Cautionary Notice Regarding Forward Looking Statements

The information contained in Item 2 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 (this "Report"). Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this Report.

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

Examples of forward-looking statements include, but are not limited to, statements we make regarding:

? our expectations regarding future trends, expectations, and performance of our

? our expectations regarding supply chain disruptions and their impact on our

? our expectations about the impact of our strategic plans; and

? the amount and timing of our capital expenditures.

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

We are an emerging technology company and our primary business focus is to enable mainstream consumers and audio enthusiasts to experience high quality wireless audio. We intend to continue selling our proprietary wireless modules to consumer electronics companies while also expanding our focus to implement a lower cost solution by porting our software onto commercially available internet of things ("IoT") modules with integrated Wi-Fi technology.

Our technology addresses some of the main issues that we perceive are hindering the growth of the home theater: complexity of installation and cost. We believe that consumers want to experience theater quality surround sound from the comfort of their homes. However, wired home theater systems often require expensive audio-visual ("AV") receivers to decode the audio stream, leaving the consumer with the burden of concealing the wires. Hiring a professional to hide the wires into the walls or floor is invasive, complicated, costly and time consuming. Further, people who rent as opposed to own may not be able to install these systems as the installation construction needed may not be permitted under a lease agreement. Our first-generation wireless technology addresses these problems by transmitting wireless audio to each speaker at Blu-ray quality (uncompressed 24-bit audio up to 96 kHz sample rates) and emphasizing ease of setup. To our knowledge, our custom chips and modules technology is one of the few technologies available today that can stream up to eight (8) separate wireless audio channels with low latency, removing lip-sync issues between the audio and video sources. In addition, every speaker within a system that utilizes our technology can be synchronized to less than one microsecond, thus eliminating phase distortion between speakers. Our first-generation technology shows that wireless home theater systems are viable home audio solutions for the average consumer and audio enthusiast alike.

Current research and development investments focus on developing Wi-Fi compatible software for transmitting multichannel wireless audio for which patent applications have been submitted. A software solution enables smart devices that have Wi-Fi and video media to deliver surround sound audio and allows us to port our wireless audio technology to popular Wi-Fi based modules and systems on a chip ("SOC") already shipping in volume. The Company's "Discovery" module announced in January 2021 is the first IoT module solution with our embedded wireless audio software that supports up to four separate wireless audio channels and, we believe, reduces the cost per wireless channel by over 50% for soundbars and entry level home theater applications up to a 3.1 configuration. Our goal is to continue to commercialize and improve performance of a software based-solution, which other brands can integrate into their devices, that will (i) reduce integration costs for mass market use, (ii) utilize Wi-Fi for wireless connectivity, making it easy to integrate into today's high volume, low cost SOC and modules, (iii) provide a low power consumption option to allow for use in battery powered devices, and (iv) provide compatibility with popular consumer electronic operating systems.

To date, our operations have been funded through sales of our common and preferred equity, proceeds from the exercise of warrants to purchase common stock, sale of debt instruments, and revenue from the sale of our products. Our condensed consolidated financial statements contemplate the continuation of our business as a going concern. However, we are subject to the risks and uncertainties associated with an emerging business, as noted above we have no established source of capital, and we have incurred recurring losses from operations since inception.

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

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

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

Given the fact that our products are sold through a variety of distribution channels, we have experienced and we continue to expect that our sales will experience some volatility as a result of the changing and less predictable operational needs of many customers as a result of the COVID 19 pandemic. We are aware that many companies, including many of our suppliers and customers, are reporting or predicting negative impacts from COVID 19 on future operating results. To date, we have experienced shipment delays from our suppliers due to COVID 19, which have not had a material adverse impact on our operating results for the three and six months ended June 30, 2022. Although we have not experienced a material supply interruption, our customers have experienced, and may continue to experience, disruptions in their operations and supply chains as a result of COVID-19, which have resulted, and may in the future result, in delayed, reduced or canceled orders, or collection risks, and which have had, and may in the future have, an adverse effect on our results of operations. There can be no assurance that we will not experience material supply delays or interruptions in the future due to COVID 19.

