories of permissible non-audit services that are recurring may be pre-approved by the Audit Committee subject to preset fee limits. The Audit Committee reviews requests for the provision of audit and non-audit services by the Company’s independent public accountants and determines if they should be approved. Such requests could be approved either at a meeting of the Audit Committee or upon approval by an independent director, if such responsibility has been delegated by the Audit Committee and if approval is needed between Audit Committee meetings. Any such interim approvals must be reported to the Audit Committee at its next scheduled meeting. Prior to approving any services, the Audit Committee considers whether the provision of such services is consistent with the SEC’s and the PCAOB’s rules on auditor independence and is compatible with maintaining the independence of the Company’s public accountants.$126,000.
All fees related to audit, audit-related, tax, and other permitted non-audit services were pre-approved by the Audit Committee (or the Board of Directors if prior to the establishment of the Audit Committee).
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESNote 5. Property and equipment
Financial Statement SchedulesProperty and equipment consisted of the following as of June 30, 2018 and 2017:
The consolidated financial statements of Akoustis Technologies, Inc., and its subsidiaries are listed on the Index to Financial Statements on this annual report on Form 10-K beginning on page F-1.
All financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as a part of this Annual Report on Form 10-K.
Estimated Useful Life | June 30, 2018 | June 30, 2017 | ||||||||
| Land | n/a | $ | 1,000,000 | $ | 1,000,000 | |||||
| Building | 11 years | 3,000,000 | 3,000,000 | |||||||
| Equipment | 2-10 years | 9,126,755 | 3,976,077 | |||||||
| Other | * | 1,057,854 | 23,748 | |||||||
| 14,184,609 | 7,999,825 | |||||||||
| Less: Accumulated depreciation | (1,364,440 | ) | (146,011 | ) | ||||||
| Total | $ | 12,820,169 | $ | 7,853,814 | ||||||
57
| F-15 |
SIGNATURES(*) Useful lives vary from 3-10 years, as well as leasehold improvements which are amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter.
Pursuant toThe Company recorded depreciation expense of $1,247,518 and $102,876 for the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrantyears ended June 30, 2018 and in the capacities and on the dates indicated.
| ||||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM2017, respectively.
To the Audit Committee of the
Board of Directors and Shareholders
of Akoustis Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Akoustis Technologies, Inc. and Subsidiaries (the “Company”) asAs of June 30, 20172018, fixed assets with a net book value totaling $435,680 were not placed in service and 2016, andtherefore not depreciated during the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.period.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Akoustis Technologies, Inc. and Subsidiaries, asAs of June 30, 2017 and 2016, and2018, fixed assets with a net book value totaling $333,250 were reclassified to Assets held for sale on the consolidated resultsbalance sheets. The Company recorded an impairment charge of its operations and its cash flows$349,571 on fixed assets held for sale during the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has not generated any revenue, and has incurred losses since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/Marcumllp
Marcumllp
New York, NYSeptember 19, 2017
Akoustis Technologies, Inc.
| June 30, | June 30, | |||||||
| 2017 | 2016 | |||||||
| Assets | ||||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | 9,631,520 | $ | 4,155,444 | ||||
| Inventory | 188,476 | 43,544 | ||||||
| Prepaid expenses | 158,457 | 54,818 | ||||||
| Other current assets | 42,808 | — | ||||||
| Total current assets | 10,021,261 | 4,253,806 | ||||||
| Property and equipment, net | 7,853,814 | 206,985 | ||||||
| Intangibles, net | 206,527 | 71,233 | ||||||
| Other assets | 10,715 | 10,715 | ||||||
| Total Assets | $ | 18,092,317 | $ | 4,542,739 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 1,336,368 | $ | 543,646 | ||||
| Deferred revenue | 14,500 | — | ||||||
| Total current liabilities | 1,350,868 | 543,646 | ||||||
| Long-term Liabilities: | ||||||||
| Contingent real estate liability | 1,730,542 | — | ||||||
| Derivative liabilities | — | 1,322,729 | ||||||
| Total long-term liabilities | 1,730,542 | 1,322,729 | ||||||
| Total Liabilities | 3,081,410 | 1,866,375 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' Equity | ||||||||
| Preferred Stock, par value $0.001: 5,000,000 shares authorized; none issued and outstanding | — | — | ||||||
| Common stock, $0.001 par value; 45,000,000 shares authorized; 19,075,050 and 15,375,981 shares issued and outstanding at June 30, 2017 and June 30, 2016, respectively | 19,075 | 15,376 | ||||||
| Additional paid in capital | 30,774,885 | 9,335,801 | ||||||
| Accumulated deficit | (15,783,053 | ) | (6,674,813 | ) | ||||
| Total Stockholders' Equity | 15,010,907 | 2,676,364 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 18,092,317 | $ | 4,542,739 | ||||
The accompanying notes are an integral part of these consolidated financial statements
Akoustis Technologies, Inc.
Consolidated Statements of Operations
For the Year Ended June 30, 2017 | For the Year Ended June 30, 2016 | |||||||
| Contract research and government grants | $ | 469,532 | $ | 254,834 | ||||
| Revenue | 16,964 | — | ||||||
| Total revenue | 486,496 | 254,834 | ||||||
| Operating expenses | ||||||||
| Research and development | 4,425,778 | 1,758,701 | ||||||
| General and administrative expenses | 6,019,285 | 2,935,299 | ||||||
| Total operating expenses | 10,445,063 | 4,694,000 | ||||||
| Loss from operations | (9,958,567 | ) | (4,439,166 | ) | ||||
| Other income (expense) | ||||||||
| Other income | — | 500 | ||||||
| Interest income | 1,936 | 1,339 | ||||||
| Bargain purchase | 1,725,881 | |||||||
| Change in fair value of derivative liabilities | (877,490 | ) | (968,840 | ) | ||||
| Total other income (expense) | 850,327 | (967,001 | ) | |||||
| Net loss | $ | (9,108,240 | ) | $ | (5,406,167 | ) | ||
| Net loss per common share - basic and diluted | $ | (0.54 | ) | $ | (0.40 | ) | ||
| Weighted average common shares outstanding -basic and diluted | 16,990,536 | 13,349,482 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
F-4
Akoustis Technologies, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
For the Years Ended June 30, 2017 and June 30, 2016
| Common Stock | Additional | Accumulated | ||||||||||||||||||
| Shares | Amount | Paid In Capital | Deficit | Stockholders’ Equity | ||||||||||||||||
| Balance, July 1, 2015 | 12,469,084 | $ | 12,469 | $ | 5,441,260 | $ | (1,268,646 | ) | $ | 4,185,083 | ||||||||||
| Common stock issued for cash, net of issuance costs | 2,240,000 | 2,240 | 3,330,343 | — | 3,332,583 | |||||||||||||||
| Warrants issued to underwriter | — | — | (165,719 | ) | — | (165,719 | ) | |||||||||||||
| Common stock issued for services | 660,231 | 660 | 702,950 | — | 703,610 | |||||||||||||||
| Common stock issued for exercise of warrants | 6,666 | 7 | 9,993 | — | 10,000 | |||||||||||||||
| Transfer of warrants from liability to equity classification | — | — | 16,974 | — | 16,974 | |||||||||||||||
| Net loss | — | — | — | (5,406,167 | ) | (5,406,167 | ) | |||||||||||||
| Balance, June 30, 2016 | 15,375,981 | $ | 15,376 | $ | 9,335,801 | $ | (6,674,813 | ) | $ | 2,676,364 | ||||||||||
| Common stock issued for cash, net of issuance costs | 2,805,000 | 2,805 | 15,381,966 | — | 15,384,771 | |||||||||||||||
| Warrants issued to underwriter | — | — | (991,767 | ) | — | (991,767 | ) | |||||||||||||
| Common stock issued for services | 783,000 | 783 | 4,242,314 | — | 4,243,097 | |||||||||||||||
| Common stock issued for exercise of warrants | 111,069 | 111 | 171,649 | — | 171,760 | |||||||||||||||
| Vesting of restricted shares | — | — | 434,703 | — | 434,703 | |||||||||||||||
| Transfer of warrants from liability to equity classification | — | — | 2,200,219 | — | 2,200,219 | |||||||||||||||
| Net loss | — | — | — | (9,108,240 | ) | (9,108,240 | ) | |||||||||||||
| Balance, June 30, 2017 | 19,075,050 | $ | 19,075 | $ | 30,774,885 | $ | (15,783,053 | ) | $ | 15,010,907 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements
Akoustis Technologies, Inc.
Consolidated Statements of Cash Flows
| For the Year Ended | For the Year Ended | |||||||
| June 30, 2017 | June 30, 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (9,108,240 | ) | $ | (5,406,167 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 102,876 | 34,828 | ||||||
| Amortization of intangibles | 7,208 | 3,339 | ||||||
| Share-based compensation | 3,906,111 | 849,625 | ||||||
| Change in fair value of derivative liabilities | 877,490 | 968,840 | ||||||
| Bargain purchase | (1,725,881 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Inventory | (48,883 | ) | (43,544 | ) | ||||
| Prepaid expenses | (103,639 | ) | 4,994 | |||||
| Other current asset | (42,808 | ) | — | |||||
| Accounts payable and accrued expenses | 572,644 | 275,116 | ||||||
| Deferred revenue | 14,500 | — | ||||||
| Net Cash Used In Operating Activities | (5,548,622 | ) | (3,312,969 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash paid for machinery and equipment | (1,625,055 | ) | (160,172 | ) | ||||
| Cash paid for acquisition of STC-MEMS | (2,846,049 | ) | — | |||||
| Cash paid for intangibles | (60,729 | ) | (43,495 | ) | ||||
| Net Cash Used In Investing Activities | (4,531,833 | ) | (203,667 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common stock | 15,384,771 | 3,332,584 | ||||||
| Proceeds from exercise of warrants | 171,760 | 10,000 | ||||||
| Net Cash Provided By Financing Activities | 15,556,531 | 3,342,584 | ||||||
| Net Increase (Decrease) in Cash | 5,476,076 | (174,052 | ) | |||||
| Cash - Beginning of Period | 4,155,444 | 4,329,496 | ||||||
| Cash - End of Period | $ | 9,631,520 | $ | 4,155,444 | ||||
| SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
| Cash Paid During the Period for: | ||||||||
| Income taxes | $ | — | $ | — | ||||
| Interest | $ | — | $ | — | ||||
| SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Stock compensation payable | $ | 654,781 | $ | 146,016 | ||||
| Warrants issued for stock issuance costs | $ | 991,767 | $ | 165,719 | ||||
| Reclassification of derivative liability to additional paid in capital | $ | 2,200,219 | $ | — | ||||
| Contingent liability | $ | 1,730,542 | $ | — | ||||
The accompanying notes are an integral part of these consolidated financial statements
AKOUSTIS TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
Note 1. Organization
Akoustis Technologies, Inc. (formerly known as Danlax, Corp.) (“the Company”) was incorporated under the laws of the State of Nevada, U.S. on April 10, 2013. Effective December 15, 2016, the Company changed its state of incorporation from the State of Nevada to the State of Delaware. Through its subsidiaries, Akoustis, Inc. and Akoustis Manufacturing New York, Inc. (each a Delaware corporation), the Company, headquartered in Huntersville, North Carolina, is focused on developing, designing and manufacturing innovative radio frequency filter products for the mobile wireless device industry. The mission of the Company is to commercialize and manufacture its patented BulkONE®acoustic wave technology to address the critical frequency-selectivity requirements in today’s mobile smartphones - improving the efficiency and signal quality of mobile wireless devices and enabling the Internet of Things.
On August 11, 2016, the Company changed its fiscal year from the period beginning on April 1 and ending on March 31 of each year to the period beginning on July 1 and ending on June 30 of each year, effective for the fiscal year ended June 30, 2017.2018.
