Datavault AI Inc.: Form 10-Q for the period ended Sep 30, 2024

Cautionary Notice Regarding Forward Looking Statements

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 maintain the listing of its common stock on Nasdaq; 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 immersive, wireless sound technology for intelligent devices and next-generation home entertainment systems. Our first generation product, which we continue to sell to consumer electronics companies, is based on our proprietary wireless modules. In 2023 we introduced our second generation technology, WiSA E. WiSA E is a proprietary technology that delivers seamless integration across platforms and devices, allowing for interoperable high-quality audio. WiSA E is System-on-Chip (“SoC”) agnostic, compatible with a wide range of SoCs and Wi-Fi agnostic, functioning efficiently across Wi-Fi compliant chips. Designed to be embedded into various devices, including TVs, mobile devices, set-top boxes, and projectors it provides interoperability between WiSA E audio source devices and playback equipment such as speakers, soundbars, subwoofers, smart speakers, and headphones, ensuring cost-effectiveness without compromising quality or performance.

To date, our operations have been funded through sales of our common and preferred equity, proceeds from the exercise of warrants, 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.

Comparison of the Three and Nine Months Ended September 30, 2024 and 2023

Revenue

Revenue for the three months ended September 30, 2024 was $1,172,000, an increase of $403,000, or 52%, compared to revenue for the three months ended September 30, 2023 of $769,000. The increase in revenue was a result of an increase in Components sales of $726,000, partially offset by a decrease in Consumer Audio Product sales of $323,000.

Revenue for the nine months ended September 30, 2024 was $1,772,000, an increase of $109,000, or 7%, compared to the revenue for the nine months ended September 30, 2023 of $1,663,000. The increase in revenue was a result of an increase in Component sales of $558,000, partially offset by a decrease in Consumer Audio Product sales of $449,000.

Gross Profit and Operating Expenses

Gross Profit (Deficit)

Gross profit for the three months ended September 30, 2024 was $226,000 compared to a gross deficit of ($1,669,000) for the three months ended September 30, 2023. The gross margin (deficit) as a percent of sales was 19% for the three months ended September 30, 2024, compared to (217%) for the three months ended September 30, 2023. The improvement in gross profit and gross margin as a percent of sales compared to the prior period is mainly attributable to: (a) an increase of $403,000 in revenue between comparable periods and (b) the three months ended September 30, 2023 included a $1.4 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, whereas the three months ended September 30, 2024 included a $22,000 increase in inventory reserves.

Gross margin for the nine months ended September 30, 2024 was $154,000, compared to a gross deficit of ($3,123,000) for the nine months ended September 30, 2023. The gross margin (deficit) as a percent of sales was 9% for the nine months ended September 30, 2024, compared to (188%) for the nine months ended September 30, 2023. The improvement in gross profit and gross margin as a percent of sales compared to the prior period is mainly attributable to the fact that the nine months ended September 30, 2023 included a $2.8 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, whereas the nine months ended September 30, 2024 included a $22,000 increase in inventory reserves.

Research and Development

Research and development expenses for the three months ended September 30, 2024 were $2,225,000, an increase of $387,000, compared to the research and development expenses for the three months ended September 30, 2023 of $1,838,000. The increase in research and development expenses is primarily related to increased salary and benefit expense of $225,000, and increased recruiting fees and consulting expenses of $103,000 and $40,000, respectively.

Research and development expenses for the nine months ended September 30, 2024 were $5,729,000, an increase of $65,000 compared to the research and development expenses for the nine months ended September 30, 2023 of $5,664,000. The increase in research and development expenses is primarily related to increased salary and benefit expense of $230,000 and recruiting fees of $84,000, offset partially by reduced consulting fees, legal fees and stock-based compensation of $130,000, $89,000 and $88,000, respectively.

Sales and Marketing

Sales and marketing expenses for the three months ended September 30, 2024 were $983,000, a decrease of $421,000 compared to the sales and marketing expenses for the three months ended September 30, 2023 of $1,404,000. The decrease in sales and marketing expenses is primarily related to decreased salary and benefit expense of $151,000 and decreased consulting expenses, tradeshow expenses and advertising expenses of $61,000, $44,000 and $37,000, respectively.

Sales and marketing expenses for the nine months ended September 30, 2024 were $2,777,000, a decrease of $1,010,000 compared to the sales and marketing expenses for the nine months ended September 30, 2023 of $3,787,000. The decrease in sales and marketing expenses is primarily related to decreased salary and benefit expense of $459,000 and decreased website expenses, consulting expenses, stock-based compensation, and public relations expenses of $155,000, $117,000, $48,000 and $47,000, respectively.

General and Administrative

General and administrative expenses for the three months ended September 30, 2024 were $2,261,000, an increase of $833,000, compared to the general and administrative expenses for the three months ended September 30, 2023 of $1,428,000. The increase in general and administrative expenses is primarily related to increased investor relations expenses of $736,000, which includes stock-based compensation charges of $156,000, and increased legal fees of $202,000, offset partially by decreased stock-based compensation expense of $128,000.

