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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-11 · 43 added, 30 removed, 64 unchanged (53% 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 March 31, 2022 (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 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 our suppliers due to COVID 19, which have not had a material adverse impact on our operating results for the quarter ended March 31, 2022.

To date, we have experienced shipment delays from our suppliers due to COVID 19, which have not had a material adverse impact on our operating results for the three and six months ended June 30, 2022.

Although we have not experienced a material supply interruption, our customers have experienced, and may continue to experience, disruptions in their operations and supply chains as a result of COVID-19, which have resulted, and may in the future result, in delayed, reduced or canceled orders, or collection risks, and which have had, and may in the future have, an adverse effect on our results of operations.

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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.

Comparison of the Three Months Ended March 31, 2022 and 2021

Revenue for the three months ended March 31, 2022 was $566,000, a decrease of $587,000, or 51%, compared to the revenue for three months ended March 31, 2021 of $1,153,000.

The decrease was a result of lower Component revenue which decreased by $689,000, compared to the three months ended March 31, 2021, partially offset by higher Consumer Audio Product sales which increased by $102,000, compared to the three months ended March 31, 2021.

This was also due in part to the supply chain interruptions experienced by our customers as a result of COVID-19, with their delaying orders to us until other components for their products could be obtained.

Comparison of the Three and Six Months Ended June 30, 2022 and 2021

Revenue for the three months ended June 30, 2022 was $946,000 a decrease of $635,000, or 40%, compared to the revenue for three months ended June 30, 2021 of $1,581,000.

The decrease was a result of lower Component revenue which decreased by $555,000, compared to the three months ended June 30, 2021, and lower Consumer Audio Product sales, which decreased by $80,000, compared to the three months ended June 30, 2021.

Such decrease was also due in part to the supply chain interruptions experienced by our customers as a result of COVID-19, as they delayed placing orders with us until other components for their own products could be obtained.

Revenue for the six months ended June 30, 2022 was $1,512,000, a decrease of $1,222,000, or 45%, compared to the revenue for the six months ended June 30, 2021 of $2,734,000.

The decrease was a result of lower Component revenue which decreased by $1,244,000, compared to the six months ended June 30, 2021, and was partially offset by Consumer Audio Product sales, which increased nominally by $22,000, compared to the six months ended June 30, 2021.

Gross Profit and Operating Expenses

Gross profit for the three months ended March 31, 2022 was $62,000, a decrease of $233,000 compared to $295,000 gross profit for the three months ended March 31, 2021.

The decrease in gross profit is mainly attributable to lower volumes of Component sales offset partially by the increase in sales of the Consumer Audio Products.

The gross margin as a percent of sales was 11.0% for the three months ended March 31, 2022 compared to 25.6% for the three months ended March 31, 2021.

The decrease in gross margin as a percent of sales is mainly attributable to reduced sales volumes in comparison to the fixed portion of costs included in our manufacturing.

Gross profit for the three months ended June 30, 2022 was $188,000, a decrease of $271,000, compared to $459,000 gross profit for the three months ended June 30, 2021.

The decrease in gross profit is mainly attributable to lower volumes of Component sales.

The gross margin as a percent of sales was 19.9% for the three months ended June 30, 2022, compared to 29.0% for the three months ended June 30, 2021.

The decrease in gross margin as a percent of sales was mainly attributable to reduced sales volumes in comparison to the fixed portion of costs included in our manufacturing.

Gross profit for the six months ended June 30, 2022 was $250,000, a decrease of $504,000, compared to $754,000 gross profit for the six months ended June 30, 2021.

The decrease in gross profit is mainly attributable to lower volumes of Component sales.

The gross margin as a percent of sales was 16.5% for the six months ended June 30, 2022, compared to 27.6% for the six months ended June 30, 2021.

The decrease in gross margin as a percent of sales was mainly attributable to reduced sales volumes in comparison to the fixed portion of costs included in our manufacturing.

Research and Development

Research and development expenses for the three months ended March 31, 2022 were $1,537,000, an increase of $364,000, compared to the research and development expenses for the three months ended March 31, 2021 of $1,173,000.

The increase in research and development expenses is primarily related to increased salary and benefit expenses, consulting expenses, stock based compensation expenses and recruiting expenses of $206,000, $73,000, $28,000 and $40,000, respectively.

Research and development expenses for the three months ended June 30, 2022 were $1,883,000, an increase of $578,000, compared to the research and development expenses for the three months ended June 30, 2021 of $1,305,000.

The increase in research and development expenses is primarily related to increased salary and benefit expenses, consulting expenses, which includes outside engineering, stock based compensation expenses, legal expenses associated with patent filings and recruiting expenses of $283,000, $77,000, $25,000, $66,000 and $88,000, respectively.

Research and development expenses for the six months ended June 30, 2022 were $3,420,000, an increase of $942,000, compared to the research and development expenses for the six months ended June 30, 2021 of $2,478,000.

The increase in research and development expenses is primarily related to increased salary and benefit expenses, consulting expenses, which includes outside engineering, stock based compensation expenses, legal expenses associated with patent filings and recruiting expenses of $489,000, $151,000, $52,000, $78,000 and $128,000, respectively.

Sales and Marketing

Sales and marketing expenses for the three months ended March 31, 2022 were $1,300,000, an increase of $426,000, compared to the sales and marketing expenses for the three months ended March 31, 2021 of $874,000.

The increase in sales and marketing expenses is primarily related increased salary and benefit expenses, stock-based compensation expenses, consulting expenses, website development expenses and advertising expenses of $132,000, $92,000, $81,000, $18,000 and $39,000, respectively.

