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Item 2. Management’s Discussion and Analysis

2021-11-10 compared with 2021-08-10 · 58 added, 62 removed, 76 unchanged (61% of the section changed)

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The information contained in Item 2 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 (this “Report”).

Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this Report.

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We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

Examples of forward-looking statements include, but are not limited to, statements we make regarding

our expectations regarding future trends, expectations, and performance of our business;

our expectations regarding supply chain disruptions and its impact on our business;

our expectations about the impact of our strategic plans;

the amount and timing of our capital expenditures.

Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing.

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We were formed as Summit Semiconductor, LLC, a Delaware limited liability company, on July 23, 2010.

We converted to a Delaware corporation, effective December 31, 2017, at which time we changed our name to Summit Semiconductor, Inc.

We converted to a Delaware corporation, effective December 31, 2017.

Effective as of September 11, 2018, we changed our name to Summit Wireless Technologies, Inc.

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In consideration for their exercise of such warrants for cash, such holders were issued new warrants to purchase up to an aggregate of 250,000 shares of common stock at an exercise price of $4.46 per share, which are exercisable for a period of five years.

On July 22, 2021, the Company entered into a securities purchase agreement (the “July 22nd Purchase Agreement”) with several accredited investors providing for the issuance of 2,500,000 shares of the Company’s common stock.

Pursuant to the July 22nd Purchase Agreement, the investors purchased all of the securities sold thereby for an aggregate purchase price of $10,000,000.

Pursuant to the July 22nd Purchase Agreement, an aggregate of 2,500,000 shares of common stock were issued to the investors in a registered direct offering pursuant to a prospectus supplement to the Company’s currently effective registration statement on Form S-3, which was declared effective on September 6, 2019.

The offering of the securities pursuant to the July 22nd Purchase Agreement was closed on July 27, 2021, with the Company receiving net proceeds of $9,026,000.

Potential Impacts of the Novel Coronavirus (“COVID-19”) on Our Business and Operations

The COVID-19 pandemic represents a fluid situation that presents a wide range of potential impacts of varying durations for different global geographies, including locations where we have offices, employees, customers, vendors and other suppliers and business partners.

Like most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March 2020.

Like most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to impact on our business in March 2020.

By that time, much of our first fiscal quarter of 2020 was completed.

During our second fiscal quarter of 2020, we observed decreased demand from certain of our customers due to the temporary closure by many retailers.

Our third and fourth fiscal quarters of 2020 and our first and second fiscal quarters of 2021 saw sustained improved customer demand as retailers partially reopened and demand for an in-home immersive cinema experience increased, while public cinemas remained closed throughout many regions in the country.

However, another closure by retailers, as well as a reopening of more public cinemas, could impact customer demand in the future.

Our third and fourth fiscal quarters of 2020 and our first three fiscal quarters of 2021 saw sustained improved customer demand as retailers slowly reopened and demand for an in-home immersive cinema experience increased, following the initial closure of many public cinemas due to COVID-19.

However, another closure by retailers could impact customer demand in the future.

Given the fact that our products are sold through a variety of distribution channels, we have experienced and we continue to expect that our sales will experience some volatility as a result of the changing and less predictable operational needs of many customers as a result of the COVID-19 pandemic.

We are aware that many companies, including many of our suppliers and customers, are reporting or predicting negative impacts from COVID-19 on future operating results.

To date, we have experienced shipment delays from two of our suppliers due to COVID-19, however we do not believe such delays will have a material adverse impact on our operating results and we have not experienced a material supply interruption.

There can be no assurance that we will not experience material supply delays or interruptions in the future due to COVID-19, although we do not believe material supply interruptions to be likely at this time.

To date, we have experienced shipment delays from our suppliers due to COVID-19, however we do not believe such delays will have a material adverse impact on our operating results and we have not experienced a material supply interruption.

There can be no assurance that we will not experience material supply delays or interruptions in the future due to COVID-19.

To date, travel restrictions and border closures have not materially impacted our ability to obtain inventory or manufacture or deliver products or services to customers.

