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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-09 · 192 added, 249 removed, 143 unchanged (76% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with the financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and with our audited financial statements and other information presented in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”).

You should read the following discussion in conjunction with the financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q (this “

Report ”

) and with our audited financial statements and other information presented in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “

Annual Report ”

The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs.

Words such as “expect,”

“anticipate,”

“intend,”

“plan,”

“believe,”

“seek,”

“estimate,”

“continue,”

“may,”

“will,”

“could,”

“would,”

Words such as “

expect, ”

anticipate, ”

intend, ”

plan, ”

believe, ”

seek, ”

estimate, ”

continue, ”

may, ”

will, ”

could, ”

would, ”

or the negative or plural of such words and similar expressions or variations of such words are intended to identify forward-looking statements,but are not the only means of identifying forward-looking statements.

Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements.

Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Report and in our other filings with the Securities and Exchange Commission (“SEC”), including particularly matters set forth under Part I, Item 1A (Risk Factors) of the Annual Report.

), including particularly matters set forth under Part I, Item 1A (Risk Factors) of the Annual Report.

Furthermore, such forward-looking statements speak only as of the date of this Report.

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For purposes of Management's Discussion and Analysis within this Report, all monetary amounts are stated in thousands except for par values and per share amounts, unless otherwise stated.

We are a global public safety technology and services company organized in March 2016 delivering modern policing solutions to law enforcement and security personnel.

We are a mission-driven organization focused on improving public safety encounters and outcomes.

We are a global public safety technology and services company that delivers safe and effective policing solutions to law enforcement and security personnel worldwide.

We are leading the movement for safer outcomes by equipping law enforcement with safe, non-pain compliance tools and immersive training for the modern world.

We began sales of our first public safety product, the BolaWrap 100 remote restraint device, in late 2018.

In October 2021 we released a new generation product, the BolaWrap 150.

The BolaWrap 150 is electronically deployed and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100 that is being phased out.

In 2020 we added a new solution to our public safety technologies, which is our virtual reality (“

In late 2020 we added a new solution to our public safety technologies, which is our virtual reality (“

VR ”) training platform –

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Wrap Reality is now sold to law enforcement agencies for simulation training as well as corrections departments for the societal reentry scenarios.

The immediate addressable domestic market for our solutions consists of approximately 900,000 full-time sworn law enforcement officers at over 15,300 federal, state and local law enforcement agencies, and over 12 million police officers in over 100 countries.

We are also exploring other domestic markets, including military and private security.

In Q1 2022 we delivered a new generation product, the BolaWrap 150.

The BolaWrap 150 is electronically deployed and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100 that has been phased out.

Our target market for our solutions includes approximately 900,000 full-time sworn law enforcement officers in over 18,000 federal, state, and local law enforcement agencies in the US and over 12 million police officers in more than 100 countries.

Additionally, we are exploring opportunities in other domestic markets, such as military and private security.

Our international focus is on countries with the largest police forces.

The 100 largest international police agencies are estimated to have over 12.1 million law enforcement personnel.

According to 360iResearch, a market research consulting firm, we participate in a segment of the non-lethal products global market expected to grow to $16.1 billion by 2027.

According to 360iResearch, a market research consulting firm, our non-lethal products are part of a global market segment expected to grow to $16.1 billion by 2027.

We focus our efforts on the following products and services:

BolaWrap Remote Restraint Device  –

is a hand-held remote restraint device that discharges an eight-foot bola style Kevlar tether to entangle an individual at a range of 10-25 feet.

BolaWrap Remote Restraint Device –

is a hand-held remote restraint device that discharges a seven and half-foot Kevlar tether to entangle an individual at a range of 10-25 feet.

BolaWrap assists law enforcement to safely and effectively control encounters early in the use of force continuum without resorting to painful force options.

Wrap Reality  –

is a law enforcement training system employing immersive computer graphics VR with proprietary software-enabled content.

Wrap Reality –

is a law enforcement 3D training system employing immersive computer graphics VR with proprietary software-enabled content.

It allows up to two participants to enter a simulated training environment simultaneously, and customized weapons controllers enable trainees to engage in strategic decision making along the force continuum.

In addition to the United States law enforcement market, we have shipped our restraint products to 53 countries.

We have established an active distributor network with 13 domestic distributors representing 50 states and one dealer representing Puerto Rico.