To date, travel restrictions and border closures have not materially impacted our ability to obtain inventory or manufacture or deliver products or services to customers. However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm our business over the long term. Travel restrictions impacting people can restrain our ability to assist our customers and distributors as well as impact our ability to develop new distribution channels, but at present we do not expect these restrictions on personal travel to be material to our business operations or financial results.

Comparison of the Three and Six Months Ended June 30, 2022 and 2021

Revenue for the three months ended June 30, 2022 was $946,000 a decrease of $635,000, or 40%, compared to the revenue for three months ended June 30, 2021 of $1,581,000. The decrease was a result of lower Component revenue which decreased by $555,000, compared to the three months ended June 30, 2021, and lower Consumer Audio Product sales, which decreased by $80,000, compared to the three months ended June 30, 2021. Such decrease was also due in part to the supply chain interruptions experienced by our customers as a result of COVID-19, as they delayed placing orders with us until other components for their own products could be obtained.

Revenue for the six months ended June 30, 2022 was $1,512,000, a decrease of $1,222,000, or 45%, compared to the revenue for the six months ended June 30, 2021 of $2,734,000. The decrease was a result of lower Component revenue which decreased by $1,244,000, compared to the six months ended June 30, 2021, and was partially offset by Consumer Audio Product sales, which increased nominally by $22,000, compared to the six months ended June 30, 2021. Such decrease was also due in part to the supply chain interruptions experienced by our customers as a result of COVID-19, as they delayed placing orders with us until other components for their own products could be obtained.

Gross Profit and Operating Expenses

Gross profit for the three months ended June 30, 2022 was $188,000, a decrease of $271,000, compared to $459,000 gross profit for the three months ended June 30, 2021. The decrease in gross profit is mainly attributable to lower volumes of Component sales. The gross margin as a percent of sales was 19.9% for the three months ended June 30, 2022, compared to 29.0% for the three months ended June 30, 2021. The decrease in gross margin as a percent of sales was mainly attributable to reduced sales volumes in comparison to the fixed portion of costs included in our manufacturing.

Gross profit for the six months ended June 30, 2022 was $250,000, a decrease of $504,000, compared to $754,000 gross profit for the six months ended June 30, 2021. The decrease in gross profit is mainly attributable to lower volumes of Component sales. The gross margin as a percent of sales was 16.5% for the six months ended June 30, 2022, compared to 27.6% for the six months ended June 30, 2021. The decrease in gross margin as a percent of sales was mainly attributable to reduced sales volumes in comparison to the fixed portion of costs included in our manufacturing.

Research and development expenses for the three months ended June 30, 2022 were $1,883,000, an increase of $578,000, compared to the research and development expenses for the three months ended June 30, 2021 of $1,305,000. The increase in research and development expenses is primarily related to increased salary and benefit expenses, consulting expenses, which includes outside engineering, stock based compensation expenses, legal expenses associated with patent filings and recruiting expenses of $283,000, $77,000, $25,000, $66,000 and $88,000, respectively.

Research and development expenses for the six months ended June 30, 2022 were $3,420,000, an increase of $942,000, compared to the research and development expenses for the six months ended June 30, 2021 of $2,478,000. The increase in research and development expenses is primarily related to increased salary and benefit expenses, consulting expenses, which includes outside engineering, stock based compensation expenses, legal expenses associated with patent filings and recruiting expenses of $489,000, $151,000, $52,000, $78,000 and $128,000, respectively.

Sales and marketing expenses for the three months ended June 30, 2022 were $1,326,000, an increase of $351,000, compared to the sales and marketing expenses for the three months ended June 30, 2021 of $975,000. The increase in sales and marketing expenses is primarily related to increased salary compensation and benefit expenses of 84,000, stock-based compensation expenses, consulting expenses, and advertising expenses of $32,000, $87,000 and $61,000, respectively.