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Travel restrictions impacting people can restrain our ability to assist our customers and distributors as well as impact our ability to develop new distribution channels, but at present we do not expect these restrictions on personal travel to be material to our business operations or financial results.

We have taken steps to restrain and monitor our operating expenses and therefore we do not expect any such impacts to materially change the relationship between costs and revenues.

Like most companies, we have taken a range of actions with respect to how we operate to assure that we comply with government restrictions and guidelines as well as best practices to protect the health and well-being of our employees and our ability to continue operating our business effectively.

To date, we have been able to operate our business effectively using these measures and to maintain all internal controls.

We also have not experienced challenges in maintaining business continuity and do not expect to incur material expenditures to do so.

However, the impacts of COVID-19 and efforts to mitigate the same have remained unpredictable and it remains possible that challenges may arise in the future.

The actions that we have taken so far during the pandemic include, but are not limited to:

● requiring all employees who can work from home to work from home;

● increasing our IT networking capability to best assure that employees can work effectively outside the office;

● for employees who must perform essential functions in one of our offices:

● having employees maintain a distance of at least six feet from other employees whenever possible;

● having employees stay segregated from other employees in the office with whom they require no interaction;

● requiring employees to wear masks while they are in the office whenever possible.

We continue to monitor the impacts of COVID-19 on our operations closely and this situation could change based on a significant number of factors that are not entirely within our control and are discussed in this and other sections of this Report.

As of the date of this Report, we do not expect there to be material changes to our assets on our balance sheet or our ability to timely account for those assets.

If business interruptions resulting from COVID-19 were to be prolonged or expanded in scope, our business, financial condition, results of operations and cash flows would be negatively impacted.

We will continue to actively monitor this situation and will implement actions necessary to maintain business continuity.

Comparison of the Three and Six Months Ended June 30, 2021 and 2020

Revenue for the three months ended June 30, 2021 was $1,581,000, an increase of $1,233,000, or 354%, compared to the revenue for three months ended June 30, 2020 of $348,000.

The increase was primarily due to increased volumes of both modules and speaker bundles.

Revenue for the six months ended June 30, 2021 was $2,734,000, an increase of $1,975,000, or 260%, compared to the revenue for the six months ended June 30, 2020 of $759,000.

The increase was primarily due to increased volumes of both modules and speaker bundles.

Comparison of the Three and Nine Months Ended September 30, 2021 and 2020

Revenue for the three months ended September 30, 2021 was $1,807,000, an increase of $1,200,000, or 198%, compared to the revenue for three months ended September 30, 2020 of $607,000.

The increase was primarily due to increased sales volumes of both modules and speaker bundles.

Revenue for the nine months ended September 30, 2021 was $4,541,000, an increase of $3,175,000, or 232%, compared to the revenue for the nine months ended September 30, 2020 of $1,366,000.

The increase was primarily due to increased sales volumes of both modules and speaker bundles.

Cost of Revenue and Operating Expenses

Cost of Revenue

Cost of revenue for the three months ended June 30, 2021 was $1,122,000, an increase of $786,000, or 234%, compared to the cost of revenue for the three months ended June 30, 2020 of $336,000.

Cost of revenue for the three months ended September 30, 2021 was $1,301,000, an increase of $798,000, or 159%, compared to the cost of revenue for the three months ended September 30, 2020 of $503,000.

The increase was primarily attributable to the direct material costs associated with higher sales volume.

Cost of revenue for the six months ended June 30, 2021 was $1,980,000, an increase of $1,296,000, or 189%, compared to the cost of revenue for the six months ended June 30, 2020 of $684,000.

Cost of revenue for the nine months ended September 30, 2021 was $3,281,000, an increase of $2,094,000, or 176%, compared to the cost of revenue for the nine months ended September 30, 2020 of $1,187,000.

The increase was primarily attributable to the direct material costs associated with higher sales volume.

Research and Development

Research and development expenses for the three months ended June 30, 2020 were $1,305,000, an increase of $401,000, compared to the research and development expenses for the three months ended June 30, 2020 of $904,000.