On March 10, 2017, the Company announced that its common stock was approved for listing on the NASDAQ Capital Market, effective March 13, 2017, under the symbol AKTS.
Acquisition of Assets
On June 26, 2017, pursuant to a Definitive Asset Purchase Agreement and Definitive Real Property Purchase Agreement (collectively, the “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, respectively, the Company completed the acquisition of certain specified assets, including STC-MEMS, a semiconductor wafer-manufacturing operation and microelectromechanical systems (“MEMS”) business with associated wafer-manufacturing tools, as well as the real estate and improvements associated with the facility located in Canandaigua, New York, which is used in the operation of STC-MEMS (the assets and real estate and improvements referred to together herein as the “STC-MEMS Business”),which was created in 2010 by RF-SUNY as an economic development project. The purpose of the initiative was to explore different technology opportunities with the goal of being a vertically integrated provider of foundry services that would offer its customers the capacity, infrastructure and operational capabilities of semiconductor and advanced manufacturing for aerospace, biomedical, communications, defense, and energy markets. Post-acquisition date, the Company also agreed to assume substantially all the on-going obligations of STC incurred in the ordinary course of business including with respect to the 29 employees employed by RF-SUNY.
The Company acquired the STC-MEMS Business through its wholly-owned subsidiary, Akoustis Manufacturing New York, Inc., (“Akoustis NY”), a Delaware corporation.
See Note 4 for a detailed description of the transaction.
The 2016-2017 Offering
The Company sold a total of 2,142,000 shares of its common stock, par value $0.001 per share (the “Common Stock”) in a private placement offering (the “2016-2017 Offering”) at a fixed purchase price of $5.00 per share (the “2016-2017 Offering Price”), with closings in each of November and December 2016 and January and February 2017. The Company also sold a total of 663,000 shares of Common Stock in a private placement offering (the “2017 Offering” and together with the 2016-2017 Offering, the “Offerings”) at a fixed purchase price of $9.00 per share (the “2017 Offering Price”), with closings in May 2017. Aggregate gross proceeds from the Offerings totaled $16.7 million before deducting commissions and expenses of approximately $1.3 million. In connection with the 2016-2017 Offering, the Company also issued to the placement agents warrants to purchase an aggregate 205,126 shares of Common Stock with a term of five years and an exercise price of $5.00 per share, and in connection with the 2017 Offering, the Company issued to the placement agents warrants to purchase an aggregate 46,410 shares of Common Stock with a term of five years and an exercise price of $9.00 per share. In accordance with the terms of the subscription agreements executed by the Company and each of the investors, if the Company issues additional shares of Common Stock or Common Stock equivalents (subject to customary exceptions, including but not limited to issuances of awards under Company employee stock incentive programs and certain issuances in connection with credit arrangements, equipment financings, lease arrangements, or similar transactions) between November 25, 2016 and September 4, 2017 (with respect to the 2016-2017 Offering), or between May 1, 2017 and May 1, 2019 (with respect to the 2017 Offering), for a consideration per share less than the 2016-2017 Offering Price or the 2017 Offering Price, as applicable (as adjusted for any subsequent stock dividend, stock split, distribution, recapitalization, reclassification, reorganization, or similar event) (the “Lower Price”), each investor will be entitled to receive from the Company additional shares of Common Stock in an amount such that, when added to the number of shares of Common Stock initially purchased by such investor, will equal the number of shares of Common Stock that such Investor’s investment in the applicable offering would have purchased at the Lower Price.
The March 2016 and April 2016 Offerings
On March 10, 2016, the Company held a closing of a private placement offering (the “March 2016 Offering”) in which it sold 494,125 shares of Common Stock at a fixed purchase price of $1.60 per share (the “2016 Offering Price”), for aggregate gross proceeds of $790,600 (before deducting legal expenses of $20,913 for the March 2016 Offering).
On April 14, 2016, the Company held closings of a private placement offering (the “April 2016 Offering”) in which the Company sold 1,741,185 shares of Common Stock at a fixed purchase price of $1.60 per share (the “2016 Offering Price”), for aggregate gross proceeds of $2,785,896 (before deducting expenses of $223,000 for legal services and agent commissions of the April 2016 Offering).
Investors in the shares were given anti-dilution protection with respect to the shares of Common Stock sold in the April 2016 Offering such that if, during the period from the closing of the April 2016 Offering until 90 days after the date on which the registration statement that the Company is required to file under a Registration Rights Agreement with the investors is declared effective by the SEC, the Company shall issue additional shares of Common Stock or Common Stock equivalents (subject to customary exceptions, including but not limited to issuances of awards under the Company’s 2015 Equity Incentive Plan and certain issuances of securities in connection with credit arrangements, equipment financings, lease arrangements or similar transactions) for a consideration per share less than the 2016 Offering Price (as adjusted for any subsequent stock dividend, stock split, distribution, recapitalization, reclassification, reorganization or similar event) (the “2016 Lower Price”), each such investor will be entitled to receive from the Company additional shares of Common Stock in an amount such that, when added to the number of shares of Common Stock initially purchased by such investor, will equal the number of shares of Common Stock that such investor’s Offering subscription amount would have purchased at the 2016 Lower Price. As of mid-October 2016, the anti-dilution rights expired.
In connection with the April 2016 Offering, the Company agreed to pay the placement agents a cash commission of 8% of the gross proceeds raised from investors first contacted by the placement agents in the 2016 Offering. In addition, the placement agents received warrants to purchase a number of shares of Common Stock equal to 10% of the number of shares of Common Stock sold in the April 2016 Offering, with a term of five (5) years and an exercise price of $1.60 per share (the “2016 Placement Agent Warrants”). Any sub-agent of the placement agents that introduced investors to the 2016 April Offering was entitled to share in the cash fees and warrants attributable to those investors as described above.
Note 2. Going Concern and Management Plans
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2017, the Company had working capital of $8.7 million and an accumulated deficit of $15.8 million. Since inception, the Company has recorded approximately $892,000 of revenue from contract research and government grants. As of June 30, 2017,development fixed assets totaling $1,062,496 were not placed in service and therefore not depreciated during the Company had cash and cash equivalents of $9.6 million which the Company believes is sufficient to fund its current operations through December 2017. 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. 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.The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company had $6.7 million of cash and cash equivalents on hand as of September 8, 2017 to fund its business.period.
There is no assurance that the Company’s projections and estimates are accurate. Note 6. Intangible assets
The Company’s primary sourcesintangible assets consisted of funds for operations since inception have been private equity, note financings and grants. the following:
| Estimated useful life | June 30, 2018 | June 30, 2017 | ||||||||
| Patents | 15 years | $ | 208,137 | $ | 135,291 | |||||
| Customer relationships | 14 years | 81,773 | 81,773 | |||||||
| Less: Accumulated amortization | (27,175 | ) | (12,097 | ) | ||||||
| Subtotal | 262,735 | 204,967 | ||||||||
| Trademarks | 1,560 | 1,560 | ||||||||
| Intangible assets, net | $ | 264,295 | $ | 206,527 | ||||||
The Company needs to obtain additional capital to accomplish its business plan objectivesrecorded amortization expense of $15,078 and will continue its efforts to secure additional funds through issuance of debt or equity instruments and/or receipts of grants as appropriate. However,$7,208 for the year ended June 30, 2018 and 2017, respectively.
The following table outlines estimated future annual amortization expense for the next five years and thereafter:
| June 30, | ||||
| 2019 | $ | 15,093 | ||
| 2020 | 15,093 | |||
| 2021 | 15,093 | |||
| 2022 | 15,093 | |||
| 2023 | 15,093 | |||
| Thereafter | 117,925 | |||
| Total | $ | 193,390 | ||
The remaining amount of funds raised, if any, may not be sufficient to enable the Company to attain profitable operations. To the extentfuture annual amortization expense of $69,345 are patents that the Company is unsuccessful in obtaining additional financing, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.are still pending approval.
Note 3. Summary of significant accounting policies7. Accounts payable and accrued expenses
Basis of presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)Accounts payable and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Akoustis, Inc. and Akoustis Manufacturing New York, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates and assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues andaccrued expenses during the reporting period(s).
Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements were:
These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash deposits. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, the Company’s cash and cash equivalent balances may be uninsured or in amounts that exceed the FDIC insurance limits; as of June 30, 2017 approximately $9.4 million was uninsured.
Inventory
Inventory is stated at the lower of cost or market using the first-in, first-out (FIFO) valuation method. Inventory was comprisedconsisted of the following at June 30, 20172018 and 2016:June 30, 2017:
| June 30, 2017 | June 30, 2016 | |||||||
| Finished goods held for resale | $ | 49,374 | $ | 43,544 | ||||
| Raw materials | 139,102 | — | ||||||
| $ | 188,476 | $ | 43,544 | |||||
| June 30, 2018 | June 30, 2017 | |||||||
| Accounts payable | $ | 139,152 | $ | 494,515 | ||||
| Accrued salaries and benefits | 505,463 | 274,050 | ||||||
| Accrued bonuses | 750,442 | — | ||||||
| Accrued stock-based compensation | 395,539 | 399,157 | ||||||
| Accrued professional fees | 293,024 | 157,661 | ||||||
| Accrued utilities | 103,277 | — | ||||||
| Accrued interest | 127,292 | — | ||||||
| Accrued good received not invoiced | 160,199 | — | ||||||
| Other accrued expenses | 119,044 | 10,985 | ||||||
| Totals | $ | 2,593,432 | $ | 1,336,368 | ||||
Property and equipment, netNote 8. Derivative Liabilities
PropertyUpon closing of private placements on May 22, 2015 and equipment are stated at cost less accumulated depreciation. Depreciation is calculated usingJune 9, 2015, the straight–line method onCompany issued 298,551 and 26,099 warrants, respectively, to purchase the various asset classes over their estimated useful lives, which range from threesame number of shares of Common Stock with an exercise price of $1.50 and a five-year term to ten years. Expenditures for major renewalsthe placement agent. Upon closing of a private placement in April 2016, the Company issued 153,713 warrants to purchase the same number of shares of Common Stock with an exercise price of $1.60 and bettermentsa five-year term to the placement agent. The Company identified certain put features embedded in the warrants that extendpotentially could result in a net cash settlement, requiring the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs, which do not extendCompany to classify the economic useful lifewarrants as a derivative liability.
| F-16 |
During the year ended June 30, 2017, the Company amended the existing warrant agreements to eliminate the derivative feature. Upon execution of the related assets, are chargedrevised agreements, a total of 471,697 warrants with a fair value of $2,200,219 were reclassified from liabilities to operations as incurred.
Intangible assets, net
Intangible assets consist of patents and trademarks. Applicable long–lived assets are amortized or depreciated over the shorter of their estimated useful lives, the estimated period that the assets will generate revenue, or the statutory or contractual term in the case of patents. Estimates of useful lives and periods of expected revenue generation are reviewed periodically for appropriateness and are based upon management’s judgment. Patents are amortized on the straight-line method over their useful lives of 15 years.
Impairment of Long-Lived Assetsequity.
The Company assesses the recoverability of its long-lived assets, including property and equipment, when there are indications that the assets might be impaired. When evaluating assets for potential impairment, the Company compares the carrying valuetable below provides a summary of the asset to its estimated undiscounted future cash flows. If an asset’s carryingchanges in fair value, exceeds such estimated undiscounted cash flows, the Company records an impairment charge for the difference between the carrying amountincluding net transfers in and/or out, of the assetall financial assets and itsliabilities measured at fair value.