Wrap Reality has 38 scenarios for law enforcement and corrections and 25 scenarios at this time for societal reentry.

Wrap Reality is one of the most robust 3D Virtual Reality solutions on the market for law enforcement and societal reentry today.

In addition to the US law enforcement market, we have shipped our restraint products to 59 countries.

We have established an active distributor network representing 50 states and one dealer representing the US territory of Puerto Rico.

We have distribution agreements with 49 international distributors covering 54 countries.

We focus significant sales, training and business development efforts to support our global distribution network.

We focus significant sales, training and business development efforts to support our distribution network in addition to our internal sales team.

We focus significant resources on research and development innovations and continue to enhance our products and plan to introduce new products.

We believe we have established a strong branding and market presence globally and have established significant competitive advantages in our markets.

We believe we have established a strong brand and market presence globally and have established significant competitive advantages in our markets.

Management Changes

As previously reported in January 2022, the Board of Directors approved and initiated a leadership transition plan to support the next phase of its corporate strategy, which is focused on new leadership diversifying the Company’s suite of products, offerings and services.

The transition and corporate strategy included the resignation of our President, Chief Executive Officer and director Thomas P.

Smith and the announcement of the planned retirement of our Former Chief Financial Officer, Secretary and Treasurer James A.

Barnes, who retired in July 2022 upon the appointment of Chris DeAlmeida as our Chief Financial Officer.

After a period of transition managed by Special Transition Committee consisting of directors Scot Cohen and Kim Sentovich and including interim contract executives, on April 18, 2022, the Company appointed TJ Kennedy, a current director, as our Chief Executive Officer and Kevin Mullins as our President.

Kennedy and Mullins have significant leadership experience in public safety technology prior to their appointment.

Mullins is leading go to market functions in the President role.

On April 17, 2023, Kevin Mullins was named Chief Executive Officer. 

In connection with Mr.

Mullins' appointment, TJ Kennedy agreed to immediately step down as the Company’s Chief Executive Officer and a member of the Board of Directors (the “

Board ”). 

Additionally, on April 17, 2023 the Company performed a reduction in force that resulted in changes in the composition of the executives of the Company. 

As part of the reduction in force, Glenn Hickman stepped down as Chief Operating Officer.

Business Outlook and Challenges

Our products and solutions continue to gain worldwide awareness and recognition through social media, media exposure, trade shows, product demonstrations and word of mouth as a result of positive responses from agencies and early adoption and deployment success.

We believe Wrap is gaining traction as a recognized global brand, with innovative technology and an initial product foundation achieved through aggressive marketing and public relations.

We believe that we have strong market opportunities for our remote restraint and VR solutions throughout the world in the law enforcement and security sectors as a result of increasing demands for less lethal policing and increasing threats posed by non-compliant subjects.

We continue to receive field reports of successful BolaWrap usage from law enforcement agencies.

Many agencies consider BolaWrap as a very low level, or non-reportable, use of force option and, accordingly, many uses are not reported to us.

Others are considered evidence and are also not shared.

Some law enforcement agencies have shared bodycam footage of their field uses, some of which we are allowed to use in our marketing activities.

We believe increased reports of avoiding escalation will help grow revenues in the future.

We believe we have a robust and growing pipeline of market opportunities for our restraint product offering and training services within the law enforcement, military, corrections, and homeland security business sectors domestically and internationally.

Social trends demanding more compassionate and safe policing practices are expected to continue to drive our global business.

We are pursuing large business prospects internationally and also pursuing business with large police agencies in the U.S.

It is difficult to anticipate how long it will take to close these opportunities, or if they will ultimately come to fruition especially given the uncertainty of COVID-19 and social unrest, as discussed below.

To support our increased sales and distribution activities we have developed and offer robust training and class materials that certify law enforcement officers and trainers as BolaWrap instructors in the use and limitations of the BolaWrap in conjunction with modern policing tactics for de-escalation of encounters.

We believe that law enforcement trainers and officers that have seen demonstrations or have been trained about our products are more supportive of their department’s purchase and deployment of product.

As of September 30, 2022, over 1,315 agencies have received BolaWrap training with over 4,390 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments.

This represents a 39% increase in agencies and a 36% increase in training officers as compared to September 30, 2021.