The increase in research and development expenses is primarily related to increased salary and benefit expense of $306,000, increased stock-based compensation expenses and consultant expenses of $73,000 and $65,000, respectively, partially offset by reduced facility allocation expense of $45,000.

Research and development expenses for the six months ended June 30, 2021 were $2,478,000, an increase of $440,000 compared to the research and development expenses for the six months ended June 30, 2020 of $2,038,000.

The increase in research and development expenses is primarily related to increased salary and benefit expense of $403,000 and increased stock-based compensation expenses of $124,000, partially offset by reduced facility allocation expense of $127,000.

Research and development expenses for the three months ended September 30, 2021 were $1,322,000, an increase of $82,000, compared to the research and development expenses for the three months ended September 30, 2020 of $1,240,000.

The increase in research and

development expenses is primarily related to increased salary and benefit expense of $153,000 and consultant expenses of $36,000, partially offset by decreased stock-based compensation expenses of $51,000 and reduced facility allocation expense of $50,000.

Research and development expenses for the nine months ended September 30, 2021 were $3,800,000, an increase of $522,000 compared to the research and development expenses for the nine months ended September 30, 2020 of $3,278,000.

The increase in research and development expenses is primarily related to increased salary and benefit expense of $556,000 and increased stock-based compensation and consulting expense of $74,000 and $81,000, respectively, partially offset by reduced facility allocation expense of $177,000.

Sales and Marketing

Sales and marketing expenses for the three months ended June 30, 2021 were $975,000, an increase of $465,000, compared to the sales and marketing expenses for the three months ended June 30, 2020 of $510,000.

The increase in sales and marketing expenses is primarily related increased salary, incentive compensation and benefit expenses of $144,000, increased stock-based compensation, website development and advertising expenses of $32,000, $89,000 and $164,000, respectively.

Sales and marketing expenses for the six months ended June 30, 2021 were $1,849,000, an increase of $641,000, compared to the sales and marketing expenses for the six months ended June 30, 2020 of $1,208,000.

The increase in sales and marketing expenses is primarily related increased salary, incentive compensation and benefit expenses of $147,000, increased stock-based compensation, website development and advertising expenses of $56,000, $183,000 and $283,000, respectively.

Sales and marketing expenses for the three months ended September 30, 2021 were $1,021,000, an increase of $186,000, compared to the sales and marketing expenses for the three months ended September 30, 2020 of $835,000.

The increase in sales and marketing expenses is primarily related increased salary and benefit expenses of $73,000, website development of $89,000 and advertising expenses of $87,000, partially offset by decreased stock-based compensation of $110,000.

Sales and marketing expenses for the nine months ended September 30, 2021 were $2,870,000, an increase of $827,000, compared to the sales and marketing expenses for the nine months ended September 30, 2020 of $2,043,000.

The increase in sales and marketing expenses is primarily related increased salary, incentive compensation and benefit expenses of $233,000, website development and advertising expenses of $272,000 and $370,000, respectively.

General and Administrative

General and administrative expenses for the three months ended June 30, 2021 were $988,000, an increase of $381,000, compared to the general and administrative expenses for the three months ended June 30, 2020 of $607,000.

The increase in general and administrative expenses is primarily related to increased salary and benefit expenses of $120,000, and increased stock-based compensation and investor relations expenses of $146,000 and $38,000, respectively.

General and administrative expenses for the six months ended June 30, 2021 were $1,956,000, an increase of $458,000, compared to the general and administrative expenses for the six months ended June 30, 2020 of $1,498,000.

The increase in general and administrative expenses is primarily related to increased salary and benefit expenses of $156,000, increased stock-based compensation and investor relations expenses of $240,000 and $108,000, respectively, partially offset by a $236,000 expense booked pursuant to the Alexander Settlement Agreement discussed in Note 6 – Convertible Preferred Stock and Stockholders’ Equity (Deficit).