Basedvalue on its assessments, the Company did not record any impairment charges fora recurring basis using significant unobservable inputs (Level 3) during the years ended June 30, 20172018 and 2016.2017:
| Fair Value Measurement Using Level 3 Inputs | ||||
| Total | ||||
| Balance, July 1, 2016 | $ | 1,322,729 | ||
| Change in fair value of derivative warrant liabilities | 877,490 | |||
| Reclassification of derivative liability to additional paid in capital | (2,200,219 | ) | ||
| Balance, June 30, 2017 | — | |||
| Issuance of derivative feature of make whole provision in convertible note | 702,900 | |||
| Issuance of derivative feature of change in control provision in convertible note | 455,900 | |||
| Change in fair value of derivative warrant liabilities | (54,099 | ) | ||
| Balance, June 30, 2018 | $ | 1,104,701 | ||
The fair value of the derivative feature of the warrants on the date of reclassification to equity was calculated using a binomial option model valued with the following weighted average assumptions:
| January 19, 2017 | ||||
| Risk free interest rate | 1.01 | % | ||
| Dividend yield | 0.00 | % | ||
| Expected volatility | 39 | % | ||
| Remaining term (years) | 3.89 - 4.79 | |||
Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Bill with a similar term on the date of the grant.
Fair ValueDividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.
Volatility: The Company estimated the expected volatility of Financial Instrumentsthe stock price based on the historical volatilities of the Company’s common stock traded on the Nasdaq Capital Market.
Remaining term: The Company’s remaining term is based on the remaining contractual maturity of the warrants.
The carrying amounts of cash and cash equivalents and accounts payable approximate fair value dueof the derivative features of the convertible note on the issuance dates, and at the balance sheet date were calculated using the with-and-without method, a form of the income approach, valued with the following weighted average assumptions:
May 14, 2018 | June 30, 2018 | |||||||
| Risk free interest rate | 2.85 | % | 2.73 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
| Expected volatility | 40 | % | 42 | % | ||||
| Remaining term (years) | 5.05 | 4.92 | ||||||
Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Bill with a similar term on the date of the issuance.
Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.
Volatility: The Company estimated the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a period consistent with the convertible note’s expected term.
| F-17 |
Remaining term: The Company’s remaining term is based on the remaining contractual term of the convertible note.
During the years ended June 30, 2018 and 2017, the Company marked the derivative features of liabilities to fair value and recorded a gain of $54,099 anda loss of $877,490, respectively, relating to the short-term naturechange in fair value.
Note 9. Convertible Notes
On May 14, 2018 the Company completed the offering of $15.0 million principal amount of the Company’s 6.5% Convertible Senior Secured Notes due 2023. The net proceeds of the offering after payment of offering costs are approximately $13.1 million. The notes will mature on May 31, 2023, unless earlier converted, redeemed or repurchased. Interest on the notes accrues at the rate of 6.5% per year and is payable at the Company’s option quarterly in cash and/or freely tradable shares of the Company’s common stock, subject to certain limitations. The notes may be converted into common stock at the option of the holder at any time prior to maturity at an initial conversion price of $6.55 per share, subject to adjustment under certain circumstances. If the holder elects to convert the notes at any time on or after the date that is one year after the last date of original issuance of the notes and prior to May 31, 2021, the holder will also receive a make-whole payment equal to the remaining scheduled interest payments that would have been made on the notes converted had such notes remained outstanding through May 31, 2021 (the “put date”). At the Company’s option, make-whole payments may be paid in cash and/or freely tradable shares of the Company’s common stock.
The holders of the notes will have a one-time right, exercisable prior to the put date in the manner described in the indenture relating to the notes, to require the Company to repurchase for cash all (but not less than all) of such holder’s notes on the put date at a purchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, and including, the put date.
At any time on or after May 31, 2019, if the closing sale price per share of the Company’s common stock is greater than 175% of the then-effective conversion price for each of 20 days of any 30 consecutive trading day period immediately preceding the Company’s optional redemption notice, the Company may redeem the notes at a redemption price equal to 100% of the principal amount thereof, plus accrued interest.
The notes are fully guaranteed on a senior secured basis and rank senior in right of payment to all of the Company’s existing unsecured indebtedness. The notes and the guarantees are secured by a first priority lien (subject to permitted liens) on substantially all of the Company’s existing and future subsidiaries’ assets, including the Canandaigua, New York manufacturing facility of the Company’s subsidiary, Akoustis, Inc., and a pledge of its equity interests in Akoustis, Inc., but excluding certain excluded property.
The Company analyzed the components of the convertible notes for embedded derivatives and the application of the corresponding accounting treatment. This analysis determined that certain features of the notes, the interest make whole payment and the qualifying fundamental change payments, represented derivatives that require bifurcation from the host contract. The fair value of these instruments.components of $1,158,800 was recorded as a debt discount and will be adjusted to fair value at the end of each future reporting period. As of June 30, 2018, the fair value of these components was $1,104,701.
In addition, the Company identified a beneficial conversion feature in relation to the conversion option of the notes. The fair value of the conversion option of $1,809,161 was recorded as a debt discount with a corresponding credit to additional paid in capital.
The Company measures the fair valuerecorded total debt discount and debt issuance costs of financial assets and liabilities based on the guidance of ASC 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Fair value measurements are categorized using a valuation hierarchy for disclosure of the inputs used to measure fair value, which prioritize the inputs into three broad levels:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date, and include those financial instruments that are valued using models or other valuation methodologies.
Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Derivative Liability
The Company evaluates its options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives$4,844,650, to be separately accounted for in accordance with paragraph 815-10-05-4amortized over three years using an effective interest method. Debt discount and Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is thatdebt issuance costs include the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. The change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair valuefeatures at the issuance date of conversion, exercise or cancellation and then$1,158,800, the related fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fairintrinsic value of the instrument onbeneficial conversion feature of $1,809,161, and debt issuance costs paid totaling $1,876,689.
As of June 30, 2018, the reclassification date. Derivative instrument liabilities will be classified in theoutstanding principal balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months ofconvertible notes was $15.0 million, and the balance sheet date.debt discount was $4,640,069.
The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”)to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.
The Company utilizes a binomial option pricing model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements of operations.Note 10. Concentrations
Revenue RecognitionVendors
Change in Accounting Policy for Revenue Recognition
Effective October 1, 2016,For the Company changed its accounting policy for the recognition of grant revenue. The Company believes this change in accounting policy is preferable due to the fact that grant revenue is viewed as an ongoing function of its intended operations. This change in accounting policy also enhances the comparabilityyear ended June 30, 2018, no vendors represented 10% or more of the Company’s financial statements with many of its industry peers. The adoption of this accounting policy change has been applied retrospectively to all prior periods presented in this Annual Report on Form 10-K and has had no impact on net loss per share.
Contract Research and Government Grantspurchases.
The Company may generate revenue from product sales, license agreements, collaborative research and development arrangements, and government grants. To dateFor the Company’s principal source of revenue consists of government research grants. The Company recognizes nonrefundable grant revenue when it is received and reports this revenue as “Contract research and government grants” on the condensed consolidated statements of operations. Contracts executed and monies received prior to the recognition of revenue are recorded as deferred revenue.
Engineering Review Services
The Company records Engineering Review Services revenue (“ERS”) which is for providing one time design and development services whereby the Company’s R&D personnel deliver simulations/models and demonstration units (low volume) for evaluation by the customers. The Company recognizes revenue when there is persuasive evidence of an arrangement, the service has been provided to the customer, the amount of fees to be paid by the customer is fixed or determinable, and the collection of fees is reasonably assured. Total ERS revenue to date is approximately $14,500.
Revenue Recognition for Facility Rental Income
Effective June 26, 2017, the Company records rental income for the tenants at the Company’s NY fabrication facility. The Company recognizes rental income in the period the rental services are delivered to the lessee; rent is received on a monthly, straight-line basis.
Research and Development
Research and development expenses are charged to operations as incurred.
Equity–based compensation
The Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “Compensation – Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.
Restricted stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a four-yearperiod (generally vesting either ratably over the first four years or on a tier basis of 50% on the second anniversary of the effective date and 25% on the third and fourth anniversary dates). The fair value of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the value of the underlying share, the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is benchmarked against similar companies in a similar industry over the expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common stock and does not intend to pay dividends on its Common stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best estimate.
Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, equity–based compensation could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the equity–based compensation could be significantly different from what the Company has recorded in the current period.
The Company accounts for share–based payments granted to non–employees in accordance with ASC 505-40, “Equity Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments is re-measured each reporting period over the requisite service period.
Income taxes
The Company applies the elements of ASC 740–10 “Income Taxes” regarding accounting for uncertainty in income taxes. This clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As of March 31, 2017, no liability for unrecognized tax benefits was required to be reported. The Company does not expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The Company’s policy is to recognize interest and penalties related to tax matters in the income tax provision on the Statement of Operations. There was no interest and penalties for the yearsyear ended June 30, 2017, and 2016.
Deferred taxes are computed based on the tax liability or benefit in future yearsone vendor represented 11% of the reversal of temporary differences in the recognition of income or deduction of expenses between financial and tax reporting purposes. The net difference, if any, between the provision for taxes and taxes currently payable is reflected in the balance sheet as deferred taxes. Deferred tax assets and/or liabilities, if any, are classified as current and non–current based on the classification of the related asset or liability for financial reporting purposes, or based on the expected reversal date for deferred taxes that are not related to an asset or liability. Valuation allowances are recorded to reduce deferred tax assets to that amount which is more likely than not to be realized. Company’s purchases.
Loss Per ShareCustomers
Basic net loss per common share is computed by dividing net loss attributable to common stockholders byFor the weighted-average numberyear ended June 30, 2018, three customers represented 37%, 24% (20% of common shares outstanding duringaccounts receivable), and 14% (35% of accounts receivable), respectively, of the period. Diluted net loss per common share is determined usingCompany’s non-grant related revenue.
For the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the yearsyear ended June 30, 2017, two customers represented 86%, and 2016 presented in these consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
The Company had the following common stock equivalents at June 30, 2017 and 2016:
| June 30, 2017 | June 30, 2016 | ||||||||
| Options | 160,000 | 160,000 | |||||||
| Warrants | 612,165 | 471,697 | |||||||
| Totals | 772,165 | 631,697 | |||||||
Shares Outstanding
Shares outstanding include shares of restricted stock with respect to which restrictions have not lapsed. Restricted stock included in reportable shares outstanding was 1,646,965 shares and 1,361,055 shares as of June 30, 2017 and 2016, respectively. Shares of restricted stock are included in the calculation of weighted average shares outstanding.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation. The reclassifications did not have an impact on net loss as previously reported.
Recently Issued Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards Update (ASU) No. 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). The amendments in this Update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the effects of ASU 2015-11 on the consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”14%, which will require entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU simplifies the current guidance, which requires entities to separately present deferred tax assets and deferred tax liabilities as current and noncurrent in a classified balance sheet. The ASU may be applied either prospectively or retrospectively. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Earlier application is permitted asrespectively, of the beginning of an interim or annual period. The Company is currently evaluating the effects of ASU 2015-17 on the consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain portions of the ASUCompany’s non-grant related to financial liabilities. The Company is currently evaluating the impact of the provisions of this new standard on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”(Topic 842). The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In April 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation” (Topic 718). The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In April 2016, the FASB issued ASU No. 2016-10,“Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (Topic 606)”. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net) (Topic 606)”. These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity’s adoption of ASU 2014-09, which the Company intends to adopt for interim and annual reporting periods beginning after December 15, 2017. The Company is in the process of evaluating the standard and does not expect the adoption will have a material effect on its consolidated financial statements and disclosures.
In May 2016, the FASB issued ASU No. 2016-12,“Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”,which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is currently evaluating the standard and does not expect the adoption will have a material effect on its consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”. This update provides guidance on how to record eight specific cash flow issues. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted and a retrospective transition method to each period should be presented. The Company is currently evaluating the effect of this update on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,“Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard.
