Datavault AI Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Notice Regarding Forward Looking Statements This Quarterly Report on Form 10-Q (this “Report”) 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”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue,” negatives thereof or similar expressions. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of WiSA Technologies, Inc.’s (“WiSA”, the “Company”, “our”, “us” or “we”) operations; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future operations, future cash needs, business plans and future financial results, and any other statements that are not historical facts. From time to time, forward-looking statements also are included in our other periodic reports on Form 10-K, 10-Q and 8-K, in our press releases, in our presentations, on our website and in other materials released to the public. Any or all of the forward-looking statements included in this Report and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate. 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; WiSA’s ability to continue as a going concern; WiSA’s ability to manage costs and execute on its operational and budget plans; and, WiSA’s ability to achieve its financial goals. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise. Overview 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 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: complexity of installation and cost. We believe that consumers want to experience theater quality surround sound from the comfort of their homes. However, wired home theater systems often require expensive audio-visual (“AV”) receivers to decode the audio stream, leaving the consumer with the burden of concealing the wires. Hiring a professional to hide the wires into the walls or floor is invasive, complicated, costly and time consuming. Further, people who rent as opposed to own may not be able to install these systems as the installation construction needed may not be permitted under a lease agreement. Our first-generation wireless technology addresses these problems by transmitting wireless audio to each speaker at Blu-ray quality (uncompressed 24-bit audio up to 96 kHz sample rates) and emphasizing ease of setup. To our knowledge, our custom chips and modules technology is one of the few technologies available today that can stream up to eight (8) separate wireless audio channels with low latency, removing lip-sync issues between the audio and video sources. In addition, every speaker within a system that utilizes our technology can be synchronized to less than one microsecond, thus eliminating phase distortion between speakers. Our first-generation technology shows that wireless home theater systems are viable home audio solutions for the average consumer and audio enthusiast alike. 29 Table of Contents 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. The Company’s “Discovery” module first announced in January 2021 is the first IoT module solution with our embedded wireless audio software that specifically targets the high growth Dolby ATMOS soundbar market with a low-cost transceiver. The Discovery module is capable of supporting ATMOS configurations up to 5.1.4. requiring five separate wireless audio channels. Our goal is to continue to commercialize and improve performance of a software based-solution, which other brands can integrate into their devices, that will (i) reduce integration costs for mass market use, (ii) utilize Wi-Fi for wireless connectivity, making it easy to integrate into today’s high volume, low cost SOC and modules, (iii) provide a low power consumption option to allow for use in battery powered devices, and (iv) provide compatibility with popular consumer electronic operating systems. To date, our operations have been funded through sales of our common and preferred equity, proceeds from the exercise of warrants to purchase common stock, sale of debt instruments, and revenue from the sale of our products. Our condensed consolidated financial statements contemplate the continuation of our business as a going concern. 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 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. 30 Table of Contents Comparison of the Three and Six Months Ended June 30, 2023 and 2022 Revenue 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 (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 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 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. 31 Table of Contents General and Administrative 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 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 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. In August 2022, we received net proceeds of $2.5 million from the issuance of a convertible promissory note to an investor. 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 32 Table of Contents 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 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. ​ Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item. ​