WiSA Technologies(WISA) - 2020 Q1 - Quarterly Report

PART I: FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents Summit Wireless Technologies, Inc.'s unaudited condensed consolidated financial statements and detailed notes for Q1 2020 Condensed Consolidated Balance Sheets The balance sheet shows a slight increase in total assets and a significant increase in total liabilities from December 31, 2019, to March 31, 2020, primarily driven by an increase in borrowings and accounts payable. Stockholders' equity shifted from a positive balance to a deficit | Metric (in thousands) | March 31, 2020 (unaudited) | December 31, 2019 (audited) | | :-------------------- | :------------------------- | :-------------------------- | | Cash and cash equivalents | $755 | $298 | | Total current assets | $4,497 | $4,016 | | Total assets | $4,622 | $4,222 | | Accounts payable | $2,335 | $1,554 | | Total current liabilities | $3,677 | $2,700 | | Borrowings | $688 | $- | | Total liabilities | $4,757 | $3,111 | | Total stockholders' equity (deficit) | $(672) | $594 | - The company's stockholders' equity transitioned from a positive $594,000 as of December 31, 2019, to a deficit of $(672,000) as of March 31, 2020[9] Condensed Consolidated Statements of Operations The company experienced a net loss of $(2,680,000) for the three months ended March 31, 2020, an increase from $(2,565,000) in the prior year period. Revenue decreased by 12%, while gross profit slightly increased. Operating expenses remained relatively stable, but interest expense increased significantly due to new debt | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Revenue, net | $411 | $465 | | Cost of revenue | $348 | $407 | | Gross profit | $63 | $58 | | Total operating expenses | $2,723 | $2,725 | | Loss from operations | $(2,660) | $(2,667) | | Interest expense | $(37) | $- | | Net loss | $(2,680) | $(2,565) | | Net loss per common share - basic and diluted | $(2.19) | $(3.33) | - Revenue decreased by $54,000, or 12%, for the three months ended March 31, 2020, compared to the same period in 2019, primarily due to lower module sales[13][177] - Interest expense increased from $0 in Q1 2019 to $37,000 in Q1 2020, mainly due to the amortization of debt discounts from convertible debt incurred in March 2020[13][182] Condensed Consolidated Statements of Comprehensive Loss The comprehensive loss for the three months ended March 31, 2020, was $(2,680,000), slightly higher than the $(2,576,000) reported in the prior year, with no foreign currency translation adjustment in 2020 | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(2,680) | $(2,565) |\ | Foreign currency translation adjustment | $- | $(11) |\ | Comprehensive loss | $(2,680) | $(2,576) | Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) Stockholders' equity shifted from a positive balance of $594,000 at December 31, 2019, to a deficit of $(672,000) by March 31, 2020, primarily due to a net loss of $(2,680,000) and convertible preferred stock dividends, partially offset by proceeds from common stock and warrant issuances | Item (in thousands) | Balance as of Dec 31, 2019 | Changes (Q1 2020) | Balance as of Mar 31, 2020 | | :------------------ | :------------------------- | :---------------- | :------------------------- | | Convertible Preferred Stock Amount | $517 | $20 | $537 | | Additional Paid-in Capital | $188,320 | $1,414 | $189,734 | | Accumulated Deficit | $(187,678) | $(2,680) | $(190,358) | | Total Stockholders' Equity (Deficit) | $594 | $(1,266) | $(672) | - Issuance of common stock and warrants, net of offering costs, contributed $725,000 to additional paid-in capital during Q1 2020[20] - Issuance of warrants in connection with convertible notes payable added $630,000 to additional paid-in capital[20] Condensed Consolidated Statements of Cash Flows Net cash used in operating activities decreased significantly from $(2,820,000) in Q1 2019 to $(1,820,000) in Q1 2020. The company generated substantial cash from financing activities in Q1 2020 through the issuance of common stock, warrants, and convertible notes, leading to a net increase in cash and cash equivalents | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(1,820) | $(2,820) | | Net cash used in investing activities | $(2) | $- | | Net cash provided by (used in) financing activities | $2,279 | $(65) | | Net decrease in cash and cash equivalents | $457 | $(2,896) | | Cash and cash equivalents as of end of period | $755 | $322 | - Proceeds from the issuance of common stock and warrants, net of issuance costs, totaled $725,000 in Q1 2020[23] - Proceeds