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,”which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This standard is required to be adopted in the first quarter of 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.
In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is evaluating the effect that ASU 2017-11 will have on its financial statements and related disclosures.
Note 4. Acquisition of STC-MEMS
Acquisition of STC-MEMS
On March 23, 2017, the Company entered into the Agreements withRF-SUNY, a New York State education corporation, on behalf of The State University of New York Polytechnic Institute, and FRMC, an affiliate of RF-SUNY to acquire the STC-MEMS Business. The acquisition will allow the Company to internalize manufacturing, increase capacity and control its wafer supply chain for single crystal BAW RF filters. Akoustis will utilize the NY Facility to consolidate all aspects of wafer manufacturing for its high-band RF filters.
Smart Systems Technology & Commercialization Center (STC-MEMS) was created in 2010 to form a vertically integrated “one-stop-shop” in smart system and smart-device innovation and manufacturing. The facility was designed to provide its customers the capacity, infrastructure and operational capabilities in all areas of semiconductor and advanced manufacturing, while covering a diverse number of markets including aerospace, biomedical, communications, defense, and energy. Located in Canandaigua, New York, just outside of Rochester, the STC-MEMS facility includes certified cleanroom manufacturing, advanced test and metrology, as well as a MEMS and optoelectronic packaging facility.
The Company acquired the STC-MEMS Business through its Akoustis NY, a Delaware corporation. Post-acquisition date, the Company also agreed to assume substantially all the on-going obligations of the STC-MEMS Business incurred in the ordinary course of business, including with respect to the 29 employees employed by RF-SUNY. The purchase closed on June 26, 2017.revenue.
Acquisition Price
| F-18 |
The purchase price paid for the transaction was an aggregate of approximately $4.58 million consisting of (i) $2.75 million in cash consideration, (ii) $96,000 in inventory, and (iii) a contingent real estate liability of approximately $1.73 million.
Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree
The fair value of the purchase consideration issued to the sellers of the STC-MEMS Business was allocated to the net tangible and intangible assets acquired. The Company accounted for the STC-MEMS Business acquisition as the purchase of a business under GAAP under the acquisition method of accounting, as specified in ASC 805 “Business Combinations”, and the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company. The fair value of the net assets acquired was approximately $6.3 million. The excess of the aggregate fair value of the net tangible and intangible assets over the consideration paid has been treated as a gain on bargain purchase in accordance with ASC 805. The purchase price allocation was based, in part, on management’s knowledge of the STC-MEMS Business and the results of a third-party appraisal commissioned by management.
The Company utilized the services of an independent appraisal company to assist it in assessing the fair value of the assets and liabilities acquired. This assessment included an evaluation of the fair value of the real estate and fixed assets in addition to the intangibles acquired. The real estate was valued utilizing a combination of the income and cost approaches. The fixed assets were valued utilizing a combination of the market and cost approaches. The intangible asset, customer relationships, was valued utilizing the income approach. The valuation process also included discussion with management regarding the history and business operations of the STC-MEMS Business, a study of the economic and industry conditions in which the STC-MEMS Business competes and an analysis of the historical and projected financial statements and other records and documents.
Recognizing and measuring goodwill or a gain from a bargain purchase
Management reviewed the assets and liabilities acquired and the assumptions utilized in estimating their fair values. Further revisions to the estimates were not deemed necessary and after identifying and valuing all assets and liabilities of the STC-MEMS Business, the Company concluded that recording a bargain purchase gain was appropriate and required under GAAP.
| Purchase Consideration | ||||
| Amount of consideration: | $ | 4,576,591 | ||
| Assets acquired and liabilities assumed at fair value | ||||
| Land | $ | 1,000,000 | ||
| Building | 3,000,000 | |||
| STC-MEMS equipment | 2,124,650 | |||
| Inventory | 96,049 | |||
| Customer relationships | 81,773 | |||
| Net assets acquired | $ | 6,302,472 | ||
| Total net assets acquired | $ | 6,302,472 | ||
| Consideration paid | 4,576,591 | |||
| Gain on bargain purchase | $ | 1,725,881 | ||
Prior to this transaction, none of the parties negotiating on behalf of the Company had met any of the individuals negotiating on behalf of the sellers. Further, there were no agreements signed with any individuals negotiating this deal. Additionally, there were no related parties associated with this transaction.
The following presents the unaudited pro-forma combined results of operations of the Company with the STC-MEMS Business as if the entities were combined on July 1, 2015.
| Year Ended | Year Ended | |||||||
| June 30, | June 30, | |||||||
| 2017 | 2016 | |||||||
| Revenues, net | $ | 4,195,374 | $ | 5,314,499 | ||||
| Net (loss) allocable to common shareholders | $ | (13,907,072 | ) | $ | (7,613,100 | ) | ||
| Net (loss) per share | $ | (0.82 | ) | $ | (0.57 | ) | ||
| Weighted average number of shares outstanding | 16,990,536 | 13,349,482 | ||||||
The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisitions been completed as of July 1, 2015 or to project potential operating results as of any future date or for any future periods.
The estimated useful life remaining on equipment and building acquired with the STC-MEMS Business is 3 to 5 years and 11 years, respectively.
The Company consolidated Akoustis NY as of the closing date of the agreement, and the results of operations of the Company include that of Akoustis NY. The Company recognized net revenues attributable to Akoustis NY of $0 and recognized net losses of $171,000 during the period June 26, 2017 through June 30, 2017; driven by wages and fringe benefits of $126,000.
Note 5. Property and equipment11. Stockholders’ Equity
Property and equipment consistedOn December 15, 2016, in connection with the Company’s reincorporation from the State of Nevada to the State of Delaware, the Company filed a Certificate of Incorporation with the State of Delaware, which, among other things, reduced the number of authorized shares of capital stock of the following:Company from 310,000,000 total shares consisting of (a) 300,000,000 shares of Common Stock and (b) 10,000,000 of $0.001 par value “blank check” preferred stock to 50,000,000 total shares consisting of (a) 45,000,000 shares of Common Stock and (b) 5,000,000 shares of “blank check” preferred stock.
As of June 30, 2018 and 2017, there were no shares of preferred stock issued and outstanding.
| Estimated Useful Life | June 30, 2017 | June 30, 2016 | ||||||||
| Land | n/a | $ | 1,000,000 | $ | — | |||||
| Research and development equipment | 3 – 10 years | 1,851,427 | 226,372 | |||||||
| Computer equipment | 5 years | 16,783 | 16,783 | |||||||
| Furniture and fixtures | 5 – 10 years | 3,725 | 3,725 | |||||||
| STC-MEMS equipment | 3 – 5 years | 2,124,650 | — | |||||||
| Building | 11 years | 3,000,000 | — | |||||||
| Leasehold improvements | * | 3,240 | 3,240 | |||||||
| 7,999,825 | 250,120 | |||||||||
| Less: Accumulated depreciation | (146,011 | ) | (43,135 | ) | ||||||
| Total | $ | 7,853,814 | $ | 206,985 | ||||||
(*) Amortized onEquity Issuances
December 2017 Offering
During the quarter ended December 31, 2017, the Company sold a straight-line basis over the termtotal of 2,640,819 shares of its common stock at $5.50 per share in a private placement for aggregate gross proceeds of $14.5 million before deducting commissions and expenses of approximately $1.3 million. The proceeds of the lease oroffering will be used to fund development and commercialization of the estimated useful lives, whichever is shorter.Company’s technology, capital expenditures and general corporate expenditures. In addition to the commissions and expenses paid, the Company issued to the placement agents warrants to purchase 154,177 shares of the Company’s common stock. The warrants represent a cost of the offering, have a grant date fair value of $645,757 and are shown as an offset on the consolidated statements of changes in stockholders’ equity.
The fair values of the warrants were estimated at the dates of grant using a binomial option pricing model with the following weighted average assumptions:
| Expected term (years) | 5.50 | |||
| Risk-free interest rate | 2.12 | % | ||
| Volatility | 69 | % | ||
| Dividend yield | 0 | % |
Investors in the December 2017 Offering (other than directors, officers, employees, or other affiliates of the Company) were given price-protected anti-dilution rights such that if, prior to September 30, 2018, the Company recorded depreciation expenseissues additional shares of $102,876Common Stock or Common Stock equivalents (subject to customary exceptions, including but not limited to issuances of awards under equity compensation plans and $34,828certain other issuances of securities in connection with credit arrangements, equipment financings, lease arrangements or similar transactions) for a consideration per share less than the December 2017 Offering price per share (as adjusted for any subsequent stock dividend, stock split, distribution, recapitalization, reclassification, reorganization or similar event) (the “Lower Price”), each such investor will be entitled to receive from the Company additional shares of Common Stock in an amount such that, when added to the number of shares of Common Stock initially purchased by such investor, will equal the number of shares of Common Stock that such investor’s subscription amount would have purchased at the greater of the Lower Price and $5.00 (or $4.40 in the case of one investor).
During the year ended June 30, 2018, the Company also issued 542,450 shares of its common stock to investors in the Company’s private placement offering that closed in May 2017. These issuances were made pursuant to the price-protection provisions granted to such investors in their subscription agreements.
Equity incentive plans
On May 22, 2015, the Board of Directors adopted, and on the same date the stockholders approved, the 2015 Equity Incentive Plan (the “2015 Plan”), which reserved a total of 1,200,000 shares of Common Stock for issuance under the 2015 Plan. The 2015 Plan authorized the grant to participants of nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance grants. No additional shares will be issued under the 2015 Plan. Effective December 15, 2016, equity awards are granted under the Company’s 2016 Stock Incentive Plan (the “2016 Plan”), which was approved stockholders on the same date. The Company settles awards issued under all plans with newly issued common shares.
In addition, the number of shares of our Common Stock subject to the 2016 Plan, any number of shares subject to any numerical limit in the 2016 Plan, and the number of shares and terms of any incentive award are expected to be adjusted in the event of any change in our outstanding Common Stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares or similar transaction.
Options granted under the 2015 Plan vest as determined by the Company’s board of directors and expire over varying terms, but not more than ten years from the date of grant. In the case of an Incentive Stock Option that is granted to a 10% shareholder on the date of grant, such Option shall not be exercisable after the expiration of five years from the date of grant. Options for 160,000 shares of Common Stock were issued under the 2015 Plan to four non-employee directors in May 2015. No new options were granted in the year ended June 30, 2017.
The fair values of the Company’s options were estimated at the dates of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
| June 30, 2018 | ||||
| Exercise price | $6.24 – $7.59 | |||
| Expected term (years) | 4.00 – 7.00 | |||
| Risk-free interest rate | 1.76 – 2.81% | |||
| Volatility | 67 – 70% | |||
| Dividend yield | 0% | |||
| Weighted Average Grant Date Fair Value of Options granted during the period | $3.82 |
| F-19 |
Expected term: The Company’s expected term is based on the period the options are expected to remain outstanding. The Company estimated this amount utilizing the “Simplified Method” in that the Company does not have sufficient historical experience to provide a reasonable basis to estimate an expected term.
Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.
Volatility: The Company calculates the expected volatility of the stock price using the historical volatilities of the Company’s common stock traded on the Nasdaq Capital Market.
Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.
The following is a summary of the option activity:
| Options | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding – June 30, 2017 | 160,000 | 1.50 | ||||||||||||||
| Exercisable – June 30, 2017 | 80,000 | 1.50 | ||||||||||||||
| Granted | 1,229,859 | 6.69 | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Forfeited/Cancelled | (51,000 | ) | 7.00 | |||||||||||||
| Outstanding – June 30, 2018 | 1,338,859 | 6.06 | 6.64 | 1,627 | ||||||||||||
| Exercisable – June 30, 2018 | 120,000 | 1.50 | 6.90 | 692 | ||||||||||||
The total intrinsic value of options exercised during the fiscal years ended June 30, 2018 and June 30, 2017 was $0 million and 2016,$0 million, respectively.
