What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-15 · 66 added, 43 removed, 54 unchanged (67% of the section changed)

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These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors, including risks related to market, economic and other conditions;

the ongoing economic and social consequences of the COVID-19 pandemic;

WiSA’s ability to continue as a going concern;

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We are an emerging technology company and our primary business focus is to enable mainstream consumers and audio enthusiasts to experience high quality wireless audio.

We intend to continue selling our proprietary wireless modules to consumer electronics companies while also expanding our focus to implement a lower cost solution by porting our software onto commercially available internet of things (“IoT”) modules with integrated Wi-Fi technology.

We intend to continue selling our proprietary wireless modules to consumer electronics companies while also expanding our focus to implement a lower cost solution by porting our IP software onto commercially available internet of things (“IoT”) modules with integrated Wi-Fi technology.

Our technology addresses some of the main issues that we perceive are hindering the growth of the home theater:

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Our first-generation technology shows that wireless home theater systems are viable home audio solutions for the average consumer and audio enthusiast alike.

Current research and development investments focus on developing Wi-Fi compatible software for transmitting multichannel wireless audio for which patent applications have been submitted.

Current research and development investments focus on developing Wi-Fi compatible IP software for transmitting multichannel wireless audio for which patent applications have been submitted.

A software solution enables smart devices that have Wi-Fi and video media to deliver surround sound audio and allows us to port our wireless audio technology to popular Wi-Fi based modules and systems on a chip (“SOC”) that is currently in production.

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However, we are subject to the risks and uncertainties associated with an emerging business, as noted above we have no established source of capital, and we have incurred recurring losses from operations since inception.

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.

However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm our business over the long term.

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.

Strategic Advisor

During the third quarter of 2022, the Company retained a strategic advisor to explore strategic opportunities specifically involving the Company’s intellectual property.

Potential strategic opportunities that may be explored or evaluated as part of this process include the potential for capital raising transactions, an acquisition, sale of assets, including substantially all of the Company’s assets, merger, business combination, partnership, joint venture, licensing and/or another strategic alternative.

Despite the Company’s efforts to identify and evaluate potential strategic transactions, the process may not result in any definitive offer to consummate a strategic transaction, or, if we receive such a definitive offer, the terms may not be as favorable as anticipated or may not result in the execution or approval of a definitive agreement.

We depend upon the timely delivery of products from our vendors and purchases from our partners and customers.

We depend on manufacturers and component customers to deliver and purchase hardware and consumer electronics in quantities sufficient to meet customer demand.

In addition, we depend on these manufacturers and customers to introduce new and innovative products and components to drive industry sales.

During the fourth quarter of 2022 and first quarter of 2023, we have experienced sales declines indirectly through disruption in the supply chain for several of our industry partners or customers whose own supply chains have been disrupted based on a variety of macroeconomic events that may or may not be related to the COVID-19 pandemic, which have resulted in delays throughout the consumer electronics industry.

Any material delay in the introduction or delivery, or limited allocations of products or offerings could result in reduced sales by us, which could have a material adverse impact on our financial results.

Any reduction in allocation of components or new hardware platforms or other technological advances by vendors or our customers (in which our technology is part of their hardware offering) to third parties such as big box retailers, could also have a material adverse impact on our financial results.

Disruptions and delays in our supply chains as a result of the COVID-19 pandemic could adversely impact manufacturers’ and other customers’ ability to meet customer demand.

Additionally, the prioritization of shipments of certain products as a result of the COVID-19 pandemic could cause delays in the shipment or delivery of our products.

Such disruptions could also result in reduced sales by us, which could materially and adversely impact on our financial results.

Comparison of the Three Months Ended March 31, 2023 and 2022

Revenue for the three months ended March 31, 2023 was $469,000 a decrease of $97,000 or 17%, compared to the revenue for the three months ended March 31, 2022 of $566,000.

The decrease was a result of lower Consumer Audio Product sales which decreased by $123,000 compared to the three months ended March 31, 2022, partially offset by higher Component revenue which increased by $26,000 compared to the three months ended March 31, 2022.

The decrease in overall sales is primarily related to a slow-down in consumer spending on consumer electronics.

On October 31, 2022, we announced that we are moving forward in our exploration of strategic alternatives to consider a wide range of options.

