Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Act. Yes ¨ No x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III or this Form 10-K or any amendment
to this Form 10-K. ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of June 28, 2019, the last business
day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held
by non-affiliates of the registrant was $13,403,000 based on the closing price of $1.16 for the registrant’s common stock
as quoted on the Nasdaq Capital Market on that date. Shares of common stock held by each director, each officer and each person
who owns 10% or more of the outstanding common stock have been excluded from this calculation in that such persons may be deemed
to be affiliates. The determination of affiliate status is not necessarily conclusive.
The registrant had 26,743,765 shares
of its common stock outstanding as of March 20, 2020.
This Annual Report on Form 10-K (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 Summit Wireless Technologies, Inc.’s
(“Summit”, 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 Forms 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. 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.
PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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Executive Officers, Other Executive Management and Directors
Our executive officers and directors and their respective ages
and positions as of March 20, 2020 are as follows:
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Name
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Age
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Positions
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Executive Officers
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Brett Moyer
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62
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President, Chief Executive Officer and Chairman of the Board
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George Oliva
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58
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Chief Financial Officer and Secretary
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Gary Williams
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53
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Chief Accounting Officer and VP of Finance
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Directors
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Jonathan Gazdak
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47
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Director
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Dr. Jeffrey M. Gilbert
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48
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Director (2)
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Helge Kristensen
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59
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Director (1)(2)(3)
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Sam Runco
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71
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Director (3)
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Michael Howse
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57
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Director
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Lisa Cummins Dulchinos
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50
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Director (1)
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Robert Tobias (4)
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56
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Director (2)(3)
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(1)
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Member of the audit committee.
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(2)
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Member of the compensation committee.
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(3)
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Member of the nominating and corporate governance committee.
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(4)
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On February 6, 2020, Brian Herr notified the Company of his decision to resign from the Board of Directors. Effective February 10, 2020, the Board of Directors appointed Mr. Tobias as a member of the Board to replace Mr. Herr.
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Executive Officers
Brett Moyer, Chief Executive Officer,
President and Director and Chairman. Brett Moyer is a founding member of the Company and has served as the President
and Chief Executive Officer of the Company and as a member of its board of directors since August 2010. From August 2002 to July
2010, Mr. Moyer served as president and chief executive officer of Focus Enhancements, Inc., a developer and marketer of proprietary
video technology and UWB wireless chips. From February 1986 to May 1997, Mr. Moyer worked at Zenith Electronics Inc. a consumer
electronic company, where he had most recently been the vice president and general manager of its Commercial Products Division.
Between August 2017 and October 2019, Mr. Moyer served as a member of the board of directors of DionyMed Brands Inc., a company
which operated a multi-state, vertically integrated operating platform that designs, develops, markets and sold a portfolio of
branded cannabis products. From June 2016 to November 2018, Mr. Moyer served as a member of the board of directors of Alliant International
University, a private university offering graduate study in psychology, education, business management, law and forensic studies,
and bachelor’s degree programs in several fields. From 2003 to December 2015, he served as a member of the board of directors
of HotChalk, Inc., a developer of software for the educational market, and from March 2007 to September 2008, he was a member of
the board of directors of NeoMagic Corporation, a developer of semiconductor chips and software that enable multimedia applications
for handheld devices. Mr. Moyer received a Bachelor of Arts in Economics from Beloit College in Wisconsin and a Master’s
of Business Administration with a concentration in finance and accounting from Thunderbird School of Global Management.
George
Oliva, Chief Financial Officer and Secretary. Mr. Oliva has served as Chief Financial Officer since September 9,
2019. Mr. Oliva has been a partner at Hardesty, LLC, an executive officer consulting service provider, since May 2019, through
which he provides financial consulting services to public and private companies nationwide. From August 2018 to April 2019, Mr.
Oliva served as Interim Chief Financial Officer of SpineEx, Inc., a California-based medical equipment manufacturer, where he was
responsible for managing the company’s financial, human resource and information technology departments. From June 2018 to
August 2018, he served as Vice President of Finance of GameWorks, a family entertainment chain, where he developed a plan to restructure
the company’s business in connection with an acquisition by a lender. From March 2017 to June 2018, Mr. Oliva served as controller
for Eva Automation, an audio company, where he implemented purchase accounting in connection with a $180 million acquisition. From
August 2016 to March 2017, Mr. Oliva served as Interim Vice President of Finance of PDF Solutions, Inc., a multinational software
and engineering services company, where he managed the company’s financial and accounting departments. From March 2014 to
June 2016, Mr. Oliva served as corporate controller of Tegile Systems, a California-based manufacturer of flash storage arrays.
Prior to 2014, Mr. Oliva served as Interim Chief Financial Officer and Vice President of Finance and as corporate controller for
various other companies in California. Mr. Oliva is a certified public accountant, inactive, and holds a B.S. in Business Administration
from the Walter A. Haas School of Business of the University of California, Berkeley.
Gary Williams, Chief Accounting Officer
and Vice President of Finance. Gary Williams has served as Chief Accounting Officer since September 9, 2019 and as
Vice President of Finance since the Company’s founding in August 2010. Mr. Williams previously served as Secretary and Chief
Financial Officer since the Company’s founding in August 2010 until September 9, 2019. In addition, Mr. Williams served as
the Chief Financial Officer of Quantum3D, Inc., a training and simulation technology company, from November 2012 to September 2016.
Prior to joining the Company, Mr. Williams served as secretary, vice president of finance and chief financial officer of Focus
Enhancements Inc., a developer and marketer of proprietary video technology, from January 2001 to July 2010, when the videography
and semiconductor businesses of the company were purchased by VITEC Multimedia, Inc. and the Company, respectively. Mr. Williams
served as controller, vice president of finance, chief financial officer and secretary of Videonics Inc., a publicly traded company
in the consumer electronics business, from February 1995 to January 2001, when Videonics merged with Focus Enhancements, Inc. From
July 1994 to January 1995, Mr. Williams served as controller for Western Micro Technology, a publicly traded company in the electronics
distribution business. From January 1990 to June 1994, Mr. Williams worked in public accounting for Coopers & Lybrand LLP.
Mr. Williams is a certified public accountant, inactive, and received a Bachelor’s Degree in Business Administration, with
an emphasis in Accounting, from San Diego State University.
Directors
Jonathan Gazdak. Jonathan
Gazdak has been a member of the Company’s board of directors since June 2015. Mr. Gazdak has served as managing director
and the head of investment banking at Alexander Capital L.P., an investment banking firm based in New York, since April 2014, concentrating
in the technology, digital media, media and entertainment industries, as well as specialty finance vehicles. He has worked on a
broad range of transactions, including public equity and debt financings, restructurings, mergers and acquisitions and special-purpose
acquisition company (“SPAC”) transactions. Prior to Alexander Capital L.P., Mr. Gazdak served as head of the technology
group at Aegis Capital Corp., a mid-sized broker-dealer, from November 2011 to April 2014. While at Aegis Capital Corp., he helped
companies complete over 40 public and private financings and merger and acquisition transactions. Prior to Aegis Capital Corp.,
from June 2009 to October 2011, Mr. Gazdak worked in the media and entertainment group at Oppenheimer & Co. Inc., an investment
banking and financial services firm. Prior to his career in investment banking, Mr. Gazdak was an entrepreneur who owned and managed
an international IT consulting and services firm for 10 years, selling it in 2005. From May 1996 to May 2006, Mr. Gazdak was a
national board member and regional president of the TechServe Alliance, which promotes the growth of hundreds of IT-related business
around the nation. Mr. Gazdak received his MBA from Columbia Business School with Beta Gamma Sigma honors and received a degree
with honors in mechanical engineering from the University of Florida. The Company believes that Mr. Gazdak is qualified to serve
on its board of directors because based on his deep experience as an entrepreneur as well as his broad experience in the finance
and technology industries.
Dr. Jeffrey M. Gilbert. Dr.
Gilbert has been a member of the Company’s board of directors since April 2015. Dr. Gilbert has been working in the Research
and Machine Intelligence and Project Loon teams at Google, Inc. since March 2014, and from January 2014 to March 2014, Dr. Gilbert
worked for Transformational Technology Insights LLC, a consulting company, where he served as the sole principal. Previously, from
May 2011 to December 2013, Dr. Gilbert was chief technology officer of Silicon Image, Inc., a leading provider of wired and wireless
connectivity solutions. Dr. Gilbert was responsible for Silicon Image Inc.’s technology vision, advanced technology, and
standards initiatives. Prior to joining Silicon Image Inc., Dr. Gilbert was chief technical officer of SiBEAM Inc., a fabless semiconductor
company pioneering the development of intelligent millimeter wave silicon solutions for wireless communications, from May 2005
to May 2011. Before SiBEAM Inc., Dr. Gilbert served as director of algorithms and architecture and other engineering and management
positions at Atheros Communications, a semiconductor developer, from May 2000 to May 2005, where he led the development of that
company’s 802.11n, 802.11g, eXtended Range (“XR”), and Smart Antenna technologies. Dr. Gilbert received a Ph.D.
in Electrical Engineering from the University of California Berkeley, an M.Phil. in Computer Speech and Language Processing from
Cambridge University, and a B.A. in Computer Science from Harvard College. The Company believes that Dr. Gilbert is qualified to
serve on its board of directors to advise the company on technology developments and management based on his long-standing experience
in the wireless and technology industries.
Helge Kristensen. Helge
Kristensen has been a member of the Company’s board of directors since August 2010. Mr. Kristensen has held high level management
positions in technology companies for the last 25 years and for the last 18 years, he has served as vice president of Hansong Technology,
an original device manufacturer of audio products based in China, and as president of Platin Gate Technology (Nanjing) Co. Ltd,
a company with focus on service-branding in lifestyle products as well as pro line products based in China. Since August 2015,
Mr. Kristensen has served as co-founder and director of Inizio Capital, an investment company based in the Cayman Islands. Mr.
Kristensen has been involved in the audio and technology industries for more than 25 years. His expertise is centered on understanding
and applying new and innovative technologies. He holds a master’s degree in Engineering and an HD-R, a graduate diploma,
in Business Administration (Financial and Management Accounting) from Alborg University in Denmark. The Company believes that Mr.
Kristensen is qualified to serve on its board of directors because of his technology and managerial experience as well has his
knowledge of the audio industry.
Sam Runco. Sam Runco
has been a member of the Company’s board of directors since August 2010. Mr. Runco co-founded Runco International, Inc. in
1987 and served as its chief executive officer until 2007. He also served as a director of Focus Enhancements Inc. from August
2004 to September 2008 and a director of the Consumer Electronics Association (“CEA”) and CEA’s video division
from 1996 to 2005. In addition, he played a leadership role in the consumer electronics industry as a member of numerous organizations
and associations. From 1997 through 2001, Mr. Runco served as a member of the National Academy of Television Arts and Sciences
(Emmy) Technical/Engineering Awards Nominating Committee, the Academy of Digital Television Pioneers. He served as member of the
Board of Directors/Governors from 1998 through 2000 and again from 2003 through 2005, then as a member of the Board of Industry
Leaders of the CEA from 2006 to 2008. He also served as a member of Board of Governors of the Electronic Industries Alliance from
1998 through 2000, and as a member of the Board of the Academy for the Advancement of High End Audio and Video. Mr. Runco is the
recipient of the Consumer Electronic Design and Installation Association peer-selected Lifetime Achievement Award and elected to
Dealerscope magazine’s Hall of Fame. The Sound & Visionary from S&V Magazine selected him as one of the 10 Most Influential
Leaders in the custom installation industry by CE Pro magazine. He was number 1 on the Most Influential Leader list in the custom
installation audio/video industry, which was voted on by his peers six years after Mr. Runco sold Runco International, Inc. The
Company believes that Mr. Runco is qualified to serve on its board of directors due to his solid reputation with the audio video
dealer network and his ability to understand consumer desires and provide guidance on product development. The Company believes
that his industry experience, including his knowledge base on dealers and their consumers, will be an excellent resource for the
Company.
Michael Howse. Michael
Howse has been a member of the Company’s board of directors since April 2018 and has served as the Company’s Interim
Chief Strategy Officer since November 1, 2018. Mr. Howse has served as founder and general partner of Eleven Ventures since 2015,
a venture capital firm focused on the consumer technology, digital gaming and VR/AR markets. Previously, from 2013 to 2014, Mr.
Howse served as Advanced Micro Devices, Inc.’s Corporate Vice President of New Ventures, where he was responsible for defining
cloud GPU platforms and strategies. Prior, from 2008 to 2012, Mr. Howse served as chief executive officer and president of Bigfoot
Networks, the creators of the Killer™ branded game networking technology, which was acquired by Qualcomm. Mr. Howse was integral
in creating the 3D graphics category for mainstream consumers while serving in senior executive roles at Creative Labs, S3 and
3dfx Interactive. Mr. Howse received his undergraduate degree from UCLA in 1986 and completed the Executive MBA Program at Stanford
University in 1995. Since 2013, he has served on the Executive Committee of the UCLA Venture Capital Fund and previously worked
at U.S. Venture Partners from 2001 to 2003. Mr. Howse has received numerous industry awards, including “Marketer of the Year”
from Marketing Computers Magazine/Brandweek, PC World’s “50 Best Products of All Time”, Fierce Wireless “Fierce
15” as well as an Academy of Interactive Arts & Sciences award for his pioneering work at Total Vision. He has also been
a featured speaker at CES, E3, Churchill Club, Digital Hollywood, and Game Developers Conference (“GDC”) amongst others.
The Company believes that Mr. Howse is qualified to serve on its board of directors because of his technology and managerial experience
as well has his knowledge of the gaming industry.
Lisa Cummins Dulchinos. Lisa
Cummins Dulchinos has been a member of the Company’s board of directors since June 2019. Ms. Dulchinos currently serves as
Chief Financial Officer and Chief Operating Officer for Ayar Labs, a venture backed startup that is developing an optical based
“chiplet” to provide high speed, high density & low power to replace traditional electrical based input/output.
She joined Ayar Labs in January 2019 after overseeing a successful sale of Penguin Computing, a private equity backed company,
to Smart Global Holdings in June 2018. Prior to that, from May 2007 to October 2012, she served as Chief Financial Officer at Adept
Technology, a Nasdaq publicly traded global robotics company, where she oversaw investor relations, led the Sarbanes-Oxley Act
of 2002, as amended, compliance, completed multiple acquisitions, and secured bank and equity financing including a secondary public
offering. Ms. Dulchinos is a certified public accountant, inactive, earned a Business Economics degree from the University of California
Santa Barbara and a Masters in Business Administration from St. Mary’s College. The Company believes that Mr. Dulchinos is
qualified to serve on its board of directors because of her over-25 years of experience as a growth-oriented financial executive
in global high-tech organizations.
Robert Tobias. Rob Tobias
has been a member of the Company’s board of directors since February 2020 and currently serves as CEO, Chairman and President
of HDMI® Licensing Administrator Inc. where he has been the strategic force behind the licensing, enforcement, compliance and
growth of HDMI technology around the world. Mr. Tobias leads efforts to promote the HDMI specification as the premier digital and
audio interface to the consumer electronics, mobile, PC and entertainment industries. In addition, he oversees IP enforcement with
1700 HDMI licensees and partners responsible for the release of almost nine billion HDMI products worldwide, and as such brings
a recognized level of expertise working with foreign regulatory channels, customs authorities, standards development organizations,
media companies, etc., to grow the business and protect the HDMI brand. Prior to joining HDMI Licensing Administrator Inc., Mr.
Tobias held the roles of President at MHL and Senior Director of Strategic Product Marketing and Business Development at Silicon
Image. Mr. Tobias earned a Bachelor’s degree in Electrical Engineering from UC Davis, an MBA from Santa Clara University
and sits on the UC Davis Engineering Faculty Dean’s Executive Committee. The Company believes that Mr. Tobias is qualified
to serve on its board of directors based on his experience and leadership in the consumer electronics industry as well as his strong
relationships with top consumer electronics brands in Asia.
Family Relationships
There are no family relationships among any of our directors
or executive officers.
Involvement in Certain Legal Proceedings
In 2015, Quantum3D, Inc. (“Quantum3D”),
a company of which Mr. Williams had been serving as chief financial officer, as a result of his prior experience in corporate restructuring,
was placed into an assignment for the benefit of creditors. Mr. Williams continued to serve as chief financial officer during Quantum3D’s
restructuring and negotiated sale in September 2016.
On October 29, 2019, DionyMed Brands Inc.,
a British Columbia company which Mr. Moyer had been serving as a director, was placed in receivership and Mr. Moyer resigned.
Other than the foregoing, to the best of
our knowledge, none of our directors or executive officers has, during the past ten (10) years:
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been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
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had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two (2) years prior to that time;
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been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or his association with persons engaged in any such activity;
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been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
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been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
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been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
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CORPORATE GOVERNANCE
Board of Directors
The Board of Directors
(“Board”) oversees our business affairs and monitors the performance of our management. In accordance with our
corporate governance principles, the Board does not involve itself in day-to-day operations. The directors keep themselves
informed through discussions with the Chief Executive Officer, other key executives and by reading the reports and other
materials sent to them and by participating in Board and committee meetings. Our directors hold office until the next Annual
Meeting of Stockholders and until their successors are elected and qualified or until their earlier resignation or removal,
or if for some other reason they are unable to serve in the capacity of director.
Our Board currently consists of eight (8)
members: Brett Moyer; Jonathan Gazdak; Dr. Jeffrey M. Gilbert; Helge Kristensen; Sam Runco; Michael Howse; Lisa Cummins Dulchinos;
and Robert Tobias. All of our directors will serve until our next Annual Meeting of Stockholders and until their successors are
duly elected and qualified or until their earlier resignation or removal.
Director Independence
As our Common Stock is listed on the Nasdaq
Capital Market, our determination of the independence of directors is made using the definition of “independent director”
contained in Rule 5605(a)(2) of the Marketplace Rules of the Nasdaq Stock Market LLC (“Nasdaq”). Our Board affirmatively
determined that Dr. Jeffrey M. Gilbert, Helge Kristensen, Sam Runco, Lisa Cummins Dulchinos and Robert Tobias are “independent
directors,” as that term is defined in the Marketplace Rules of Nasdaq. Under the corporate governance rules of Nasdaq, our
Board must be composed of a majority of “independent directors.” Additionally, subject to certain limited exceptions,
our audit, compensation, and nominating and corporate governance committees also must be composed of all independent directors.
Upon our payment to Hansong Technology, which is an original device manufacturer of audio products based in China and which Mr.
Kristensen has served as vice president of for the last 18 years, it is very likely that Mr. Kristensen would no longer meet the
qualifications of an “independent director,” in which case our Board would no longer be composed of a majority of “independent
directors” nor would our committees be composed of all “independent directors.” In such event we would
be required to take such actions, as necessary, to regain compliance with the independence requirements under the Nasdaq rules,
in order to avoid being delisted.
The rules of Nasdaq require that each member
of a listed company’s audit and compensation committees be independent. Audit committee members must also satisfy the independence
criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Under
the rules of Nasdaq, a director will only qualify as an “independent director” if, in the opinion of that company’s
board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.
To be considered to be independent for
purposes of Rule 10A-3 of the Exchange Act, a member of an audit committee of a listed company may not, other than in his capacity
as a member of our audit committee, our board of directors, or any other committee of our board of directors: (1) accept, directly
or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (2) be
an affiliated person of the listed company or any of its subsidiaries.
Our Board has undertaken a review of its
composition, the composition of its committees and the independence of each director. Based upon information requested from and
provided by each director concerning his background, employment and affiliations, including family relationships, our board of
directors has determined that the following members of our Board have a relationship that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director: Brett Moyer, Jonathan Gazdak and Michael Howse, and that
other than such directors, each of these directors is “independent” as that term is defined under the listing requirements
and rules of Nasdaq. In making this determination, our Board considered the current and prior relationships that each non-employee
director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their
independence, including the beneficial ownership of our common stock by each non-employee director. Our Board has also determined
that Messrs. Kristensen and Runco satisfy the independence standards for the audit committee established by the listing standards
of Nasdaq and Rule 10A-3 of the Exchange Act. Our Board has determined that Mr. Kristensen and Dr. Gilbert satisfy the independence
standards for the compensation committee established by the listing standards of Nasdaq and are “independent directors”
for committee purposes (as determined under the listing standards of Nasdaq.
Board Meetings and Attendance
During fiscal year 2019, the Board held
10 physical/telephonic meetings. No incumbent director attended, either in person or via telephone, fewer than 75% of the aggregate
of all meetings of the Board and the committees of the Board, for which at the time of the meeting they were a member of the Board,
except for Brian Herr and Sam Runco who attended less than 75% of the meetings of the Board. The Board also approved certain actions
by unanimous written consent.
Annual Meeting Attendance
The
Company held its 2019 Annual Meeting of Stockholders on December 19, 2019, which was attended by Brett Moyer, Lisa Cummins
Dulchinos and Jonathan Gazdak.
Stockholder Communications with the
Board
Stockholders wishing to communicate with
the Board, the non-management directors, or with an individual Board member may do so by writing to the Board, to the non-management
directors, or to the particular Board member, and mailing the correspondence to: c/o Brett Moyer, Chief Executive Officer, Summit
Wireless Technologies, Inc., 6840 Via Del Oro, Ste. 280, San Jose, CA 95119. The envelope should indicate that it contains a stockholder
communication. All such stockholder communications will be forwarded to the director or directors to whom the communications are
addressed.
Board Committees
Our Board has an Audit Committee, a Compensation
Committee, and a Nominating and Corporate Governance Committee. Each committee has a charter, which is available on our website
at https://ir.summitwireless.com/governance-docs. Information contained on our website is not incorporated herein by reference.
Each of the Board committees has the composition and responsibilities described below. As of March 20, 2020, the members of these
committees are:
Audit Committee – Lisa Cummins Dulchinos*(1)
and Helge Kristensen
Compensation Committee – Helge Kristensen*,
Robert Tobias and Dr. Jeffrey M. Gilbert
Nominating and Corporate Governance Committee
– Helge Kristensen*, Robert Tobias and Sam Runco
* Indicates Committee Chair
(1) Indicates Audit Committee
Financial Expert
Audit Committee
We have an Audit Committee established
in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The
members of our Audit Committee are Lisa Cummins Dulchinos and Helge Kristensen. Ms. Cummins Dulchinos and Mr. Kristensen are “independent”
within the meaning of Rule 10A-3 under the Exchange Act and the Marketplace Rules of Nasdaq. Our Board has determined that Ms.
Cummins Dulchinos shall serve as the “audit committee financial expert,” as such term is defined in Item 407(d)(5)
of Regulation S-K. In addition, Ms. Cummins Dulchinos serves as Chairman of our Audit Committee.
The Audit Committee oversees our corporate
accounting and financial reporting process and oversees the audit of our financial statements and the effectiveness of our internal
control over financial reporting. The responsibilities of the Audit Committee include, among other matters:
|
|
·
|
selecting a qualified firm to serve as the independent registered public accounting firm to audit our consolidated financial statements;
|
|
|
·
|
helping to ensure the independence and performance of the independent registered public accounting firm;
|
|
|
·
|
discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management and the independent registered public accounting firm, our interim and year-end operating results;
|
|
|
·
|
developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;
|
|
|
·
|
reviewing our policies on risk assessment and risk management;
|
|
|
·
|
reviewing related party transactions;
|
|
|
·
|
obtaining and reviewing a report by the independent registered public accounting firm at least annually, that describes our internal control procedures, any material weaknesses with such procedures, and any steps taken to deal with such material weaknesses when required by applicable law; and
|
|
|
·
|
approving (or, as permitted, pre-approving) all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm.
|
In 2019, the Audit Committee held one (1)
telephonic meeting at which all of the members of the then current Audit Committee were present, except for Mr. Runco, to review
and approve the filing of the Company’s Quarterly Report on 10-Q for the quarter ended March 31, 2019. In addition, Mr. Williams
held separate virtual meetings with (a) each of Messrs. Herr and Kristensen to review and approve the filing of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2018, and (b) all of the members of the then current Audit Committee
to review and approve the filing of the Company’s Quarterly Report on 10-Q for the quarters ended June 30, 2019 and September
30, 2019.
The Audit Committee operates under a written
charter adopted by the Board that satisfies the applicable standards of Nasdaq.
On March 23, 2020, we notified Nasdaq that
the Company is relying on the “Cure Period” set forth in Listing Rule 5605(c)(4)(B) to regain compliance with the audit
committee composition requirement. Effective February 10, 2020, Brian Herr, a former director of the Company and member of the
Audit Committee, resigned from the Board. We are actively searching for a qualified individual to replace Mr. Herr as a member
of the Audit Committee, and the Company intends to comply with the audit committee composition requirement under Listing Rule 5605(c)(2)(A).
Compensation Committee
The members of our Compensation Committee
are Helge Kristensen, Robert Tobias and Dr. Jeffrey M. Gilbert. Messrs. Kristensen, Tobias and Gilbert are “independent”
within the meaning of the Marketplace Rules of the Nasdaq Stock Market. In addition, each member of our Compensation Committee
qualifies as a “non-employee director” under Rule 16b-3 of the Exchange Act. Our Compensation Committee assists the
Board in the discharge of its responsibilities relating to the compensation of the members of the Board and our executive officers.
Mr. Kristensen serves as Chairman of our Compensation Committee.
The Compensation Committee’s compensation-related
responsibilities include, among other matters:
|
|
·
|
reviewing and approving, or recommending that our board of directors approve, the compensation of our executive officers;
|
|
|
·
|
reviewing and recommending to our board of directors the compensation of our directors;
|
|
|
·
|
reviewing and approving, or recommending that our board of directors approve, the terms of compensatory arrangements with our executive officers;
|
|
|
·
|
administering our stock and equity incentive plans;
|
|
|
·
|
reviewing and approving, or recommending that our board of directors approve, incentive compensation and equity plans; and
|
|
|
·
|
reviewing and establishing general policies relating to compensation and benefits of our employees and reviewing our overall compensation philosophy.
|
In 2019, the Compensation Committee held
two (2) meetings at which all of the members of the then current Compensation Committee were present, except for Brian Herr who
was unable to attend one meeting.