As of June 30, 2017, research and development fixed assets totaling $1,062,496 were not placed2018, the Company has $2,842,778 in service and therefore not depreciated duringunrecognized stock-based compensation expense attributable to the period. outstanding options, which will be amortized over a period of 2.69 years.
Note 6. Intangible assetsFor the years ended June 30, 2018 and 2017, the Company recorded $1,675,093 and $27,932, respectively, in stock-based compensation related to stock options, which is reflected in the consolidated statements of operations.
Restricted Stock Units and Restricted Stock Awards
The Company recognizes the compensation expense for all share-based compensation granted based on the grant date fair value for directors and employees and the reporting period remeasured fair value for consultants. Share-based compensation expense is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. The fair value of the award is recorded as share-based compensation expense over the respective restricted period. Any portion of the grant awarded to consultants, directors, employees, and other service providers as to which the repurchase option has not lapsed is accrued on the Balance Sheet as a component of accounts payable and accrued expenses. As of June 30, 2018 and 2017, the accrued stock-based compensation was $395,539 and $399,157, respectively. The Company has the right to repurchase some or all of such shares in certain circumstances upon termination of the recipient’s service with the Company, for up to 60 months from the date of termination (“repurchase option”). The shares as to which the repurchase option has not lapsed are subject to forfeiture upon termination of consulting and employment relationships.
In September 2015, the Company amended the original restricted stock agreement for certain award recipients. Pursuant to the amendment, 75% of the shares as to which the repurchase option had not lapsed as of September 30, 2015 will be released from the repurchase option on the third anniversary of the original effective date of the agreement. The remaining 25% of the shares will be released from the repurchase option on the fourth anniversary of the original effective date.
A summary of unvested restricted stock awards (“RSAs”) and restricted stock unit awards (“RSUs”) outstanding as of June 30, 2018 and changes during the twelve months then ended is as follows:
| Number of RSAs/RSUs | Weighted Average Fair Value per | |||||||
| Outstanding - June 30, 2017 | 1,460,632 | $ | 3.73 | |||||
| Granted | 1,035,994 | 6.61 | ||||||
| Vested | (653,420 | ) | 3.41 | |||||
| Forfeited/Cancelled/Repurchased | (244,151 | ) | 3.68 | |||||
| Outstanding – June 30, 2018 | 1,599,055 | $ | 5.73 | |||||
| F-20 |
The weighted average grant date fair value per share for awards granted during the fiscal years ended June 30, 2018 and June 30, 2017 was $6.61 and $4.83, respectively. The total fair value of restricted awards that vested during the fiscal years ended June 30, 2018 and June 30, 2017 was $3.8 million and $3.7 million, respectively.
During the years ended June 30, 2018 and 2017, the Company recorded stock-based compensation expense of $3,784,554 and $3,223,398, respectively related to the RSAs and RSUs that have been issued to date.
As of June 30, 2018, the Company had approximately $5.0 million in unrecognized stock-based compensation expense related to the unvested shares.
Performance Awards
In March 2018 the Company granted 139,500 performance-based restricted stock units (PBRSU) to employees with a grant date fair value per share of $6.26. The PBRSU awards contain performance and service conditions which must be satisfied for an employee to earn the award. The performance condition is based primarily on the achievement of certain performance objectives. Once earned, the PBRSU awards vest 100% on the first anniversary of the grant date. The Company recognizes compensation expense for PBRSU awards using a graded vesting model, based on the probability of the performance condition being met. During the year, 15,000 of the PBRSU awards were earned and 124,500 of the awards were cancelled. For the year ended June 30, 2018, the Company recognized $30,870 of stock compensation expense on PBRSU awards.
As of June 30, 2018, the Company had approximately $0.06 million in unrecognized stock-based compensation expense related to the 15,000 unvested PBRSU awards.
Note 12. Commitments and contingencies
Employment Agreements
On June 15, 2015, the Company entered into a three-year employment agreement with its Chief Executive Officer (“CEO”). After the initial three-year term, the agreement is automatically renewed for successive one-year periods unless terminated by either party on at least 30 days’ written notice prior to the end of the then-current term. Under the employment agreement, the CEO’s annual base salary was $150,000, subject to increase or decrease on each anniversary of the agreement as determined by the Board of Directors. The Board of Directors increased the CEO’s annual salary to $154,500, effective July 4, 2016, and to $163,770, effective September 11, 2017. By notice effective July 1, 2018, the Board of Directors increased the CEO’s annual salary to $300,000. The CEO is eligible, at the discretion of our Board of Directors, to receive an annual cash bonus of up to 100% of his annual base salary, which may be based on the Company achieving certain operational, financial or other milestones (the “Milestones”) that may be established by the Board of Directors. The CEO is entitled to receive stock options or other equity incentive awards under the 2016 Plan as and when determined by the Board, and is entitled to receive perquisites and other fringe benefits that may be provided to, and is eligible to participate in any other bonus or incentive program established by the Company, for the executives. The CEO and his dependents are also entitled to participate in any of the employee benefit plans subject to the same terms and conditions applicable to other employees. The CEO will be entitled to be reimbursed for all reasonable travel, entertainment and other expenses incurred or paid by him in connection with, or related to, the performance of his duties, responsibilities or services under his employment agreement, in accordance with policies and procedures, and subject to limitations, adopted by us from time to time. In the event that the CEO is terminated by the Company without Cause (as defined in his employment agreement) or he resigns for Good Reason (as defined in his employment agreement) during the term of his employment agreement, the CEO would be entitled to (x) an amount equal to his annual base salary then in effect (payable in accordance with the Company’s intangible assets consistednormal payroll practices) for a period of 24 months commencing on the effective date of his termination (the “Severance Period”) (in the case of termination by the executive for Good Reason, reduced by any cash remuneration paid to him because of any other employment or self-employment during the Severance Period), and (y) if and to the extent the Milestones are achieved for the annual bonus for the year in which the Severance Period commences (or, in the absence of Milestones, the Board of Directors has, in its sole discretion, otherwise determined an amount of the CEO’s annual bonus for such year), an amount equal to such annual bonus pro-rated for the portion of the performance year completed before the CEO employment terminated, (z) any unvested stock options, restricted stock or similar incentive equity instruments will vest immediately. For the duration of the Severance Period, the CEO will also be eligible to participate in our benefit plans or programs, provided the CEO was participating in such plan or program immediately prior to the date of employment termination, to the extent permitted under the terms of such plan or program (collectively, the “Termination Benefits”). If the CEO’s employment is terminated during the term of his employment agreement by the Company for Cause, by the CEO for any reason other than Good Reason or due to his death, then he will not be entitled to receive the Termination Benefits, and shall only be entitled to the compensation and benefits which shall have accrued as of the date of such termination (other than with respect to certain benefits that may be available to the CEO as a result of a Permanent Disability (as defined in his employment agreement).
On July 14, 2017, the Board named a new Chief Financial Officer who would also serve as the Company’s Chief Accounting Officer, effective as of the same date.
In connection with the election of the new Chief Financial Officer of the Company, the Company entered into a one-year employment agreement, dated July 14, 2017 (the “Employment Agreement”), with the Chief Financial Officer with essentially the same terms as the Chief Executive Officer employment agreement described above with the exception of the following:
| F-21 |
| Estimated useful life | June 30, 2017 | June 30, 2016 | ||||||||||
| Patents | 15 years | $ | 135,291 | $ | 74,562 | |||||||
| Customer relationships | 14 years | 81,773 | — | |||||||||
| Less: Accumulated amortization | (12,097 | ) | (4,889 | ) | ||||||||
| Subtotal | 204,967 | 69,673 | ||||||||||
| Trademarks | — | 1,560 | 1,560 | |||||||||
| Intangible assets, net | $ | 206,527 | $ | 71,233 | ||||||||
| - | Monthly living expenses of $1,600. |
| - | Target annual bonus each fiscal year equal to 70% of his annual base salary, based on certain Company operation, financial, and other milestones set by the Board and/or its Compensation Committee. |
| - | A restricted a stock award for 100,000 shares of Common Stock and options for 75,000 shares of Common Stock to be granted during the Company’s next open trading window. The Awards will be granted under the 2016 Plan and will vest 25% on each of the first, second, third, and fourth anniversaries of the grant date, subject to the CFO’s continued employment and the terms and conditions of the 2016 Plan and the applicable award agreements. |
The term of the Employment Agreement extends through July 31, 2018, and the Employment Agreement will automatically renew for successive one- year periods unless either party gives at least 30 days written notice of non-renewal to the other party prior to the end of the then applicable term.
Operating leases
The Company recorded amortizationleased three office locations in Huntersville, NC pursuant to five- and three-year lease agreements, and month to month. The three-year lease agreement expired in April 2018 in connection with a move in corporate office location, and the five-year lease agreement expires in November 2022. The operating leases provide for annual real estate tax and cost of living increases and contain predetermined increases in the rentals payable during the terms of the leases. The aggregate rent expense of $7,208is recognized on a straight-line basis over the lease term. The total lease rental expense was $143,112 and $3,339$56,808 for the years ended June 30, 2018 and 2017, respectively.
The Company leased equipment for the NY Facility on a month-to-month basis until November 2017. The original lease agreement had a three-month term beginning on June 16, 2017. The aggregate rent expense is recognized on a straight-line basis over the lease term. The total lease rental expense was $79,375, and $8,125 for the year ended June 30, 2018 and 2017, respectively. Additionally, the Company leases a copier for the NC office location pursuant to a five year lease agreement. The total lease rental expense was $1,348 and 2016, respectively.$0 for the years ended June 30, 2018 and 2017.
The following table outlines estimatedthe minimum future annual amortization expenselease payments for the next five years and thereafter:
| June 30, | June 30, | |||||||||
| 2018 | $ | 14,811 | ||||||||
| 2019 | 2019 | 14,811 | $ | 120,859 | ||||||
| 2020 | 2020 | 14,811 | 124,478 | |||||||
| 2021 | 2021 | 14,811 | 128,206 | |||||||
| 2022 | 2022 | 14,811 | 132,046 | |||||||
| 2023 | 55,825 | |||||||||
| Thereafter | Thereafter | 130,912 | — | |||||||
| Total | Total | $ | 204,967 | $ | 561,414 | |||||
Ontario County Industrial Development Authority Agreement
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.
Real Estate Contingent Liability
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 $1,750,000, subject to certain enumerated exceptions. The penalty imposed shall be equivalent to the amount that the sales price of the property exceeds $1,750,000 up to the maximum penalty (“Maximum Penalty”) defined below:
| Maximum Penalty | |||||
| Year 1, ended June 26, 2018 | $ | 5,960,000 | |||
| Year 2, ending June 26, 2019 | $ | 3,973,333 | |||
| Year 3, ending June 26, 2020 | $ | 1,986,667 | |||
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 17.0%. The 17.0% discount rate was derived from a weighted average cost of capital, modified to include the effects of the bargain purchase price. As of June 30, 2018 and 2017, the fair value of the contingent liability was $1,229,966 and $1,730,542, respectively. During the year ended June 30, 2018 and 2017, the Company marked the contingent liability to fair value and recorded a gain of $500,756 and $0, respectively, relating to the change in fair value.
| F-22 |
Litigation, Claims and Assessments
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.
Tax Credit Contingency
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 June 30, 2018 and $0.0 million as of June 30, 2017 and is recorded on the Consolidated Balance Sheet as a long term liability.