Sales and marketing expenses for the three months ended June 30, 2022 were $1,326,000, an increase of $351,000, compared to the sales and marketing expenses for the three months ended June 30, 2021 of $975,000.

The increase in sales and marketing expenses is primarily related to increased salary compensation and benefit expenses of 84,000, stock-based compensation expenses, consulting expenses, and advertising expenses of $32,000, $87,000 and $61,000, respectively.

Sales and marketing expenses for the six months ended June 30, 2022 were $2,626,000, an increase of $777,000, compared to the sales and marketing expenses for the six months ended June 30, 2021 of $1,849,000.

The increase in sales and marketing expenses is primarily related to increased salary compensation and benefit expenses of $216,000, increased stock-based compensation, consulting expenses and advertising expenses of $188,000, $113,000 and $103,000, respectively.

General and Administrative

General and administrative expenses for the three months ended March 31, 2022 were $1,126,000, an increase of $158,000, compared to the general and administrative expenses for the three months ended March 31, 2021 of $968,000.

The increase in general and administrative expenses is primarily related to increased stock-based compensation expenses, business travel and board fees of $94,000, $22,000 and $38,000, respectively, offset partially by decreased investor relations expenses of $57,000.

General and administrative expenses for the three months ended June 30, 2022 were $1,082,000, an increase of $94,000, compared to the general and administrative expenses for the three months ended June 30, 2021 of $988,000.

The increase in general and administrative expenses is primarily related to increased stock-based compensation expenses and board fees of $60,000 and $38,000, respectively, offset partially by decreased investor relations expenses of $28,000.

General and administrative expenses for the six months ended June 30, 2022 were $2,208,000 an increase of $252,000, compared to the general and administrative expenses for the six months ended June 30, 2021 of $1,956,000.

The increase in general and administrative expenses is primarily related to increased stock-based compensation expenses, legal expenses and board fees of $153,000, $61,000 and $75,000, respectively, offset partially by decreased investor relations expenses of $45,000.

Interest Expense

Interest expense for the three months ended March 31, 2022 was $1,000, a decrease of $2,000 compared to the interest expense for the three months ended March 31, 2021 of $3,000.

Interest expense for the three and six months ended June 30, 2022 and 2021 was not significant.

Change in Fair Value of Warrant Liability

There was no change in the fair value of the warrant liability for the three months ended March 31, 2022 and 2021.

There was no change in the fair value of the warrant liability for the three and six months ended June 30, 2022 and 2021.

Deemed Dividend on Exchange of Convertible Preferred Stock for Common Stock

No deemed dividend occurred during the three months ended March 31, 2022.

No deemed dividend occurred during the three and six months ended June 30, 2022, compared to $1,192,000 in deemed dividends during the three and six months ended June 30, 2021, in connection with the exchange of all 250,000 shares of the Company’s outstanding Series A 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.

Warrant Inducement Expense

No warrant inducement occurred during the three months ended March 31, 2022, compared to $567,000 in the three months ended March 31, 2021.

No warrant inducement occurred during the three and six months ended June 30, 2022, compared to warrant inducement expenses of $579,000 and $1,146,000, respectively, during the three and six months ended June 30, 2021, 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.

Liquidity and Capital Resources

Cash and cash equivalents as of March 31, 2022 were $9,061,000, compared to $13,108,000 as of December 31, 2021.

We incurred a net loss of $3,904,000 for the three months ended March 31, 2022 and used net cash in operating activities of $4,034,000.

We incurred a net loss of $3,292,000 for the three months ended March 31, 2021 and used net cash in operating activities of $2,771,000.

Excluding non-cash adjustments, the primary reasons for the increase in the use of net cash from operating activities during the three months ended March 31, 2022, was related to the increase in inventories, partially offset by an increase in accounts payable.

Cash and cash equivalents as of June 30, 2022 were $4,762,000, compared to $13,108,000 as of December 31, 2021.

We incurred a net loss of $8,012,000 for the six months ended June 30, 2022 and used net cash in operating activities of $8,307,000.

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.

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, 2022, was related to the increase in inventories and decrease in accounts payable, partially offset by a decrease in prepaid expenses and other current assets.

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.

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For the year ended December 31, 2021, we raised net proceeds of approximately $8,303,000 from exercises of warrants which were acquired by investors in conjunction with such financings completed during fiscal 2020.

As of March 31, 2022, warrants exercisable for approximately 1,647,165 shares of common stock, remain outstanding, with exercise prices ranging from $1.52 to $2.61 per share.

In December 2021, the Company entered into an “at-the-market” sales agreement with Maxim Group LLC (the “Agent”), pursuant to which the Company may sell from time to time, shares of its common stock having an aggregate offering price of up to $4.5 million through the Agent.

As of March 31, 2022, the Company has not sold any shares of common stock under the ATM Program.

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

We have no off-balance sheet arrangements.

As of June 30, 2022, warrants exercisable for approximately 1,647,165 shares of common stock, remain outstanding, with exercise prices ranging from $1.52 to $2.61 per share.

In December 2021, the Company entered into an “at-the-market” (“ATM”) sales agreement with Maxim Group LLC (the “Agent”), pursuant to which the Company may sell from time to time, shares of its common stock having an aggregate offering price of up to $4.5 million through the Agent.

As of June 30, 2022, the Company has not sold any shares of common stock under the ATM Program.

Based on current operating levels, including additional costs and expenses related to research and development activities, plans to expand our product portfolio, and increase our market share, the Company expects to raise additional funds during the second half of 2022 and in 2023, by selling additional equity, which may include the use of the ATM Program, or incurring debt.

See Note 11 – Subsequent Event.

Quantitative and Qualitative Disclosures About Market Risk.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis