Cautionary Notice Regarding Forward Looking Statements

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 June 30, 2021 (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.

This filing contains a number of forward-looking statements which reflect management's current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, events, or developments which management expects or anticipates will or may occur in the future, and also including statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words "believe," "expect," "intend," "anticipate," "estimate," "may," variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

Readers should not place undue reliance on these forward-looking statements, which are based on management's current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements.

Overview

We were formed as Summit Semiconductor, LLC, a Delaware limited liability company, on July 23, 2010. We converted to a Delaware corporation, effective December 31, 2017, at which time we changed our name to Summit Semiconductor, Inc. Effective as of September 11, 2018, we changed our name to Summit Wireless Technologies, Inc. We run our operations through Summit Wireless Technologies, Inc., as well as through our wholly-owned subsidiary WiSA, LLC, a Delaware limited liability company. The address of our corporate headquarters is 6840 Via Del Oro, Ste. 280, San Jose, CA 95119. Our website address is www.summitwireless.com. The information contained in or accessible through our website is not part of this Report and is intended for informational purposes only.

We are an early stage 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.



                                       31

Table of Contents

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.

Current research and development investments focus on developing Wi-Fi compatible 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") already shipping in volume. The Summit Wireless "Discovery" module announced in January 2021 is the first IoT module solution with our embedded wireless audio software that supports up to four separate wireless audio channels and, we believe, reduces the cost per wireless channel by over 50% for soundbars and entry level home theater applications up to a 3.1 configuration. 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.

In January 2021, pursuant to the Company's solicitation of certain warrant holders, such warrant holders agreed to exercise warrants to purchase an aggregate of 1,221,675 shares of common stock for net proceeds of approximately $2.9 million. In consideration for their exercise of these warrants, for cash, the exercising holders are being issued new warrants to purchase up to an aggregate of 305,419 shares of common stock, at an exercise price of $4.20 per share, which are exercisable for a period of five years.

On June 4, 2021, the Company entered into an exchange agreement, pursuant to which the Company exchanged with an investor 250,000 Series A 8% Senior Convertible Preferred Stock, par value $0.0001 per share (the "Series A Preferred Stock") held by such investor for: (i) 250,000 shares of common stock and (ii) warrants to purchase up to 187,500 shares of common stock. The warrants were exercisable for a period of five (5) years and four (4) months. The exercise price with respect to the warrants was $3.00 per share. The exercise price and the number of shares of common stock issuable upon exercise of the warrants were subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances. In June 2021, the investor subsequently fully exercised such warrant on a cashless basis for 79,244 shares of common stock.

On June 7, 2021, pursuant to the Company's solicitation of certain warrant holders, such warrant holders agreed to exercise warrants to purchase an aggregate of 1,000,000 shares of common stock for net proceeds of approximately $2.3 million. In consideration for their exercise of such warrants for cash, such holders were issued new warrants to purchase up to an aggregate of 250,000 shares of common stock at an exercise price of $4.46 per share, which are exercisable for a period of five years.



                                       32

Table of Contents

Potential Impacts of the Novel Coronavirus ("COVID-19") on Our Business and Operations

The COVID-19 pandemic represents a fluid situation that presents a wide range of potential impacts of varying durations for different global geographies, including locations where we have offices, employees, customers, vendors and other suppliers and business partners.

Like most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March 2020. By that time, much of our first fiscal quarter of 2020 was completed. During our second fiscal quarter of 2020, we observed decreased demand from certain of our customers due to the temporary closure by many retailers. Our third and fourth fiscal quarters of 2020 and our first and second fiscal quarters of 2021 saw sustained improved customer demand as retailers partially reopened and demand for an in-home immersive cinema experience increased, while public cinemas remained closed throughout many regions in the country. However, another closure by retailers, as well as a reopening of more public cinemas, could impact customer demand in the future.

Given the fact that our products are sold through a variety of distribution channels, we have experienced and we continue to expect that our sales will experience some volatility as a result of the changing and less predictable operational needs of many customers as a result of the COVID-19 pandemic. 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 two of our suppliers due to COVID-19, however we do not believe such delays will have a material adverse impact on our operating results and we have not experienced a material supply interruption. There can be no assurance that we will not experience material supply delays or interruptions in the future due to COVID-19, although we do not believe material supply interruptions to be likely at this time.