Nominating and Corporate Governance
Committee
The members of our Nominating and Corporate
Governance Committee are Robert Tobias, Helge Kristensen and Sam Runco. Messrs. Tobias, Kristensen and Runco are “independent”
within the meaning of the Marketplace Rules of the Nasdaq Stock Market. In addition, each member of our Nominating and Corporate
Governance Committee qualifies as a “non-employee director” under Rule 16b-3 of the Exchange Act. The purpose of the
Nominating and Corporate Governance Committee is to recommend to the Board nominees for election as directors and persons to be
elected to fill any vacancies on the Board, develop and recommend a set of corporate governance principles and oversee the performance
of the Board. Mr. Kristensen serves as Chairman of our Nominating and Corporate Governance Committee. The Nominating and Corporate
Governance Committee’s responsibilities include, among other things:
|
|
·
|
identifying, evaluating and selecting, or recommending that our board of directors approve, nominees for election to our board of directors and its committees;
|
|
|
·
|
evaluating the performance of our board of directors and of individual directors;
|
|
|
·
|
considering and making recommendations to our board of directors regarding the composition of our board of directors and its committees;
|
|
|
·
|
reviewing developments in corporate governance practices;
|
|
|
·
|
evaluating the adequacy of our corporate governance practices and reporting;
|
|
|
·
|
developing and making recommendations to our board of directors regarding corporate governance guidelines and matters; and
|
|
|
·
|
overseeing an annual evaluation of the board’s performance.
|
In 2019, the Nominating and Corporate Governance
Committee held one (1) meeting at which all of the members of the then current Nominating and Corporate Governance Committee were
present.
Leadership Structure of the Board
The Board does not currently have a policy
on whether the same person should serve as both the Chief Executive Officer and Chairman of the Board or, if the roles are separate,
whether the Chairman should be selected from the non-employee directors or should be an employee. The Board believes that it should
have the flexibility to make these determinations at any given point in time in the way that it believes best to provide appropriate
leadership for the Company at that time. Mr. Moyer is both the Chief Executive Officer and Chairman of the Board.
Director Nomination Procedures
There have been no material changes to
the procedures by which security holders may recommend nominees to the Board.
Risk Oversight
The Board oversees risk management directly
and through its committees associated with their respective subject matter areas. Generally, the Board oversees risks that may
affect the business of the Company as a whole, including operational matters. The Audit Committee is responsible for oversight
of the Company’s accounting and financial reporting processes and also discusses with management the Company’s financial
statements, internal controls and other accounting and related matters. The Compensation Committee oversees certain risks related
to compensation programs, and the Nominating and Corporate Governance Committee oversees certain corporate governance risks. As
part of their roles in overseeing risk management, these committees periodically report to the Board regarding briefings provided
by management and advisors as well as the committees’ own analysis and conclusions regarding certain risks faced by the Company.
Management is responsible for implementing the risk management strategy and developing policies, controls, processes and procedures
to identify and manage risks.
Code of Business Conduct and Ethics
We have adopted a code of business conduct
and ethics that applies to all of our employees and officers, including those officers responsible for financial reporting. We
have also adopted a code of business conduct and ethics that applies to our directors. Both codes of business conduct and ethics
are available on our website at https://ir.summitwireless.com/governance-docs. The information contained in or accessible
through the foregoing website is not incorporated herein by reference and is intended for informational purposes only. We intend
to disclose any amendments to such codes, or any waivers of its requirements, on our website to the extent required by applicable
SEC rules and Nasdaq requirements.
DELINQUENT SECTION 16(a) REPORTS
Section 16(a) of the Exchange Act requires
the Company’s directors and executive officers and persons who own more than ten percent (10%) of the Common Stock to file
with the SEC the initial reports of ownership and reports of changes in ownership of Common Stock. Officers, directors and greater
than ten percent (10%) stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Specific due dates for such reports have
been established by the SEC, and the Company is required to disclose in this Report any failure to file reports by such dates during
fiscal year 2019. During the fiscal year ended December 31, 2019, we believe that all reports required to be filed by such persons
pursuant to Section 16(a) were filed on a timely basis, with the exception of our officers, directors and greater than 10 percent
(10%) beneficial owners listed in the table below:
|
Name
|
|
Number
of Late
Reports
|
|
Description
|
|
Lisa J. Walsh
|
|
1
|
|
Ms. Walsh’s Form 5 was not filed on a timely basis.
|
|
Jonathan Gazdak
|
|
1
|
|
Mr. Gazdak’s Form 5 was not filed on a timely basis.
|
|
Lisa Cummins Dulchinos
|
|
1
|
|
Ms. Cummins’ Form 3 was not filed on a timely basis.
|
|
George Oliva
|
|
1
|
|
Mr. Oliva’s Form 3 was not filed on a timely basis
|
|
Item 11.
|
Executive Compensation.
|
Summary Compensation Table for Fiscal Years 2019 and 2018
The following table sets forth all plan
and non-plan compensation for the last two completed fiscal years paid to all individuals who served as the Company’s
principal executive officer or acted in a similar capacity and the Company’s two other most highly compensated executive
officers during the last completed fiscal year, as required by Item 402(m)(2) of Regulation S-K of the Securities Act.
We refer to all of these individuals collectively as our “Named Executive Officers.”
Name and Principal
Position
|
|
Year
|
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Stock
Awards
($)(1)(2)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total ($)
|
|
|
Brett Moyer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President and Chief
|
|
|
2019
|
|
|
$
|
335,000
|
|
|
$
|
-
|
|
|
$
|
134,646
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
469,646
|
|
|
Executive Officer
|
|
|
2018
|
|
|
$
|
299,566
|
|
|
$
|
38,493
|
|
|
$
|
405,035
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
743,093
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary Williams
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Accounting Officer
|
|
|
2019
|
|
|
$
|
250,000
|
|
|
$
|
-
|
|
|
$
|
63,943
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
313,943
|
|
|
and VP of Finance
|
|
|
2018
|
|
|
$
|
228,365
|
|
|
$
|
94,486
|
|
|
$
|
262,479
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
585,330
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George Oliva
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
2019
|
|
|
$
|
67,306
|
|
|
$
|
-
|
|
|
$
|
142,500
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
209,806
|
(5)
|
|
and Secretary
|
|
|
2018
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
(1)
|
Amounts reported in this column do not reflect the amounts actually received by our named executive officers. Instead, these amounts reflect the aggregate grant date fair value of each stock award to purchase a share of common stock granted to the named executive officers during the fiscal years ended December 31, 2019 and 2018, as computed in accordance with FASB ASC 718. The calculation of the 2018 amounts are based on the fair market value of the shares of restricted common stock granted to such officers as of the date of grant. The calculation of the 2019 amounts are based on the fair market value of the shares of restricted common stock granted to such officers as of December 31, 2019. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.
|
|
(2)
|
In connection with the termination of the Carve-Out Plan and the approval of the LTIP on January 31, 2018, we issued 445,009 shares of restricted common stock to our named executive officers, whose proceeds under the Carve-Out Plan were vested as of that date (the “January 2018 Restricted Stock Grant”). See also “Executive Officer Compensation – Non-Equity Incentive Plans”. Such shares were issued to such officers on January 31, 2018, and were released in three equal tranches on September 1, 2018, March 1, 2019 and September 1, 2019. The amounts listed in this column for the fiscal year ended December 31, 2018 reflect the total value of such shares issued on January 31, 2018.
|
|
(3)
|
During the year ended December 31, 2018, Mr. Moyer’s voluntary reduced compensation continued through June 4, 2018, reducing his total 2018 salary to $299,566 instead of $335,000.
|
|
(4)
|
During the year ended December 31, 2018, Mr. Williams’ voluntary reduced compensation continued through June 4, 2018, reducing his total 2018 salary to $228,365 instead of $250,000.
|
|
(5)
|
Reflects all compensation received by Mr. Oliva between September 9, 2019, the date of his appointment as Chief Financial Officer of the Company, through December 31, 2019.
|
Executive Employment Agreements and
Arrangements
Brett Moyer
We are party to an employment agreement
with Brett Moyer, which we assumed on or about August 1, 2010 and which was amended in 2011. Pursuant to such agreement, Mr. Moyer
agreed to serve as our Chief Executive Officer and President in consideration for an annual cash salary, which was set at $335,000
for the years ended December 31, 2019 and 2018. Mr. Moyer voluntarily agreed to accept 50% of the salary due to him pursuant to
such agreement between October 7, 2017 and February 8, 2019 and 75% of the salary due him between February 9, 2019 and June 4,
2018. Mr. Moyer received a bonus of $0 and $38,493 for the fiscal years ended December 31, 2019 and 2018, respectively, but he
did not have a target bonus for such fiscal years under his employment agreement. For additional information on the amounts paid
to Mr. Moyer during such periods, refer to the footnotes of the Summary Compensation Table above. Pursuant to Mr. Moyer’s
employment agreement, if he is terminated “without cause”, as defined in such agreement, he is entitled to receive
12 months of salary and all options held will immediately vest and become exercisable. Additionally, in the event that Mr. Moyer’s
contract is not renewed, he shall receive 12 months of his then current salary. Such agreement provides for incentive bonuses as
determined by the Board, and employee benefits, including health and disability insurance, in accordance with our policies, and
shall automatically renew for successive one-year terms, unless terminated by either party 30 days prior to the end of the then
current term.
George Oliva
In
connection with his appointment as the Company’s Chief Financial Officer and Secretary, the Company and Mr. Oliva executed
an amended and restated offer letter, dated October 4, 2019 (the “Offer Letter”), setting forth the terms of Mr. Oliva’s
employment with the Company. The Offer Letter does not provide for a specified term of employment and Mr. Oliva’s employment
is on an at-will basis, subject to the payment of severance in certain circumstances as described below.
Pursuant
to the Offer Letter, Mr. Oliva will receive an annual base salary of $250,000 and will be eligible to participate in the Company’s
discretionary and non-discretionary bonus programs.
Additionally,
pursuant to the Offer Letter and as a material inducement to Mr. Oliva’s acceptance of employment with the Company, the Company
issued Mr. Oliva 150,000 shares of restricted Common Stock of the Company (the “Stock Award”). The Stock Award was
approved by the compensation committee of the Board and such shares were issued in accordance with Nasdaq Listing Rule 5635(c)(4)
outside of the LTIP. Pursuant to the Offer Letter, such shares will vest equally over a period of four years, with the first tranche
to vest on September 1, 2020, and in the event that Mr. Oliva is (i) terminated without cause within one year of a change in control
of the Company (defined as over a 50% change in ownership of the Company) or (ii) his role is diminished as a result of such change
in control, all incentive equity compensation granted to him will fully accelerate and vest, and he will receive as severance (i)
all cash bonuses due to him under the Company’s incentive plans, prorated as of the effective date of termination, and (ii)
an additional six months of base salary and benefits
Gary Williams
We are party to an employment agreement
with Gary Williams, which we assumed on or about August 1, 2010 and which was amended in 2011. Pursuant to such agreement, Mr.
Williams agreed to serve as our Executive Vice President of Finance and Chief Financial Officer in consideration for an annual
cash salary, which was set at $250,000 for the years ended December 31, 2019 and 2018. Mr. William’s target bonus was $75,000
for the fiscal years ended December 31, 2019 and 2018, however on September 7, 2019, this changed to $37,500 for the fiscal year
ended December 31, 2019 in connection with Mr. Williams appointment to Chief Accounting Officer. For additional information on
the amounts paid to Mr. Williams during such periods, refer to the footnotes of the Summary Compensation Table above. Pursuant
to Mr. Williams’ employment agreement, if he is either terminated “without cause” or in the event of a “change
in control”, as defined in such agreement, he is entitled to 12 months of salary, payment of prorated bonus amounts and all
stock and options held will immediately vest and become exercisable. Such agreement provides for bonuses, as determined by our
board of directors, and employee benefits, including health and disability insurance, in accordance with our policies and automatically
renews for consecutive one-year terms, unless terminated by either party 90 days prior to the end of the then current term. Effective
September 9, 2019, Gary Williams was succeeded by George Oliva as Chief Financial Officer, Mr. Williams assumed the role of Chief
Accounting Officer and continues to serve as Vice President of Finance. Upon assuming the role of Chief Accounting Officer, Mr.
Williams’ employment agreement was amended to state that if he is either terminated “without cause” or in the
event of a “change in control”, as defined in such agreement, he is entitled to six months of salary.
Other Compensation
Other than as described above, there were
no post-employment compensation, pension or nonqualified deferred compensation benefits earned by our Named Executive Officers
during the year ended December 31, 2019. We do not have any retirement, pension or profit-sharing programs for the benefit of our
directors, officers or other employees. The Board may recommend adoption of one or more such programs in the future.
Outstanding Equity Awards as of December 31, 2019
The following table provides information
regarding the unexercised warrants to purchase Common Stock and stock awards held by each of our named executive officers:
|
|
|
Option/Warrant Awards
|
|
|
Stock Awards
|
|
|
Name
|
|
Number of
Securities
underlying
Unexercised
Options and
Warrants
(#)
Exercisable
|
|
|
Number of
Securities
underlying
Unexercised
Options
and Warrants
(#)
Unexercisable
|
|
|
Option/
Warrant
Exercise
Price
($/Sh)
|
|
|
Option/
Warrant
Expiration
Date
|
|
|
Number of
shares or
units of
stock that
have not
vested
|
|
|
Market
value of
shares or
units of
stock that
have not
vested (1)
|
|
|
Equity
incentive
plan
awards:
Number of
unearned
shares,
units or
other
rights that
have not
vested
(#)
|
|
|
Equity
incentive
plan
awards:
Market or
payout
value of
unearned
shares,
units or
other
rights that
have not
vested
($)
|
|
|
Brett Moyer
|
|
|
3,102
|
|
|
|
—
|
|
|
$
|
4.50
|
|
|
|
3/31/2021
|
|
|
|
141,733
|
(2)
|
|
$
|
86,457
|
(2)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
3,102
|
|
|
|
—
|
|
|
$
|
4.50
|
|
|
|
6/30/2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,058
|
|
|
|
—
|
|
|
$
|
0.79
|
|
|
|
2/28/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,630
|
|
|
|
—
|
|
|
$
|
3.00
|
|
|
|
6/27/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,889
|
|
|
|
—
|
|
|
$
|
3.00
|
|
|
|
7/25/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary Williams
|
|
|
2,056
|
|
|
|
—
|
|
|
$
|
4.50
|
|
|
|
3/31/2021
|
|
|
|
67,308
|
(3)
|
|
$
|
41,058
|
(3)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
2,055
|
|
|
|
—
|
|
|
$
|
4.50
|
|
|
|
6/30/2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,578
|
|
|
|
—
|
|
|
$
|
0.79
|
|
|
|
11/30/2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George Oliva
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000
|
(4)
|
|
$
|
91,500
|
(4)
|
|
|
—
|
|
|
$
|
—
|
|
(1) Market value based upon the closing
market price of $0.61 on December 31, 2019.
(2) Mr. Moyer was granted 141,733 shares
of restricted common stock, which vest in equal installments on the first, second and third anniversaries of September 1, 2019.
(3) Mr. Williams was granted 67,308 shares
of restricted common stock, which vest in equal installments on the first, second and third anniversaries of September 1, 2019.
(4) Mr. Oliva was granted 150,000 shares
of restricted stock vest in equal installment on the first, second, third and fourth anniversaries of September 1, 2019.
Equity Incentive Plans
On January 30, 2018, the Board approved
the establishment of the LTIP. The LTIP is intended to enable the Company to continue to attract able directors, employees, and
consultants and to provide a means whereby those individuals upon whom the responsibilities rest for successful administration
and management of the Company, and whose present and potential contributions are of importance, can acquire and maintain Common
Stock ownership, thereby strengthening their concern for the Company’s welfare. The aggregate maximum number of shares of
Common Stock (including shares underlying options) that may be issued under the LTIP pursuant to awards of Restricted Shares or
Options will be limited to 15% of the outstanding shares of Common Stock, which calculation shall be made on the first trading
day of each new fiscal year; provided that, in any year no more than 8% of the Common Stock or derivative securitization with Common
Stock underlying 8% of the Common Stock may be issued in any fiscal year. For fiscal year 2018, up to 300,000 shares of Common
Stock were initially available for participants under the LTIP, which shares were granted outside the LTIP’s first year share
availability pool. For fiscal year 2019, up to 2,304,909 shares of Common Stock are available for participants under the LTIP.
The number of shares of Common Stock that are the subject of awards under the LTIP which are forfeited or terminated, are settled
in cash in lieu of shares of Common Stock or in a manner such that all or some of the shares covered by an award are not issued
to a participant or are exchanged for awards that do not involve shares will again immediately become available to be issued pursuant
to awards granted under the LTIP. If shares of Common Stock are withheld from payment of an award to satisfy tax obligations with
respect to the award, those shares of Common Stock will be treated as shares that have been issued under the LTIP and will not
again be available for issuance under the LTIP.
In connection with the termination of the Carve-Out Plan and
the approval of the LTIP on January 31, 2018, the Company issued 1,284,470 and 153,126 shares of restricted common stock to certain
of its employees and directors, respectively, whose proceeds under the Carve-Out Plan were vested as of that date (the “January
2018 Restricted Stock Grant”). Such shares were issued to such persons on January 31, 2018, and were to be released in three
equal tranches on September 1, 2018, March 1, 2019 and September 1, 2019. As of December 31, 2019, all of the shares of such restricted
common stock were released, with an additional 21,132 shares to be released to a terminated employee in three equal tranches over
the next 14 months pursuant to the terms of such employee’s restricted stock agreement.
The January 2018 Restricted Stock Grant
and the LTIP were approved by a majority of the Company’s stockholders on January 31, 2018.
Non-Equity Incentive Plans
On January 30, 2018, the Company terminated
the Company’s Carve-Out Plan. Prior to its cancellation, our employees and directors of the Company were entitled to participate
in the Carve-Out Plan at the discretion of the Company’s Board. Each Carve-Out Plan participant was awarded points which
entitled that participant to a portion of the proceeds payable to the Company and/or its members upon a sale of the Company. The
proceeds payable to a Carve-Out Plan participant were equal to an amount determined in accordance with the following formula: (number
of points held by participant divided by total points outstanding) multiplied by 18% of Net Sale Price. For this purpose, “Net
Sale Price” equaled the aggregate amount payable to the Company and/or its members in connection with a sale of the Company
less all amounts payable to creditors of the Company.
DIRECTOR COMPENSATION
The table below sets forth the compensation
paid to our directors during the fiscal year ended December 31, 2019.
|
Director
|
|
Fees Earned
or
Paid in Cash
|
|
|
Stock
Awards(1)
|
|
|
All Other
Compensation
|
|
|
Total
|
|
|
Lisa Cummins Dulchinos
|
|
$
|
-
|
|
|
$
|
15,250
|
|
|
$
|
-
|
|
|
$
|
15,250
|
(2)
|
|
Jonathan Gazdak
|
|
$
|
-
|
|
|
$
|
15,250
|
|
|
$
|
-
|
|
|
$
|
15,250
|
(3)
|
|
Dr. Jeffrey M. Gilbert
|
|
$
|
-
|
|
|
$
|
15,250
|
|
|
$
|
-
|
|
|
$
|
15,250
|
(4)
|
|
Helge Kristensen
|
|
$
|
-
|
|
|
$
|
15,250
|
|
|
$
|
-
|
|
|
$
|
15,250
|
(5)
|
|
Sam Runco
|
|
$
|
-
|
|
|
$
|
15,250
|
|
|
$
|
-
|
|
|
$
|
15,250
|
(6)
|
|
Brian Herr
|
|
$
|
-
|
|
|
$
|
15,250
|
|
|
$
|
-
|
|
|
$
|
15,250
|
(7)
|
|
Michael Fazio
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
(8)
|
|
Michael Howse
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
(9)
|
(1) Represents 25,000 shares of restricted
common stock granted to each non-employee director, except for Mr. Fazio who resigned June 19, 2019, which vest in equal installments
on the first, second and third anniversaries of September 1, 2019, based upon the closing market price of $0.61 on December 31,
2019. Amounts reported in this column do not reflect the amounts actually received by our non-employee directors. Instead, these
amounts reflect the aggregate grant date fair value of each stock award to purchase a share of common stock granted to the Company’s
directors during the fiscal year ended December 31, 2019, as computed in accordance with the Financial Accounting Standards Board
(“FASB”) ASC 718. The calculation of the 2019 amounts are based on the fair market value of the shares of restricted
common stock granted to such directors as of December 31, 2019. As required by SEC rules, the amounts shown exclude the impact
of estimated forfeitures related to service-based vesting conditions.
(2) As of December 31, 2019, Ms. Cummins
Dulchinos beneficially owned 25,000 shares of Common Stock issued as stock awards and did not have any outstanding option awards.
See “Security Ownership of Certain Beneficial Ownership and Management.”
(3) As of December 31, 2019, Mr. Gazdak
beneficially owned 50,000 shares of Common Stock issued as stock awards and did not have any outstanding option awards. See “Security
Ownership of Certain Beneficial Ownership and Management.”
(4) As of December 31, 2019, Mr. Gilbert
beneficially owned 50,000 shares of Common Stock issued as stock awards and did not have any outstanding option awards. See “Security
Ownership of Certain Beneficial Ownership and Management.”
(5) As of December 31, 2019, Mr. Kristensen
beneficially owned 50,000 shares of Common Stock issued as stock awards and did not have any outstanding option awards. See “Security
Ownership of Certain Beneficial Ownership and Management.”
(6) As of December 31, 2019, Mr. Runco
beneficially owned 50,000 shares of Common Stock issued as stock awards and did not have any outstanding option awards. See “Security
Ownership of Certain Beneficial Ownership and Management.”
(7) As of December 31, 2019, Mr. Herr beneficially
owned 25,000 shares of Common Stock issued as stock awards and did not have any outstanding option awards. See “Security
Ownership of Certain Beneficial Ownership and Management.” On February 6, 2020, Mr. Herr notified the Company of his decision
to resign from the Board. Effective February 10, 2020, the Board appointed Mr. Tobias as a member of the Board to replace Mr. Herr.
(8) As of December 31, 2019, Mr. Fazio
beneficially owned 7,292 shares of Common Stock issued as stock awards and did not have any outstanding option awards. Mr. Fazio
resigned as a director of the Company effective June 19, 2019. See “Security Ownership of Certain Beneficial Ownership
and Management.”
(9) As of December 31, 2019, Mr. Howse
beneficially owned no shares of Common Stock issued as stock awards and did not have any outstanding option awards. See “Security
Ownership of Certain Beneficial Ownership and Management.”
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of March
20, 2020, information regarding beneficial ownership of our capital stock by:
|
|
·
|
each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of our equity securities;
|
|
|
·
|
each of our named executive officers;
|
|
|
·
|
each of our directors; and
|
|
|
·
|
all of our executive officers and directors as a group.
|
The percentage ownership information
shown in the table prior to this offering is based upon 26,743,765 shares of Common Stock and 250,000 shares of Series A Preferred
Stock outstanding as of March 20, 2020. The percentage ownership information shown in the table excludes (i) 14,088 shares of restricted
stock to be released to a terminated employee in three equal tranches over the next 11 months pursuant to the terms of such employee’s
restricted stock agreement, and (ii) 400,000 unvested Deferred Shares issued to Michael Howse pursuant to the Deferred Shares
Agreement. As of March 20, 2020, the holder of Series A Preferred Stock has not converted her shares of Series A Preferred Stock
into shares of Common Stock.
Beneficial ownership is determined according
to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole
or shared voting or investment power of that security, including securities that are exercisable for shares of Common Stock within
sixty (60) days of March 20, 2020. Except as indicated by the footnotes below, we believe, based on the information furnished to
us, that the persons named in the table below have sole voting and investment power with respect to all shares of Common Stock
shown that they beneficially own, subject to community property laws where applicable.
For purposes of computing the percentage
of outstanding shares of our Common Stock held by each person or group of persons named above, any shares of Common Stock that
such person or persons has the right to acquire within sixty (60) days of March 20, 2020 is deemed to be outstanding, but is not
deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any
shares of Common Stock listed as beneficially owned does not constitute an admission of beneficial ownership.
Except as otherwise noted below, the address for persons listed
in the table is c/o Summit Wireless Technologies, Inc., 6840 Via Del Oro, Ste. 280, San Jose, CA 95119.
|
|
|
Shares Beneficially Owned
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Series A Preferred
Stock
|
|
|
%
Total
Voting
|
|
|
5% or greater stockholders:
|
|
Shares
|
|
|
%
|
|
|
Shares
|
|
|
%
|
|
|
Power
(1)
|
|
|
Carl E. Berg (3)
|
|
|
1,711,594
|
|
|
|
6.4
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
6.3
|
%
|
|
Lisa Walsh (4)
|
|
|
6,451,537
|
|
|
|
23.4
|
%
|
|
|
250,000
|
|
|
|
100.0
|
|
|
|
24.1
|
%
|
|
MARCorp Signal, LLC (5)
|
|
|
2,757,244
|
|
|
|
9.9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
9.9
|
%
|
|
Medalist Partners LP (6)
|
|
|
2,502,026
|
|
|
|
9.9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and executive officers (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brett Moyer (7)
Chief Executive Officer and Chairman
|
|
|
510,786
|
|
|
|
1.9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
1.9
|
%
|
George Oliva (8)
Chief Financial Officer
|
|
|
150,000
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
Gary Williams (9)
Chief Accounting officer and Vice President of Finance
|
|
|
175,605
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
Jonathan Gazdak (10)
Director
|
|
|
241,408
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
Dr. Jeffrey M. Gilbert (11)
Director
|
|
|
50,000
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
Michael Howse (12)
Director
|
|
|
275,000
|
|
|
|
1.0
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
1.0
|
%
|
Helge Kristensen (13)
Director
|
|
|
196,917
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
Sam Runco (14)
Director
|
|
|
50,000
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
Lisa Cummins Dulchinos (15)
Director
|
|
|
25,000
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
Robert Tobias (16)
Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Directors and executive officers as a group (10 persons)
|
|
|
1,699,716
|
|
|
|
6.4
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
6.3
|
%
|
|
(1)
|
Percentage of total voting power represents voting power with respect to all shares of our Common Stock and Series A Preferred Stock, which have the same voting rights as our shares of Common Stock. The holders of our Common Stock and our Series A Preferred Stock are each entitled to one vote per share.
|
|
|
|
|
(2)
|
Includes fully vested warrants to purchase 482,557 shares of Common Stock at exercise prices between $0.01 and $5.40 per share.
|
|
|
|
|
(3)
|
Includes fully vested warrants to purchase 104,397 shares of Common Stock at an exercise price of $5.40 per share.
|
|
|
|
|
(4)
|
Includes (i) fully vested warrants to purchase 774,929 shares of Common Stock with exercise prices ranging from $0.79 to $1.98 per share and (ii) 250,000 shares of Common Stock based upon the assumed conversion of 250,000 shares of Series A Preferred Stock convertible into shares of our Common Stock at a price of $4.00 per share, subject to adjustment under the Certificate of Designations upon certain subsequent transactions and events described therein, and which price cannot be reduced below $1.50 per share.
|
|
|
|
|
(5)
|
Includes fully vested warrants to purchase 2,952,244 shares of Common Stock at an exercise price of $3.00 per share. Excludes (i) warrants to purchase 150,000 shares of Common Stock, with an exercise price of $3.00 per share, which contain a provision prohibiting exercise to the extent that the holder, together with its affiliates, would beneficially own in excess of 9.99% of the number of shares of our Common Stock outstanding immediately after giving effect to such exercise (subject to increase or decrease upon prior written notice, in the case of any increase, of not less than 61 days).
|
|
|
|
|
(6)
|
Brian Herr is an employee of Medalist Partners LP (“Medalist”) and/or one of its affiliates, is a partner and co-portfolio manager for each of the Medalist Funds (defined below), and is a former director of the Company who, on February 6, 2020, notified the Company of his decision to resign from the Board and, effective February 10, 2020, was replaced by Robert Tobias as a member of the Board.