Operating expenses in the third fiscal quarter of 2022 reduced by 28% as compared to the third fiscal quarter of 2021.

The focus on reducing operating expenses was an immediate focus on the new management team.

In the second quarter, our new management team focused on assessing all facets of the business and completed a strategic roadmap to drive long-term growth and produce lasting value for shareholders.

Our strategic roadmap is centered on sustainably growing sales through building repeatable domestic BolaWrap sales, ramping international sales on the new BolaWrap 150, and implementing a customer success function expanding existing agencies to full patrol-wide BolaWrap deployment.

We also have added a dedicated inside sales function to grow our velocity on new leads. 

We will be expanding our distributor and partner relationships, and leveraging product diversification and innovation to catalyze sales growth.

A key decision in the strategic roadmap was to improve our pricing on BolaWrap 150 devices and cassettes now that the product has proven itself to law enforcement as a significant upgrade.

We have also transitioned to charging for our respected training services.

We have implemented changes to how we sell Wrap Reality and have now solidified our go forward virtual reality model as a Software as a Service (“

SaaS ”) model.

These changes will have significant positive impact on our future success and growth.

We firmly believe that focusing on these strategic changes can drive significant sales growth and put us on a path to sustainable profitability.

Management intends to execute on its strategic roadmap immediately driving changes in Q3.

While geopolitical tensions and macroeconomic headwinds have impacted us in recent quarters, we remain uniquely positioned to deliver best-in-class technologies and data-driven services that can empower law enforcement officers across the globe to have safe, effective encounters with minimal use of force.

Wrap has a distinct value proposition in a growing addressable market.

Now with improved pricing, reduced operating expenses, and by growing future sales we expect to have reduced losses and improved cash flow.

We are recovering from supply chain impacts and a difficult transition from the BolaWrap 100 to the BolaWrap 150.

We expect to make more product demonstrations and conduct more training sessions, especially in international markets, as pandemic-related restrictions continue to ease in 2022.

We also expect to see increased sales momentum in the back half of 2022 internationally as we raise awareness of all of the BolaWrap 150 enhancements and transition countries to the BolaWrap 150.

Lastly, we anticipate discount and promotional costs to decline after Q3 as we have phase out upgrade offers and prioritize growing brand awareness.

Looking beyond 2022, we expect to continue to see strong sales growth of the BolaWrap 150 and Wrap Reality. 

This coupled with continued cost savings and cost control, should lead to a continuing reduction of cash burn going forward. 

As a result, we anticipate moving to a cash flow break-even point by the end of fiscal 2023, and we anticipate strong sales could lead to profitability by the end of 2024.

With the acquisition of NSENA in December 2020, and the rebranding of the NSENA business as Wrap Reality, we have continued to market our VR system while working to integrate previous scenarios into a robust platform, employing BolaWrap and additional de-escalation techniques into new Wrap Reality scenarios.

The improved law enforcement simulator platform continues to be used by additional agencies.

In July 2022 we announced new wins with large correction agencies in Ohio and Pennsylvania that introduced our new scenarios focused on societal reentry and preventing recidivism.

We plan to increase marketing activities for our VR solution to both law enforcement and corrections.

On September 30, 2022, we had backlog of approximately $26 thousand expected to be delivered in the next twelve months.

We believe our Company's products and solutions are gaining global recognition and awareness through active use across multiple agencies and continued acceptance worldwide as well as various marketing channels such as demos, social media, trade shows, and media exposure, among others.

In part, this recognition and awareness can be attributed to positive feedback from law enforcement agencies and the successful deployment of our products.

As a result, our brand, Wrap, is becoming increasingly recognized on a global scale as a leader in remote restraint and non-lethal solutions.

In addition, we are focused on aggressive marketing and public relations efforts.

We are confident in the potential market opportunities for our remote restraint and virtual reality solutions in the law enforcement and security sectors worldwide.

These opportunities are driven by the increasing demand for less-lethal policing.

In the law enforcement sector, our BolaWrap product has been successfully deployed in the field, as reported by many agencies.

BolaWrap is now in use by almost 1,000 US law enforcement agencies and in 59 countries.

Due to its safe remote restraint capabilities, many agencies do not deem its usage a categorical reportable use of force and rather place it underneath early use of force such as handcuffs.