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. We have taken steps to restrain and monitor our operating expenses and therefore we do not expect any such impacts to materially change the relationship between costs and revenues.

Like most companies, we have taken a range of actions with respect to how we operate to assure that we comply with government restrictions and guidelines as well as best practices to protect the health and well-being of our employees and our ability to continue operating our business effectively. To date, we have been able to operate our business effectively using these measures and to maintain all internal controls. We also have not experienced challenges in maintaining business continuity and do not expect to incur material expenditures to do so. However, the impacts of COVID-19 and efforts to mitigate the same have remained unpredictable and it remains possible that challenges may arise in the future.

The actions that we have taken so far during the pandemic include, but are not limited to:

?requiring all employees who can work from home to work from home; ?increasing our IT networking capability to best assure that employees can work effectively outside the office; ?for employees who must perform essential functions in one of our offices:

? having employees maintain a distance of at least six feet from other employees

whenever possible;

? having employees stay segregated from other employees in the office with whom

they require no interaction; and

? requiring employees to wear masks while they are in the office whenever


   possible.

We continue to monitor the impacts of COVID-19 on our operations closely and this situation could change based on a significant number of factors that are not entirely within our control and are discussed in this and other sections of this Report. As of the date of this Report, we do not expect there to be material changes to our assets on our balance sheet or our ability to timely account for those assets. If business interruptions resulting from COVID-19 were to be prolonged or expanded in scope, our business, financial condition, results of operations and cash flows would be negatively impacted. We will continue to actively monitor this situation and will implement actions necessary to maintain business continuity.



                                       33

  Table of Contents

Comparison of the Three and Six Months Ended June 30, 2021 and 2020

Revenue

Revenue for the three months ended June 30, 2021 was $1,581,000, an increase of $1,233,000, or 354%, compared to the revenue for three months ended June 30, 2020 of $348,000. The increase was primarily due to increased volumes of both modules and speaker bundles.

Revenue for the six months ended June 30, 2021 was $2,734,000, an increase of $1,975,000, or 260%, compared to the revenue for the six months ended June 30, 2020 of $759,000. The increase was primarily due to increased volumes of both modules and speaker bundles.

Cost of Revenue and Operating Expenses

Cost of Revenue

Cost of revenue for the three months ended June 30, 2021 was $1,122,000, an increase of $786,000, or 234%, compared to the cost of revenue for the three months ended June 30, 2020 of $336,000. The increase was primarily attributable to the direct material costs associated with higher sales volume.

Cost of revenue for the six months ended June 30, 2021 was $1,980,000, an increase of $1,296,000, or 189%, compared to the cost of revenue for the six months ended June 30, 2020 of $684,000. The increase was primarily attributable to the direct material costs associated with higher sales volume.

Research and Development

Research and development expenses for the three months ended June 30, 2020 were $1,305,000, an increase of $401,000, compared to the research and development expenses for the three months ended June 30, 2020 of $904,000. The increase in research and development expenses is primarily related to increased salary and benefit expense of $306,000, increased stock-based compensation expenses and consultant expenses of $73,000 and $65,000, respectively, partially offset by reduced facility allocation expense of $45,000.

Research and development expenses for the six months ended June 30, 2021 were $2,478,000, an increase of $440,000 compared to the research and development expenses for the six months ended June 30, 2020 of $2,038,000. The increase in research and development expenses is primarily related to increased salary and benefit expense of $403,000 and increased stock-based compensation expenses of $124,000, partially offset by reduced facility allocation expense of $127,000.

Sales and Marketing

Sales and marketing expenses for the three months ended June 30, 2021 were $975,000, an increase of $465,000, compared to the sales and marketing expenses for the three months ended June 30, 2020 of $510,000. The increase in sales and marketing expenses is primarily related increased salary, incentive compensation and benefit expenses of $144,000, increased stock-based compensation, website development and advertising expenses of $32,000, $89,000 and $164,000, respectively.

