As filed with the Securities and Exchange Commission on January 23, 2014

 

Registration No. 333- ________

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

ENERGOUS CORPORATION

( Exact name of registrant as specified in its charter )

 

Delaware   335900   46-1318953
( State or other jurisdiction of   ( Primary Standard Industrial   ( I.R.S. Employer
incorporation or organization)   Classification Code Number)   Identification No.)

 

303 Ray Street

Pleasanton, CA, 94566

(925) 344-4200

( Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices )

 

Stephen R. Rizzone

Chief Executive Officer

Energous Corporation

303 Ray Street

Pleasanton, CA, 94566

(925) 344-4200

 ( Name, address, including zip code, and telephone number, including area code, of agent for service )

 

Copies to :

 

Mark R. Busch

K&L Gates LLP

Hearst Tower, 47th Floor

214 North Tryon St.

Charlotte, North Carolina 28202

Telephone: (704) 331-7440

Fax: (704) 353-3140

Andrew Hudders

Golenbock Eiseman Assor Bell & Peskoe LLP

437 Madison Avenue - 40th Floor

New York, New York 10022

Telephone: (212) 907-7349

Fax: (212) 754-0330

 

As soon as practicable after the effective date of this Registration Statement.

( Approximate date of commencement of proposed sale to the public )

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

 
 

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer  ¨   Accelerated filer                   ¨
Non-accelerated filer    ¨   Smaller reporting company  x
( Do not check if a smaller reporting company )    

  

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be
Registered
  Amount to be
Registered (1)
    Proposed
Maximum
Aggregate
Offering Price
Per Share
    Proposed
Maximum
Aggregate
Offering Price
    Amount of
Registration Fee
 
Common stock (2)     4,600,000     $ 5.00     $ 23,000,000     $ 2,962.40  
Underwriter Warrant  (3)(4)     1             $ 100     $ 0.01  
Shares of common stock underlying Underwriter Warrant (5)     460,000     $ 6.00     $ 2,760,000     $ 355.49  
Total Registration Fee                   $ 25,760,100     $ 3,317.90  

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

(2) Includes 600,000 shares of common stock representing 15% of the shares offered to the public that the underwriter has the option to purchase to cover over-allotments, if any.

 

(3) No registration fee required pursuant to Rule 457(g) under the Securities Act of 1933.

 

(4) Represents a warrant granted to the underwriter to purchase shares of common stock in an amount up to 10% of the number of shares sold to the public in this offering. See “Underwriting” beginning on page 51 of the prospectus contained within this Registration Statement for information on underwriting arrangements relating to this offering.

 

(5) Pursuant to Rule 416 under the Securities Act of 1933, as amended, there is also being registered hereby such indeterminate number of additional shares of common stock of the registrant as may be issued or issuable because of stock splits, stock dividends, stock distributions, and similar transactions.

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment, which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 
 

 

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

 

SUBJECT TO COMPLETION, DATED JANUARY 23, 2014

 

PRELIMINARY PROSPECTUS

 

4,000,000 Shares of Common Stock

 

ENERGOUS CORPORATION

 

We are offering 4,000,000 shares of our common stock, $0.00001 par value, in a firm commitment underwritten offering, which share number reflects our proposed one for 3.99 reverse stock split (the “reverse stock split”) described in this prospectus.  After the effectiveness of the registration statement, of which this prospectus is a part, and concurrently with the pricing of the offering, we will effect the reverse stock split.

 

This is an initial public offering of our common stock.  We expect the public offering price to be $5.00 per share (assuming the reverse stock split).  There is presently no public market for our common stock.  We have applied for listing of our common stock on the Nasdaq Capital Market under the symbol “ [●] ,” which listing we expect to occur upon consummation of this offering.  No assurance can be given that our application will be approved.  If our application to the Nasdaq Capital Market is not approved or we otherwise determine that we will not be able to secure the listing of the common stock on the Nasdaq Capital Market, we will not complete the offering or effect the reverse stock split.

 

We are an “emerging growth company” under the federal securities laws and will have the option to use reduced public company reporting requirements.  Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 8 for a discussion of information that should be considered in connection with an investment in our securities.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.

 

MDB Capital Group, LLC is the underwriter for our initial public offering.   MDB Capital Group, LLC has rendered advisory services to us in the past and has acted as our placement agent in connection with the placement of our senior secured convertible promissory notes completed in May 2013. 

 

If we sell all of the common stock we are offering, we will pay to MDB Capital Group, LLC $2.0 million, or, 10% of the gross proceeds of this offering and non-accountable expenses equal to $175,000.  For a more complete discussion of the compensation we will pay to the underwriter, please see the section of this prospectus titled “Underwriting.”  In connection with this offering, we have also agreed to issue to MDB Capital Group, LLC a warrant to purchase shares of our common stock in an amount up to 10% of the shares of common stock sold in the public offering, with an exercise price equal to 120% of the per-share public offering price.

 

 
 

 

    Per Share     Total  
Public offering price   $ 5.00     $ 20,000,000  
Underwriting discount   $ 0.50     $ 2,000,000  
Proceeds, before expenses, to us   $ 4.50     $ 18,000,000  

 

(1) Does not include a non-accountable expense allowance equal to $175,000 payable to MDB Capital Group, LLC, the underwriter. See “Underwriting” for a description of compensation payable to the underwriter.

 

The underwriter may also purchase an additional 600,000 shares of our common stock (assuming the reverse stock split) amounting to 15% of the number of shares offered to the public, within 45 days of the date of this prospectus, to cover over-allotments, if any, on the same terms set forth above.

 

The underwriter expects to deliver the shares on or about _____________________, 2014.

 

MDB Capital Group, LLC

 

The date of this prospectus is _______________, 2014.

 

 
 

 

Table of Contents

 

  Page
   
Prospectus Summary 1
   
THE OFFERING 4
   
SUMMARY SELECTED FINANCIAL INFORMATION 6
   
RISK FACTORS 8
   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS 20
   
BUSINESS 22
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 32
   
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 38
   
EXECUTIVE COMPENSATION 40
   
DESCRIPTION OF CAPITAL STOCK 44
   
MARKET FOR OUR COMMON STOCK, DIVIDEND POLICY AND OTHER STOCKHOLDER MATTERS 47
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 48
   
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 49
   
UNDERWRITING 51
   
USE OF PROCEEDS 55
   
CAPITALIZATION 55
   
DILUTION 56
   
LEGAL MATTERS 57
   
EXPERTS 57
   
WHERE YOU CAN FIND MORE INFORMATION 58
   
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 58

 

Unless otherwise stated or the context otherwise requires, the terms “Energous,” “DvineWave”, “we,” “us,” “our” and the “Company” refer to Energous Corporation.

 

You should rely only on the information contained in this prospectus.  We have not authorized anyone to provide you with additional or different information.  The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

 

No dealer, salesperson or any other person is authorized in connection with this offering to give any information or make any representations about us, the securities offered hereby or any matter discussed in this prospectus, other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us.  This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any circumstance in which the offer or solicitation is not authorized or is unlawful.

 

- i -
 

 

Prospectus Summary

 

This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information that you need to consider in making your investment decision.  You should carefully read this entire prospectus, as well as the information to which we refer you, before deciding whether to invest in our common stock.  You should pay special attention to the “Risk Factors” section of this prospectus to determine whether an investment in our common stock is appropriate for you.

 

This registration statement, including the exhibits and schedules thereto, contains additional relevant information about us and our securities.  With respect to the statements contained in this prospectus regarding the contents of any agreement or any other document, in each instance, the statement is qualified in all respects by the complete text of the agreement or document, a copy of which has been filed or incorporated by reference as an exhibit to the registration statement.

 

About Energous Corporation

 

We are a development stage technology company. We are developing technology that can enable wireless charging or powering of electronic devices at distance. We believe our technology is a novel approach, in that it charges or powers devices by surrounding them with a three dimensional (“3D”) pocket of energy formed by radio frequencies (“RF pocket”). In our laboratory, our prototype devices have enabled wireless transmission of energy from a transmitter (similar in size and shape to a Wi-Fi router) to multiple receiver test boards at a distance of up to 15 feet. Our test boards are constructed from commercially available parts and components, are not optimized for our receiver application and are too large to be incorporated in commercially marketed product. We intend to develop a receiver chip to integrate into additional test devices. We believe this receiver chip will optimize our technology into a significantly smaller space and allow for the incorporation or our receiver technology into various products. If the receiver chip we expect to develop is integrated into a low-power (under 10 watts) electronic device, the chip should be able to utilize the received energy to either power the device directly or charge the battery that powers the device. We are also developing management and control of our solution through a software application that will ultimately reside on the device being charged. We believe that if our development efforts are successful, our transmitter/receiver solution will initially be able to power or charge multiple electronic devices at up to 1.5 watts at distances of up to 30 feet. Subsequent development efforts will focus on increasing the charging wattage, increasing the distance of charging, enhancing reliability, enhancing management and control of the solution and reducing design cost.

 

We were incorporated in Delaware on October 30, 2012 under the name of DvineWave Inc. and changed our name to Energous Corporation in January 2014. The address of our corporate headquarters is 303 Ray Street, Pleasanton, CA, 94566 and our telephone number is (925) 344-4200.  Our website can be accessed at www.energous.com.  The information contained on, or that may be obtained from, our website is not, and shall not be deemed to be, a part of this prospectus.

 

Our Technology

 

The wireless charging solution we are developing employs 3D “pocketforming.” The solution has two main hardware components: a transmitter, which creates the RF pocket; and one or many receivers connected to electronic devices, which receive the power from the RF pocket. Today this solution is able to send wattage from the transmitter to individual receiver test boards.

 

Our transmitter locates the receiver(s) in a 3-dimensional space. Next, the transmitter generates a proprietary waveform to create an RF pocket around the receiver(s). We expect that the receiver chips we intend to develop will gather power from this RF pocket. We believe that these proposed receiver chips would then be able to either charge rechargeable-battery devices, or power low–power (under 10 watts) devices that would otherwise need a battery or a connection to a power outlet. Our transmitter uses proprietary software algorithms to dynamically direct, focus and control our proprietary waveform in three dimensions. We believe this control will allow for transmission of energy to a moving object (such as a mobile phone in a user’s pocket).

 

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Our Business Strategy

 

We intend to license our technology to various consumer electronics companies. We intend to pursue this path because we believe there are several market verticals to which our technology can apply, and we believe that this is the most capital-efficient manner in which we can address many of them at once. We intend to target all aspects of the consumer electronics supply chain. This includes:

 

· Manufacturers of individual electronic components, such as antennae and integrated batteries.

 

· Original equipment manufacturers (“OEMs”), which manufacture products for sale under another firm’s brand.

 

· Original design manufacturers (“ODMs”), which also manufacture products for sale under another firm’s brand, but differ from OEMs in that they also design these products (either collaboratively with their customers or on their own). An ODM may engage multiple companies with similar designs that are then marketed under several different end customers’ brands.

 

· Branded consumer electronics firms, some of which design their own products and manufacture them through OEMs, and some of which are value-added resellers that rely on an ODM to design and manufacture their products.

 

Collectively, we refer to these firms as the “consumer electronics supply chain”. We believe strategic relationships with key consumer electronics supply chain licensees will enable our technology to penetrate the marketplace much faster than it would if we manufactured, marketed and distributed products ourselves.  We believe this business model will allow us to concentrate our resources on projects more aligned to our core competency in generating licensable intellectual property through research-and-development. As we develop new applications for our technology, we expect to target new strategic relationships in different market sectors.

 

Nasdaq Listing and Reverse Stock Split

 

We have applied for listing of our common stock on the Nasdaq Capital Market. If our application to the Nasdaq Capital Market is not approved or we otherwise determine that we will not be able to secure the listing of the common stock on the Nasdaq Capital Market, we will not complete the offering.

 

On December 12, 2013 our board of directors and stockholders holding a majority of our outstanding voting power, approved resolutions authorizing our board of directors to effect a reverse split of our common stock at an exchange ratio of between one-for-two and one-for-ten, with our board of directors retaining the discretion as to whether to implement the reverse split and which exchange ratio to implement.  The reverse stock split is intended to allow us to meet the minimum share price requirement of The Nasdaq Capital Market.  In [●], our board of directors determined that following the effectiveness of the registration statement, of which this prospectus is a part, and prior to the closing of this offering, the board of directors will effect the reverse stock split at a ratio of 1 share for each 3.99 shares.

 

Except as otherwise indicated and except in our financial statements, all information regarding share amounts of common stock and prices per share of common stock contained in this prospectus assume the consummation of the reverse stock split to be effected following effectiveness of the registration statement, of which this prospectus is a part, and prior to the closing of this offering.

 

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Status as an Emerging Growth Company

 

We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act (the “JOBS Act”).  Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act) are required to comply with the new or revised financial accounting standard.  The JOBS Act also provides that a company can elect to opt out of the extended transition period provided by Section 102(b)(1) of the JOBS Act and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable.  We have irrevocably elected to opt out of this extended transition period provided by Section 102(b)(1) of the JOBS Act.  Even though we have elected to opt out of the extended transition period, we may still take advantage of all of the other provisions of the JOBS Act, which include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and the exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

Ability to Continue our Operations

 

For the period October 30, 2012 (inception) through December 31, 2012 our net loss was $21,287.   Net loss for the nine month period ended September 30, 2013 was $3,242,809, which increased our accumulated net loss for the period October 30, 2012 (inception) through September 30, 2013 to $3,264,096.

 

We will need financing to continue our operations, particularly for the support of our research and development efforts.  Beyond this offering, we have no committed sources of capital and do not know whether additional financing will be available when needed on terms that are acceptable, if at all.  The failure to satisfy our capital requirements will adversely affect our business, financial condition, results of operations and prospects.

 

Unless we raise funds in this offering, we will not have sufficient capital to continue our operations for the next 12 months.  Even if we raise funds in this offering, they may be insufficient to sustain our operations for the next 12 months if our costs are higher than projected or unforeseen expenses arise.

 

Convertible Promissory Notes

 

We issued $5.5 million in senior secured convertible promissory notes that bear simple interest at 6% and must be paid or converted into shares of our common stock on or before August 16, 2014.  We refer to these promissory notes as the “Convertible Notes” in this prospectus.   Upon consummation of a public offering of our common stock yielding gross proceeds of at least $10 million, all of the outstanding principal and interest accrued on the Convertible Notes will be converted in full into shares of our common stock. Assuming that this offering was completed on September 30, 2013, based on interest accrued through such date the Convertible Notes would have been converted into 2,249,910 shares of our common stock.

 

Risks Related to Our Business

 

Our business is subject to a number of risks.  You should understand these risks before making an investment decision.  If any of these risks actually occurs, our business, financial condition or results of operations would likely be materially adversely affected.  In such case, the trading price of our common stock would likely decline, and you may lose all or part of your investment.  Below is a summary of some of the principal risks we face.  The risks are discussed more fully in the section of this prospectus below titled “Risk Factors.” 

 

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· We are a development-stage technology company, have no history of generating revenue, have a history of operating losses, and we may never achieve or maintain profitability.

 

· We expect that, unless we are able to obtain non-dilutive financing through licensing revenues or other strategic partner transactions, we will need additional capital. If we are unable to raise additional capital when and as needed in the future, we will not have sufficient funds to continue operations.

 

· We may raise additional financing by issuing new securities that may have terms or rights superior to those of our shares of common stock, which could adversely affect the market price of our shares of common stock and our business.

 

· Our technology under development is subject to regulation by the Federal Communications Commission and by other governmental agencies and we may have difficulty complying with applicable regulations.

 

· Even if we do successfully commercialize our technology, it may never achieve widespread market acceptance.

 

· Our industry is subject to intense competition and rapid technological change, which may result in products or new solutions that are superior to our technology under development or other future products we may bring to market from time to time. If we are unable to anticipate or keep pace with changes in the marketplace and the direction of technological innovation and customer demands, our technology may become less useful or obsolete and our operating results will suffer.

 

· We may be unable to protect our intellectual property.

 

· We expect to depend on third-party licensors to manufacture, market and distribute our technology under development or other future products. If these strategic partners and distributors fail to successfully manufacture, market and distribute our technology under development or other future products, our business will be materially harmed.

 

· We could become subject to product liability claims, product recalls, and warranty claims that could be expensive, divert management’s attention and harm our business.

 

THE OFFERING

 

The following summary contains basic information about our initial public offering and our common stock and is not intended to be complete.  It does not contain all of the information that may be important to you.  For a more complete understanding of our common stock, please refer to the section of this prospectus titled “Description of Capital Stock.”

 

Issuer   Energous Corporation, a Delaware corporation.
     
Common Stock Offered By Us   4,000,000 shares of common stock, par value $0.00001 per share.
     
Over-allotment Option   We have granted an option to our underwriter to purchase up to an additional 600,000 shares of common stock within 45 days of the date of this prospectus in order to cover over-allotments, if any.
     
Common Stock Outstanding Prior To This Offering   2,708,214 shares of common stock (1).

 

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Public Offering Price   $5.00 per share
     
Common Stock Outstanding After This Offering   8,958,124 shares of common stock (1)(2)(3)
     
Use of Proceeds   We intend to use the net proceeds from our sale of common stock in this offering as follows: approximately $10.3 million will be used for product research, development, reference design development and product certifications, approximately $0.7 million will be used for the protection of our intellectual property, approximately $2.8 million will be used for sales and marketing activities, approximately $0.8 million will be used for the purchase of fixed assets which consists primarily of computer equipment and software, and the balance of the funds will be used for general and administrative expenses and other general corporate purposes.  See “Use of Proceeds” and “Plan of Operation” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
     
Market And Trading Symbol For The Common Stock   There is currently no market for our common stock.  We have applied for listing of our common stock on the Nasdaq Capital Market under the symbol “[●]”.
     
Underwriter Common Stock Purchase Warrant   In connection with this offering, we have also agreed to sell to MDB Capital Group, LLC and its designees a warrant to purchase up to 10% of the shares of common stock sold in this offering.  If this warrant is exercised, each share may be purchased by MDB Capital Group, LLC at $6.00 per share (120% of the price of the shares sold in this offering.)  This warrant will have a five-year term and be subject to a six month lock-up.  See “Underwriting” for additional information.
     
Lock-Up Agreements   Our officers, directors and employees, and 5% or greater holders of our equity securities as determined pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended, and MDB Capital, LLC and its transferees (with respect to the warrants originally issued on May 16, 2013) will have the securities they own locked up until the first anniversary of the Underwriting Agreement we will enter into in conjunction with this offering (the “One Year Lock-Up”).  The purchasers of our senior secured convertible promissory notes are subject to lock-up requirements for periods that may last no more than 180 days following the date of this prospectus (the “ 180 Days Lock-Up”).  The number of currently outstanding shares of common stock subject to the One Year Lock-Up totals 2,708,214 shares, the number of shares underlying options subject to the One Year Lock-Up totals 813,534 shares and the number of shares underlying warrants subject to the One Year Lock-Up totals 461,561 shares.  The number of shares of common stock to be issued to the holders of our senior secured convertible promissory notes that will be subject to the 180 Days Lock-Up as of September 30, 2013 totals 2,249,910 shares.  The warrant to purchase up to 10% of the shares of common stock sold in this offering we have agreed to issue MDB Capital Group, LLC in connection with this offering will also be subject to the 180 Days Lock-up.  For more information about the lock-up agreements and requirements, see the section titled “Underwriting - Lock-Up Agreements” in this prospectus.

 

5
 

 

Offering Termination   If our application to the Nasdaq Capital Market is not approved or we otherwise determine that we will not be able to secure the listing of the common stock on the Nasdaq Capital Market, we will not complete the offering

 

(1) The number of shares of our common stock to be outstanding both before and after this offering is based on the number of shares outstanding as of September 30, 2013 and excludes:

 

· 275,689 shares of our common stock reserved for issuance under stock option agreements at a weighted average exercise price of $1.68 per share;

 

· 461,561 shares of common stock reserved for issuance under outstanding warrants at a weighted average exercise price of $1.22 per share;

 

· 766,478 shares of our common stock reserved for future issuance under our 2013 Equity Incentive Plan (including 537,845 shares reserved for issuance pursuant to stock option awards issued in January 2014);

 

· shares to be issued upon conversion of interest accrued on our senior secured convertible promissory notes after September 30, 2013; and

 

· shares of our common stock issuable upon exercise of the warrant to be issued to the underwriter representing ten percent of the number of shares offered by this prospectus.

 

Unless otherwise specifically stated, information throughout this prospectus assumes that none of the outstanding options or warrants to purchase shares of our common stock are exercised.

 

(2) Unless otherwise indicated, the number of shares of common stock presented in this prospectus excludes shares issuable pursuant to the exercise of the underwriter’s over-allotment option.

 

(3) This number includes 4,000,000 shares of common stock that will be issued in this offering and 2,249,910 shares of common stock that will be issued to the holders of our senior secured convertible promissory notes upon the completion of this offering.

 

SUMMARY SELECTED FINANCIAL INFORMATION

 

The table below includes historical selected financial data for the period October 30, 2012 (inception) through December 31, 2012 and for the nine months ended September 30, 2013, derived from our audited and unaudited financial statements included elsewhere in this prospectus.  

 

You should read the historical selected financial information presented below in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and our financial statements and the notes to those financial statements included elsewhere in this prospectus.  Historical results are not necessarily indicative of the results that may be expected for any future period. 

 

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    For the Period
October 30, 2012
(Inception)
through
December 31,
2012
    For the Nine
Months ended
September 30,
2013
    For the Period
October 30, 2012
(Inception)
through
September 30,
2013
 
          (Unaudited)     (Unaudited)  
STATEMENTS OF OPERATIONS:                        
Operating expenses:                        
Derivative instrument issuance expenses   $ -     $ 887,062     $ 887,062  
Research and development expenses     17,103       1,019,950       1,037,053  
General and administrative expenses     4,184       808,903       813,087  
Marketing expenses     -       32,014       32,014  
Loss from operations     (21,287 )     (2,747,929 )     (2,769,216 )
Other (expense) income:                        
Change in fair value of derivative liabilities     -       (111,500 )     (111,500 )
Interest expense     -       (383,380 )     (383,380 )
Other (expense) income, net     -       (494,880 )     (494,880 )
Net loss   $ (21,287 )   $ (3,242,809 )   $ (3,264,096 )
Basic and diluted net loss per common share   $ -     $ (0.32 )        
Weighted average shares outstanding, basic and diluted     7,680,000       10,254,345          
                         
    As of
December 31,
2012
    As of
September 30,
2013 (Unaudited)
       
BALANCE SHEET DATA:                        
Cash and cash equivalents   $ 994     $ 3,854,489      
Working capital (deficit)     (11,287 )     (3,073,761 )        
Total assets     994       3,903,193          
Total liabilities     12,281       6,956,608          
Total stockholders’ deficit     (11,287 )     (3,053,415 )        

 

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RISK FACTORS

 

We are subject to various risks that may materially harm our business, prospects, financial condition and results of operations.  An investment in our common stock is speculative and involves a high degree of risk.  In evaluating an investment in shares of our common stock, you should carefully consider the risks described below, together with the other information included in this prospectus.

 

If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties that are not presently known to us or that we currently deem immaterial later materialize, then our business, prospects, results of operations and financial condition could be materially adversely affected.  In that event, the trading price of our common stock could decline, and you may lose all or part of your investment in our shares.  The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

 

Risks Related to Our Business

 

We are a development-stage technology company, have no history of generating revenue, have a history of operating losses, and we may never achieve or maintain profitability.

 

We are a development-stage technology company. We have a limited operating history and only a preliminary business plan upon which investors may evaluate our prospects. We have never generated revenues and we have a history of losses from operations. As of September 30, 2013, we had an accumulated deficit of approximately $3,264,096. Our ability to achieve revenue-generating operations and, ultimately, achieve profitability will depend on whether we can obtain additional capital when we need it, complete the development of our technology and find customers who will purchase our future products and services. There can be no assurance that we will ever generate revenues or achieve profitability.

 

Our efforts may never demonstrate the feasibility of our technology.

 

We have developed a working prototype of our technology but significant additional research and development activity will be required before we achieve a commercial product. Our research and development efforts remain subject to all of the risks associated with the development of new products based on emerging technologies, including without limitation unanticipated technical or other problems and the possible insufficiency of funds needed in order to complete development of these products and enable us to render services. Technical problems may result in delays and cause us to incur additional expenses that would increase our losses. If we cannot complete, or if we experience significant delays in developing our technology, and products and services based on such technology, for use in potential commercial applications, particularly after incurring significant expenditures, our business may fail. In particular, to our knowledge, the technological concepts we are applying to develop commercial applications of wireless power for fixed and mobile low-power rechargeable devices have not been previously successfully applied by anyone else, if we fail to develop a practical, efficient or economical commercial product based on those technological concepts, our business may fail.

 

We expect to need FCC approval for our technology, which may be difficult to achieve, and existing laws or regulations or future legislative or regulatory changes may affect our business.

 

Our remote charging technology involves the transmission of power using RF energy waves, which are subject to regulation by the Federal Communications Commission (“FCC”), and may be subject to regulation by other federal, state and local agencies. We intend to design our technology so that it will operate in the 2.4/5.8 GHz radio frequency range, which is the same range as Wi-Fi routers and several other wireless consumer electronics. For those types of products, the FCC grants what is known as Part 15 approval if, among other things, the specific absorption rate (“SAR”) is below certain thresholds. In addition, because our technology involves the transmission of power greater than the power threshold limits of Part 15, we also expect to need to obtain FCC Part 18 approval. To our knowledge, the transmission of power using RF energy waves by a consumer product at the ranges we are proposing is novel and there can be no assurance that we will be able to obtain this FCC approval or that other governmental approvals will not be required. Our efforts to achieve required governmental approvals could be costly and time consuming and if we are unable to receive any such required approvals in a timely and cost-efficient manner our business and operating results may be materially adversely affected.

 

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The cost of compliance with new laws or regulations governing our technology or future products could adversely affect our financial results. New laws or regulations may impose restrictions or obligations on us that could force us to redesign our technology under development or other future products, and may impose restrictions that are not possible or practicable to comply with, which could cause our business to fail. We cannot predict the impact on our business of any legislation or regulations related to our technology or future products that may be enacted or adopted in the future.

 

We anticipate future losses and negative cash flow, and it is uncertain if or when we will become profitable.

 

We have not yet demonstrated our ability to generate revenue, and we may never be able to produce material revenues or operate on a profitable basis. As a result, we have incurred losses since our inception and expect to experience operating losses and negative cash flow for the foreseeable future.

 

We expect to expend significant resources on hiring of personnel and startup costs, including payroll and benefits, product testing and development, intellectual property development and prosecution, marketing and promotion, capital expenditures, working capital, general and administrative expenses, and fees and expenses associated with this offering. We expect to incur costs and expenses related to prototype development, consulting costs, laboratory development costs, obtaining regulatory approvals required for our technology and reference product designs, marketing and other promotional activities, hiring of personnel, and the continued development of relationships with strategic business partners. We are attempting to obtain the necessary working capital for operations, of which this offering is a part, but we may not be able to obtain financing in a sufficient amount or at all. We anticipate our losses will continue to increase from current levels during our development stage.

 

If we cannot generate sufficient revenue to finance our operations, we will require additional financing.

 

We anticipate that our future cash requirements may be significant. Even following completion of this offering we do not expect to have sufficient funds to implement our business plan, which includes completing the development of our technology and the license of our technology to consumer electronics supply chain firms. We expect that, unless we are able to obtain non-dilutive financing through licensing revenues or other strategic partner transactions, we will need to raise capital through new financings. Such financings could include equity financing, which may be dilutive to stockholders, or debt financing, which would likely restrict our ability to borrow from other sources. In addition, such securities may contain rights, preferences or privileges senior to those of the rights of our current stockholders. There can be no assurance that additional funds will be available on terms attractive to us, or at all. If adequate funds are not available, we may be required to curtail the development of our technology or materially curtail or reduce our operations. We could be forced to sell or dispose of our rights or assets. Any inability to raise adequate funds on commercially reasonable terms could have a material adverse effect on our business, results of operation and financial condition, including the possibility that a lack of funds could cause our business to fail and liquidate with little or no return to investors.

 

We may be unable to continue as a going concern if we do not successfully raise additional capital or if we fail to generate sufficient revenue from operations.

 

Our independent registered public accounting firm has issued an unqualified opinion with an explanatory paragraph to the effect that there is substantial doubt about our ability to continue as a going concern. The factors giving rise to this unqualified opinion with an explanatory paragraph could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and Note 2 to our financial statements included elsewhere in this prospectus.

 

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Primarily as a result of our lack of revenue, history of losses to date and our lack of liquidity, there is substantial uncertainty as to our ability to continue as a going concern. If we are unable to raise additional capital or if we are unable to generate sufficient revenue from our operations, we may not stay in business. We have no committed sources of capital and there is no assurance whether additional financing will be available when needed on terms that are acceptable, if at all. We do not own any significant assets that we expect could serve as acceptable collateral for a bank or other commercial lender. The above circumstances may discourage some investors from purchasing our stock, lending us money, or from providing alternative forms of financing. The failure to satisfy our capital requirements would adversely affect our business, financial condition, results of operations and prospects. Unless we raise additional funds, either through the sale of equity securities or one or more collaborative arrangements, we will not have sufficient funds to continue operations. Even if we take these actions, they may be insufficient, particularly if our costs are higher than projected or unforeseen expenses arise.

 

We may have difficulty managing growth in our business.

 

As we expand our activities, there will be additional demands on our financial, technical, operational and management resources. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including issues relating to our research and development activities and retention of experienced scientists, managers and engineers, could have a material adverse effect on our business, financial condition and results of operations and our ability to timely execute our business plan. If we are unable to implement these actions in a timely manner, our results may be adversely affected.

 

If we successfully commercially launch a product, and our product does not achieve widespread market acceptance, we will not be able to generate the revenue necessary to support our business.

 

Achieving acceptance of a wireless recharging system as a preferred method to recharge low-power fixed and mobile electronic devices will be crucial to our continued success. Consumers and commercial customers will not begin to use or increase the use of our product unless they agree that the convenience of our solution would be worth the additional expense of purchasing our system. We have no history of marketing any product and we may fail to generate significant interest in our initial commercial product or any other product we may develop. These and other factors, including the following factors, may affect the rate and level of the market acceptance:

 

· our system’s price relative to other products or competing methods of recharging;

 

· the effectiveness of our sales and marketing efforts;

 

· perception by users, both individual and enterprise users, of our system’s convenience, safety, efficiency, and benefits compared to competing methods of recharging;

 

· press and blog coverage, social media coverage, and other publicity and public relations factors which are not within our control; and

 

· regulatory developments related to marketing our products or their inclusion in others’ products.

 

If we are unable to achieve or maintain market acceptance, our business would be significantly harmed.

 

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If we successfully commercially launch a product, we may experience seasonality or other unevenness in our financial results in consumer markets or a long and variable sales cycle in enterprise markets.

 

While we do not now have revenue or a commercial product, our strategy depends on developing a successful commercial product and effectively licensing our technology into the consumer and enterprise markets. We will need to understand enterprise procurement and consumer buying cycles to be successful in licensing our technology into those markets. If we eventually generate a substantial portion of our revenues from licensing arrangements, we anticipate it is possible that demand for our technology could vary similarly with the market for products with which our technology may be used, for example, the market for new purchases of laptops, tablet, mobile phones, gaming systems, toys and the like. Such consumer markets are often seasonal, with peaks in and around the December holiday season and the August-September back-to-school season. Enterprises may have annual or other budgeting and buying cycles that could affect us, and, particularly if we are designated as a capital improvement project, we may have a long or unpredictable sales cycle.

 

We may not be able to achieve all the product features we seek to include in our product.

 

We have developed a prototype of our product concept that displays limited functionality in a laboratory setting. There are a variety of features we seek to include in our product that we have not yet achieved. For example, our prototype transmitter is capable of sending some wattage to three devices. While recharging on a commercially acceptable level multiple devices from one transmitter may be possible theoretically by sharing the capabilities of the transmitter, we have not achieved these results, even in the laboratory. We believe our research and development efforts will yield additional functionality over time. However, there can be no assurance that we will be successful in achieving all the features we are targeting and our inability to do so may limit the appeal of our product to consumers.

 

Use of our technology under development or other future products may require the user to purchase additional products to use with existing devices. To the extent these additional purchases are inconvenient, the adoption of our technology under development or other future products could be slowed, which would harm our business.

 

All rechargeable devices will require our receiver technology, which may be embedded in a sleeve, case or other enclosure. Certain products, for example smoke detectors or toys equipped with replaceable AA size or other sized batteries, would need to be outfitted with enhanced batteries and other hardware that would enable the devices to be rechargeable by our system. In each case to use a device with our system, unless, for example, a consumer electronics supply chain firm has built compatible battery technology and a receiver into the device, an end user or enterprise customer will be required to retrofit the device with a receiver and may be required to upgrade the battery technology used with the device. These additional steps and expenses may offset the convenience for some users and discourage some users from purchasing our technology under development or other future products. Such factors may inhibit adoption of our technology, which would harm our business. We have not developed the enhanced battery to be used in devices, and our ability to enable use of our technology with devices that will require an enhanced battery will depend on our ability to develop a commercial version of such an enhanced battery that could be manufactured at a reasonable cost. If we fail to develop or enable a commercially practicable enhanced battery, we expect our business would be harmed, and we may need to change our strategy and target markets.

 

Laboratory conditions differ from field conditions, which could affect the effectiveness of our technology under development or other future products. Failures to effectively move from laboratory to the field would harm our business.

 

Our technology, when used in the field, may not be able to match the observations, developments, test results and performance that our technology may be able to achieve (and we may be able to document) under controlled laboratory circumstances. As one example of the difference between ideal laboratory conditions and field use, consider that in the laboratory, we can arrange for the transmitter to have line-of-sight transmission to a receiver. If we intend to test the performance through obstruction, we can control the configurations of the obstructions and the materials from which such obstructions are made. In the field, however, the receiver may be obscured or obstructed, or placed around a corner. Also, in the field we will have no control over configuration of the obstructions or the materials that comprise each obstruction. These conditions may significantly decrease or eliminate the power received at the receiver or the effective range, because the RF energy from the transmitter may be absorbed by obscuring or blocking material or may need to be reflected off of a surface to reach the receiver, making the transmission distance longer than straight-line distances. The failure of our technology under development or other future products to be able to meet the demands of users in the field would harm our business.

 

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Safety concerns and legal action by private parties may affect our business.

 

While we believe our technology is safe, it is possible that some people may be concerned with wireless transmission of power in a manner that has occurred with some other wireless technologies as they were put into residential and commercial use, such as the safety concerns that were raised by some regarding the use of cellular telephones and other devices to transmit data wirelessly in close proximity to the human body. While we plan to at least partially address this potential concern by developing our management software to be configurable by users to selectively recharge devices in ways that would be intended to avoid recharging in close proximity to a human body, such as recharging only during predetermined time periods or recharging only when the device is not moving, we do not plan to conduct any tests to determine whether RF waves produce harmful effects on humans or other animals. We may be unable to effectively prevent recharging in close proximity to a user’s body, which could affect the marketability of our technology or could result in requests for law or regulation governing our technology under development or a class of products in which our technology under development would be included. In addition, while we believe our technology is safe, users of our technology under development or other future products who suffer medical ailments may blame the use of our products, as occurred with a small number of users of cellular telephones. Any resulting legal action against us claiming our products caused harm could be expensive, divert management and adversely affect us or cause our business to fail, whether or not such legal actions were ultimately successful.

 

Our industry is subject to intense competition and rapid technological change, which may result in products or new solutions that are superior to our technology under development or other future products we may bring to market from time to time. If we are unable to anticipate or keep pace with changes in the marketplace and the direction of technological innovation and customer demands, our products may become less useful or obsolete and our operating results will suffer.