General and administrative expenses for the three months ended September 30, 2021 were $1,081,000, an increase of $67,000, compared to the general and administrative expenses for the three months ended September 30, 2020 of $1,014,000.

The increase in general and administrative expenses is primarily related to increased salary and benefit expenses, board fees and investor relations expenses of $22,000, $33,000 and $34,000, respectively, offset partially by increased stock-based compensation of $153,000.

General and administrative expenses for the nine months ended September 30, 2021 were $3,037,000, an increase of $525,000, compared to the general and administrative expenses for the nine months ended September 30, 2020 of $2,512,000.

The increase in general and administrative expenses is primarily related to increased salary, incentive compensation and benefit expenses of $178,000, increased stock-based compensation, board fees and investor relations expenses of $87,000, $33,000 and $141,000, respectively, partially offset by a $237,000 expense recorded in 2020 pursuant to the Alexander Settlement Agreement discussed in Note 6 – Convertible Preferred Stock and Stockholders’ Equity (Deficit) recorded in the prior year.

Interest Expense

Interest expense for the three months ended June 30, 2021 was $3,000, a decrease of $1,349,000 compared to the interest expense for the three months ended June 30, 2020 of $1,352,000.

Minimal interest expense was booked in the three months ended June 30, 2021, as the Company had no significant outstanding debt.

Interest expense for the three months ended June 30, 2020 was due to the full amortization of debt discounts associated with the convertible debt that the Company incurred in March 2020, as such convertible debt was fully repaid in April 2020.

Interest expense for the six months ended June 30, 2021 was $6,000, a decrease of $1,383,000, compared to the interest expense for the six months ended June 30, 2020 of $1,389,000.

Minimal interest expense was booked in the six months ended June 30, 2021, as the Company had no significant outstanding debt.

Interest expense for the six months ended June 30, 2020 was due to the full amortization of debt discounts associated with the convertible debt that the Company incurred in March 2020, as such convertible debt was fully repaid in April 2020.

Interest expense for the three months ended September 30, 2021 was $3,000, a decrease of $2,000 compared to the interest expense for the three months ended September 30, 2020 of $5,000.

Minimal interest expense for both periods was primarily related to interest accrued on the PPP loan.

Interest expense for the nine months ended September 30, 2021 was $9,000, a decrease of $1,385,000, compared to the interest expense for the nine months ended September 30, 2020 of $1,394,000.

Minimal interest expense recorded in the nine months ended September 30, 2021, was primarily related to interest accrued on the PPP loan.

Interest expense for the nine months ended September 30, 2020 was primarily due to the full amortization of debt discounts associated with the convertible debt that the Company incurred in March 2020, as such convertible debt was fully repaid in April 2020.

Change in Fair Value of Warrant Liability

There was no change in the fair value of the warrant liability for the three months ended June 30, 2021, compared to a gain of $5,000 due to the change in fair value of the warrant liability for the three months ended June 30, 2020.

The gain for the three months ended June 30, 2020 is due to the decrease in our common stock price during the period.

The was no change in the fair value of the warrant liability for the six months ended June 30, 2021, compared to a gain of $24,000 due to the change in fair value of the warrant liability for the six months ended June 30, 2020.

The gain for the six months ended June 30, 2020 is due to the decrease in our common stock price during the period.

There was no change in the fair value of the warrant liability for the three months ended September 30, 2021 and 2020.

There was no change in the fair value of the warrant liability for the nine months ended September 30, 2021, compared to a gain of $24,000 due to the change in fair value of the warrant liability for the nine months ended September 30, 2020.

The gain for the nine months ended September 30, 2020 was due to the decrease in our common stock price during the period.

Gain on Forgiveness of Paycheck Protection Loan

The Company recorded a gain of $859,000 due to the forgiveness of the Paycheck Protection Loan for the three and nine months ended September 30, 2021.

No such forgiveness occurred during the three and nine months ended September 30, 2020.