Note 7. Accounts payable and accrued expenses
Accounts payable and accrued expenses consistedNote 13. Related Party Transactions
Consulting Services
AEG Consulting, a firm owned by one of the following atCompany’s Co-Chairmen, received $7,395 and $15,195 for consulting fees for the years ended June 30, 2018 and 2017, and June 30, 2016:
| June 30, 2017 | June 30, 2016 | |||||||
| Accounts payable | $ | 494,515 | $ | 73,400 | ||||
| Accrued salaries and benefits | 274,050 | 21,376 | ||||||
| Accrued bonuses | — | 126,575 | ||||||
| Accrued stock-based compensation | 399,157 | 179,079 | ||||||
| Other accrued expenses | 168,646 | 143,216 | ||||||
| Totals | $ | 1,336,368 | $ | 543,646 | ||||
Note 8. Derivative Liabilitiesrespectively.
UponOn September 27, 2017, the Company granted a restricted stock award of 11,000 shares of the Company’s common stock with a fair value on the grant date of $78,320 to a director for board advisory services provided from January 2017 to June 2017, prior to the director’s appointment to the Board of Directors on July 14, 2017. The award vests 25% on each of the first four anniversaries of the grant date.
Offering/Private Placement
The Company’s CEO and Vice President of Engineering participated in the closing of private placementsthe 2016-2017 Offering that occurred on May 22, 2015 and June 9, 2015, the Company issued 298,551 and 26,099 warrants, respectively, to purchase the same number ofNovember 25, 2016 where they each purchased 20,000 shares of Common Stock with an exerciseat a price of $1.50 and a five-year term to the placement agent. Upon closing$5.00 per share. The Company’s Vice-President of a private placement in April 2016, the Company issued 153,713 warrants to purchase the same number ofOperations also purchased 2,000 shares of Common Stock within the closing at an exerciseaggregate purchase price of $1.60$10,000. One of the Co-Chairmen of the Company’s Board purchased 200,000 shares of Common Stock at a price of $5.00 per share at an aggregate purchase price of $1,000,000. The brother of the CEO purchased 14,000 shares of Common Stock in the closing at an aggregate purchase price of $70,000.
The Company’s second Co-Chairman participated in the closing of the 2016-2017 Offering that occurred on December 27, 2016 where he purchased 2,000 shares of Common Stock at a price of $5.00 per share for an aggregate purchase price of $10,000. A second brother of the CEO purchased 20,000 shares of Common Stock in the closing at an aggregate purchase price of $100,000.
On November 14, 2017, certain members of the Company’s Board of Directors purchased shares of the Company’s common stock at a price of $5.50 per share in a private placement. One of the Company’s Co-Chairmen purchased 154,545 shares at a price of $5.50 per share for an aggregate purchase price of $849,998. The other Co-Chairman purchased 1,818 shares at a price of $5.50 per share for an aggregate purchase price of $9,999. Three additional members of the Company’s Board of Directors each purchased 5,454 shares at a price of $5.50 per share for an aggregate purchase price of $29,997 for each such Board member.
On December 1, 2017 a brother of the Company’s Chief Executive Officer purchased 12,000 shares of the Company’s common stock in a private placement at a price of $5.50 per share for an aggregate purchase price of $66,000.
Note 14. Income Taxes
On December 22, 2017, the Tax Cuts and a five-year termJobs Act (“Tax Act”) was signed into law. ASC 740, Accounting for Income Taxes, requires companies to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. Due to the placement agent.timing of the Company’s fiscal year. The Company identified certain put features embeddedlower corporate tax rate will be phased in, the warrants that potentially could resultresulting in a net cash settlement, requiring the Company to classify the warrants as a derivative liability.
During theU.S. statutory federal rate of approximately 27.6% for our fiscal year ended June 30, 2018 and 21% for subsequent fiscal years.
The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the appropriate accounting treatment when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. In the interim periods, provisional amounts are to be recorded where the income tax effect can be reasonably estimated. The Company’s accounting for the Tax Act is incomplete, but the Company has recorded the provisional estimates discussed below and will finalize and record any resulting adjustments within the one-year measurement period. The final transitional impacts of the Tax Act may differ from the below provisional estimates, possibly materially, due to, among other things: legislation by states with respect to the Tax Act; evolving technical interpretations of the Tax Act; legislative action to address questions that arise because of the Tax Act; clarification of the application of accounting standards for income taxes or related interpretations in response to the Tax Act; or updates or changes to provisional amounts the Company has utilized to calculate the transitional impacts, including impacts from changes to current year earnings and tax liabilities, and deferred tax assets and liabilities.
| F-23 |
The deferred tax assets and liabilities of the Company are impacted by the Tax Act. The reduction in the U.S. federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, requires the Company to remeasure its deferred tax assets and liabilities. The Company has evaluated this change and recorded a decrease to net deferred tax assets with a corresponding decrease to the Company’s valuations allowance against deferred tax assets of $4.6 million. The Company is still in the process of evaluating the state tax impact of the Tax Act on deferred tax balances.
The Company had no income tax expense due to operating losses incurred for the years ended June 30, 2018 and 2017.
The provision for/(benefit from) income tax differs from the amount computed by applying the statutory federal income tax rate to income before the provision for/(benefit from) income taxes. The sources and tax effects of the differences are as follows:
For the June 30, | For the June 30, | |||||||
| Income taxes at Federal statutory rate | (27.55 | )% | (34.00 | )% | ||||
| State income taxes, net of Federal income tax benefit | (1.96 | )% | (2.63 | )% | ||||
| Tax Credits | (0.21 | )% | — | |||||
| Permanent differences | 0.04 | % | (6.36 | )% | ||||
| Other | 1.90 | % | 6.49 | % | ||||
| Change in Valuation Allowance | 12.19 | % | 36.50 | % | ||||
| Effect of changes in income tax rate applied to net deferred taxes | 15.59 | % | 0.00 | % | ||||
| Income Tax Provision | 0.00 | % | 0.00 | % | ||||
The tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities are as follows:
| June 30, 2018 | June 30, 2017 | |||||||
| Net Operating Loss Carryforwards | $ | 7,848,901 | $ | 5,352,238 | ||||
| Share-based compensation | 1,283,454 | 406,498 | ||||||
| Accumulated depreciation/basis differences | (919,211 | ) | — | |||||
| Credits | 45,681 | — | ||||||
| Other | 116,819 | (33,028 | ) | |||||
| 8,375,644 | 5,725,708 | |||||||
| Valuation Allowance | (8,375,644 | ) | (5,725,708 | ) | ||||
| Net Deferred Tax Assets | $ | — | $ | — | ||||
At June 30, 2018, the Company had approximately $34.1 million of federal and state NOL carry overs that may be available to offset future taxable income.
The NOL carry overs, if not utilized, will expire in stages beginning 2034.
Based on a history of cumulative losses at the Company and the results of operations for the years ended June 30, 2018 and 2017, the Company amendeddetermined that it is more likely than not it will not realize benefits from the existing warrant agreementsdeferred tax assets. The Company will not record income tax benefits in the financial statements until it is determined that it is more likely than not that the Company will generate sufficient taxable income to eliminaterealize the derivative feature. Upon executiondeferred income tax assets. As a result of the revised agreements,analysis, the Company determined that a total of 471,697 warrants with a fair value of $2,200,219 were reclassified from liability to equity.
Level 3 Financial Liabilities – Derivative warrant liabilities
Financialfull valuation allowance against the deferred tax assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed onis required. The net change in the consolidated balance sheet as of June 30, 2017:
Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the condensed consolidated balance sheet as of June 30, 2016:
| Carrying | Fair Value Measurement Using | |||||||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Derivative warrant liabilities | $ | 1,322,729 | $ | — | $ | — | $ | 1,322,729 | $ | 1,322,729 | ||||||||||
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3)valuation allowance during the year ended June 30, 2017 and 2016:2018 was an increase of approximately $2.6 million.
| Fair Value Measurement Using Level 3 Inputs | ||||
| Total | ||||
| Balance, July 1, 2015 | $ | 205,144 | ||
| Issuance of derivative warrants | 165,719 | |||
| Change in fair value of derivative warrant liabilities | 968,840 | |||
| Reclassification of Derivative liability to Additional Paid in Capital | (16,974 | ) | ||
| Balance, June 30, 2016 | $ | 1,322,729 | ||
| Change in fair value of derivative warrant liabilities | 877,490 | |||
| Reclassification of Derivative liability to Additional Paid in Capital | (2,200,219 | ) | ||
| Balance, June 30, 2017 | $ | — | ||
As a result of the reverse merger that occurred on May 22, 2015, the Company’s previous NOL may be significantly limited. The Company has not performed a detailed analysis to determine whether an ownership change under IRC Section 382 or similar rules has occurred. The effect of an ownership change would be the imposition of annual limitation on the use of NOL carry forwards attributable to periods before the change which total approximately $421,000. Any limitation may result in expiration of a portion of the NOL before utilization. The Company recognizes interest and penalties related to uncertain tax positions in selling, general and administrative expenses.
The fairCompany’s gross unrecognized tax benefits totaled $0.3 million as of June 30, 2018 and $0.0 million as of June 30, 2017. Of these amounts, $0.3 million and $0.0 as of June 30, 2018 and June 30, 2017, respectively, represent the amounts of unrecognized tax benefit that, if recognized, would impact the effective tax rate in each of the fiscal years.
| F-24 |
A reconciliation of June 30, 2017 through June 30, 2018 beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
| June 30, 2018 | June 30, 2017 | |||||||
| Beginning Balance | $ | — | $ | — | ||||
| Additions based on positions related to the current year | 250 | — | ||||||
| Additions for tax positions in prior years | 46 | — | ||||||
| Reductions for tax positions in prior years | — | — | ||||||
| Expiration of statute of limitations | — | — | ||||||
| Ending Balance | $ | 296 | $ | — | ||||
The unrecognized tax benefit of $0.3 million at the end of June 30, 2018 is recorded on the Consolidated Balance Sheet as a reduction to the carrying value of the derivative feature of the warrants on the issuance dates, at the balance sheet date and on the date of reclassification to equity were calculated using a binomial option model valued with the following weighted average assumptions:
April 14, 2016 | June 30, 2016 | January 19, 2017 | ||||||||||
| Risk free interest rate | 1.04 | % | 1.08 | % | 1.01 | % | ||||||
| Dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
| Expected volatility | 41 | % | 44 | % | 39 | % | ||||||
| Remaining term (years) | 4.15 - 4.19 | 5.0 | 3.89 - 4.79 | |||||||||
Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.gross deferred tax assets.
Dividend yield:The Company’s fiscal 2015 federal and North Carolina returns and subsequent tax years remain open for examination. The Company uses a 0% expected dividend yieldis not currently under examination by any taxing authorities.
Note 15. Segment Information
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 has not paid dividends to dateoperates in two segments, Foundry Fabrication Services which consists of engineering review services and does not anticipate declaring dividendsSTC-MEMS foundry services; and RF Filters which consists of amplifier and filter product sales, and grant revenue. The Company records all of its general and administrative costs in the near future.RF Filters segment.
Volatility: The Company calculates the expected volatilityevaluates performance of the stock priceits operating segments based on the corresponding volatility of the Company’s peer group stock pricerevenue and operating profit (loss). Segment information for a period consistent with the warrant’s expected term.
Remaining term: The Company’s remaining term is based on the remaining contractual maturity of the warrants.
During the years ended June 30, 2018 and 2017 and 2016, the Company marked the derivative feature of the warrants to fair value and recorded a loss of $877,490 and $968,840, respectively, relating to the change in fair value.