 

The consumer and commercial electronics industry in general and power, recharging and alternative recharging method segment of that industry in particular are subject to intense and increasing competition and rapidly evolving technologies. Because our products are expected to have long development cycles, we must anticipate changes in the marketplace and the direction of technological innovation and customer demands. To compete successfully, we will need to demonstrate the advantages of our products and technologies over well-established alternative solutions, products and technologies, as well as newer methods of power delivery and convince consumers and enterprises of the advantages of our products and technologies. Traditional wall plug-in recharging remains an inexpensive alternative to our technology under development. Also, directly competing products are offered by Powermat Technologies, Duracell’s wireless charging business, Energizer’s inductive charging business, PureEnergy Solutions, Inc., ecoupled and PowerCast Corporation, which have greater resources than us and are better established in the market than we are. We cannot be certain which other companies may have already decided to or may in the future choose to enter our markets. For example, consumer electronics products companies may invest substantial resources in wireless power or other recharging technologies and may decide to enter our target markets. Successful developments of competitors that result in new approaches for recharging could reduce the attractiveness of our products or render them obsolete.

 

Our future success will depend in large part on our ability to establish and maintain a competitive position in current and future technologies. Rapid technological development may render our technology under development or future products based on our technology obsolete. Many of our competitors have or may have greater corporate, financial, operational, sales and marketing resources, and more experience in research and development than we have. We cannot assure you that our competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products or that would render our technologies and products obsolete. We may not have or be able to raise or develop the financial resources, technical expertise, marketing, distribution or support capabilities to compete successfully in the future. Our success will depend in large part on our ability to maintain a competitive position with our technologies.

 

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Our competitive position also depends on:

 

· widespread awareness, acceptance and adoption by the consumer and enterprise markets of our technology under development and future products;

 

· our ability to design a product that may be sold at an acceptable price point;

 

· the development by us of new or enhanced technologies or features that improve the convenience, efficiency, safety or perceived safety, and productivity of our technology under development and future products;

 

· properly identifying customer needs and delivering new products or product enhancements to address those needs;

 

· limiting the time required from proof of feasibility to routine production;

 

· limiting the timing and cost of regulatory approvals;

 

· our ability to attract and retain qualified personnel;

 

· the extent of our patent protection or our ability to otherwise develop proprietary products and processes; and

 

· securing sufficient capital resources to expand both our continued research and development, and sales and marketing efforts.

 

If our technology under development is not or our future products are not competitive based on these or other factors, our business would be harmed.

 

It is difficult and costly to protect our intellectual property and our proprietary technologies, and we may not be able to ensure their protection.

 

Our success depends significantly on our ability to obtain, maintain and protect our proprietary rights to the technologies used in our products. Patents and other proprietary rights provide uncertain protections, and we may be unable to protect our intellectual property. For example, we may be unsuccessful in defending our patents and other proprietary rights against third party challenges.

 

As of December 9, 2013, we have 38 pending U.S. patents and provisional patent applications on file, but do not have any issued patents to protect our technology.

 

In addition to patents, we expect to rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical security measures to protect our intellectual property rights. These measures may not be adequate to safeguard the technology underlying our products. If they do not protect our rights adequately, third parties could use our technology, and our ability to compete in the market would be reduced. Although we are attempting to obtain patent coverage for our technology where available and where we believe appropriate, there are aspects of the technology for which patent coverage may never be sought or received. We may not possess the resources to or may not choose to pursue patent protection outside the United States or any or every country other than the United States where we may eventually decide to sell our future products. Our ability to prevent others from making or selling duplicate or similar technologies will be impaired in those countries in which we have no patent protection. Although we have 38 pending U.S. patents and provisional patent applications on file in the United States protecting aspects of our technology under development, our patents may not issue as a result of those applications drawing priority or otherwise based on those patent applications, may issue only with limited coverage or may issue and be subsequently successfully challenged by others and held invalid or unenforceable.

 

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Similarly, even if patents do issue based on our applications or future applications, any issued patents may not provide us with any competitive advantages. Competitors may be able to design around our patents or develop products that provide outcomes comparable or superior to ours. Our patents may be held invalid or unenforceable as a result of legal challenges by third parties, and others may challenge the inventorship or ownership of our patents and pending patent applications. In addition, if we choose to and are able to secure protection in countries outside the United States, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be difficult and time consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management’s attention. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge.

 

We may also in the future as one of our strategies to deploy our technology into the market, license patent and other proprietary rights to aspects of our technology to third parties. Disputes with our licensors may arise regarding the scope and content of these licenses. Further, our ability to expand into additional fields with our technologies may be restricted by our existing licenses or licenses we may grant to third parties in the future.

 

The policies we use to protect our trade secrets may not be effective in preventing misappropriation of our trade secrets by others. In addition, confidentiality agreements executed by our employees, consultants and advisors may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. Litigating a trade secret claim is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge methods and know-how. If we are unable to protect our intellectual property rights, we may be unable to prevent competitors from using our own inventions and intellectual property to compete against us, and our business may be harmed.

 

Because our industry is characterized by competing intellectual property, we may be sued for violating the intellectual property rights of others. Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of patent litigation actions is often uncertain. We have not conducted any significant search of patents issued to third parties, and no assurance can be given that third party patents containing claims covering our products, parts of our products, technology or methods do not exist, have not been filed, or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas or fields, our competitors or other third parties may assert that our products and the methods we employ in the use of our products are covered by United States or foreign patents held by them. In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware, and which may result in issued patents that our technology under development or other future products would infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also be existing patents that one or more of our products or parts may infringe and of which we are unaware. As the number of competitors in the market for wireless power and alternative recharging solutions increases, and as the number of patents issued in this area grows, the possibility of patent infringement claims against us increases. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

 

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In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the relevant patents or other intellectual property were upheld as valid and enforceable and we were found to infringe or violate the terms of a license to which we are a party, we could be prevented from selling any infringing products of ours unless we could obtain a license or were able to redesign the product to avoid infringement. If we were unable to obtain a license or successfully redesign, we might be prevented from selling our technology under development or other future products. If there is an allegation or determination that we have infringed the intellectual property rights of a competitor or other person, we may be required to pay damages, or a settlement or ongoing royalties. In these circumstances, we may be unable to sell our products at competitive prices or at all, our business and operating results could be harmed.

 

We could become subject to product liability claims, product recalls, and warranty claims that could be expensive, divert management’s attention and harm our business.

 

Our business exposes us to potential liability risks that are inherent in the marketing and sale of products used by consumers. We may be held liable if our technology under development or other future products cause injury or death or are found otherwise unsuitable during usage. Our technology under development incorporates sophisticated components and computer software. Complex software can contain errors, particularly when first introduced. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after installation. While we believe our technology is safe, because our products are designed to be used to perform complex functions involving RF energy, possibly in close proximity to users, users could allege or possibly prove defects, some of which could be alleged or proved to cause harm to users or others. A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs. The coverage limits of our insurance policies we may choose to purchase to cover related risks may not be adequate to cover future claims. If sales of our products increase or we suffer future product liability claims, we may be unable to maintain product liability insurance in the future at satisfactory rates or with adequate amounts. A product liability claim, any product recalls or excessive warranty claims, whether arising from defects in design or manufacture or otherwise, could negatively affect our sales or require a change in the design or manufacturing process, any of which could harm our reputation and business, harm our relationship with licensors of our products, result in a decline in revenue and harm our business.

 

In addition, if a product we designed is defective, whether due to design or manufacturing defects, improper use of the product or other reasons, we or our strategic partners may be required to notify regulatory authorities and/or to recall the product. A required notification to a regulatory authority or recall could result in an investigation by regulatory authorities of our products, which could in turn result in required recalls, restrictions on the sale of the products or other penalties. The adverse publicity resulting from any of these actions could adversely affect the perception of our customers and potential customers. These investigations or recalls, especially if accompanied by unfavorable publicity, could result in our incurring substantial costs, losing revenues and damaging our reputation, each of which would harm our business.

 

We expect to depend on consumer electronics supply chain firms to manufacture, market and distribute our technology under development. If these strategic partners fail to successfully manufacture, market and distribute our technology under development, our business will be materially harmed.

 

We currently intend to license our system architecture, proprietary waveform and application specific integrated circuit design to consumer electronics supply chain firms rather than manufacture our technology under development ourselves. We will not be able to control the efforts and resources these consumer electronics supply chain firms would devote to marketing our technology under development or other future products. Those third parties may not be able to successfully market and sell the products they develop based on our technology, may not devote sufficient time and resources to support the marketing and selling efforts and may not market those products at prices that will permit the products to develop, achieve or sustain market acceptance. Finding new licensors could be an expensive and time-consuming process and we may not be able to find suitable consumer electronics supply chain firms and other distribution strategic partners on acceptable terms or at all. If we cannot find suitable third party partners or our third party partners experience difficulties, do not actively market our technology under development or future products or do not otherwise perform under our license agreements, our potential for revenue may be dramatically reduced, and our business could be harmed. We have not dedicated any resources to investigating foreign markets or planning to satisfy import or export requirements to deliver our product to consumers or businesses outside the U.S.

 

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We intend to pursue licensing of our technology as a primary means of commercialization but we may not be able to secure advantageous license agreements. If we are not able to secure advantageous license agreements, our business and results of operations will be adversely affected.

 

We intend to pursue licensing of our technology as a primary means of commercialization. We believe there are many companies that could be interested in implementing our technology into their devices. Many of these companies are well-known, world-wide companies. To date we do not have any specific business relationships with any potential licensees. Creating a license or other business relationship with these classes of companies will take a substantial effort, as we expect to have to convince them of the efficacy of our technology, meet their design and manufacturing requirements, satisfy their marketing and product needs, and comply with their selection, review and contracting requirements. There can be no assurance that we will be able to gain entry to these companies, or that they will ultimately decide to integrate our technology with their products. We may not be able to secure license agreements with customers on terms that are advantageous to us. Furthermore, the timing and volume of revenue earned from license agreements will be outside of our control. If the license agreements we enter into do not prove to be advantageous to us, our business and results of operations will be adversely affected.

 

We are highly dependent on certain key members of our executive management team.  Our inability to retain these individuals could impede our business plan and growth strategies, which could have a negative impact on our business and the value of your investment.

 

Our ability to implement our business plan depends, to a critical extent, on the continued efforts and services of Steve Rizzone (Chief Executive Officer), Michael Leabman (Chief Technology Officer), George Holmes (Vice President of Sales and Marketing) and Thomas Iwanski (Chief Financial Officer).  If we lose the services of any of these persons, we would likely be forced to expend significant time and money in the pursuit of replacements, which may result in a delay in the implementation of our business plan and plan of operations.  We can give no assurance that we could find satisfactory replacements for these individuals on terms that would not be unduly expensive or burdensome to us.  We do not currently carry a key-man life insurance policy that would assist us in recouping our costs in the event of the death or disability of either of these executives.

 

Risks Related to this Offering and Owning Our Common Stock

 

As an investor, you may lose all of your investment.

 

Investing in our common stock involves a high degree of risk. As an investor you may never recoup all, or even part of, your investment and you may never realize any return on your investment. You must be prepared to lose all of your investment.

 

Prior to the completion of our initial public offering, there was no public trading market for our common stock.

 

The offering under this prospectus is an initial public offering of our securities.  Prior to the closing of the offering, there will have been no public market for our common stock.  While we plan to list our common stock on the Nasdaq Capital Market, we cannot assure you that our listing application will be approved, and that a public market for our common stock will develop.  If our application to the Nasdaq Capital Market is not approved or we otherwise determine that we will not be able to secure the listing of the common stock on the Nasdaq Capital Market, we will not complete the offering.

 

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We are an “emerging growth company” under the JOBS Act of 2012 and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.  We cannot predict if investors will find our common stock less attractive because we may 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.

 

We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30.

 

Our status as an “emerging growth company” under the JOBS Act of 2012 may make it more difficult to raise capital as and when we need it.

 

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company,” we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it.  Investors may be unable to compare our business with other companies in our industry if they believe that our reporting is not as transparent as other companies in our industry.  If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

 

If a public market for our common stock develops, it may be volatile.  This may affect the ability of our investors to sell their shares as well as the price at which they sell their shares.

 

If a market for our common stock develops, the market price for the shares may be significantly affected by factors such as variations in quarterly and yearly operating results, general trends in the alternative energy industry, and changes in state or federal regulations affecting us and our industry.  Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations that are unrelated or disproportionate to the operating performance of the affected companies.  Such broad market fluctuations may adversely affect the market price of our common stock, if a market for it develops.

 

We have not paid dividends in the past and have no immediate plans to pay dividends.

 

We plan to reinvest all of our earnings, to the extent we have earnings, in order to market our products and to cover operating costs and to otherwise become and remain competitive.  We do not plan to pay any cash dividends with respect to our securities in the foreseeable future.  We cannot assure you that we would, at any time, generate sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend.  Therefore, you should not expect to receive cash dividends on the common stock we are offering. 

 

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Concentration of ownership among our existing executive officers, directors and significant stockholders may prevent new investors from influencing significant corporate decisions.

 

All decisions with respect to the management of the Company will be made by our board of directors and our officers, who, before this offering, beneficially own 28.6% of our common stock, as calculated in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934.  After the issuance of our common stock in this offering and the conversion of the Convertible Notes, management will beneficially own 8.7% of our common stock, as calculated in accordance with Rule 13d-3.  In addition, before this offering DvineWave Holdings LLC beneficially owns 71.1% of our common stock and after this offering will beneficially own 21.5% of our common stock, as calculated in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934. As a result, these stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our Company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these stockholders.

 

We will incur significant increased costs as a result of becoming a public company that reports to the Securities and Exchange Commission and our management will be required to devote substantial time to meet compliance obligations.

 

As a public company reporting to the Securities and Exchange Commission, we will incur significant legal, accounting and other expenses that we did not incur as a private company.  We will be subject to reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission that impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices.  In addition, on July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act was enacted.  There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that are expected to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources.  Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives.  In addition, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.  As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

 

Assuming a market for our common stock develops, shares eligible for future sale may adversely affect the market for our common stock.

 

After [●], 2014, we have agreed to register for resale 2,249,910 shares of common stock expected to be issued upon conversion of our senior secured convertible promissory notes and 461,561 shares of common stock underlying warrants. Furthermore, from time to time after we become subject to the reporting requirements of section 13 or section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) for at least 90 days, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations.  In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement (which disappears after one year).  Of the 8,958,124 shares of our common stock expected to be outstanding following completion of the offering, approximately 6,284,774 shares will be held by “non-affiliates” and will be freely tradable without restriction pursuant to Rule 144, although 34,864 shares of common stock held by non-affiliates will be subject to a one year lock-up that will end on the first anniversary of the execution of the underwriting agreement entered into in connection with this offering.

 

Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus (including sales by investors of securities acquired in connection with this offering) may have a material adverse effect on the market price of our common stock.

 

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We may allocate the net proceeds from this offering in ways that differ from the estimates discussed in the section titled “Use of Proceeds” and with which you may not agree.

 

The allocation of net proceeds of the offering set forth in the “Use of Proceeds” section below represents our estimates based upon our current plans and assumptions regarding industry and general economic conditions, and our future revenues and expenditures.  The amounts and timing of our actual expenditures will depend on numerous factors, including market conditions, cash generated by our operations, business developments and related rate of growth.  We may find it necessary or advisable to use portions of the proceeds from this offering for other purposes.  Circumstances that may give rise to a change in the use of proceeds and the alternate purposes for which the proceeds may be used are discussed in the section entitled “Use of Proceeds” below.  You may not have an opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use our proceeds.  As a result, you and other stockholders may not agree with our decisions.  See “Use of Proceeds” for additional information.

 

You will experience immediate dilution in the book value per share of the common stock you purchase.

 

Because the price per share of our common stock being offered is substantially higher than the book value per share of our common stock, you will experience substantial dilution in the net tangible book value of the common stock you purchase in this offering.  Based on the offering price of $5.00 per share, if you purchase shares of common stock in this offering, you will experience immediate and substantial dilution of $2.78 per share in the net tangible book value of the common stock at September 30, 2013.   See the section titled “Dilution” below for a more detailed discussion of the dilution you will incur if you purchase common stock in this offering.

 

Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable.

 

Upon the closing of this offering, provisions of our Certificate of Incorporation (“Certificate”) and bylaws and applicable provisions of Delaware law may delay or discourage transactions involving an actual or potential change in control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests.  The provisions in our Certificate and bylaws:

 

· limit who may call stockholder meetings;

 

· do not provide for cumulative voting rights; and

 

· provide that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.

 

In addition, once we become a publicly traded corporation, Section 203 of the Delaware General Corporation Law may limit our ability to engage in any business combination with a person who beneficially owns 15% or more of our outstanding voting stock unless certain conditions are satisfied.  This restriction lasts for a period of three years following the share acquisition.  These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices.  This potential inability to obtain a control premium could reduce the price of our common stock. See “Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Charter Documents” for additional information.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS

 

This prospectus contains forward-looking statements.  Forward-looking statements give our current expectations or forecasts of future events.  You can identify these statements by the fact that they do not relate strictly to historical or current facts.  You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may” or other similar expressions in this prospectus.  These statements may be found under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in this prospectus, as well as in this prospectus generally.  In particular, these include statements relating to future actions, prospective products, applications, customers, technologies, future performance or results of anticipated products, expenses, and financial results.  These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.  Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

· our limited cash and a history of losses;

 

· our ability to achieve profitability;

 

· our limited operating history;

 

· emerging competition and rapidly advancing technology;

 

· customer demand for the products we develop;

 

· our ability to secure required FCC or other governmental approvals;

 

· the impact of competitive or alternative products, technologies and pricing;

 

· our ability to successfully license any products we develop to consumer electronics supply chain firms;

 

· general economic conditions and events and the impact they may have on us and our potential customers;

 

· the adequacy of protections afforded to us by the patents that we own and the cost to us of maintaining, enforcing and defending those patents;

 

· our ability to obtain, expand and maintain patent protection in the future, and to protect our non-patented intellectual property;

 

· our exposure to and ability to defend third-party claims and challenges to our patents and other intellectual property rights;

 

· our ability to obtain adequate financing in the future;

 

· our ability to continue as a going concern;

 

· our success at managing the risks involved in the foregoing items; and

 

· other factors discussed in the “Risk Factors” section of this prospectus.

 

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The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this prospectus. We undertake no obligation to publicly update or revise any forward-looking statements included in this prospectus or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise, except to the extent required by federal securities laws.  Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under the section entitled “Risk Factors” and matters described in this prospectus generally.  In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this prospectus will in fact occur.  You should not place undue reliance on these forward-looking statements.

 

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BUSINESS

 

Our Company

 

We are a development stage technology company. We are developing technology that can enable wireless charging or powering of electronic devices at distance. We believe our technology is a novel approach, in that it charges or powers devices by surrounding them with a three dimensional (“3D”) pocket of energy formed by radio frequencies (“RF pocket”). In our laboratory, our prototype devices have enabled wireless transmission of energy from a transmitter (similar in size and shape to a Wi-Fi router) to multiple receiver test boards at a distance of up to 15 feet. Our receiver test boards are constructed from commercially available parts and components, are not optimized for our receiver application and are too large to be incorporated in commercially marketed products. We intend to develop a receiver chip that we can integrate into additional test devices. We believe this receiver chip will optimize our technology into a significantly smaller space and allow for the incorporation or our receiver technology into various products. If the receiver chip we expect to develop is integrated into a low-power (under 10 watts) electronic device, the chip should be able to utilize the received energy to either power the device directly or charge the battery that powers the device. We are also developing management and control of our solution through a software application that will ultimately reside on the device being charged. We believe that if our development efforts are successful, our transmitter/receiver solution will initially be able to power or charge multiple electronic devices at up to 1.5 watts at distances of up to 30 feet. Subsequent development efforts will focus on increasing the charging wattage, increasing the distance of charging, enhancing reliability, enhancing management and control of the solution and reducing design cost.

 

In our operating history, we have developed a beta system consisting of a base station transmitter, a smart phone receiver case, receiver test boards and management software. In addition, we have designed and submitted for manufacturing an application specific integrated circuit (“ASIC”) to optimize our transmitter technology. Furthermore, we have designed but not yet submitted for manufacturing, an ASIC for the receiver. In connection with the receiver technology, we have designed multiple smart phone charging cases, which are still under development. Complementing our hardware designs, we have developed a software application that we believe allows for management, control, statistics and prioritization of the charging for the remote devices via a smartphone, tablet or PC.

 

We have pursued an aggressive intellectual property strategy and are developing new patents. As of January 17, 2014, we have 38 pending U.S. patents and provisional patent applications. Thus far we have identified more than 80 specific inventions we believe to be novel and patentable, and we intend to continue filing these inventions for patent protection.

 

Importantly, we have recruited and hired a seasoned management team with public company and relevant industry experience to develop and execute the company’s operating plan. In addition, we have hired and have identified additional engineering resources which are expected to engage with the Company to build up the engineering capability of the internal team. Finally, we have identified and started the selection process for our independent board of directors whom we believe will provide valuable assistance to the Company in terms of industry credibility, corporate governance, and strategic direction. We were incorporated in Delaware in October 2012. Our corporate headquarters is at 303 Ray Street, Pleasanton, CA 94566. Our website can be accessed at www.energous.com. The information contained on, or that may be obtained from our website is not, and shall not be deemed to be, part of this prospectus.

 

Our Technology

 

The remote charging solution we are developing employs 3D “pocketforming” via a transmitter which creates a mobile, target specific area (“RF pocket”) in a room around a receiving device which may be mobile or fixed.

 

Figure 1 below shows a simple diagram of our solution. Today this solution is able to send wattage from the transmitter to individual receiver boards in our laboratory.

 

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Figure 1: Our Remote Charging Solution Diagram

 

 

First, our proprietary transmitter locates the client receiver(s) in a 3-dimensional space. Next, the transmitter generates a proprietary waveform to create an RF pocket around the client receiver(s). We expect that the receiver chips that we intend to develop will gather power from this RF pocket. We believe that these proposed receiver chips will then be able to either charge rechargeable-battery devices or power low–power devices, such as smart phones, tablets, keyboards, mice, remote controls, rechargeable lights or any other device with similar charging requirements that would otherwise need a battery or a connection to a power outlet.

 

Our transmitter uses proprietary software algorithms to dynamically direct, focus and control our proprietary waveform in three dimensions. This control allows for very efficient transmission of energy to a moving object (such as a mobile phone in a user’s pocket).

 

Figure 2 below shows our prototype transmitter in its current enclosure. This enclosure has dimensions of approximately 12” x 8.5” x 2”.

 

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Figure 2: Prototype Transmitter in Plastic Enclosure

 

 

Figure 3 below shows internal and external views, respectively, of the front and back of a smart phone case that integrates our receiver technology and will, if used with our transmitter within the appropriate range, wirelessly charge a smart phone.

 

Figure 3: Front and back of our prototype smart phone cover with embedded Energous receiver technology

 

 

Below, in Figure 4, are additional prototype receiver devices under development, including an e-book reader wirelessly charged cover and wirelessly charged universal receiver.

 

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Figure 4: Computer generated images of additional prototype devices under development

 

 

Currently, our demonstration system is able to output wattage to three devices at a distance of 15 feet with the ability to refocus the RF pocket within 1 second. While our demonstration system employs off-the-shelf components, we are developing several ASICs that we believe will enable our future system designs to deliver multiple watts at a distance of up to 30 feet, and to refocus the RF pocket within fractions of a second. We believe our ASICs in development will allow us to significantly reduce our transmitter size and costs and achieve higher delivered power.

 

We submitted our first design for production of our initial ASIC to our ASIC manufacturer in November 2013. We expect to receive the ASIC in our laboratory in late February 2014, after which it will be tested by our team and, if deemed acceptable by us, integrated into a newly designed prototype transmitter unit. Depending on the results of the initial transmitter ASIC and adequate funding, we expect to submit our second transmitter ASIC design for manufacturing in June 2014. Additional ASIC designs and manufacturing will be scheduled based upon the performance, attributes and cost efficiencies of each prior ASIC as determined by us.

 

Our Competition

 

There are numerous existing, widely commercially available methods to provide power to rechargeable low-power fixed and mobile devices, including wall plug-in recharging, inductive recharging, power-mat recharging, battery recharging stations and more. To our knowledge, almost all mobile consumer electronic devices equipped with a rechargeable battery come bundled with a method to recharge the device (for example, a power cord). This bundling makes the bundled recharging system effectively free to the user. We are depending on the development of a market that will sufficiently value the convenience of wireless recharging to pay the additional cost to purchase our remote charging solutions.

 

We believe that the main advantage of our remote charging technology, as compared to traditional charging technologies, will be the ability to charge multiple devices anywhere within the charging area (expected to be up-to 30 feet) without the use of a charging pad. We believe our technology is unique and flexible allowing us to target a fixed or mobile device, track that device if it moves or is moving, and focus and transmit pockets of energy to the targeted device to charge the device without having to remove the battery or plug in the device.

 

We are not currently aware of any company or researcher looking to develop a 3-D pocket-forming approach similar to our remote charging technology. However, there are other wireless charging technologies on the market today. These fall into the following categories:

 

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Magnetic Induction : Magnetic Induction is the most commercially available wireless charging technology, and has been available for 10+ years in products such as rechargeable electric toothbrushes. It uses a magnetic coil to create resonance, which can transmit energy over very short distances. Magnetic induction delivers power as a function of coil size (the larger the coil, the more power), which must be directly paired (one receiver coil to one transmitter coil = directly coupled pair) over a typical distance of less than 1 inch.

 

The companies that have launched products using this technology are members of the wireless Power Consortium (Qi) and the Power Matters Alliance (PMA), the most prominent company being PowerMat. There is a new consortium called Alliance for Wireless Power (A4WP) which is working on a new inductive transmitter which uses overlapping coils in the transmitter, so that one transmitter will support multiple receivers over distances of less than 10 inches. Though we are not aware of a commercial product that utilizes the A4WP standard, prominent companies that are part of the A4WP consortium include Broadcom, HTC, and Intel.

 

Magnetic Resonance : Magnetic Resonance is similar to magnetic induction, as it uses coils to transmit energy. This technology uses coils that range in size depending on the power being transmitted and has the ability to transmit power up to ~11 inches (30CM) which can be increased with the use of resonance repeaters.

 

We are aware of only one company working with magnetic resonance, which is WiTricity. WiTricity has evaluation systems available for purchase but we are not aware of any sales to commercial customers.

 

Conductive : Conductive wireless charging (or simply conductive charging) uses conductive power transfer to eliminate wires between the charger (often a charging mat) and the charging device. It requires the use of a charging board as the power transmitter to deliver the power, and a charging device, with a built-in receiver, to receive the power. This technology requires direct metal contact between the charging board and the receiver. Once the charging board recognizes the valid receiver, the charging begins.

 

The company that commercialized this technology was PureEnergy (formerly WildCharge), which brought the technology to market under its own brand and under license to Duracell and RadioShack. In 2011, Duracell terminated its license with PureEnergy and partnered with PowerMat to bring to market an inductive solution. To our knowledge, RadioShack has since exited the conductive charging sector.

 

RF Harvesting : At the core of what we are doing at Energous is the harvesting of RF energy. These approaches typically utilize directional antennas to target and deliver energy. To our knowledge, there are only two other companies attempting to utilize a directional pocket of energy similar to that being developed by Energous.

 

PowerCast was the first company to commercialize RF harvesting. PowerCast products deliver only milliwatts of power at distances of up to 30 feet, so they are targeted for use in extremely low-power applications (such as radio frequency identification “RFID” tags).

 

A new entrant into the RF-Harvesting space is Ossia. Ossia, which is developing a product under the name Cota, has received some recent press coverage with a large 4’ x 8’ proof-of-concept transmitter that utilizes roughly 200 individually controlled antennas. In demonstrations, Ossia has been able to show Cota delivering wireless power at an unspecified level to a smart phone.

 

Laser : This technology uses very short wavelengths of light to create a collimated beam that maintains its size over distance, using what is described as distributed resonance to deliver power to an optical receiver.

 

There are two companies that are currently developing wireless power solutions using laser technology. LaserMotive & Wi-Charge are both working to commercialize laser-based solutions.

 

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Ultrasound : This technology converts electric energy into acoustic energy in the form of ultrasound waves. Then it reconverts those waves through an “energy-harvesting” receiver. The challenge with this technology is that acoustic energy only goes in a straight line and any obstacles in the path will drastically reduce performance.

 

Ubeam is the only company we have identified that is working with this technology.

 

Our Business Strategy

 

We intend to license our solution to the designers of devices that would benefit from remote charging. We intend to pursue this licensing path because we believe there are several market verticals to which our technology can apply, and we believe that this is the most capital-efficient manner in which we can address many of them at once.

 

In addition, we believe that our greatest market opportunity is to create a standard protocol for wireless charging at a distance, in much the same way that Wi-Fi is the standard for wireless data. The goal is to ensure interoperability between base stations and receivers that are based on our technology, regardless of who made them, installed them into finished goods, or marketed them. The implementation of previous standards such as Wi-Fi and Bluetooth should help to illustrate our goal; Wi-Fi routers, regardless of their designer or manufacturer, work with Wi-Fi receivers installed in various consumer electronic devices, regardless of the manufacturer.

 

In order to make our solution the standard for charging at distance, we intend to pursue an ecosystem strategy for our solution, engaging not only potential licensees for our base station and transmitter, but also their upstream and downstream value chain partners. We also intend to prioritize protecting our intellectual property portfolio, as we believe that keeping a firm grasp on that will make it less likely that a competing platform will be able to compete with our technology in a “standards battle.”

 

We believe strategic relationships with key licensees will enable us to reap the benefits of our technology much faster, with greater penetration, than by manufacturing, distributing or installing products ourselves.  We believe this business model will also allow us to concentrate our efforts and resources on projects more in line with our expertise as a research-and-development oriented company that is focused on generating licensable intellectual property. As we develop new applications for our technology, we expect to target new strategic relationships in different market sectors.

 

In order to demonstrate the capability of our technology to potential partners, we are currently developing complete products, which our licensees modify and remanufacture to fit their own needs. These products are what are known as “reference designs” of our integrated solution. These reference designs will be licensed to key potential partners, which we believe will allow them to speed up incorporation of technology into their product lines, create awareness and demand, and bring our power solution to market faster. Our initial reference designs currently under development are being designed for use with smart phones and e-book readers. However, we believe that there is a wide variety of potential uses for our proprietary technology, including tablets, keyboards, mice, remote controls, rechargeable lights or any other device with similar charging requirements that would otherwise need a battery or a connection to a power outlet.

 

Since we are a development stage company, we have not yet finalized some aspects of our strategy. For example, we may decide to sell our ASICs ourselves, rather than licensing the design of those ASICs. The decision to sell ASICs would be dependent on the business case evaluation of our perceived market demand for our ASIC to potential customers who would require such a component in order to provide their solution to the marketplace. However, we do not intend to manufacture our own ASICs; if we decide to sell ASICs rather than license their designs, we will utilize a contract manufacturer to manufacture the ASICs. In any event, we do not intend to produce finished goods consumer products.

 

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Our Initial Target Markets

 

We believe that our technology will be compelling to many end markets, each of which may have several potential customers. In an effort to focus our activities, we have selected certain initial target markets based on the potential value we would be able to create in these markets. As we continue to develop our technology, we may find that it creates more value in other markets; if that is the case, we intend to shift our focus to those other markets. As we have already discussed, our solution consists of two components: our base station and our receiver. Consequently, we view our initial target markets in these two categories.

 

Base Station Target Markets

 

Wi-Fi Routers

 

We believe that consumers will be best able to understand our technology in the context of the wireless data industry, since our technology allows devices to receive power while unplugged in much the same way that the Wi-Fi router allowed devices to receive data while unplugged. In addition, we believe our base station technology can integrate well into form factors of a similar size to that of existing wireless data routers. Our current prototype is approximately 12” X 8.5” X 2”, which is slightly larger than a typical commercial wireless data router; after our transmitter ASIC is complete, we expect to be able to integrate our technology into the form factor demanded by branded consumer electronics router marketers. We also believe that our 3-D pocketforming technology may be able to enhance the data signal of a Wi-Fi router, which we believe will provide an even stronger value proposition to wireless data router manufacturers.

 

According to Infonetics Research, the wireless local area network (“WLAN”) market was approximately $4 billion in 2012. This includes enterprise access points, WLAN controllers, and Wi-Fi phone access points. The Wi-Fi router market has two segments: commercial and residential. The key differentiator between these segments is that commercial routers tend to have much more robust security features, including virtual private networks and advanced content filtering. We believe that our technology is applicable to both the commercial and residential Wi-Fi router markets. Consequently, we have begun to engage with some of these leading firms in both of these segments.

 

In addition, the Wi-Fi router market has other key players. These include consumer electronics supply chain firms, including OEMs, ODMs, component manufacturers and branded consumer electronics firms. We believe that each of these categories of players can help to integrate our technology into a commercially available Wi-Fi router.

 

An ODM designs products either collaboratively with their customers or on their own and manufactures them for sale to companies under the end customer’s brand. Additionally, an ODM may engage multiple companies with similar designs that are then marketed under several different end customers’ brands. An OEM manufactures products for sale under another firm’s brand. We believe that engaging with both types of organizations will be necessary to speed our entry into the market and extend our market reach.

 

Component suppliers are also a key part of our go-to-market strategy, as most ODMs and OEMs do not design their own components. We expect to be actively engaged with component companies that supply, antennas, mixed signal, power and RF components to the major ODM and OEMs in the Wi-Fi router market.

 

As part of our go-to-market strategy, we will be marketing to major infrastructure developers, both for the consumer and commercial applications. The consumer market will primarily include engagements with the major residential home builders. For commercial installations we will be engaging with the wireless network operators and private Wi-Fi system operators. We will also be engaging with concentrated consumer destinations (for example, coffee shop and restaurant chains, airport lounges and airports). We will be educating these concentrated consumer destinations on the benefits of our solutions to drive them to specify and demand our solution from their vendors and suppliers.

 

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Receiver Target Markets

 

Cases for Mobile Devices (Phones and Tablets)

 

We believe that aftermarket cases for mobile devices (which include both phones and tablets) are an attractive initial market for our receiver. This is because this market is large and growing. According to ABI Research, the smartphone accessory market (which includes headphones and chargers as well as cases) was $20 billion in 2012. According to the NPD Group, the mobile phone case industry was approximately 36% of the overall mobile phone market for the first half of 2012. If both of these estimates are correct, the smartphone case market was approximately $7 billion in 2012. According to the NPD Group, this market grew 69% year-over-year from the first half of 2011 to the first half of 2012.

 

In addition, this is a fiercely competitive market, with dozens of players looking for a way to differentiate themselves. There are hundreds of different types of mobile phone cases that range in price from under $10 to over $100, and are made of materials from simple polymers to full-grain leather. Some of these cases differentiate themselves by being thin and light, while others differentiate themselves by providing advanced features such as external battery packs, waterproofing or credit card slots. We believe that this competition makes it more likely that we will be able to find a partner that chooses to differentiate itself by licensing our technology. We have begun to engage some of the leading firms in this space in our initial conversations.

 

We further believe that this is an attractive market because the design cycles for these cases tend to be much shorter than those for the devices themselves. Though our longer-term goal remains integrating our receiver technology into the mobile devices themselves (through the branded consumer electronics firms that market them or the OEM or ODM that manufactures them), we believe that initially putting our receivers into cases will provide industry validation and “pull” our technology into the original manufacture of mobile devices.