Based upon a Schedule 13G/A that was jointly filed with the SEC on February 14, 2020 by (i) Medalist, a Delaware limited partnership, (ii) Medalist Partners Harvest Master Fund, Ltd., a Cayman Islands exempted company (“Harvest”) and (iii) Medalist Partners Opportunity Fund A, L.P., a Cayman Islands exempted company (“Opportunity” and, collectively with Harvest, the “Medalist Funds” and, collectively with Harvest and Medalist, the “Reporting Persons”).
Medalist is the investment manager to the Medalist Funds and may be deemed to beneficially own the securities held by the Medalist Funds. As of December 31, 2019, each of Harvest and Opportunity held (a) 1,014,108 shares of Common Stock, (b) warrants (“Medalist Warrants”) exercisable for an aggregate of 236,114 shares of Common Stock and (c) prefunded warrants (“Medalist Prefunded Warrants”) exercisable for an aggregate of 207,182 shares of Common Stock.
The Medalist Warrants and the Medalist Prefunded Warrants are subject to exercise and conversion limitations prohibiting the exercise or conversion of each security to the extent that it would result in the holder, or any of its affiliates, being deemed to beneficially own in excess of 9.99% of the then-outstanding shares of Common Stock. Pursuant to the terms of the 9.99% beneficial ownership limitation and as of December 31, 2019, any Medalist Warrants or Medalist Prefunded Warrants deemed to be beneficially owned by Medalist that would result in its beneficial ownership being in excess of 9.99% are not exercisable and therefore are not reflected in the above calculations of Medalist’s beneficial ownership.
The reported beneficial ownership percentages are based upon 24,570,247 shares of Common Stock, issued and outstanding as of November 12, 2019, as reported by the Company in its Quarterly Report on Form 10-Q, filed with the SEC on November 14, 2019.
The principal business office of the Reporting Persons is 777 Third Avenue, Suite 1402, New York, NY 10017.
|
|
|
|
|
(7)
|
Includes (i) 141,733 shares of restricted Common Stock that is subject to annual vesting over a period of three years beginning September 1, 2019 and (ii) fully vested warrants to purchase 33,781 shares of Common Stock with exercise prices ranging from $0.79 to $4.50 per share.
|
|
|
|
|
(8)
|
Includes 150,000 shares of restricted Common Stock that is subject to annual vesting over a period of four years beginning September 1, 2019.
|
|
|
|
|
(9)
|
Includes (i) 67,308 shares of restricted Common Stock that is subject to annual vesting over a period of three years beginning September 1, 2019 and (ii) fully vested warrants to purchase 7,690 shares of Common Stock with exercise prices ranging from $0.79 to $4.50 per share.
|
|
|
|
|
(10)
|
Includes (i) 25,000 shares of restricted Common Stock that is subject to annual vesting over a period of three years beginning September 1, 2019 and (ii) fully vested warrants to purchase 163,803 shares of Common Stock with exercise prices ranging from $3.30 to $6.25 per share. Excludes warrants to purchase 40,816, 122,272, 75,000 and 91,051 shares of Common Stock, with exercise prices of $2.18, $1.66, $0.875 and $0.44, respectively, issued to Alexander Capital, L.P., of which Mr. Gazdak is managing director and the head of investment banking.
|
|
|
|
|
(11)
|
Includes 25,000 shares of restricted Common Stock that is subject to annual vesting over a period of three years beginning September 1, 2019.
|
|
(12)
|
Includes fully vested warrants to purchase 275,000 shares of Common Stock with an exercise price of $2.00 per share. Excludes 400,000 Deferred Shares issued pursuant to the Deferred Shares Agreement that will vest immediately prior to a Fundamental Transaction.
|
|
|
|
|
(13)
|
Includes (i) 25,000 shares of restricted Common Stock that is subject to annual vesting over a period of three years beginning September 1, 2019, (ii) 133,339 shares of Common Stock owned indirectly by Inizio Capital, (iii) 11,295 shares of Common Stock owned indirectly by Hansong Technology, and (iv) fully vested warrants to purchase 2,283 shares of Common Stock at an exercise price of $5.40 per share owned indirectly by Hansong Technology. Mr. Kristensen serves as a director of Inizio Capital and as a vice president of Hanson Technology, and therefore may have voting or investment power over such shares.
|
|
|
|
|
(14)
|
Includes 25,000 shares of restricted Common Stock that is subject to annual vesting over a period of three years beginning September 1, 2019.
|
|
|
|
|
(15)
|
Such shares of restricted Common Stock are subject to annual vesting over a period of three years beginning September 1, 2019.
|
|
|
|
|
(16)
|
Mr. Tobias replaced Brian Herr as a director of the Company, effective February 10, 2020.
|
Securities Authorized for Issuance under Equity Compensation
Plans
EQUITY COMPENSATION PLAN INFORMATION
Equity Compensation Plan Information as of December 31, 2019
|
Plan Category
|
|
Number of
Securities to Be
Issued upon
Exercise of
Outstanding
Options,
Warrants and
Rights
|
|
|
Weighted
Average
Exercise Price
of
Outstanding
Options,
Warrants and
Rights
|
|
|
Number of
Securities
Remaining
Available for
Future
Issuance
under the Plan
(Excluding
Securities
Reflected in
Column (a))
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders (1)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
2,523,073
|
|
|
Equity compensation plans not approved by security holders
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
-
|
|
|
$
|
-
|
|
|
|
2,523,073
|
|
|
(1)
|
See “Executive Compensation – Equity Incentive Plans.”
|
|
Item 13.
|
Certain Relationships and Related Transactions, and Director Independence
|
Certain Relationships and Related Transactions
Other than compensation arrangements for
our directors and executive officers, the following is a summary of transactions since the years ended December 31, 2018 and 2019
to which we have been a party in which the amount involved exceeded the lesser of (i) $120,000 or (ii) one percent of the average
of our total assets at year-end for the last three completed fiscal years, and in which any of our then directors, executive officers
or holders of more than 5% of any class of our stock at the time of such transaction, or any members of their immediate family,
had or will have a direct or indirect material interest. See also “Executive Compensation” for additional information
regarding compensation of related parties.
Warrant Amendment and Exercise Agreements
Between September 25, 2019 and October 8, 2019, the Company
and certain holders, including Brett Moyer, Gary Williams, Jonathan Gazdak, each of the Medalist Funds (as defined below) and Lisa
Walsh (each a “Holder” and collectively, the “Holders”), of the Company’s common stock purchase warrants,
with exercise prices between $3.00 and $5.40 (collectively, the “Original Warrants”), including the Company’s
Series D common stock purchase warrants, Series F common stock purchase warrants (the “Series F Warrants”) and Series
G common stock purchase warrants (the “Series G Warrants”), entered into Warrant Amendment and Exercise Agreements
(the “Warrant Amendment Agreements”), pursuant to which the Company agreed to reduce the exercise price of each Original
Warrant to $0.80 (the “Reduced Exercise Price”), and for each Original Warrant exercised by a Holder at the Reduced
Exercise Price, the Company agreed to reduce the exercise price of Original Warrants to purchase up to an equivalent number of
shares of Common Stock (the “Amended Warrants”) to $0.79 (the “Amended Exercise Price”). The Company entered
into Warrant Amendment Agreements with 32 Holders, under which Original Warrants were exercised for a total of 1,128,381 shares
of Common Stock and the Company received gross proceeds of $903,000. Remaining Original Warrants for 1,381,403 shares of Common
Stock had their exercise price adjusted to the Amended Exercise Price of $0.79.
Additionally, pursuant to the Warrant Amendment
Agreements, the Company agreed to prepare and file with the SEC, as soon as practicable, but in no event later than November 4,
2019 (as extended by the Settlement Agreements (as defined below) to November 18, 2019), a registration statement on Form S-3 to
register all shares of Common Stock received by the Holders upon exercise of any Warrant (as defined in the Warrant Amendment Agreements)
and all shares of Common Stock underlying the Original Warrants (as defined in the Warrant Amendment Agreements) (such issued and
underlying shares, the “Resale Shares”). On December 3, 2019, the Company filed a prospectus to its Registration Statement
on Form S-3 (Registration No. 333-234787) for the registration of the Resale Shares.
From November 3, 2019 to November 6, 2019,
the Company entered into settlement agreements (each a “Settlement Agreement” and collectively, the “Settlement
Agreements”) with each of the Holders (other than the Medalist Funds (as defined herein), whose Settlement Agreement is described
below) pursuant to which the Company agreed to issue such Holders an aggregate of 152,944 additional shares of common stock, with
such shares meant to compensate such Holders for the difference between the Amended Exercise Price and the lower priced shares
that were offered to investors in connection with the Company’s earlier registered direct offering of an aggregate of 2,500,000
shares of Common Stock, priced at $0.70 per share, that the Company closed on October 16, 2019 (the “Registered Direct Offering”).
In addition, pursuant to the Settlement Agreements, the Company and the Holders agreed to extend the date by which the Company
would file a registration statement on Form S-3 to register all of the Resale Shares from November 4, 2019 to November 18, 2019.
Brett Moyer
Mr. Moyer has served as the Company’s
President, Chief Executive Officer and a Board member since the Company’s founding in August 2010.
In December 2016, Mr. Moyer extinguished
secured promissory notes of the Company, consisting of an aggregate of $135,704, a promissory note of the Company in the principal
amount of $50,000 and $69,290 of reimbursable expense reports, and invested the aggregate sum of $269,091 in the Company’s
Series D convertible note (the “Series D Notes”) financing. In connection with the Series D Convertible Notes financing,
the Company also issued Mr. Moyer a warrant to purchase 9,058 shares of common stock at an exercise price of $5.40. In connection
with the extension of the maturity date of such Series D Convertible Note to June 30, 2018, the number of warrants granted to Mr.
Moyer in connection with such financing was doubled, or increased by 9,058, effective February 28, 2018.
In April 2018, the Company issued Mr. Moyer
a $62,500 Series G 20% Original Issue Discount Senior Secured Promissory Note, as amended (a “Series G Note”), in consideration
for $50,000 of expenses incurred by Mr. Moyer. In June 2018, in consideration for extending the maturity date of the Series G Note,
Mr. Moyer was granted a warrant to purchase 4,630 shares of common stock. In July 2018, in consideration for extending the maturity
date of the Series G Note and agreeing to make the note convertible, Mr. Moyer was granted a warrant to purchase 13,889 shares
of common stock. On July 25, 2018, in connection with the Company’s IPO, $537,336 of principal under convertible promissory
notes, and all accrued interest, was automatically converted into a total of 157,881 shares of common stock and the warrants issued
in connection with the Series G Notes now have an exercise price of $3.00.
On October 7, 2019, Mr. Moyer entered into
a Warrant Amendment Agreement with the Company, as described above. Mr. Moyer exercised Original Warrants for a total of 9,058
shares of Common Stock and the Company received proceeds of $7,246. On November 3, 2019, Mr. Moyer entered into a Settlement
Agreement with the Company, as described above, pursuant to which the Company issued Mr. Moyer 1,294 additional shares of Common
Stock.
Gary Williams
Mr. Williams has served as the Company’s
Chief Accounting Officer since September 2019, as the Company’s VP of Finance since August 2010 and previously served as
the Company’s Chief Financial Officer from August 2010 to September 2019.
On October 7, 2019, Mr. Williams entered
into a Warrant Amendment Agreement with the Company, as described above. Mr. Williams exercised Original Warrants for a total of
3,578 shares of Common Stock and the Company received proceeds of $2,862. On November 3, 2019, Mr. Williams entered in a Settlement
Agreement with the Company, as described above, pursuant to which the Company issued Mr. Williams 512 additional shares of Common
Stock.
Michael Fazio
Mr. Fazio is the chairman of MARCorp Financial
LLC, a private equity firm located in Illinois, of which MARCorp Signal, LLC is a wholly-owned subsidiary. Mr. Fazio previously
served as a member of the Company’s board of directors, which tenure commenced on May 2017 and ended on June 19, 2019. Pursuant
to a settlement agreement that the Company entered into with MARCorp Signal, LLC on July 25, 2018, a warrant to purchase an aggregate
of 487,864 shares of common stock was issued to MARCorp Signal, LLC, and following the Company’s IPO, the exercise price
of the warrants issued in connection with the Series E Convertible Note (defined below) became $3.00.
Jonathan Gazdak
Mr. Gazdak is Managing Director –
Head of Investment Banking for Alexander Capital, L.P., an investment banking firm based in New York. Mr. Gazdak has been a member
of the Board since June 2015. Alexander Capital, L.P. has acted as the lead investment bank in a number of the Company’s
private financings and as an underwriter for the Company’s IPO.
The Company signed an engagement letter
with Alexander Capital, L.P. in August of 2014 (“August 2014 Engagement Letter”), under which Alexander Capital, L.P.
earned a fee on total investments by their clients. Alexander Capital, L.P. earned fees of $321,300 and $0 for the years ended
December 31, 2018 and 2019, respectively, under the August 2014 Engagement Letter. In connection with the August 2014 Engagement
Letter, which was terminated immediately prior to the IPO, Alexander Capital, L.P. has been issued warrants to purchase a total
of 588,391 shares of common stock, exercisable at prices between $3.30 and $5.40 per share and for five years from the date of
issuance.
Pursuant to the underwriting agreement
entered into between the Company and Alexander Capital, L.P. in connection with the IPO (the “Underwriting Agreement”),
Alexander Capital, L.P. was paid a cash fee of $900,000, as well as a non-accountable expense allowance of $120,000 and reimbursements
of $100,000. Pursuant to the Underwriting Agreement, the Company issued Alexander Capital, L.P. a warrant to purchase 72,000 shares
of common stock. Such warrant is exercisable at a per share price of $6.25 and is exercisable at any time during the five-year
period commencing 180 days from the effective date of the IPO, which period shall not exceed five years from such effective date.
On July 25, 2018, in connection with the
Company’s IPO, $21,176 of principal under convertible promissory notes, and all accrued interest, were automatically converted
into a total of 5,647 shares of common stock.
On April 4, 2019, the Company signed another
engagement letter with Alexander Capital, L.P. under which Alexander Capital, L.P. earns a fee on total investments by its clients.
In connection with the issuance of the initial tranche of the Series A Preferred Stock, Alexander Capital, L.P. earned a fee of
$80,000 and the Company agreed to issue it a warrant to purchase 40,816 shares of Common Stock. Such warrant is exercisable at
a per share price of $2.18 and is exercisable at any time during the five-year period commencing 180 days from the effective date
of the issuance of such Common Stock, which period shall not exceed five years from such effective date.
On April 17, 2019, the Company entered
into an underwriting agreement with Alexander Capital, L.P. in connection with an offering by the Company of 4,075,726 shares of
Common Stock, pursuant to which Alexander Capital, L.P. was paid cash fees of $406,554 as well as a non-accountable expense allowance
of $54,207 and reimbursements of $100,000 and pursuant to which the Company agreed to issue a warrant to purchase 122,272 shares
of Common Stock. Such warrant is exercisable at a per share price of $1.66 and is exercisable at any time during the five-year
period commencing 180 days from the effective date of the issuance of such Common Stock, which period shall not exceed five years
from such effective date.
On October 16, 2019, the Company entered
into another underwriting agreement with Alexander Capital, L.P. in connection with an offering by the Company of up to an aggregate
of 2,500,000 shares of Common Stock, pursuant to which Alexander Capital, L.P. was paid cash fees of $131,250 as well as a non-accountable
expense allowance of $17,500 and reimbursements of $43,750 and pursuant to which the Company agreed to issue a warrant to purchase
75,000 shares of common stock. Such warrant is exercisable at a per share price of $0.875 and is exercisable at any time during
the five-year period commencing one year from the effective date of the issuance of such stock, which period shall not exceed five
years from such effective date.
On October 7, 2019, Mr. Gazdak entered
into a Warrant Amendment Agreement with the Company, as described above. Mr. Gazdak exercised Original Warrants for a total of
3,138 shares of Common Stock and the Company received proceeds of $2,510. On November 6, 2019, Mr. Gazdak entered into a Settlement
Agreement with the Company, as described above, pursuant to which the Company issued Mr. Gazdak 449 additional shares of Common
Stock. In connection with the Company’s entry in the Warrant Amendment Agreements, Alexander Capital, L.P. was paid a cash
fee of $51,374.
Helge Kristensen
In February 2016, Inizio Capital an investment company based
in the Cayman Islands, for which Mr. Kristensen serves as a director, loaned the Company $50,000 under a convertible promissory
note (the “Inizio Note”). On July 25, 2018, in connection with the Company’s IPO, the Inizio Note and all accrued
interest, were automatically converted into a total of 27,923 shares of common stock.
In August 2019, we issued a $360,000 purchase
order to Hansong Technology. Pursuant to such purchase order, we will pay $360,000 to Hansong Technology for the purchase of certain
products. Additionally, Hansong Technology purchased $63,523 of our modules pursuant to purchase orders issued in 2019, with
$22,923 received by us in 2019 and the remaining amount expected to be received in 2020.
Michael Howse
The Company is party to an agreement with
Michael Howse, dated April 6, 2018, as amended effective as of December 27, 2018 (the “Howse Agreement”), pursuant
to which Mr. Howse was appointed interim role as chief strategy officer on an “at-will” basis in consideration for
a monthly cash salary as well as (i) a warrant to purchase 110,000 shares of our common stock, exercisable at a per share price
of $2.00 and which vested monthly over a nine-month period and which fully vested on January 6, 2019 and (ii) a warrant to purchase
165,000 shares of our common stock, exercisable at a per share price of $2.00, which shall vest, so long as Mr. Howse continues
to serve as interim chief strategy officer and/or as a member of our board of directors, (x) as to 110,000 shares of common stock
upon the achievement of a significant milestone and (y) as to 65,000 shares of common stock upon the achievement of an additional
significant milestone. The foregoing exercise prices are subject to adjustment as provided in each warrant. Pursuant to the Howse
Agreement, such warrants shall fully vest on the earlier of (1) immediately prior to a Fundamental Transaction, as defined in such
agreement, (2) Mr. Howse’s removal from our board of directors for any reason other than his resignation, his intentional
illegal conduct or gross misconduct, or his conviction for any felony, theft, embezzlement or violent crime. In addition, pursuant
to the Howse Agreement, we also agreed to appoint Mr. Howse to our Board, where he may only be removed for cause, or his termination
or resignation.
Under the Howse Agreement, if the Company
raises capital in one or more financings from certain pre-approved strategic investors, or is acquired by a third-party during
the period that Mr. Howse serves as interim chief strategy officer (or within six months thereafter), he will receive a percentage
cash bonus concurrently with the closing of such transaction based on the amount raised or consideration paid for the Company,
as applicable, (A) which bonus doubles in the event that the Company does not incur an amount equal to 2% or more of the Consideration
(as defined in the Howse Agreement) in fees to any investment bank in connection with such transaction, if such transaction is
a Fundamental Transaction (such fees, “General Expenses”), and (B) 50% of which bonus may be paid as a convertible
note or preferred equity with the same terms as the other participants in such transaction, if such transaction is a financing.
Pursuant to the Howse Agreement, we may terminate Mr. Howse at any time, with or without cause, upon 90 days’ prior written
notice. Such agreement provides for Company-sponsored benefits in accordance with our policies. Pursuant to the Howse Agreement,
effective November 1, 2018, Mr. Howse was placed on our payroll and is now considered a part-time Company employee.
In connection with the Howse Agreement,
the Company is also party to the Deferred Shares Agreement, pursuant to which the Company granted Mr. Howse up to 400,000 Deferred
Shares under the LTIP. Pursuant to such agreement, if a Fundamental Transaction has not occurred within 180 days of the earlier
of the date on which Mr. Howse no longer serves (i) as our interim chief strategy officer or (ii) on our Board, all of the Deferred
Shares shall be forfeited and Mr. Howse will have no further rights to such shares. Pursuant to such agreement, the Deferred Shares
shall vest immediately prior to a Fundamental Transaction, and the number of Deferred Shares that shall vest is based on the Consideration
paid for the Company in such transaction, which number of Deferred Shares that shall vest to double in the event that the Company
does not incur General Expenses.
Brian Herr
Mr. Herr is Chief Investment Officer and
Co-Head of Structured Credit and Asset Finance, for the Medalist Partners platform (f/k/a Candlewood Structured Strategy Funds),
serves as a partner and co-portfolio manager for each of the Medalist Partners Harvest Master Fund, Ltd. and Medalist Partners
Opportunity Master Fund A, LP (collectively, the “Medalist Funds”), and is a former director of the Company who, on
February 6, 2020, notified the Company of his decision to resign from the Board and, effective February 10, 2020, was replaced
by Robert Tobias as a member of the Board. Mr. Herr was granted a seat on the Company’s Board pursuant to a securities purchase
agreement, dated as of November 30, 2017, between the Company and the Medalist Funds, pursuant to which the Company also issued
to the Medalist Funds an aggregate of $2,000,000 Series F Convertible Notes and warrants to purchase an aggregate of 222,222 shares
of our common stock which are exercisable for a price of $3.60 per share. In addition, between April 20, 2018 and June 29, 2018,
the Company issued an aggregate of $2,437,500 of Series G Convertible Notes to the Medalist Funds and warrants to purchase an aggregate
of 180,570 shares of our common stock. In July 2018, in consideration for extending the maturity date of the Series G Convertible
Notes and agreeing to make the note convertible, the Medalist funds were granted a warrant to purchase 541,666 shares of common
stock. On July 25, 2018, in connection with the Company’s IPO, $3,950,000 of principal under convertible promissory notes,
and all accrued interest, were automatically converted into a total of 1,950,348 shares of common stock and the exercise price
of the warrants issued in connection with the Series G Notes became $3.00.
In addition, on October 8, 2019, each of
the Medalist Funds entered into a Warrant Amendment Agreement with the Company, as described above. In connection with and prior
to the Warrant Amendment Agreement that each of the Medalist Funds entered into, the Company also executed Amendment No. 1 to the
Series F Warrants held by each of the Medalist Funds (the “Series F Warrant Amendment”), pursuant to which each such
Series F Warrant was further amended to add, among other things, fundamental transaction and subsequent rights offerings provisions
as well as a 9.99% beneficial ownership limitation (the “Beneficial Ownership Limitation”).
Pursuant to Warrant Amendment Agreements
that were entered into with each of the Medalist Funds, with respect to the Series F Warrants and Series G Warrants, if the exercise
of an Original Warrant at the Reduced Exercise Price would cause each of the Medalist Funds to exceed the Beneficial Ownership
Limitation, in lieu of receiving such number of shares of Common Stock in excess of the Beneficial Ownership Limitation, the Company
will only issue such number of shares of Common Stock to each of the Medalist Funds as would not cause each of the Medalist Funds
to exceed the maximum number of shares of Common Stock permitted under the Beneficial Ownership Limitation, and each of the Medalist
Funds shall be issued, at an exercise price equal to the Reduced Exercise Price less $0.79 per share, pre-funded common stock purchase
warrants covering such number of shares of Common Stock as would otherwise have been in excess of the Beneficial Ownership Limitation
(the “Pre-Funded Warrants”). In connection with such exercises, the Medalist Funds were issued Pre-Funded Warrants
to purchase an aggregate of 414,364 shares of Common Stock. The Company received aggregate gross proceeds of approximately $327,000
in connection with the Pre-Funded Warrants.
On November 4, 2019, the Company entered
into a Settlement Agreement with the Medalist Funds, pursuant to which the Company agreed to pay the Medalist Funds an aggregate
of $47,223 in cash, with such cash meant to compensate the Medalist Funds for the difference between the Amended Exercise Price
and the lower priced shares of Common Stock that were offered to investors in connection with the Registered Direct Offering. In
addition, pursuant to the Settlement Agreement, the Company and the Medalist Funds agreed to extend the date by which the Company
would file a registration statement on Form S-3 to register all of the Resale Shares from November 4, 2019 to November 18, 2019.
Significant Stockholders
In January 2017, Carl E. Berg invested
the aggregate sum of $300,000 in the Company’s Series D Convertible Note financing and was granted a warrant to purchase
39,216 shares of common stock at an exercise price of $5.40.
Effective February 28, 2018, Mr. Berg agreed
to extend the maturity date of such note to June 30, 2018, which was later amended to extend the maturity date to July 25, 2018,
and which accrued an additional 10% interest on the first day of every month, beginning March 1, 2018, so long as such note remained
outstanding. In connection with the maturity date extension, Mr. Berg’s warrant to purchase 39,216 shares of common stock
at an exercise price of $5.40 was doubled, or increased by 39,216. In addition, Mr. Berg agreed to extend the maturity date of
his various other convertibles notes to June 30, 2018, which was later amended to extend the maturity date to July 25, 2018. In
connection with the maturity date extensions, Mr. Berg received warrants to purchase a total of 25,965 shares of common stock at
an exercise price of $5.40.
On July 25, 2018, in connection with the
Company’s IPO, $1,479,412 of principal under convertible promissory notes, and all accrued interest, were automatically converted
into a total of 464,687 shares of common stock.