To explore strategic opportunities specifically involved in our IP and licensable software used in WiSA E and WiSA DS technologies, the Board of Directors approved the engagement of AQ Technology Partners during the third quarter of 2022.

To date, five companies have executed non-disclosure agreements in consideration of a potential transaction.

We, with our advisors, are evaluating a broad range of strategic transactions.

Potential strategic transactions that may be explored or evaluated as part of this process include the potential for capital raising transactions, an acquisition, sale of assets, including substantially all of our assets, merger, business combination, partnership, joint venture, licensing and/or another strategic alternative.

Despite devoting efforts to identify and evaluate potential strategic transactions, the process may not result in any definitive offer to consummate a strategic transaction, or, if we receive such a definitive offer, the terms may not be as favorable as anticipated or may not result in the execution or approval of a definitive agreement.

Even if we enter into a definitive agreement, we may not be successful in completing a transaction or, if we complete such a transaction, it may not enhance stockholder value or deliver expected benefits.

Comhear, Inc.

Non-Binding Letter of Intent

On May 15, 2023, we announced that we have signed a non-binding letter of intent to acquire Comhear, Inc.

(“Comhear”), a developer of AI-enabled adaptive audio technology.

Under the proposed acquisition, we would acquire all shares of Comhear common stock in exchange for newly issued shares of our common stock.

The letter of intent for the proposed transaction is non-binding, and the parties intend to enter into one or more definitive agreements with respect thereto.

Completion of the transaction is subject to, among other matters, the completion of due diligence, the negotiation of definitive agreements providing for the proposed transaction, and satisfaction of various conditions to be negotiated therein and customary for transactions of the type contemplated, including, but not limited to, receipt of regulatory approvals, the provision of an audit of Comhear’s financial statements, and board of director and WiSA shareholder approvals.

However, there can be no assurance that the parties will successfully negotiate and enter into definitive agreements regarding the proposed transaction, or that the proposed transaction will be completed as currently contemplated, or at all.

Comparison of the Three and Six Months Ended June 30, 2023 and 2022

Revenue for the three months ended June 30, 2023 was $425,000, a decrease of $521,000 or 55%, compared to the revenue for the three months ended June 30, 2022 of $946,000.

The decrease in overall sales is primarily related to a slow-down in consumer spending on consumer electronics which resulted in lower Component revenue and Consumer Audio Product revenue of $459,000 and $62,000, respectively, compared to the three months ended June 30, 2022.

Revenue for the six months ended June 30, 2023 was $894,000, a decrease of $618,000 or 41%, compared to the revenue for the six months ended June 30, 2022 of $1,512,000.

The decrease in overall sales is primarily related to a slow-down in consumer spending on consumer electronics which resulted in lower Component revenue and Consumer Audio Product revenue of $433,000 and $185,000, respectively, compared to the six months ended June 30, 2022.

Gross Profit and Operating Expenses

Gross profit for the three months ended March 31, 2023 was ($1,253,000), a decrease of $1,315,000, compared to $62,000 gross profit for the three months ended March 31, 2022.

The gross margin as a percent of sales was (267%) for the three months ended March 31, 2023 compared to 11.0% for the three months ended March 31, 2022.

The decrease in gross profit and gross margin as a percent of sales is mainly attributable to a $1.3 million increase in inventory reserves as a result of certain excess raw materials, primarily attributable to the out of balance inventory associated with longer lead time semiconductor chips, lower volumes of Consumer Audio Product sales and lower pricing of our Consumer Audio Products.

Gross Profit (Deficit)

Gross deficit for the three months ended June 30, 2023 was ($201,000), a decrease of $389,000, compared to $188,000 gross profit for the three months ended June 30, 2022.

The gross margin (deficit) as a percent of sales was (47%) for the three months ended June 30, 2023, compared to 20% for the three months ended June 30, 2022.

The decrease in gross profit and gross margin as a percent of sales is mainly attributable to a $169,000 increase in inventory reserves associated with our Consumer Audio Product products, lower sales volumes sales volumes in relation to the fixed portion of costs and lower pricing of our Consumer Audio Products.

Gross deficit for the six months ended June 30, 2023 was ($1,454,000), a decrease of $1,704,000 compared to $250,000 gross profit for the six months ended June 30, 2022.

The gross margin as a percent of sales was (163%) for the six months ended June 30, 2023, compared to 17% for the six months ended June 30, 2022.