 

Mobile Devices (Phones and Tablets)

 

Our medium-term goal is to be “pulled” into original manufacture of mobile devices because we believe our technology scales well into that market; while there are potentially dozens of licensees for phone cases, as discussed above, there are relatively fewer and larger manufacturers of mobile devices. In January 2013, Gartner estimated that the size of the smart phone industry was approximately $117.5 billion in 2012, and would grow to approximately $175.4 billion in 2016 (which would represent a compound annual growth rate of approximately 10.5%). Gartner also estimated that the size of the combined media tablet and premium tablet industry was approximately $32 billion in 2012, and would grow to approximately $62.8 billion in 2016 (which would represent a compound annual growth rate of 19.5%).

 

The major issue we confront in having our receiver integrated into mobile devices is that building relationships with branded consumer electronics firms and their large OEM/ODM partners is complicated, because these firms tend to be risk-averse.

 

Therefore, we believe that our best strategy in approaching these firms is to also build relationships across the value chain of these devices. We believe that triangulating mobile device branded consumer electronics firms and their OEM/ODM partners across their value chains is the best route to providing them with comfort that our solution will work for their devices.

 

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We have identified the key players in this value chain. We categorize these players as upstream providers (which produce components for OEMs and ODMs, such as baseband integrated circuits, application processors, Bluetooth modules, memory and batteries), midstream providers (which assemble devices for branded firms and test components for OEMs and ODMs) and downstream providers (which provide end-use services for consumers of devices sold by branded consumer electronics firms and include telecom operators and channel distributors). We have begun to engage key players in each of these segments.

 

Other Markets

 

We believe there are many more potential markets for our technology in the longer term. We are pursuing a licensing strategy so that we can bring our technology to multiple markets simultaneously.

 

Some potential long-term markets for our technology include:

 

· Light switches

 

· Audio speakers

 

· Sensors (such as thermostats or smoke detectors)

 

· Remote controls

 

· Toys

 

· Rechargeable batteries

 

· Automotive accessories

 

· Personal care products (such as toothbrushes or shavers)

 

· Retail inventory management (such as RFID tags)

 

· Hand-held industrial devices (such as scanners or keypads)

 

· Hand-held healthcare devices (such as tablets or electronic thermometers)

 

This list is meant for illustrative purposes only; we cannot guarantee that we will address any of these markets, and we may decide to address a market that is not on the above list. We intend to continuously evaluate our target markets and choose new markets based on factors including (but not limited to) time-to-market, market size and growth, and the strength of our value proposition for a specific application.

 

Our Intellectual Property

 

As a company primarily focused on licensing, we expect that our most valuable asset will be our intellectual property. This includes U.S. and foreign patents, patent applications and know-how. We are pursuing an aggressive intellectual property strategy and developing new patents.  

 

As of January 17, 2014, we have 38 pending U.S. patents and provisional patent applications. Thus far we have identified more than 80 specific inventions we believe to be novel and patentable, and we intend to continue filing these inventions for patent protection.

 

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Government Regulation

 

Our remote charging technology involves the transmission of power using RF energy waves, which are subject to regulation by the Federal Communications Commission (“FCC”), and may be subject to regulation by other federal, state and local agencies. To our knowledge, the transmission of power in this manner by a consumer product at the ranges we are proposing is novel. We believe our technology is safe, and we intend to demonstrate that to the FCC as soon as practicable.

 

We believe our technology is safe because our proprietary waveform operates in the 2.4/5.8 GHz radio frequency range, which is the same range as Wi-Fi routers and several other wireless consumer electronics. For those types of products, the FCC grants what is known as Part 15 approval if, among other things, the specific absorption rate (“SAR”) is below certain thresholds. Based on our preliminary calculations, the SAR at our receiver should be well below that of a typical cellular signal, so we believe we will be able to gain FCC Part 15 approval for each of our reference designs currently in development. In addition, because our technology involves the transmission of power greater than the power threshold limits of Part 15, we also expect to need to obtain FCC Part 18 approval. To our knowledge, the transmission of power in this manner by a consumer product at the ranges we are proposing is novel and there can be no assurance that we will be able to obtain this approval or that other governmental approvals will not be required.

 

We also plan to combat any perception of safety risk by developing the management software of our transmitter to be configurable by users to selectively transmit power to devices based on the device’s proximity to the human body, such as only transmitting during certain times or transmitting only when the device is not moving. We do not believe users will need to use that configuration to ensure safety, and we expect that we will get FCC approval that will confirm our belief. However, we believe that offering that configuration option will assuage users who need more assurance on safety.

 

Employees

 

As of January 17, 2014, we had 8 full-time employees.  None of these employees are covered by a collective bargaining agreement, and we believe our relationship with our employees is good.  We also employ consultants, including technical advisors, on an as-needed basis to supplement existing staff.  Consultants and technical advisors provide us with expertise in electrical engineering, software development, and other specialized areas of engineering and science.

 

Industry Certifications

 

It is our expectation that our products and/or the reference designs will undergo UL/CE as well as FCC Part 15, FCC Part 18, SAR, California Energy Star and Apple compliance testing. While this list of required certifications may change or expand from time to time, it is our expectation, based on similar products and designs developed by our team, that completing these certification tests will be conducted as part of the Company’s standard course of business and planning process.

 

Properties

 

Our principal office is located at 303 Ray Street, Pleasanton, CA 94566.  We currently lease approximately 3500 square feet of office and laboratory space under a lease that is due to expire in June 2014. The rent is approximately $6,000 per month.

 

Legal Proceedings

 

We are not a party to any pending legal proceedings.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section of this prospectus titled “Summary Selected Financial Information” and our financial statements and related notes appearing elsewhere in this prospectus.  In addition to historical information, this discussion and analysis here and throughout this prospectus contains forward-looking statements that involve risks, uncertainties and assumptions.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We were incorporated in Delaware on October 30, 2012 under the name DvineWave Inc. and in January 2014 we changed our name to Energous Corporation. We were formed to develop and commercialize our technology, which enables wireless charging of electronic devices at a distance. We are located in Pleasanton, CA. To date, our operations have been funded through the sale of our common stock and convertible debt. We have not generated any revenue to date.

 

We intend to license our technology to various consumer electronics companies, including component manufacturers, OEMs, ODMs and branded consumer electronics firms. We believe strategic relationships with key consumer electronics supply chain licensees will enable us to reap the benefits of our technology much faster than by manufacturing, distributing or installing products ourselves.

 

In our operating history, we have developed a beta system consisting of a base station transmitter, a smart phone receiver case, receiver test boards and management software. In addition, we have designed and submitted for manufacturing an application specific integrated circuit (“ASIC”) to optimize our transmitter technology. Furthermore, we have designed, but not yet submitted for manufacturing, an ASIC to optimize our receiver technology. In connection with the receiver technology, we have designed multiple smart phone charging cases, which are still under development. Complementing our hardware designs, we have developed a software application that we believe allows for management, control, statistics and prioritization of the charging for the remote devices via a smartphone, tablet or PC.

 

We have pursued an aggressive intellectual property strategy and are developing new patents. As of January 17, 2013, we have 38 pending U.S. patents and provisional patent applications. Thus far we have identified more than 80 specific inventions we believe to be novel and patentable, and we intend to continue filing these inventions for patent protection.

 

We have recruited and hired a seasoned management team with public company and relevant industry experience to develop and execute our operating plan. In addition, we have hired and have identified additional engineering resources, which we expect will build up the engineering capability of our internal team. Finally, we have started the selection process for the independent members of our board of directors, which we intend to rely upon for valuable assistance in terms of industry credibility, corporate governance, and strategic direction.

 

Our financial statements contemplate the continuation of our business as a going concern. We are subject to the risks and uncertainties associated with a new business, including lack of operating capital, lack of personnel and lack of demand for our products. We are a development stage company and have not yet generated any revenue, have no established source of capital, and we have incurred significant debt and significant losses from operations since inception. These matters raise substantial doubt about our ability to continue as a going concern.

 

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Plan of Operation

 

Our strategy is to continue to focus on the development of our remote charging technology with our current goal being to license this technology to consumer electronics supply chain firms or manufacturers or developers of toys and other devices that would benefit from remote charging. We expect that our remote charging technology will be made commercially available to potential licensees during the fourth quarter of 2014; however, we believe that potential licensees of our remote charging technology will take at least one to two years to incorporate the Company’s technology into commercial products available for sale. We expect to use the net proceeds received from this offering to continue our remote charging technology development, develop product reference designs, complete certification testing, protect our intellectual property, pursue licensing partners and for working capital and other general corporate purposes. The net proceeds from this offering are anticipated to be approximately $17.25 million, which we expect to be sufficient to fund our activities through August 31, 2015. We intend to use the net proceeds from our sale of common stock in this offering as follows: approximately $10.3 million will be used for product research, development, reference design development and product certifications, approximately $0.7 million will be used for the protection of our intellectual property, approximately $2.8 million will be used for sales and marketing activities, approximately $0.8 million will be used for the purchase of fixed assets which consists primarily of computer equipment and software, and the balance of the funds will be used for general and administrative expenses and other general corporate purposes. Our anticipated costs include employee salaries and benefits, compensation paid to consultants and independent contractors, capital costs for research and other equipment, cost for ASIC manufacturing and testing, cost associated with governmental certification testing, costs associated with development activities including travel and administration, legal expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage, publicly-traded technology company. We anticipate increasing the number of employees by up to approximately 39 employees; however, this is highly dependent on the progress of our development efforts. We anticipate adding employees in the areas of research and development, sales and marketing, operations and general and administrative functions required 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 annual capital expenditures to be approximately $0.5 million and $0.3 million for 2014 and 2015, respectively.

 

The amounts that 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 development and licensing efforts, unexpected difficulties arising in the process of protecting our intellectual property, market conditions, and changes in or revisions to our marketing strategies. In addition, we may use a portion of any net proceeds to acquire complementary products, technologies or businesses; however, we do not have plans for any acquisitions at this time. We will have significant discretion in the use of any net proceeds. Investors will be relying on the judgment of our management regarding the application of the proceeds of any sale of our common stock.

 

CRITICAL ACCOUNTING POLICIES

 

The following discussion and analysis of 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.  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 their 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.  Please see Note 3 to our financial statements for a more complete description of our significant accounting policies.

 

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Basis of Presentation .  Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern.  However, we are subject to the risks and uncertainties associated with a new business, we have limited sources of revenue, and we have incurred significant losses from operations since inception.  Our operations are dependent upon it raising additional capital.  These matters raise substantial doubt about our ability to continue as a going concern.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.

 

Research and Development.   Research and development expenses are charged to operations as incurred. For internally developed patents, all costs incurred to the point when a patent application is to be filed are expended as incurred as research and development expense. Patent application costs, generally legal costs, are expensed as research and development costs until such time as the future economic benefits of such patents become more certain. 

 

Income Taxes . The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included or excluded in the financial statements or tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse.

 

For the period October 30, 2012 (inception) through December 31, 2012, the Company had approximately $17,000 of research and development expenses capitalized for federal income tax purposes, with amortization commencing upon the Company receiving an economic benefit from the related research and $4,000 of organization costs capitalized, to be amortized for federal income tax purposes over 15 years. Accordingly, as of December 31, 2012, the Company had no gross federal and state net operating loss carryovers (“NOLs”). For the period October 30, 2012 (inception) through December 31, 2012, the deferred tax assets in connection with the research and development costs and the organizational costs were fully reserved, and the Company’s effective tax rate was 0%.

 

In its interim financial statements the Company follows the guidance in ASC 270 “Interim Reporting” and utilized the expected annual effective tax rate in determining its income tax provision for the interim period.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the future generation of taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and taxing strategies in making this assessment. Based on this assessment, management has established a full valuation allowance against all of the net deferred tax assets for each period, since it is more likely than not that all of the deferred tax assets will not be realized.

 

Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. As of December 31, 2012, no liability for unrecognized tax benefits was required to be reported. The guidance also discusses the classification of related interest and penalties on income taxes. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the period ended December 31, 2012.

 

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Convertible Instruments . The Company accounts for hybrid contracts that feature conversion options in accordance with ASC 815 “Derivatives and Hedging Activities,” (“ASC 815”) and ASC 480 “Distinguishing Liabilities from Equity” (“ASC 480”), which require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (i) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The Company accounts for convertible instruments that have been determined to be free standing derivative financial instruments (when the Company has determined that the embedded conversion options should be bifurcated from their host instruments) in accordance with ASC 815.  Under ASC 815, a portion of the proceeds received upon the issuance of the hybrid contract are allocated to the fair value of the derivative. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.

 

Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.

 

The Company accounts for convertible debt instruments, when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, in accordance with ASC 470-20 “Debt with Conversion and Other Options”. The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized under the effective interest method over the term of the related debt.

 

Common Stock Purchase Warrants and Other Derivative Financial Instruments. The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock as defined in ASC 815-40 “Contracts in Entity's Own Equity” (“ASC 815-40”). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).  The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.

 

RESULTS OF OPERATIONS

 

Revenues .  To date we have not generated any revenues.

 

Operating Expenses and Loss from Operations .    Operating expenses   are made up of derivative issuance, research, development and general and administrative and marketing expenses. Operating expenses and loss from operations for the period October 30, 2012 (inception) through December 31, 2012 were $21,287. Operating expenses for the nine months ended September 30, 2013 were $2,747,929. Operating expenses for the period October 30, 2012 (inception) through September 30, 2013 were $2,769,216. General and administrative expenses include costs for general and corporate functions, including facility fees, travel, telecommunications, insurance, professional fees, consulting fees and other overhead.

 

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Change in Fair Value of Derivative Liabilities. Change in fair value of derivative liabilities for the period ended October 30, 2012 (inception) through December 31, 2012 was $0. Change in fair value of derivative liabilities for the nine months ended September 30, 2013 and for the period October 30, 2012 (inception) through September 30, 2013 was $111,500.

 

Interest Expense.    Interest expense for the period October 30, 2012 (inception) through December 31, 2012 was $0. Interest expense for the nine months ended September 30, 2013 and for the period October 30, 2012 (inception) through September 30, 2013 was $383,380, which included $262,506 for the amortization of the discount on the Convertible Notes.

 

Net Loss .    Net loss for the period October 30, 2012 (inception) through December 31, 2012 was $21,287. Net loss for the nine months ended September 30, 2013 was $3,242,809. Net loss for the period October 30, 2012 through September 30, 2013 was $3,264,096.

 

Liquidity and Capital Resources

 

As of December 31, 2012 and September 30, 2013, the Company’s cash on hand was $994 and $3,854,489, respectively. The Company has not generated revenues since its inception and has incurred net losses of $21,287 for the period October 30, 2012 (inception) through December 31, 2012, $3,242,809 for the nine months ended September 30, 2013 and $3,264,096 for the period October 30, 2012 (inception) through September 30, 2013. During the nine months ended September 30, 2013, the Company has met its liquidity requirements principally through the private placement of convertible notes.

As of December 31, 2012, the Company had a working capital deficiency and a stockholders’ deficit of $11,287. As of September 30, 2013, the Company had a working capital deficiency and a stockholders’ deficit of $3,073,761 and $3,053,415, respectively.

 

During the period October 30, 2012 (inception) through December 31, 2012, cash flows used in operating activities were $9,006, consisting of a net loss of $21,287 less $1,875 and $10,406 representing increases in accounts payable and accrued expenses, respectively. During the nine months ended September 30, 2013, cash flows used in operating activities were $1,825,969, consisting of a net loss of $3,242,809 less non-cash expenses aggregating $1,098,886 (representing principally amortization of debt discount of $262,506, warrant expense of $724,000 and change in fair value of derivative liabilities of $111,500), offset by net changes in operating assets and liabilities of $317,954. During the period October 30, 2012 (inception) through September 30, 2013, cash flows used in operating activities were $1,834,975, consisting of a net loss of $3,264,096 less non-cash expenses aggregating $1,098,886 (representing principally amortization of debt discount of $262,506, warrant expense of $724,000 and change in fair market value of derivative liabilities of $111,500), offset by net changes in operating assets and liabilities of $330,235.

 

During the period October 30, 2012 (inception) through December 31, 2012, during the nine months ended September 30, 2013 and during the period October 30, 2012 (inception) through September 30, 2013, cash flows from investing activities were $0, $21,226 and $21,226, respectively. The increase for the nine months ended September 30, 2013 and during the period October 30, 2012 (inception) through September 30, 2013, consisted of $16,501 and $4,725 for the costs incurred for the purchase of property and equipment and the costs to develop a trademark, respectively.

 

During the period October 30, 2012 (inception) through December 31, 2012, cash flows from financing activities were $10,000 and consisted of proceeds from the sale of the Company’s common stock. For the nine months ended September 30, 2013, cash flows from financing activities were $5,700,690 and consisted of $5,500,009 in proceeds from the issuance of Convertible Notes and $200,681 in proceeds from the sale of the Company’s common stock. During the period October 30, 2012 (inception) through September 30, 2013, cash flows from financing activities were $5,710,690 and consisted of $5,500,009 in proceeds from the issuance of Convertible Notes and $210,681 in proceeds from the sale of the Company’s common stock.

 

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Off Balance Sheet Transactions

 

We do not have any off-balance sheet transactions.

 

Trends, Events and Uncertainties

 

Research and development of new technologies is, by its nature, unpredictable.  Although we will undertake development efforts with commercially reasonable diligence, there can be no assurance that the net proceeds from this offering will be sufficient to enable us to develop our technology to the extent needed to create future revenues to sustain operations as contemplated herein.  Accordingly, we expect that we may require additional financing which could include follow-on equity offerings, debt financing, co-development agreements or other alternatives.

 

We cannot assure you that our technology will be adopted, that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable.  Furthermore, since we have no committed source of financing, we cannot assure you that we will be able to raise money as and when we need it to continue our operations.  If we cannot raise funds as and when we need them, we may be required to severely curtail, or even to cease, our operations.

 

Other than as discussed above and elsewhere in this prospectus, we are not aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition.

 

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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The following table sets forth the names and ages of all of our directors and executive officers.  Our officers are appointed by, and serve at the pleasure of, the board of directors. 

 

Name   Age   Position
Stephen R. Rizzone   64   President, Chief Executive Officer and Chairman
Michael Leabman   40   Chief Technology Officer and Director
Thomas Iwanski   55   Chief Financial Officer
George B. Holmes   50   Vice President of Sales and Marketing
Gregory S. Brewer   50   Director

 

Biographical information with respect to our executive officers and directors is provided below.  There are no family relationships between any of our executive officers or directors.

 

Stephen R. Rizzone – President, Chief Executive Officer and Chairman

 

Mr. Stephen R. Rizzone joined the Company as President, Chief Executive Officer and chairman of the board of directors in October 2013. Mr. Rizzone has more than 35 years of executive management, marketing, sales and entrepreneurial experience in the data communications hardware, networking hardware and software, silicon and optical components markets. Prior to joining the Company, Mr. Rizzone served as Chief Executive Officer and chairman of the board of directors of Active Storage, Inc. from June 2011 until December 2012 and as the Chief Executive Officer and chairman of the board of directors of Communicado, Inc. from April 2006 to September 2009. Mr. Rizzone previously served as member of the board of directors of Katzkin Leather from June 2011 to November 2013 and the Los Angeles Regional Technology Alliance (LARTA) from February 2009 to November 2011. Mr. Rizzone holds a BA in Public Administration from California State University at Fullerton.  Mr. Rizzone’s extensive industry, executive and board experience position him well to serve as our Chief Executive Officer and a member of our board of directors.

 

Michael Leabman – Chief Technology Officer, Director and Founder

 

Mr. Leabman founded the Company in October 2012 and became the Company’s Chief Technology Officer in October 2013. Mr. Leabman has been a member of the Company’s board of directors since its founding and served as the Company’s President, Chief Financial Officer, Treasurer and Secretary until October 2013. From September 2010 to September 2013, Mr. Leabman served as President of TruePath Wireless, a service provider and equipment provider in the broadband communications industry. Mr. Leabman has served on the board of directors of TruePath Wireless since 2010 and continues to serve on the board today. From 2008 to 2010, Mr. Leabman served as Chief Technology Officer for DataRunway Inc., a wireless communication company providing broadband internet to airlines. Mr. Leabman received both his Bachelor of Science degree and Master of Engineering degree in electrical engineering from the Massachusetts Institute of Technology. Mr. Leabman’s extensive knowledge the Company, its technology and the consumer and commercial electronics industry position him well for service on our board of directors.

 

Thomas Iwanski – Chief Financial Officer

 

Mr. Iwanski joined the Company in October 2013 as a financial consultant and in December 2013 was appointed Chief Financial Officer. Mr. Iwanski has more than 23 years (18 years of which were with publicly traded companies) of executive management and financial experience in the data communications hardware, networking and storage hardware and software, silicon and optical components markets in addition to almost 10 years of prior auditing experience at KPMG LLP. Mr. Iwanski was self-employed as a financial consultant from May 2007 until he joined the Company. In addition, Mr. Iwanski has served as an independent director at Pacific Health Care Organization, Inc. a publicly traded healthcare management and claims administration company, since 2004. Mr. Iwanski filed a personal bankruptcy petition in June 2013 in connection with alleged guarantees of debt of Live-Vu Communications, Inc., a private company in which Mr. Iwanski made a significant personal investment and for which he served as a key consultant, officer and director. Mr. Iwanski holds a bachelor of business administration with a major in accounting from the University of Wisconsin-Madison and is a Certified Public Accountant.

 

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George Holmes – Vice President of Sales and Marketing

 

Mr. Holmes joined the Company as Vice President of Sales and Marketing in October 2013. Prior to joining the Company, Mr. Holmes served as Vice President of Sales at SolarBridge Technologies from February 2011 until June 2013 where he was responsible for all sales, business development, applications and sales operations activities for the company. Mr. Holmes served as Senior Vice President Sales and Marketing from January 2008 until December 2010 for PureEnergy Solutions, a developer and manufacturer of wireless power products. Since 2007, Mr. Holmes has served as been a partner at aAgave Solutions, LLC, a provider of sales at marketing consulting services. He has served in strategic executive management and sales roles for companies including PowerCast, X1 Technologies, Agere Systems (formerly Lucent MicroElectronics), Ortel Corp. (acquired by Lucent), Level One Communications and Symmetricom. Mr. Holmes holds a B.A. in business from the University of Puget Sound, a diploma in international business from Nyenrode University and has completed the AEA Executive Institute, Management of Technology Companies program at Stanford University.

 

Gregory S. Brewer – Director

 

Mr. Brewer has been a member of the board of directors of the Company since October 2012. Mr. Brewer is the Chief Executive Officer and Chairman of Prosoft Engineering, Inc., a software company focused on data recovery software and other utilities which help protect and manage personal data. Mr. Brewer founded Prosoft Engineering in 1985 and beyond executive and board leadership his responsibilities have included software/firmware engineering, project and product management, partnership development, strategic alliance and mergers and acquisitions. Mr. Brewer’s extensive leadership and operational experience in the computing industry, including his extensive knowledge of the development and sale of computing peripherals, position him well for service on our board of directors.

 

Director Independence

 

Our board of directors has determined that [●] , [●] and [●] are “independent directors” as such term is defined by Nasdaq Marketplace Rule 5605(a)(2).  We have established an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee.  Each of [●],[●] and [●] serve as members of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. Our board of directors has determined that [●] is an audit committee financial expert, as defined under the applicable rules of the SEC, and that all members of the Audit Committee are “independent” within the meaning of the applicable Nasdaq listing standards and the independence standards of rule 10A-3 of the Securities Exchange Act of 1934. Each of the members of the Audit Committee meets the requirements for financial literacy under the applicable rules and regulations of the SEC and The Nasdaq Stock Market.

 

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EXECUTIVE COMPENSATION

 

Our compensation philosophy is to offer our executive officers compensation and benefits that are competitive and meet our goals of attracting, retaining and motivating highly skilled management, which is necessary to achieve our financial and strategic objectives and create long-term value for our shareholders. We believe the levels of compensation we provide should be competitive, reasonable and appropriate for our business needs and circumstances. The principal elements of our executive compensation program have to date included base salary, and long-term equity compensation in the form of stock options. We believe successful long term Company performance is more critical to enhancing shareholder value than short term results. For this reason and to conserve cash and better align the interests of management and our shareholders, we emphasize long-term performance-based equity compensation over base annual salaries.

 

The following table sets forth information concerning the compensation earned by the individual that served as our Principal Executive Officer during 2013 and our two most highly compensated executive officers other than the individual who served as our Principal Executive Officer during 2013 (collectively, the “named executive officers”):

 

2013 Summary Compensation Table

 

 

Name and Principal Position   Year   Salary ($)     Bonus ($)     Option
Awards 
($)(1)
    All Other
Compensation 
($)
    Total ($)  
Stephen R. Rizzone   2013     37,500       -       258,373       -       295,873  
Chief Executive Officer and   2012     -       -       -       -       -  
President                                            
                                             
Michael Leabman   2013     86,500       100,000 (2)     -       -       186,500  
Chief Technology Officer   2012     -       -       -       -       -  
                                             
Thomas Iwanski   2013     37,500       -       -       -       37,500  
Chief Financial Officer   2012     -       -       -       -       -  

________

 

(1) The amounts shown in this column indicate the grant date fair value of option awards granted in the subject year computed in accordance with FASB ASC Topic 718. For additional information regarding the assumptions made in calculating these amounts, see notes [__] to our audited financial statements included herein.

 

(2) Mr. Leabman’s bonus must be repaid in full if his employment with the Company is terminated for any reason prior to September 27, 2014.

 

In 2013, Mr. Rizzone, was granted an option award covering 275,689 shares of common stock on under our 2013 Equity Incentive Plan that vests over four years in 48 equal monthly installments beginning October 1, 2013.

 

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Outstanding Equity Awards at 2013 Fiscal Year-End

 

The following table provides information regarding equity awards held by the named executive officers as of December 31, 2013.

 

Name   Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
    Option
Exercise
Price ($)
    Option
Expiration
Date
Stephen R. Rizzone     17,230       258,459 (1)   $ 1.68     12/12/23

________

 

(1) Reflects the unvested portion of an option grant which vests in equal monthly installments through October 2017 .

 

Employment Agreements and ‘Change of Control Arrangements

 

Employment Agreements

 

The following is a summary of the employment arrangements with our executive officers as currently in effect.

 

Stephen Rizzone . We entered into an employment agreement with Stephen Rizzone, our President, Chief Executive Officer and chairman of our board of directors, effective October 1, 2013. The employment agreement has no specific term and constitutes at-will employment. Mr. Rizzone’s current annual base salary is $150,000, although his annual base salary will increase to $300,000 immediately following our initial public offering, and he is eligible for up to five annual cash bonuses of up to $30,000 each (one each with respect to our fiscal quarters and one with respect to our fiscal year) based upon achievement of performance-based objectives established by our board of directors. Pursuant to Mr. Rizzone’s employment agreement, he was granted a ten year option to purchase 275,689 shares of common stock on December 12, 2013 under our 2013 Equity Incentive Plan that vests over four years in 48 equal monthly installments beginning October 1, 2013, the start of the requisite service period. Mr. Rizzone’s employment agreement provides that upon the consummation of our initial public offering he will receive an additional option award so that together with Mr. Rizzone’s December 2013 option award the two option awards combined represent six percent (6%) of the Company’s outstanding shares on a fully-diluted basis. The second option award, if issued, will vest over the same vesting schedule as Mr. Rizzone’s December, 2013 option award.

 

If Mr. Rizzone’s employment is terminated due to his death or disability, by the Company without cause or if Mr. Rizzone resigns for good reason, Mr. Rizzone will be entitled to receive (i) one year of his base salary at the rate then in effect, (ii) five performance bonuses (each equal to the average of the performance bonus paid with respect to the two fiscal quarters, or the fiscal quarter-end and fiscal year-end, as applicable, immediately preceding Mr. Rizzone’s termination or resignation) (iii) reimbursement of Mr. Rizzone’s cost of COBRA coverage for one year, and (iv) twenty-five percent (25%) of the options to purchase shares of common stock subject to Mr. Rizzone’s option awards described above will vest immediately and become exercisable, and, along with any previously vested and unexercised options, may be exercised by Mr. Rizzone within one year following his termination or resignation. However, if a Liquidation Event (as defined below) shall occur within one year of Mr. Rizzone’s termination without cause or his resignation for good reason, all of Mr. Rizzone’s option awards described above will vest immediately and become exercisable.

 

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Mr. Rizzone’s employment agreement provides that if the Company experiences a Liquidation Event (as defined below), Mr. Rizzone’s employment with the Company will be terminated and the Company will enter into a consulting agreement with Mr. Rizzone that entitles him to the following during its term: (i) continued payment of Mr. Rizzone’s base salary at the rate then in effect, (ii) continued payment of Mr. Rizzone’s performance bonuses described above, and (iii) continued payment of benefits that are substantially similar to those of the Company’s other senior executive officers, and (iv) continuation of the vesting period of the option awards described above. The term of the consulting agreement between the Company and Mr. Rizzone shall expire on the later of two years from the date of the Liquidation event or October 1, 2017. For purposes of Mr. Rizzone’s employment agreement, a Liquidation Event means a merger, acquisition, consolidation or other transaction (other than an equity financing) following which our stockholders prior to such transaction hold less than fifty percent (50%) of our outstanding voting securities of the acquiring or surviving entity, or a sale, license or transfer of all or substantially all of our assets.

 

If Mr. Rizzone resigns without good reason, he will be entitled to his base salary at the rate then in effect up to and through the effective date of his resignation, along with any unreimbursed reasonable, out-of-pocket business expenses incurred by Mr. Rizzone in the performance of his duties.

 

Mr. Rizzone is also eligible to receive benefits that are substantially similar to those of the Company’s other senior executive officers. Mr. Rizzone is subject to certain restrictive covenants, including non-solicitation of employees, consultants and customers and non-competition each for a period one year following termination of his employment with the Company.

 

Michael Leabman . We entered into an employment agreement with Michael Leabman, our Chief Technology Officer, effective October 1, 2013. The employment agreement has no specific term and constitutes at-will employment. Mr. Leabman’s current annual base salary is $250,000, and he is eligible for an annual performance based bonus award of up to twenty percent (20%) of his base salary based upon achievement of performance-based objectives established by our Chief Executive Officer and board of directors. Pursuant to Mr. Leabman’s employment agreement, he is entitled to a ten year option to purchase 57,644 shares of common stock under our 2013 Equity Incentive Plan that vests over four years in 48 equal monthly installments beginning October 1, 2013, the start of the requisite service period. Mr. Leabman’s employment agreement provides that upon the consummation of our initial public offering, if Mr. Leabman’s option award plus any Company securities he currently owns represent less than three percent (3%) of the Company’s outstanding shares on a fully-diluted basis, he shall be entitled to a second option award which will entitle him to purchase that number of shares of our common stock such that the two option awards combined plus any Company securities he currently owns represent three percent (3%) of the Company’s outstanding shares on a fully-diluted basis. The second option award, if issued, will vest over the same vesting schedule as Mr. Leabman’s initial option award.

 

If Mr. Leabman’s employment is terminated due to his death or disability, by the Company without cause or if Mr. Leabman resigns for good reason, Mr. Leabman will be entitled to receive (i) one year of his base salary at the rate then in effect, (ii) a performance bonuses each equal to the total performance bonuses paid to Mr. Leabman in the calendar year immediately preceding Mr. Leabman’s termination or resignation (iii) reimbursement of Mr. Leabman’s cost of COBRA coverage for one year, and (iv) twenty-five percent (25%) of the options to purchase shares of common stock subject to Mr. Leabman’s option awards described above will vest immediately and become exercisable, and, along with any previously vested and unexercised options, may be exercised by Mr. Leabman within one year following his termination or resignation. However, if a Liquidation Event (as defined below) shall occur within one year of Mr. Leabman’s termination without cause or his resignation for good reason, all of Mr. Leabman’s options to purchase shares of common stock pursuant to the option awards described above will vest immediately and become exercisable.

 

In addition to those benefits described above, if Mr. Leabman’s employment is terminated by the Company without cause or he resigns for Good Reason within 18 months of a Liquidation Event (as defined below), all of Mr. Leabman’s options to purchase shares of common stock pursuant to the option awards described above will vest immediately and become exercisable. For purposes of Mr. Leabman’s employment agreement, a Liquidation Event has the same meaning as in Mr. Rizzone’s employment agreement.

 

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If Mr. Leabman resigns without good reason, he will be entitled to his base salary at the rate then in effect up to and through the effective date of his resignation, along with any unreimbursed reasonable, out-of-pocket business expenses incurred by Mr. Leabman in the performance of his duties.

 

Mr. Leabman is also eligible to receive benefits that are substantially similar to those of the Company’s other senior executive officers. Mr. Leabman is subject to certain restrictive covenants, including non-solicitation of employees, consultants and customers and non-competition each for a period one year following termination of his employment with the Company.

 

Thomas Iwanski and George Holmes. Mr. Iwanski and Mr. Holmes are currently providing services to the Company pursuant to consulting arrangements under which they are being paid $12,500 and $10,000 per month, respectively.

 

Director Compensation

 

Members of our board of directors did not receive compensation for their service as directors for the year ended December 31, 2013.  We currently do not have a policy governing the compensation of our non-employee directors. However, we expect to establish a non-employee director compensation policy that includes both equity and cash components.

 

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DESCRIPTION OF CAPITAL STOCK

 

The following is a brief description of our capital stock. This summary does not purport to be complete in all respects. This description is subject to and qualified entirely by the terms of our Second Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”), and our bylaws, copies of which have been filed with the SEC and are also available upon request from us.

 

Authorized Capitalization

 

We have 40,000,000 shares of capital stock authorized under our Certificate of Incorporation, consisting of 40,000,000 shares of common stock with a par value of $0.00001 per share. As of January 17, 2014, we had 2,708,214 shares of common stock outstanding.  Our authorized but unissued shares of common stock are available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded.

 

Common Stock

 

Holders of our common stock are entitled to such dividends as may be declared by our board of directors out of funds legally available for such purpose. The shares of common stock are neither redeemable nor convertible. Holders of common stock have no preemptive or subscription rights to purchase any of our securities.

 

Each holder of our common stock is entitled to one vote for each such share outstanding in the holder’s name.  No holder of common stock is entitled to cumulate votes in voting for directors.

 

In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive pro rata our assets, which are legally available for distribution, after payments of all debts and other liabilities.  All of the outstanding shares of our common stock are fully paid and non-assessable.  The shares of common stock offered by this prospectus will also be fully paid and non-assessable.

 

There is no public market for our common stock.  We have applied for listing of our common stock on the Nasdaq Capital Market. If our application to the Nasdaq Capital Market is not approved or we otherwise determine that we will not be able to secure the listing of the common stock on the Nasdaq Capital Market, we will not complete the offering.

 

Stock Options and Warrants

 

As of January 17, 2014, we had reserved the following shares of common stock for issuance pursuant to stock option and warrant agreements:

 

· 813,534 shares of our common stock for issuance under stock option agreements at a weighted average exercise price of $2.22 per share;

 

· 461,561 shares of common stock for issuance under outstanding warrants at a weighted average exercise price of $1.22 per share;

 

· 228,633 shares of our common stock for future issuance under our 2013 Equity Incentive Plan.

 

Holders of our outstanding warrants are entitled to one-time demand registration rights and certain piggyback registration rights with respect to the shares of common stock issuable upon exercise thereof.

 

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Convertible Promissory Notes

 

We have issued $5.5 million in senior secured convertible promissory notes that bear simple interest at 6% and must be paid or converted into shares of our common stock on or before August 16, 2014. We refer to these promissory notes as the “Convertible Notes” in this prospectus. Upon consummation of a public offering of our common stock yielding gross proceeds of at least $10 million in this offering, all of the outstanding principal and interest accrued on the Convertible Notes will be converted in full into shares of our common stock. Assuming that this offering was completed on September 30, 2013, based on interest accrued through such date the Convertible Notes would have been converted into 2,249,910 shares of our common stock. Because interest that accrues after September 30, 2013 will also be converted, the actual number of shares to be issued upon conversion of the Convertible Notes will exceed this number of shares of common stock. Holders of the Convertible Notes are entitled to one-time demand registration rights and certain piggyback registration rights with respect to the shares of common stock issuable upon conversion thereof.

 

Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Charter Documents

 

The following is a summary of certain provisions of Delaware law, our Certificate of Incorporation and our bylaws. This summary does not purport to be complete and is qualified in its entirety by reference to the corporate law of Delaware and our Certificate of Incorporation and bylaws.

 

Effect of Delaware Anti-Takeover Statute.   We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law.  In general, Section 203 prohibits a Delaware corporation from engaging in any business combination (as defined below) with any interested stockholder (as defined below) for a period of three years following the date that the stockholder became an interested stockholder, unless:

 

· prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

 

· upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares of voting stock outstanding (but not the voting stock owned by the interested stockholder) those shares owned by persons who are directors and officers and by excluding employee stock plans in which employee participants do not have the right to determine whether shares held subject to the plan will be tendered in a tender or exchange offer; or

 

· on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.

 

Section 203 defines “business combination” to include the following:

 

· any merger or consolidation involving the corporation and the interested stockholder;

 

· any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

 

· subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

 

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· subject to limited exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or

 

· the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

 

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation, or who beneficially owns 15% or more of the outstanding voting stock of the corporation at any time within a three-year period immediately prior to the date of determining whether such person is an interested stockholder, and any entity or person affiliated with or controlling or controlled by any of these entities or persons.

 

Effect of California Corporation Long-Arm Statute . We are a Delaware corporation, governed by the Delaware General Corporation Law; however, our headquarters, property and officers are located in California. Section 2115 of the California Corporations Code (the “California Corporation Long-Arm Statute”) purports to impose on corporations like the Company certain portions of California’s laws governing corporations formed under the laws of the State of California. While disputes have arisen regarding the enforceability of the California Corporation Long-Arm Statute, the statute purports to apply the California Corporations Code in the following areas of governance to corporations that meet the test for applicability for the California Corporation Long-Arm Statute: Chapter 1 (general provisions and definitions), to the extent applicable to the following provisions; Section 301 (annual election of directors); Section 303 (removal of directors without cause); Section 304 (removal of directors by court proceedings); Section 305, subdivision (c) (filling of director vacancies where less than a majority in office elected by shareholders); Section 309 (directors’ standard of care); Section 316 (excluding paragraph (3) of subdivision (a) and paragraph (3) of subdivision (f)) (liability of directors for unlawful distributions); Section 317 (indemnification of directors, officers, and others); Sections 500 to 505, inclusive (limitations on corporate distributions in cash or property); Section 506 (liability of shareholder who receives unlawful distribution); Section 600, subdivisions (b) and (c) (requirement for annual shareholders’ meeting and remedy if same not timely held); Section 708, subdivisions (a), (b), and (c) (shareholder’s right to cumulate votes at any election of directors); Section 710 (supermajority vote requirement); Section 1001, subdivision (d) (limitations on sale of assets); Section 1101 (provisions following subdivision (e)) (limitations on mergers); Section 1151 (first sentence only) (limitations on conversions); Section 1152 (requirements of conversions); Chapter 12 (commencing with Section 1200) (reorganizations); Chapter 13 (commencing with Section 1300) (dissenters’ rights); Sections 1500 and 1501 (records and reports); Section 1508 (action by Attorney General); Chapter 16 (commencing with Section 1600) (rights of inspection).

 

We believe it is likely that we meet the test for the application of the California Corporation Long-Arm Statute and do not anticipate a specific time in the future when we would not meet such test. The California Corporation Long-Arm Statute, if applicable, would purport to require a different outcome for certain important activities fundamental to the governance of corporations, and you are encouraged to review the effect of the California Long-Arm Statute to determine whether the differences from the Delaware General Corporation Law are important to you.

 

Our Charter Documents.   Our charter documents include provisions that may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by our stockholders.  Certain of these provisions are summarized in the following paragraphs.

 

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Effects of authorized but unissued common stock.   One of the effects of the existence of authorized but unissued common stock may be to enable our board of directors to make more difficult or to discourage an attempt to obtain control of our Company by means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of management.  If, in the due exercise of its fiduciary obligations, the board of directors were to determine that a takeover proposal was not in our best interest, such shares could be issued by the board of directors without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the proposed acquirer or insurgent stockholder group, by putting a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise.

 

Cumulative Voting.   Our Certificate of Incorporation does not provide for cumulative voting in the election of directors, which would allow holders of less than a majority of the stock to elect some directors.

 

Vacancies.   Our Certificate of Incorporation provides that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.

 

Special Meeting of Stockholders.   A special meeting of stockholders may only be called by the President, the Chief Executive Officer, or the board of directors at any time and for any purpose or purposes as shall be stated in the notice of the meeting, or by request of the holders of record of at least 10% of the outstanding shares of common stock.  This provision could prevent stockholders from calling a special meeting because, unless certain significant stockholders were to join with them, they might not obtain the percentage necessary to request the meeting.  Therefore, stockholders holding less than 10% of the issued and outstanding common stock, without the assistance of management, may be unable to propose a vote on any transaction that would delay, defer or prevent a change of control, even if the transaction were in the best interests of our stockholders.

 

MARKET FOR OUR COMMON STOCK, DIVIDEND POLICY AND OTHER STOCKHOLDER MATTERS

 

There is no established public trading market for our common stock.   We have never paid cash dividends on our securities and we do not anticipate paying any cash dividends on our shares of common stock in the foreseeable future.  We intend to retain any future earnings for reinvestment in our business.  Any future determination to pay cash dividends will be at the discretion of our board of directors, and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as our board of directors deems relevant.

 

We have applied for the listing of our common stock on the Nasdaq Capital Market but we cannot assure you that our application will be approved. If our application to the Nasdaq Capital Market is not approved or we otherwise determine that we will not be able to secure the listing of the common stock on the Nasdaq Capital Market, we will not complete the offering.

 

As of January 17, 2014, we had 2,708,214 shares of common stock outstanding, held of record by five stockholders. 

 

The name, address and telephone number of our stock transfer agent is [●].

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

We have set forth in the following table certain information regarding our common stock beneficially owned by (i) each stockholder we know to be the beneficial owner of 5% or more of our outstanding common stock, (ii) each of our directors and named executive officers, and (iii) all executive officers and directors as a group.  Generally, a person is deemed to be a “beneficial owner” of a security if that person has or shares the power to dispose or to direct the disposition of such security.  A person is also deemed to be a beneficial owner of any securities of which the person has the right to acquire beneficial ownership within 60 days pursuant to options, warrants, conversion privileges or similar rights.  Unless otherwise indicated, ownership information is as of January 17, 2014, and is based on 2,708,214 shares of common stock outstanding on that date.  The percentage ownership after the offering is based on 8,958,124 shares of common stock outstanding.

 

Name and Address of Beneficial 
Owner (1)
  Number of
Shares
Beneficially
Owned (2)
    Percentage
of Class Prior 
to the
Offering
    Percentage
of Class After 
the Offering
 
Directors and Executive Officers                        
Gregory Brewer     668,337 (3)     24.7 %     7.5 %
George Holmes     -       *       *  
Thomas Iwanski     -       *       *  
Michael Leabman     86,206 (4)     3.2 %     *  
Stephen Rizzone     28,718 (5)     1.0 %     *  
Directors and Executive Officers as a group (5 persons)     783,260       28.6 %     8.7 %
                         
Five Percent Stockholders                        
DvineWave Holdings LLC (6)     1,924,812       71.1 %     21.5 %
Absolute Ventures LLC (7)     668,337       24.7 %     7.5 %

 

(1) Except as set forth below, the address of each officer and director and 5% owner is 303 Ray Street, Pleasanton, CA, 94566.

 

(2) Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and is generally determined by voting powers and/or investment powers with respect to securities. Unless otherwise noted, the shares of common stock listed above are owned as of January 17, 2014, and are owned of record by each individual named as beneficial owner and such individual has sole voting and dispositive power with respect to the shares of common stock owned by each of them.

 

(3) Includes 668,337 shares of common stock held by Absolute Ventures, LLC.

 

(4) Includes 6,005 shares subject to options to purchase common stock.

 

(5) Includes 28,718 shares subject to options to purchase common stock.

 

(6) DvineWave Holdings LLC was formed by the parents of Mr. Leabman to make an investment in the Company when it was founded. DvineWave Irrevocable Trust dated December 12, 2012 is the manager of DvineWave Holdings LLC. Gregory Tamkin, the trustee of the DvineWave Irrevocable Trust, has sole voting and investment power with respect to the entity’s shares of common stock. The address is for DvineWave Holdings LLC is 8010 East Cedar Ave, Denver CO 80230.

 

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(7) Gregory Brewer, a director of the Company, has sole voting and investment power with respect to Absolute Ventures, LLC’s shares of common stock. The address for Absolute Ventures, LLC is 1599 Greenville Road, Livermore, CA 94568.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

We have applied for the listing of our common stock on the Nasdaq Capital Market, therefore, our determination of the independence of directors is made using the definition of “independent” contained in the listing standards of the Nasdaq Stock Market. On the basis of information solicited from each director, the board has determined that each of [●] , [●] and [●] has no material relationship with the Company and is independent within the meaning of such rules.

 

SEC regulations define the related person transactions that require disclosure to include any transaction, arrangement or relationship in which the amount involved exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year end for the last two completed fiscal years in which we were or are to be a participant and in which a related person had or will have a direct or indirect material interest. A related person is: (i) an executive officer, director or director nominee of the Company, (ii) a beneficial owner of more than 5% of our common stock, (iii) an immediate family member of an executive officer, director or director nominee or beneficial owner of more than 5% of our common stock, or (iv) any entity that is owned or controlled by any of the foregoing persons or in which any of the foregoing persons has a substantial ownership interest or control.

 

For the period from our inception, through the date of this prospectus (the “Reporting Period”), described below are certain transactions or series of transactions between us and certain related persons.

 

On November 8, 2012, DvineWave Holdings LLC, an entity formed by the parents of Michael Leabman, our Chief Technology Officer, to make an investment in the Company, purchased 1,924,812 shares of common stock in exchange for $10,000.

 

On January 28, 2013, Mr. Leabman purchased 80,201 shares of common stock in exchange for $417.

 

On March 1, 2013, Absolute Ventures LLC, an affiliate of a director of the Company, Greg Brewer, purchased 668,337 shares of common stock in exchange for $160,000.

 

Set forth in the table below is information relating to stock option grants made to our executive officers.  The awards were granted under our 2013 Equity Incentive Plan.  The term of each grant is ten years.  The option awards granted to Mr. Rizzone and Mr. Leabman vest over four years in 48 equal monthly installments beginning October 1, 2013, the start of the requisite service period. The option awards grant to Mr. Iwanski and Mr. Holmes vest 25% of award amount as of October 1, 2014 and 1/48 th of the award amount per month for the three years thereafter with the award fully vested on October 1, 2017.

 

Name of Officer   Number
of Option
Shares
    Exercise
Price
 
Stephen Rizzone     275,689     $ 1.68  
Michael Leabman     57,644     $ 2.49  
George Holmes     80,201     $ 2.49  
Thomas Iwanski     80,201     $ 2.49  

 

Certain of our current officers have executed employment agreements with us or have received shares of common stock or options to purchase common stock as compensation.  Our independent directors also will receive compensation for their services to us.  See the section of this prospectus titled “Executive Compensation” for a discussion of these transactions.

 

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On October 4, 2013, we entered into a Standard Industrial/Commercial Multi-Tenant Lease with ProSoft Engineering, Inc. for our principal office space located at 303 Ray Street, Pleasanton, CA 94566.  The lease covers approximately 3500 square feet of office and laboratory space and expires on June 4, 2014. The monthly rental rate under the lease is $6,055 and the aggregate amount payable to ProSoft Engineering under the lease is approximately $48,440 plus an additional security deposit of $6,055. Greg Brewer, a member of our board of directors, is the owner and founder of ProSoft Engineering, Inc.

 

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UNDERWRITING

 

We are offering the shares of common stock described in this prospectus through the underwriter, MDB Capital Group, LLC, which is acting as lead managing underwriter of the offering.  MDB Capital Group, LLC has rendered advisory services to us in the past and has acted as our placement agent in connection with the placement of our senior secured convertible promissory notes which was consummated in May 2013.

 

We have agreed to enter into an underwriting agreement with the underwriter prior to the closing of this offering. Subject to the terms and conditions of the underwriting agreement, we will agree to sell to the underwriter, and the underwriter will agree to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, as it may be supplemented, shares of common stock.

 

The underwriter is committed to purchase all of the common shares offered by us, other than those covered by the option to purchase additional shares described below, if they purchase any shares.  The underwriting agreement provides that the underwriter’s obligations to purchase shares of our common stock are subject to conditions contained in the underwriting agreement.  A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part.

 

We have been advised by the underwriter that the underwriter proposes to offer shares of our common stock directly to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers that are members of the Financial Industry Regulatory Authority (FINRA). Any securities sold by the underwriter to such securities dealers will be sold at the public offering price less a selling concession not in excess of $[●] per share. After the public offering of the shares, the offering price and other selling terms may be changed by the underwriter.

 

None of our securities included in this offering may be offered or sold, directly or indirectly, nor may this prospectus and any other offering material or advertisements in connection with the offer and sales of any of our common stock, be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons who receive this prospectus are advised to inform themselves about and to observe any restrictions relating to this offering of our common stock and the distribution of this prospectus. This prospectus is neither an offer to sell nor a solicitation of any offer to buy any of our common stock included in this offering in any jurisdiction where that would not be permitted or legal.

 

The underwriter has advised us that it does not intend to confirm sales to any accounts over which they exercise discretionary authority.

 

Underwriting Discount and Expenses

 

The following table summarizes the underwriting discount and commission to be paid to the underwriter by us.

 

    Without Over-
Allotment
    With Over-
Allotment
 
Public offering price   $ -     $ -  
Underwriting discount to be paid to the underwriter                
Non-accountable expense allowance                
Net proceeds, before other expenses   $ -     $ -  

 

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We estimate the total expenses payable by us for this offering to be approximately $2.75 million, which amount includes (i) the underwriting discount of $2.0 million ($2.3 million if the underwriter’s over-allotment option is exercised in full), (ii) reimbursement of the non-accountable expenses of the underwriter equal to $175,000 (none of which has been paid in advance), including the legal fees of the underwriter being paid by us, and (iii) other estimated company expenses of approximately $575,000, which includes legal, accounting, printing costs and various fees associated with the registration and listing of our shares.  In no event will the aggregated expenses reimbursed to MDB Capital Group, LLC exceed $175,000.

 

Over-allotment Option

 

We have granted to the underwriter an option, exercisable not later than 45 days after the date of this prospectus, to purchase up to an additional 600,000 shares of our common stock (up to 15% of the shares firmly committed in this offering) at the public offering price, less the underwriting discount, set forth on the cover page of this prospectus. The underwriter may exercise the option solely to cover over-allotments, if any, made in connection with this offering. If any additional shares of our common stock are purchased pursuant to the over-allotment option, the underwriter will offer these additional shares of our common stock on the same terms as those on which the other shares of common stock are being offered hereby.

 

Determination of Offering Price

 

There is no current market for our common stock. Our underwriter, MDB Capital Group, LLC, is not obligated to make a market in our securities, and even if it chooses to make a market, can discontinue at any time without notice. Neither we nor the underwriter can provide any assurance that an active and liquid trading market in our securities will develop or, if developed, that the market will continue.

 

The public offering price of the shares offered by this prospectus has been determined by negotiation between us and the underwriter. Among the factors considered in determining the public offering price of the shares were:

 

· our history and our prospects;

 

· the industry in which we operate;

 

· our past and present operating results;

 

· the previous experience of our executive officers; and

 

· the general condition of the securities markets at the time of this offering.

 

The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the shares. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the shares can be resold at or above the public offering price.

 

Underwriter Warrant

 

We have agreed to issue to MDB Capital Group, LLC and its designees a warrant to purchase shares of our common stock (up to 10% of the shares of common stock sold in this offering). This warrant is exercisable at $6.00 per share (120% of the price of the common stock sold in this offering), commencing on the effective date of this offering and expiring five years from the effective date of this offering. The warrant and the shares of common stock underlying the warrant have been deemed compensation by FINRA and are therefore subject to a 180 days  lock up pursuant to Rule 5110(g)(1) of FINRA. MDB Capital Group, LLC (or permitted assignees under the Rule) will not sell, transfer, assign, pledge, or hypothecate this warrant or the securities underlying this warrant, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of this warrant or the underlying securities for a period of 180 days from the effective date of the offering.

 

52
 

 

Pursuant to engagement agreements entered into on January 23, 2013 with MDB Capital Group, LLC, on May 16, 2013 we issued warrants to purchase an aggregate of 461,561 shares of our common stock to MDB Capital Group, LLC.  These warrants are exercisable at any time commencing six months after completion of this offering through May 16, 2018.  278,228 of these warrants have an exercise price of $0.04 per share and 183,333 of these warrants have an exercise price of $3.00 per share.  We issued these warrants to MDB Capital Group, LLC for advisory services performed prior to May 16, 2013 and private placement agency services rendered in connection with the May 16, 2013 private placement of our senior secured convertible promissory notes. In January 2014 MDB Capital Group, LLC transferred 50% of these warrants to certain transferees.

 

Lock-Up Agreements

 

All of our officers, directors, employees, stockholders beneficially owning 5% or more of our common stock and MDB Capital Group, LLC and its transferees (with respect to the warrants originally issued on May 16, 2013) have agreed that, until the one year anniversary of the date of the Underwriting Agreement we will enter into in conjunction with this offering, they will not sell, contract to sell, grant any option for the sale or otherwise dispose of any of our equity securities, or any securities convertible into or exercisable or exchangeable for our equity securities, without the consent of MDB Capital Group, LLC (and in the case of MDB Capital Group, also the Company), except for exercise or conversion of currently outstanding warrants, options and convertible securities, as applicable; and exercise of options under our stock incentive plan (the “One Year Lock-Up”).  The number of currently outstanding shares of common stock subject to the One Year Lock-Up totals 2,708,214 shares, the number of shares underlying options subject to the One Year Lock-Up totals 813,534 shares and the number of shares underlying warrants subject to the One Year Lock-Up totals 461,561 shares.

 

The purchasers of our senior secured convertible promissory notes are subject to lock-up requirements for periods that may last no more than 180 days following the date of this prospectus (the “180 Days Lock-Up”). The number of shares of common stock to be issued to the holders of our senior secured convertible promissory notes that will be subject to the 180 Days Lock-Up as of September 30, 2013 totals 2,249,910 shares. The warrant to purchase up to 10% of the shares of common stock sold in this offering that we have agreed to issue MDB Capital Group, LLC in connection with this offering will also be subject to the 180 Days Lock-up.

 

Other than in respect of the 10% warrant being issued to MDB Capital Group, LLC in connection with this offering, the underwriter may consent to an early release from the lock-up period if, in its opinion, the market for the common stock would not be adversely impacted by sales and in cases of a financial emergency of an officer, director or other stockholder. We are unaware of any security holder who intends to ask for consent to dispose of any of our equity securities during the relevant lock-up periods.

 

Indemnification

 

We will agree to indemnify the underwriter against certain liabilities, including certain liabilities arising under the Securities Act, and to contribute to payments that the underwriter may be required to make for these liabilities.

 

Short Positions and Penalty Bids

 

The underwriter may engage in over-allotment, syndicate covering transactions, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Exchange Act.

 

53
 

 

· Over-allotment involves sales by the underwriter of shares in excess of the number of shares the underwriter is obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by an underwriter is not greater than the number of shares that it may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriter may close out any short position by either exercising its over-allotment option and/or purchasing shares in the open market.

 

· Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which it may purchase shares through the over-allotment option. If an underwriter sells more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if an underwriter is concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

 

· Penalty bids permit an underwriter to reclaim a selling concession from a syndicate member when the shares originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

These syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the NASDAQ Capital Market, and if commenced, they may be discontinued at any time.

 

Neither we nor the underwriter make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor the underwriter make any representation that the underwriter will engage in these transactions or that any transaction, once commenced, will not be discontinued without notice.

 

Electronic Distribution

 

A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by the underwriter, or by its affiliates. In those cases, prospective investors may view offering terms online and, depending upon the underwriter, prospective investors may be allowed to place orders online. The underwriter may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriter on the same basis as other allocations.

 

Other than the prospectus in electronic format, the information on the underwriter’s website and any information contained in any other website maintained by the underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriter in its capacity as underwriter and should not be relied upon by investors.

 

The underwriter’s compensation in connection with this offering is limited to the fees and expenses described above under “Underwriting Discount and Expenses.”

 

54
 

  

USE OF PROCEEDS

 

We estimate the gross proceeds from the sale of 4,000,000 shares of common stock in this offering, prior to deducting underwriting discounts and commissions and the estimated offering expenses payable by us, will be approximately $17.25 million (approximately $19.95 million if the over-allotment option granted to the underwriter is exercised in full).

 

We estimate that we will receive net proceeds of approximately $17.25 million, after deducting underwriting discounts and commissions and our underwriter’s expense allowance, and other estimated expenses of approximately $2.75 million, which includes legal, accounting, printing costs and various fees associated with the registration and listing of our shares.  If the underwriter exercises its right to purchase an additional 600,000 shares of common stock to cover over-allotments, we will receive an additional approximately $2.70 million, after deducting $300,000 for underwriting discounts and commissions.

 

We intend to use the net proceeds from our sale of common stock in this offering as follows: approximately $10.3 million will be used for product research, development, reference design development and product certifications, approximately $0.7 million will be used for the protection of our intellectual property, approximately $2.8 million will be used for sales and marketing activities, approximately $0.8 million will be used for the purchase of fixed assets which consists primarily of computer equipment and software, and the balance of the funds will be used for general and administrative expenses and other general corporate purposes.

 

The amounts and timing of our actual expenditures will depend on numerous factors, including market conditions, results from our research and development efforts, business developments and opportunities and related sales and marketing activities. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the proceeds from this offering. We may find it necessary or advisable to use portions of the proceeds from this offering for other purposes. Circumstances that may give rise to a change in the use of proceeds and the alternate purposes for which the proceeds may be used include: 

 

· the existence of unforeseen or other opportunities or the need to take advantage of changes in timing of our existing activities;

 

· the need or desire on our part to accelerate, increase, reduce or eliminate one or more existing initiatives due to, among other things, changing market conditions and competitive developments or interim results of research and development efforts;

 

· results from our business development and marketing efforts;

 

· the effect of federal, state, and local regulation on our business; and

 

· the presentation of strategic opportunities of which we are not currently aware (including acquisitions, joint ventures, licensing and other similar transactions).

 

From time to time, we evaluate these and other factors and we anticipate continuing to make such evaluations to determine if the existing allocation of resources, including the proceeds of this offering, is being optimized. 

 

CAPITALIZATION

 

The following table sets forth our actual cash and cash equivalents and capitalization, each as of September 30, 2013:

 

· on an actual basis; and

 

· on a pro forma as adjusted basis to give effect to the reverse stock split, conversion of the convertible debt into common stock and issuance of the common stock offered hereby and the use of proceeds, as described in the section entitled “Use of Proceeds.”

 

55
 

 

You should consider this table in conjunction with our financial statements and the notes to those financial statements included in this prospectus. 

 

    Actual     As adjusted for the 
effect of the
Reverse Stock
Split
    As adjusted for the 
debt conversion 
and the offering (1)
 
                   
Total debt at face value, net of debt discount                        
Convertible debt  less debt discount   $ 386,515       386,515       -  
                         
Stockholders’ equity                        
Common stock, par value $0.00001 per share – 40,000,000 shares of common stock authorized at September 30, 2013; 11,101,306  shares issued and outstanding as of September 30, 2013; 2,782,282 shares issued and outstanding after giving effect to the reverse stock split; 9,032,192 shares issued and outstanding, as adjusted.   $ 111       28       90  
Additional paid-in-capital     210,570       210,653       22,960,600  
                         
Accumulated deficit     (3,264,096 )     (3,264,096 )     (2,895,590 )
Total stockholders’ equity (deficit)     (3,053,415 )     (3,053,415 )     20,065,100  
                         
Total capitalization     (2,666,900 )     (2,666,900 )     20,065,100  
                         
Stockholders’ equity (deficit) per share   $ (0.28 )   $ (1.10 )   $ 2.22  

 

(1) Assumes that 4,000,000 shares of common stock are sold in this offering and that the net proceeds thereof are approximately $17.25 million after deducting underwriting discounts and commissions and our estimated expenses. If the underwriter’s over-allotment option is exercised in full, net proceeds will increase to approximately $19.95 million.

 

DILUTION

 

On a pro forma basis after taking into account the reverse stock split , our net tangible book value as of September 30, 2013, was ($3,058,140), or ($1.10) per share of our common stock. Our net tangible book value per share represents our total tangible assets less total liabilities divided by the number of shares of our common stock outstanding on September 30, 2013. After giving effect to our sale of 4,000,000 shares in this offering at the public offering price of $5.00 per share, after deducting the commissions and estimated offering expenses payable by us, and the conversion of $5,624,776 of senior secured convertible promissory notes and accrued interest, our net tangible book value as of September 30, 2013, would have been $20,060,375, or $2.22 per share of our common stock. This amount represents an immediate increase in net tangible book value of $3.32 per share to our existing stockholders and an immediate dilution in net tangible book value of $2.78 per share to new investors purchasing shares of our common stock in this offering.

 

56
 

 

We determine dilution by subtracting the adjusted net tangible book value per share after this offering and the conversion of the convertible notes and accrued interest from the public offering price per share of our common stock. The following table illustrates the dilution in net tangible book value per share to new investors: 

 

Public offering price         $ 5.00  
Pro forma net tangible book value per share as of September 30, 2013   $ (1.10 )        
Increase per share after this offering and the conversion of the convertible notes and accrued interest   $ 3.32          
As adjusted tangible book value per share after this offering and the conversion of the convertible notes and accrued interest           $ 2.22  
Dilution per share to new investors in this offering           $ 2.78  

 

The following shares were not included in the above calculation:

 

· 275,689 shares of our common stock reserved for issuance under stock option agreements at a weighted average exercise price of $1.68 per share;

 

· 461,561 shares of common stock reserved for issuance under outstanding warrants at a weighted average exercise price of $1.22 per share;

 

· 766,478 shares of our common stock reserved for future issuance under our 2013 Equity Incentive Plan (including 537,845 shares reserved for issuance pursuant to stock option awards issued in January 2014);

 

· shares to be issued upon conversion of interest accrued on our senior secured convertible promissory notes after September 30, 2013; and

 

· shares of our common stock issuable upon exercise of the warrant to be issued to the underwriter representing ten percent of the number of shares offered by this prospectus.

 

LEGAL MATTERS

 

K&L Gates LLP, with an office at Hearst Tower, 47th Floor, 214 North Tryon Street, Charlotte, North Carolina 28202, will pass upon the validity of the shares of common stock offered by this prospectus and certain other legal matters. Golenbock Eiseman Assor Bell & Peskoe LLP, with an office at 437 Madison Avenue, New York, New York 10022-7020, is legal counsel to MDB Capital Group, LLC.

 

EXPERTS

 

The financial statements of Energous Corporation (F/K/A DvineWave, Inc.) as of December 31, 2012 and for the period October 30, 2012 (Inception) through December 31, 2012 included in this prospectus have been audited by Marcum LLP, independent registered public accounting firm (which contain an explanatory paragraph related to our ability to continue as a going concern as described in Note 2 to our financial statements) as set forth in their report. We have included these financial statements in this prospectus in reliance upon the report of Marcum LLP, given on their authority as experts in accounting and auditing.

 

57
 

  

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of our common stock to be sold in this offering. Our SEC filings are and will become available to the public over the Internet at the SEC’s website at  www.sec.gov .  You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street N.E., Washington, D.C. 20549. You can also obtain copies of the documents upon the payment of a duplicating fee to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

 

This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. Some items are omitted in accordance with the rules and regulations of the SEC. You should review the information and exhibits included in the registration statement for further information about us and the securities we are offering. Statements in this prospectus concerning any document we filed as an exhibit to the registration statement or that we otherwise filed with the SEC are not intended to be comprehensive and are qualified by reference to these filings. You should review the complete document to evaluate these statements.

 

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

  

58
 

 

DvineWave Inc.

 

INDEX TO FINANCIAL STATEMENTS

 

  Page(s)
   
Report of Independent Registered Public Accounting Firm F-1
   
Balance Sheets as of December 31, 2012 and September 30, 2013 (Unaudited) F-2
   
Statements of Operations for the period October 30, 2012 (Inception) through December 31, 2012, for the nine months ended September 30, 2013 (Unaudited) and for the period October 30, 2012 (Inception) through September 30, 2013 (Unaudited) F-3
   
Statement of Changes in Stockholders' Deficit for the period October 30, 2012 (Inception) through  December 31, 2012 and for the nine months ended September 30, 2013 (Unaudited) F-4
   
Consolidated Statements of Cash Flows for the period October 30, 2012 (Inception) through December 31, 2012, for the nine months ended September 30, 2013 (Unaudited) and for the period October 30, 2012 (Inception) through September 30, 2013 (Unaudited) F-5
   
Notes to Financial Statements F-6

 

 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Energous Corporation (f/k/a DvineWave Inc.)

 

We have audited the accompanying balance sheet of DvineWave Inc. (a development stage company) (the “Company”) as of December 31, 2012 and the related statements of operations, changes in stockholders’ deficit and cash flows for the period from October 30, 2012 (inception) through December 31, 2012.  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.

 

We conducted our audit 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 audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of DvineWave Inc. (a development stage company), as of December 31, 2012, and the results of its operations and its cash flows for the period from October 30, 2012 (inception) through December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, at December 31, 2012, the Company is in its development stage and has not yet generated revenues, is dependent upon future sources of equity or debt in order to fund its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty

 

/s/ Marcum LLP

Marcum LLP

Melville, NY

December 16, 2013, except for Note 11(e)&(f) which is dated January 23, 2014

 

F- 1
 

 

DvineWave Inc.
(A Development Stage Company)
BALANCE SHEETS

 

    As of December 31,     As of September 30,  
    2012     2013  
          (Unaudited)  
ASSETS                
Current Assets:                
Cash and cash equivalents   $ 994     $ 3,854,489  
Prepaid expenses and other current assets     -       28,358  
Total current assets     994       3,882,847  
                 
Property and equipment, net     -       15,621  
Intangible assets, net     -       4,725  
Total assets   $ 994     $ 3,903,193  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT                
Current liabilities:                
Accounts payable   $ 1,875     $ 175,432  
Accrued expenses     10,406       167,161  
Other current liabilities     -       16,000  
Senior secured convertible notes, net of discount     -       386,515  
Derivative liabilities     -       6,211,500  
Total liabilities     12,281       6,956,608  
                 
Commitments and contingencies                
                 
Stockholders’ deficit                
Preferred Stock, $0.00001 par value, 5,000,000 and 0 shares authorized at                
December 31, 2012 and September 30, 2013, respectively;  no shares issued or outstanding.     -       -  
Common Stock, $0.00001 par value, 18,000,000 and 40,000,000 shares                
authorized at December 31,  2012 and September 30, 2013, respectively; 7,680,000 and 11,101,306 shares issued and outstanding at                
December 31, 2012 and September 30, 2013, respectively.     77       111  
Additional paid-in capital     9,923       210,570  
Deficit accumulated during the development stage     (21,287 )     (3,264,096 )
Total stockholders’ deficit     (11,287 )     (3,053,415 )
Total liabilities and stockholders’ deficit   $ 994     $ 3,903,193  

 

F- 2
 

 

DvineWave Inc.
(A Development Stage Company)
STATEMENTS OF OPERATIONS 

 

    For the Period
October 30, 2012 
(Inception) through 
December 31,
2012
    For the Nine
Months ended
September 30,
2013
    For the Period
 October 30, 2012
 (Inception)
 through
September 30, 2013
 
          (Unaudited)     (Unaudited)  
Operating expenses:                        
Derivative instrument issuance expenses   $ -     $ 887,062     $ 887,062  
Research and development expenses     17,103       1,019,950       1,037,053  
General and administrative expenses     4,184       808,903       813,087  
Marketing expenses     -       32,014       32,014  
Loss from operations     (21,287 )     (2,747,929 )     (2,769,216 )
                         
Other (expense) income:                        
Change in fair value of derivative liabilities     -       (111,500 )     (111,500 )
Interest expense     -       (383,380 )     (383,380 )
Other expense, net     -       (494,880 )     (494,880 )
                         
Net loss   $ (21,287 )   $ (3,242,809 )   $ (3,264,096 )
                         
Basic and diluted net loss per common share   $ -     $ (0.32 )        
                         
Weighted average shares outstanding, basic and diluted     7,680,000       10,254,345          

 

F- 3
 

 

DvineWave Inc.
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

 

    Common Stock     Additional
Paid-in
    Deficit
Accumulated
During the
Development
    Total
Stockholders'
 
    Shares     Amount     Capital     Stage     Deficit  
                               
Balance, October 30, 2012 (inception)     -     $ -     $ -     $ -     $ -  
                                         
Common stock sold on November 8, 2012 to third party investor at $0.0013 per share     7,680,000       77       9,923       -       10,000  
                                         
Net loss for the period from October 30, 2012 (inception) through December 31, 2012     -       -       -       (21,287 )     (21,287 )
                                         
Balance, December 31, 2012     7,680,000       77       9,923       (21,287 )     (11,287 )
                                         
Common stock sold on January 28, 2013 to founder at $0.0013 per share     320,000       3       414       -       417  
                                         
Common stock sold on March 4, 2013 to affiliate of a director at $0.06 per share     2,666,666       27       159,973       -       160,000  
                                         
Common stock sold on May 7, 2013 to third party investor at $0.06 per share     80,000       1       4,799       -       4,800  
                                         
Restricted common stock sold on May 14, 2013 under the 2013 Stock Plan of DvineWave, Inc., to consultant at $0.10 per share     354,640       3       35,461       -       35,464  
                                         
Net loss for the nine months ended September 30, 2013     -       -       -       (3,242,809 )     (3,242,809 )
                                         
Balance, September 30, 2013 (Unaudited)     11,101,306     $ 111     $ 210,570     $ (3,264,096 )   $ (3,053,415 )

 

F- 4
 

 

 

DvineWave Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS

 

    For the Period
October 30,
2012
(Inception)
through
December 31,
2012
    For the Nine
Months ended
September 30,
2013
   

For the Period

October 30,
2012

(Inception)

through

September 30,

2013

 
          (Unaudited)     (Unaudited)  
Cash flows from operating activities:                        
Net loss   $ (21,287 )   $ (3,242,809 )   $ (3,264,096 )
Adjustments to reconcile net loss to net cash used in operating activities:                        
Depreciation and amortization     -       880       880  
Amortization of debt discount     -       262,506       262,506  
Warrant expense     -       724,000       724,000  
Change in fair value of derivative liabilities     -       111,500       111,500  
Changes in operating assets and liabilities:                        
Prepaid expenses and other current assets     -       (28,358 )     (28,358 )
Accounts payable     1,875       173,557       175,432  
Accrued expenses     10,406       156,755       167,161  
Other current liabilities     -       16,000       16,000  
Net cash used in operating activities     (9,006 )     (1,825,969 )     (1,834,975 )
                         
Cash flows from investing activities:                        
Purchase of property and equipment     -       (16,501 )     (16,501 )
Costs of trademark             (4,725 )     (4,725 )
Net cash used in investing activities     -       (21,226 )     (21,226 )
                         
Cash flows from financing activities:                        
Proceeds from the sale of common stock     10,000       200,681       210,681  
Proceeds from the sale of senior secured convertible notes     -       5,500,009       5,500,009  
Net cash provided by financing activities     10,000       5,700,690       5,710,690  
                         
Net increase in cash and cash equivalents     994       3,853,495       3,854,489  
Cash and cash equivalents - beginning     -       994       -  
Cash and cash equivalents - ending   $ 994     $ 3,854,489     $ 3,854,489  

 

F- 5
 

 

DvineWave Inc.