from the issuance of convertible notes payable, net of issuance costs, amounted to $1,665,000 in Q1 2020[23] Notes to Condensed Consolidated Financial Statements These notes provide detailed disclosures on the company's business, financial condition, and operations, including recent financing activities, Nasdaq compliance challenges, accounting policies, fair value measurements, equity structure, debt, income taxes, commitments, related party transactions, segment information, and subsequent events 1. Business and Viability of Operations Summit Wireless develops wireless audio products, secured Q1 2020 financing, but faces Nasdaq compliance and going concern issues - The company received $100,000 from a convertible promissory note funding agreement in January 2020, which was fully repaid by March 31, 2020[25][69] - A February 2020 private placement of 91,062 units (common stock + warrants) generated gross proceeds of $835,000[26][101] - A March 2020 private placement of a senior secured convertible note and warrant resulted in gross proceeds of $1,700,000[28][70] - The company received Nasdaq notifications for non-compliance with minimum bid price ($1.00), minimum stockholders' equity ($2,500,000), and audit committee independence rules[31][32][33] - As of March 31, 2020, the company had an accumulated deficit of approximately $190.4 million and has not generated positive cash flows from operations, raising substantial doubt about its ability to continue as a going concern[34] 2. Summary of Significant Accounting Policies This section details the company's significant accounting policies, including revenue recognition, financial instruments, and COVID-19 impacts - The company capitalizes deferred offering costs, which amounted to $154,000 as of March 31, 2020[39] - As of March 31, 2020, two customers accounted for 79% and 11% of accounts receivable, and one customer accounted for 66% of net revenue for the three months ended March 31, 2020[41] - The company bifurcates conversion options and warrants from host instruments, accounting for them as freestanding derivative financial instruments if certain criteria are met[45] - Revenue is recognized when control of promised goods (wireless modules) is transferred to the customer, typically upon shipment[50] - The company adopted ASU 2018-07 (nonemployee share-based payment accounting) and ASU 2018-13 (fair value measurement) as of January 1, 2019, and January 1, 2020, respectively, with no significant impact[62][63] 3. Balance Sheet Components This note provides a breakdown of key balance sheet components, including inventories, property and equipment, and accrued liabilities, showing minor changes in inventory and property, but notable shifts in accrued liabilities such as a new contingency accrual | Inventories (in thousands) | March 31, 2020 | December 31, 2019 | | :------------------------- | :------------- | :---------------- | | Work in progress | $322 | $301 | | Finished goods | $2,328 | $2,365 | | Total inventories | $2,650 | $2,666 | | Accrued Liabilities (in thousands) | March 31, 2020 | December 31, 2019 | | :--------------------------------- | :------------- | :---------------- | | Accrued vacation | $290 | $263 | | Accrued rebate | $297 | $204 | | Contingency accrual | $250 | $- | | Accrued compensation | $129 | $38 | | Customer advances | $232 | $451 | | Accrued audit fees | $88 | $140 | | Accrued other | $56 | $50 | | Total accrued liabilities | $1,342 | $1,146 | - A new contingency accrual of $250,000 was recorded as of March 31, 2020, related to threatened litigation from Alexander Capital, L.P[68][117] 4. Borrowings This note details the company's borrowing activities, including a short-term funding agreement that was repaid and a significant senior secured convertible promissory note issued in March 2020. The convertible note includes complex conversion features, anti-dilution protection, and warrants, with associated debt discounts amortized to interest expense - A convertible promissory note of $111,100 was issued on January 23, 2020, for $100,000 cash, including a 10% original issue discount, 500 common shares, and a warrant for 7,936 shares. This note was fully repaid by March 31, 2020[69] - A senior secured convertible note (March 2020 Note) with a principal of $2,040,000 was issued on March 30, 2020, generating gross proceeds of $1,700,000, along with warrants to purchase 227,679 common shares for the investor and 20,400 for the placement agent[70][76] - The March 2020 Note's conversion price is the lesser of 90% of the average of the five lowest daily VWAPs