The decrease in gross profit and gross margin as a percent of sales is mainly attributable to a $1.4 million increase in inventory reserves primarily attributable to the out of balance inventory associated with longer lead time semiconductor chips, lower sales volumes sales volumes in relation to the fixed portion of costs and lower pricing of our Consumer Audio Products.

Research and Development

Research and development expenses for the three months ended March 31, 2023 were $1,893,000, an increase of $356,000 compared to the research and development expenses for the three months ended March 31, 2022 of $1,537,000.

The increase in research and development expenses is primarily related to increased consulting expenses and salary and benefit expenses of $223,000 and $109,000, respectively.

Research and development expenses for the three months ended June 30, 2023 were $1,933,000, an increase of $50,000, compared to the research and development expenses for the three months ended June 30, 2022 of $1,883,000.

The increase in research and development expenses is primarily related to increased consulting expenses of $121,000, which includes outside engineering, offset partially by reduced recruiting expenses of $68,000.

Research and development expenses for the six months ended June 30, 2023 were $3,826,000 an increase of $406,000, compared to the research and development expenses for the six months ended June 30, 2022 of $3,420,000.

The increase in research and development expenses is primarily related to increased salary and benefit expenses of $81,000, consulting expenses, which includes outside engineering and direct materials used in research and development of $344,000 and $23,000, respectively, partially offset by reduced recruiting fees of $108,000.

Sales and Marketing

Sales and marketing expenses for the three months ended March 31, 2023 were $1,294,000, an decrease of $6,000, compared to the sales and marketing expenses for the three months ended March 31, 2022 of $1,300,000.

The decrease in sales and marketing expenses is primarily related to decreased website development expenses and selling fees of $40,000 and $20,000, respectively, partially offset by increased consulting expenses.

Sales and marketing expenses for the three months ended June 30, 2023 were $1,089,000 a decrease of $237,000, compared to the sales and marketing expenses for the three months ended June 30, 2022 of $1,326,000.

The decrease in sales and marketing expenses is primarily related to lower salary and benefit expenses of $39,000 as well as lower consulting, website development and advertising fees of $17,000, $22,000 and $116,000, respectively.

Sales and marketing expenses for the six months ended June 30, 2023 were $2,383,000 a decrease of $243,000, compared to the sales and marketing expenses for the six months ended June 30, 2022 of $2,626,000.

The decrease in sales and marketing expenses is primarily related to lower advertising expenses and website expenses of $129,000 and $63,000, respectively.

General and Administrative

General and administrative expenses for the three months ended March 31, 2023 were $1,362,000, an increase of $236,000, compared to the general and administrative expenses for the three months ended March 31, 2022 of $1,126,000.

The increase in general and administrative expenses is primarily related to increased legal fees and shareholder expenses of $140,000 and $79,000, respectively.

The increase in legal and shareholder expenses are primarily attributable to expenses associated with the special shareholder meeting and implementation of a reverse stock split that occurred in January 2023.

General and administrative expenses for the three months ended June 30, 2023 were $1,470,000, an increase of $388,000, compared to the general and administrative expenses for the three months ended June 30, 2022 of $1,082,000.

The increase in general and administrative expenses is primarily related to increased investor relations expenses and consulting fees of $334,000 and $52,000, respectively.

General and administrative expenses for the six months ended June 30, 2023 were $2,832,000 an increase of $624,000, compared to the general and administrative expenses for the six months ended June 30, 2022 of $2,208,000.

The increase in general and administrative expenses is primarily related to increased legal expenses, investor relations expenses and consulting fees of $168,000, $292,000 and $85,000, respectively.

Interest Expense, net

Interest expense, net for the three months ended March 31, 2023 was $723,000 an increase of $722,000, compared to the interest expense for the three months ended March 31, 2022 of $1,000.

The increase for the three months ended March 31, 2023, was primarily due to the amortization of debt discounts associated with the senior secured convertible note in the principal amount of $3,600,000 (the “Convertible Note”) that the Company incurred in August 2022.

Change in Fair Value of Warrant Liability

Change in fair value of warrant liability for the three months ended March 31, 2023 was $5,605,000, compared to $0 for the three months ended March 31, 2022.

The change in fair value of the warrant liability for the three months ended March 31, 2023 was due to the issuance of warrants in February 2023 associated with our stock offering and the subsequent decrease in the price of our common stock price at March 31, 2023 compared to the price of our stock on the date of the warrant issuance as well as the decline in our stock price from December 31, 2022, related to existing warrant liabilities.

Interest expense, net for the three and six months ended June 30, 2023 was $37,000 and $760,000, respectively.

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

The increase in interest expense, net for the three and six months ended June 30, 2023, was primarily due to the amortization of debt discounts associated with the senior secured convertible note that the Company issued in August 2022 and repaid in full on April 11, 2023.

Change in Fair Value of Warrant Liabilities

Change in fair value of warrant liabilities for the three months ended June 30, 2023 was $246,000, compared to $0 for the three months ended June 30, 2022.

The change in fair value of the warrant liabilities for the three months ended June 30, 2023 was primarily due to the decrease in the price of our common stock at June 30, 2023 compared to the price of our common stock on the date of the warrant issuance as well as the decline in our common stock price from March 31, 2023, related to existing warrant liabilities.

Change in fair value of warrant liabilities for the six months ended June 30, 2023 was $5,850,000, compared to $0 for the six months ended June 30, 2022.

The change in fair value of the warrant liabilities for the six months ended June 30, 2023 was due to the issuance of warrants in February 2023 and the subsequent decrease in the price of our common stock at June 30, 2023 compared to the price of our common stock on the date of the warrant issuance as well as the decline in our common stock price from December 31, 2022, related to existing warrant liabilities.

Loss on Debt Extinguishment

During the three and six months ended June 30, 2023, the Company recorded a loss on debt extinguishment of $837,000.

The loss is directly related to the Company’s April 2023 repayment of the Convertible Note in the amount of $1,656,744.

The repayment of the entirety of the outstanding balance of such note, included the unpaid principal, interest through the payoff date, and a pre-payment premium of $276,000.

The loss also includes the expensing of the related unamortized debt discounts totaling $894,000, offset partially by a $333,000 gain on termination of a derivative liability that was established in connection with the Convertible Note.

Liquidity and Capital Resources

Cash and cash equivalents as of March 31, 2023 were $5,259,000, compared to $2,897,000 as of December 31, 2022.

We incurred a net loss of $921,000 for the three months ended March 31, 2023 and used net cash in operating activities of $4,618,000.

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.

Excluding non-cash adjustments, the primary reasons for the decrease in the use of net cash from operating activities during the three months ended March 31, 2023, was related to the decrease in inventories, partially offset by an increase in prepaid expenses and a decrease in accrued liabilities.

Cash and cash equivalents as of June 30, 2023 were $2,007,000, compared to $2,897,000 as of December 31, 2022.

We incurred a net loss of $6,247,000 for the six months ended June 30, 2023 and used net cash in operating activities of $9,126,000.

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.

Excluding non-cash adjustments, the primary reasons for the decrease in the use of net cash from operating activities during the six months ended June 30, 2023, was related to the decrease in inventories and prepaid expenses, partially offset by a decrease 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.

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In December 2022, we received net proceeds of $6.4 million, from the issuance of 540,000 shares of common stock (includes the exercise of 36,000 pre-funded warrants) and the issuance of 1,080,000 warrants to purchase common stock.

In February 2023, we received net proceeds of approximately $5.3 million from the issuance of 583,306 shares of common stock (includes the exercise of 381,762 pre-funded warrants) and the issuance of 874,959 warrants to purchase common stock.

In February 2023, we received net proceeds of approximately $5.3 million from the issuance of 583,306 shares of

common stock (includes the exercise of 381,762 pre-funded warrants) and the issuance of 874,959 warrants to purchase common stock.

In March 2023, we received net proceeds of approximately $1.6 million from the issuance of 837,207 shares of common stock and the issuance of 1,674,414 warrants to purchase common stock.

In April 2023, we raised gross proceeds of approximately $1.2 million through the issuance of common stock and warrants - see Note 11 – Subsequent Events for additional information.

We will need to raise additional proceeds via the issuance of equity securities and/or the sale of debt instruments by the third quarter of 2023 to fund operations through December 31, 2023.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

In April 2023, we received net proceeds of approximately $1.0 million through the issuance of common stock and warrants.

In May 2023, we received net proceeds of approximately $1.9 million in connection with a warrant inducement.

We will need to raise additional proceeds via the issuance of equity securities and/or the sale of debt instruments in the third quarter of 2023 to fund operations through December 31, 2023.

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