 

Notes to Condensed Financial Statements

 

For the Period Ended October 30, 2012 (inception) through December 31, 2012 and the Nine Months Ended September 30, 2013 (Information Relating to the Nine Months Ended September 30, 2013 is Unaudited)

 

Note 1 - Business Organization, Nature of Operations

 

DvineWave Inc. (the “Company”) was incorporated in Delaware on October 30, 2012 (inception). The Company is a development stage technology company focused on developing a solution to delivering a wireless charging system, as a means of providing convenient, adaptive wireless power charging capabilities to low power fixed and mobile devices, such as mobile phones, tablets, toys, videogame controllers, watches, remote controls, smoke alarms, window covering deployment and retraction motors, installed sensors and night and emergency lighting fixtures that use or are capable of using a rechargeable battery. The Company is targeting both consumer and commercial enterprise markets that use such rechargeable fixed and mobile devices.

 

As of September 30, 2013, the Company had not yet completed the development of its product and has not yet recorded any revenues. Since inception, the Company’s primary activities have consisted of developing its business plan, raising capital, recruiting and hiring its executive team and developing its technology. To date, these activities have been funded through sales of its common stock and the sale of Senior Secured Convertible Notes (“Convertible Notes”) (See Note 7, Private Placement).

 

The Company is considered to be in the development stage, and as such, the Company’s financial statements are prepared in accordance with the Accounting Standards Codification (“ASC”) topic 915, “Development Stage Entities.” The Company is subject to all of the risks associated with development stage companies.

 

Note 2 – Going Concern and Management Plans

 

As of December 31, 2012 and September 30, 2013, the Company’s cash on hand was $994 and $3,854,489, respectively. The Company has not generated revenues since its inception and has incurred a net loss of $21,287 for the period October 30, 2012 (inception) through December 31, 2012, $3,242,809 for the nine months ended September 30, 2013 and $3,264,096 for the period ended October 30, 2012 (inception) through September 30, 2013. During the nine months ended September 30, 2013, the Company has met its liquidity requirements principally through the private placement of convertible notes.

 

As of December 31, 2012, the Company had a working capital deficiency and a stockholders’ deficit of $11,287. As of September 30, 2013, the Company had a working capital deficiency and a stockholders’ deficit of $3,073,761 and $3,053,415, respectively.

 

The Company expects that the cash it has available as of December 16, 2013 will fund its operations only until May, 2014.  The Company intends to raise additional capital through its initial public offering (“IPO”), though there is no assurance that it will be able to do so. These matters raise substantial doubt about the Company’s ability to continue as a going concern. If the Company is unable to raise additional capital, the Company may have to curtail its research and development efforts, delay repayments of its Convertible Notes, delay payments to vendors, and/or initiate cost reductions, which would have a material adverse effect on the Company’s business, financial condition and results of operations.

 

F- 6
 

 

Note 3 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying financial statements are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).

 

The accompanying unaudited condensed financial statements for the nine months ended September 30, 2013 have been prepared in accordance with U.S. GAAP for interim financial information and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal accruals) considered for a fair presentation have been included. Operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported expenses during the reporting periods.

 

The Company’s significant estimates and assumptions include the valuation of the Company’s common stock and the valuation of derivative financial instruments, the amortization of deferred financing costs, the amortization and recoverability of capitalized patent costs and useful lives of long-lived assets, and income tax expense, some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company maintains cash in bank accounts, consisting solely of deposits held at major banks, which, at times, may exceed federally insured limits. Cash equivalents include investments in open ended money markets held at the same major banks. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible.

 

Property and Equipment

 

Property and equipment are stated at cost net of accumulated depreciation, which is recorded using the straight line method at rates sufficient to charge the cost of depreciable assets to operations over their estimated useful lives, which range from 3 to 7 years. Maintenance and repairs are charged to operations as incurred.

 

F- 7
 

 

Note 3 – Summary of Significant Accounting Policies, continued

 

Trademarks

 

Legal and filing fees incurred in connection with the registration of trademarks are capitalized.

 

Research and Development

 

Research and development expenses are charged to operations as incurred. For internally developed patents, all costs incurred to the point when a patent application is to be filed are expended as incurred as research and development expense. Patent application costs, generally legal costs, are expensed as research and development costs until such time as the future economic benefits of such patents become more certain. The Company incurred research and development costs of $17,103 during the period from October 31, 2012 (inception) through December 31, 2012, $1,019,950 for the nine months ended September 30, 2013 and $1,037,053 for the period October 30, 2012 (inception) through September 30, 2013.

 

Impairment of Long-lived Assets

 

The Company reviews for the impairment of long-lived assets, including trademarks, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The Company has not identified any such impairment losses.

 

F- 8
 

 

Note 3 – Summary of Significant Accounting Policies, continued

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included or excluded in the financial statements or tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse.

 

For the period October 30, 2012 (inception) through December 31, 2012, the Company had approximately $17,000 of research and development expenses capitalized for federal income tax purposes, with amortization commencing upon the Company receiving an economic benefit from the related research and $4,000 of organization costs capitalized, to be amortized for federal income tax purposes over 15 years. Accordingly, as of December 31, 2012, the Company has approximately $0 gross federal and state net operating loss carryovers (“NOLs”). For the period October 30, 2012 (inception) through December 31, 2012, the deferred tax assets in connection with the research and development costs and the organizational costs were fully reserved, and the Company’s effective tax rate was 0%.

 

In its interim financial statements the Company follows the guidance in ASC 270 “Interim Reporting” and utilized the expected annual effective tax rate in determining its income tax provision for the interim period.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the future generation of taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and taxing strategies in making this assessment. Based on this assessment, management has established a full valuation allowance against all of the net deferred tax assets for each period, since it is more likely than not that all of the deferred tax assets will not be realized.

 

Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. As of December 31, 2012, no liability for unrecognized tax benefits was required to be reported. The guidance also discusses the classification of related interest and penalties on income taxes. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties was recorded during the period ended December 31, 2012.

 

F- 9
 

 

Note 3 – Summary of Significant Accounting Policies, continued

 

Net Loss Per Common Share

 

Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of the conversion of the Company’s convertible notes and warrants (using the if-converted method). The computation of basic loss per share for the period ended October 30, 2012 (inception) through December 31, 2012 and for the nine months ended September 30, 2013, excludes potentially dilutive securities of 0 and 12,808,401, respectively, because their inclusion would be antidilutive. As a result, the computations of net loss per share for each period presented is the same for both basic and fully diluted.

 

Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share, because the effect of their inclusion would have been anti-dilutive.

 

    For the Period Ending
October 30, 2012
(Inception) Through
December 31,
    For the Nine
Months Ended
September 30,
 
    2012     2013  
Convertible Notes – principal     -       10,576,923  
Convertible Notes – accrued interest     -       239,937  
Consulting Warrant to purchase common stock     -       1,110,131  
Financing Warrant to purchase common stock     -       881,410  
Total potentially dilutive securities     -       12,808,401  

 

F- 10
 

 

Note 3 – Summary of Significant Accounting Policies, continued

 

Fair Value Measurements

 

The carrying amounts of cash and cash equivalents, accounts payable and accrued expenses and other current liabilities, approximate fair value due to the short-term nature of these instruments.

 

Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:  

 

· Level 1. Quoted prices in active markets for identical assets or liabilities.

· Level 2. Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.

· Level 3. Significant unobservable inputs that cannot be corroborated by market data.

 

The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the assets that are measured at fair value on a recurring basis.

 

    Total     Quoted
Prices in
Active
Markets for
Identical
Assets or
Liabilities
(Level 1)
    Quoted
Prices for
Similar
Assets or
Liabilities in
Active
Markets 
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
Derivative Liabilities:                                
December 31, 2012   $ -     $ -     $ -     $ -  
September 30, 2013:                                
Conversion Feature   $ 5,482,000     $ -     $ -     $ 5,482,000  
Financing Warrant     189,500       -       -       189,500  
Consulting Warrant     540,000       -       -       540,000  
Total   $ 6,211,500     $ -     $ -     $ 6,211,500  

 

F- 11
 

 

Note 3 – Summary of Significant Accounting Policies, continued

 

Fair Value Measurements, continued

 

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis: 

 

    For the Period Ended
October 30, 2012
(Inception) Through
December 31, 2012
    For the Nine Months
Ended September
30, 2013
 
Beginning balance   $ -     $ -  
Aggregate fair value of conversion feature and warrants upon issuance     -       6,100,000  
Change in fair value of conversion feature and warrants     -       111,500  
Ending balance   $ -     $ 6,211,500  

 

The conversion feature of the Convertible Notes was measured at fair value using a Monte Carlo simulation and is classified within Level 3 of the valuation hierarchy. The warrant liabilities for the Financing Warrant and the Consulting Warrant were measured at fair value using a Monte Carlo simulation and are classified within Level 3 of the valuation hierarchy. The significant assumptions and valuation methods that the Company used to determine fair value and the change in fair value of the Company’s derivative financial instruments are discussed in Note 7 – Private Placement.

 

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivate liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s Chief Financial Officer determined its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Chief Financial Officer with support from the Company’s consultants and which are approved by the Chief Financial Officer.

 

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

 

The Company uses a Monte Carlo model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This simulation incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as, volatility. The Company also used a binomial simulation and Black-Scholes economic model as supplemental valuation tools in order to validate the reasonableness of the results of the Monte Carlo simulation when measuring the Financing Warrant and the Consulting Warrant.

 

F- 12
 

 

Note 3 – Summary of Significant Accounting Policies, continued

 

Fair Value Measurements, continued

 

A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in Change in Fair Value of Derivative Liabilities within Other Expense (Income) on the Company’s Statements of Operations.

 

  As of December 31, 2012 and September 30, 2013, there were no transfers in or out of level 3 from other levels in the fair value hierarchy.

 

In accordance with the provisions of ASC 815, the Company presented the conversion feature and warrant liabilities at fair value on its balance sheet, with the corresponding changes in fair value recorded in the Company’s statement of operations for the applicable reporting periods.

 

The fair value of the Company’s common stock was determined by a third party valuation consultant, and was derived from the valuation of the Company using a methodology which back-solved to the fair value of the common stock on May 16, 2013, based upon the Company’s capitalization, existing dilutive securities and the proceeds received from the issuance of the Convertible Notes. For the purposes of this back-solve computation, management assumed that the Convertible Notes would convert at $0.52 per share (the floor level), and that the Financing Warrant would have an exercise price of $0.624 per common share or, 120% of the exercise price of the Convertible Notes.

 

Management determined that the results of its valuations are reasonable.

 

F- 13
 

 

Note 3 – Summary of Significant Accounting Policies, continued Convertible Instruments

 

The Company accounts for hybrid contracts that feature conversion options in accordance. ASC 815 “Derivatives and Hedging Activities,” (“ASC 815”) and ASC 480 “Distinguishing Liabilities from Equity” (“ASC 480”), which require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (i) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The Company accounts for convertible instruments which have been determined to be free standing derivative financial instruments (when the Company has determined that the embedded conversion options should be bifurcated from their host instruments) in accordance with ASC 815.  Under ASC 815, a portion of the proceeds received upon the issuance of the hybrid contract are allocated to the fair value of the derivative. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.

 

Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.

 

The Company accounts for convertible debt instruments, when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, in accordance with ASC 470-20 “Debt with Conversion and Other Options”. The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt.

 

F- 14
 

 

Note 3 – Summary of Significant Accounting Policies, continued Common Stock Purchase Warrants and Other

 

Derivative Financial Instruments

 

The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock as defined in ASC 815-40 “Contracts in Entity's Own Equity” (“ASC 815-40”). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).  The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.

 

Management’s Evaluation of Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued (See Note 11 - Subsequent Events).

 

Note 4 – Property and Equipment

 

Property and equipment are as follows:

 

    As of December 31,     As of September 30,  
    2012     2013  
Computer software   $ -     $ 4,150  
Computer hardware     -       1,695  
Furniture and fixtures     -       10,656  
Total             16,501  
Less – Accumulated depreciation     -       (880 )
Total property and equipment, net   $ -     $ 15,621  

 

Total depreciation expense of the Company’s property and equipment for the period ended October 30, 2012 (inception) through December 31, 2012, for the nine months ended September 30, 2013 and for the period October 30, 2012 (inception) through September 30, 2013, was $0, $880 and $880, respectively.

 

F- 15
 

 

Note 5 – Intangible Assets, continued

 

Intangible assets as of September 30, 2013 are as follows:

 

    Cost     Accumulated
amortization
    Net  
Trademark   $ 4,725     $ -     $ 4,725  

 

There were no intangible assets as of December 31, 2012.

 

Amortization expense for intangible assets was $0 for the period ended October 30, 2012 (inception) through December 31, 2012, for the nine months ended September 30, 2013 and for the period ended October 30, 2012 (inception) through September 30, 2013, as the Company’s trademark is a non-amortizing asset.

 

Note 6 – Accrued Expenses and Other Current Liabilities

 

Accrued expenses consist of the following at December 31, 2012 and September 30, 2013:

 

    As of
December 31, 2012
    As of
September 30, 2013
 
Accrued interest payable   $ -     $ 124,767  
Accrued compensation     -       11,244  
Other accrued expenses     10,406       31,150  
Total   $ 10,406     $ 167,161  

 

Note 7 – Private Placement

 

Senior Secured Convertible Notes

 

On May 16, 2013, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with accredited investors (the “Investors”), pursuant to which the Company sold an aggregate of (i) $5,500,009 principal amount of senior secured convertible notes (the “Convertible Notes”). In connection with the sale of the Convertible Notes (the “Bridge Financing”), the Company entered into a registration rights agreement (the “Registration Rights Agreement”) and a security agreement (the “Security Agreement”) with the Investors. The closing of the Bridge Financing was completed on May 16, 2013. The Convertible Notes bear interest at 6% per annum and mature on August 16, 2014.

 

F- 16
 

 

Note 7 – Private Placement, continued

 

Senior Secured Convertible Notes, continued

 

The principal and interest of the Convertible Notes are convertible into the Company’s common stock at a conversion price between $0.52 and $1.04 per share depending on the facts and circumstances at the time of the conversion (see below). Upon issuance, the Convertible Notes bear simple interest at 6% per annum, and upon the occurrence of any specified event of default, the Convertible Notes would bear interest at 12% per annum. The Convertible Notes may be prepaid or converted into Common Stock with consent of the holder or the holders of a majority of the principal then outstanding under all the Convertible Notes (the “Required Holders”) and upon certain events constituting a change in control of the Company. The Convertible Notes are required to be converted upon a qualifying initial public offering (“IPO”), if any, in which case the conversion price is to be equal to 50% of the price to the public in such offering (but not more than $1.04 or less than $0.52 per share). A Convertible Note may also be converted in certain circumstances at the election of the holder of the Convertible Note in connection with a financing that is not an initial public offering, in which case the conversion price is to be equal to 50% of the price paid by the investors in such financing (but not more than $1.04 or less than $0.52 per share). In the event of an optional conversion by the holder of a Convertible Note during a continuing event of default, the conversion price would be $0.52; otherwise the optional conversion price would be $1.04. The conversion price under the Convertible Notes is further subject to adjustment in the event of stock splits, combinations or the like and upon certain other events, all as provided in the Convertible Notes.

 

The aggregate amount of accrued interest on the Convertible Notes was $0 and $124,767 as of December 31, 2012 and September 30, 2013, respectively. As of September 30, 2013, the principal and accrued interest on the Convertible Notes were convertible into 10,576,923 and 239,937 shares of the Company’s common stock, respectively, assuming a conversion price of $0.52 per share.

 

Accounting for the Senior Secured Convertible Notes

 

Pursuant to the terms of the Convertible Notes, the conversion price is subject to adjustment in the event of an IPO, other financing and upon certain other events. The embedded conversion feature was not clearly and closely related to the host instrument and was bifurcated from the host Convertible Notes as a derivative, principally because the instrument’s variable exercise price terms would not qualify as being indexed to the Company’s own common stock. Accordingly, this conversion feature instrument has been classified as a derivative liability in the accompanying balance sheet as of September 30, 2013.  Derivative liabilities are initially recorded at fair value and are then re-valued at each reporting date, with changes in fair value recognized in earnings during the reporting period.

 

The Company determined that the initial fair value of the embedded conversion option was $5,376,000.  From the gross proceeds upon the issuance of the Convertible Notes of $5,500,009, the Company deducted in full the fair value of the embedded conversion feature of $5,376,000 as a debt discount, as shown below. The debt discount is being amortized under the effective interest method over the term of the Convertible Notes. 

 

Face value of the Convertible Notes   $ 5,500,009  
Discount-fair value of embedded conversion feature     (5,376,000 )
Proceeds attributable to the Convertible Notes   $ 124,009  

 

F- 17
 

 

Note 7 – Private Placement, continued

 

Accounting for the Senior Secured Convertible Notes, continued

 

The Company calculated the fair value of the embedded conversion feature of the Convertible Notes using a Monte Carlo simulation, with the observable assumptions as provided in the table below. The significant unobservable inputs used in the fair value measurement of the reporting entity’s embedded conversion feature are expected stock prices, levels of trading and liquidity of the Company stock. Significant increases in the expected stock prices and expected liquidity would result in a significantly higher fair value measurement.  Significant increases in either the probability or severity of default of the host instrument would result in a significantly lower fair value measurement. 

 

    As of  
    May 16, 2013     September 30, 2013  
Stock price on valuation date   $ 0.42     $ 0.42  
Conversion price     0.52       0.52  
Term (years)     1.25       .88  
Expected volatility     60 %     60 %
Dividend yield     0 %     0 %
Weighted average risk-free interest rate     0.79 %     1.39 %
Trials     20,000       20,000  
Aggregate fair value   $ 5,376,000     $ 5,482,000  

 

The amortization of debt discount related to the Convertible Notes was $0, $262,506 and $262,506, respectively, for the period ended October 30, 2012 (inception) through December 31, 2012, for the nine months ended September 30, 2013 and for the period October 30, 2012 (inception) through September 30, 2013. As of September 30, 2013, the debt discount will be amortized over a remaining period of 0.9 years. The derivative liability related to the embedded conversion feature is revalued at each reporting period.  During the nine months ended September 30, 2013 and for the period ended October 30, 2012 (inception) through September 30, 2013, the Company recorded an increase of $106,000 in the fair value of the derivative liability for the conversion feature of the Convertible Notes, which was recorded as a change in the fair value of derivative liabilities within the statement of operations.

 

Placement Agent Agreement

 

On January 23, 2013, the Company entered into an agreement (the “Placement Agent Agreement”) with MDB Capital Group, Inc. (“MDB”), pursuant to which the Company appointed MDB to act as the Company’s placement agent in connection with the sale of the Company’s securities (“Offering or Offerings”). Specifically, MDB was the placement agent in connection with the sale of its Convertible Notes. The Placement Agent Agreement had an initial term of 180 days, and was renewed automatically upon the expiration of its initial term, after which it will continue in effect until it is terminated by either party with 60 days written notice to the other party.

 

In connection with the sale of the Convertible Notes, the Company paid MDB a cash fee of $538,393 and sold to MDB for $1,000 in cash, issued on May 16, 2013 a warrant (the “Financing Warrant”) to purchase shares of the Company’s common stock. The Financing Warrant was fully vested upon issuance, has a term of five years and may not be exercised until six months after the consummation of this offering, which is a qualifying firm commitment underwritten initial public offering. Pursuant to the terms of the Financing Warrant, the aggregate exercise price is fixed at $550,000, with the per share exercise price determined based upon 120% of the conversion price of the Convertible Notes upon the consummation of the IPO, or upon other events under which the Convertible Notes may convert. As of September 30, 2013, the Financing Warrant is exercisable into 881,410 shares of the Company’s common stock, respectively, assuming an exercise price of $0.624 per share (or 120% of the Convertible Notes conversion price of $0.52 per share).

 

F- 18
 

  

Note 7 – Private Placement, continued

 

Placement Agent Agreement, continued

 

In addition, in the event of a non-liquid exit transaction, as defined in the Financing Warrant agreement, the holder of the Financing Warrant may put the Financing Warrant back to the Company for a cash settlement at a fair value amount to be determined by appraisal and agreed to by both parties.

 

MDB shall have certain registration rights with respect to the common stock issued upon exercise of the Financing Warrant, including a one-time demand registration right with respect to such common stock.

 

Consulting Agreement

 

On January 23, 2013, the Company entered into a consulting agreement with MDB (the “Consulting Agreement”), pursuant to which MDB agreed to provide financial, strategic and intellectual property advisory services. The Consulting Agreement had an initial term of 180 days, and was renewed automatically upon the expiration of its initial term, after which it will continue in effect until it is terminated by either party with 30 days written notice to the other party.

 

As consideration for services provided under the Consulting Agreement prior to May 16, 2013, the Company sold to MDB for $1,500 in cash, a warrant (the “Consulting Warrant”) for the purchase of an aggregate of 1,110,131 shares of the Company’s common stock.

 

The Consulting Warrant was fully vested upon issuance, has a term of five years, an exercise price of $0.01 per share and may not be exercised until six months after the consummation of this offering, which is a qualifying firm commitment underwritten initial public offering. The Consulting Warrant may be exercised on a cashless basis. In addition, in the event of a non-liquid exit transaction, as defined in the Consulting Warrant, the holder of the Consulting Warrant may put the Consulting Warrant back to the Company for a cash settlement at a fair value amount to be determined by appraisal and agreed to by both parties.

 

MDB shall have certain registration rights with respect to the common stock issued upon exercise of the Consulting Warrant, including a one-time demand registration right with respect to such common stock.

 

Accounting for the Financing Warrant and the Consulting Warrant

 

The Company determined, based upon authoritative guidance, that both the Financing Warrant and the Consulting Warrant qualified as derivative instruments.  Accordingly, these instruments have been classified as derivative liabilities in the accompanying balance sheet as of September 30, 2013.  Derivative liabilities are initially recorded at fair value and are then re-valued at each reporting date, with changes in fair value recognized in earnings during the reporting period.

 

The Company calculated the fair value of the Financing Warrant and the Consulting Warrant using a Monte Carlo simulation, with the observable assumptions as provided in the table below.   The significant unobservable inputs used in the fair value measurement of the reporting entity’s Financing Warrant and the Consulting Warrant are expected stock prices, levels of trading and liquidity of the Company’s common stock. Significant increases in the expected stock prices and expected liquidity would result in a significantly higher fair value measurement.  Significant increases in either the probability or severity of default of the host instrument would result in a significantly lower fair value measurement. 

 

F- 19
 

 

Note 7 – Private Placement, continued

 

Accounting for the Financing Warrant and the Consulting Warrant, continued

 

Provided below are the principal assumptions used in the measurement of the fair values of the Financings Warrant and the Consulting Warrant as of May 16, 2013 and September 30, 2013.

 

    As of May 16, 2012     As of September 30, 2013  
    Financing
Warrant
    Consulting
Warrant
    Financing
Warrant
    Consulting
Warrant
 
Stock price on valuation date   $ 0.42     $ 0.42     $ 0.42     $ 0.42  
Exercise price   $ 0.624     $ 0.01     $ 0.624     $ 0.01  
Term (years)     5.00       5.00       4.63       4.63  
Expected volatility     60 %     60 %     60 %     60 %
Dividend yield     0 %     0 %     0 %     0 %
Weighted average risk-free interest rate     0.79 %     1.39 %     0.79 %     1.39 %
Number of warrants     881,410       1,110,131       881,410       1,110,131  
Number of trials     20,000       20,000       20,000       20,000  
Aggregate fair value   $ 186,500     $ 537,500     $ 189,500     $ 540,000  

 

The initial fair value of the Financing Warrant was $186,500 and was accounted for as derivative issuance expense and along with the other derivative issuance expenses (see below), was expensed upon the issuance of the Convertible Notes. The initial fair value of the Consulting Warrant was $537,500, and was expensed immediately as a consulting fee and was recorded within general and administrative expenses in the statement of operations for the nine months ended September 30, 2013. During the nine months ended September 30, 2013 and for the period October 30, 2012 (inception) through September 30, 2013, the Company recorded an increase of $5,500 in the fair value of the derivative liability for the Financing Warrant and the Consulting Warrant, which was recorded as a change in the fair value of derivative liabilities within the statement of operations.

 

Derivative Issuance Expenses

 

Derivative issuance expenses incurred in connection with the Private Placement are shown below and were expensed upon the issuance of the Convertible Notes, as substantially all the value was attributable to the derivative instruments.

 

    For the Nine Months Ended
September 30, 2013
 
Fair value of Financing Warrant   $ 186,500  
Cash placement agent fee     538,393  
Legal and other expenses     162,169  
Total   $ 887,062  

 

Patent Assignment

 

On May 16, 2013, the Company entered into a patent assignment and Security Agreement with the Investors, in order to grant a continuing security interest in the patents included as collateral pledged in connection with the Convertible Notes.

 

F- 20
 

 

Note 8 – Commitments and Contingencies

 

Consulting Agreements

 

On May 14, 2013, the Company entered into a consulting agreement with Cheryl Sanchez, the sister of one of the directors and shareholders of the Company, for Ms. Sanchez to provide finance, accounting and other advisory services (“Finance Consulting Agreement”). Ms. Sanchez was paid at a rate of $21,550 per month. In connection with the execution of the Finance Consulting Agreement, Ms. Sanchez purchased for $35,464 in cash, 354,640 shares of the Company’s common stock, under the Company’s 2013 Stock Plan (See Note 10 – Stock Based Compensation). The Company’s Board of Directors determined that the purchase price of $0.10 per share represented the fair value of these shares upon issuance, and further concluded that no compensation was deemed to be awarded to Ms. Sanchez in connection with this share issuance. The Finance Consulting Agreement was terminated effective November 30, 2013. In connection with the termination of the Finance Consulting Agreement, the Company repurchased for $29,553, 295,533 shares of restricted common stock from Ms. Sanchez.

 

Note 9 – Stockholders’ Deficiency

 

Authorized Capital

 

Pursuant to the Company’s original certificate of incorporation, on October 30, 2012 (inception), the Company authorized 18,000,000 shares of common stock with a par value of $0.00001 per share and 5,000,000 shares of preferred stock $0.00001 par value per share, all of which was designated Series AA Preferred Stock.

 

On May 10, 2013, pursuant to an amendment of the Company’s certificate of incorporation, the Company increased to 40,000,000 the authorized number of shares of common stock, par value of $0.00001 per share, and simultaneously, the Company eliminated the preferred stock (See Note 11 – Subsequent Events).

 

F- 21
 

 

Note 9 – Stockholders’ Deficiency, continued

 

Authorized Capital, continued

 

The holders of the Company’s common stock are entitled to one vote per share. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of legally available funds. Upon the liquidation, dissolution or winding up of the Company, holders of common stock are entitled to share ratably in all assets of the Company that are legally available for distribution.

 

Series AA Preferred Stock

 

During the period from October 30, 2012 (inception) through May 9, 2013, the Company was authorized to issue shares of its Series AA Preferred Stock. The Series AA Preferred Stock ranked senior to the Company’s common stock. The Series AA Preferred Stock was subordinate and ranked junior to all indebtedness of the Company. No shares of the Series AA Preferred Stock were ever issued.

 

Common Stock Issued

 

On November 8, 2012, the Company sold 7,680,000 shares of its common stock at a price of approximately $.0013 per share and representing aggregate proceeds of $10,000 to DvineWave Holdings LLC , an entity formed by the parents of Michael Leabman, the Company’s founder and its Chief Technology Officer, to make an investment in the Company.

 

On January 28, 2013, Company sold 320,000 shares of its common stock to Mr. Michael Leabman the Company’s founder and prior to October 30, 2013, also its President, at a price of approximately $.0013 per share for aggregate proceeds of $417.

 

On March 4, 2013, the Company sold 2,666,666 shares of its common stock at a price of $0.06 per share to Absolute Ventures LLC, an affiliate of Mr. Greg Brewer, one of the Company’s directors for aggregate proceeds of $160,000.

 

On May 7, 2013, the Company sold 80,000 shares of its common stock at a price of $0.06 per share to MS Investments, an affiliate of one of the company’s legal firms, Much Shelist, P.C. for aggregate proceeds of $4,800.

 

Note 10 – Stock Based Compensation

 

Adoption of 2013 Stock Plan

 

Effective as of May, 9, 2013, the Board adopted the 2013 Stock Plan of DvineWave Inc. (the “2013 Stock Plan”). The 2013 Stock Plan is administered by the Board, and provides for the issuance of incentive and non-incentive stock options, stock purchase rights and restricted stock units, for the purchase of up to a total of 4,217,352 shares of the Company’s common stock to the Company’s employees and consultants (as determined by the Board). The Board, or a committee of the Board, has the authority to determine the amount, type and terms of each award. Pursuant to the 2013 Stock Plan, each option grant must have an exercise price at or above the fair market value of the Company’s common stock on the date of grant in the case of a non-statutory stock option, or until the Company’s securities are listed on a recognized exchange, at 85% of fair value (as determined) under the 2013 Stock Plan of DvineWave Inc. (See Note 8 – Commitments and Contingencies).

 

F- 22
 

 

Note 11 – Subsequent Events

 

(a) Operating Lease

On October 4, 2013, the Company executed an eight month lease for 3,562 square feet of office space in Pleasanton California from an affiliate of Greg Brewer, one of the Company’s directors. The base rent is $6,055 per month plus an additional security deposit of $6,055. The Company has the right to terminate the lease upon 30 days written notice.

 

(b) Employment Agreements

 

The following is a summary of the employment arrangements with our executive officers as currently in effect.

 

Stephen Rizzone

 

The Company entered into an employment agreement with Stephen Rizzone, the Company’s President, Chief Executive Officer and chairman of the board of directors, effective October 1, 2013. The employment agreement has no specific term and constitutes at-will employment. Mr. Rizzone’s current annual base salary is $150,000, although his annual base salary will increase to $300,000 immediately following our initial public offering, and he is eligible for up to five annual cash bonuses of up to $30,000 each (one each with respect to our fiscal quarters and one with respect to our fiscal year) based upon achievement of performance-based objectives established by our board of directors. Pursuant to Mr. Rizzone’s employment agreement, he was granted a ten year option to purchase 1,100,000 shares of common stock on December 12, 2013 under our 2013 Equity Incentive Plan that vests over four years in 48 equal monthly installments. Mr. Rizzone’s employment agreement provides that upon the consummation of our initial public offering he will receive an additional option award so that together with Mr. Rizzone’s December 2013 option award the two option awards combined represent six percent (6%) of the Company’s outstanding shares on a fully-diluted basis. The second option award, if issued, will vest over the same vesting schedule as Mr. Rizzone’s December, 2013 option award.

 

If Mr. Rizzone’s employment is terminated due to his death or disability, by the Company without cause or if Mr. Rizzone resigns for good reason, Mr. Rizzone will be entitled to receive (i) one year of his base salary at the rate then in effect, (ii) five performance bonuses (each equal to the average of the performance bonus paid with respect to the two fiscal quarters, or the fiscal quarter-end and fiscal year-end, as applicable, immediately preceding Mr. Rizzone’s termination or resignation) (iii) reimbursement of Mr. Rizzone’s cost of COBRA coverage for one year, and (iv) twenty-five percent (25%) of the options to purchase shares of common stock subject to Mr. Rizzone’s option awards described above will vest immediately and become exercisable, and, along with any previously vested and unexercised options, may be exercised by Mr. Rizzone within one year following his termination or resignation. However, if a Liquidation Event (as defined below) shall occur within one year of Mr. Rizzone’s termination without cause or his resignation for good reason, all of Mr. Rizzone’s option awards described above will vest immediately and become exercisable.

 

F- 23
 

 

Note 11 – Subsequent Events, continued

 

Stephen Rizzone , continued

 

Mr. Rizzone’s employment agreement provides that if the Company experiences a Liquidation Event (as defined below), Mr. Rizzone’s employment with the Company will be terminated and the Company will enter into a consulting agreement with Mr. Rizzone that entitles him to the following during its term: (i) continued payment of Mr. Rizzone’s base salary at the rate then in effect, (ii) continued payment of Mr. Rizzone’s performance bonuses described above, and (iii) continued payment of benefits that are substantially similar to those of the Company’s other senior executive officers, and (iv) continuation of the vesting period of the option awards described above. The term of the consulting agreement between the Company and Mr. Rizzone shall expire on the later of two years from the date of the Liquidation event or October 1, 2017. For purposes of Mr. Rizzone’s employment agreement, a Liquidation Event means a merger, acquisition, consolidation or other transaction (other than an equity financing) following which our stockholders prior to such transaction hold less than fifty percent (50%) of our outstanding voting securities of the acquiring or surviving entity, or a sale, license or transfer of all or substantially all of our assets.

 

If Mr. Rizzone resigns without good reason, he will be entitled to his base salary at the rate then in effect up to and through the effective date of his resignation, along with any unreimbursed reasonable, out-of-pocket business expenses incurred by Mr. Rizzone in the performance of his duties.

 

Mr. Rizzone is also eligible to receive benefits that are substantially similar to those of the Company’s other senior executive officers. Mr. Rizzone is subject to certain restrictive covenants, including non-solicitation of employees, consultants and customers and non-competition each for a period one year following termination of his employment with the Company.

 

Grant of Stock Options

 

In December 2013, Mr. Rizzone was granted an option under the 2013 Equity Incentive Plan to purchase 1,100,000 shares of the Company’s common stock, at a price of $0.42 per share, with a term of ten years and which vests 1/48 for each completed month of service.

 

F- 24
 

 

Note 11 – Subsequent Events, continued

 

Michael Leabman

 

We entered into an employment agreement with Michael Leabman, the Company’s Chief Technology Officer, effective October 1, 2013. The employment agreement has no specific term and constitutes at-will employment. Mr. Leabman’s current annual base salary is $250,000, and he is eligible for an annual performance based bonus award of up to twenty percent (20%) of his base salary based upon achievement of performance-based objectives established by our Chief Executive Officer and board of directors. Pursuant to Mr. Leabman’s employment agreement, he is entitled to a ten year option to purchase 230,000 shares of common stock under our 2013 Equity Incentive Plan that vests over four years in 48 equal monthly installments. Mr. Leabman’s employment agreement provides that upon the consummation of our initial public offering, if Mr. Leabman’s option award plus any Company securities he currently owns represent less than three percent (3%) of the Company’s outstanding shares on a fully-diluted basis, he shall be entitled to a second option award which will entitle him to purchase that number of shares of our common stock such that the two option awards combined plus any Company securities he currently owns represent three percent (3%) of the Company’s outstanding shares on a fully-diluted basis. The second option award, if issued, will vest over the same vesting schedule as Mr. Leabman’s initial option award.

 

If Mr. Leabman’s employment is terminated due to his death or disability, by the Company without cause or if Mr. Leabman resigns for good reason, Mr. Leabman will be entitled to receive (i) one year of his base salary at the rate then in effect, (ii) a performance bonuses each equal to the total performance bonuses paid to Mr. Leabman in the calendar year immediately preceding Mr. Leabman’s termination or resignation (iii) reimbursement of Mr. Leabman’s cost of COBRA coverage for one year, and (iv) twenty-five percent (25%) of the options to purchase shares of common stock subject to Mr. Leabman’s option awards described above will vest immediately and become exercisable, and, along with any previously vested and unexercised options, may be exercised by Mr. Leabman within one year following his termination or resignation. However, if a Liquidation Event (as defined below) shall occur within one year of Mr. Leabman’s termination without cause or his resignation for good reason, all of Mr. Leabman’s options to purchase shares of common stock pursuant to the option awards described above will vest immediately and become exercisable.

 

In addition to those benefits described above, if Mr. Leabman’s employment is terminated by the Company without cause or he resigns for Good Reason within 18 months of a Liquidation Event (as defined below), all of Mr. Leabman’s options to purchase shares of common stock pursuant to the option awards described above will vest immediately and become exercisable. For purposes of Mr. Leabman’s employment agreement, a Liquidation Event has the same meaning as in Mr. Rizzone’s employment agreement.

 

If Mr. Leabman resigns without good reason, he will be entitled to his base salary at the rate then in effect up to and through the effective date of his resignation, along with any unreimbursed reasonable, out-of-pocket business expenses incurred by Mr. Leabman in the performance of his duties.

 

Mr. Leabman is also eligible to receive benefits that are substantially similar to those of the Company’s other senior executive officers. Mr. Leabman is subject to certain restrictive covenants, including non-solicitation of employees, consultants and customers and non-competition each for a period one year following termination of his employment with the Company.

 

F- 25
 

 

Note 11 – Subsequent Events, continued

 

Michael Leabman, continued

 

Additionally, if Mr. Leabman’s employment is terminated due to his death or disability, twenty-five percent (25%) of the options to purchase shares of common stock subject to Mr. Leabman’s option awards described above will vest immediately and become exercisable, and, along with any previously vested and unexercised options, may be exercised within a period of one year following such termination. If Mr. Leabman’s employment is terminated due to his death or disability and, prior to the one-year anniversary of his termination, the Company experiences a liquidation event, all of Mr. Leabman’s options to purchase shares of common stock pursuant to the option award described above will vest immediately and become exercisable.

 

If Mr. Leabman resigns without good reason, he will be entitled to his base salary at the rate then in effect up to and through the effective date of his resignation, along with any unreimbursed reasonable, out-of-pocket business expenses incurred by Mr. Leabman in the performance of his duties.

 

Mr. Leabman is also eligible to receive benefits that are substantially similar to those of the Company’s other senior executive officers. Mr. Leabman is subject to certain restrictive covenants, including non-solicitation of employees, consultants and customers and non-competition each for a period one year following termination of his employment with the Company.

 

(c) Reverse Stock Split

 

In December 2013 the Company’s board of directors and stockholders holding a majority of outstanding voting power, approved resolutions authorizing the Company’s board of directors to effect a reverse split of the Company’s common stock at an exchange ratio of between one-for-two and one-for-ten, with the board of directors retaining the discretion as to whether to implement the reverse split and which exchange ratio to implement.  

 

(d) Equity Incentive Plan

 

In December 2013 the Company’s board and stockholders approved the 2013 Equity Incentive Plan, providing for the issuance of equity based instruments aggregating an initial total of 4,158,245 shares which replaces the 2013 Stock Plan.

 

(e) Employee Option Grants

 

On January 7, 2014, the Company’s board granted to various employees and consultants, stock options to purchase an aggregate of 2,146,000 shares of our common stock at an exercise price of $0.625 per share. Included in the grant were 230,000 options to Michael Leabman, Chief Technical Director pursuant to his employment contract and 320,000 options each to Thomas Iwanski, Chief Financial Officer and George Holmes, Vice President of Sales and Marketing. These stock option grants were issued from the 2013 Equity Incentive Plan.

 

(f) Company Name Change

 

On January 2, 2014, the board and stockholders approved the name change for the Company from DvineWave Inc. to Energous Corporation .

 

F- 26
 

 

4,000,000 Shares of Common Stock

 

Energous Corporation

 

PROSPECTUS

 

MDB Capital Group, LLC

 

Until            , 2014, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.  This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 
 

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

 

The following table sets forth the various expenses to be incurred in connection with the sale and distribution of our common stock being registered hereby, all of which will be borne by us (except any underwriting discounts and commissions and expenses incurred for brokerage, accounting, tax or legal services or any other expenses incurred in disposing of the shares). All amounts shown are estimates except the SEC registration fee.

 

SEC Filing Fee   $ 3,318  
FINRA Fee*   $ 50,000  
Underwriter’s Legal Fees and Expenses.   $ 175,000  
Nasdaq Fee*   $ 50,000  
Printing Expenses*   $ 10,000  
Accounting Fees and Expenses*   $ 100,000  
Legal Fees and Expenses*   $ 250,000  
Transfer Agent and Registrar Expenses*   $ 10,000  
Miscellaneous*   $ 101,682  
         
Total   $ 750,000  

 

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

The following summary is qualified in its entirety by reference to the complete text of any statutes referred to below and the certificate of incorporation of Energous Corporation, a Delaware corporation.

 

Section 145 of the General Corporation Law of the State of Delaware (the “DGCL”) permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.

 

In the case of an action by or in the right of the corporation, Section 145 of the DGCL permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses that the Court of Chancery or such other court shall deem proper.

 

II- 1
 

 

Section 145 of the DGCL also permits a Delaware corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under Section 145 of the DGCL.

 

Article IX of our Amended and Restated Certificate of Incorporation states that our directors shall not be personally liable to us or to our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to us or to our stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.  If the Delaware General Corporation Law is amended after the date hereof to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our directors shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.

 

Article X of our Amended and Restated Certificate of Incorporation authorizes us, to the fullest extent permitted by applicable law, to provide indemnification of (and advancement of expenses to) our directors, officers, employees and agents (and any other persons to which the Delaware General Corporation Law permits us to provide indemnification) through bylaw provisions, agreements with such directors, officers, employees, agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by the Delaware General Corporation Law, with respect to actions for breach of duty to this corporation, its stockholders, and others.

 

Article VI of our Bylaws provides that we shall, to the maximum extent and in the manner permitted by the Delaware General Corporation Law, indemnify each of our directors and officers against expenses (including attorneys’ fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the Company. The right to indemnification conferred by Article VI is a contract right and includes the right to be paid by us the expenses incurred in defending any action or proceeding for which indemnification is required or permitted following authorization thereof by the Board of Directors shall be paid in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that the indemnified party is not entitled to be indemnified as authorized in Article VI.  We may maintain insurance, at our expense, to protect the Company and any of our directors, officers, employees or agents against any such expense, liability or loss, whether or not we have the power to indemnify such person.

 

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES

 

During the past three years, we issued the following securities without registration under the Securities Act of 1933, as amended (the “Securities Act”).

 

II- 2
 

 

Stock, Warrants and Convertible Subordinated Notes

 

On May 14, 2013, we sold 354,640 shares of common stock to a former consultant of the Company for proceeds of $35,464. We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investor was accredited and there was no form of general solicitation or general advertising relating to the offer. On December 12, 2013, pursuant the restricted stock purchase agreement between the Company and the consultant, the Company repurchased 295,533 shares of common stock from the consultant at the original purchase price per share paid by the consultant.

 

On May 7, 2013, we sold 80,000 shares of common stock to MS Investments, LLC for proceeds of $4,800. We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investor was accredited and there was no form of general solicitation or general advertising relating to the offer.

 

On March 1, 2013, we sold 2,666,666 shares of common stock to Absolute Ventures LLC for proceeds of $160,000. We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investor was accredited and there was no form of general solicitation or general advertising relating to the offer.

 

On November 8, 2012, we sold 7,680,000 shares of common stock to DvineWave Holdings LLC, an entity formed by the parents of Michael Leabman, our Chief Technology Officer, to make an investment in the Company, for proceeds of $10,000. We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investor was accredited and there was no form of general solicitation or general advertising relating to the offer.

 

On January 28, 2013, we sold 320,000 shares of common stock to Michael Leabman, our Chief Technology Officer, for proceeds of $417. We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investor was accredited and there was no form of general solicitation or general advertising relating to the offer.

 

On May 16, 2013, we completed an offering of $5.5 million in principal amount of our senior secured convertible promissory notes.  The notes bear simple interest at 6%, and upon and during the occurrence of any specified event of default, the notes bear interest at 12%. The notes may be prepaid or converted into common stock with consent of the holder or the holders of a majority of the principal then outstanding under all the notes and upon certain events constituting a change in control of the Company. If we proceed with an initial public offering of our securities, as defined in the Securities Purchase Agreement, then there will be a mandatory conversion of the notes at a conversion price equal to a 50% discount to the per share initial public offering price (but not less than $0.52 or more than $1.04 per share). A note may also be converted in certain circumstances at the election of the holder of the note connection with a financing that is not an initial public offering, in which case the conversion price is to be equal to 50% of the price paid by the investors in such financing (but not less than $0.52 or more than $1.04 per share). In the event of an optional conversion by the holder of a Note during a continuing event of default, the conversion price would be $0.52; otherwise the optional conversion price would be $1.04.   We relied on the exemption provided by Rule 506 of Regulation D of the Securities Act of 1933 to make the offerings inasmuch as all of the investors were accredited and there was no form of general solicitation or general advertising relating to the offers.

 

On May 16, 2013, we issued to MDB Capital Group, LLC a warrant, subsequently amended, to purchase shares of our common stock as consideration for its service as placement agent in connection with our May 16, 2013 offering of senior secured convertible promissory notes. This warrant has a term of five years, an aggregate exercise price fixed at $550,000 and an initial per share exercise price of $0.52; provided that the per share exercise price for which the warrant is exercisable will be adjusted upon consummation of a qualifying firm commitment underwritten initial public offering, if any, based on the actual conversion price of the notes in such initial public offering or shall be adjusted to 120% of the then in effect conversion price of the notes upon the occurrence of a merger, acquisition, sale or other disposition of substantially all assets, certain transactions involving the acquisition of voting control of the Company or certain stock splits or similar transactions not effected in connection with any initial public offering of the Company. We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investors were accredited and there was no form of general solicitation or general advertising relating to the offer. This warrant was subsequently amended and restated on December 13, 2013, solely to provide that it may not be exercised, except in certain circumstances, until six months following the Company’s initial public offering, to which this registration statement relates.

 

II- 3
 

 

On May 16, 2013, we issued to MDB Capital Group, LLC, as consideration for consulting services rendered prior to the issuance date, a warrant to purchase 1,110,131 shares of our common stock. This warrant has a term of five years and a per share exercise price of $0.01. We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investors were accredited and there was no form of general solicitation or general advertising relating to the offer. This warrant was subsequently amended and restated on December 13, 2013, solely to provide that it may not be exercised, except in certain circumstances, until six months following the Company’s initial public offering, to which this registration statement relates.

 

Stock Options

 

On December 12, 2013, we granted to Stephen Rizzone, our President and Chief Executive Officer, an option to purchase an aggregate of 1,100,000 shares of our common stock at an exercise price of $0.42 per share. We received no consideration from these individuals in connection with the issuance of such options.

 

On January 7, 2014, we granted to 13 of our employees and consultants options to purchase an aggregate of 2,146,000 shares of our common stock at an exercise price of $0.625 per share. We received no consideration from these individuals in connection with the issuance of such options.

 

All of the stock options described above were granted under our 2013 Equity Incentive Plan to our officers, directors, employees and consultants in reliance upon an available exemption from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b) of the Securities Act. Among other things, we relied on the fact that, under Rule 701, companies that are not subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act are exempt from registration under the Securities Act with respect to certain offers and sales of securities pursuant to “compensatory benefit plans” as defined under that rule. We believe that our 2013 Equity Incentive Plan qualifies as a compensatory benefit plan.

 

II- 4
 

 

ITEM 16.   EXHIBITS
     
Exhibit    
No.   Description of Document
1.1   Form of Underwriting Agreement**
3.1   Amended and Restated Certificate of Incorporation of Energous Corporation **
3.2   Bylaws of Energous Corporation **
4.1   Specimen Certificate representing shares of common stock of Energous Corporation **
4.2   Form of Underwriter’s Warrant**
5.1   Opinion of K&L Gates LLP regarding the validity of the common stock being registered**
10.1   Engagement Agreement dated January 23, 2013 between the registrant and MDB Capital Group, LLC*
10.2   Engagement Agreement dated January 23, 2013 between the registrant and MDB Capital Group, LLC*
10.3   Form of Lock-Up Agreement*
10.4   Form of Securities Purchase Agreement between the registrant and investors for an offering completed on May 16, 2013*
10.5   Form of Registration Rights Agreement between the registrant and investors for an offering completed on May 16, 2013*
10.6   Form of Senior Secured Convertible Promissory Note issued by the registrant to investors in the offering completed on May 16, 2013*
10.7   Form of Security Agreement between the registrant and investors for the offering completed on May 16, 2013*
10.8   Executive Employment Agreement between the Company and Stephen R. Rizzone dated October 1, 2013 *
10.9   Executive Employment Agreement between the Company and Michael Leabman dated October 1, 2013 *
10.10   Form of Indemnification Agreement *
10.11   Form of Confidential Information and Invention Assignment Agreement *
10.12   Amended and Restated Warrant issued to MDB Capital Group, LLC (ARW-1) dated December 13, 2013*
10.13   Amended and Restated Warrant issued to MDB Capital Group, LLC (ARW-2) dated December 13, 2013*
10.14   Form of Lock-Up Agreement with MDB Capital Group, LLC**
10.15   Registration Rights Agreement between the registrant and MDB Capital Group, LLC dated May 16, 2013*
10.16   Energous Corporation 2013 Equity Incentive Plan*
10.17   Form of stock option award under 2013 Omnibus Equity Incentive Plan*
10.18   Standard Industrial/Commercial Multi-Tenant Lease between the registrant and ProSoft Engineering, Inc. dated October 4, 2013*
14.1   Code of Ethics**
23.1   Consent of Marcum LLP, Independent Registered Public Accounting Firm*
23.2   Consent of K&L Gates LLP (included in Exhibit 5.1)**
24.1   Power of Attorney*

 

*Filed herewith.
  
**To be filed by amendment.

 

II- 5
 

 

ITEM 17.  UNDERTAKINGS

 

The undersigned registrant hereby undertakes:

 

(1)             To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i)              To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

 

(ii)             To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

 

(iii)            To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

 

(2)             That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3)             To remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering.

 

(4)             That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; (ii) any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; (iii) the portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and (iv) any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

(5)             To provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

(6)             For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus as filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

II- 6
 

 

(7)             For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(8)             Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

II- 7
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pleasanton, State of California, on this 23rd day of January, 2014.  

 

  Energous Corporation
   
  /s/ Stephen R. Rizzone
  Stephen R. Rizzone
  Chief Executive Officer and Director
  (Principal Executive Officer)

 

POWER OF ATTORNEY

 

Each person whose signature appears below constitutes and appoints Stephen R. Rizzone and Thomas Iwanski and each of them, his true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution, severally, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, any subsequent registration statements pursuant to Rule 462 of the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney may be executed in counterparts.

 

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

Dated: January 23, 2014 /s/ Stephen R. Rizzone
  Stephen R. Rizzone
  Chief Executive Officer and Director
  (Principal Executive Officer)
   
Dated: January 23, 2014 /s/ Michael Leabman
  Michael Leabman
  Chief Technology Officer and Director
   
Dated: January 23, 2014 /s/ Thomas Iwanski
  Thomas Iwanski
  Chief Financial Officer
  (Principal Financial and Accounting Officer)
   
Dated: January 23, 2014 /s/ Gregory Brewer
  Gregory Brewer, Director

 

II- 8

 

 

 

January 23, 2013

 

Michael Leabman

DvineWave Inc.

207 Veritas Court

San Ramon, CA 94582

 

Re:          Engagement Agreement

 

Dear Mr. Leabman:

 

This letter agreement (the “Agreement”) confirms the terms and conditions that will govern the DvineWave Inc. (together with its affiliates, subsidiaries, predecessors, and successors, the “Company”) engagement (the “Engagement”) of MDB Capital Group, LLC (together with its affiliates, “MDB”) as the Company’s exclusive financial advisor and placement agent in connection with an offering or series of offerings of Company securities.

 

1.           Exclusive Appointment; Services .

 

a.            Exclusive Appointment . The Company hereby appoints MDB to act as its exclusive placement agent in connection with the sale of its securities, including but not limited to equity, debt, equity-linked securities, or equity capital commitments (“Securities”) to one or more financial, strategic, accredited, or other investors. 1 The transactions currently contemplated consist of the following: (1) a Bridge Loan of approximately $2 million; (2) a “PIPE” (Private Investment in Public Entity) offering of approximately $6 million; and (3) a public offering of up to approximately $20 million of Company Securities. However, it is understood that the manner, size, and timing of the contemplated transactions may change, and more or fewer transactions may occur, and the exclusive appointment of MDB covers any and all offerings or sales of any type or form, including but not limited to private placements, registered direct offerings, institutional offerings under Rule 144A and similar arrangements, mergers and acquisitions, and public offerings, on any basis, agency or underwritten (each, an “Offering”).

 

During the term of this Agreement, the Company will not, nor will it permit any of its advisors or representatives to, engage any party other than MDB to act as placement agent or underwriter for any Offering, or to perform any other financial advisory, underwriting, or investment banking services for the Company. If the Company or, to the Company’s knowledge, any of its subsidiaries, stockholders, members, partners, affiliates, advisors or representatives, is contacted by any person concerning an Offering of Securities or expressing a desire to purchase Securities, the Company shall provide to MDB all relevant details of the inquiry.

 

 

1 The term “Securities” shall have the broadest possible meaning, but shall not include executive incentive equity or other employee or consultant equity grants that are unrelated to an Offering contemplated herein and shall not include any other securities that are mutually agreed by MDB and the Company in writing to be excluded from the definition of Securities. MDB recognizes that businesses like the Company may have an opportunity to exchange equity for intellectual property or for services that are not related to investment of working capital or financing, and agrees to consider in good faith any request by the Company to exclude from the definition of “Securities” common stock issued in connection with a transaction that is not a capital raising transaction.

 

 
 

 

MDB Engagement Letter

January 23, 2013

p. 2 of 15

 

b.            Services . MDB represents and warrants that it is a licensed broker/dealer under applicable federal and state securities law. MDB shall assist the Company in identifying investors and potential purchasers, carrying out due diligence with respect to any potential Offering, and analyzing, structuring, and negotiating the contemplated Offering(s) on the terms and conditions set forth herein. In the case of private Offerings, MDB shall undertake to arrange such transactions on a “best efforts” basis; MDB shall underwrite public Offerings, if any, on a “firm commitment” basis (any such underwritten public Offering is a “Public Offering”). However, nothing contained herein constitutes a commitment or guarantee, express or implied, that any Offering will be consummated. MDB will not have the power or authority to bind the Company to any sale of the Securities, and any Offering will be conducted at a price and on terms satisfactory to the Company. MDB will have the right, but not the obligation, to determine the allocation of the Securities among prospective purchasers, if necessary, provided that such allocation is reasonably acceptable to the Company.

 

From time to time throughout the Engagement, MDB shall propose potential investors to the Company for its review and approval. MDB will use commercially reasonable efforts to answer the reasonable questions of Company in connection with Company’s review and consideration. It is not anticipated that MDB will propose potential investors that are not U.S. persons. MDB shall seek Company approval (which shall not be unreasonably withheld) prior to contacting any potential investor on behalf of the Company. The Company shall have two business days in which to object to MDB contacting any such potential investor after MDB identifies the investor; in the absence of any objection received within that time period, MDB may reasonably presume contact to be approved. Such contacts as are approved by the Company shall be included in the definition of an “MDB Investor” for the purposes of Section 2c.

 

2.           Compensation . As consideration for the services provided under this Agreement, the Company will pay MDB a fee as follows:

 

a.            Fee . The Company shall pay MDB a cash fee (the “Fee”) equal to ten percent (10%) of the Gross Transaction Value (defined below) of any Offering, which is due and payable at the time of each closing of an Offering (“Closing”) exclusively from the proceeds of the Offering (directly from escrow, if an escrow account is used).

 

As used herein, the term “Gross Transaction Value” shall be any consideration whether paid directly or indirectly to or by the Company, or an affiliate, or to any of its stockholders, directors, officers or other management personnel, or to any third party at the direction of the Company, so long as such consideration is paid in connection with an Offering, including, but not limited to:

 

i. all cash, Securities or other property actually received;

 

ii. the aggregate principal amount of any indebtedness assumed by investors in connection with the Offering;

 

iii. all contingent future payments (including, but not limited to, milestone payments, royalties, or any other payments based upon future sales, profits or otherwise) as actually received;

 

iv. any payments for non-compete covenants or consulting agreements received from investors;

 

v. the net value of any liabilities assumed by investors or otherwise paid or to be paid by investors or out of proceeds of the Offering; and

 

vi. the net value of any excess benefits which are realized by any party or any stockholder, director, officer, employee or agent thereof as a result of contractual arrangements providing for benefits to it which are greater than those which would be reasonably expected to available to it on an arm's length basis.

  

 
 

 

MDB Engagement Letter

January 23, 2013

p. 3 of 15

 

If the Gross Transaction Value is paid in whole or in part in the form of Securities, the value of such Securities, for purposes of calculating MDB’s fee, shall be deemed to be the fair market value thereof on the day prior to the Closing, as the Company and MDB shall mutually agree; provided, however, that if such Securities consist of freely trading Securities for which there is an existing public trading market, the fair market value thereof shall be deemed to be the average of the last sales prices for such Securities on the ten (10) trading days ending five (5) days prior to Closing. With respect to contingent or non-contingent future payments, the value will be determined, and the payment made, at such future date as actually received.

 

b.            Warrants . In addition to the Cash Fee, immediately upon Closing, the Company shall sell to MDB warrants (“Warrants”) to purchase the same type and character of Securities as are issued in the Offering (e.g., Common Stock), in an amount equal to ten percent (10%) of the aggregate Securities issued in the Offering for the sum of $1,000. Such Warrants will be for a term of five (5) years at an exercise price equal to 120% (one hundred twenty percent) of the price paid by investors in the Offering. The Warrants will contain cashless exercise and anti-dilution provisions and representations and warranties normal and customary for warrants issued to placement agents or underwriters, and will not be callable or terminable prior to the expiration date. No adjustment will be made to the exercise price or number of shares underlying the Warrants in the event of subsequent financings. Common stock underlying the Warrants will have identical registration rights as provided to investors in the Offering, including “piggyback” registration rights on the registrations of the Company or demand registrations (voting with the other registrable securities to effect any such demand) by any later round of investors. The Company shall bear all costs and expenses of registration, including the filing and clearing of one or more registration statements. The Warrants may be issued to any persons or entities designated by MDB.

 

c.            Other Fee Provisions; Fee Tail . The entire Fee and Warrants will be payable in respect of any other sale or placement of Company Securities that closes or is in process during the term of this Agreement, regardless of whether such sale has been arranged by MDB, by another agent, or directly by the Company. Upon termination of this Agreement for any reason, the Company shall promptly pay MDB its accrued but unpaid fees and unreimbursed expenses incurred up to and as of the date of termination. Notwithstanding any termination of this Agreement, MDB shall be entitled to the entire Fee and Warrants set forth in Section 2(a)-(b) if, within two (2) years of the later to occur of (i) the termination of this Agreement or (ii) the last Closing of any Offering arranged by MDB, the Company consummates or enters into an agreement for the sale of Securities or to obtain financing or other benefit with any person or entity contacted by MDB in connection with this engagement as approved by the Company pursuant to Section 1b or with which the Company or any of its agents on behalf of the Company first made contact without the involvement of MDB during the term of this Engagement (each, an “MDB Investor”). Any and all such fees shall be payable upon the Closing of any such sale.

 

d.            Expenses . The Company is responsible for all costs and expenses associated with any Offering of its Securities. Promptly upon request, the Company shall reimburse MDB for all reasonable out-of-pocket expenses incurred in connection with this Engagement, including but not limited to reasonable travel, printing, and the fees and expenses of legal counsel and any other independent advisors selected and retained by MDB (with the Company’s consent, which shall not be unreasonably withheld), subject to the following:

 

i.             MDB Expenses . With the exception of legal fees and expenses, any single expense in excess of $1,000 (one thousand dollars) will not be incurred without the Company’s prior approval, which shall not be unreasonably withheld. In addition, the Company’s obligation to reimburse such ordinary expenses prior to the securing of bridge or other interim financing shall be limited to the sum of $10,000 (ten thousand dollars). Notwithstanding the foregoing limitation, any reasonable reimbursable expenses incurred but not reimbursed prior to bridge financing due to said limitation shall be reimbursed after the bridge financing and the cap shall be thereafter lifted, subject to the Company’s continued right to approve expenses over $1,000. Upon execution of this Agreement, the Company shall deposit with MDB a fully refundable expense retainer of $10,000 (ten thousand dollars).

 

 

 

 
 

 

MDB Engagement Letter

January 23, 2013

p. 4 of 15

 

ii.          Legal Expenses . It is understood that the amount of MDB’s legal expenses necessarily depends on the manner and size of any Offering the Company pursues. Prior to MDB’s engagement of counsel with respect to any Offering, public or private, the Company shall deposit with MDB a refundable legal fee retainer of $25,000 (twenty-five thousand dollars). With respect to any single private Offering, the Company shall not be expected to reimburse MDB more than $25,000 (twenty-five thousand dollars) in legal fees. It is understood that the fees of MDB’s counsel for any Public Offering (“Underwriter’s Counsel”) will significantly exceed $25,000 but will not exceed the market rate for similar services by counsel of commensurate reputation, experience, and skill; legal fees for Underwriter’s Counsel shall be negotiated in good faith and approved by the Company (which approval shall not be unreasonably withheld) prior to commencement of any work by Underwriter’s Counsel with respect to any Public Offering of Company Securities, it being understood that in no event will MDB advance legal fees on the Company’s behalf.

 

e.            Payments . All payments to be made to MDB hereunder will be made in cash by wire transfer of immediately available U.S. funds. Except as expressly set forth herein, no fee payable to MDB hereunder shall be credited against any other fee due to MDB. The obligation to pay any fee or expense set forth herein shall be absolute and unconditional and shall not be subject to reduction by way of setoff, recoupment or counterclaim.

 

3.           Manner of Offering; Representations and Warranties of the Company . The Company warrants and agrees that:

 

a.            Due Diligence . The Company will fully cooperate with MDB in any due diligence investigation reasonably requested by MDB in connection with the Engagement and will use commercially reasonable efforts (or in the case of a request in connection with a Public Offering, best efforts) to furnish MDB with such information with respect to the business, operations, assets, liabilities, financial condition and prospects of the Company, including but not limited to financial statements, certificates of its senior officers regarding such information, and customary opinions of counsel and customary letters or opinions of accountants, and such other documents as MDB may from time to time reasonably request (the "Company Information") to assist in preparing a private placement memorandum, registration statement, or similar document for use in connection with any Offering and will provide MDB with access to the officers, directors, employees, accountants, counsel and other representatives (collectively, the “Representatives”) of the Company. It is acknowledged that the practice of requesting legal opinions in private Offerings is declining in prevalence and that the scope of such opinions, when given, is also declining. The Company represents and warrants that all Company Information provided to MDB, including but not limited to the Company's financial statements, will be complete and correct in all material respects and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company acknowledges and confirms that MDB (i) will use and rely upon the accuracy and completeness of all such Company Information without independently investigating or verifying same; (ii) has not been retained to independently verify any such Company Information; (iii) assumes no responsibility for the accuracy, completeness, or adequacy for any purpose of such Company Information or any other information regarding the Company; and (iv) will not make any appraisal of any assets of the Company.

 

b.            Offering Materials . The Company will be solely responsible for the contents of the private placement memorandum, registration statement, or other offering document (as such may be amended or supplemented from time to time, and including any information incorporated therein by reference, the "Offering Materials") and any and all other written or oral communications provided by or on behalf of the Company to any actual or prospective purchaser of the Securities, and the Company represents and warrants that the Offering Materials (other than with respect to any financial projections contained therein, if any), registration statement, and such other communications will not, as of the date of the offer or sale of the Securities, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. With respect to any financial projections that may be contained in the Offering Materials (the “Projections”), the Company represents and warrants that the Projections will be made with a reasonable basis and in good faith and that the Projections will represent the best then-available estimate and judgment as to the future financial performance of the Company based on the assumptions to be disclosed therein, which assumptions will be all the assumptions that are material in forecasting the financial results of the Company and which will reflect the best then-available estimate of the events, contingencies and circumstances described therein. The Company authorizes MDB to provide the Offering Materials and related communications to prospective and final Company-approved purchasers of the Securities.

 

 
 

 

MDB Engagement Letter

January 23, 2013

p. 5 of 15

 

If, at any time prior to the completion of the offer and sale of the Securities, an event occurs that would cause the Offering Materials, registration statement, or other selling communications to contain an untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or that would cause a material change in the Company’s view of the likelihood of achievement of the Projections or the reasonableness of the underlying assumptions, then the Company will notify MDB immediately of such event, and MDB will suspend solicitations of the prospective purchasers of the Securities until such time as the Company shall prepare a supplement or amendment to the Offering Materials, registration statement, and selling communications that corrects such statement or omission or revises the Projections or such assumptions.

 

c.            Reliance Upon Company Representations and Opinions of Counsel, Etc . The Company agrees that any representations and warranties made by it to any investor in a private Offering shall be deemed also to be made to MDB for its benefit, and MDB shall be entitled to rely upon the same opinions of counsel and accountant’s letters that are provided to purchasers of the Securities in such Offering. Accordingly, the Company shall use commercially reasonable efforts to cause any such opinion or letter delivered to any investors in the Offering also to be addressed and delivered to MDB, or to cause such counsel or accountant to deliver to MDB a letter authorizing it to rely upon such opinion or letter. In connection with any Public Offering, the Company and MDB expect to enter into a mutually agreeable underwriting agreement in customary form, which would be expected to supersede this Engagement Agreement. For convenience and clarity of public disclosure, the parties agree to cooperate and attempt in good faith to incorporate Material Surviving Provisions into such underwriting agreement or a short and simple additional agreement or supplement to such underwriting agreement entered into at or around the time of effectiveness of the underwriting agreement. “Material Surviving Provisions” shall mean any surviving provisions of this Engagement Agreement that would be material in the context of such Public Offering and that may be required to be performed after the effectiveness of the registration statement filed in connection with such Public Offering.

 

d.            Compliance with State Securities Laws . The Company will be solely responsible for all applicable state securities law compliance with respect to the offer and sale of the Securities, including the timely making of any filings or taking other actions required under the applicable securities or “blue sky” laws or regulations of such domestic states as MDB reasonably may specify and the continuation of qualifications in effect for so long as may be required. The Company will provide MDB with copies of any pertinent filings at or around the time they are made, and to the extent any filing contains information relating to MDB and/or the terms of this Engagement, MDB will be provided a copy of the intended filing sufficiently in advance to permit time for review and comment. Before contacting any possible investor in connection with any Offering and, in any event, before providing any Offering Materials to any possible investor, MDB will provide to the Company its CRD number and make a good-faith attempt to disclose to the Company all other broker-dealer or investment adviser registration or exemption information it reasonably believes in its experience is required to be disclosed to any government authority in any securities filing required in connection with the Offering; further, MDB will promptly, and in any event within two business days of request from the Company provide such other information as the Company reasonably believes is required regarding MDB or its associates or affiliates to complete any securities law filing in order to comply with applicable law. Compliance with state securities laws will be at the Company’s sole expense.

  

 
 

 

MDB Engagement Letter

January 23, 2013

p. 6 of 15

 

e.            Offerings Exempt from Registration . To the extent that any Offering is designated as one to be made pursuant to an applicable exemption from registration under the Securities Act of 1933, as amended (the “Act”), the Company agrees that it will not, directly or indirectly, make any offer or sale of any Securities which would cause the contemplated Offering to fail to be entitled to the applicable exemption or unreasonably limit the availability of a public registered Offering or an Offering in which MDB will act. In particular, the Company represents and warrants to MDB that it has not, directly or indirectly, made any offers or sales of Securities which would cause the Offering of the Securities contemplated hereunder to fail to be entitled to the exemption from registration afforded by Section 4(2) of the Act. As used herein, the terms “offer” and “sale” have the meanings specified in Section 2(3) of the Act.

 

To the extent that an Offering is designated as one to be made pursuant to Regulation D under the Act, the offer and sale of the Securities will comply with certain requirements of Regulation D, including, without limitation, the requirements that:

 

(i) The Company will not offer or sell the Securities by means of any form of general solicitation or general advertising.

 

(ii) The Company will not offer or sell the Securities to any person who is not an “accredited investor” (as defined in Rule 501 under the Act).

 

(iii) The Company will exercise reasonable care to assure that the purchasers of the Securities are not underwriters within the meaning of Section 2(11) of the Act and, without limiting the foregoing, that such purchasers will comply with Rule 502(d) under the Act.

 

(iv) The Company will not make any filings with the Securities and Exchange Commission with respect to the offer and sale of the Securities without prior notification to MDB.

 

f.             Audits . The Company shall be solely responsible for performing, and shall perform, all financial audits necessary to meet the listing requirements of the NASDAQ, NYSE, or AMEX exchanges, as appropriate. For the avoidance of doubt, no financial audits will be required in connection with private Offerings.

 

g.            Patent Drafting Firm . Prior to Closing of an Offering, the Company shall retain a professional patent drafting firm reasonably acceptable to MDB in terms of scope of services and fees.

 

h.            Additional Pre-Offering Requirements . Prior to any Offering, the Company shall ensure that its capital structure, employee stock option plan, and Board of Directors are reasonably acceptable to MDB and, where applicable, the Company shall cause all holders to convert all notes and preferred shares to Common Stock with the extinguishment of attached rights. As a condition to making any changes at MDB’s request in connection with this subsection, the Company may require reasonable employment agreements or other protective agreements be entered into with one or more officers of the Company.

 

j.             Lock-Up Period . In the event of an IPO, all shares held by principals in the Company, shares received pursuant to a merger, if any, which closes within ninety days of the IPO closing, all Fee shares or Warrants and all shares received pursuant to exercise of such Warrants received by MDB hereunder, and all fee shares/warrants and all shares received pursuant to exercise of such Warrants received by the IP Development Company pursuant to subsection (j) above may not be sold or redeemed for a period of 12 months following the initial listing on an exchange. Investors in bridge financing, if any, will be locked up for a period of no less than 180 days following initial listing.

  

 
 

 

MDB Engagement Letter

January 23, 2013

p. 7 of 15

 

k.           Investor Relations Firm; Investor Conference Calls . For a period of two (2) years from the Closing of a Public Offering, the Company shall retain an investor relations firm reasonably acceptable to MDB in terms of scope of services and fees, which firm should have the ability to perform investor relations and product and company branding functions. For a period of two (2) years from the Closing of a Public Offering, the Company, with the aid of the investor relations firm, will announce and hold investor and public conference calls at least quarterly, at which the Company will review its quarterly and annual financial results and give guidance for the financial results of the then fiscal year, which information will also be made available in a press release and Form 8-K.

 

l.             Post-Offering Commitments . For a period of two (2) years from the Closing of a Public Offering, the Company shall:

 

(i) subscribe to the Depository Trust Clearing Corporation weekly transfer sheet reports, and provide such reports to MDB immediately upon receipt; and

 

(ii) no less than 24 hours prior to making any public filing or announcement, provide to MDB all such proposed public filings and announcements for its review and comment.