Sales and marketing expenses for the six months ended June 30, 2022 were $2,626,000, an increase of $777,000, compared to the sales and marketing expenses for the six months ended June 30, 2021 of $1,849,000. The increase in sales and marketing expenses is primarily related to increased salary compensation and benefit expenses of $216,000, increased stock-based compensation, consulting expenses and advertising expenses of $188,000, $113,000 and $103,000, respectively.

General and administrative expenses for the three months ended June 30, 2022 were $1,082,000, an increase of $94,000, compared to the general and administrative expenses for the three months ended June 30, 2021 of $988,000. The increase in general and administrative expenses is primarily related to increased stock-based compensation expenses and board fees of $60,000 and $38,000, respectively, offset partially by decreased investor relations expenses of $28,000.

General and administrative expenses for the six months ended June 30, 2022 were $2,208,000 an increase of $252,000, compared to the general and administrative expenses for the six months ended June 30, 2021 of $1,956,000. The increase in general and administrative expenses is primarily related to increased stock-based compensation expenses, legal expenses and board fees of $153,000, $61,000 and $75,000, respectively, offset partially by decreased investor relations expenses of $45,000.

Interest expense for the three and six months ended June 30, 2022 and 2021 was not significant.

Change in Fair Value of Warrant Liability

There was no change in the fair value of the warrant liability for the three and six months ended June 30, 2022 and 2021.

Deemed Dividend on Exchange of Convertible Preferred Stock for Common Stock

No deemed dividend occurred during the three and six months ended June 30, 2022, compared to $1,192,000 in deemed dividends during the three and six months ended June 30, 2021, in connection with the exchange of all 250,000 shares of the Company's outstanding Series A preferred stock for 250,000 shares of common stock and warrants to purchase up to 187,500 shares of common stock, which warrants were subsequently fully exercised on a cashless basis for 79,244 shares of common stock.

No warrant inducement occurred during the three and six months ended June 30, 2022, compared to warrant inducement expenses of $579,000 and $1,146,000, respectively, during the three and six months ended June 30, 2021, in connection with the fair value of warrants issued to warrant holders in connection with a solicitation of such warrant holders to exercise their outstanding warrants during this period. See Note 6 - Convertible Preferred Stock and Stockholders' Equity.

Cash and cash equivalents as of June 30, 2022 were $4,762,000, compared to $13,108,000 as of December 31, 2021.

We incurred a net loss of $8,012,000 for the six months ended June 30, 2022 and used net cash in operating activities of $8,307,000. We incurred a net loss of $6,690,000 for the six months ended June 30, 2021 and used net cash in operating activities of $5,328,000. Excluding non-cash adjustments, the primary reasons for the increase in the use of net cash from operating activities during the six months ended June 30, 2022, was related to the increase in inventories and decrease in accounts payable, partially offset by a decrease in prepaid expenses and other current assets.

We have financed our operations to date primarily through the issuance of equity securities, proceeds from the exercise of warrants to purchase common stock and sale of debt instruments. In July 2021, we raised approximately $9,026,000 in net proceeds in a registered direct offering from the issuance and sale of 2,500,000 shares of common stock at a price of $4.00 per share. For the year ended December 31, 2021, we raised net proceeds of approximately $8,303,000 from exercises of warrants which were acquired by investors in conjunction with such financings completed during fiscal 2020. As of June 30, 2022, warrants exercisable for approximately 1,647,165 shares of common stock, remain outstanding, with exercise prices ranging from $1.52 to $2.61 per share. In December 2021, the Company entered into an "at-the-market" ("ATM") sales agreement with Maxim Group LLC (the "Agent"), pursuant to which the Company may sell from time to time, shares of its common stock having an aggregate offering price of up to $4.5 million through the Agent. As of June 30, 2022, the Company has not sold any shares of common stock under the ATM Program. Based on current operating levels, including additional costs and expenses related to research and development activities, plans to expand our product portfolio, and increase our market share, the Company expects to raise additional funds during the second half of 2022 and in 2023, by selling additional equity, which may include the use of the ATM Program, or incurring debt. See Note 11 - Subsequent Event.

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