WiSA Technologies, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

9 Months Ended

Sep. 30, 2018

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.

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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.

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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.

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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 September 30, 2018 and December 31, 2017 by level within the fair value hierarchy, are as follows:

	September 30, 2018
	Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
Liabilities:
Warrant liability	$	-	$	-	$	220,909
Derivative liability	$	-	$	-	$	-

	December 31, 2017
	Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
Liabilities:
Warrant liability	$	-	$	-	$	1,227,786
Derivative liability	$	-	$	-	$	20,832,000

There were no transfers between Level 1, 2 or 3 during the three and nine months ended September 30, 2018.

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 three and nine months ended September 30, 2018 and 2017:

	For The Three Months Ended						For The Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Beginning balance	$	5,349,786			1,619,287		$	1,227,786			1,619,287
Additions		111,000			3,332,907			176,000			3,332,897
Change in fair value		3,878,196			(3,203,478	)		8,127,196			(3,203,468	)
Reclass to additional paid-in capital		(9,118,073	)		-			(9,310,073	)		-

Ending balance	$	220,909		$	1,748,716		$	220,909		$	1,748,716

The changes in fair value of the warrant liability are recorded in change in fair value of warrant liability in the condensed 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 September 30, 2018 is as follows:

	As of September 30, 2018
Common Stock Price	$	4.30
Term (Years)		4.81
Volatility		59	%
Risk-free rate of interest		2.94	%
Dividend Yield		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 three and nine months ended September 30, 2018 and 2017:

	For The Three Months Ended					For The Nine Months Ended
	September 30, 2018			September 30, 2017		September 30, 2018			September 30, 2017
Beginning balance	$	25,776,000		$	-	$	20,832,000		$	-
Additions		6,328,125			4,183,000		7,886,125			4,183,000
Change in fair value		10,907,963			-		14,293,963			-
Reclassification to equity at initial public offering		(43,012,088	)		-		(43,012,088	)		-

Ending balance	$	-		$	4,183,000	$	-		$	4,183,000

On July 25, 2018, the derivative liability was reclassified to equity upon the Company’s initial public offering. As of September 30, 2017, the Company measured the fair value of the derivative by estimating the fair value of the convertible notes payable at certain conversion points. As of July 25, 2018, the date of the Company’s successful initial public offering, the Company measured the fair value of the derivative by estimating the fair value using the offering price of $5.00. To calculate the fair value of the convertible notes payable with the conversion feature at September 30, 2017, the Company calculated the present value of the convertible notes payable upon conversion at a qualifying initial public offering in the first quarter of 2018, and the present value of the convertible notes payable at non-qualifying initial public offering in the last quarter of 2018. The Company estimated a probability of 50% for the occurrence of a qualifying initial public offering in the first quarter of 2018 and a probability of 50% in the last quarter of 2018.

The Company’s derivative liabilities are measured at fair value using the Probability Weighted Expected Return valuation methodology. A summary of the weighted average significant unobservable inputs (Level 3 inputs) used in measuring the Company’s embedded conversion options that is categorized within Level 3 of the fair value hierarchy as of July 25, 2018 and September 30, 2017 are as follows:

	July 25, 2018			September 30, 2017
Common Stock Price	$	5.00		$	3.60
Term (Years)		0.50			1.00
Volatility		65	%		52	%
Risk-free rate of interest		2.20	%		1.31	%
Dividend Yield		0.0	%		0.0	%

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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