In July 2017, Lisa Walsh invested an additional
$360,000 in the Company’s Series D Convertible Note financing and received a warrant to purchase 47,059 shares of common
stock at an exercise price of $5.40. Effective February 28, 2018, Ms. Walsh agreed to extend the maturity date of such note to
June 30, 2018, which was later amended to extend the maturity date to July 25, 2018, and which accrued an additional 10% interest
on the first day of every month, beginning March 1, 2018, so long as such note remained outstanding. In connection with the maturity
date extension, the warrants granted to Ms. Walsh to purchase 112,419 shares of common stock at an exercise price of $5.40 was
doubled, or increased by 112,419. In November 2017, Ms. Walsh invested $6,500,000 in the Company’s Series F Convertible Note
financing and was issued warrants to purchase 722,222 shares of common stock at an exercise price of $5.40 per share.
In May 2018, Ms. Walsh participated in
the Company’s Series G Convertible Notes offering and was issued a $312,500 Series G Convertible Note and a warrant to purchase
23,150 shares of common stock. In July 2018, in consideration for extending the maturity date of the Series G Convertible Notes
and agreeing to make the note convertible, Ms. Walsh was granted a warrant to purchase 69,444 shares of common stock. On July 25,
2018, in connection with the Company’s IPO, $8,330,147 of principal under convertible promissory notes, and all accrued interest,
were automatically converted into a total of 2,938,650 shares of common stock and the exercise price of the warrants issued in
connection with the Series F and Series G Notes became $3.60 and $3.00, respectively.
On April 18, 2019, the Company entered
into a Securities Purchase Agreement, dated as of April 18, 2019, with Ms. Walsh (the “Preferred SPA”), pursuant to
which the Company issued 250,000 shares of its Series A 8% Senior Convertible Preferred Stock, par value $0.0001 per share (the
“Series A Preferred Stock”), which shares have a stated value of $4.00, grant holders the same voting rights as holders
of our shares of Common Stock, and are convertible into shares of Common Stock at a price of $4.00 per share, which price cannot
be reduced below $1.50, and which is subject to adjustment under the Certificate of Designations of the Preferences, Rights and
Limitations of the Series A Preferred Stock upon certain subsequent transactions and events described therein, in consideration
for $1,000,000 (the “Initial Tranche”). The Series A Preferred Stock may be issued in tranches of at least $500,000
and in an aggregate of up to $5,000,000. In connection with the Initial Tranche, the Company also issued to Ms. Walsh a warrant
to purchase 255,102 shares of Common Stock, which is immediately exercisable, has a five-year life, has an exercise price of $1.98
and is subject to 4.99/9.99% blockers and to adjustment for stock dividends and splits. Pursuant to the Preferred SPA, holders
of shares of the Series A Preferred Stock (i) have the right to require the Company to register the shares of Series A Preferred
Stock as well as the shares of Common Stock underlying such shares and the warrant issued to Ms. Walsh within 180 days of the Closing
Date (as defined in the Preferred SPA) on which purchasers have committed to purchase an aggregate of amount of Series A Preferred
Stock with an aggregate stated value equal to or exceeding $1,000,000.
In connection with the October 16, 2019
Registered Direct Offering, Ms. Walsh purchased 1,000,000 shares of Common Stock at a price of $0.70 per share. The Company received
proceeds of $700,000 from such purchase.
On October 7, 2019, Ms. Walsh entered into
a Warrant Amendment Agreement with the Company, as described above. Ms. Walsh exercised Original Warrants for a total of 519,827
shares of Common Stock and the Company received proceeds of $415,862. On November 3, 2019, Ms. Walsh entered into a Settlement
Agreement with the Company, as described above, pursuant to which the Company agreed to issue Ms. Walsh 74,261 additional shares
of Common Stock.
Outstanding Equity Grants to Directors
and Executive Officers
We have granted warrants and restricted
shares to our certain of our directors and executive officers. For more information regarding the warrants and stock awards granted
to our directors and named executive officers, see “Executive Compensation—Outstanding Equity Awards as of December
31, 2019.”
Indemnification Agreements
We have entered into indemnification agreements
with each of our directors and executive officers. Such indemnification agreements require us to indemnify our directors and executive
officers to the fullest extent permitted by Delaware law.
Related Person Transaction Policy
Our Audit Committee considers and approves
or disapproves any related person transaction as required by Nasdaq Stock Market regulations. The Company’s written policies
and procedures on related party transactions cover any transaction, arrangement or relationship or series of similar transactions,
arrangements or relationships (including any indebtedness or guarantee of indebtedness) in which: (i) the Company (or any subsidiary)
is a participant; (ii) any related party has or will have a direct or indirect interest; and (iii) the aggregate amount involved
(including any interest payable with respect to indebtedness) will or may be expected to exceed $120,000, except that there is
no $120,000 threshold for members of the Audit Committee. A related party is any: (i) person who is or was (since the beginning
of the two fiscal years preceding the last fiscal year, even if they do not presently serve in that role) an executive officer,
director or nominee for election as a director; (ii) greater than five percent (5%) beneficial owner of the Company’s common
stock; or (iii) immediate family member of any of the foregoing. An immediate family member includes a person’s spouse, parents,
stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law
and any person (other than a tenant or employee) sharing the same household as such person.
In determining whether to approve or ratify
a related party transaction, the Audit Committee, or disinterested directors, as applicable, will take into account, among other
factors it deems appropriate: (i) whether the transaction is on terms no less favorable than terms generally available to an unaffiliated
third party under the same or similar circumstances; (ii) the nature and extent of the related party’s interest in the transaction;
(iii) the material terms of the transactions; (iv) the importance of the transaction both to the Company and to the related party;
(v) in the case of a transaction involving an executive officer or director, whether the transaction would interfere with the performance
of such person’s duties to the Company; and (vi) in the case of a transaction involving a non-employee director or a nominee
for election as a non-employee director (or their immediate family member), whether the transaction would disqualify the director
or nominee from being deemed an “independent” director, as defined by Nasdaq, and whether the transaction would disqualify
the individual from serving on the Audit Committee or the Compensation Committee or other committees of the Board under applicable
Nasdaq and other regulatory requirements.
The Audit Committee only approves those
related party transactions that are on terms comparable to, or more beneficial to us than, those that could be obtained in arm’s
length dealings with an unrelated third party.
Director Independence
See “Corporate Governance—Director
Independence.”
|
Item 14.
|
Principal Accounting Fees and Services.
|
BPM LLP is our independent registered public
accounting firm and performed the audits of our consolidated financial statements for the years ended December 31, 2019 and 2018.
The following table sets forth all fees billed or to be billed for such periods:
|
|
|
2019
|
|
|
2018
|
|
|
Audit fees (1)
|
|
$
|
297,111
|
|
|
$
|
320,552
|
|
|
Audit-related fees (2)
|
|
|
—
|
|
|
|
—
|
|
|
Tax fees (3)
|
|
|
19,000
|
|
|
|
—
|
|
|
All other fees
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
316,111
|
|
|
$
|
320,552
|
|
|
(1)
|
“Audit fees” include fees for professional services rendered in connection with the audit of our annual consolidated financial statements, review of our quarterly condensed consolidated financial statements and advisory services on accounting matters that were addressed during the annual audit and quarterly review. This category also includes fees for services that were incurred in connection with statutory and regulatory filings or engagements, such as consents and review of documents filed with the SEC.
|
|
(2)
|
“Audit-related fees” include fees billed for professional services rendered that are reasonably related to the performance of the audit or review of our consolidated financial statements including subscription for the online library of accounting research literature and are not reported under “Audit Fees”.
|
|
(3)
|
“Tax fees” include fees for tax advice. Tax advice fees encompass a variety of permissible services, including technical tax advice related to federal and state income tax matters, and assistance with tax audits.
|
Policy on Audit Committee Pre-Approval
of Audit and Permissible Non-Audit Services of Independent Auditors
Our audit committee chairman pre-approves
all audit and non-audit services provided by the independent registered public accounting firm prior to the engagement of the independent
registered public accounting firm with respect to such services. The chairman of our audit committee has been delegated the authority
by such committee to pre-approve all services by the independent registered public accounting firm. The chairman of our audit committee
will report all such pre-approvals to the entire audit committee at the next committee meeting.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are
an integral part of these consolidated financial statements.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
1.
|
Business and Viability of Operations
|
Summit Wireless Technologies,
Inc. (f/k/a Summit Semiconductor, Inc.) (also referred to herein as “we”, “us”, “our”, or the
“Company”) was originally formed as a limited liability company in Delaware on July 23, 2010. The Company develops
wireless audio integrated circuits for home entertainment and professional audio markets. On December 31, 2017, the Company converted
from a Delaware limited liability company to a Delaware corporation (the “Conversion”). Prior to the Conversion, the
Company had been taxed as a partnership for federal and state income tax purposes, such that the Company’s taxable income
was reported by its members in their respective tax returns. Following the Conversion, the Company will be taxed as a corporation.
In connection with the Conversion, the Company’s Board of Directors approved a 15-for-1 reverse split of the Company’s
units into stock. All unit and stock data in this report have been retroactively adjusted to reflect the split. In connection with
the Conversion, the Company authorized 20,000,000 shares of preferred stock and 200,000,000 shares of common stock and issued 324,821
shares of common stock to such investors previously holding 4,872,221 common membership interests and 2,762,594 shares of convertible
preferred stock to such investors previously holding 41,438,818 preferred membership interests. Such shares of common stock and
convertible preferred stock were fully paid, nonassessable shares of stock of the Company.
On July 26, 2018, the Company
closed its initial public offering (“IPO”). The Company’s registration statement on Form S-1 (File No. 333-224267)
relating to the IPO was declared effective by the Securities and Exchange Commission (“SEC”) on July 25, 2018. The
shares of common stock began trading on The Nasdaq Capital Market under the ticker symbol “WISA” on July 27, 2018.
Under the offering, the Company issued 2,400,000 shares of common stock at an offering price of $5.00 per share, raising gross
proceeds of $12,000,000. In aggregate, the shares issued in the offering generated approximately $10,273,000 in net proceeds, which
amount is net of $900,000 in underwriters’ discounts and commissions, $220,000 in underwriters’ accountable and non-accountable
expenses and legal, accounting and other estimated offering costs of $607,000. Upon the closing of the IPO, (i) all shares of convertible
preferred stock then outstanding were automatically converted into 2,762,594 shares of common stock and (ii) all convertible notes
payable along with accrued interest were automatically converted in to 9,527,144 shares of common stock, except for $200,000 of
such notes which were repaid in cash immediately following the offering.
On April 18, 2019, we entered
into a Securities Purchase Agreement, dated as of April 18, 2019, with Lisa Walsh (the “Preferred SPA”), pursuant
to which we issued 250,000 shares of our Series A 8% Senior Convertible Preferred Stock, par value $0.0001 per share (the “Series
A Preferred Stock”), which shares have a stated value of $4.00, grant holders the same voting rights as holders of our shares
of common stock, and are convertible into shares of our common stock at price of $4.00 per share, subject to a floor price of $1.50
and to adjustment under our Certificate of Designations of the Preferences, Rights and Limitations of the Series A Preferred Stock,
in consideration for $1,000,000 (the “Initial Tranche”). The Series A Preferred Stock may be issued in tranches of
at least $500,000 and in an aggregate of up to $5 million. In connection with the Initial Tranche, the Company also issued to the
Ms. Walsh a warrant to purchase 255,102 shares of our common stock.
On May 24, 2019, the Company
closed a public offering of the Company’s common stock (“Public Offering”). The Company’s registration
statement on Form S-1 (File No. 333-230952) relating to the Public Offering was declared effective by the SEC on May 21, 2019.
In connection with the Public Offering, the Company issued an aggregate of 4,075,726 shares of common stock at a public offering
price of $1.33 per share for gross proceeds of approximately $5,420,000. The net proceeds to the Company, after deducting underwriting
discounts and commissions and other offering expenses, were approximately $4,664,000.
On October 16, 2019, the Company
closed a registered direct offering with certain institutional investors for 2,500,000 registered common shares (the “Shares”)
priced at $0.70 per share (the “Registered Direct Offering”). The Registered Direct Offering was registered and the
Shares were issued pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-233433) (the
“Registration Statement”), which was initially filed with the SEC on August 23, 2019, and was declared effective on
September 6, 2019, and the related base prospectus included in the Registration Statement, as supplemented by the preliminary
prospectus supplement dated October 16, 2019 (the “Prospectus Supplement”). In connection with the Registered Direct
Offering, the Company issued its shares of common stock for gross proceeds of approximately $1,750,000. The Company intends to
use the net proceeds of approximately $1,485,000 from the offering for working capital purposes.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
1.
|
Business and Viability of Operations, continued
|
Nasdaq Notification
On October 16, 2019, the Company
received a written notification (the “Notice”) from the Nasdaq Stock Market LLC (“Nasdaq”) indicating that
the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2), as the closing bid price of the Company’s common stock
was below $1.00 per share for the previous thirty (30) consecutive business days. Pursuant to Nasdaq Listing Rule 5810(c)(3)(A),
the Company has been granted a 180 calendar day compliance period, or until April 13, 2020, to regain compliance with Nasdaq’s
minimum bid price requirements. During the compliance period, the Company’s shares of common stock will continue to be listed
and traded on Nasdaq. To regain compliance, the closing bid of the common stock must meet or exceed $1.00 per share for at least
ten (10) consecutive business days during such 180 calendar day grace period. If the Company is not in compliance by April 13,
2020, the Company may be afforded a second 180 calendar day grace period. To qualify, the Company would be required to meet the
continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq, with
the exception of the minimum bid price requirements. In addition, the Company would be required to notify Nasdaq of its intent
to cure such minimum bid price deficiency by effecting a reverse stock split, if necessary. If the Company does not regain compliance
within the allotted compliance period(s), including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that
the Company’s shares of common stock will be subject to delisting. The Company intends to monitor the closing bid price for
its common stock between now and April 13, 2020, and will consider available options to resolve the Company’s noncompliance
with Nasdaq’s minimum bid price requirement, as may be necessary. There can be no assurance that the Company will be able
to regain compliance with such minimum bid price requirement or will otherwise be in compliance with other Nasdaq listing criteria.
On March 23, 2020, the Company received an extension of time to regain compliance.
On November 18, 2019, we were
officially notified by Nasdaq that we did not comply with Nasdaq Listing Rule 5550(b), which requires a minimum $2,500,000 stockholders’
equity (the “Stockholders’ Equity Requirement”), among other continued listing criteria. We were required to
submit to Nasdaq a plan to regain compliance with the Stockholders’ Equity Requirement for consideration by the Nasdaq Listing
Qualifications staff (“Nasdaq Staff”) by no later than January 2, 2020. On January 2, 2020, we submitted a plan to
regain compliance (the “Compliance Plan”) to the Nasdaq Staff. As of March 20, 2020, the Compliance Plan remains under
review by the Nasdaq Staff. If we fail to achieve compliance with the Stockholders’ Equity Requirement, we may be delisted
from Nasdaq.
Liquidity and management
plans
The consolidated financial statements
of the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities
in the normal course of business. The Company has incurred net operating losses each year since inception. As of December 31, 2019,
the Company had cash and cash equivalents of $0.3 million, an accumulated deficit of approximately $187.7 million and has not generated
positive cash flows from operations. The Company expects operating losses to continue in the foreseeable future because of additional
costs and expenses related to research and development activities, plans to expand its product portfolio, and increase its market
share. The Company’s ability to transition to attaining profitable operations is dependent upon achieving a level of revenues
adequate to support its cost structure. Based on current operating levels, the Company will need to raise additional funds by selling
additional equity or incurring debt. To date, the Company has not generated significant revenues and has funded its operations
primarily through sales of its common stock in public markets, sales of common and preferred units prior to its IPO and proceeds
from convertible notes. Additionally, future capital requirements will depend on many factors, including the rate of revenue growth,
the selling price of the Company’s products, the expansion of sales and marketing activities, the timing and extent of spending
on research and development efforts and the continuing market acceptance of the Company’s products. These factors raise substantial
doubt about the Company’s ability to continue as a going concern.
Management of the Company intends
to raise additional funds through the issuance of equity securities or debt. There can be no assurance that, in the event the
Company requires additional financing, such financing will be available at terms acceptable to the Company, if at all. Failure
to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending could have a material
adverse effect on the Company’s ability to achieve its intended business objectives. As a result, the substantial doubt
about the Company’s ability to continue as a going concern has not been alleviated. The accompanying consolidated financial
statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) and include all adjustments necessary for the fair presentation of the Company’s financial position,
results of operations and cash flows for the periods presented. The consolidated financial statements reflect the accounts of Summit
Wireless Technologies, Inc. and its wholly-owned subsidiaries, Summit Semiconductor K.K., a Japanese corporation, and WiSA, LLC,
a Delaware limited liability company.
Deferred Offering Costs
Deferred offering costs, consisting
of legal, accounting and filing fees relating to public offerings, are capitalized. The deferred offering costs will be offset
against public offering proceeds upon the effectiveness of an offering. In the event that an offering is terminated, deferred offering
costs will be expensed. As of December 31, 2019 and 2018, the Company had capitalized $12,000 and $41,000, respectively, of deferred
offering costs in prepaid expenses and other current assets on the consolidated balance sheet.
Use of Estimates
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
and Other Risks and Uncertainties
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.
Cash and cash equivalents are deposited in demand and money market accounts at one financial institution. At times, such deposits
may be in excess of insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.
The Company’s accounts receivable are derived from revenue
earned from customers located throughout the world. The Company performs credit evaluations of its customers’ financial condition
and sometimes requires full or partial payment in advance of shipping. As of December 31, 2019, the Company had three customers
accounting for 37%, 28% and 20% of accounts receivable. As of December 31, 2018, the Company had two customers accounting for 47%
and 42% of accounts receivable. The Company had two customers accounting for 57% and 24% of its net revenue for the year ended
December 31, 2019. The Company had two customers accounting for 55% and 37% of its net revenue for the year ended December 31,
2018.
The Company’s future results
of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results
and cause actual results to vary materially from expectations include, but are not limited to, rapid technological change, continued
acceptance of the Company’s products, competition from substitute products and larger companies, protection of proprietary
technology, strategic relationships and dependence on key individuals.
The Company relies on sole-source
suppliers to manufacture some of the components used in its product. The Company’s manufacturers and suppliers may encounter
problems during manufacturing due to a variety of reasons, any of which could delay or impede their ability to meet demand. The
Company is heavily dependent on a single contractor in China for assembly and testing of its products.
Cash and Cash Equivalents
The Company considers all highly
liquid investments purchased with original maturities of three months or less to be cash equivalents.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
2.
|
Summary of Significant Accounting Policies, continued
|
Accounts Receivable and Allowance
for Doubtful Accounts
Accounts receivable are recorded
at the invoice amount and are generally not interest bearing. The Company reviews its trade receivables aging to identify specific
customers with known disputes or collection issues. The Company exercises judgment when determining the adequacy of these reserves
as it evaluates historical bad debt trends and changes to customers’ financial conditions. Uncollectible receivables are
recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received.
As of December 31, 2019 and 2018, there was no allowance for doubtful accounts.
Fair Value of Financial Instruments
Carrying amounts of certain
of the Company’s financial instruments and investments, including cash and cash equivalents, accounts receivable, prepaid
expenses and other current assets, accounts payable and accrued liabilities approximate fair value due to their relatively short
maturities.
Inventories
Inventories, principally purchased
components, are stated at the lower of cost or net realizable value. Cost is determined using an average cost, which approximates
actual cost on a first-in, first-out basis. Inventory in excess of salable amounts and inventory which is considered obsolete based
upon changes in existing technology is written off. At the point of loss recognition, a new lower cost basis for that inventory
is established and subsequent changes in facts and circumstances do not result in the restoration or increase in the new cost basis.
Property and Equipment, Net
Property and equipment are stated
at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line
method over their estimated useful lives of two to five years. Leasehold improvements are amortized on a straight-line basis over
the shorter of the useful life or term of the lease. Upon retirement or sale, the cost and related accumulated depreciation are
removed from the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to
operations as incurred.
Intangible Assets
Intangible assets as of December
31, 2019 and 2018 consisted of trademarks and are presented at cost, net of accumulated amortization. The intangible assets are
amortized using the straight-line method over their estimated useful lives of three years, which approximates the economic benefit.
If our underlying assumptions regarding the estimated useful life of an intangible asset change, then the amortization period,
amortization expense and the carrying value for such asset would be adjusted accordingly. During fiscal 2019 and 2018, no changes
were made to the estimated useful life of intangible assets.
Impairment of Long-Lived
Assets
The Company evaluates its long-lived
assets for indicators of possible impairment by comparison of the carrying amounts to future net undiscounted cash flows expected
to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s
fair value or discounted estimates of future cash flows. The Company has not identified any such impairment losses to date.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
2.
|
Summary of Significant Accounting Policies, continued
|
Convertible Financial Instruments
The Company bifurcates conversion
options and warrants from their host instruments and accounts for them as freestanding derivative financial instruments if certain
criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument
that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable
generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument
with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule
is when the host instrument is deemed to be conventional, as that term is described under applicable U.S. GAAP.
When the Company has determined
that the embedded conversion options and warrants should be bifurcated from their host instruments, discounts are recorded for
the intrinsic value of conversion options embedded in the instruments based upon the differences between the fair value of the
underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the instrument.
Debt discounts under these arrangements
are amortized to interest expense using the interest method over the earlier of the term of the related debt or their earliest
date of redemption.
Warrants for Common Shares and Derivative Financial
Instruments
Warrants for common shares and
other derivative financial instruments are classified as equity if the contracts (1) require physical settlement or net-share settlement
or (2) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement).
Contracts which (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and
if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement in
shares (physical settlement or net-share settlement), or (3) that contain reset provisions that do not qualify for the scope exception
are classified as equity or liabilities. The Company assesses classification of its warrants for common shares and other derivatives
at each reporting date to determine whether a change in classification between equity and liabilities is required.
The issuance of the convertible
notes payable generated a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued
with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option
has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized
the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon
conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per
share on the commitment date, to common shares, resulting in a discount on the convertible debt.
Product Warranty
The Company’s products
are generally subject to a one year warranty, which provides for the repair, rework, or replacement of products (at the Company’s
option) that fail to perform within the stated specification. The Company has assessed its historical claims and, to date, product
warranty claims have not been significant. The Company will continue to assess if there should be a warranty accrual going forward.
Revenue Recognition
Revenue is recognized when
control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect
to be entitled to in exchange for those goods or services. Sales of products with alternative use account for the majority of
our revenue and are recognized at a point in time.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
2.
|
Summary of Significant Accounting Policies, continued
|
Taxes assessed by a governmental
authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from
a customer and deposited with the relevant government authority, are excluded from revenue. Our revenue arrangements do not contain
significant financing components.
Sales to certain distributors
are made under arrangements which provide the distributors with price adjustments, price protection, stock rotation and other allowances
under certain circumstances. The Company does not provide its customers with a contractual right of return. However, the Company
accepts limited returns on a case-by-case basis. These returns, adjustments and other allowances are accounted for as variable
consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized.
We believe that there will not be significant changes to our estimates of variable consideration.
If a customer pays consideration,
or the Company has a right to an amount of consideration that is unconditional before we transfer a good or service to the customer,
those amounts are classified as deferred income/ advances received from customers which are included in other current liabilities
when the payment is made or it is due, whichever is earlier.
Contract Balances
We receive payments from customers
based on a billing schedule as established in our contracts. Contract assets are recorded when we have a conditional right to consideration
for our completed performance under the contracts. Accounts receivables are recorded when the right to this consideration becomes
unconditional. We do not have any material contract assets as of December 31, 2019.
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Contract liabilities
|
|
$
|
(451
|
)
|
|
$
|
(186
|
)
|
|
During the three and twelve months ended December 31, 2019, the Company recognized $0 and $171,000, respectively, of revenue that was included in the contract balances as of December 31, 2018.
|
|
|
|
|
|
|
|
|
Disaggregated Revenue
In general, revenue disaggregated by geography (See Note 12) is aligned according to the nature and
economic characteristics of our business and provides meaningful disaggregation of our results of operations. Since we operate
in one segment, all financial segment and product line information can be found in the consolidated financial statements.
Practical Expedients and Exemptions
As part of our adoption of ASC
606, we elected to use the following practical expedients: (i) not to adjust the promised amount of consideration for the effects
of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised
product or service to a customer and when the customer pays for that product or service will be one year or less; (ii) to expense
costs as incurred for costs to obtain a contract when the amortization period would have been one year or less; (iii) not to assess
whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
In addition, we do not disclose
the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
2.
|
Summary of Significant Accounting Policies, continued
|
Research and Development
Research and development costs
are charged to operations as incurred.
Advertising Costs
Advertising costs are charged
to sales and marketing expenses as incurred. Advertising costs for the years ended December 31, 2019 and 2018 are $30,000 and zero,
respectively.
Comprehensive Loss
Comprehensive loss includes
all changes within stockholders’ equity (deficit) that are not the result of transactions with stockholders. Accumulated
other comprehensive loss includes the foreign currency translation adjustments arising from the consolidation of the Company’s
foreign subsidiary.
Foreign Currency
The financial position and results
of operations of the Company’s foreign operations are measured using currencies other than the U.S. dollar as their functional
currencies. Accordingly, for these operations all assets and liabilities are translated into U.S. dollars at the current exchange
rates as of the respective balance sheet date. Expense items are translated using the weighted average exchange rates prevailing
during the period. Cumulative gains and losses from the translation of these operations’ financial statements are reported
as a separate component of stockholders’ equity (deficit), while foreign currency transaction gains or losses, resulting
from remeasuring local currency to the U.S. dollar are recorded in the consolidated statements of operations in other income (expense),
net and were not material for the years ended December 31, 2019 and 2018.
Net Loss per Common Share
Basic and diluted net loss
per common share is presented in conformity with the two-class method required for participating securities. The Company considers
all series of convertible preferred stock to be participating securities. Under the two-class method, the net loss attributable
to common stockholders is not allocated to the convertible preferred stock as the holders of the convertible preferred stock do
not have a contractual obligation to share in the losses of the Company. Under the two-class method, net income would be attributed
to common stockholders and participating securities based on their participation rights.
Basic net loss per common
share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common
shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per common
share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common
shares and potentially dilutive common share equivalents outstanding for the period determined using the treasury-stock and
if-converted methods. For purposes of the diluted net loss per common share calculation, convertible preferred stock,
warrants for common stock and restricted stock units are considered to be potentially dilutive securities.
For the year ended
December 31, 2019, warrants to purchase 7,937,094 shares of common stock, 942,906 shares of restricted stock and 250,000
shares of convertible preferred stock have been excluded from the calculation of net loss per common share because the
inclusion would be antidilutive. For the years ended December 31, 2018, warrants to purchase 8,641,813 shares of common
stock, and 964,505 shares of restricted stock have been excluded from the calculation of net loss per common share because
the inclusion would be antidilutive.