over twenty trading days or $6.40, subject to full ratchet anti-dilution protection[73] - The company recognized $17,000 of interest expense from the amortization of debt discounts related to the March 2020 Note during Q1 2020[76] 5. Fair Value Measurements This note details the fair value measurements of financial instruments, specifically derivative and warrant liabilities, categorized under Level 3 of the fair value hierarchy due to significant unobservable inputs. The warrant liability decreased in fair value, resulting in a gain, while the derivative liability remained stable | Liability (in thousands) | March 31, 2020 | December 31, 2019 | | :----------------------- | :------------- | :---------------- | | Derivative liability | $387 | $387 | | Warrant liability | $5 | $24 | - The warrant liability decreased in fair value by $19,000 for the three months ended March 31, 2020, resulting in a gain, primarily due to a decrease in the common stock price[81][183] | Weighted Average Unobservable Inputs (Level 3) | March 31, 2020 | December 31, 2019 | | :--------------------------------------------- | :------------- | :---------------- | | Common Stock Price | $6.80 | $12.20 | | Term (Years) | 3.01 | 3.26 | | Volatility | 65% | 62% | | Risk-free rate of interest | 0.29% | 1.62% | | Dividend Yield | 0.0% | 0.0% | 6. Convertible Preferred Stock and Stockholders' Equity (Deficit) This note details Series A Preferred Stock features and common stock activities, including the February 2020 Private Placement - 250,000 shares of Series A 8% Senior Convertible Preferred Stock were issued in April 2019 for $1,000,000, with a stated value of $4.00 per share and a conversion price of $80.00 (subject to adjustment, not less than $30.00)[84][86] - The Series A Preferred Stock has an embedded conversion feature classified as a derivative, with a fair value of $216,000 at issuance[85] - The company accrued $20,000 in dividends for the Series A Preferred Stock for the three months ended March 31, 2020[86] - The February 2020 Private Placement involved the issuance of 91,062 units (common stock and warrants) at $9.17 per unit, with warrants exercisable for 45,534 shares at $9.80 per share[101][102] | Warrants for Common Stock Outstanding (as of March 31, 2020) | | :----------------------------------------------------------- | | Exercise Price Range | Number Outstanding | Remaining Life (years) | Number Exercisable | | $6.40 - $9.80 | 306,102 | 4.92 | 285,702 | | $15.80 - $17.50 | 93,562 | 2.64 | 89,812 | | $24.80 - $99.00 | 230,571 | 1.75 | 224,457 | | $108 - $207.00 | 72,864 | 2.35 | 72,864 | | $35.82 | 703,099 | 3.72 | 672,835 | 7. Income Taxes The company recorded no income tax provision for the three months ended March 31, 2020, maintaining a full valuation allowance on its deferred tax assets due to historical operating losses. The impact of the CARES Act is currently being analyzed - The company recorded a provision for income taxes of $0 for Q1 2020, compared to $6,000 for Q1 2019 (primarily state income tax)[106] - The effective tax rate was 0.0% for Q1 2020 and (0.2%) for Q1 2019, primarily due to a full valuation allowance on deferred tax assets[107][109] - The company is currently analyzing the impact of the Coronavirus Aid, Relief and Economic Security (CARES) Act on its income taxes[111] 8. Commitments and Contingencies The company has an operating lease for its Beaverton, Oregon office, with future minimum payments of $213,000 for 2020. A significant contingency arose from threatened litigation by Alexander Capital, L.P. regarding alleged breach of an engagement agreement, leading to a $250,000 accrual - Future annual minimum lease payments under the non-cancelable operating lease as of March 31, 2020, are $213,000 for the year ending December 31, 2020[113] - The company received letters from Alexander Capital, L.P. alleging breach of an engagement agreement due to the March 2020 Private Placement, claiming $170,000 and warrants for 22,768 shares[115] - A contingency reserve of $250,000 was recorded for the three months ended March 31, 2020, in connection with Alexander's threatened litigation[117] 9. Related Parties This note details transactions and relationships with key executives, directors, and significant shareholders - Brett Moyer (CEO) owned 1.8% of outstanding common stock as of March 31, 2020[120] - Alexander Capital, L.P., where Jonathan Gazdak is Managing Director, received cash fees of $83,000 and a warrant for 4,553 common shares in connection with the February 2020 Private Placement[128] - The Medalist Funds, associated