Deemed Dividend on Exchange of Convertible Preferred Stock for Common Stock

During the three and six months ended June 30, 2021, the Company recorded a deemed dividend of $1,192,000 in connection with the exchange of all 250,000 shares of preferred stock for 250,000 shares of common stock and warrants to purchase up to 187,500 shares of common stock, which warrants were subsequently fully exercised on a cashless basis for 79,244 shares of common stock.

During the three and nine months ended September 30, 2021, the Company recorded a deemed dividend of $0 and $1,192,000 in connection with the exchange of all 250,000 shares of preferred stock for 250,000 shares of common stock and warrants to purchase up to 187,500 shares of common stock, which warrants were subsequently fully exercised on a cashless basis for 79,244 shares of common stock.

No such deemed dividend occurred during the three and nine months ended September 30, 2020.

Warrant Inducement Expense

During the three and six months ended June 30, 2021, the Company recorded a charge of $579,000 and $1,146,000, respectively, in connection with the fair value of warrants issued to warrant holders in connection with a solicitation of such warrant holders to exercise their outstanding warrants during this period.

During the three and nine months ended September 30, 2021, the Company recorded a charge of $0 and $1,146,000, respectively, in connection with the fair value of warrants issued to warrant holders in connection with a solicitation of such warrant holders to exercise their outstanding warrants during this period.

See Note 6 – Convertible Preferred Stock and Stockholders’ Equity (Deficit).

No such inducement occurred during the three and six months ended June 30, 2020.

No such inducement occurred during the three and nine months ended September 30, 2020.

Liquidity and Capital Resources

Cash and cash equivalents as of June 30, 2021 were $10,293,000, compared to $7,415,000 as of December 31, 2020.

We incurred a net loss of $6,690,000 for the six months ended June 30, 2021 and used net cash in operating activities of $5,328,000.

We incurred a net loss of $6,078,000 for the six months ended June 30, 2020 and used net cash in operating activities of $4,832,000.

Excluding non-cash adjustments, the primary reasons for the increase in the use of net cash from operating activities during the six months ended June 30, 2021, was related to the increase in accounts receivable, inventories, prepaid expenses and other assets, partially offset by an increase in accrued liabilities.

Cash and cash equivalents as of September 30, 2021 were $16,067,000, compared to $7,415,000 as of December 31, 2020.

We incurred a net loss of $8,751,000 for the nine months ended September 30, 2021 and used net cash in operating activities of $8,574,000.

We incurred a net loss of $9,068,000 for the nine months ended September 30, 2020 and used net cash in operating activities of $7,499,000.

Excluding non-cash adjustments, the primary reasons for the increase in the use of net cash from operating activities during the nine months ended September 30, 2021, was related to the increase in accounts receivable, inventories, prepaid expenses and other assets, partially offset by an increase in accounts payable and accrued liabilities.

We have financed our operations to date primarily through the issuance of equity securities, proceeds from the exercise of warrants to purchase common stock and sale of debt instruments (approximately $17,028,000 raised from various financings in fiscal 2020).

In addition, during the six months ended June 30, 2021, we raised approximately $8,254,000 from exercises of warrants which were acquired by investors in conjunction with such financings during fiscal 2020.

In addition, during the nine months ended September 30, 2021, we raised approximately $8,303,000 from exercises of warrants which were acquired by investors in conjunction with such financings during fiscal 2020.

Warrants exercisable for approximately 4,053,384 shares of common stock with exercise prices ranging from $2.32 to $4.46 per share, remain outstanding.

Additionally, in July 2021, we raised $10,000,000 in gross proceeds in a registered direct offering for the issuance and sale of 2,500,000 shares of common stock at a price of $4.00 per share.

We believe that our current level of liquid assets will be sufficient to fund our operations at least through the balance of fiscal 2021.

Additionally, in July 2021, we raised approximately $9,026,000 in net proceeds in a registered direct offering from the issuance and sale of 2,500,000 shares of common stock at a price of $4.00 per share.

We believe that our current level of liquid assets will be sufficient to fund our operations through the balance of fiscal 2022.

Off-Balance Sheet Arrangements

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What changed 10-Q

Item 2. Management’s Discussion and Analysis