Income Taxes
Prior to December 31, 2017,
the Company was taxed as a partnership for federal and state income tax purposes. As such, partners were taxed on their share of
earnings and deductions of the Company, regardless of the amount of distributions received. Generally, the Company was not subject
to federal income tax but was subject to California minimum tax. Effective December 31, 2017, the Company converted from a Limited
Liability Company to a C Corporation and is subject to federal and state taxes at the applicable C Corporation rates which were
34.0% and 7.72%, respectively, at that date.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
2.
|
Summary of Significant Accounting Policies, continued
|
Deferred taxes are provided
on the liability method whereby deferred tax assets are recognized for deductible temporary differences, and operating loss and
tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is “more-likely-than-not” that some portion or all of
the deferred tax assets will not be realized. The Company has recognized valuation allowances against its deferred tax assets as
of December 31, 2019 and 2018. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
On December 22, 2017, H.R. 1,
the Tax Cuts and Jobs Act, was signed into law reducing the federal C Corporation rate to 21.0% effective January 1, 2018. Deferred
tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets
and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
The Company uses a comprehensive
model for recognizing, measuring, presenting, and disclosing in the consolidated financial statements tax positions taken or expected
to be taken on a tax return. A tax position is recognized as a benefit only if it is “more-likely-than-not” that the
tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is
the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting
the “more-likely-than-not” test, no tax benefit is recorded. The Company recognizes interest accrued and penalties
related to unrecognized tax benefits in tax expense. During the years ended December 31, 2019 and 2018, the Company recognized
no interest and penalties.
Recently Issued and Adopted Accounting Pronouncements
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) on revenue from contracts with customers,
ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”). This standard update outlines a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers. The guidance is effective for annual
reporting periods including interim reporting reports beginning after December 15, 2017. Collectively, we refer to Topic 606, its
related amendments and Subtopic 340-40 as the “new standard”.
On January 1, 2018, we adopted
the new standard using the modified retrospective method applied to all contracts that are not completed contracts at the date
of initial application (i.e., January 1, 2018). Results for reporting periods after January 1, 2018 are presented under the new
standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting. There
was no impact on the opening accumulated deficit as of January 1, 2018 due to the adoption of the new standard.
In June 2018, the Financial
Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2018-07, “Compensation—Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”. ASU 2018-07 applies to all entities
that enter into share-based payment transactions for acquiring goods and services from nonemployees. The amendments in ASU 2018-07
expand the scope of Topic 718, Compensation - Stock Compensation, to include share-based payments transactions to nonemployees.
Changes to the accounting for nonemployee awards as a result of ASU 2018-07 include: 1) equity-classified nonemployee share-based
payment awards are measured at the grant date, instead of the previous requirement to remeasure the awards through the performance
completion date, 2) for awards with performance conditions, compensation cost is recognized when the achievement of the performance
condition is probable, rather than upon achievement, and 3) the current requirement to reassess the classification (equity or liability)
for nonemployee awards upon vesting is eliminated. ASU 2018-07 clarifies that Topic 718 does not apply to financing transactions
or awards granted to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The
amendments in ASU 2018-07 are effective for public business entities for fiscal years beginning after December 15, 2018. The Company
adopted this guidance as of January 1, 2019 and the adoption did not have a significant impact on the condensed consolidated financial
statements.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
2.
|
Summary of Significant Accounting Policies, continued
|
Recently Issued and Not Yet
Adopted Accounting Pronouncements
In February 2016, the FASB issued
ASU 2016-02, “Leases”. The objective of the update is to increase transparency and comparability among organizations
by recognizing lease assets and liabilities on the balance sheet for leases with a lease term of more than 12 months. In addition,
the update will require additional disclosures regarding key information about leasing arrangements. Under existing guidance, operating
leases are not recorded as lease assets and lease liabilities on the balance sheet. In October 2019, the FASB decided to defer
the mandatory effective date of ASU 2016-02 to fiscal years beginning after December 15, 2020 for certain entities, including private
companies. As an emerging growth company, the Company is allowed to adopt accounting pronouncements at the same time as non-public
business entities. As a result, we will adopt the update for our fiscal year beginning after December 15, 2020. The Company does
not expect the adoption of this standard to significantly impact the consolidated financial statements.
In August 2018, the FASB issued
ASU 2018-13, “Fair Value Measurement (Topic 820)”. The FASB developed the amendments to Accounting Standards
Codification 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in
the notes to financial statements by focusing on requirements that clearly communicate the most important information to users
of the financial statements. This update eliminates certain disclosure requirements for fair value measurements for
all entities, requires public entities to disclose certain new information and modifies some of the existing disclosure requirements. The
Company will adopt this standard as of January 1, 2020 and does not expect the adoption of this standard to significantly impact
the consolidated financial statements.
We have reviewed other recent
accounting pronouncements and concluded they are either not applicable to the business, or no material effect is expected on the
condensed consolidated financial statements as a result of future adoption.
|
3.
|
Balance Sheet Components
|
Inventories (in thousands):
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Work in progress
|
|
$
|
301
|
|
|
$
|
191
|
|
|
Finished goods
|
|
|
2,365
|
|
|
|
1,192
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
2,666
|
|
|
$
|
1,383
|
|
Property and equipment, net (in thousands):
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Machinery and equipment
|
|
$
|
771
|
|
|
$
|
746
|
|
|
Tooling
|
|
|
11
|
|
|
|
7
|
|
|
Computer software
|
|
|
89
|
|
|
|
89
|
|
|
Furniture and fixtures
|
|
|
15
|
|
|
|
15
|
|
|
Leasehold improvements
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
897
|
|
|
|
868
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(813
|
)
|
|
|
(758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
84
|
|
|
$
|
110
|
|
Depreciation and amortization
expense for the years ended December 31, 2019 and 2018 was $58,000 and $42,000, respectively.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
3.
|
Balance Sheet Components, continued
|
Accrued liabilities (in thousands):
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Accrued vacation
|
|
$
|
263
|
|
|
$
|
238
|
|
|
Accrued compensation
|
|
|
38
|
|
|
|
17
|
|
|
Accrued bonus
|
|
|
-
|
|
|
|
158
|
|
|
Customer advances
|
|
|
451
|
|
|
|
186
|
|
|
Accrued audit fees
|
|
|
140
|
|
|
|
126
|
|
|
Accrued other
|
|
|
254
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
1,146
|
|
|
$
|
846
|
|
In connection with the acquisition
of the Focus Enhancements, Inc. assets in July 2010, the Company assumed an asset purchase agreement with Hallo Development Co,
LLC (“Hallo”). In October 2010, the Hallo agreement was amended to require the Company to pay royalties to Hallo at
specified rates based on annual net sales derived from the Company’s purchased technology over a period of three years with
a minimum royalty of $900,000. Initial shipments commenced in 2011 and after three years, cumulative royalties due to Hallo were
$900,000. In April 2014, the Hallo agreement was amended, converting the outstanding balance of $358,000, to an unsecured promissory
note (“Hallo Note”), bearing interest at 18.0% per year with an initial maturity date of December 31, 2015, that was
later extended. In December 2016, following a principal reduction payment of $38,000, the Hallo Note was amended as follows: (i)
the maturity date was changed to “five days following an IPO”, (ii) following a debt or equity financing in excess
of $4,000,000, the Company would make a principal reduction payment of $13,000, (iii) on the maturity date, the Company would make
a principal reduction payment of $95,000, and (iv) the remaining unpaid principal and accrued interest, after the payments described
in (ii) and (iii) above, would automatically convert to shares in connection with an initial public offering, at a conversion price
equal to the average of the highest and the lowest price of the related stock that the Company sold on the maturity date. As a
result of such amendment, the Hallo Note was reclassified to convertible notes payable as of December 31, 2016. As of February
28, 2018, the Hallo Note holders agreed to amend the conversion price language in their respective convertible notes to be the
lower of (i) $4.50 or (ii) the initial price of the Company’s common stock sold pursuant to an IPO and to extend the maturity
date to June 30, 2018. The Company recognized interest expense of $24,000 for the year ended December 31, 2018. The Company made
principal reduction payments under the Hallo Note of $100,000 for the year ended December 31, 2018. On July 25, 2018, the outstanding
convertible note automatically converted into 56,723 shares of common stock in connection with the Company’s IPO.
On January 5, 2015, we entered
into a Loan and Securities Agreement and a separate Secured Promissory Note with the principal face value of $500,000 (the “January
2015 Note”). The personal property, fixtures and intellectual property and products of the Company served as the collateral
for the borrowing. The initial interest rate was 15.0% per year with an initial maturity date of July 5, 2015, that was later extended.
In February 2016, following a principal reduction payment of $225,000, the maturity date was extended to September 1, 2017, and
the interest rate was adjusted to 10.0% per year. In December 2016, following a principal reduction payment of $23,000, the January
2015 Note was amended as follows: (i) the maturity date was changed to “five days following an IPO”, (ii) following
a debt or equity financing in excess of $4,000,000 prior to an IPO, the Company would make a principal reduction payment of $13,000,
(iii) on the maturity date, the Company would make a principal reduction payment of $95,000, and (iv) the remaining unpaid principal
and accrued interest, after the payments described in (ii) and (iii) above, would automatically convert to shares in connection
with the IPO, at a conversion price equal to the average of the highest and the lowest price of the related stock that the Company
sold on the maturity date. As a result of such amendment, the January 2015 Note was reclassified to convertible notes payable as
of December 31, 2016. As of February 28, 2018, the January 2015 Note holders agreed to amend the conversion price language in their
respective convertible notes to be the lower of (i) $4.50 or (ii) the initial price of the Company’s common stock sold pursuant
to an IPO and to extend the maturity date to June 30, 2018. The Company recognized interest expense of $11,000 for the year ended
December 31, 2018. The Company made principal reduction payments under the January 2015 Note of $100,000 for the year ended December
31, 2018. On July 25, 2018, the outstanding convertible note automatically converted into 39,653 shares of common stock in connection
with the Company’s IPO.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
4.
|
Promissory Notes, continued
|
On April 4, 2015, we entered
into a Loan and Securities Agreement and a separate Secured Promissory Note with the principal face value of $450,000 (the “April
2015 Note”). The proceeds from April 2015 Note were used to repay the $450,000 loan outstanding with a bank. The personal
property, fixtures and intellectual property and products of the Company served as the collateral for the borrowing. Interest accrued
at a rate 5.0% per year during the first twelve months and increased to 10.0% per year through maturity. All principal and related
accrued interest outstanding were due and payable at the maturity date, which was originally January 31, 2017. In November 2016,
the April 2015 Note was amended to (i) change the maturity date to September 1, 2017 and (ii) provide that if the Company completes
an underwritten public offering of its common shares or consummates a change of control, then the aggregate outstanding principal
and related accrued interest would automatically convert into the number of common shares equal to the quotient obtained by dividing
the aggregate principal and accrued interest by the conversion price. The conversion price was the lesser of $4.50 or the highest
price per common share sold in the IPO or paid by a buyer upon a change in control multiplied by 75%. As a result of such amendment,
the April 2015 Note was reclassified to convertible notes payable. As of February 28, 2018, the April 2015 Note holder agreed to
extend the maturity date to June 30, 2018. The Company recognized interest expense of $26,000 for the year ended December 31, 2018.
On July 25, 2018, the outstanding
convertible note automatically converted into 155,373 shares of common stock in connection with the Company’s IPO.
On September 18, 2015, we entered
into a Loan and Securities Agreement and a separate Secured Promissory Note with the principal face value of $200,000 (the “September
2015 Note”). The personal property, fixtures and intellectual property and products of the Company served as the collateral
for the borrowing. Interest accrued at a rate 10.0% per year through maturity. All principal and related accrued interest outstanding
were due and payable at the maturity date, which was originally January 31, 2017. In November 2016, the September 2015 Note was
amended to (i) change the maturity date to September 1, 2017 and (ii) provide that if the Company completes an underwritten public
offering of its common shares or consummates a change of control, then the aggregate outstanding principal and related accrued
interest would automatically convert in to the number of common shares equal to the quotient obtained by dividing the aggregate
principal and accrued interest by the conversion price. The conversion price was the lesser of $4.50 or the highest price per common
share sold in the IPO or paid by a buyer upon a change in control multiplied by 75%. As a result of such amendment, the September
2015 Note was reclassified to convertible notes payable. As of February 28, 2018, the September 2015 Note holder agreed to extend
the maturity date to June 30, 2018. The Company recognized interest expense of $11,000 for the year ended December 31, 2018. On
July 25, 2018, the outstanding convertible note automatically converted into 68,544 shares of common stock in connection with the
Company’s IPO.
In connection with the sale
of product on December 22, 2015, we entered into a Loan and Securities Agreement and a separate Secured Promissory Note with the
principal face value of $353,000 (the “December 2015 Note”). The principal amount represented as advance on the product
sale. The personal property, fixtures and intellectual property and products of the Company served as the collateral for the borrowing
(see Note 5 – Series E Convertible Note Payable for subsequent release of collateral). Interest accrued at a rate 12.0% per
year through maturity. All principal and related accrued interest outstanding were due and payable at the maturity date, which
was originally September 22, 2016, that was later extended. In December 2016, the December 2015 Note was amended to (i) change
the maturity date to September 1, 2017 and (ii) provide that if the Company completes an underwritten public offering of its common
shares or consummates a change of control, then the aggregate outstanding principal and related accrued interest would automatically
convert in to the number of common shares equal to the quotient obtained by dividing the aggregate principal and accrued interest
by the conversion price. The conversion price was the lesser of $4.50 or the highest price per common share sold in an initial
public offering or paid by a buyer upon a change in control multiplied by 75%. As a result of such amendment, the December 2015
Note was reclassified to convertible notes payable. As of December 31, 2017, the December 2015 Note had a zero principal balance
as the Company had fulfilled its obligation to ship product to the lender. On July 25, 2018, the outstanding accrued interest on
the December 2015 Note automatically converted into 11,295 shares of common stock in connection with the Company’s IPO.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
4.
|
Promissory Notes, continued
|
During February 2016, we entered
into five different Loan and Securities Agreements and separate Secured Promissory Notes with a total principal face value of $250,000
(the “Five February 2016 Notes”). The personal property, fixtures and intellectual property and products of the Company
served as the collateral for the borrowings. Interest accrued at a rate 10.0% per year through maturity. All principal and related
accrued interest outstanding were due and payable at the maturity date, which was originally February 1, 2017, that was later extended.
In December 2016, two of the Five February 2016 Notes were terminated and extinguished and the lenders agreed that the $100,000
aggregate principal balance of the loans and the $9,000 aggregate accrued interest would be used to fund their participation in
the Series D convertible notes. In May 2017, the three remaining holders of the Five February 2016 Notes agreed to amend their
notes to include a provision that if the Company completes an underwritten public offering of its common shares or consummates
a change of control, then the aggregate outstanding principal and related accrued interest would automatically convert in to the
number of common shares equal to the quotient obtained by dividing the aggregate principal and accrued interest by the conversion
price. The conversion price was the lesser of $4.50 or the highest price per common share sold in the IPO or paid by a buyer upon
a change in control multiplied by 75%. As a result of such amendment, the three remaining Five February 2016 Notes were reclassified
to convertible notes payable. Effective February 28, 2018, the February 2016 Note holders agreed to extend the maturity date to
June 30, 2018. The Company recognized interest expense of $8,000 for the year ended December 31, 2018. On July 25, 2018, the outstanding
convertible notes automatically converted into 49,815 shares of common stock in connection with the Company’s IPO.
In connection with the Five
February 2016 Notes, the Company issued warrants to purchase common shares of 111,112 (see Note 6 – Fair Value Measurements
for fair value computation). The sum of the fair value of the warrants was recorded as a debt discount to be amortized over the
respective terms of the various notes. The debt discounts are amortized to interest expense using the effective interest method.
During the years ended December 31, 2019 and 2018, the Company recognized no interest expense from the amortization of the debt
discount.
|
5.
|
Convertible Notes Payable
|
As of July 25, 2018, the convertible
notes payable and related accrued interest were converted in to 9,527,144 shares of common stock in connection with the Company’s
IPO. No convertible notes payable were outstanding as of December 31, 2018.
On February 12, 2016, we entered
into a Loan and Securities Agreement and a separate Secured Promissory Note with the principal face value of $300,000 (the “February
2016 Note”). The personal property, fixtures and intellectual property and products of the Company served as the collateral
for the borrowing (see Note 5 – Series E Convertible Note Payable for subsequent release of collateral). Interest accrued
at a rate 10.0% per year through maturity. All principal and related accrued interest outstanding were due and payable at the maturity
date, which was originally January 31, 2017. In November 2016, the February 2016 Note was amended to (i) change the maturity date
to September 1, 2017 and (ii) provide that if the Company completes an underwritten public offering of its common shares or consummates
a change of control, then the aggregate outstanding principal and related accrued interest would automatically convert in to the
number of common shares equal to the quotient obtained by dividing the aggregate principal and accrued interest by the conversion
price. The conversion price was the lesser of $4.50 or the highest price per common share sold in the IPO or paid by a buyer upon
a change in control multiplied by 75%. As a result of such amendment, the February 2016 Note was reclassified to convertible notes
payable. As of February 28, 2018, the February 2016 Note holders agreed to extend the maturity date to June 30, 2018. The Company
recognized interest expense of $17,000 for the year ended December 31, 2018. On July 25, 2018, the outstanding convertible note
automatically converted into 99,594 shares of common stock in connection with the Company’s IPO.
In connection with the February
2016 Note, the Company issued warrants to purchase 33,334 common shares (see Note 6 – Fair Value Measurements for fair value
computation). The sum of the fair value of the warrants for the February 2016 Note was recorded as a debt discount and is being
amortized to interest expense over the term of the note using the effective interest method. During the years ended December 31,
2019 and 2018, the Company recognized no interest expense from the amortization of the debt discount.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
5.
|
Convertible Notes Payable, continued
|
On May 11, 2016, a significant
shareholder provided a $300,000 unsecured advance to the Company (the “May 2016 Advance”) in contemplation of participating
in the Preferred Unit Purchase Agreement dated April 12, 2016, which required the significant shareholder to invest a minimum of
$500,000. In July 2016, the significant shareholder invested an additional $201,000 and requested the May 2016 Advance be cancelled
and its principal be aggregated with the $201,000 to purchase a total of 111,307 preferred shares at $4.50 per share.
Series C Convertible Notes
Payable
During February 2016 through
October 2016, the Company received total proceeds of $2,880,000 from the issuance of original issue discount convertible notes
(“Series C Convertible Notes”) to investors. The principal balance, plus all accrued and unpaid interest, was due February
28, 2018, as amended, or upon a change of control or an initial public offering by the Company. On February 28, 2018, in connection
with the extension of the maturity date to August 28, 2018, the Company issued 327 shares of common stock to the holder of the
convertible notes. The conversion price in effect upon an initial public offering was the lesser of $9.00 or the price per common
share in the pre-money valuation immediately prior to the initial public offering multiplied by 80%. The conversion price at any
other conversion event was $9.00. Issuance costs to obtain the convertible notes were recorded as a debt discount in the amount
of $209,000. The Company recognized no interest expense for the year ended December 31, 2018. On July 25, 2018, the outstanding
convertible note automatically converted into 7,353 shares of common stock in connection with the Company’s IPO.
In connection with the Series
C Convertible Notes, the Company issued warrants to investors and investment bankers to purchase common shares of 188,236 and 26,354,
respectively (see Note 6 – Fair Value Measurements for fair value computation). The sum of the fair value of the warrants,
the BCF and issuance costs for the Series C Convertible Notes were recorded as debt discounts to be amortized to interest expense
over the respective term using the effective interest method. During the year ended December 31, 2018, the Company recognized no
interest expense from the amortization of the debt discounts. Between November and December 2016, all of the Series C Convertible
Notes, except for $25,000, were extinguished and converted to Series D Convertible Notes.
Series D Convertible Notes
Payable
On various dates in 2016 and
2017, the Company received total proceeds of $4,717,000 from the issuance of original issue discount convertible notes (“Series
D Convertible Notes”) to investors. In addition, the Company: (i) extinguished Series C Convertible Notes in the amount of
$2,855,000 along with accrued interest of $172,000 and converted those to Series D Convertible Notes; (ii) extinguished other promissory
notes in the amount of $236,000 along with accrued interest of $19,000 and converted those to Series D Convertible Notes; (iii)
allowed Brett Moyer, the Company’s President, Chief Executive Officer and a director, to convert $69,000 of reimbursable
expense reports into Series D Convertible Notes; and (iv) allowed Jonathan Gazdak, a member of the Company’s board of directors,
to convert $12,000 of certain expenses into Series D Convertible Notes. At the date of issuance, the Series D Convertible Notes
had a senior priority security interest in all the personal property, fixtures and intellectual property and products of the Company
except for the January 2015 Note and the Hallo Note which had a pari passu security interest with the Series D Convertible Notes
(see Note 5 – Series E Convertible Note Payable for subsequent release of security interest). The principal balance, plus
all accrued and unpaid interest was due on September 30, 2018, as amended. The Series D Convertible Notes were eligible for conversion
at any point prior to the maturity date or upon a change of control or an initial public offering by the Company. The conversion
price in effect upon the initial public offering was the lesser of $4.50 or the highest price per common share sold in the initial
public offering multiplied by 75%. The conversion price at any other conversion event was $4.50. Issuance costs to obtain the convertible
notes were recorded as a debt discount in the amount of $386,000. In connection with the February 28, 2018 extension of the maturity
date, the Company confirmed to the holders of the Series D Convertible Notes that Series D Convertible Notes would accrue an additional
10% interest on the first day of every month, beginning March 1, 2018, so long as such Series D Convertible Notes remained outstanding.
The Company recognized interest expense of $4,791,000 for the year ended December 31, 2018. On July 25, 2018, the outstanding convertible
notes automatically converted into 3,783,334 shares of common stock in connection with the Company’s IPO.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
5.
|
Convertible Notes Payable, continued
|
In connection with the Series
D Convertible Notes, the Company issued warrants to investors and investment bankers to purchase common shares of 1,017,692 and
380,449, respectively (see Note 6 – Fair Value Measurements for fair value computation). The sum of the fair value of the
warrants, the BCF, the embedded conversion feature and issuance costs for the Series D Convertible Notes described above were recorded
as debt discounts to be amortized to interest expense over the respective term using the effective interest method. In connection
with the extension of the maturity date to June 30, 2018, the Company confirmed to the holders of the Series D Convertible Notes
that the number of shares issuable upon exercise of the warrants issued in connection with the Series D Convertible Notes would
double to 2,035,434, effective February 28, 2018. During the year ended December 31, 2018, the Company recognized interest expense
of $3,268,000 from the amortization of the debt discounts.
Series E Convertible Notes Payable
On various dates from May to
September 2017, the Company received total proceeds of $5,000,000 from the issuance of original issue discount convertible promissory
notes (“Series E Convertible Notes”). The Series E Convertible Notes had a senior priority security interest in all
the personal property, fixtures and intellectual property and products of the Company. The principal balance of the Series E Convertible
Notes was due on October 31, 2017. The Series E Convertible Notes were eligible for conversion at any point prior to the maturity
date or upon a change of control or an initial public offering by the Company. The conversion price in effect upon on initial public
offering was the lesser of $4.50 or the highest price per common share sold in the initial public offering multiplied by 75%. The
conversion price at any other conversion event was the lessor of $4.50 or the price per share issued by the Company in connection
with any sale involving substantially all the assets of the Company. Additionally, in connection with the Series E Convertible
Note financing, all of the Company’s outstanding promissory and convertible note holders agreed to: (i) subordinate their
notes to the Series E Convertible Notes, (ii) release all security interests in the Company’s assets in favor of the Series
E Convertible Notes (iii) extend their maturity dates to February 28, 2018 and (iv) amend the Company’s Operating Agreement
to allow the Series E Convertible Note lender one seat on the Company’s board of directors so long as the investor owns any
debt or securities of the Company. Issuance costs to obtain the convertible notes were recorded as a debt discount in the amount
of $275,000.
On October 31, 2017, the Company
filed a confidential S-1 registration statement with the SEC (“S-1”) with the belief that the S-1 filing would extend
the maturity date of the Series E Convertible Notes to November 30, 2017. The Series E Convertible Note holder claimed that the
S-1 filing did not meet the definition outlined in the Series E Convertible Note and issued a notice of default to the Company
on November 2, 2017 (“Default Notice”).
On November 30, 2017, as a result
of the Default Notice and an inability of the two parties to renegotiate the Series E Convertible Notes under acceptable terms,
the Company requested and received a Series E Convertible Note payoff letter (“Series E Payoff Letter”) from the Series
E Convertible Note holder. The Series E Payoff Letter stated that in addition to the repayment of the Series E Convertible Notes
of $5,882,000, that the Series E Convertible Note holder was due $1,098,000 of default interest and penalties, reimbursement of
$179,000 of legal fees, and consulting, travel and lodging fees of $102,000. Despite the Company’s disagreement that it was
in default and subject to default penalties, interest and legal fees, the Company paid the full monetary demand of $7,261,000 as
requested by the Series E Convertible Note holder on November 30, 2017.
In addition, the note holder
claimed that the Company was obligated to issue warrants to purchase 487,865 shares in connection with the Default Notice. Pursuant
to a settlement agreement that the Company entered into with note holder on July 25, 2018 a warrant to purchase an aggregate of
487,864 shares of common stock was issued (see Note 6 – Fair Value Measurements for fair value computation).
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
5.
|
Convertible Notes Payable, continued
|
In connection with the Series
E Convertible Notes, the Company issued warrants to investors and investment bankers to purchase common shares of 1,307,190 and
114,380, respectively (see Note 6 – Fair Value Measurements for fair value computation). On November 30, 2017, in connection
with a provision in the Series E warrants issued to investors, the number of outstanding shares issuable upon exercise of the warrants
would double as the Company did not complete an initial public offering by November 30, 2017. Therefore, the total number of shares
issuable upon exercise of such warrants to investors under the Series E Convertible Notes became 3,102,245. The sum of the fair
value of the warrants, the BCF, the embedded conversion feature and issuance costs for the Series E Convertible Notes described
above were recorded as debt discounts to be amortized to interest expense over the respective term using the effective interest
method. During the year ended December 31, 2018, the Company recognized interest expense of $70,000 from the amortization of the
debt discounts.