with former director Brian Herr, were issued Pre-Funded Warrants to purchase 20,719 common shares, generating approximately $327,000 in proceeds[132] - Michael Howse (interim chief strategy officer/director) has vested warrants to purchase 13,750 common shares and is eligible for a cash bonus upon capital raises or acquisition[135][137] - Lisa Walsh, a significant shareholder, owned 100% of Series A Preferred Stock and 21.2% of outstanding common stock as of March 31, 2020, and participated in various equity transactions[144] 10. Segment Information The company operates in a single business segment: wireless audio products. Revenue is disaggregated by geographic region, with Asia Pacific being the largest contributor - The company operates in one business segment: wireless audio products[145] | Net Revenue by Geographic Region (in thousands) | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Region | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | United States | $38 | $3 | | Europe | $24 | $149 | | Asia Pacific | $349 | $313 | | Total | $411 | $465 | - Asia Pacific was the largest revenue contributor, increasing from $313,000 in Q1 2019 to $349,000 in Q1 2020, while Europe saw a significant decrease[145] 11. Subsequent Events Subsequent events include a reverse stock split, public offering, Nasdaq compliance, debt repayment, PPP loan, and a settlement - A 1-for-20 reverse stock split became effective on April 9, 2020[146] - A public offering closed on April 23, 2020, raising approximately $6.5 million in gross proceeds from the sale of common stock, pre-funded warrants, and common stock purchase warrants[147] - The company regained compliance with Nasdaq's minimum bid price requirement on April 24, 2020[148] - The $2,040,000 outstanding debt from the March 2020 Note was fully repaid on April 29, 2020[149] - The company received an $846,636 loan under the Paycheck Protection Program (PPP) on May 7, 2020[151] - A settlement agreement with Alexander Capital, L.P. was reached on May 14, 2020, involving a $125,000 cash payment and the issuance of 50,000 common shares[153] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2020 financial condition, operations, COVID-19 impact, liquidity, and ongoing need for additional funding Overview Summit Wireless is an early-stage wireless audio company, with Q1 2020 financing for working capital and general corporate purposes - The company's primary business focus is to enable high-quality wireless audio through semiconductors and modules, with plans to increase focus on a software licensing business segment[159] - Current wireless module technology transmits Blu-ray quality (uncompressed 24-bit audio up to 96 kHz) and supports up to eight separate wireless audio channels for immersive surround sound[167] - The February 2020 Private Placement generated gross proceeds of $835,000, with net proceeds of approximately $725,000 used for working capital and to comply with Nasdaq listing rules[164] - The March 2020 Private Placement generated gross proceeds of $1,700,000, intended for working capital, debt repayment, and general corporate purposes[166] Potential Impacts of the Novel Coronavirus ("COVID-19") on Our Business and Operations The COVID-19 pandemic began impacting the company's business in March 2020, leading to decreased demand from certain customers and expected significant year-over-year revenue decline for Q2 2020. The company has implemented measures to lower operating expenses and ensure business continuity, but the full impact remains uncertain - The COVID-19 pandemic began impacting the company's business in March 2020, leading to recent decreases in demand from certain customers[170] - The company expects revenue for the three months ending June 30, 2020, to decline significantly year over year due to COVID-19 conditions[176] - Measures taken include requiring remote work, increasing IT networking capability, and implementing social distancing and mask-wearing for essential on-site employees[175] Comparison of the Three Ended March 31, 2020 and 2019 Q1 2020 revenue decreased 12%, gross profit slightly increased, operating expenses shifted, and interest expense rose due to new debt - Revenue decreased by $54,000 (12%) to $411,000 in Q1 2020, compared to $465,000 in Q1 2019, primarily due to lower module sales[177] - Research and development expenses decreased by $227,000, mainly due to reduced consulting and recruiting fees[179] - General and administrative expenses increased by $276,000, driven by higher salary and benefit expenses ($73,000), increased stock compensation and