Sales and marketing expenses for the six months ended June 30, 2021 were $1,849,000, an increase of $641,000, compared to the sales and marketing expenses for the six months ended June 30, 2020 of $1,208,000. The increase in sales and marketing expenses is primarily related increased salary, incentive compensation and benefit expenses of $147,000, increased stock-based compensation, website development and advertising expenses of $56,000, $183,000 and $283,000, respectively.



                                       34

  Table of Contents

General and Administrative

General and administrative expenses for the three months ended June 30, 2021 were $988,000, an increase of $381,000, compared to the general and administrative expenses for the three months ended June 30, 2020 of $607,000. The increase in general and administrative expenses is primarily related to increased salary and benefit expenses of $120,000, and increased stock-based compensation and investor relations expenses of $146,000 and $38,000, respectively.

General and administrative expenses for the six months ended June 30, 2021 were $1,956,000, an increase of $458,000, compared to the general and administrative expenses for the six months ended June 30, 2020 of $1,498,000. The increase in general and administrative expenses is primarily related to increased salary and benefit expenses of $156,000, increased stock-based compensation and investor relations expenses of $240,000 and $108,000, respectively, partially offset by a $236,000 expense booked pursuant to the Alexander Settlement Agreement discussed in Note 6 - Convertible Preferred Stock and Stockholders' Equity (Deficit).

Interest Expense

Interest expense for the three months ended June 30, 2021 was $3,000, a decrease of $1,349,000 compared to the interest expense for the three months ended June 30, 2020 of $1,352,000. Minimal interest expense was booked in the three months ended June 30, 2021, as the Company had no significant outstanding debt. Interest expense for the three months ended June 30, 2020 was due to the full amortization of debt discounts associated with the convertible debt that the Company incurred in March 2020, as such convertible debt was fully repaid in April 2020.

Interest expense for the six months ended June 30, 2021 was $6,000, a decrease of $1,383,000, compared to the interest expense for the six months ended June 30, 2020 of $1,389,000. Minimal interest expense was booked in the six months ended June 30, 2021, as the Company had no significant outstanding debt. Interest expense for the six months ended June 30, 2020 was due to the full amortization of debt discounts associated with the convertible debt that the Company incurred in March 2020, as such convertible debt was fully repaid in April 2020.

Change in Fair Value of Warrant Liability

There was no change in the fair value of the warrant liability for the three months ended June 30, 2021, compared to a gain of $5,000 due to the change in fair value of the warrant liability for the three months ended June 30, 2020. The gain for the three months ended June 30, 2020 is due to the decrease in our common stock price during the period.

The was no change in the fair value of the warrant liability for the six months ended June 30, 2021, compared to a gain of $24,000 due to the change in fair value of the warrant liability for the six months ended June 30, 2020. The gain for the six months ended June 30, 2020 is due to the decrease in our common stock price during the period.



                                       35

Table of Contents

Deemed Dividend on Exchange of Convertible Preferred Stock for Common Stock

During the three and six months ended June 30, 2021, the Company recorded a deemed dividend of $1,192,000 in connection with the exchange of all 250,000 shares of 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

During the three and six months ended June 30, 2021, the Company recorded a charge of $579,000 and $1,146,000, respectively, 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 (Deficit). No such inducement occurred during the three and six months ended June 30, 2020.

Liquidity and Capital Resources

Cash and cash equivalents as of June 30, 2021 were $10,293,000, compared to $7,415,000 as of December 31, 2020.

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. We incurred a net loss of $6,078,000 for the six months ended June 30, 2020 and used net cash in operating activities of $4,832,000. 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, 2021, was related to the increase in accounts receivable, inventories, prepaid expenses and other assets, partially offset by an increase in 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 (approximately $17,028,000 raised from various financings in fiscal 2020). In addition, during the six months ended June 30, 2021, we raised approximately $8,254,000 from exercises of warrants which were acquired by investors in conjunction with such financings during fiscal 2020. Warrants exercisable for approximately 4,072,000 shares of common stock with exercise prices ranging from $2.32 to $4.46 per share, remain outstanding. Additionally, in July 2021, we raised $10,000,000 in gross proceeds in a registered direct offering for the issuance and sale of 2,500,000 shares of common stock at a price of $4.00 per share. We believe that our current level of liquid assets will be sufficient to fund our operations at least through the balance of fiscal 2021.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

© Edgar Online, source Glimpses