Series F Convertible Notes
Payable
On various dates between November
2017 and March 2018, the Company received total proceeds of $10,345,000 from the issuance of senior secured convertible promissory
notes (“Series F Convertible Notes”) to investors. The Series F Convertible Notes accrue interest at 15% per year and
have a senior priority security interest in all the personal property, fixtures and intellectual property and products of the Company.
The principal balance of the Series F Convertible Notes, plus all accrued interest is due on June 30, 2018. The Series F Convertible
Notes are eligible for conversion at any point prior to the maturity date at the option of the holder. The conversion price in
effect upon on an initial public offering shall be the lesser of $4.50 or the highest price per common share sold in the initial
public offering multiplied by 60%. The conversion price at any other conversion event shall be $4.50. Between April 1, 2018 and
May 25, 2018, the Company issued $225,000 of additional Series F Convertible Notes. In connection with the additional Series F
Convertible Notes the Company issued 25,000 and 5,000 warrants to purchase common stock, to its lenders and investment bankers,
respectively. The warrants have a five-year life and are exercisable into common stock at $5.40 per share. Issuance costs to obtain
the convertible notes were recorded as a debt discount in the amount of $135,300. The Company recognized interest expense of $865,000
for the year ended December 31, 2018. On July 25, 2018, the outstanding convertible notes automatically converted into 3,849,210
shares of common stock in connection with the Company’s IPO.
In connection with the issuance
of the Series F Convertible Notes, the Company issued warrants to the lender and investment bankers to purchase common shares of
1,174,447 and 233,111, respectively (see Note 6 – Fair Value Measurements for fair value computation). The sum of the fair
value of the warrants, the BCF, the embedded conversion feature and issuance costs for the Series F Convertible Notes described
above were recorded as debt discounts to be amortized to interest expense over the respective term using the effective interest
method. During the year ended December 31, 2018, the Company recognized interest expense of $11,996,000 from the amortization of
the debt discounts.
Extension of Maturity Date
The Company’s Series D
and Series F convertible promissory notes as well as its other convertible promissory notes, excluding its Series C Convertible
Notes and its Series G Notes, had maturity dates of June 30, 2018 (the “June 30th Notes”). On June 30, 2018,
the June 30th Notes with a principal balance of $26.4 million went into default. The Company obtained consents from
the holders of such notes to initially extend the maturity date of the June 30th Notes to July 15, 2018 and then requested
and received consents to extend the maturity date to July 25, 2018.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
5.
|
Convertible Notes Payable, continued
|
Series G Notes Payable
Between April 20, 2018 and June
29, 2018, the Company issued $2,813,000 of 15% OID Senior Secured Promissory Notes due June 15, 2018 (“Series G Notes”),
raising an aggregate principal amount of $2,200,000 and cancelling $50,000 of expense reimbursements payable by the Company to
Mr. Moyer, Medalist Partners Harvest Master Fund, Ltd. and Medalist Partners Opportunity Master Fund A, LP, each of which Brian
Herr, who was a member of the Company’s board of directors from February 2008 to February 2020, is co-portfolio manager,
each participated in the Series G Notes financing. The Series G Notes had a senior priority security interest in all the personal
property, fixtures and intellectual property and products of the Company. Additionally, in connection with the Series G Note financing,
all of the Company’s Series F Convertible Note holders were required by the terms of the Series G Notes to subordinate their
notes to the Series G Notes. As of June 15, 2018, the Company was in default on $1,725,000 of the Series G Notes. On June 28, 2018,
the Company and the holders of the Series G Notes agreed to extend the maturity date of such notes from June 30, 2018 to July 15,
2018 in consideration for increasing the original issue discount of such notes from 15% to 20% and the issuance of warrants to
purchase 208,350 shares of common stock.
As of July 15, 2018, the Company
was in default on $2,812,500 of the Series G Notes. On July 20, 2018, the Company and the holders of the Series G Notes agreed
to (i) extend the maturity date of such notes from July 15, 2018 to July 25, 2018 and (ii) agreed to make the Series G Notes automatically
convertible in connection with an initial public offering at a conversion price of the lesser of $4.50 or 40% of the highest price
of the common stock sold in an initial public offering. In consideration for the extension of the maturity date and the agreement
to make the Series G Notes automatically convertible, the Company agreed to issue warrants to purchase an additional 625,000 shares
of common stock to the Series G Note holders. As a result of the agreement, the Series G Notes were reclassified from promissory
notes to convertible notes payable as of the date of the agreement.
The Company accrued and recognized
interest expense of $562,500 for the year ended December 31, 2018. On July 25, 2018, the outstanding convertible notes automatically
converted into 1,406,250 shares of common stock in connection with the Company’s IPO.
In connection with the issuance
of the Series G Notes, the Company issued warrants to the lender and investment bankers to purchase common shares of 833,350 and
58,334, respectively (see Note 6 – Fair Value Measurements for fair value computation). The sum of the fair value of the
warrants, the BCF, the embedded conversion feature and issuance costs for the Series G Convertible Notes described above were recorded
as debt discounts to be amortized to interest expense over the respective term using the effective interest method. During the
year ended December 31, 2018, the Company recognized interest expense of $9,819,000 from the amortization of the debt discounts.
Derivative Liability
The February 2016 Note, the
Series C Convertible Notes, the Series D Convertible Notes, the Series E Convertible Notes, the Series F Convertible Notes, and
the Series G Notes contain an embedded conversion feature that the Company has determined is a derivative requiring bifurcation.
In July 2018, the derivative liability was reclassified to additional paid-in capital as of the date of the Company’s IPO.
|
6.
|
Fair Value Measurements
|
The Company measures the fair
value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels. Each level of input has different levels of subjectivity and difficulty involved in determining
fair value.
|
|
·
|
Level 1 – Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date. Therefore, determining fair value for Level 1 investments generally does not require significant judgment, and the estimation is not difficult.
|
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
6.
|
Fair Value Measurements, continued
|
|
|
·
|
Level 2 – Pricing is provided by third-party sources of market information obtained through investment advisors. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information received from its advisors.
|
|
|
·
|
Level 3 – Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The determination of fair value for Level 3 instruments involves the most management judgment and subjectivity.
|
The Company’s financial
assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2019 and 2018 by level within the
fair value hierarchy, are as follows:
|
(in thousands)
|
|
December 31, 2019
|
|
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
387
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24
|
|
|
(in thousands)
|
|
December 31, 2018
|
|
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
210
|
|
There were no transfers between
Level 1, 2 or 3 during the years ended December 31, 2019 or 2018.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
6.
|
Fair Value Measurements, continued
|
Warrant Liability
The following table includes
a summary of changes in fair value of the Company’s warrant liability measured at fair value using significant unobservable
inputs (Level 3) for the years ended December 31, 2019 and 2018:
|
|
|
For The Year Ended December 31,
|
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
Beginning balance
|
|
$
|
210
|
|
|
$
|
1,228
|
|
|
Additions
|
|
|
18
|
|
|
|
241
|
|
|
Change in fair value
|
|
|
(204
|
)
|
|
|
8,051
|
|
|
Reclass to additional paid-in capital
|
|
|
-
|
|
|
|
(9,310
|
)
|
|
Ending balance
|
|
$
|
24
|
|
|
$
|
210
|
|
The changes in fair value of
the warrant liability are recorded in change in fair value of warrant liability in the consolidated statements of operations.
A summary of the weighted average
significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liability that is categorized within
Level 3 of the fair value hierarchy as of December 31, 2019 and 2018 is as follows:
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Common Stock Price
|
|
$
|
0.61
|
|
|
$
|
3.42
|
|
|
Term (Years)
|
|
|
3.26
|
|
|
|
4.27
|
|
|
Volatility
|
|
|
62
|
%
|
|
|
58
|
%
|
|
Risk-free rate of interest
|
|
|
1.62
|
%
|
|
|
2.58
|
%
|
|
Dividend Yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Derivative Liability
The following table includes
a summary of changes in fair value of the Company’s derivative liability measured at fair value using significant unobservable
inputs (Level 3) for the years ended December 31, 2019 and 2018:
|
|
|
For The Year Ended December 31,
|
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
20,832
|
|
|
Additions
|
|
|
216
|
|
|
|
7,886
|
|
|
Change in fair value
|
|
|
171
|
|
|
|
14,294
|
|
|
Reclassification to equity at initial public offering
|
|
|
-
|
|
|
|
(43,012
|
)
|
|
Ending balance
|
|
$
|
387
|
|
|
$
|
-
|
|
As of December 31, 2017, the
Company measured the fair value of the derivative by estimating the fair value of the convertible notes payable at certain conversion
points. To calculate the fair value of the convertible notes payable with the conversion feature, the Company calculated the present
value of the convertible notes payable upon conversion at a qualifying IPO in the second quarter of 2018, and the present value
of the convertible notes payable at non-qualifying IPO in the fourth quarter of 2018. The Company estimated a probability of 50%
for the occurrence of a qualifying IPO in the second quarter of 2018 and a probability of 50% in the fourth quarter of 2018.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
6.
|
Fair Value Measurements, continued
|
The Company’s derivative
liability during the period ended July 25, 2018 was measured at fair value using the Probability Weighted Expected Return valuation
methodology. The weighted average significant unobservable inputs (Level 3 inputs) used in measuring the Company’s embedded
conversion options during that period are as follows:
|
|
|
For The Period Ended July 25, 2018
|
|
|
Common Stock Price
|
|
$
|
5.00
|
|
|
Term (Years)
|
|
|
0.50
|
|
|
Volatility
|
|
|
65
|
%
|
|
Risk-free rate of interest
|
|
|
2.20
|
%
|
|
Dividend Yield
|
|
|
0.0
|
%
|
As of July 25, 2018, the date
of the Company’s successful initial public offering, the Company measured the fair value of the derivative related to the
convertible notes payable by estimating the fair value of the underlying shares using the offering price of $5.00. On July 25,
2018, the derivative liability was reclassified to equity upon the Company’s initial public offering.
As of December 31, 2019,
the Company measured the fair value of the derivative related to the convertible preferred stock by estimating the fair value
of the Series A Preferred Stock as if conversion occurred on December 31, 2019. The Company calculated value of the
conversion feature using the Fixed Conversion Price of the Series A Preferred Stock, as adjusted to 95% of the volume
weighted average price of the common stock for the previous ten trading days and the specified floor price of $1.50. There
was no change in the fair value of the derivative liability because the volume weighted average price of the common stock was
below the specified floor price.
|
7.
|
Convertible Preferred Stock and Stockholders’ Equity
|
Convertible Preferred
Stock
On July 26, 2018, upon the
closing of the IPO, all shares of convertible preferred stock then outstanding were automatically converted into 2,762,594
shares of common stock.
Series A 8% Senior Convertible
Preferred Stock
On April 18, 2019, the Company
entered into a Securities Purchase Agreement, dated as of April 18, 2019, with Ms. Walsh (the “Preferred SPA”),
pursuant to which we issued 250,000 shares of our Series A Preferred Stock, par value $0.0001 per share, which shares have a stated
value of $4.00 (the “Stated Value”), grant holders the same voting rights as holders of our shares of common stock,
and are convertible into shares of our common stock at price of $4.00 per share, subject to a floor price of $1.50 and to adjustment
under our Certificate of Designations of the Preferences, Rights and Limitations of the Series A Preferred Stock (the “Certificate
of Designations”), in consideration for $1,000,000 (the “Initial Tranche”). The Series A Preferred Stock may
be issued in tranches of at least $500,000 and in an aggregate of up to $5 million. In connection with the Initial Tranche, the
Company also issued to Ms. Walsh a warrant to purchase 255,102 shares of our common stock.
The Series A Preferred Stock
contains an embedded conversion feature that the Company has determined is a derivative requiring bifurcation. The fair value of
the derivative liability at the issuance of the Series A Preferred Stock was $216,000, which was recorded as a derivative liability
with the offset recorded as a discount to the Series A Preferred Stock. (See Note 6 – Fair Value Measurements for the fair
value computation.)
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
7.
|
Convertible Preferred Stock and Stockholders’ Equity, continued
|
The authorized, issued and outstanding
shares of Series A Preferred Stock and liquidation preferences as of December 31, 2019, were as follows:
|
|
|
|
|
|
Number
|
|
|
Proceeds
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
of Shares
|
|
|
Net of
|
|
|
Conversion
|
|
|
|
|
|
|
|
of Shares
|
|
|
Issued and
|
|
|
Issuance
|
|
|
Price per
|
|
|
Liquidation
|
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Costs
|
|
|
Share
|
|
|
Preference
|
|
|
Series A 8 % Senior Convertible Preferred Stock
|
|
|
1,250,000
|
|
|
|
250,000
|
|
|
$
|
920,000
|
|
|
$
|
4.00
|
|
|
$
|
1,056,000
|
|
The Series A Preferred Stock
rights, privileges and preferences are as follows:
Dividends —
The holders of the Series A Preferred Stock are entitled to receive cumulative dividends at the rate per share of 8% per annum,
payable on conversion. The form of the dividend payment on the Series A Preferred Stock will be determined based on the legal availability
of funds for the payment and the satisfaction of the Equity Conditions (as defined in the Certificate of Designations) for the
5 consecutive trading days immediately prior to the payment date. The form of the payment, depending on the priority, may be made
in cash or shares of common stock at the Company’s option. If funds are not available and the Equity Conditions have not
been met, the dividends will accrue to the next payment date or accrete to the Stated Value. The Company accrued dividends of $56,000
for the year ended December 31, 2019, respectively.
Liquidation Rights
— In the event of any liquidation, dissolution, or winding-up of the Company, each holder of Series A Preferred Stock
is entitled to receive an amount equal to the Stated Value, plus accrued and unpaid dividends and any other fees or liquidated
damages before any distribution will be made to holders of junior securities. If assets are insufficient for such payment, then
the entire assets will be distributed only to the holders of the Series A Preferred Stock. A fundamental or change of control transaction
is not deemed a liquidation.
Conversion —
Each share of Series A Preferred Stock is convertible at the option of the holder into the number of shares of common stock (subject
to adjustment for certain events, including dilutive issuances, stock splits, and reclassifications) determined by multiplying
such number by the ratio of the Stated Value by a conversion price, which price is originally equal to $4.00 (the “Fixed
Conversion Price”). However, if the closing price of the common stock is less than the Fixed Conversion Price, then the Fixed
Conversion Price may be reduced to equal 95% of the lowest volume weighted average price of the common stock for the previous 10
trading days, which price shall not be less than $1.50. Notwithstanding the foregoing, unless the Company obtains stockholder approval
pursuant to the rules and regulations of The Nasdaq Capital Market, the Company cannot issue shares of common stock upon conversion
of the Series A Preferred Stock in the event that such issuance exceeds 19.99% of the issued and outstanding shares of the Company’s
common stock as of April 18, 2019 or if such conversion is considered a “change of control” under Nasdaq rules and
regulations.
Voting Rights —
Each holder has the right to one vote for each share of common stock into which such preferred stock could be converted. So long
as any shares of Series A Preferred Stock are outstanding, the Company shall not, without first obtaining the approval of more
than 67% of the holders of Series A Preferred Stock then outstanding, voting together as a separate class (a) alter or amend
the Certificate of Designations or alter or change adversely the powers, rights or preferences of the Series A Preferred Stock,
including amending the Company’s certificate of incorporation or other charter documents in any manner adversely affecting
the holders of the Series A Preferred Stock; (b) authorize or create any class of stock ranking as to dividends, redemption
or distribution of assets upon a liquidation senior to, or otherwise pari passu with, the Series A Preferred Stock; (c) increase
the total number of authorized shares of Series A Preferred Stock; or (d) enter into any agreement with respect to any of the foregoing.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
7.
|
Convertible Preferred Stock and Stockholders’
Equity, continued
|
Redemption —
The Series A Preferred Stock is not mandatorily redeemable as it does not have a set redemption date or a date after which the
shares may be redeemed by the holders. However, if a Triggering Event (as defined in the Certificate of Designations) occurs, then
each holder will receive 120% of the aggregate Stated Value, plus all accrued and unpaid dividends and any other fees or liquidated
damages. Additionally, upon such an event, the divided rate of the Series A Preferred Stock increases to 18% per annum. A Triggering
Event is defined as any (1) default on credit obligations; (2) default on payment of certain Series A Preferred Stock payments
or a default under the Certificate of Designations and any related transaction document entered into in connection with the issuance
of the Series A Preferred Stock; (3) bankruptcy of the Company; (4) ineligibility for listing of the Company’s common stock
on a trading market; (5) change of control or fundamental transaction entered into by the Company, or other transaction entered
into by the Company where more than 51% of the Company’s assets are sold; (6) failure of the Company to perform certain regulatory
reporting; (7) failure to timely deliver certificates representing shares of common stock upon conversion of the shares of Series
A Preferred Stock; (8) failure of the Company to maintain a sufficient number of reserved shares pursuant to the Preferred SPA;
and (9) judgment is entered or filed against the Company or its subsidiaries in excess of an aggregate of $100,000 or the Company
or any of its subsidiaries experiences a loss of property in excess of an aggregate of $100,000. The Company has elected not to
adjust the carrying values of the Series A Preferred Stock to the liquidation preferences of such shares because it is uncertain
whether or when an event would occur that would obligate the Company to pay the liquidation preferences to holders of shares and
at the balance sheet date, these circumstances were not probable. Subsequent adjustments to the carrying values of the liquidation
preferences will be made only when it becomes probable that such a liquidation event will occur.
Rights Upon a Subsequent
Financing — So long as holders of shares of Series A Preferred Stock hold such shares with an aggregate Stated Value
equal to or exceeding $250,000, upon any issuance of shares of our common stock, Common Stock Equivalents (as defined in the Preferred
SPA), conventional debt or a combination of such securities and/or debt (a “Subsequent Financing”), unless the proposed
terms of a Subsequent Financing shall have first been delivered to such holders in reasonable detail and such holders have first
been granted the option to purchase such securities pursuant to such terms, such holders have the right to purchase all, and no
less than all, of the securities offered to investors in a Subsequent Financing on the same terms, conditions and price provided
for in the Subsequent Financing. In addition, so long as holders of shares of Series A Preferred Stock hold such shares with an
aggregate Stated Value equal to or exceeding $500,000, if we effect a Subsequent Financing, such holders have a right to tender
shares of Series A Preferred Stock for the securities offered pursuant to a Subsequent Financing.
Subsequent Equity Sales
— In the event that we or any of our subsidiaries issue additional shares of common stock and/or common stock equivalents
in connection with a financing pursuant to which the effective price per share for such securities is less than the then conversion
price of the Series A Preferred Stock, then subject to certain exceptions set forth in the Certificate of Designations, such conversion
price will be reduced to such the effective price of such issued securities.
Common Stock
On January 30, 2018, the Company’s
Board of Directors approved the establishment of the Company’s 2018 Long-Term Stock Incentive Plan (the “LTIP”)
and termination of its Carve-Out Plan (the “Plan”). Under the LTIP, the aggregate maximum number of shares of common
stock (including shares underlying options) that may be issued under the LTIP pursuant to awards of restricted shares or options
will be limited to 15% of the outstanding shares of common stock, which calculation shall be made on the first (1st) business day
of each new fiscal year; provided that for fiscal year 2018, upon approval of the LTIP by the Company’s shareholders, up
to 300,000 shares of common stock will initially be available for participants under the LTIP. Thereafter, the 15% evergreen provision
shall govern the LTIP.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
7.
|
Convertible Preferred Stock and Stockholders’
Equity, continued
|
In connection with
the termination of the Plan, on January 31, 2018, the Company issued to its employees and directors 1,284,470 and 153,126, shares
of restricted common stock (“January 2018 Restricted Stock Grant”), respectively. Such shares of restricted common
stock were granted outside the LTIP’s first year share availability pool, are fully vested, and will be released to the employees
and directors in three tranches at the rate of 33.4%, 33.3% and 33.3% on September 1, 2018, March 1, 2019 and September 1, 2019,
respectively. In the event an employee resigns prior to the date when all such shares have been released, the shares will be released
at the rate of 16.5% every six months, until 100% of such shares are released. In the event that a director resigns prior to the
date when all such shares have been released, the shares will be released in three tranches at the rate of 33.4%, 33.3% and 33.3%
six months from the dates such shares were originally due to be released.
The LTIP and January 2018 Restricted
Stock Grant were approved by a majority of the Company’s stockholders on January 31, 2018. In connection with the January
2018 Restricted Stock Grant, the Company recorded stock-based compensation expense of $2,156,394 for the year ended December 31,
2018.
On September 1, 2018, the Company
released its first tranche of restricted shares under the January 2018 Restricted Stock Grant. The majority of the restricted stock
that were released were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum
statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities.
The total shares withheld were based on the value of the restricted stock on their release date as determined by our closing stock
price. These net-share settlements had the effect of share repurchases as they reduced and retired the number of shares that would
have otherwise been issued as a result of the release and did not represent an expense to us. For the year ended December 31, 2018,
473,091 shares of restricted stock were released with an intrinsic value of approximately $2.3 million. Of the restricted stock
released, 123,255 shares were forfeited and we withheld 92,555 shares to satisfy approximately $499,000 of employees’ minimum
tax obligation on the released restricted stock. As of December 31, 2018, there were 964,505 shares of restricted stock remaining
under the January 2018 Restricted Stock Grant, 929,264 of such shares were to be released in two equal tranches on March 1, 2019
and September 1, 2019, with an additional 35,241 shares to be released to a terminated employee in five equal tranches over the
next 26 months.
On March 1, 2019 and September
1, 2019, the Company released its second and third tranches, respectively, of restricted shares under the January 2018 Restricted
Stock Grant. A portion of the restricted stock that was released was net-share settled such that the Company withheld shares with
value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and
remitted the cash to the appropriate taxing authorities. The total shares withheld were based on the value of the restricted stock
on their release date as determined by our closing stock price. These net-share settlements had the effect of share repurchases
as they reduced and retired the number of shares that would have otherwise been issued as a result of the release and did not represent
an expense to us. For the year ended December 31, 2019, 943,373 shares of restricted stock were released with an intrinsic value
of approximately $1.5 million. Of the restricted stock released, 362,824 shares were forfeited and we withheld 46,422 shares to
satisfy approximately $87,000 of employees’ minimum tax obligation on the released restricted stock. As of December 31, 2019,
there were 21,132 shares of restricted stock remaining under the January 2018 Restricted Stock Grant to be released to a terminated
employee in three equal tranches over the next 14 months.
On February 28, 2018, in connection
with the extension of the maturity date of the Series C Convertible Note to August 28, 2018, the Company issued 327 shares of its
common stock to the note holder. The Company recorded nominal interest expense for the year ended December 31, 2018.
During July, August and September
2018, the Company issued 94,160 shares of restricted common stock to vendors in return for website and investor relations services.
The Company recorded an operating expense of $437,517 for the services.
On January 4, 2019, the Company
awarded 400,000 deferred shares to Michael Howse, a member of the Company’s board of directors, in connection with a Deferred
Shares Agreement under the LTIP. The shares vest immediately prior to a significant change in ownership, defined as a Fundamental
Transaction in the agreement. In light of this performance vesting condition, the Company has not recorded any stock-based compensation
expense for the issuance of these shares during the year ended December 31, 2019.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
7.
|
Convertible Preferred Stock and Stockholders’
Equity, continued
|
On September 9, 2019, the
Company agreed to issue 150,000 shares of restricted common stock to George Oliva, the Company’s new Chief Financial
Officer, as an inducement grant. Such shares were issued outside the Company’s LTIP. Such shares shall be subject to
annual vesting over a period of four years beginning September 1, 2019. The Company will record stock-based compensation
expense over the vesting period. The Company recorded stock-based compensation expense of $12,000 for the year ended December
31, 2019 relating to this grant.
During the year ended December
31, 2019, the Company issued 172,780 restricted common shares, respectively, in exchange for services. The Company recorded an
operating expense of $246,000 for the year ended December 31, 2019.
During the year ended December
31, 2019, the Company issued 792,906 restricted common shares to employees, board members and consultants under the Company’s
LTIP. Such shares shall subject to annual vesting over a period of three years beginning September 1, 2019. The Company will record
stock-based compensation expense over the vesting period. The Company recorded stock compensation expense of $93,000 for the year
ended December 31, 2019 relating to this grant.
As of December 31, 2019, 942,906 restricted common shares at
a weighted average grant date fair value price of $0.98 remained subject to vesting. In addition, $816,000 of unrecognized compensation
expense related to the unvested restricted common shares will be recognized over the remaining weighted average period of 2.87
years.
Warrants for Common Shares
The Company has issued warrants
to purchase common shares to employees and consultants as compensation for services rendered, as well as, in conjunction with the
purchase of common shares in equity and debt transactions. A summary of the warrant activity and related information for the years
ended December 31, 2019 and 2018 is provided as follows.
In connection with the Series
F Convertible Notes, the Company issued warrants to purchase 1,174,447 common units at an exercise price of $5.40 per unit with
a five-year term. The grant date fair value of the warrants was $300,000 which was recorded as debt discount with the offset recorded
to common units on the consolidated balance sheet. The fair value of the warrants was determined using the Black-Scholes Model
based on the following weighted average assumptions: common unit price on date of grant $1.50, expected dividend yield 0%, expected
volatility 57%, risk-free interest rate 2.14% and expected life of 5 years.
In connection with the Series
F Convertible Notes, the Company issued warrants to investment bankers to purchase 200,001 common units at an exercise price of
$5.40 per unit with a five-year term. The grant date fair value of the warrants was $60,000 which was recorded as debt discount
with the offset recorded to common units on the consolidated balance sheet. The fair value of the warrants was determined using
the Black-Scholes Model based on the following weighted average assumptions: common unit price on date of grant $1.50, expected
dividend yield 0%, expected volatility 57%, risk-free interest rate 1.9% and expected life of 5 years.
In connection with the Series
F Convertible Notes, the Company recognized the fair value of the warrants as a component of stockholders’ deficit.
In connection with the Series
F Convertible Notes issued during 2018, the Company issued warrants to purchase 25,000 common shares at an exercise price of $5.40
per share with a five-year term. The grant date fair value of the warrants was $44,000 which was recorded as debt discount with
the offset recorded to additional paid-in capital on the consolidated balance sheet. The fair value of the warrants was determined
using the Black-Scholes Model based on the following weighted average assumptions: common share price on date of grant $4.03, expected
dividend yield 0%, expected volatility 57%, risk-free interest rate 2.82% and expected life of 5 years.