We train law enforcement agencies deploy BolaWrap when verbal commands breakdown but long before there is justifiable escalation to pain inducing tools such as:

pepper spray, pepper ball, batons, bean bags, tasers or Conducted Electrical Weapons (CEW’s) or firearms.

Some agencies voluntarily report usage to Wrap but many do not.

In the usage reports we have been provided;

officers have reported successful outcomes in 83% of the use cases.

This percentage is higher than what is often seen with less lethal tools.

From the information we have been provided, the most common BolaWrap use case is for individuals with behavioral health issues, and the second most common BolaWrap use case is during domestic violence calls.

Twenty-six percent of the reported persons who are wrapped with the BolaWrap are thought to be under the influence of alcohol or drugs.

There are many reasons why we may not receive reports on all the use of the BolaWrap, including, when uses of BolaWrap are considered evidence in ongoing criminal cases, are controlled by local policy or regulation, or require officer and union and other released to be shared with us.

However, many agencies have shared bodycam footage of successful field deployments with us, which we may use in our training and education efforts.

We believe that as the reports of BolaWrap's effectiveness in de-escalation continue to increase, it will contribute to our future revenue growth.

Management anticipates that our portfolio of safe, remote restraint products and training services has a strong and expanding pipeline of market opportunities in the law enforcement, military, corrections, and homeland security sectors both domestically and internationally.

With the increasing demand for more humane and safer policing practices, we expect a continued surge in our global business.

Currently, we are exploring major international business prospects while simultaneously seeking to establish relationships with large police agencies in the US.

However, we acknowledge that it is challenging to predict the exact timeline for closing these deals, or whether they will ultimately materialize.

As part of our efforts to expand our sales and distribution operations, we provide a comprehensive training program for law enforcement officers and trainers in using the BolaWrap.

This training equips them with knowledge about the appropriate use and limitations of BolaWrap in tandem with modern policing techniques for de-escalation of encounters.

We now focus on also teaching when and why BolaWrap should be used, including the specific area of success (i.e., after verbal commands break down and before the law enforcement officer is ready to escalate to pain compliance tools.

Management believes that law enforcement trainers and officers who have been trained to use our products, or have witnessed demonstrations, are more inclined to support the acquisition and deployment of our products by their respective departments to drive successful outcomes.

As of March 31, 2023, over 1,390 agencies have received BolaWrap training with over 4,660 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments, representing a 31% increase in agencies and a 26% increase in trained officers as compared to March 31, 2022. 

Operating expenses for the three months ended March 31, 2023 reduced by $1.489 million or 24% as compared to the three months ended March 31, 2022.

While we made significant strides in reducing quarterly operating expenses in 2022, we believe it is imperative to continue to further reduce operating expenses to align with sales forecasts, while still allowing room for continued growth of revenue. 

As a result, in April, we implemented several additional cost reduction measures that are expected to lower certain operating expenses and allow the Company to transition to a just-in-time production model that aligns with sales forecasts.

Management believes that by taking these measures, the Company will be on an accelerated path to sustained profitability.

These changes are expected to generate a minimum quarterly reduction in operating expenses of $1.5 million, or $6 million on an annual basis.

However, the Company does anticipate incurring additional one-time operating expenses during the second quarter of 2023 due to severance charges associated with the changes in management.

Management is confident that implementing these strategic changes will lead to substantial sales growth and put us on a path towards sustainable profitability.

Although geopolitical tensions and macroeconomic challenges have affected our quarterly results in the past and may in the future, we believe our firm is uniquely positioned to provide lifesaving technologies and training that enable law enforcement officers worldwide to conduct safe and effective encounters while reducing the use of force.

If departments follow our newly released Use of Force Guarantee requirements, we are confident enough to offer that in 12 months we would buy their BolaWrap devices back if they do not reduce their reportable use of force by 10%.

With an increasing addressable market, Wrap offers a unique value proposition.

Our improved pricing strategy, coupled with reduced operating expenses and our growing sales outlook, is expected to help reduce losses and improve cash flow in the future. 

Looking ahead to the coming years, we plan to increase the number of product demonstrations and training sessions, particularly in international markets.

Our new focus on the when and why BolaWrap is used is already showing improved results.

This is a departure of the hardware product only approach of the past.