Note 9. Concentrationsare as follows:
For
| Foundry Fabrication Services | RF Filters | Total | ||||||||||
| Year ended June 30, 2018 | ||||||||||||
| Revenue | $ | 1,006,993 | $ | 53,640 | $ | 1,060,633 | ||||||
| Grant revenue | — | 147,232 | 147,232 | |||||||||
| Cost of revenue | 1,016,413 | 3,077 | 1,019,490 | |||||||||
| Gross margin | (9,420) | 197,795 | 188,375 | |||||||||
| Research and development | — | 13,266,975 | 13,266,975 | |||||||||
| General and administrative | — | 8,804,103 | 8,804,103 | |||||||||
| Other operating expenses | — | 395,025 | 395,025 | |||||||||
| Income/(Loss) from Operations | $ | (9,420) | $ | (22,268,308 | ) | $ | (22,277,728 | ) | ||||
| Year ended June 30, 2017 | ||||||||||||
| Revenue | $ | 14,500 | $ | 471,996 | $ | 486,496 | ||||||
| Cost of revenue | — | — | — | |||||||||
| Gross margin | 14,500 | 471,996 | 486,496 | |||||||||
| Research and development | — | 5,013,260 | 5,013,260 | |||||||||
| General and administrative | — | 6,156,807 | 6,156,807 | |||||||||
| Loss from Operations | $ | 14,500 | $ | (10,698,071 | ) | $ | (10,683,571 | ) | ||||
| As of June 30, 2018 | ||||||||||||
| Accounts receivable | $ | 191,846 | $ | 22,813 | $ | 214,659 | ||||||
| Property and equipment | 465,360 | 12,354,809 | 12,820,169 | |||||||||
| As of June 30, 2017 | ||||||||||||
| Accounts receivable | $ | — | $ | — | $ | — | ||||||
| Property and equipment | 424,174 | 7,429,640 | 7,853,814 | |||||||||
Note 16. Subsequent Events
Grant Agreement
On July 24, 2018 the year ended June 30, 2017, one vendor represented 11%Company executed a grant agreement with the Town of Canandaigua, through the Community Development Block Grant. The purpose of the Company’s purchases. For the year ended June 30, 2016, two vendors represented 28% and 14%grant is to provide financing in support of the Company’s purchases.purchase and installation of new machinery and equipment at its NY Facility made between June 27, 2017 and June 27, 2019. The grant is subject to certain terms and conditions and allows for disbursement of up to $734,000 in grants.
Warrant Exercise
In July 2018, 20,079 warrants were exercised resulting in the receipt of $70,520 and the issuance of 19,086 shares of Common Stock.
| F-25 |
Note 10. Stockholders’ EquityITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 15, 2016,None.
| 37 |
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in connectionRules 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We conducted an evaluation under the supervision and with the Company’s reincorporation from the Stateparticipation of Nevada to the State of Delaware, the Company filed a Certificate of Incorporation with the State of Delaware, which, among other things, reduced the number of authorized shares of capital stock of the Company from 310,000,000 total shares consisting of (a) 300,000,000 shares of Common Stock and (b) 10,000,000 of $0.001 par value “blank check” preferred stock to 50,000,000 total shares consisting of (a) 45,000,000 shares of Common Stock and (b) 5,000,000 shares of “blank check” preferred stock.
As of June 30, 2017 and 2016, there were no shares of preferred stock issued and outstanding.
The Company recorded stock-based compensation expense for the shares issued to consultants that have vested, which is a component of operating expenses in the Consolidated Statement of Operations as follows:
| Stock-Based Compensation | ||||||||||||
| For the Year Ended | ||||||||||||
| Month of Original Grant | Shares Issued | June 30, 2017 | June 30, 2016 | |||||||||
| December 2015 | 230,000 | $ | 945,189 | $ | 342,811 | |||||||
| March 2016 | 60,000 | 261,214 | 71,786 | |||||||||
| August 2016 | 40,000 | 147,600 | — | |||||||||
| January 2017 | 50,000 | 194,776 | — | |||||||||
| 380,000 | $ | 1,548,779 | $ | 414,597 | ||||||||
On March 10, 2016, the Company held a closing of a private placement offering (the “March 2016 Offering”) in which it sold 494,125 shares of Common Stock at a fixed purchase price of $1.60 per share (the “2016 Offering Price”), for aggregate gross proceeds of $790,600 (before deducting legal expenses of the March 2016 Offering).
On April 14, 2016, the Company held closings of a private placement offering (the “April 2016 Offering”) in which the Company sold 1,741,185 shares of Common Stock at a fixed purchase price of $1.60 per share (the “2016 Offering Price”), for aggregate gross proceeds of $2,785,896 (before deducting expenses for legal services and agent commissions of the April 2016 Offering).
The Company sold a total of 2,142,000 shares of its Common Stock at the 2016-2017 Offering Price, with closings in each of November and December 2016 and January and February 2017, as well as 663,000 shares of Common Stock at the 2017 Offering Price, for aggregate gross proceeds were $16.7 million before deducting commissions and expenses of approximately $1.3 million.
Stock incentive plans
2015 Equity Incentive Plan
On May 22, 2015, the Board of Directors adopted, and on the same date the stockholders approved, the 2015 Equity Incentive Plan (the “2015 Plan”), which reserved a total of 1,200,000 shares of Common Stock for issuance under the 2015 Plan. The 2015 Plan authorized the grant to participants of nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance grants. No additional shares will be issued under the 2015 Plan. Effective December 15, 2016, equity awards are granted under the Company’s 2016 Stock Incentive Plan, which was approved stockholders on the same date.
In addition, the number of shares of our Common Stock subject to the 2016 Plan, any number of shares subject to any numerical limit in the 2016 Plan, and the number of shares and terms of any incentive award are expected to be adjusted in the event of any change in our outstanding Common Stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares or similar transaction.
Options granted under the 2015 Plan vest as determined by the Company’s board of directors and expire over varying terms, but not more than seven years from the date of grant. In the case of an Incentive Stock Option that is granted to a 10% shareholder on the date of grant, such Option shall not be exercisable after the expiration of five years from the date of grant. Options for 160,000 shares of Common Stock were issued under the 2015 Plan to four non-employee directors in May 2015. No options have been awarded under the 2016 Plan.
The fair values of the Company’s options were estimated at the dates of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
Expected term: The Company’s expected term is based on the period the options are expected to remain outstanding. The Company estimated this amount utilizing the “Simplified Method” in that the Company does not have sufficient historical experience to provide a reasonable basis to estimate an expected term.
Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.
Volatility: The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a period consistent with the options’ expected term.
Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.
The following is a summary of the option activity:
| Options | Weighted Average Exercise Price | |||||||
| Outstanding – July 1, 2015 | 160,000 | $ | 1.50 | |||||
| Exercisable – July 1, 2015 | — | $ | — | |||||
| Granted | — | — | ||||||
| Exercised | — | — | ||||||
| Forfeited/Cancelled | — | — | ||||||
| Outstanding – June 30, 2016 | 160,000 | 1.50 | ||||||
| Exercisable – June 30, 2016 | 40,000 | 1.50 | ||||||
| Granted | — | — | ||||||
| Exercised | — | — | ||||||
| Forfeited/Cancelled | — | — | ||||||
| Outstanding – June 30, 2017 | 160,000 | $ | 1.50 | |||||
| Exercisable – June 30, 2017 | 80,000 | $ | 1.50 | |||||
As of June 30, 2017, the total intrinsic value of options outstanding and exercisable was $1,158,400 and $579,200, respectively. As of June 30, 2017, the Company has $52,800 inunrecognized stock-based compensation expense attributable to the outstanding options, which will be amortized over a period of 2.14 years.
For the years ended June 30, 2017 and 2016, the Company recorded $27,932 and $28,008, respectively, in stock-based compensation related to stock options, which is reflected in the consolidated statements of operations.
Issuance of restricted shares – employees and consultants
Restricted stock awards are considered outstanding at the time of execution by the Company and the recipient of a restricted stock agreement, as the stock award holders are entitled to dividend and voting rights. As of June 30, 2017, the number of shares granted for which the restrictions have not lapsed was 1,352,265 shares.
The Company recognizes the compensation expense for all share-based compensation granted based on the grant date fair value for directors and employees and the reporting period remeasured fair value for consultants. The fair value of the award is recorded as share–based compensation expense over the respective restriction period. Any portion of the grant awarded to consultants, directors, employees, and other service providers as to which the repurchase option has not lapsed is accrued on the Balance Sheet as a component of accounts payable and accrued expenses. As of June 30, 2017 and 2016, the accrued stock-based compensation was $399,157 and $179,079, respectively. The Company has the right to repurchase some or all of such shares in certain circumstances upon termination of the recipient’s service with the Company, for up to 60 months from the date of termination (“repurchase option”). The shares as to which the repurchase option has not lapsed are subject to forfeiture upon termination of consulting and employment relationships.
In September 2015, the Company amended the original restricted stock agreement for certain award recipients. Pursuant to the amendment, 75% of the shares as to which the repurchase option had not lapsed as of September 30, 2015 will be released from the repurchase option on the third anniversary of the original effective date of the agreement. The remaining 25% of the shares will be released from the repurchase option on the fourth anniversary of the original effective date.
The following is a summary of restricted shares:
| Grant Date | Shares Issued | Fair Value (1) | Shares Vested | |||||||||
| June 2014 | 307,876 | $ | 1,294,029 | 121,530 | ||||||||
| July 2014 | 32,408 | 48,612 | 23,791 | |||||||||
| August 2014 | 81,020 | 326,323 | 8,102 | |||||||||
| September 2014 | 129,633 | 352,282 | 13,667 | |||||||||
| March 2015 | 72,918 | 401,717 | — | |||||||||
| October 2015 | 293,000 | 439,500 | — | |||||||||
| November 2015 | 36,200 | 54,300 | — | |||||||||
| December 2015 | 300,000 | 1,393,000 | 230,000 | |||||||||
| January 2016 | 40,000 | 68,000 | — | |||||||||
| March 2016 | 60,000 | 333,000 | 60,000 | |||||||||
| June 2016 | 118,000 | 535,809 | — | |||||||||
| August 2016 | 351,000 | 1,489,247 | 40,000 | |||||||||
| January 2017 | 192,000 | 1,165,122 | — | |||||||||
| February 2017 | 110,000 | 697,500 | — | |||||||||
| March 2017 | 20,000 | 135,000 | — | |||||||||
| 2,144,055 | $ | 8,733,441 | 497,090 | |||||||||
In relation to the above restricted stock agreements for the year ended June 30, 2017 and 2016, the Company recorded stock-based compensation expense for the shares that have vested of $3,223,398 and $821,617, respectively.
As of June 30, 2017, the Company had $3,966,899 in unrecognized stock-based compensation expense related to the unvested shares.