In connection with the Series
F Convertible Notes issued during 2018, the Company issued warrants to investment bankers to purchase 3,222 common shares at an
exercise price of $5.40 per share with a five-year term. The grant date fair value of the warrants was $5,700 which was recorded
as debt discount with the offset recorded to additional paid-in capital on the consolidated balance sheet. The fair value of the
warrants was determined using the Black-Scholes Model based on the following weighted average assumptions: common share price on
date of grant $4.03, expected dividend yield 0%, expected volatility 57%, risk-free interest rate 2.82% and expected life of 5
years.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
7.
|
Convertible Preferred Stock and Stockholders’ Equity,
continued
|
In connection with the Series
G Notes issued during 2018, the Company issued warrants to purchase 208,350 common shares at an exercise price of $5.40 per share
with a five-year term. The grant date fair value of the warrants was $366,000 which was recorded as debt discount with the offset
recorded to additional paid-in capital on the consolidated balance sheet. The fair value of the warrants was determined using the
Black-Scholes Model based on the following weighted average assumptions: common share price on date of grant $4.03, expected dividend
yield 0%, expected volatility 57%, risk-free interest rate 2.81% and expected life of 5 years.
In connection with the Series
G Notes issued during 2018, the Company issued warrants to investment bankers to purchase 58,334 common shares at an exercise price
of $5.40 per share with a five-year term. The grant date fair value of the warrants was $102,000 which was recorded as debt discount
with the offset recorded to additional paid-in capital on the consolidated balance sheet. The fair value of the warrants was determined
using the Black-Scholes Model based on the following weighted average assumptions: common share price on date of grant $4.03, expected
dividend yield 0%, expected volatility 57%, risk-free interest rate 2.82% and expected life of 5 years.
In April 2018, the Company granted
warrants to purchase up to 275,000 shares of common stock to Mr. Michael Howse, a member of the Company’s Board of Directors
in connection with a consulting agreement. The warrants have an exercise price of $2.00 per share and warrants to purchase up to
110,000 shares of common stock vest over nine months. The remaining warrants vest upon certain performance milestones. The Company
amended the warrants as of December 27, 2018 to remove certain price protection provisions and to include the determination of
the number of warrants to be outstanding if a fundamental transaction occurs. All of the warrants immediately vest upon a change
of control. The fair value of the vested warrants was $220,909 which was recorded as consulting expense with the offset recorded
to warrant liability. The fair value of the warrants was estimated using the Black-Scholes Model based on the following weighted
average assumptions: common share price on date of grant $3.25, expected dividend yield 0%, expected volatility 58%, risk-free
interest rate 2.58% and expected life of 4.27 years. In December 2019, the performance milestones were achieved and 165,000 warrants
vested at that time. The fair value of the warrants was estimated using the Black-Scholes Model based on the following weighted
average assumptions: common share price on date of grant $0.60, expected dividend yield 0%, expected volatility 62%, risk-free
interest rate 1.67% and expected life of 3.30 years. The fair value of the vested warrants was $14,000 which was recorded as consulting
expense with the offset recorded to warrant liability. As of December 31, 2019 and 2018, warrants of 275,000 and 97,778, respectively,
were vested.
In connection with a settlement
agreement entered into in July 2018 with the original holder of the Series E Convertible Note, the Company issued a warrant to
purchase 487,864 common shares at an exercise price of $3.00 per share with a five-year term. The grant date fair value of the
warrant was $1,590,095 which was recorded as interest expense with the offset recorded to additional paid-in capital on the consolidated
balance sheet. The fair value of the warrant was determined using the Black-Scholes Model based on the following weighted average
assumptions: common share price on date of grant $5.00, expected dividend yield 0%, expected volatility 59%, risk-free interest
rate 2.82% and expected life of 5 years.
In connection with the Series
G Notes amendment, the Company issued warrants to purchase 625,000 common shares at an exercise price of $4.50 per share with a
five-year term. The grant date fair value of the warrants was $1,253,125 which was recorded as debt discount with the offset recorded
to additional paid-in capital on the consolidated balance sheet. The fair value of the warrants was determined using the Black-Scholes
Model based on the following weighted average assumptions: common share price on date of grant $4.03, expected dividend yield 0%,
expected volatility 59%, risk-free interest rate 2.77% and expected life of 5 years.
In August 2018, as payment for
investor relations services, the Company issued a warrant to purchase 50,000 common shares at an exercise price of $4.00 per share
with a three-year term to a vendor. The grant date fair value of the warrant was $135,000 which was recorded as consulting expense
with the offset recorded to additional paid-in capital on the consolidated balance sheet. The fair value of the warrant was determined
using the Black-Scholes Model based on the following weighted average assumptions: common share price on date of grant $4.30, expected
dividend yield 0%, expected volatility 60%, risk-free interest rate 2.88% and expected life of 3 years.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
7.
|
Convertible Preferred Stock and Stockholders’ Equity,
continued
|
On July 25, 2018, as part of
the agreement with the investment bankers in connection with the initial public offering, the Company issued warrants to purchase
72,000 common shares at an exercise price of $6.25 per share with a five-year term. The grant date fair value of the warrants was
$169,000 which was recorded as issuance costs in additional paid-in capital with the offset also recorded to additional paid-in
capital on the consolidated balance sheet. The fair value of the warrants was determined using the Black-Scholes Model based on
the following weighted average assumptions: common share price on date of grant $5.00, expected dividend yield 0%, expected volatility
59%, risk-free interest rate 2.86% and expected life of 5 years.
On October 30, 2018, the Company
issued a warrant to purchase 40,000 shares of common stock at an exercise price of $4.95 per share with a five-year term to a consultant
pursuant to a consulting agreement in consideration for providing certain media agent services to the Company for a period of twelve
months. The grant date fair value of the warrant was $104,400 which was recorded as consulting expense with the offset recorded
to additional paid-in capital on the consolidated balance sheet. The fair value of the warrant was determined using the Black-Scholes
Model based on the following weighted average assumptions: common share price on date of grant $4.95, expected dividend yield 0%,
expected volatility 59%, risk-free interest rate 2.94% and expected life of 5 years.
In connection with the Series
G Notes amendment, entered into during the three months ended September 30, 2018, the Company issued warrants to purchase 625,000
common shares at an exercise price of $4.50 per share with a five-year term. The grant date fair value of the warrants was $2,506,250
which was recorded as debt discount with the offset recorded to additional paid-in capital on the consolidated balance sheet. The
fair value of the warrants was determined using the Black-Scholes Model based on the following weighted average assumptions: common
share price on date of grant $4.03, expected dividend yield 0%, expected volatility 59%, risk- free interest rate 2.77% and expected
life of 5 years.
In April 2019, the Company granted
a warrant to purchase up to 225,102 shares of common stock to Ms. Walsh, holder of Series A Preferred Stock. The warrant has an
exercise price of $1.98 per share and are fully vested. The fair value of the warrant at issuance was $216,000. The fair value
of the warrant was estimated using the Black-Scholes Model based on the following weighted average assumptions: common share price
on date of grant $2.08, expected dividend yield 0%, expected volatility 59%, risk-free interest rate 2.38% and expected life of
5 years. The Company determined the relative fair value of the warrant and the related Series A Preferred Stock, and recorded the
warrant at $200,000, with the offset recorded to additional paid-in capital.
In April 2019, the Company agreed
to grant a warrant to purchase up to 40,816 shares of common stock to Alexander Capital, L.P. in connection with the issuance of
the Series A Preferred Stock. The warrant has an exercise price of $2.18 per share and are fully vested but not exercisable until
October 2019. The fair value of the warrant at issuance was $43,000. The fair value of the warrant was estimated using the Black-Scholes
Model based on the following weighted average assumptions: common share price on date of grant $2.08, expected dividend yield 0%,
expected volatility 59%, risk-free interest rate 2.38% and expected life of 5.0 years. The fair value was recorded as a cost of
issuance of the Series A Preferred Stock, with the offset to additional paid-in capital.
In May 2019, the Company agreed
to grant a warrant to purchase up to 122,272 shares of common stock to Alexander Capital, L.P. in connection with the Public Offering.
The warrant has an exercise price of $1.66 per share and are fully vested but not exercisable until May 2020. The fair value of
the warrant at issuance was $70,000. The fair value of the warrant was estimated using the Black-Scholes Model based on the following
weighted average assumptions: common share price on date of grant $1.36, expected dividend yield 0%, expected volatility 60%, risk-free
interest rate 2.18% and expected life of 4.0 years. The fair value was recorded as a cost of issuance of the common stock, with
the offset to additional paid-in capital.
In July 2019, the Company granted
a warrant to purchase up to 40,000 shares of common stock to Lippert/Heishorn Associates Inc. The warrant has an exercise price
of $1.24 per share and are fully vested. The fair value of the warrant at issuance was $23,000. The fair value of the warrant was
estimated using the Black-Scholes Model based on the following weighted average assumptions: common share price on date of grant
$1.16, expected dividend yield 0%, expected volatility 58%, risk-free interest rate 1.88% and expected life of 5.0 years. The fair
value was recorded as professional services with the offset to additional paid-in capital.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
7.
|
Convertible Preferred Stock and Stockholders’ Equity, continued
|
In August 2019, the Company
granted warrants to purchase up to 50,000 shares of common stock to DFC Advisory Services, LLC. The warrants have an exercise price
of $1.31 per share and are fully vested. The fair value of the warrants at issuance was $23,000. The fair value of the warrants
was estimated using the Black-Scholes Model based on the following weighted average assumptions: common share price on date of
grant $1.01, expected dividend yield 0%, expected volatility 58%, risk-free interest rate 1.51% and expected life of 5.0 years.
The fair value was recorded as professional services with the offset to additional paid-in capital.
Warrant Amendment and Exercise
Agreements
Between September 25, 2019 and
October 8, 2019, the Company and certain holders (each a “Holder” and collectively, the “Holders”) of the
Company’s common stock purchase warrants, with exercise prices between $3.00 and $5.40 (collectively, the “Original
Warrants”), including the Company’s Series D common stock purchase warrants, Series F common stock purchase warrants
(the “Series F Warrants”) and Series G common stock purchase warrants (the “Series G Warrants”), entered
into Warrant Amendment and Exercise Agreements (the “Warrant Amendment Agreements”), pursuant to which the Company
agreed to reduce the exercise price of each Original Warrant to $0.80 (the “Reduced Exercise Price”), and for each
Original Warrant exercised by a Holder at the Reduced Exercise Price, the Company agreed to reduce the exercise price of Original
Warrants to purchase up to an equivalent number of shares of common stock (the “Amended Warrants”) to $0.79 (the “Amended
Exercise Price”). The Company entered into Warrant Amendment Agreements with 32 Holders, under which Original Warrants were
exercised for a total of 1,128,381 shares of common stock and the Company received gross proceeds of $903,000. The net proceeds
to the Company, after commissions and legal expenses, were approximately $840,000. Remaining Original Warrants for 1,381,403 shares
of common stock had their exercise price adjusted to the Amended Exercise Price of $0.79.
A modification to the price of a warrant is treated as an exchange of the original warrant for a new warrant. The calculation
of the incremental value associated with the new warrant is based on the excess of the fair value of the modified warrant
based on current assumptions over the fair value of the original warrant measured immediately before its price is modified
based on current assumptions. The total incremental stock-based compensation expense was $892,000 recorded in other income
(expense), net on the consolidated statements of operations during fiscal year 2019.
Pursuant to the Warrant Amendment
Agreement entered into with the Holders of Series F Warrants and Series G Warrants, if the exercise of an Original Warrant at the
Reduced Exercise Price would cause such a Holder to exceed the 9.99% beneficial ownership limitation (the “Beneficial Ownership
Limitation”), in lieu of receiving such number of shares of common stock in excess of the Beneficial Ownership Limitation,
the Company will only issue such number of shares of common stock to such Holder as would not cause such Holder to exceed the maximum
number of shares of common stock permitted under the Beneficial Ownership Limitation, and such Holder shall be issued, at an exercise
price equal to the Reduced Exercise Price less $0.01 per share, pre-funded common stock purchase warrants covering such number
of shares of common stock as would otherwise have been in excess of the Beneficial Ownership Limitation (the “Pre-Funded
Warrants”, and collectively with the Original Warrants and the Amended Warrants, the “Warrants”). In connection
with such exercises, two Holders were issued Pre-Funded Warrants to purchase an aggregate of 414,364 shares of common stock.
Additionally, pursuant to the
Warrant Amendment Agreements, the Company agreed to prepare and file with the SEC, as soon as practicable, but in no event later
than November 4, 2019 (as extended by the Settlement Agreements (as defined below) to November 18, 2019), a registration statement
on Form S-3 to register all shares of common stock received by the Holders upon exercise of any Warrant (as defined in the Warrant
Amendment Agreements) and all shares of common stock underlying the Original Warrants (as defined in the Warrant Amendment Agreements)
(such issued and underlying shares, the “Resale Shares”). On December 3, 2019, the Company filed a prospectus to its
Registration Statement on Form S-3 (Registration No. 333-234787) for the registration of the Resale Shares.
From November 3, 2019 to November
6, 2019, the Company entered into settlement agreements (each a “Settlement Agreement” and collectively, the “Settlement
Agreements”) with each of the Holders (other than the Medalist Funds (as defined herein), whose Settlement Agreement is described
below) pursuant to which the Company agreed to issue such Holders an aggregate of 152,944 additional shares of common stock, with
such shares meant to compensate such Holders for the difference between the Amended Exercise Price and the lower priced shares
that were offered to investors in connection with the Company’s earlier registered direct offering of an aggregate of 2,500,000
shares of common stock, priced at $0.70 per share, that the Company closed on October 16, 2019 (the “Registered Direct Offering”).
In addition, pursuant to the Settlement Agreements, the Company and the Holders agreed to extend the date by which the Company
would file a registration statement on Form S-3 to register all of the Resale Shares from November 4, 2019 to November 18, 2019.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
7.
|
Convertible Preferred Stock and Stockholders’ Equity, continued
|
Information regarding
warrants for common stock outstanding and exercisable as of December 31, 2019 is as follows:
|
|
|
|
Warrants
|
|
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Outstanding as of
|
|
|
Remaining
|
|
|
Exercisable as of
|
|
|
Price
|
|
|
December 31, 2019
|
|
|
Life (years)
|
|
|
December 31, 2019
|
|
|
$0.79 - $2.18
|
|
|
|
2,653,956
|
|
|
|
2.95
|
|
|
|
2,456,684
|
|
|
$3.00 - $4.00
|
|
|
|
3,638,911
|
|
|
|
2.94
|
|
|
|
3,638,911
|
|
|
$4.50 - $4.95
|
|
|
|
187,767
|
|
|
|
1.41
|
|
|
|
187,767
|
|
|
$5.40 - $6.25
|
|
|
|
1,454,826
|
|
|
|
2.62
|
|
|
|
1,454,826
|
|
|
$10.35
|
|
|
|
1,634
|
|
|
|
1.28
|
|
|
|
1,634
|
|
|
$3.58
|
|
|
|
7,937,094
|
|
|
|
3.00
|
|
|
|
7,739,822
|
|
Warrants exercisable as of December
31, 2019 excludes warrants to purchase 197,272 common shares issued to Alexander Capital L.P., which are fully vested, but are
exercisable in the amounts of 122,272 and 75,000 after May 21, 2020 and October 16, 2020, respectively.
Information regarding warrants
for common stock outstanding and exercisable as of December 31, 2018 is as follows:
|
|
|
|
Warrants
|
|
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Outstanding as of
|
|
|
Remaining
|
|
|
Exercisable as of
|
|
|
Price
|
|
|
December 31, 2018
|
|
|
Life (years)
|
|
|
December 31, 2018
|
|
|
$2.00
|
|
|
|
275,000
|
|
|
|
4.26
|
|
|
|
97,778
|
|
|
$3.00 - $4.00
|
|
|
|
5,522,720
|
|
|
|
4.21
|
|
|
|
5,522,720
|
|
|
$4.50 - $4.95
|
|
|
|
298,882
|
|
|
|
2.73
|
|
|
|
298,882
|
|
|
$5.40 - $6.25
|
|
|
|
2,543,577
|
|
|
|
3.58
|
|
|
|
2,543,577
|
|
|
$10.35
|
|
|
|
1,634
|
|
|
|
2.28
|
|
|
|
1,634
|
|
|
$3.85
|
|
|
|
8,641,813
|
|
|
|
3.97
|
|
|
|
8,464,591
|
|
Warrants exercisable as of December
31, 2018, excludes warrants to purchase 177,222 common shares issued to Mr. Howse which have not yet vested.
On December 31, 2017, the Company
converted from a limited liability company and became a taxable entity (“C Corporation”).
The domestic and foreign components
of loss before provision for income taxes for the years ended December 31, 2019 and 2018 were as follows:
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
Domestic
|
|
$
|
(12,028
|
)
|
|
$
|
(67,327
|
)
|
|
Foreign
|
|
|
(2
|
)
|
|
|
(22
|
)
|
|
Loss before provision for income taxes
|
|
$
|
(12,030
|
)
|
|
$
|
(67,349
|
)
|
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
8.
|
Income Taxes, continued
|
The following represent components
of the income tax expense for the years ended December 31, 2019 and 2018:
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
8
|
|
|
|
8
|
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
Total current provision for income taxes
|
|
|
8
|
|
|
|
8
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
Total deferred provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
8
|
|
|
$
|
8
|
|
Tax effects of temporary differences
that give rise to significant portions of the Company’s deferred tax assets at December 31, 2019 and 2018 are presented below:
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
7,170
|
|
|
$
|
4,894
|
|
|
Accruals and reserves
|
|
|
80
|
|
|
|
64
|
|
|
Amortization of intangible assets
|
|
|
1,983
|
|
|
|
1,747
|
|
|
Other
|
|
|
206
|
|
|
|
115
|
|
|
Gross deferred tax assets
|
|
|
9,439
|
|
|
|
6,820
|
|
|
Valuation allowance
|
|
|
(9,382
|
)
|
|
|
(6,783
|
)
|
|
Total deferred tax assets
|
|
|
57
|
|
|
|
37
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(57
|
)
|
|
|
(37
|
)
|
|
Total deferred tax liabilities
|
|
|
(57
|
)
|
|
|
(37
|
)
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
8.
|
Income Taxes, continued
|
The Company’s accounting
for deferred taxes involves the evaluation of a number of factors concerning the realizability of the Company’s net deferred
tax assets. The Company primarily considered such factors as the Company’s history of operating losses; the nature of the
Company’s deferred tax assets and the timing, likelihood and amount, if any, of future taxable income during the periods
in which those temporary differences and carryforwards become deductible. At present, the Company does not believe that it is “more-likely-than-not”
that the deferred tax assets will be realized; accordingly, a full valuation allowance was maintained, and no deferred tax assets
were shown in the accompanying consolidated balance sheets. The valuation allowance increased by $2,599,000 and decreased by $7,096,000
during the years ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, the
Company had federal net operating loss carryforwards of $25,598,000. The federal net operating loss carryforwards will carryforward
indefinitely but are subject to the 80% taxable income limitation.
As of December 31, 2019, the
Company had state net operating loss carryforwards of $25,589,000, which will begin to expire in 2038.
As of December 31, 2019, the
Company had foreign net operating loss carryforwards of $24,000, which will begin to expire in 2027.
Utilization of the Company’s
net operating losses and credit carryforwards may be subject to annual limitations in the event of a Section 382 ownership change.
Such future limitations could result in the expiration of net operating losses and credit carryforwards before utilization as a
result of such an ownership change.
Provision for income taxes
for the years ended December 31, 2019 and 2018 differed from the amounts computed by applying the statutory federal income tax
rate of 21% to loss before provision for income taxes as a result of the following:
|
|
|
Year Ended December 31,
|
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
Effective tax rate reconciliation:
|
|
|
|
|
|
|
|
|
|
Income tax provision at statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
State taxes, net of federal benefit
|
|
|
(0.1
|
)
|
|
|
-
|
|
|
Other permanent differences
|
|
|
(1.2
|
)
|
|
|
(13.9
|
)
|
|
Change in valuation allowance
|
|
|
(19.7
|
)
|
|
|
(7.1
|
)
|
|
Total income tax benefit (expense)
|
|
|
-
|
%
|
|
|
-
|
%
|
Tax positions are evaluated
in a two-step process. The Company first determines whether it is “more-likely-than-not” that a tax position will be
sustained upon examination. If a tax position meets the “more-likely-than-not” recognition threshold it is then measured
to determine the amount of benefit to recognize in the consolidated financial statements. The tax position is measured as the largest
amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The aggregate changes in the balance
of gross unrecognized tax benefits, which excludes interest and penalties, for the years ended December 31, 2019 and 2018 is zero.
The Company has not incurred
any material tax interest or penalties as of December 31, 2019. The Company does not anticipate any significant change within 12
months of this reporting date of its uncertain tax positions. The Company is subject to taxation in the United States, Japan, and
various state jurisdictions. There are no ongoing examinations by taxing authorities at this time. The Company’s various
tax years 2013 through 2019 remain open for examination by various taxing jurisdictions.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
8.
|
Income Taxes, continued
|
The Company recognizes interest
and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2019 and 2018, the Company
has not accrued any penalties or interest related to uncertain tax positions.
The Company intends to indefinitely
reinvest the Japan earnings outside of the U.S. as of December 31, 2019. Thus, deferred taxes are not provided in the U.S. for
unremitted earnings in Japan.
|
9.
|
Commitments and Contingencies
|
Operating Leases
The Company rents its Beaverton,
Oregon office under an operating lease, which was set to expire in October 2018. In July 2018, the Company extended its lease through
October 31, 2020. Under the terms of the lease, the Company is responsible for taxes, insurance and maintenance expense. The Company
recognizes rent expense on a straight-line basis over the lease period. Rent expense for the years ended December 31, 2019 and
2018 was $378,000 and $349,000, respectively.
Future annual minimum lease
payments under the non-cancelable operating lease as of December 31, 2019 is $304,000 for the year ending December 31, 2020.
Other Commitments
From 2011 to January 30, 2018,
employees, consultants, and directors of the Company were entitled to participate in the Plan at the discretion of the Company’s
Board of Directors. Each Plan participant was awarded points which entitled the participant to a portion of the proceeds payable
to the Company and/or its members upon a sale of the Company. The proceeds payable to a Plan participant were to equal an amount
determined in accordance with the following formula: number of points held by participant, divided by total points outstanding,
multiplied by 18% of Net Sale Price. For this purpose, “Net Sale Price” equaled the aggregate amount payable to the
Company and/or its members in connection with a sale of the Company, less all amounts payable to creditors of the Company. Awards
payable to Plan participants were senior to any amounts payable to members of the Company. As of December 31, 2017, the Company
had not recorded a liability relating to the Plan, as any amounts payable under the Plan would be recognized as compensation expense
in the consolidated statement of operations during the period that the Company would have become obligated to make such payments.
On January 30, 2018, the
Company’s Board of Directors terminated the Plan and adopted the LTIP. (See Note 7 – Convertible Preferred Stock
and Stockholders’ Equity (Deficit)).
Contingencies
In the normal course of business,
the Company may become involved in legal proceedings. The Company will accrue a liability for such matters when it is probable
that a liability has been incurred and the amount can be reasonably estimated. When only a range of a possible loss can be established,
the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within
the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example,
estimates of potential damages, outside legal fees and other directly related costs expected to be incurred.
The Company’s management
does not believe that any such matters, individually or in the aggregate, will have a materially adverse effect on the Company’s
consolidated financial statements.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
Trademarks are being amortized
on a straight line basis over their respective estimated useful life of 36 months.
|
|
|
December 31, 2019
|
|
|
|
|
Estimated
Useful
Life (in
Years)
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Trademarks
|
|
|
3
|
|
|
$
|
100,000
|
|
|
$
|
72,000
|
|
$
|
28,000
|
|
|
|
December 31, 2018
|
|
|
|
|
Estimated
Useful
Life (in
Years)
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Trademarks
|
|
|
3
|
|
|
$100,000
|
|
$
|
39,000
|
|
$
|
61,000
|
The estimated future amortization
expense of acquisition-related intangible assets subject to amortization as of December 31, 2019 is $28,000 for the year ending
December 31, 2020.
Brett Moyer
Mr. Moyer has served as the
Company’s President, Chief Executive Officer and a board member since the Company’s founding in August 2010. Effective
February 28, 2018, Mr. Moyer agreed to extend the maturity date of his Series D Convertible Note to June 30, 2018, which was later
amended to extend the maturity date to July 25, 2018. In connection with the maturity date extension, Mr. Moyer received a warrant
to purchase 9,058 shares of common stock at an exercise price of $5.40 and which accrued an additional 10% interest on the first
day of every month, beginning March 1, 2018, so long as such Series D Convertible Note remains outstanding. In April 2018, the
Company issued Mr. Moyer a $63,000 Series G Note, initially due June 15, 2018, in consideration for $50,000 of expenses incurred
by Mr. Moyer. In June 2018, in consideration for extending the maturity date of the Series G Note to July 15, 2018, Mr. Moyer was
granted a warrant to purchase 4,630 shares of common stock at an exercise price equal to the lesser of (i) $4.50 or (ii) the price
per share of common stock sold in the Company’s IPO, multiplied by 60%. In July 2018, in consideration for the extension
of the Series G Note maturity date to July 25, 2018 and the agreement to make the Series G Note automatically convertible, Mr.
Moyer was granted a warrant to purchase 13,889 shares of common stock at an exercise price equal to the lesser of (i) $4.50 or
(ii) the price per share of common stock sold in the Company’s IPO, multiplied by 60%. On July 25, 2018, in connection with
the Company’s IPO, $537,000 of principal under convertible promissory notes, and all accrued interest, was automatically
converted into a total of 157,881 shares of common stock and the warrants issued in connection with the Series G Notes had their
exercise price adjusted to $3.00.
On October 7, 2019, Mr. Moyer
entered into a Warrant Amendment Agreement and Settlement Agreement with the Company, as discussed in Note 7 - Warrant Amendment
and Exercise Agreements. Mr. Moyer exercised Original Warrants for a total of 9,058 shares of common stock and the Company received
proceeds of $7,246. On November 6, 2019, Mr. Moyer entered into a Settlement Agreement with the Company, pursuant to which
the Company issued Mr. Moyer 1,294 additional shares of common stock.
As of December 31, 2019 and
2018, Mr. Moyer was owed $0 of principal under convertible promissory notes and owned 1.9% and 1.5% of the outstanding shares of
the Company’s common stock respectively.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
Gary Williams
Mr. Williams has served as the
Company’s Chief Accounting Officer since September 2019, as the Company’s VP of Finance since August 2010 and previously
served as the Company’s Chief Financial Officer from August 2010 to September 2019.