accounting expenses ($38,000 and $36,000, respectively), and a $250,000 contingency accrual[181] - Interest expense was $37,000 in Q1 2020, up from $0 in Q1 2019, due to amortization of debt discounts from convertible debt[182] - A gain from the change in fair value of warrant liability was $19,000 in Q1 2020, compared to $111,000 in Q1 2019, both due to decreases in common stock price[183] Liquidity and Capital Resources Cash increased to $755,000 by March 31, 2020, driven by financing, but ongoing losses necessitate further funding, raising going concern doubts - Cash and cash equivalents increased to $755,000 as of March 31, 2020, from $298,000 as of December 31, 2019[184] - The increase in cash was driven by $725,000 from the February 2020 Private Placement and $1,665,000 from the sale of convertible notes[184] - Net cash used in operating activities decreased to $1,820,000 in Q1 2020 from $2,820,000 in Q1 2019, mainly due to increases in accounts payable and accrued liabilities[186] - The company has generated losses since inception and requires additional funds through equity or debt financing to continue operations, raising substantial doubt about its ability to continue as a going concern[187] Off-Balance Sheet Arrangements The company has no off-balance sheet arrangements - The company has no off-balance sheet arrangements[188] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Summit Wireless Technologies, Inc. is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the registrant is not required to provide information on quantitative and qualitative disclosures about market risk[189] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective as of March 31, 2020, with no material changes in internal control - As of March 31, 2020, management concluded that the company's disclosure controls and procedures were not effective to provide reasonable assurance for timely and accurate reporting[190] - No material changes in the company's internal control over financial reporting occurred during the three months ended March 31, 2020[191] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any legal actions that are expected to have a material adverse effect on its business, operating results, or financial condition - There are no pending or threatened legal actions that, to the knowledge of executive officers, could have a material adverse effect on the company's business, operating results, or financial condition[193] Item 1A. Risk Factors As a smaller reporting company, Summit Wireless Technologies, Inc. is not required to provide risk factor disclosures in this report - As a smaller reporting company, the registrant is not required to provide risk factor information[194] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details unregistered sales of equity securities, including convertible notes and private placements, relying on registration exemptions - A convertible promissory note for $111,100 was issued on January 23, 2020, for $100,000 cash, along with 500 common shares and a warrant for 7,936 shares. Proceeds were used for general corporate purposes[195] - The February 2020 Private Placement of 91,062 units (common stock and warrants) generated gross proceeds of $835,000, used primarily to increase stockholders' equity for Nasdaq compliance and general corporate purposes[196] - The March 2020 Private Placement of a senior secured convertible note and warrant generated gross proceeds of $1,700,000, used for working capital, debt repayment, and general corporate purposes[197] - These sales relied on exemptions from registration pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D[198] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - There were no defaults upon senior securities[199] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[200] Item 5. Other Information No other information is reported under this item - No other information is reported under this item[201] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including settlement agreements, leak-out agreements, and certifications - Exhibits include a Settlement Agreement and Release and a Leak-Out Agreement, both dated May 14, 2020, with Alexander Capital, L.P[203] - Certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[203] SIGNATURES The report is duly signed on behalf of Summit Wireless Technologies, Inc. by its Chief Executive Officer, Brett Moyer, and Principal Financial Officer, George Oliva, on May 27, 2020 - The report was signed by Brett Moyer, Chief Executive Officer, and George Oliva, Principal Financial Officer, on May 27, 2020[208]