Our sales of the BolaWrap 150 and Wrap Reality are expected to continue to rise, aided by our ongoing cost savings and cost control measures, which should lead to an overall reduction in cash burn.

Due to the recent changes in leadership, Wrap will be re-evaluating its previously communicated outlook and guidance for fiscal year 2023.

The Board recognizes the importance of providing new leadership with sufficient time to conduct an independent assessment of Wrap's existing pipeline, near-term opportunities, and resource requirements.

At March 31, 2023 we had backlog of approximately $21 thousand expected to be delivered in the second quarter of 2023.

Additionally, we had deferred revenue of $291 thousand expected to be recognized generally over the next five years.

Our deferred revenue mostly is from Wrap Reality subscription and other revenue.

We expect our deferred revenue to grow in future years due to the SaaS business model on Wrap Reality.

Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instances, cancellation, in the normal course of business.

Since inception in March 2016, we have generated significant losses from operations and anticipate that we will continue to generate significant losses from operations for the foreseeable future.

Since inception, we have generated significant losses from operations and anticipate that we will continue to generate significant losses from operations for the foreseeable future.

We believe that we have adequate financial resources to sustain our operations for the next year.

In the third quarter of fiscal 2022 we reduced our net loss by more than $2 thousand versus the comparable prior year quarter.

Net cash used in operations during the nine months ended September 30, 2022 was $2.8 million less than cash used in operations during the first nine months of the prior year.

We expect that we will need to continue to innovate new applications for our public safety technology, develop new products and technologies to meet diverse customer requirements and identify and develop new markets for our products.

In March 2020, the World Health Organization (" WHO ") classified the COVID-19 outbreak as a pandemic.

We believe our sales during the first nine months of 2022 were negatively impacted by the transition to the BolaWrap 150 product and the stopping of our BolaWrap 100 production line and the effects of limited ability to demonstrate and train in 2021 due to the COVID-19 pandemic, especially internationally.

However, we are beginning to see some recovery during Q3 as full production and sales of the BolaWrap 1500 occurred.

We continue to monitor developments and assess areas where there is potential for our business to be impacted by the pandemic.

Businesses and governments with which we engage may be operating under restrictions and experiencing disruptions, which may create obstacles in the coordination of business activities, including demonstrations, training and the negotiation and fulfillment of orders.

Disruptions in the supply chain have already impacted us and could negatively impact our ability to source materials or manufacture and distribute products.

We could experience a decrease in new orders from pandemic related events, which could negatively impact our revenues and reduce our liquidity and cash flows.

Growth in revenue could also be impeded by these factors.

The financial markets have been subject to significant volatility that could impact our ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing activities.

We have $23.7 million in cash and cash equivalents and short-term investments as of September 30, 2022, which we believe provides sufficient capital to fund our operations for at least the next twelve months and withstand the potential near-term consequences of the pandemic, although liquidity constraints and access to capital markets could adversely impact our liquidity and warrant changes to our investment strategy.

The full magnitude of the pandemic cannot be measured at this time, and therefore, any of the aforementioned circumstances, as well as other factors, may cause our results of operations to vary substantially from year to year and quarter to quarter.

Based on various standards published to date, we believe the work our employees and associates perform is critical and essential.

We are taking a variety of measures to promote the safety and security of our employees while ensuring the availability and functionality of our critical infrastructure.

We are following Center for Disease Control and local guidelines regarding COVID-19 safety in the workplace.

In addition, the following events related to the COVID-19 pandemic could result in lost or delayed revenue to the Company:

limitations on the ability of our suppliers to meet delivery requirements and commitments;

limitations on the ability of our employees to perform their work due to illness caused by the pandemic, or local, state or federal orders requiring employees to remain at home;

limitations on the ability of carriers to deliver our products to customers;

unforeseen deviations from customers or foreign governments restricting the ability to do business;

and, limitations on the ability of our customers to pay us on a timely basis, if at all.

We also may be adversely affected by continued social unrest, protests against racial inequality, protests against police brutality and movements such as “Defund the Police”

and such unrest may be exacerbated by inaccurate information or negative publicity regarding our solutions.

Although the negativity of some of these events has been reduced, some of these events may still directly or indirectly affect police agency budgets and funding available to current and potential customers.

Participants in these events may also attempt to create the perception that our solutions are contributing to the perceived problems, which may adversely affect us, our business and results of operations, including our revenues, earnings and cash flows from operations.