General and administrative expenses for the nine months ended September 30, 2024 were $6,454,000, an increase of $2,194,000, compared to the general and administrative expenses for the three months ended September 30, 2023 of $4,260,000. The increase in general and administrative expenses is primarily related to increased investor relations expenses of $1,728,000, which includes stock-based compensation charges of $312,000, and increased legal fees $336,000, offset partially by decreased stock-based compensation expense of $381,000.

Interest Income (Expense), net

Interest income, net for the three months ended September 30, 2024 was $9,000 compared to net interest expense of $52,000 for the three months ended September 30, 2023, a net change of $61,000. Interest expense, net for the nine months ended September 30, 2024 was $1,260,000, an increase of $448,000 compared to the interest expense for the nine months ended September 30, 2023 of $812,000.

The increase in interest expense, net for the nine months ended September 30, 2024, was primarily due to the amortization of debt discounts associated with the January 2024 Promissory Note in the principal amount of $1,000,000 that the Company incurred in January 2024 and repaid in full in January 2024.

Change in Fair Value of Warrant Liability

Change in fair value of warrant liability for the three months ended September 30, 2024 was a gain of $6,000, compared to a gain of $284,000 for the three months ended September 30, 2023. The change in fair value of the warrant liabilities for the three months ended September 30, 2024 was primarily due to the decrease in the price of our common stock at September 30, 2024 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 June 30, 2024, related to existing warrant liabilities.

Change in fair value of warrant liability for the nine months ended September 30, 2024 was a loss of $29,120,000 compared to a gain of $6,134,000 for the nine months ended September 30, 2023. The change in fair value of the warrant liability for the nine months ended September 30, 2024 was due to the issuance of additional warrants to purchase 5,602,693 shares of common stock and the subsequent valuing of such warrants. The additional warrants were issued as a result of provision in certain of the warrant agreements that was triggered following the Company’s reverse stock split that occurred in April 2024. The change in fair value of the warrant liabilities for the nine months ended September 30, 2023 was due to the issuance of warrants in February 2023 and the subsequent decrease in the price of our common stock at September 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 nine months ended September 30, 2024, the Company recorded a loss on debt extinguishment of $0. During the three and nine months ended September 30, 2023, the Company recorded a loss on debt extinguishment of $0 and $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.

Other Income (Expense), net

Other income, net for the three months ended September 30, 2024 was $136,000 compared to net interest expense of $4,000 for the three months ended September 30, 2023, a net change of $140,000. Other income, net for the nine months ended September 30, 2024 was $136,000, an increase of $143,000 compared to the other expense, net for the nine months ended September 30, 2023 of $7,000.

The increase in other income, net for the three and nine months ended September 30, 2024, was due to the receipt of an Employee Retention Credit (“ERC”) refund of $141,000, net of fees. The ERC refund was for the three month period ended June 30, 2020.

Liquidity and Capital Resources

Cash and cash equivalents as of September 30, 2024 were $3,921,000 compared to $411,000, as of December 31, 2023.

We recorded a net loss of $45,050,000 for the nine months ended September 30, 2024 and used net cash in operating activities of $13,276,000. We incurred a net loss of $12,358,000 for the nine months ended September 30, 2023 and used net cash in operating activities of $12,101,000. 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, 2024, was related to an increase in prepaid expenses and inventories, which was partially offset by a decrease in accounts payable.

We have financed our operations to date primarily through the issuance of equity securities, proceeds from the exercise of warrants, sale of debt instruments and revenue from the sale of our products. In January 2024, we received gross proceeds of $600,000 from the issuance of promissory notes and common stock purchase warrants to certain accredited investors. In February 2024, we received gross proceeds of approximately $10.0 million from the public offering of 1,025,600 units, with each unit consisting of one share of common stock (or pre-funded warrant in lieu thereof) and one warrant, each to purchase one (1) share of common stock. In March 2024 we received net proceeds of approximately $2.3 million from the issuance of 417,833 shares of common stock, 93,342 pre-funded common stock warrants and the issuance of 511,175 warrants to purchase common stock. On April 19, 2024, we received net proceeds of approximately $591,000 from the issuance of 225,834 shares of common stock and the issuance of 225,834 warrants to purchase common stock. On April 23, 2024, we received net proceeds of approximately $1.6 million from the issuance of 361,904 shares of common stock and the issuance of 542,856 warrants to purchase common stock. On April 30, 2024, we received net proceeds of approximately $2.1 million from the issuance of 418,845 shares of common stock and the issuance of 418,845 warrants to purchase common stock. On May 15, 2024, we received net proceeds of approximately $2.3 million from the issuance of 785,000 shares of common stock and the issuance of 785,000 warrants to purchase common stock. On May 17, 2024, we received net proceeds of approximately $2.1 million from the issuance of 675,000 shares of common stock and the issuance of 675,000 warrants to purchase common stock. In September 2024, we received net proceeds of approximately $2.4 million from the exercise of 1,193,721 warrants to purchase common stock. We will need to raise additional proceeds via the issuance of equity securities and/or the sale of debt instruments in the fourth quarter of 2024 to fund operations for fiscal year 2025.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures. Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2024, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Controls

There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2024 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.