On October 7, 2019, Mr. Williams
entered into a Warrant Amendment Agreement and Settlement Agreement with the Company, as discussed in Note 7 - Warrant Amendment
and Exercise Agreements. Mr. Williams exercised Original Warrants for a total of 3,578 shares of common stock and the Company received
proceeds of $2,862. On November 3, 2019, Mr. Williams entered in a Settlement Agreement with the Company, pursuant to which
the Company issued Mr. Williams 512 additional shares of common stock.
As of December 31, 2019, Mr.
Williams owned less than 1% of the outstanding shares of the Company’s common stock.
Michael Fazio
Mr. Fazio is the chairman of
MARCorp Financial LLC, a private equity firm located in Illinois. Mr. Fazio served as a member of the Company’s board of
directors from May 2017 to June 2019. On May 17, 2017, the Company entered into a securities purchase agreement with MARCorp Signal,
LLC, pursuant to which the Company borrowed a total of $5,000,000 from MARCorp Signal, LLC in consideration for the Series E Convertible
Note. MARCorp Signal, LLC is a wholly-owned subsidiary of MARCorp Financial LLC. In connection with such borrowings, MARCorp Signal,
LLC was issued a warrant to purchase 2,614,381 of the Company’s common units, which warrant was exercisable at $4.50 per
unit and had a five-year life. On November 30, 2017, MARCorp Signal, LLC’s Series E Convertible Note was repaid by the Company
in full. Pursuant to a settlement agreement that the Company entered into with MARCorp Signal, LLC on July 25, 2018, a warrant
to purchase an aggregate of 487,864 shares of common stock was issued to MARCorp Signal, LLC, and following the Company’s
IPO, the exercise price of the warrants issued in connection with the Series E Convertible Note became $3.00. On June 19, 2019,
Mr. Fazio notified the Company of his decision to resign from the Company’s board of directors effective June 19, 2019. Mr.
Fazio resigned to focus on managing MARCorp Financial LLC and not due to any disagreement between the Company and Mr. Fazio, or
any matter related to the Company s operations, policies or practices. As of December 31, 2019 and 2018, Mr. Fazio was owed
$0 of principal under convertible promissory notes.
Jonathan Gazdak
Mr. Gazdak is Managing Director
– Head of Investment Banking for Alexander Capital, L.P., an investment banking firm based in New York. Mr. Gazdak has been
a member of the Company’s board of directors since September 2015. Alexander Capital, L.P. has acted as the lead investment
bank in a number of the Company’s private financings. Effective February 28, 2018, Mr. Gazdak agreed to extend the maturity
date of his Series D Convertible Note to June 30, 2018, which was later amended to extend the maturity date to July 25, 2018. In
connection with the maturity date extension, Mr. Gazdak received a warrant to purchase 1,569 shares of common stock at an exercise
price of $5.40 and accrued an additional 10% interest on the first day of every month, beginning March 1, 2018, so long as such
Series D Convertible Note remains outstanding. On July 25, 2018, in connection with the Company’s IPO, $21,000 of principal
under convertible promissory notes, and all accrued interest, were automatically converted into a total of 5,647 shares of common
stock.
On October 7, 2019, Mr. Gazdak
entered into a Warrant Amendment Agreement and Settlement Agreement with the Company, as discussed in Note 7 - Warrant Amendment
and Exercise Agreements. Mr. Gazdak exercised Original Warrants for a total of 3,138 shares of common stock and the Company received
proceeds of $2,510. On November 6, 2019, Mr. Gazdak entered into a Settlement Agreement with the Company, pursuant to which
the Company issued Mr. Gazdak 449 additional shares of common stock.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
11.
|
Related Parties, continued
|
As of December 31, 2019 and
2018, Mr. Gazdak was owed $0 of principal under convertible promissory notes and owned less than 1% of the outstanding shares of
the Company’s common stock.
The Company signed an engagement
letter with Alexander Capital, L.P. in August of 2014 (“August 2014 Engagement Letter”), under which Alexander Capital,
L.P. earned a fee on total investments by its clients. Alexander Capital, L.P. earned fees of $321,000 for the year ended December
31, 2018, respectively, under the August 2014 Engagement Letter. As of December 31, 2019, Alexander Capital, L.P. has been issued
warrants to purchase a total of 588,391 shares of common stock, exercisable at prices between $3.30 and $5.40 per share and for
five years from the date of issuance, under the August 2014 Engagement Letter. The August 2014 Engagement Letter was terminated
upon the completion of the IPO.
Pursuant to the underwriting
agreement entered into between the Company and Alexander Capital, L.P. in connection with the IPO (the “Underwriting Agreement”),
Alexander Capital, L.P. was paid a cash fee of $900,000, as well as a non-accountable expense allowance of $120,000 and reimbursements
of $100,000. Pursuant to the Underwriting Agreement, we issued Alexander Capital, L.P. warrants to purchase 72,000 shares of common
stock. Such warrants are fully vested, exercisable at a per share price of $6.25 and are exercisable at any time during the five-year
period commencing 180 days from the effective date of the IPO, which period shall not exceed five years from such effective date.
The Company signed an engagement
letter with Alexander Capital, L.P. on April 4, 2019 (“April 4, 2019 Engagement Letter”), under which Alexander Capital,
L.P. earns a fee on total investments by its clients. In connection with the issuance of the initial tranche of the Series A Preferred
Stock, Alexander Capital, L.P. earned fees of $80,000 and was issued a warrant to purchase a total of 40,816 shares of common stock
at an exercise price of $2.18 per share. The warrant is fully vested and exercisable after October 18, 2019 through April 18, 2024.
On April 17, 2019, the Company
entered into an underwriting agreement with Alexander Capital, L.P. in connection with an offering by the Company of 4,075,726
shares of common stock, pursuant to which Alexander Capital, L.P. was paid cash fees of $406,554 as well as a non-accountable expense
allowance of $54,207 and reimbursements of $100,000 and pursuant to which the Company agreed to issue a warrant to purchase 122,272
shares of common stock. Such warrant is exercisable at a per share price of $1.66. The warrant is fully vested and exercisable
after May 21, 2020 through May 21, 2024.
On October 16, 2019, the Company
entered into another underwriting agreement with Alexander Capital, L.P. in connection with an offering by the Company of up to
an aggregate of 2,500,000 shares of common stock, pursuant to which Alexander Capital, L.P. was paid cash fees of $131,250 as well
as a non-accountable expense allowance of $17,500 and reimbursements of $43,750 and pursuant to which the Company agreed to issue
a warrant to purchase 75,000 shares of common stock. Such warrant is exercisable at a per share price of $0.875. The warrant is
fully vested and exercisable after October 16, 2020 through October 16, 2024.
In connection with the Company’s
entry in the Warrant Amendment Agreements, Alexander Capital, L.P. was paid a cash fee of $51,374.
Summit
Wireless Technologies, Inc.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
11.
|
Related Parties, continued
|
Brian Herr
Mr. Herr has been a member of
the Company’s board of directors since February 2018. Mr. Herr is Chief Investment Officer and Co-Head of Structured Credit
and Asset Finance for the Medalist Partners platform (f/k/a Candlewood Structured Strategy Funds) and serves as a co-portfolio
manager for the Medalist Partners Harvest Master Fund, Ltd. and Medalist Partners Opportunity Master Fund A, LP (collectively,
the “Medalist Funds”). Mr. Herr was granted a seat on the Company’s board of directors pursuant to a securities
purchase agreement, dated as of November 30, 2017, between the Company and the Medalist Funds, pursuant to which the Company also
issued to the Medalist Funds an aggregate of $2,000,000 Series F Convertible Notes, due June 30, 2018, which was later amended
to extend the maturity date to July 25, 2018, and warrants to purchase an aggregate of 222,222 shares of our common stock. In addition,
between April 20, 2018 and June 29, 2018, the Company issued an aggregate of $2,438,000 of Series G Notes due July 15, 2018, as
amended to the Medalist Funds and warrants to purchase an aggregate of 180,570 shares of our common stock. In July 2018, in consideration
for the extension of the Series G Note maturity date to July 25, 2018 and the agreement to make the Series G Note automatically
convertible, the Medalist Funds were granted a warrant to purchase 541,666 shares of common stock at an exercise price equal to
the lesser of (i) $4.50 or (ii) the price per share of common stock sold in the Company’s IPO, multiplied by 60%. On July
25, 2018, in connection with the Company’s IPO, $3,950,000 of principal under convertible promissory notes, and all accrued
interest, were automatically converted into a total of 1,950,348 shares of common stock and the exercise price of the warrants
issued in connection with the Series G Notes became $3.00.
In addition, on October 8, 2019,
each of the Medalist Funds entered into a Warrant Amendment Agreement with the Company, as discussed in Note 7 - Warrant Amendment
and Exercise Agreements. The Medalist Funds exercised Original Warrants, in aggregate, a total of 57,868 shares of common stock
and the Company received proceeds of $46,294.
Pursuant to Warrant Amendment
Agreements that were entered into with each of the Medalist Funds, with respect to the Series F Warrants and Series G Warrants,
if the exercise of an Original Warrant at the Reduced Exercise Price would cause each of the Medalist Funds to exceed the Beneficial
Ownership Limitation, in lieu of receiving such number of shares of common stock in excess of the Beneficial Ownership Limitation,
the Company will only issue such number of shares of common stock to each of the Medalist Funds as would not cause each of the
Medalist Funds to exceed the maximum number of shares of common stock permitted under the Beneficial Ownership Limitation, and
each of the Medalist Funds shall be issued, at an exercise price equal to the Reduced Exercise Price less $0.79 per share, pre-funded
common stock purchase warrants covering such number of shares of common stock as would otherwise have been in excess of the Beneficial
Ownership Limitation (the “Pre-Funded Warrants”). In connection with such exercises, the Medalist Funds were issued
Pre-Funded Warrants to purchase an aggregate of 414,364 shares of common stock. The Company received aggregate gross proceeds of
approximately $327,000 in connection with the Pre-Funded Warrants.
On November 4, 2019, the Company
entered into a Settlement Agreement with the Medalist Funds, pursuant to which the Company agreed to pay the Medalist Funds an
aggregate of $47,223 in cash, with such cash meant to compensate the Medalist Funds for the difference between the Amended Exercise
Price and the lower priced shares of common stock that were offered to investors in connection with the Registered Direct Offering.
In addition, pursuant to the Settlement Agreement, the Company and the Medalist Funds agreed to extend the date by which the Company
would file a registration statement on Form S-3 to register all of the Resale Shares from November 4, 2019 to November 18, 2019.
On February 6, 2020, Mr. Herr
notified the Company of his decision to resign from the Company’s board of directors effective February 10, 2020. Mr. Herr
resigned to focus on managing the Medalist Funds and not due to any disagreement between the Company and Mr. Herr, or any matter
related to the Company s operations, policies or practices. As of December 31, 2019 and 2018, the Medalist Funds were owed $0 of
principal under convertible promissory notes and owned 8.3% and 12.8% of the outstanding shares of the Company’s common stock,
respectively.
Summit
Wireless Technologies, Inc.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
11.
|
Related Parties, continued
|
Michael Howse
We are party to an agreement
with Michael Howse, dated April 6, 2018, as amended effective as of December 27, 2018 (the “Howse Agreement”), pursuant
to which Mr. Howse was appointed interim role as chief strategy officer on an “at-will” basis in consideration for
a monthly cash salary as well as (i) a warrant to purchase 110,000 shares of our common stock, exercisable at a per share price
of $2.00 and which vested monthly over a nine-month period and which fully vested on January 6, 2019 and (ii) a warrant to purchase
165,000 shares of our common stock, exercisable at a per share price of $2.00, which shall vest, so long as Mr. Howse continues
to serve as interim chief strategy officer and/or as a member of our board of directors, (x) as to 110,000 shares of common stock
upon the achievement of a significant milestone and (y) as to 65,000 shares of common stock upon the achievement of an additional
significant milestone. The foregoing exercise prices are subject to adjustment as provided in each warrant. Pursuant to the Howse
Agreement, such warrants shall fully vest on the earlier of (1) immediately prior to a Fundamental Transaction, as defined in such
agreement, and (2) Mr. Howse’s removal from our board of directors for any reason other than his resignation, his intentional
illegal conduct or gross misconduct, or his conviction for any felony, theft, embezzlement or violent crime. In addition, pursuant
to the Howse Agreement, we also agreed to appoint Mr. Howse to our board of directors, where he may only be removed for cause,
or his termination or resignation.
Under the Howse Agreement, if
the Company raises capital in one or more financings from certain pre-approved strategic investors, or is acquired by a third-party
during the period that Mr. Howse serves as interim chief strategy officer (or within six months thereafter), he will receive a
percentage cash bonus concurrently with the closing of such transaction based on the amount raised or consideration paid for the
Company, as applicable, (A) which bonus doubles in the event that the Company does not incur an amount equal to 2% or more of the
consideration (as defined in the Howse Agreement) in fees to any investment bank in connection with such transaction, if such transaction
is a Fundamental Transaction, and (B) 50% of which bonus may be paid as a convertible note or preferred equity with the same terms
as the other participants in such transaction, if such transaction is a financing. Pursuant to the Howse Agreement, we may terminate
Mr. Howse at any time, with or without cause, upon 90 days’ prior written notice. Such agreement provides for Company-sponsored
benefits in accordance with our policies. Pursuant to the Howse Agreement, effective November 1, 2018, Mr. Howse was placed on
our payroll and is now considered a part-time Company employee.
In connection with the Howse
Agreement, the Company is also party to the Deferred Shares Agreement, entered into as January 4, 2019 (the “Deferred Shares
Agreement”), pursuant to which the Company granted Mr. Howse up to 400,000 deferred shares under the LTIP (the “Deferred
Shares”). Pursuant to such agreement, if a Fundamental Transaction has not occurred within 180 days of the earlier of the
date on which Mr. Howse no longer serves (i) as our interim chief strategy officer or (ii) on our board of directors, all of the
Deferred Shares shall be forfeited and Mr. Howse will have no further rights to such shares. Pursuant to such agreement, the Deferred
Shares shall vest immediately prior to a Fundamental Transaction, and the number of Deferred Shares that shall vest is based on
the consideration paid for the Company in such transaction, which number of Deferred Shares that shall vest to double in the event
that the Company does not incur general expenses (as defined).
As of December 31, 2019, Mr.
Howse has vested warrants to purchase 275,000 shares of common stock and owns 0% of the outstanding shares of the Company’s
common stock.
Summit
Wireless Technologies, Inc.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
11.
|
Related Parties, continued
|
Helge Kristensen
Mr. Kristensen has served as
a member of the Company’s board of directors since 2010. Mr. Kristensen serves as vice president of Hansong Technology, an
original device manufacturer of audio products based in China, president of Platin Gate Technology (Nanjing) Co. Ltd, a company
with focus on service-branding in lifestyle products as well as pro line products based in China and co-founder and director of
Inizio Capital, an investment company based in the Cayman Islands. Effective February 28, 2018, Inizio Capital and Hansong Technology
agreed to extend the maturity dates of the Five February 2016 Note and the December 2015 Note, respectively to June 30, 2018, which
was later amended to extend the maturity date to July 25, 2018. In connection with the maturity date extensions, Inizio Capital
and Hansong Technology received warrants to purchase 1,341 and 942 shares of common stock, respectively, at an exercise price of
$5.40. On July 25, 2018, in connection with the Company’s IPO, $50,000 of principal under convertible promissory notes, and
all accrued interest, were automatically converted into a total of 27,923 shares of common stock. In August 2019, the Company issued
Hansong Technology a purchase order in the amount of $360,000, to purchase wireless audio speaker systems, for delivery in the
fourth quarter of 2019.
In August 2019, we issued a
$360,000 purchase order to Hansong Technology. Pursuant to such purchase order, we will pay $360,000 to Hansong Technology for
the purchase of certain products. As of December 31, 2019, the full $360,000, due Hansong Technology remained unpaid. At the
time these payments are made, it is likely that Mr. Kristensen would no longer be considered an “independent director”.
Additionally, Hansong Technology purchased $63,523 of our modules pursuant to purchase orders issued in 2019, with $22,923 received
by us in 2019 and the remaining amount expected to be received in 2020.
As of December 31, 2019 and
2018, affiliates of Mr. Kristensen were owed $0 of principal under convertible promissory notes and owned less than 1.0% of the
outstanding shares of the Company’s common stock.
Significant Shareholders
In January 2017, Carl E. Berg
invested the aggregate sum of $300,000 in the Company’s Series D Convertible Note financing described in Note 5 of the Notes
to the Consolidated Financial Statements and was granted a warrant to purchase 39,216 shares of common stock at an exercise price
of $5.40. Effective February 28, 2018, Mr. Berg agreed to extend the maturity date of his Series D Convertible Note to June 30,
2018, which was later amended to extend the maturity date to July 25, 2018. In connection with the maturity date extension, Mr.
Berg received a warrant to purchase 39,216 shares of common stock at an exercise price of $5.40 and accrued an additional 10% interest
on the first day of every month, beginning March 1, 2018, so long as such Series D Convertible Note remained outstanding. In addition,
Mr. Berg agreed to extend the maturity date of his various other convertibles notes to June 30, 2018, which was later amended to
extend the maturity date to July 25, 2018. In connection with the maturity date extensions, Mr. Berg received warrants to purchase
a total of 25,965 shares of common stock at an exercise price of $5.40. On July 25, 2018, in connection with the Company’s
IPO, $1,479,000 of principal under convertible promissory notes, and all accrued interest, were automatically converted into a
total of 464,687 shares of common stock.
As of December 31, 2019 and,
2018, Mr. Berg was owed $0 of principal under convertible promissory notes and owned 6.5% and 10.4% of the outstanding shares of
the Company’s common stock, respectively.
Summit
Wireless Technologies, Inc.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
11.
|
Related Parties, continued
|
In November 2017, Lisa Walsh
invested $6,500,000 in the Company’s Series F Convertible Note financing and was issued warrants to purchase 722,222 shares
of common stock at an exercise price of $5.40 per share. Effective February 28, 2018, Ms. Walsh agreed to extend the maturity
date of her Series D Convertible Note to June 30, 2018, which was later amended to extend the maturity date to July 25, 2018. In
connection with the maturity date extension, Ms. Walsh received a warrant to purchase 112,419 shares of common stock at an exercise
price of $5.40 and accrued an additional 10% interest on the first day of every month, beginning March 1, 2018, so long as such
Series D Convertible Note remained outstanding. In May 2018, the Company issued Ms. Walsh a $288,000 Series G Note, initially due
June 15, 2018. In June 2018, in consideration for extending the maturity date of the Series G Note to July 15, 2018, Ms. Walsh
was granted a warrant to purchase 23,150 shares of common stock at an exercise price equal to the lesser of (i) $4.50 or (ii) the
price per share of common stock sold in the Company’s IPO, multiplied by 60%. In July 2018, in consideration for the extension
of the Series G Note maturity date to July 25, 2018 and the agreement to make the Series G Note automatically convertible, Ms.
Walsh was granted a warrant to purchase 69,444 shares of common stock at an exercise price equal to the lesser of (i) $4.50 or
(ii) the price per share of common stock sold in the Company’s IPO, multiplied by 60%. On July 25, 2018, in connection with
the Company’s IPO, $8,330,000 of principal under convertible promissory notes, and all accrued interest, were automatically
converted into a total of 2,938,650 shares of common stock and the exercise price of the warrants issued in connection with the
Series G Notes became $3.00.
On April 18, 2019, Ms. Walsh agreed
to purchase 250,000 shares of our Series A Preferred Stock in consideration for $1,000,000. Ms. Walsh was granted a warrant to
purchase 255,102 shares of our common stock at an exercise price of $1.98 per share.
On October 16, 2019, in connection
with the Registered Direct Offering, Ms. Walsh purchased 1,000,000 shares of Common Stock at a price of $0.70 per share. The Company
received proceeds of $700,000 from such purchase.
On October 7, 2019, Ms. Walsh entered into a Warrant Amendment
Agreement and Settlement Agreement with the Company, as discussed in Note 7 - Warrant Amendment and Exercise Agreements. Ms. Walsh
exercised Original Warrants for a total of 519,827 shares of Common Stock and the Company received proceeds of approximately
$416,000. On November 3, 2019, Ms. Walsh entered into a Settlement Agreement with the Company, pursuant to which the Company agreed
to issue Ms. Walsh 74,261 additional shares of Common Stock.
As of December 31, 2019 and
2018, Ms. Walsh was owed $0 of principal under convertible promissory notes and owned 22.8% and 26.4% of the outstanding shares
of the Company’s common stock, respectively. In addition, Ms. Walsh owns 100% of the Company’s Series A Preferred
Stock.
The Company operates in one
business segment, wireless audio products. Our chief decision-maker, the President and Chief Executive Officer, evaluates our performance
based on company-wide consolidated results.
Summit
Wireless Technologies, Inc.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
12.
|
Segment Information, continued
|
Net revenue from customers is
designated based on the geographic region to which the product is delivered. Net revenue by geographic region for the years ended
December 31, 2019 and 2018 was as follows:
|
|
|
For the year ended
|
|
|
|
|
December 31,
|
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
United States
|
|
$
|
23
|
|
|
$
|
7
|
|
|
Europe
|
|
|
456
|
|
|
|
533
|
|
|
Asia Pacific
|
|
|
1,187
|
|
|
|
834
|
|
|
Total
|
|
$
|
1,666
|
|
|
$
|
1,374
|
|
Substantially all of our long-lived
assets are located in the United States.
February 2020 Private Placement
On February 28, 2020, the Company
released the last of four escrow drawdowns, thus completing a private placement (the “Private Placement”) of $835,000
of units (the “Units”), each consisting of (i) one (1) share of common stock and (ii) a warrant to purchase 0.50 share
of common stock (collectively, the “Warrants,” and together with the Units, the common stock and the shares of common
stock issuable upon exercise of the Warrants (the “Investor Warrant Shares”), at a price per Unit of $0.4585 (the “Price
Per Unit”). The Units were issued pursuant to a Unit Purchase Agreement, dated February 4, 2020 (the “Purchase Agreement”),
and a Subscription Agreement, dated February 28, 2020 (the “Subscription Agreement”) by and among the Company and the
purchaser signatory thereto (the “Holder”). The Private Placement, which was priced above market, resulted in gross
proceeds of $835,000 before fees and other expenses associated with the transaction. The proceeds will be used primarily toward
increasing shareholders equity to comply with Nasdaq Listing Rule 5550(b) and for general corporate purposes.
The Warrants are exercisable
to purchase up to an aggregate of 906,390 shares of common stock commencing on the date of issuance at an exercise price of $0.49
per share (the “Exercise Price”). The Warrants are exercisable immediately and will expire on the close of business
on February 28, 2025. The Exercise Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital
changes.
The exercise of the Warrants
are subject to beneficial ownership limitations such that the Holder may exercise a Warrant to the extent that such exercise would
result in the Holder being the beneficial owner in excess of 4.99% (or, upon election of purchaser, 9.99%), which beneficial ownership
limitation may be increased or decreased up to 9.99% upon notice to the Company, provided that any increase in such limitation
will not be effective until 61 days following notice to the Company.
The offers and sales of securities
in the Private Placement were made pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act,
including pursuant to Rule 506 thereunder. Such offers and sales were made solely to “accredited investors” under Rule
506 and were made without any form of general solicitation and with full access to any information requested by the investor regarding
the Company or the securities offered in the Private Placement.
The foregoing does not purport
to be a complete description of the Unit Purchase Agreement, the Subscription Agreement, and the Warrants, is qualified in its
entirety by reference to the full text of such documents, which are attached as Exhibits 4.1, 10.1, and 10.2 to this Form 8-K and
are incorporated by reference herein.
Summit
Wireless Technologies, Inc.
Notes
To Consolidated Financial Statements
For the years ended December 31, 2019 and
2018
|
13.
|
Subsequent Events, continued
|
Funding Agreement
On January 23, 2020, we
entered into a funding agreement, as amended (the “Funding Agreement”), pursuant to which an unaffiliated accredited
investor provided us with convertible debt funding in the amount of $100,000, which was funded on January 24, 2020, so that
we could fund certain obligations due and payable on such date. The funding agreement provides for the issuance of a promissory
note, in the principal amount of $111,100, which reflects a 10% original issue discount, and is payable on or before February 24,
2020, by our paying such investor $111,100. On February 27, 2020, such parties amended the Funding Agreement to reflect
(i) that payment on such note shall be paid to such investor 45 days from execution the Funding Agreement, or March 9,
2020 (ii) that the conversion price of such note shall equal $0.35, (iii) an increase in the number of warrants to be
issued to such investor and a modification to the terms of such warrants and (iv) a modification to the conversion terms of
and rights granted under such note, which terms are described below. The outstanding principal amount of such note is convertible
into our common stock, at any time until maturity, at a conversion rate of $0.35 per share. If we do not repay the outstanding
principal amount of $111,100 on or before the amended maturity date, such investor, thereafter, has the right after 90 days from
the issuance of such note to convert the outstanding principal amount into our common stock at a conversion rate equal to the lesser
of (i) $0.35 and (ii) a discounted price to the market price of our common stock in the event that we enter into a subsequent
financing transaction with other investors. Under the terms of this financing, the investor is entitled to the issuance of
10,000 shares of our common stock and a five-year warrant exercisable for 158,714 shares of common stock with an exercise price
of $0.49 per share. Additionally, such investor has been granted a most favored nation right pursuant to the Funding Agreement.
Convertible Promissory
Note
On March 22, 2020, the Company
entered into a private placement (the “Private Placement”) of $2,040,000 in principal amount of a senior secured convertible
promissory note (the “Note”) due March 22, 2022 and a warrant (the “Warrant”) to purchase 4,553,571 shares
of the Company’s common stock, $0.0001 par value per share to an institutional investor (the “Investor”). The
Note and Warrant were issued pursuant to a Securities Purchase Agreement, entered into as of March 22, 2020 (the “Purchase
Agreement”), by and between the Company and the Investor. Upon funding, which is expected subsequent to the filing of this
Form 10-K, the Private Placement is expected to result in gross proceeds of $1,700,000, before fees and other expenses associated
with the transaction, including but not limited to, an $85,000 commitment fee payable to the Investor. The net proceeds to be received
by the Company will be used primarily for working capital, debt repayment and general corporate purposes.