 

4.           Confidentiality . MDB acknowledges that in connection with the Engagement, the Company will provide MDB with information which the Company considers to be confidential and which will be marked with some methodology that indicates the Company’s intention to preserve the information as confidential (“Confidential Information”). MDB agrees to employ all reasonable efforts to keep the Confidential Information secret and confidential, using no less than the degree of care employed by MDB to preserve and safeguard its own confidential information, and shall not disclose or reveal the Confidential Information to anyone except its employees, consultants and contractors who have an obligation of confidentiality with MDB. MDB will not use the Confidential Information except in connection with its performance of services hereunder, unless disclosure is required by law, court order, or any government, regulatory or self-regulatory agency or body in the opinion of MDB’s counsel, in which event MDB will provide the Company with reasonable advance notice of such disclosure. These obligations do not apply to any portion of Confidential Information which: (a) is or becomes generally available to the public other than through a breach of this Agreement; (b) was rightfully in MDB’s possession or readily available to MDB from another source not under obligation of secrecy to the Company prior to the disclosure; (c) is rightfully received by MDB from another source on a non-confidential basis; (d) is disclosed by the Company to an unaffiliated third party free of any obligation of confidence; (e) is developed by or for MDB without reference to the Company’s Confidential Information; or (f) is released for disclosure with the Company’s written consent. Notwithstanding any termination of this Agreement, MDB’s confidentiality obligations shall survive (1) in perpetuity under the Uniform Trade Secrets Act (“UTSA”) in respect of any Trade Secret as defined by the UTSA, and (2) in respect of any non-Trade Secret, for a period of two years from the date of disclosure.

 

Notwithstanding any of the foregoing, MDB is authorized to transmit to any Company-approved prospective investor the following: confidential material furnished by the Company or prepared by MDB in conjunction with the Company for transmission to prospective investors in a private Offering; and forms of purchase agreements and any other legal documentation supplied to MDB for transmission to any prospective investor by or on behalf of the Company. The Company authorizes MDB to execute, on the Company’s behalf, confidentiality agreements in a form acceptable to the Company with such Company-approved prospective investors.

 

5.           Indemnification . The Company agrees to indemnify MDB and related persons in accordance with the indemnification agreement attached as Exhibit A, which is incorporated herein by this reference. The provisions of Exhibit A shall survive any termination or expiration of this Agreement.

 

 
 

 

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January 23, 2013

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6.           Term and Termination . MDB’s Engagement will commence upon the execution of this Agreement and shall continue in effect for a period of 180 (one hundred eighty) days (the “Initial Term”). During the Initial Term, this agreement may not be terminated by the Company absent gross negligence or willful misconduct of MDB. After the expiration of the Initial Term, the Agreement shall automatically renew and continue in effect until it is terminated by either party with sixty (60) days’ written notice to the other pursuant to Section 19. Upon termination of this Agreement for any reason, the rights and obligations of the parties hereunder shall terminate, except for the obligations set forth in Sections 2 (including, without limitation, to the extent payment is required under Section 2(c)), 3(b)-(g), 3(j)-(l), 5,6, 8-19, and Exhibit A , which shall survive termination.

 

7.           Additional Services; Right of First Refusal . Should the Company request MDB to perform any services or act in any capacity not specifically addressed in this Agreement, such services or activities shall constitute separate engagements, the terms and conditions of which will be embodied in separate written agreement(s) and will include appropriate indemnification provisions. The indemnity provisions of Exhibit A shall apply to any such additional engagements (whether or not covered by a separate written agreement), unless and until superseded by a written indemnity provision set forth in a subsequent agreement.

  

8.           Other Transactions; Disclaimers . The Company acknowledges that MDB is engaged in a wide range of investing, investment banking and other activities (including investment management, corporate finance, securities issuance, trading and research and brokerage activities) from which conflicting interests or duties, or the appearance thereof, may arise. Information held elsewhere within MDB but not accessible (absent a breach of internal procedures) to its investment banking personnel providing services to the Company will not under any circumstances affect MDB’s responsibilities to the Company hereunder. The Company further acknowledges that MDB and its affiliates have and may continue to have investment banking, broker-dealer and other relationships with parties other than the Company pursuant to which MDB may acquire information of interest to the Company. MDB shall have no obligation to disclose to the Company or to use for the Company’s benefit any such non-public information or other information acquired in the course of engaging in any other transaction (on MDB’s own account or otherwise) or otherwise carrying on the business of MDB. The Company further acknowledges that from time to time MDB’s independent research department may publish research reports or other materials, the substance and/or timing of which may conflict with the views or advice of MDB’s investment banking department and/or which may have an adverse effect on the Company’s interests in connection with the transactions contemplated hereby or otherwise. In addition, the Company acknowledges that, in the ordinary course of business, MDB may trade the securities of the Company for its own account and for the accounts of its customers, and may at any time hold a long or short position in such securities. MDB shall nonetheless remain fully responsible for compliance with federal and state securities laws in connection with such activities.

 

It is expressly understood and agreed that MDB has not provided nor is undertaking to provide any advice to the Company relating to legal, regulatory, accounting, or tax matters. The Company acknowledges and agrees that it has relied and will continue to rely on the advice of its own legal, tax and accounting advisors in all matters relating to any Offering contemplated hereunder.

 

The Company further acknowledges and agrees that MDB will act solely as an independent contractor hereunder, and that MDB’s responsibility to the Company is solely contractual in nature and that MDB does not owe the Company or any other person or entity, including but not limited to its shareholders, any fiduciary or similar duty as a result of the Engagement or otherwise.

 

The Company agrees that neither MDB nor any of its controlling persons, affiliates, directors, officers, employees or consultants shall have any liability to the Company or any person asserting claims on behalf of or in right of the Company for any losses, claims, damages, liabilities or expenses arising out of or relating to the Engagement, unless it is finally judicially determined that such losses, claims, damages, liabilities or expenses resulted solely from the gross negligence or willful misconduct of MDB.

 

 
 

 

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January 23, 2013

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9.           Work Product and Announcements . MDB's advice shall be the sole proprietary work product and intellectual property of MDB, and such advice may not be disclosed, in whole or in part, to third parties other than the Company’s professional advisors, as necessary, without the prior written permission of MDB unless such disclosure is required by law. The Company acknowledges that MDB, at its option and expense, and no earlier than the first to occur of (i) the signing of definitive agreements regarding the Offering or (ii) the public announcement of the Offering by the Company, may place announcements and advertisements or otherwise publicize the Offering (which may include the reproduction of the Company’s logo and a hyperlink to the Company’s website) on MDB’s website and in such financial and other newspapers and journals as it may choose, stating that MDB has acted as an agent in connection with or advised the Company about such Offering.

 

10.       Complete Agreement; Amendments; Assignment . This Agreement sets forth the entire understanding of the parties relating to the subject matter hereof and supersedes and cancels any prior communications, understandings and agreements, whether oral or written, between MDB and the Company. This Agreement may not be amended or modified except in writing. The rights of MDB hereunder shall be freely assignable to any affiliate of MDB, and this Agreement shall apply to, inure to the benefit of and be binding upon and enforceable against each of the parties and their successors and assigns.

 

11.         Third Party Beneficiaries . This Agreement is intended solely for the benefit of the parties hereto and, with the exception of the rights and benefits conferred upon the Indemnified Parties by Section 5 and Exhibit A of this Agreement, shall not be deemed or interpreted to confer any rights upon any third parties.

 

12.          Governing Law; Jurisdiction; Venue . All aspects of the relationship created by this Agreement shall be governed by and construed in accordance with the laws of the State of California, applicable to contracts made and to be performed in California, without regard to its conflicts of laws provisions. All actions and proceedings which are not submitted to arbitration pursuant to Section 13 hereof shall be heard and determined exclusively in the state and federal courts located in the County of Los Angeles, State of California, and the Company and MDB hereby submit to the jurisdiction of such courts and irrevocably waive any defense or objection to such forum, on forum non conveniens grounds or otherwise. The parties agree to accept service of process by mail, to their principal business address, addressed to the chief executive officer and secretary thereof. The parties hereby agree that this Section 12 shall survive the termination and/or expiration of this Agreement. Each of the Company and MDB will use commercially reasonable efforts to cooperate in connection with a reasonable request of the other to provide information to facilitate compliance with applicable law and regulation in connection with their respective performance under this Agreement.

 

13.          Arbitration . Any dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate, shall be determined by arbitration in Los Angeles (with the exception of claims to enforce the indemnity provision contained herein, which may, at the option of the party seeking relief, be submitted either to arbitration or to any court of competent jurisdiction). The arbitration shall be administered either by FINRA Dispute Resolution pursuant to its Code of Arbitration Procedure, or if FINRA cannot or does not accept the arbitration, by JAMS pursuant to its Streamlined Arbitration Rules and Procedures. Judgment on the Award may be entered in any court having jurisdiction. This clause shall not preclude parties from seeking provisional remedies in aid of arbitration from a court of appropriate jurisdiction.

 

 
 

 

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January 23, 2013

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The arbitrator may, in the Award, allocate all or part of the costs of the arbitration, including the fees of the arbitrator and the reasonable attorneys’ fees of the prevailing party.

 

The parties hereby agree that this Section 13 shall survive the termination and/or expiration of this Agreement.

 

The Company’s and MDB’s consent to Arbitration are confirmed by initialing below:

 

     
Company   MDB

 

14.          Severability . Should any one or more covenants, restrictions and provisions contained in this Agreement be held for any reason to be void, invalid or unenforceable, in whole or in part, such unenforceability will not affect the validity of any other term of this Agreement, and the invalid provision will be binding to the fullest extent permitted by law and will be deemed amended and construed so as to meet this intent. To the extent any provision cannot be so amended or construed as a matter of law, the validity of the remaining provisions shall be deemed unaffected and the illegal or invalid provision will be deemed stricken from this Agreement.

 

15.          Section Headings . The section headings herein are for convenience of reference only, and shall not limit or otherwise affect the meaning hereof.

 

16.          Accounting . Any calculation, computation or accounting that may be required under this Agreement shall be made in accordance and conformity with the Generally Accepted Accounting Principles and other standards as determined by the Financial Accounting Standards board and regulatory agencies with appropriate jurisdiction.

 

17.          Counterparts . This Agreement may be executed via facsimile transmission and may be executed in separate counterparts, each of which shall be deemed to be an original and all of which together shall constitute a single instrument.

 

18.          Patriot Act . MDB hereby notifies the Company that pursuant to the requirements of the USA PATRIOT Act (the “Patriot Act”), it is required to obtain, verify and record information that identifies the Company in a manner that satisfies the requirements of the Patriot Act. This notice is given in accordance with the requirements of the Patriot Act.

 

19.          Notice . All notices, demands, and other communications to given pursuant to this Agreement shall be in writing and shall be personally delivered, sent by overnight delivery using a nationally recognized courier service, sent by facsimile transmission, or emailed. Notice shall be deemed received: (a) if personally delivered, upon the date of delivery to the address of the receiving party; (b) if sent by overnight courier, the date actually received by the recipient; (c) if sent by facsimile or email, when sent. The parties will each promptly notify the other of any changes to the following contact information.

 

Notices to MDB shall be sent to:   Notices to the Company shall be sent to:
     
MDB Capital Group, LLC   DvineWave Inc.
401 Wilshire Blvd., Suite 1020   Attention Mr. Michael Leabman
Santa Monica, California 90401   207 Veritas Court
Fax: (310) 526-5020   San Ramon, CA 94582
Email: d@mdb.com    

 

 
 

 

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January 23, 2013

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    With a copy to Company counsel at:
     
    Much Shelist, P.C.
    191 North Wacker Drive, Suite 1800
    Chicago, IL, 60606
    Reference #10484

 

 
 

 

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January 23, 2013

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If the above accords with your understanding and agreement, kindly indicate your consent hereto by signing below. We look forward to a long and successful relationship with you.

 

  Very truly yours,
   
  MDB CAPITAL GROUP LLC
   
  /s/ Anthony DiGiandomenico
  By:         Anthony DiGiandomenico, Partner
                 Head of Investment Banking

 

ACCEPTED AND AGREED TO

AS OF THE DATE FIRST ABOVE WRITTEN:

 

DvineWave Inc.

 

/s/ Michael Leabman  
By: Michael Leabman  
  President  

 

 
 

 

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January 23, 2013

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EXHIBIT A

INDEMNIFICATION AGREEMENT

 

In further consideration of the engagement by DvineWave Inc. (the “Company”) of MDB Capital Group LLC ("MDB") to act as the Company’s exclusive placement agent in connection with a potential Offering or Offerings of securities, as such engagement is described in that letter agreement between us of even date (the “Engagement Agreement”), the Company agrees to indemnify MDB and certain other persons provided for herein, as follows:

 

A.            Indemnification Generally . The Company hereby agrees to indemnify and hold harmless MDB Capital, its directors, officers, agents, employees, members, affiliates, subsidiaries, counsel, and each other person or entity who controls MDB or any of its affiliates within the meaning of Section 15 of the Securities Act (collectively, the “Indemnified Parties”) to the fullest extent permitted by law from and against any and all losses, claims, damages, expenses, or liabilities (or actions in respect thereof) (“Losses”), joint or several, to which they or any of them may become subject under any statute or at common law, and to reimburse such Indemnified Parties for any reasonable legal or other expense (including but not limited to the cost of any investigation, preparation, response to third party subpoenas) incurred by them in connection with any litigation or administrative or regulatory action (“Proceeding”), whether pending or threatened, and whether or not resulting in any liability, insofar as such losses, claims, liabilities, or litigation arise out of or are based upon (1) the engagement of MDB pursuant to the Engagement Agreement or subsequent agreement of similar purpose between the Company and MDB (an “Additional Engagement Agreement”); (2) the Offering of Company Securities to third parties contemplated by the Engagement Agreement or Additional Engagement Agreement, (3) any other matter relating to any Offering of Company Securities referred to or contemplated by the Engagement Agreement or Additional Engagement Agreement; (4) any untrue statement or alleged untrue statement of any material fact contained in the private placement memorandum, offering materials, registration statement, or other offering or selling document (as may be amended or supplemented and including any information incorporated therein by reference, the “Company Documentation”), or in any other written or oral communication provided by or on behalf of the Company to any actual or prospective purchaser of Securities (as that term is defined in the Engagement Agreement), unless such untrue statement or alleged untrue statement arises solely from information supplied by any members, officers, agents or employees of MDB, in writing specifically for use therein; or (5) the omission or alleged omission to state in the Company Documentation a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided , however , that while the indemnity provisions herein shall include any and all claims regardless of whether MDB Capital’s sole negligence, active or passive, contributed to losses, they shall not apply to (i) amounts paid in settlement of any such litigation if such settlement is effected without the consent of the Company, which consent will not be unreasonably withheld, or (ii) Losses arising solely from the willful misconduct or gross negligence of Indemnified Parties; and provided that the Company will not be responsible for the fees and expenses of more than one counsel to all Indemnified Parties, in addition to appropriate local counsel, unless in the reasonable judgment of any Indemnified Party there exists a potential conflict of interest which would make it inappropriate for one counsel to represent all such Indemnified Parties.

 

B.            Reimbursement . The Company will reimburse all Indemnified Parties for all reasonable expenses (including, but not limited to, reasonable fees and disbursements of no more than one counsel for all Indemnified Parties) incurred by any such Indemnified Parties in connection with investigating, preparing, and defending any such action or claim, whether or not in connection with pending or threatened litigation in connection with the transaction to which an Indemnified Parties is a party, promptly as such expenses are incurred or paid (unless the Indemnified Parties request they be paid in advance pursuant to Subsection C below).

 

 
 

 

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C.            Advances . Notwithstanding any other provision hereof or any other agreement between the parties, the Company shall advance, to the extent not prohibited by law, all expenses reasonably anticipated to be incurred by or on behalf of the Indemnified Parties in connection with any Proceeding, whether pending or threatened, within fifteen (15) days of receipt of a statement or statements (“Statement(s)”) from the Indemnified Parties, or any of them, requesting such advances from time to time.  This advancement obligation shall include any refundable retainers of counsel retained by Indemnified Parties (as selected by Indemnified Parties in their sole and absolute discretion), subject to the restriction that the Company shall not be required to advance legal fees of the Indemnified Persons with respect to more than one (1) law firm that is representing the Indemnified Parties. If, due to conflict or other issues, the Indemnified Persons engage more than one law firm to represent them (or any of them), the Company’s indemnification obligations under this Exhibit A shall only apply as against one law firm representing MDB or the majority of the Indemnified Parties. Any Statement requesting advances shall evidence the expenses anticipated or incurred by the Indemnified Parties with reasonable particularity and may include only those expenses reasonably expected to be incurred within the 180-day period following each Statement. In the event some portion of the amounts advanced pursuant to this Section C are unused, or in the event a court of competent jurisdiction finally determines that the Indemnified Parties are not entitled to be indemnified against certain expenses, Indemnified Parties shall return the unused or disallowed portion of any advances within ninety (90) days of the final disposition of any Proceeding to which such advances pertain, together with interest thereon at an annual percentage rate of 6%.

 

D.            Contribution . If such indemnification is for any reason not available or insufficient to hold an Indemnified Party harmless, the Company agrees promptly to contribute to the Losses involved in such proportion as is appropriate to reflect the relative benefits received (or anticipated to be received) by the Company, on the one hand, and by MDB, on the other hand, with respect to the Engagement or similar services under any Additional Engagement Agreement or, if such allocation is determined by a court or arbitral tribunal to be unavailable, in such proportion as is appropriate to reflect other equitable considerations such as the relative fault of the Company on the one hand and of MDB on the other hand; provided , however , that, to the extent permitted by applicable law, the Indemnified Parties shall not be responsible for amounts which in the aggregate are in excess of the amount of all cash fees, exclusive of costs, actually received by MDB from the Company at the Closing in connection with the Engagement or similar services under any Additional Engagement Agreement. Relative benefits to the Company, on the one hand, and to MDB, on the other hand, with respect to the Engagement shall be deemed to be in the same proportion as (i) the total value received or proposed to be received by the Company in connection with the Offering, whether or not consummated, bears to (ii) all fees received or proposed to be received by MDB in connection with the applicable engagement. Relative fault shall be determined, in the case of Losses arising out of or based on any untrue statement or any alleged untrue statement of a material fact or omission or alleged omission to state a material fact, by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company to MDB and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act of 1933, as amended) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

 

E.            No Liability Without Gross Negligence or Misconduct . The Company agrees that no Indemnified Party shall have any liability to the Company or its respective owners, successors, heirs, parents, affiliates, security holders or creditors for any Losses, except to the extent such Losses are determined, by a final, non-appealable judgment by a court or arbitral tribunal of competent jurisdiction, to have resulted solely from such Indemnified Person’s gross negligence or willful misconduct.

 

F.            Notice . MDB agrees, promptly upon receipt, to notify the Company in writing of the receipt of written notice of the commencement of any action against it or against any other Indemnified Parties, in respect of which indemnity may be sought hereunder; however, the failure so to notify the Company will not relieve it from liability under Sections A above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the Company of substantial rights or defenses.

 

 
 

 

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G.            Settlement . The Company will not, without MDB's prior written consent, settle, compromise, or consent to the entry of any judgment in or otherwise seek to terminate any pending Proceeding in respect of which indemnification may be sought hereunder (whether or not any Indemnified Party is a party therein) unless the Company has given MDB reasonable prior written notice thereof and such settlement, compromise, consent or termination includes an unconditional release of each Indemnified Party from any liabilities arising out of such Proceeding. The Company will not permit any such settlement, compromise, consent or termination to include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of an Indemnified Party, without such Indemnified Party's prior written consent. No Indemnified Party seeking indemnification, reimbursement or contribution under this Agreement will, without the Company's prior written consent, settle, compromise, consent to the entry of any judgment in or otherwise seek to terminate any Proceeding referred to herein or admit fault, culpability or failure to act by or on behalf of the Company or any Indemnified Party.

 

H.            Survival; Successors . The indemnity, contribution and expense reimbursement obligations set forth herein shall be in addition to any liability the Company may have to any Indemnified Party at common law or otherwise (but not duplicative of or effective to result in any multiplicative return of Losses or of any such liability of the Company), and shall remain operative and in full force and effect notwithstanding the termination of this Agreement, the closing of the contemplated Offering, and any successor of MDB or any other Indemnified Parties shall be entitled to the benefit of the provisions hereof. Prior to entering into any agreement or arrangement with respect to, or effecting, any merger, statutory exchange or other business combination or proposed sale or exchange, dividend or other distribution or liquidation of all or a significant portion of its assets in one or a series of transactions or any significant recapitalization or reclassification of its outstanding securities that does not directly or indirectly provide for the assumption of the obligations of the Company set forth herein, the Company will promptly notify MDB in writing thereof and, if requested by MDB, shall arrange in connection therewith alternative means of providing for the obligations of the Company set forth herein, including the assumption of such obligations by another party, insurance, surety bonds or the creation of an escrow, in each case in an amount and on terms and conditions reasonably satisfactory to MDB.

 

I.            Consent to Jurisdiction; Attorneys’ Fees . Solely for the purpose of enforcing the Company's obligations hereunder, the Company consents to personal jurisdiction, service and venue in any court proceeding in which any claim subject to this Agreement is brought by or against any Indemnified Party other than MDB. In any action for enforcement of this indemnity provision, the prevailing party shall be entitled to recover all costs, including reasonable attorneys’ fees, of bringing such an action.

 

DVINEWAVE INC.

 

/s/ Michael Leabman  
By: Michael Leabman  
  President  

 

 

 

 

 

January 23, 2013

 

Michael Leabman

DvineWave Inc.

207 Veritas Court

San Ramon, CA 94582

 

Re:          Engagement Letter for Strategic Consulting Services

 

Dear Mr. Leabman:

 

MDB Capital Group, LLC (together with its affiliates, “MDB”) is a financial and strategic advisory firm helping companies develop key assets and plans to support their business objectives. Our unique methodologies are intended to maximize returns on innovation and expand shareholder value through strategic consulting, corporate development, and innovation management. As a result of our working together, many clients use MDB’s brand to enhance their own brand as top innovators, realizing a sustainable competitive advantage in their respective fields.

 

We understand that DvineWave Inc. (together with its affiliates, subsidiaries, predecessors, and successors, the “Company”) is seeking the services provided by MDB, so as to build and maintain its overall corporate profile and to assist the Company in preparing for a possible IPO event towards the end of 2013. We are pleased to propose a program we believe is designed to enhance the Company’s valuation, develop the investor “story,” and set the foundation for long-term stakeholder value.

 

This letter agreement (the “Agreement”) confirms the terms and conditions that will govern the Company’s engagement of MDB to provide financial, strategic, and intellectual property advisory services (the “Engagement”).

 

1.          Services.

 

a.            Services Provided . MDB shall assist the Company with all aspects of its business, strategic, and intellectual property development, including:

 

BUSINESS STRATEGY ACTIVITIES

 

· Assessing the Company’s market landscape;

 

· Formulation of the Company’s business strategy;

 

· Formulation of the Company’s financial plan, including assessment of financing options;

 

· Defining technology milestones;

 

· Creating development and commercialization strategy;

 

· Identifying and recruiting key members of the management team and Board of Directors;

 

 
 

 

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January 23, 2013

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· Corporate structuring; and

 

· General corporate advice, as needed and requested.

 

IP RELATED ACTIVITIES

 

· Inventory and assessment of the Company’s intellectual property portfolio (the “Assets”), using PatentVest®, MDB’s proprietary IP business intelligence platform;

 

· Identification and evaluation of specific market or competitive issues pertaining to the Company’s intellectual property portfolio;

 

· Formulation of the Company’s IP strategy, including development of a comprehensive plan for invention prioritization and patent development;

 

· For each individual invention of the Company (an “Invention”), development of a clear strategy for Invention drafting and Invention family development roadmap;

 

· Preparation of a complete Invention package with technical disclosure documentation (each, a “Disclosure”) for use in the Company’s patent applications;

 

· Invention extraction;

 

· Identification of companies with intellectual property profiles best matching the Company’s portfolio and those which will likely have the greatest value for the Company’s portfolio;

 

· Selecting IP assets and companies for acquisition;

 

· Assessment of the monetization method which would be most appropriate for realizing the value of the Company’s current patent assets, including but not limited to full or partial patent sale, spin-out, additional financing, etc;

 

· Preparation of an internal valuation memorandum, with a valuation range predicated on the most likely monetization method, with tactical recommendations on realizing the portfolio value; and

 

· Access to PatentVest and MDB’s Patent Factory.

 

b.            Additional Services/Exclusions . It is expressly understood and agreed that MDB has not provided nor is undertaking to provide any advice to the Company relating to legal, regulatory, accounting, or tax matters. The services provided to the Company hereunder are designed to assist, but not replace, the Company’s own intellectual property counsel.

 

Should the Company request MDB to perform any services or act in any capacity not specifically addressed in this Agreement, such services or activities shall constitute separate engagements, the terms and conditions of which will be embodied in separate written agreement(s).

 

2.           Compensation . As consideration for the services provided under this Agreement, the Company will pay MDB a fee as follows:

 

 
 

 

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January 23, 2013

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a.            Warrant . Upon the consummation of the bridge loan (or similar bridge financing) contemplated by the Company and considered under the investment banking engagement agreement between the Company and MDB of approximate even date herewith (such engagement agreement, the “Engagement Agreement” and such bridge loan or similar bridge financing, the “Bridge Financing”), the Company shall sell to MDB, for the total amount of $1,500, a warrant, which may be issued in one or more instruments (the “Warrants”) to purchase an aggregate of shares of Company common stock (the “Common Stock”), in an amount equal to ten percent (10%) of the total issued and outstanding Common Stock of the Company after giving effect to the conversion of all options, warrants and other rights to acquire securities of the Company existing or issuable on conversion of then outstanding preferred stock, options, warrants or other convertible securities as at the time immediately prior to the consummation of the Bridge Financing. For the avoidance of doubt, without duplicating in whole or in part the warrant to be issued under the Engagement Agreement as a result of the Bridge Financing, the Warrants will entitle MDB is to purchase upon exercise thereof 10% of the fully diluted number of shares outstanding and that may be issued or issuable by the Company, pursuant to any form of agreement, arrangement or undertaking, immediately prior to the final consummation of the Bridge Financing, whether in one or more closings, treating all such closings as a single Bridge Financing. Such Warrants will be for a term of five (5) years at an exercise price of $0.01 per share, shall contain cashless exercise and anti-dilution provisions and representations and warranties normal and customary for warrants issued to placement agents or underwriters, and will not be callable or terminable prior to the expiration date. No adjustment will be made to the exercise price or number of shares underlying the Warrants in the event of subsequent financings. The Common Stock underlying the Warrants will have registration rights no less favorable than those granted to any other person, including “piggyback” registration rights on the registrations of the Company or demand registrations (voting with the other registrable securities to effect any such demand) by any later round of investors. The Company shall bear all costs and expenses of registration, including the filing and clearing of one or more registration statements. The Warrants may be issued to any persons or entities designated by MDB.

 

b.            Expenses . The Company shall fund MDB’s travel and other reasonable expenses related to the Engagement, including economy class air fare, business class accommodations, ground transportation, meals and incidentals, in connection with visits by the MDB team to the Company’s site. Prior to the Company securing bridge financing, if any, such expenses shall be limited to $10,000 (ten thousand dollars). After bridge or other financing is secured, the Company shall also promptly reimburse MDB for any expenses related to the Engagement that are approved by the Company in writing in advance, with such approval not to be unreasonably withheld.

 

c.            Payments . All payments to be made to MDB hereunder will be made in cash by wire transfer of immediately available U.S. funds. Except as expressly set forth herein, no fee payable to MDB hereunder shall be credited against any other fee due to MDB. The obligation to pay any fee or expense set forth herein shall be absolute and unconditional and shall not be subject to reduction by way of setoff, recoupment or counterclaim.

 

d.            Compensation Earned . All compensation to MDB provided under this Agreement will be deemed fully earned as of the date of the payment or issuance, which once paid or issued is not subject to return in whole or in part or subject to reduction or further limitation. The Company waives any and all rights of set off against the compensation provided for herein, including any securities underlying any Warrants.

 

3.           Representations and Warranties of the Company . The Company warrants and agrees that it is the true and rightful owner of all intellectual property rights in each of the Assets and Inventions submitted to MDB for analysis; that any and all technical Invention information provided to MDB may, to the actual knowledge of the officers of the Company, be transmitted across country borders subject to compliance with applicable export control and similar laws; and that no U.S. agency has suspended, revoked, or denied the Company’s export privileges.

 

 
 

 

MDB Engagement Letter

January 23, 2013

p. 4 of 13

 

4.           Term and Termination . MDB’s Engagement will commence upon the execution of this Agreement and shall continue in effect for a period of 180 (one hundred eighty) days (the “Initial Term”). After the expiration of the Initial Term, the Agreement shall automatically renew and continue in effect until it is terminated by either party with thirty (30) days’ written notice to the other pursuant to Section 10. Upon termination of this Agreement for any reason, the rights and obligations of the parties hereunder shall terminate, except for the obligations set forth in Sections 2-3 and 5-18, which shall survive termination.         

 

5.           Confidentiality . MDB acknowledges that in connection with the Engagement, the Company will provide MDB with information which the Company considers to be confidential, including its trade secrets (“Confidential Information”). MDB agrees to employ all reasonable efforts to keep the Confidential Information secret and confidential, using no less than the degree of care employed by MDB to preserve and safeguard its own confidential information, and shall not disclose or reveal the Confidential Information to anyone except its employees, consultants and contractors who have an obligation of confidentiality with MDB. MDB will not use the Confidential Information except in connection with its performance of services hereunder, unless disclosure is required by law, court order, or any government, regulatory or self-regulatory agency or body in the opinion of MDB’s counsel, in which event MDB will provide the Company with reasonable advance notice of such disclosure. “Confidential Information” does not include information which (a) was in the public domain or readily available to the trade or the public prior to the date of the disclosure; (b) becomes generally available to the public in any manner or form through no fault of MDB or its representatives; (c) was in MDB’s possession or readily available to MDB from another source not under obligation of secrecy to the Company prior to the disclosure; (d) is rightfully received by MDB from another source on a non-confidential basis; (e) is developed by or for MDB without reference to the Company’s Confidential Information; (f) is disclosed by Disclosing Party to an unaffiliated third party free of any obligation of confidence; or (g) is released for disclosure with the Company’s written consent. Notwithstanding any termination of this Agreement, MDB’s confidentiality obligations (1) in respect of any material that qualifies as a “Trade Secret” under the Uniform Trade Secrets Act (“UTSA”) shall survive in perpetuity under the UTSA until such information ceases to be a Trade Secret, and (2) in respect of any non-Trade Secret, for a period of two years from the date of disclosure.

 

6.           Indemnification . The Company hereby agrees to indemnify and hold harmless MDB Capital, its directors, officers, agents, employees, members, affiliates, subsidiaries, and counsel (collectively, the “MDB Indemnified Parties”) to the fullest extent permitted by law from and against any and all losses, claims, damages, expenses, or liabilities (or actions in respect thereof) (“Losses”), joint or several, to which they or any of them may become subject under any statute or at common law, and to reimburse such MDB Indemnified Parties for any reasonable legal or other expense (including but not limited to the cost of any investigation, preparation, response to third party subpoenas) incurred by them in connection with any litigation or administrative or regulatory action (“Proceeding”), whether pending or threatened, and whether or not resulting in any liability, insofar as such losses, claims, liabilities, or litigation arise out of or are based upon: the Company’s use or misuse (including use contrary to federal or state law) of the Disclosure(s), the Company’s breach of the Representations and Warranties contained in Section 3 hereof, or any violation of U.S or other import or export controls; provided, however, that while the indemnity provisions herein shall include any and all claims regardless of whether MDB Capital’s sole negligence, active or passive, contributed to losses, they shall not apply to (i) amounts paid in settlement of any such litigation if such settlement is effected without the consent of the Company, which consent will not be unreasonably withheld, or (ii) Losses arising solely from the willful misconduct or gross negligence of MDB Indemnified Parties.

 

The provisions of this Section 6 shall survive any termination or expiration of this Agreement.

 

 
 

 

MDB Engagement Letter

January 23, 2013

p. 5 of 13

 

7.           Work Product and Announcements . MDB's advice shall be the sole proprietary work product and intellectual property of MDB, and such advice may not be disclosed, in whole or in part, to third parties other than the Company’s professional advisors without the prior written permission of MDB, unless such disclosure is required by law. Any document or information prepared by MDB in connection with this Engagement shall not be duplicated by the Company except as explicitly provided for hereunder or required by law. The Company acknowledges that MDB, at its option and expense, may place announcements and advertisements or otherwise publicize the Engagement (which may include the reproduction of the Company’s logo and a hyperlink to the Company’s website) on MDB’s website and in such financial and other newspapers and journals as it may choose.

 

8.           Limitation of Liability . MDB shall employ due care and attention in providing the services hereunder. However, the Company acknowledges that MDB does not warrant or represent the accuracy or completeness of any public information or any information provided solely by the Company used in any analysis and that inaccurate or incomplete data may affect the validity and reliability of MDB’s work product, including any draft patent Disclosures. Similarly, MDB makes no representation or warranty with respect to the non-infringement of any of the Assets or Inventions described in the Disclosure(s). MDB makes no warranty, representation, promise, or undertaking with respect to any legal or financial consequences of, or any other consequences or benefits obtained from the use of any work product hereunder, including the Disclosure(s), including any representation that any patent(s) will be granted. The Company assumes all risks related to documentation or technical information and data which may be subject to U.S. export controls or export or import restrictions in other countries. MDB SPECIFICALLY DISCLAIMS ANY OTHER WARRANTY, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. MDB SHALL NOT BE LIABLE ON ACCOUNT OF ANY ERRORS, OMISSIONS, DELAYS, OR LOSSES UNLESS CAUSED BY ITS GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. To the fullest extent permitted by law, NEITHER MDB NOR any of its controlling persons, affiliates, directors, officers, employees or consultants will be liable for any loss, damage or injury (including without limitation lost profits, indirect, special, or consequential damages) alleged to be caused by use of the Disclosure(s) OR OTHER SERVICES PROVIDED HEREUNDER. MDB’S LIABILITY ARISING UNDER THIS AGREEMENT SHALL BE LIMITED TO THE AMOUNTS PAID BY THE COMPANY TO MDB WITH REGARD TO THE PROVISION OF THE SPECIFIC SERVICES THAT GAVE RISE TO THE CLAIM OF LIABILITY, BUT IN NO EVENT WILL SUCH LIABILITY EXCEED THE TOTAL AMOUNT ACTUALLY PAID TO MDB PURSUANT TO SECTION 2.

 

9.           Other Transactions; Disclaimers . The Company acknowledges that MDB is engaged in a wide range of investing, investment banking and other activities (including investment management, corporate finance, securities issuance, trading and research and brokerage activities) from which conflicting interests or duties, or the appearance thereof, may arise. Information held elsewhere within MDB but not accessible (absent a breach of internal procedures) to its investment banking personnel providing services to the Company will not under any circumstances affect MDB’s responsibilities to the Company hereunder. The Company further acknowledges that MDB and its affiliates have and may continue to have investment banking, broker-dealer and other relationships with parties other than the Company pursuant to which MDB may acquire information of interest to the Company. MDB shall have no obligation to disclose to the Company or to use for the Company’s benefit any such non-public information or other information acquired in the course of engaging in any other transaction (on MDB’s own account or otherwise) or otherwise carrying on the business of MDB. The Company further acknowledges that from time to time MDB’s independent research department may publish research reports or other materials, the substance and/or timing of which may conflict with the views or advice of MDB’s investment banking department and/or which may have an adverse effect on the Company’s interests in connection with the transactions contemplated hereby or otherwise. In addition, the Company acknowledges that, in the ordinary course of business, MDB may trade the securities of the Company for its own account and for the accounts of its customers, and may at any time hold a long or short position in such securities. MDB shall nonetheless remain fully responsible for compliance with federal securities laws in connection with such activities.

 

 
 

 

MDB Engagement Letter

January 23, 2013

p. 6 of 13

 

The Company further acknowledges and agrees that MDB will act solely as an independent contractor hereunder, and that MDB’s responsibility to the Company is solely contractual in nature and that MDB does not owe the Company or any other person or entity, including but not limited to its shareholders, any fiduciary or similar duty as a result of the Engagement or otherwise.