Note 11. Commitments and contingencies
Employment agreements
On June 15, 2015, the Company entered into a three-year employment agreement with the Chief Executive Officer (“CEO”). After the initial three-year term, the agreement will be automatically renewed for successive one-year periods unless terminated by either party on at least 30 days’ written notice prior to the end of the then-current term. The CEO’s annual base salary is $150,000 and is subject to increase or decrease on each anniversary as determined by the Board of Directors. The CEO is eligible, at the discretion of our Board of Directors, to receive an annual cash bonus of up to 100% of his annual base salary, which may be based on the Company achieving certain operational, financial or other milestones (the “Milestones”) that may be established by the Board of Directors. The CEO is entitled to receive stock options or other equity incentive awards under the 2016 Plan as and when determined by the Board, and is entitled to receive perquisites and other fringe benefits that may be provided to, and is eligible to participate in any other bonus or incentive program established by the Company, for the executives. The CEO and his dependents are also entitled to participate in any of the employee benefit plans subject to the same terms and conditions applicable to other employees. The CEO will be entitled to be reimbursed for all reasonable travel, entertainment and other expenses incurred or paid by him in connection with, or related to, the performance of his duties, responsibilities or services under his employment agreement, in accordance with policies and procedures, and subject to limitations, adopted by us from time to time. In the event that the CEO is terminated by the Company without Cause (as defined in his employment agreement) or he resigns for Good Reason (as defined in his employment agreement) during the term of his employment agreement, the CEO would be entitled to (x) an amount equal to his annual base salary then in effect (payable in accordance with the Company’s normal payroll practices) for a period of 24 months commencing on the effective date of his termination (the “Severance Period”) (in the case of termination by the executive for Good Reason, reduced by any cash remuneration paid to him because of any other employment or self-employment during the Severance Period), and (y) if and to the extent the Milestones are achieved for the annual bonus for the year in which the Severance Period commences (or, in the absence of Milestones, the Board of Directors has, in its sole discretion, otherwise determined an amount of the CEO’s annual bonus for such year), an amount equal to such annual bonus pro-rated for the portion of the performance year completed before the CEO employment terminated, (z) any unvested stock options, restricted stock or similar incentive equity instruments will vest immediately. For the duration of the Severance Period, the CEO will also be eligible to participate in our benefit plans or programs, provided the CEO was participating in such plan or program immediately prior to the date of employment termination, to the extent permitted under the terms of such plan or program (collectively, the “Termination Benefits”). If the CEO’s employment is terminated during the term of his employment agreement by the Company for Cause, by the CEO for any reason other than Good Reason or due to his death, then he will not be entitled to receive the Termination Benefits, and shall only be entitled to the compensation and benefits which shall have accrued as of the date of such termination (other than with respect to certain benefits that may be available to the CEO as a result of a Permanent Disability (as defined in his employment agreement).
On June 15, 2015, the Company also entered into two-year employment agreements with each of the Vice President of Business Development, the Vice President of Operations, and the then Chief Financial Officer. Each of these employment agreements had substantially the same terms as that of the CEO described above. These employment agreements expired on June 15, 2017.
On July 14, 2017, the Board named a new Chief Financial Officer who would also serve as the Company’s Chief Accounting Officer, effective as of the same date.
In connection with the election of the new Chief Financial Officer of the Company,effectiveness of the Company entered into a one-year employment agreement, dated July 14, 2017 (the “Employment Agreement”), with thedesign and operation of our disclosure controls and procedures as of June 30, 2018. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer with essentiallyconcluded that our disclosure controls and procedures were effective as of such date.
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Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the same termsCompany. Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2018. In making this assessment, our management used the Chief Executive Officer employment agreement described abovecriteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control Integrated Framework (2013). Based on that evaluation under this framework, our management concluded that our internal control over financial reporting was effective.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness as to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the exceptionpolicies or procedures may deteriorate. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
This Report does not include an attestation report of the following:
The termCompany’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Employment Agreement extends through July 31, 2018,Securities and Exchange Commission that permit the Employment Agreement will automatically renew for successive one- year periods unless either party gives at least 30 days written notice of non-renewalCompany (as an emerging growth company) to the other party prior to the end of the then applicable term.provide only management’s report in this annual report.
Operating leasesChanges in Internal Control over Financial Reporting
The Company leases office spaceThere have been no changes in Huntersville, NC pursuant to a three-year lease agreement. The operating lease provides for annual real estate tax and cost of living increases and contains predetermined increases in the rentals payableour internal control over financial reporting during the term of the lease. The aggregate rent expense is recognized on a straight-line basis over the lease term. The total lease rental expense was $56,808 and $55,186 for the yearsquarter ended June 30, 2017 and 2016, respectively. The future minimum payments under this lease2018 that have materially affected, or are $40,314.
The Company leases equipment for its Canandaigua, NY facility pursuantreasonably likely to a three-month lease agreement beginning on June 16, 2017. The aggregate rent expense is recognized on a straight-line basismaterially affect, our internal control over the lease term. The total lease rental expense was $8,125 and $0 for the years ended June 30, 2017 and 2016, respectively. The future minimum payments under this lease are $44,375. The Company anticipates renewing the lease for another three months and in process of finalizing terms and conditions.financial reporting.
Real Estate Contingent Liability
In connection with the acquisition of the STC-MEMS Business, the Company agreed to pay to Fuller Road Management Corporation 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 $1,750,000, subject to certain enumerated exceptions. The penalty imposed shall be equivalent to the amount that the sales price of the property exceeds $1,750,000 up to the maximum penalty (“Maximum Penalty”) defined below:
| Maximum Penalty | |||||
| Year 1 | $ | 5,960,000 | |||
| Year 2 | $ | 3,973,333 | |||
| Year 3 | $ | 1,986,667 | |||
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 14.1%. The 14.1% discount rate was derived from a weighted average cost of capital, modified to include the effects of the bargain purchase price. As of June 30, 2017, the balance of the contingent liability was $1,730,542.
Note 12. Related Party Transactions
Consulting ServicesNone.
AEG Consulting, a firm owned by one ofPART III
Information to be provided in the Company’s Co-Chairmen, received $15,195 and $10,238 for consulting fees for the years ended June 30, 2017 and 2016, respectively.proxy statement filing
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The Company’s CEO and Vice Presidentfollowing Consolidated Financial Statements as set forth in Part II, Item 8 of Engineering participated in the closing of the 2016-2017 Offering that occurred on November 25, 2016 where they each purchased 20,000 shares of Common Stock at a price of $5.00 per share. The Company’s Vice-President of Operations also purchased 2,000 shares of Common Stock in the closing at an aggregate purchase price of $10,000. One of the Co-Chairmen of the Company’s Board purchased 200,000 shares of Common Stock at a price of $5.00 per share at an aggregate purchase price of $1,000,000. The brother of the CEO purchased 14,000 shares of Common Stock in the closing at an aggregate purchase price of $70,000.this report are filed herein.
The Company’s second Co-Chairman participated in the closing of the 2016-2017 Offering that occurred on December 27, 2016 where he purchased 2,000 shares of Common Stock at a price of $5.00 per share for an aggregate purchase price of $10,000. A second brother of the CEO purchased 20,000 shares of Common Stock in the closing at an aggregate purchase price of $100,000.Consolidated Financial Statements
Inventory PurchaseConsolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
In March 2016, the Company purchased inventory from Big Red LLC (“Big Red”), a company formed by the CEO, the brother of the Company’s CEO, the Vice President of Operations and one additional party. The transaction for $43,544 was executed so the Company could pursue commercialization of the amplifier inventory purchased. The Company will utilize this inventory and related technologyNotes to process and sell the amplifiers. The CEO and Vice President of Operations assigned their interests in Big Red to other parties in March of 2016.Consolidated Financial Statements
License AgreementFinancial Statement Schedules
In April 2016,All financial statement schedules are omitted because they are not applicable or the Company entered into a license agreement with Big Red. The license agreement was executed so that the Company could pursue commercialization of amplifier inventory purchased from Big Red in March 2016. The Company will utilize this inventory and related technology to process and sell the amplifiers. Future revenue from sales utilizing the amplifier technology will result in a license fee paid to Big Red according to the following schedule:
Note 13. Income Taxes
The Company had no income tax expense due to operating losses incurred for the years ended June 30, 2017 and 2016.
The provision for/(benefit from) income tax differs from the amount computed by applying the statutory federal income tax rate to income before the provision for/(benefit from) income taxes. The sources and tax effects of the differences are as follows:
For the June 30, | For the Year Ended June 30, 2016 | |||||||
| Income taxes at Federal statutory rate | (34.00 | )% | (34.00 | )% | ||||
| State income taxes, net of Federal income tax benefit | (2.63 | )% | (2.60 | )% | ||||
| Permanent differences | (6.36 | )% | 0.22 | % | ||||
| Other | 6.49 | % | — | |||||
| Change in Valuation Allowance | 36.50 | % | 36.09 | % | ||||
| State tax rate change | 0.00 | % | 0.29 | % | ||||
| Income Tax Provision | 0.00 | % | 0.00 | % | ||||
The tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities are as follows:
| June 30, 2017 | June 30, 2016 | |||||||
| Net Operating Loss Carryforwards | $ | 5,352,238 | $ | 1,711,488 | ||||
| Share-based compensation | 406,498 | 396,264 | ||||||
| Derivative liability | — | 315,205 | ||||||
| Other | (33,028 | ) | (22,365 | ) | ||||
| 5,725,708 | 2,400,592 | |||||||
| Valuation Allowance | (5,725,708 | ) | (2,400,592 | ) | ||||
| Net Deferred Tax Assets | $ | — | $ | — | ||||
At June 30, 2017, the Company had approximately $14,600,000 of Federal and state NOL carryovers that may be available to offset future taxable income.
The NOL carry overs, if not utilized, will expire in stages beginning 2035.
Based on a history of cumulative losses at the Company and the results of operations for the years ended June 30, 2017 and 2016, the Company determined that itrequired information is more likely than not it will not realize benefits from the deferred tax assets. The Company will not record income tax benefitsshown in the financial statements until it is determined that it is more likely than not that the Company will generate sufficient taxable income to realize the deferred income tax assets. As a result of the analysis, the Company determined that a full valuation allowance against the deferred tax assets is required. The net change in the valuation allowance during the year ended June 30, 2017 was an increase of approximately $3,325,000.or notes thereto.
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Exhibits
As a result of the reverse merger that occurred on May 22, 2015, the Company’s previous NOL may be significantly limited. The Company has not performed a detailed analysis to determine whether an ownership change under IRC Section 382 or similar rules has occurred. The effect of an ownership change would be the imposition of annual limitation on the use of NOL carryforwards attributable to periods before the change which total approximately $421,000. Any limitation may result in expiration of a portion of the NOL before utilization. The Company recognizes interest and penalties related to uncertain tax positions in selling, general and administrative expenses. The Company has not identified any uncertain tax positions requiring a reserve as of June 30, 2017.
Note 14. Subsequent EventsEXHIBIT INDEX
In July 2017, 9,533 placement agent warrants issued in connection with the 2016-2017 private placement offering, each having a term of five years and an exercise price of $5.00, were exercised.
EXHIBIT INDEX
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| 101§* | Interactive Data Files of Financial Statements and Notes. | |
| 101.ins* | Instant Document | |
| 101.sch* | XBRL Taxonomy Schema Document | |
| 101.cal* | XBRL Taxonomy Calculation Linkbase Document | |
| 101.def* | XBRL Taxonomy Definition Linkbase Document | |
| 101.lab* | XBRL Taxonomy Label Linkbase Document | |
| 101.pre* | XBRL Taxonomy Presentation Linkbase Document |
* Filed herewith
† Management contract or compensatory plan or arrangement
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AKOUSTIS TECHNOLOGIES, INC. | ||
| Dated: August 29, 2018 | By: | /s/ Jeffrey B. Shealy |
| Jeffrey B. Shealy | ||
| President and Chief Executive Officer | ||
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||
| /s/ Jeffrey B. Shealy | Chief Executive Officer (Principal | August 29, 2018 | ||
| Jeffrey B. Shealy | Executive Officer), Director | |||
| /s/ John T. Kurtzweil | Chief Financial Officer and Chief Accounting Officer (Principal | August 29, 2018 | ||
| John T. Kurtzweil | Financial and Accounting Officer) | |||
| /s/ Arthur E. Geiss | Co-Chairman of the Board | August 29, 2018 | ||
| Arthur E. Geiss | ||||
| /s/ Jerry D. Neal | Co-Chairman of the Board | August 29, 2018 | ||
| Jerry D. Neal | ||||
| /s/ Steven P. DenBaars | Director | August 29, 2018 | ||
| Steven P. DenBaars | ||||
| /s/ Jeffrey K. McMahon | Director | August 29, 2018 | ||
| Jeffrey K. McMahon | ||||
| /s/ Steven P. Miller | Director | August 29, 2018 | ||
| Steven P. Miller | ||||
| /s/ Suzanne B. Rudy | Director | August 29, 2018 | ||
| Suzanne B. Rudy |
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