 

10.          Notice . All notices, demands, and other communications to given pursuant to this Agreement shall be in writing and shall be personally delivered, sent by overnight delivery using a nationally recognized courier service, sent by facsimile transmission, or emailed. Notice shall be deemed received: (a) if personally delivered, upon the date of delivery to the address of the receiving party; (b) if sent by overnight courier, the date actually received by the recipient; (c) if sent by facsimile or email, when sent. The parties will each promptly notify the other of any changes to the following contact information.

 

Notices to MDB shall be sent to:   Notices to the Company shall be sent to:
     
MDB Capital Group, LLC   DvineWave Inc.
Attn: Anthony DiGiandomenico   207 Veritas Court
401 Wilshire Blvd., Suite 1020   San Ramon, CA 94582
Santa Monica, California 90401   Attn: Michael Leabman
Fax: (310) 526-5020    
Email: d@mdb.com    
     
    With a copy to Company counsel at:
     
    Much Shelist, P.C.
    191 North Wacker Drive, Suite 1800
    Chicago, IL 60606
    Reference #10484

 

11.        Complete Agreement; Amendments; Assignment . This Agreement sets forth the entire understanding of the parties relating to the subject matter hereof and supersedes and cancels any prior communications, understandings and agreements, whether oral or written, between MDB and the Company. This Agreement may not be amended or modified except in writing. The rights of MDB hereunder shall be freely assignable to any affiliate of MDB, and this Agreement shall apply to, inure to the benefit of and be binding upon and enforceable against the parties and their respective successors and assigns.

 

12.        Third Party Beneficiaries . This Agreement is intended solely for the benefit of the parties hereto and, with the exception of the rights and benefits conferred upon the Indemnified Parties by Section 6 of this Agreement, shall not be deemed or interpreted to confer any rights upon any third parties.

 

13.          Governing Law; Jurisdiction; Venue . All aspects of the relationship created by this Agreement shall be governed by and construed in accordance with the laws of the State of California, applicable to contracts made and to be performed in California, without regard to its conflicts of laws provisions. All actions and proceedings which are not submitted to arbitration pursuant to Section 14 hereof shall be heard and determined exclusively in the state and federal courts located in the County of Los Angeles, State of California, and the Company and MDB hereby submit to the jurisdiction of such courts and irrevocably waive any defense or objection to such forum, on forum non conveniens grounds or otherwise. The parties agree to accept service of process by mail, to their principal business address, addressed to the chief executive officer and secretary thereof. The parties hereby agree that this Section 13 shall survive the termination and/or expiration of this Agreement. Each of the Company and MDB will use commercially reasonable efforts to cooperate in connection with a reasonable request of the other to provide information to facilitate compliance with applicable law and regulation in connection with their respective performance under this Agreement.

 

 
 

 

MDB Engagement Letter

January 23, 2013

p. 7 of 13

 

14.          Arbitration . Any dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate, shall be determined by arbitration before one arbitrator in Los Angeles (with the exception of claims to enforce the indemnity provision contained herein, which may, at the option of the party seeking relief, be submitted either to arbitration or to any court of competent jurisdiction). The arbitration shall be administered by JAMS pursuant to its Streamlined Arbitration Rules and Procedures, unless the parties are required to arbitrate by FINRA Rule 12200 subsection (2), in which event the matter shall be submitted to FINRA Dispute Resolution pursuant to its Code of Arbitration Procedure for Customer Disputes. Judgment on the Award may be entered in any court having jurisdiction. This clause shall not preclude parties from seeking provisional remedies in aid of arbitration from a court of appropriate jurisdiction.

 

The arbitrator may, in the Award, allocate all or part of the costs of the arbitration, including the fees of the arbitrator and the reasonable attorneys’ fees of the prevailing party.

 

The parties hereby agree that this Section 14 shall survive the termination and/or expiration of this Agreement.

 

The Company’s and MDB’s consent to Arbitration are confirmed by initialing below:

 

     
Company   MDB

 

15.          Severability . Should any one or more covenants, restrictions and provisions contained in this Agreement be held for any reason to be void, invalid or unenforceable, in whole or in part, such unenforceability will not affect the validity of any other term of this Agreement, and the invalid provision will be binding to the fullest extent permitted by law and will be deemed amended and construed so as to meet this intent. To the extent any provision cannot be so amended or construed as a matter of law, the validity of the remaining provisions shall be deemed unaffected and the illegal or invalid provision will be deemed stricken from this Agreement.

 

16.          Section Headings . The section headings herein are for convenience of reference only, and shall not limit or otherwise affect the meaning hereof.

 

17.          Accounting . Any calculation, computation or accounting that may be required under this Agreement shall be made in accordance and conformity with the Generally Accepted Accounting Principles and other standards as determined by the Financial Accounting Standards board and regulatory agencies with appropriate jurisdiction.

 

18.          Counterparts . This Agreement may be executed via facsimile transmission and may be executed in separate counterparts, each of which shall be deemed to be an original and all of which together shall constitute a single instrument.

 

19.          Patriot Act . MDB hereby notifies the Company that pursuant to the requirements of the USA PATRIOT ACT (the “Patriot Act”), it is required to obtain, verify and record information that identifies the Company in a manner that satisfies the requirements of the Patriot Act. This notice is given in accordance with the requirements of the Patriot Act.

 

 
 

 

MDB Engagement Letter

January 23, 2013

p. 8 of 13

 

If the above accords with your understanding and agreement, kindly indicate your consent hereto by signing below. We look forward to a long and successful relationship with you.

 

  Very truly yours,
   
  MDB CAPITAL GROUP LLC
   
  /s/ Anthony DiGiandomenico
  By:         Anthony DiGiandomenico, Partner
                  Head of Investment Banking

 

ACCEPTED AND AGREED TO

AS OF THE DATE FIRST ABOVE WRITTEN:

 

DvineWave Inc.

 

/s/ Michael Leabman  
By: Michael Leabman  
  President  

 

 

 

 

Dated as of __________, 2013

 

MDB Capital Group, LLC

401 Wilshire Boulevard

Santa Monica, California 90401

 

Ladies and Gentlemen:

 

This agreement is being delivered to you in connection with the proposed Underwriting Agreement (the “ Underwriting Agreement ”) between DvineWave, Inc., a Delaware corporation (the “ Company ”), and MDB Capital Group, LLC (“ MDB ”) relating to a proposed underwritten public offering of shares (the “ Shares ”) of the Company’s Common Stock (the “ Common Stock ”).

 

In order to induce MDB to enter into the Underwriting Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees that, during the period beginning on and including the date of the Underwriting Agreement through and including the one year anniversary of the date of the Underwriting Agreement (the “ Lock-Up Period ”), the undersigned, or any affiliated party of the undersigned, will not, without the prior written consent of MDB, directly or indirectly:

 

(i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or

 

(ii) enter into any swap or other agreement, arrangement or transaction that transfers to another, in whole or in part, directly or indirectly, any of the economic consequence of ownership of any Common Stock or any securities convertible into or exercisable or exchangeable for any Common Stock,

 

whether any transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock, other securities, in cash or otherwise. Moreover, if:

 

(1) during the last 17 days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or

 

(2) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the Lock-Up Period,

 

the Lock-Up Period shall be extended and the restrictions imposed by this agreement shall continue to apply until the expiration of the 18-day period beginning on the date of issuance of the earnings release or the occurrence of the material news or material event, as the case may be, unless MDB waives, in writing, such extension.

 

 
 

 

Notwithstanding the provisions set forth in the immediately preceding paragraph, the undersigned may, without the prior written consent of MDB, (1) transfer any Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock as a bona fide gift or gifts, or by will or intestacy, to any member of the immediate family (as defined below) of the undersigned or to a trust the beneficiaries of which are exclusively the undersigned or members of the undersigned’s immediate family or to a charity or educational institution; provided, however, that it shall be a condition to the transfer that (A) the transferee executes and delivers to MDB not later than one business day prior to such transfer, a written agreement, in substantially the form of this agreement and otherwise satisfactory in form and substance to MDB, and (B) if the undersigned is required to file a report under Section 16(a) of the Securities Exchange Act of 1934, as amended, reporting a reduction in beneficial ownership of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock by the undersigned during the Lock-Up Period (as the same may be extended as described above), the undersigned shall include a statement in such report to the effect that such transfer or distribution is not a transfer for value and that such transfer is being made as a gift or by will or intestacy, as the case may be or (2) exercise or convert currently outstanding warrants, options and convertible debentures, as applicable, and exercise options under an acceptable stock option plan, so long as the undersigned agrees that the shares of Common Stock received from any such exercise or conversion will be subject to this agreement. For purposes of this paragraph, “immediate family” shall mean a spouse, child, grandchild or other lineal descendant (including by adoption), father, mother, brother or sister of the undersigned.

 

The undersigned further agrees that (i) it will not, during the Lock-Up Period (as the same may be extended as described above), make any demand for or exercise any right with respect to the registration under the Securities Act of 1933, as amended (the “ 1933 Act ”), of any Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, and (ii) the Company may, with respect to any Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock owned or held (of record or beneficially) by the undersigned, cause the transfer agent or other registrar to enter stop transfer instructions and implement stop transfer procedures with respect to such securities during the Lock-Up Period (as the same may be extended as described above).

 

In addition, the undersigned hereby waives any and all notice requirements and rights with respect to the registration of any securities pursuant to any agreement, instrument, understanding or otherwise, including any registration rights agreement or similar agreement, to which the undersigned is a party or under which the undersigned is entitled to any right or benefit and any tag-along rights or other similar rights to have any securities (debt or equity) included in the offering contemplated by the Underwriting Agreement or sold in connection with the sale of Common Stock pursuant to the Underwriting Agreement, provided that such waiver shall apply only to the public offering of Common Stock pursuant to the Underwriting Agreement and each registration statement filed under the 1933 Act in connection therewith.

 

The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this agreement and that this agreement has been duly executed and delivered by the undersigned and is a valid and binding agreement of the undersigned. This agreement and all authority herein conferred are irrevocable and shall survive the death or incapacity of the undersigned and shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned.

 

[Signature Page Immediately Follows]

 

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IN WITNESS WHEREOF, the undersigned has executed and delivered this agreement as of the date first set forth above.

 

  Yours very truly,
   
   
   
  Print Name:  

 

Signature Page — Letter to
MDB Capital Group, LLC

 

 

 

SECURITIES PURCHASE AGREEMENT

 

This SECURITIES PURCHASE AGREEMENT (this “ Agreement ”), dated as of May 16, 2013 (the “ Effective Date ”), is by and among DvineWave Inc., a Delaware corporation (the “ Company ”), and the investors listed on the Schedule of Buyers, attached hereto as Exhibit A (individually, a “ Buyer ” and collectively, the “ Buyers ”).

 

RECITALS

 

A.           The Company and each Buyer is executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the “ 1933 Act ”), and Rule 506 of Regulation D (“ Regulation D ”) as promulgated by the United States Securities and Exchange Commission (the “ SEC ”) under the 1933 Act.

 

B.           The Company has authorized the issuance of senior secured convertible notes in the aggregate original principal amount of up to $5,500,000, subject to further increase in the discretion of the Company, in the form attached hereto as Exhibit B (the “ Notes ”), which Notes shall be convertible into shares of Common Stock (as defined in the Notes) (as converted, collectively, the “ Conversion Shares ”), in accordance with the terms of the Notes.

 

C.           Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms and conditions stated in this Agreement, the aggregate original principal amount of the Notes set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers.

 

D.           At the Closing, the parties hereto shall execute and deliver a Registration Rights Agreement, in the form attached hereto as Exhibit C (the “ Registration Rights Agreement ”), pursuant to which the Company has agreed to provide certain registration rights with respect to the Registrable Securities (as defined in the Registration Rights Agreement), under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws.

 

E.           In connection with the Offering, the Company, together with MDB Capital Group LLC, as the placement agent, (the “ Placement Agent ”) have entered into an escrow agreement, in the form attached hereto as Exhibit D (the “ Escrow Agreement ”), with U.S. Bank National Association (the (“ Escrow Agent ”), to hold the Purchase Price (as hereinafter defined), to be released at the Closing to the Company, upon the written consent of the Company and MDB Capital Group.

 

F.           The Notes and the Conversion Shares are collectively referred to herein as the “ Securities .”

 

G.           The Notes will be secured by a first priority perfected security interest in all the assets of the Company as evidenced by a security agreement as the Buyers shall require in form and substance acceptable to each Buyer (the “ Security Agreement ” attached hereto as Exhibit E and together with the other security documents and agreements entered into in connection with this Agreement and each of such other documents and agreements, as each may be amended or modified from time to time, collectively, the “ Security Documents ”).

 

 
 

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each Buyer hereby agree as follows:

 

1. PURCHASE AND SALE OF NOTES AND WARRANTS.

 

(a)           Notes Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall issue and sell to each Buyer, and each Buyer severally, but not jointly, shall purchase from the Company on the Closing Date (as defined below), a Note in the original principal amount as is set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers.

 

(b)           Closing . In the discretion of the Company, one or more closings (each a “ Closing ”) of the purchase of the Notes by the Buyers shall occur on a Business Day at the offices of Much Shelist, P.C., 191 N. Wacker Drive, Suite 1800, Chicago, IL 60606. The date and time of the initial Closing (the “ Closing Date ” of the initial Closing) shall be 10:00 a.m., New York time on a date selected by the Company after which the conditions referenced below have been satisfied or waived. The Company may hold additional Closings, from time to time, but not later than 30 days after the Closing Date of the initial Closing (the date of any such additional Closing, likewise selected by the Company, its respective “ Closing Date ”). At the Closing Date of the initial Closing, and at any subsequent Closing, the Closing with respect to the subscriptions for the Notes then being accepted by the Company will be subject to the satisfaction or waiver of the conditions set forth in Sections 6 and 7 below, as applicable to the Notes being purchased. The Company shall be permitted to amend this Agreement and the Security Documents without the consent of any other Party hereto to add Buyers in connection with Closings that occur after the initial Closing. As used herein “ Business Day ” means any day other than a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to remain closed.

 

(c)           Purchase Price; Payment of Purchase Price . The aggregate purchase price for the Note to be purchased by each Buyer (the “ Purchase Price ”) shall be the amount set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers. Upon delivery of this Agreement to the Company, with a copy to the placement agreement, such Buyer shall pay its respective Purchase Price to the Escrow Agent, for the Note being purchased by such Buyer, by wire transfer of immediately available funds or bank check or personal check subject to collection. The payment of the Purchase Price by such Buyer will be held pursuant to the terms of the Escrow Agreement, once collected and in good funds with the Escrow Agent. If the offering of the Notes is terminated before a Closing or this Agreement is not accepted by the Company or otherwise terminated in whole or in part, the Purchase Price of such Buyer not being applied to the purchase of a Note will be returned to such Buyer, without cost or expense, including any interest earned thereon.

 

2
 

 

(d)           Payment of Purchase Price; Delivery of Notes . On the Closing Date or any subsequent Closings, against delivery by the Escrow Agent to the account of the Company of the Purchase Price for the Note being purchased by each Buyer participating in the applicable Closing, the Company shall deliver to each Buyer a Note (in such amount as is set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers), in all cases, duly executed on behalf of the Company and registered in the name of such Buyer or its designee, together with the other deliveries set forth herein.

 

2. BUYER’S REPRESENTATIONS AND WARRANTIES.

 

Each Buyer represents and warrants to the Company with respect to only itself that as of the Closing Date(s) of the Closing(s) in which such Buyer participates:

 

(a)           Organization; Authority . Such Buyer is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents (as defined below) to which it is a party and otherwise to carry out its obligations hereunder and thereunder.

 

(b)           No Public Sale or Distribution . Such Buyer (i) is acquiring its Note, and (ii) upon conversion of its Note will acquire the Conversion Shares issuable upon conversion thereof, in each case, for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof in violation of applicable securities laws, except pursuant to sales registered or exempted under the 1933 Act; provided, however, by making the representations herein, such Buyer does not agree, or make any representation or warranty, to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act. Such Buyer does not presently have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities in violation of applicable securities laws.

 

(c)           Accredited Investor Status . Such Buyer is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D.

 

(d)           Reliance on Exemptions . Such Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Buyer’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire the Securities.

 

(e)           Information . Such Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by such Buyer. Such Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Such Buyer understands that its investment in the Securities involves a high degree of risk. Such Buyer has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities.

 

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(f)           No Governmental Review . Such Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.

 

(g)           Transfer or Resale . Such Buyer understands that except as provided in the Registration Rights Agreement or Section 4(h) or Section 4(u) hereof: (i) the Securities have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, (B) such Buyer shall have delivered to the Company (if requested by the Company) an opinion of counsel to such Buyer, in a form reasonably acceptable to the Company, to the effect that such Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) such Buyer provides the Company with reasonable assurance and documentation as may be requested by the Company or its legal counsel that such Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the 1933 Act (or a successor rule thereto) (collectively, “ Rule 144 ”); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144, and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the Person (as defined below) through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC promulgated thereunder; and (iii) neither the Company nor any other Person is under any obligation to register the Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder.

 

(h)           Validity; Enforcement . This Agreement has been duly and validly authorized, executed and delivered on behalf of such Buyer and constitutes the legal, valid and binding obligations of such Buyer enforceable against such Buyer in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

 

(i)           No Conflicts . The execution, delivery and performance by such Buyer of this Agreement and the consummation by such Buyer of the transactions contemplated hereby will not (i) result in a violation of the organizational documents of such Buyer, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which such Buyer is a party or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to such Buyer, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of such Buyer to perform its obligations hereunder.

 

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(j)           Buyer’s Principal Residence . The address of Buyer’s principal residence, if Buyer is a natural Person or if Buyer is a non-natural Person, such as a corporation, limited liability company or other entity, is set forth in column (2) of the Schedule of Buyers.

 

(k)           No Engagements . Such Buyer has not engaged any brokers, finders or agents, and the Company has not, nor will, incur, directly or indirectly, as a result of any action taken by such Buyer, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with the transactions consummated under this Agreement. Neither such Buyer, nor any of Buyer’s officers, directors, employees, agents, stockholders or partners has either directly or indirectly, including through a broker or finder: (i) engaged in or received any general solicitation or (ii) published or received any advertisement in connection with the offer or sale of the Securities.

 

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company represents and warrants, as of the applicable Closing Date, unless with respect to a particular representation or warranty another date is provided, to each of the Buyers that, except as provided in the Disclosure Letter, attached hereto as Exhibit F :

 

(a)           Organization and Qualification . The Company is an entity duly organized and validly existing and in good standing under the laws of the jurisdiction in which it is formed, and has the requisite power and authorization to own its properties and to carry on its business as now being conducted and as presently proposed to be conducted. The Company is duly qualified as a foreign entity to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not be reasonably expected to have a Material Adverse Effect. “Material Adverse Effect” means any material adverse effect on (i) the business, properties, assets, liabilities, operations (including results thereof) or condition (financial or otherwise) of the Company, either individually or taken as a whole, (ii) the ability to consummate transactions contemplated to be consummated on such Closing Date hereunder or under any of the other Transaction Documents with a Buyer participating in the Closing on such Closing Date or (iii) the authority or ability of the Company to perform any of its obligations under any of the Transaction Documents (as defined below). The Company has no Subsidiaries. “Subsidiaries” means any Person in which the Company, directly or indirectly, (I) owns any of the outstanding capital stock or holds any equity or similar interest of such Person or (II) controls or operates all or any part of the business, operations or administration of such Person, and each of the foregoing, is individually referred to herein as a “Subsidiary.” Additionally, to the extent that any Subsidiary is hereafter created, and the context of the provision of this Agreement would ordinarily include a Subsidiary, then the term “Company” will be deemed to include such Subsidiary.

 

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(b)           Authorization; Enforcement; Validity . The Company has the requisite power and authority to enter into and perform its obligations under this Agreement and the other Transaction Documents and to issue the Securities in accordance with the terms hereof and thereof. The execution and delivery of this Agreement and the other Transaction Documents by the Company, and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Notes and the reservation for issuance and issuance of the Conversion Shares issuable upon conversion of the Notes) have been duly authorized by the Company’s board of directors or other governing body, as applicable, and (other than the filing with the SEC of one or more Registration Statements in accordance with the requirements of the Registration Rights Agreement, a Form D with the SEC and any other filings as may be required by any state securities agencies) no further filing, consent or authorization is required by the Company, its respective boards of directors or the stockholders or other governing body. This Agreement has been, and the other Transaction Documents will be prior to the Closing, duly executed and delivered by the Company, and each constitutes the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies and except as rights to indemnification and to contribution may be limited by federal or state securities law. “Transaction Documents” means, collectively, this Agreement, the Notes, the Security Documents, the Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined in the Registration Rights Agreement), the Subordination Agreement (as defined below) and each of the other agreements and instruments entered into or delivered by any of the parties hereto in connection with the consummation of the transactions contemplated hereby and thereby, as may be amended from time to time.

 

(c)           Issuance of Conversion Shares . The Conversion Shares, when issued in accordance with the terms of the Notes, will be validly issued, fully paid and non-assessable and free from all preemptive or similar rights, taxes, liens, charges and other encumbrances with respect to the issue thereof under the terms thereof, with the holders being entitled to all rights accorded to a holder of Common Stock. The Company shall have reserved from its duly authorized capital stock not less than one hundred one percent (101%) of the sum of the maximum number of Conversion Shares issuable upon conversion of the Notes in accordance with their terms. Subject to the accuracy of the representations and warranties of the Buyers in this Agreement, the offer and issuance by the Company of the Securities is exempt from registration under the 1933 Act.

 

(d)           No Conflicts . The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Notes, the Conversion Shares upon conversion of the Notes, the reservation for issuance of the Conversion Shares and the creation of the security interests represented by the Security Documents) will not (i) result in a violation of the Certificate of Incorporation (as defined below) (including, without limitation, any certificate of designation contained therein) or other organizational documents of the Company, any capital stock of the Company or Bylaws (as defined below) of the Company, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including, without limitation, foreign, federal and state securities laws and regulations and the rules and regulations of any stock exchange or trading medium (the “Principal Market”)) applicable to the Company or by which any property or asset of the Company is bound or affected except, in the case of clause (ii) or (iii) above, to the extent such violations that could not reasonably be expected to have a Material Adverse Effect.

 

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(e)           Consents . The Company is not required to obtain any consent from, authorization or order of, or make any filing or registration with (other than the filing with the SEC of one or more Registration Statements in accordance with the requirements of the Registration Rights Agreement, a Form D with the SEC and any other filings as may be required by any state securities agencies), any court, governmental agency or any regulatory or self-regulatory agency or any other Person in order for it to execute, deliver or perform any of its respective obligations under, or contemplated by, the Transaction Documents, in each case, in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company is required to obtain at or prior to the Closing have been obtained or made on or prior to the Closing Date, and the Company is not aware of any facts or circumstances which might prevent the Company from obtaining or effecting any of the registration, application or filings contemplated by the Transaction Documents, including without limitation the requirements of the Principal Market.

 

(f)           Acknowledgment Regarding Buyer’s Purchase of Securities . The Company acknowledges and agrees that each Buyer is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby and that no Buyer is (i) an officer or director of the Company, (ii) an “affiliate” (as defined in Rule 144) of the Company or (iii) to its knowledge, a “beneficial owner” of more than ten percent (10%) of the shares of Common Stock (as defined for purposes of Rule 13d-3 of the Securities and Exchange Act of 1934 Act, as amended (“1934 Act”)). The Company further acknowledges that no Buyer is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby, and any advice given by a Buyer or any of its representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to such Buyer’s purchase of the Securities. The Company further represents to each Buyer that the Company’s decision to enter into the Transaction Documents to which it is a party has been based solely on the independent evaluation by the Company and its respective representatives.

 

(g)           No General Solicitation; Placement Agent’s Fees . Except as set forth in Schedule 3(g) attached to the Disclosure Letter, neither the Company nor any Person acting on its behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Securities. The Company shall be responsible for the payment of any Placement Agent’s fees, financial advisory fees, or brokers’ commissions (other than for Persons engaged by any Buyer or its investment advisor) relating to or arising out of the transactions contemplated hereby. Other than MDB Capital Group, LLC (i.e., the “Placement Agent”) to which a cash fee of ten percent (10%) of the gross proceeds of any Closing hereunder and a warrant based on ten percent (10%) of the initial principal amount of the Notes issued at any Closing hereunder, the Company has not engaged any placement agent or other broker or dealer in connection with the offer or sale of the Securities.

 

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(h)           No Integrated Offering . None of the Company or any of their affiliates, nor any Person acting on their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the issuance of any of the Securities under the 1933 Act, whether through integration with prior offerings or otherwise, or cause this offering of the Securities to require approval of stockholders of the Company (other than any required approval of holders of a majority of the outstanding common stock of the Company received before the Closing) under any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated for quotation. None of the Company, nor its affiliates nor any Person acting on their behalf will take any action or steps that would require registration of the issuance of any of the Securities under the 1933 Act or cause the offering of any of the Securities to be integrated with other offerings of securities of the Company.

 

(i)           Dilutive Effect . The Company understands and acknowledges that the number of Conversion Shares may increase in certain circumstances. The Company further acknowledges that its obligation to issue the Conversion Shares upon conversion of the Notes in accordance with this Agreement and the Notes is absolute and unconditional, regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company.

 

(j)           Application of Takeover Protections; Rights Agreement . The Company and its board of directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, interested stockholder, business combination, poison pill (including, without limitation, any distribution under a rights agreement) or other similar anti-takeover provision under the Certificate of Incorporation, Bylaws or other organizational documents or the laws of the jurisdiction of its incorporation or otherwise which is or could become applicable to any Buyer as a result of the consummation of the transactions contemplated by this Agreement, including, without limitation, the Company’s issuance of the Securities and any Buyer’s ownership of the Securities. The Company and its board of directors have taken all necessary action, if any, in order to render inapplicable any stockholder rights plan or similar arrangement relating to accumulations of beneficial ownership of shares of Common Stock or a change in control of the Company.

 

(k)           Placement Documents; Financial Statements . The private placement memorandum provided to the Buyers in connection with the sale of the Notes, at the time of the date thereon, as it may be amended from time to time, did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the private placement memorandum are unaudited and were not prepared in accordance with generally accepted accounting principles, but fairly represented the financial position and results of the Company as of at and for the periods ended on the dates of such financial statements. No other information provided by or on behalf of the Company to any of the Buyers taken together with such private placement memorandum contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein not misleading, in the light of the circumstance under which they are or were made.

 

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(l)           Absence of Certain Changes . Since the date of the Company’s most recent financial statements contained in the private placement memorandum provided to the Buyer in connection with the sale of the Notes, there has been no material adverse change and no material adverse development in the business, assets, liabilities, properties, operations (including results thereof), condition (financial or otherwise) or prospects of the Company. Since the date of the Company’s most recent financial statements contained in in the private placement memorandum provided to the Buyer in connection with the sale of the Notes, the Company has not (i) declared or paid any dividends (whether by cash, property or securities), (ii) sold any assets, individually or in the aggregate, outside of the ordinary course of business or (iii) made any capital expenditures, individually or in the aggregate, outside of the ordinary course of business. The Company has not taken any steps to seek protection pursuant to any law or statute relating to bankruptcy, insolvency, reorganization, receivership, liquidation or winding up, nor does the Company have any knowledge or reason to believe that any of their respective creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor to do so. The Company is not as of the date hereof, and after giving effect to the transactions contemplated hereby to occur at the Closing, will not be Insolvent (as defined below). “Insolvent” means (i) the present fair saleable value of the Company’s assets is less than the amount required to pay the Company’s total Indebtedness (as defined below), (ii) the Company is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured or (iii) the Company intends to incur or believe that they will incur debts that would be beyond its ability to pay as such debts mature. The Company has not engaged in any business or in any transaction, and is not about to engage in any business or in any transaction, for which the Company’s remaining assets constitute unreasonably small capital.

 

(m)           No Undisclosed Events, Liabilities, Developments or Circumstances . The Company has no knowledge of any event, liability, development or circumstance that has occurred or exists, or that is reasonably expected to occur or exist with respect to the Company or any of its business, properties, liabilities, operations (including results thereof) or condition (financial or otherwise), that (i) would be required to be disclosed by the Company under applicable securities laws on a registration statement on Form S-1 filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced or disclosed to the Buyers, (ii) could have a material adverse effect on any Buyer’s investment hereunder or (iii) could have a Material Adverse Effect.

 

(n)           Conduct of Business; Regulatory Permits . The Company is not in violation of any term of or in default under its Certificate of Incorporation or Bylaws. The Company is not in violation of any judgment, decree or order or any statute, ordinance, rule or regulation applicable to the Company, and the Company will not conduct its business in violation of any of the foregoing, except in all cases for possible violations which could not, individually or in the aggregate, have a Material Adverse Effect. The Company possess all certificates, authorizations and permits issued by the appropriate regulatory authorities necessary to conduct their respective businesses, except where the failure to possess such certificates, authorizations or permits would not have, individually or in the aggregate, a Material Adverse Effect, and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.

 

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(o)           Foreign Corrupt Practices . The Company and none of its directors, officers, agents, employees or other Persons acting on behalf of the Company has, in the course of its actions for, or on behalf of, the Company (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

 

(p)           Sarbanes-Oxley Act . The Company is in compliance with all applicable requirements of the Sarbanes-Oxley Act of 2002 and all applicable rules and regulations promulgated by the SEC thereunder.

 

(q)           Transactions With Affiliates . Except as set forth on Schedule 3(q) attached to the Disclosure Letter and in the private placement documents provided to the Buyers in connection with the sale of the Notes, none of the officers, directors, employees or affiliates of the Company is presently a party to any transaction with the Company (other than for ordinary course services as employees, officers or directors and immaterial transactions), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any such officer, director, employee or affiliate or, to the knowledge of the Company, any corporation, partnership, trust or other Person in which any such officer, director, employee or affiliate has a substantial interest or is an employee, officer, director, trustee or partner.

 

(r)           Equity Capitalization . Except as set forth in Schedule 3(r) attached to the Disclosure Letter:

 

As of the Effective Date, the authorized capital stock of the Company will consist solely of shares of Common Stock, of which are issued and outstanding and shares are reserved for issuance pursuant to Convertible Securities (as defined below) (other than the Notes). No approval of the shareholders is required for the issuance of the Notes or the Conversion Shares or any of the Convertible Securities. No shares of Common Stock are held in treasury. All of such outstanding shares are duly authorized and have been, or upon issuance will be, validly issued and are fully paid and non-assessable. Shares of the Company’s issued and outstanding Common Stock on the date hereof are owned by Persons who are “affiliates” (as defined in Rule 405 of the 1933 Act and calculated based on the assumption that only officers, directors and holders of at least ten percent (10%) of the Company’s issued and outstanding Common Stock are “affiliates” without conceding that any such Persons are “affiliates” for purposes of federal securities laws) of the Company. To the Company’s knowledge, no Person owns ten percent (10%) or more of the Company’s issued and outstanding shares of Common Stock (calculated based on the assumption that all Convertible Securities, whether or not presently exercisable or convertible, have been fully exercised or converted (as the case may be) taking account of any limitations on exercise or conversion (including “blockers”) contained therein) without conceding in the private placement documentation that such identified Person is a ten percent (10%) stockholder for purposes of federal securities laws. Except as contemplated by the Transaction Documents, as of immediately prior to the Closing, (i) none of the Company’s capital stock is subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any capital stock of the Company, or contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional capital stock of the Company or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any capital stock of the Company (except pursuant to an agreement to issue common stock in connection with patent and intellectual property services); (iii) there are no outstanding debt securities, notes, credit agreements, credit facilities or other agreements, documents or instruments evidencing Indebtedness of the Company or by which the Company is or may become bound; (iv) there are no financing statements securing obligations in any amounts filed in connection with the Company; (v) there are no agreements or arrangements under which the Company is obligated to register the sale of any of their securities under the 1933 Act (except pursuant to the Registration Rights Agreement and warrants issued to MDB Capital Group LLC or its affiliates); (vi) there are no outstanding securities or instruments of the Company which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company is or may become bound to redeem a security of the Company; (vii) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities; and (viii) the Company has not issued any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement. The Company has furnished to the Buyers true, correct and complete copies of the Company’s Certificate of Incorporation, as amended and as in effect on the date hereof (the “Certificate of Incorporation”), and the Company’s bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and the terms of all securities convertible into, or exercisable or exchangeable for, shares of Common Stock and the material rights of the holders thereof in respect thereto. “Convertible Securities” means preferred stock, options, warrants or other securities directly or indirectly convertible into, exchangeable for or exercisable for Common Stock of the Company.

 

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(s)           Indebtedness and Other Contracts . The Company (i) except as disclosed on Schedule 3(s)(i) attached to the Disclosure Letter, has no outstanding Indebtedness (as defined below), (ii) is a party to any contract, agreement or instrument, the violation of which, or default under which, by the other party(ies) to such contract, agreement or instrument could reasonably be expected to result in a Material Adverse Effect, (iii) is in violation of any term of, or in default under, any contract, agreement or instrument relating to any Indebtedness, except where such violations and defaults would not result, individually or in the aggregate, in a Material Adverse Effect, or (iv) is a party to any contract, agreement or instrument relating to any Indebtedness, the performance of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse Effect. (x) “Indebtedness” of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (including, without limitation, “capital leases” in accordance with generally accepted accounting principles) (other than trade payables entered into in the ordinary course of business), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with generally accepted accounting principles, consistently applied for the periods covered thereby, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above; (y) “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto; and (z) “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.

 

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(t)           Absence of Litigation . Except as set forth on Schedule 3(t) attached to the Disclosure Letter, there is no action, suit, proceeding, inquiry or investigation before or by the Principal Market, any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company, threatened against or affecting the Company, the Common Stock or any of the Company’s officers or directors which is outside of the ordinary course of business or individually or in the aggregate material to the Company. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the SEC or other United States governmental agency involving the Company or any current or former director or officer of the Company.

 

(u)           Insurance . Except as set forth in Schedule 3(u) attached to the Disclosure Letter, the Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company is engaged. The Company has not been refused any insurance coverage sought or applied for, and the Company has no any reason to believe that it will be unable to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.

 

(v)          Employee Relations . The Company is not a party to any collective bargaining agreement or employs any member of a union. The Company believes that its relations with their respective employees are good. No executive officer (as defined in Rule 501(f) promulgated under the 1933 Act) or other key employee of the Company has notified the Company that such officer intends to leave the Company or otherwise terminate such officer’s employment with the Company. To the Company’s knowledge, no executive officer or other key employee of the Company is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer or other key employee (as the case may be) does not subject the Company to any liability with respect to any of the foregoing matters. The Company is in compliance with all federal, state, local and foreign laws and regulations respecting labor, employment and employment practices and benefits, terms and conditions of employment and wages and hours, except where failure to be in compliance would not, either individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.

 

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(w)           Title . The Company has good and marketable title in fee simple to all real property, and have good and marketable title to all personal property, owned by them which is material to the business of the Company, in each case, free and clear of all liens, encumbrances and defects except such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company. Any real property and facilities held under lease by the Company is held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company.

 

(x)           Intellectual Property Rights . To the Company’s knowledge, the Company owns or possesses adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, original works, inventions, licenses, approvals, governmental authorizations, trade secrets and other intellectual property rights and all applications and registrations therefor (“Intellectual Property Rights”) necessary to conduct is business as now conducted and as presently proposed to be conducted. None of the Company’s Intellectual Property Rights have expired, terminated or been abandoned, or are expected to expire, terminate or be abandoned, within three years from the date of this Agreement. The Company has no knowledge of any infringement by the Company of Intellectual Property Rights of others. Ther