Our business may be impacted by global economic conditions, which have been in recent years, and continue to be, volatile.

Geopolitical conflict, such as the recent conflict in Ukraine, and related international economic sanctions and their impact may exacerbate this volatility.

Specifically, our revenues and gross margins depend significantly on global economic conditions and the demand by foreign governments and agencies for the BolaWrap in many of our target markets.

Changes in management and other key personnel have the potential to improve and disrupt our business, and any such disruption could potentially adversely affect our operations, programs, growth, financial condition or results of operations.

Improvements to operations, operating expenses and go to market approaches also have the opportunity to impact the success of the business going forward.

We reduced our net loss during the three months ended March 31, 2023 by more than $1.401 million as compared to the three months ended March 31, 2022.

Net cash used in operations during the three months ended March 31, 2023 was $1.783 million less than cash used in operations during the three months ended March 31, 2022.

This improvement was a result of our strategic roadmap as well as our cost control measures implemented in Q2, Q3 and Q4 of our last fiscal year, and Q1 of this fiscal year.

We expect that we will continue to innovate new applications for our public safety technology, open new geographies, develop new products and technologies to meet diverse customer requirements and identify and develop new markets for our products.

We believe that our sales during the three months ended March 31, 2023 were impacted by the timing of new orders and associated budgeting from our customer. 

For the year ended December 31, 2022, our results were significantly adversely affected by the shift to our BolaWrap 150 product and the discontinuation of the BolaWrap 100 production line, along with the limited ability to demonstrate and train customers in 2021 due to the COVID-19 pandemic, particularly internationally.

Supply chain disruptions have also affected our operations and could negatively impact our ability to source materials, manufacture and distribute products.

Moreover, financial markets are experiencing significant volatility, which could potentially affect our ability to enter into or modify favorable terms and conditions regarding equity and debt financing activities.

Nevertheless, we currently have $16 million in cash and cash equivalents and short-term investments as of March 31, 2023, which we believe provides sufficient capital to fund our operations for the next twelve months and absorb the potential near-term impacts of the pandemic and other economic uncertainty.

However, liquidity constraints and access to capital markets could still negatively affect our liquidity and require changes to our investment strategy.

We acknowledge that the work carried out by our employees and associates is critical and essential, as per various published standards.

We have taken several measures to ensure the safety and security of our employees, while also ensuring the availability and functionality of our critical infrastructure.

In compliance with the guidelines issued by the Centers for Disease Control and local authorities, we have implemented COVID-19 safety measures in the workplace.

Nevertheless, we recognize that events related to the COVID-19 pandemic or other global pandemics could potentially result in lost or delayed revenue for our Company.

These events include restrictions on our suppliers' ability to meet delivery requirements and commitments, employees' inability to perform their work due to illness caused by a pandemic or local, state, or federal mandates requiring employees to stay home.

Delays in carriers' ability to deliver our products to customers, unforeseen deviations from customers or foreign governments restricting the ability to conduct business, and customers' inability to pay us on a timely basis, if at all, could also limit our revenue.

Our Company may be positively or negatively impacted by continued social unrest, protests against racial inequality, and movements like "Defund the Police." Such unrest may be further fueled by misleading information or negative publicity about our solutions.

We believe our solutions are actually the answer to reducing use of force and driving safer outcomes for officers and the citizens they interact with each day.

Although the intensity of these events may have subsided, some may still indirectly or directly influence police agency budgets and the funding available to current and potential customers.

In addition, participants in these events may attempt to create the impression that our solutions are contributing to the perceived problems, potentially harming our business and operations, including our revenues, earnings, and cash flows from operations.

Changes in our management and other critical personnel have the potential to positively or negatively affect our business.

Such disruptions could have an adverse impact on our operations, programs, growth, financial condition, or results of operations.

On the other hand, improvements in our operations, operating expenses, and go-to-market approaches could positively influence the success of our business in the future.

Critical Accounting Policies and Estimates

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Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

Other than the planned production change requiring a new estimate of exit expense, there were no significant changes or modification of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the period ended September 30, 2022.

Our accounting policies are more fully described in Note 1.

Organization and Summary of Significant Accounting in the notes to our audited consolidated financial statements included in the Annual Report.

Recent Accounting Pronouncements

New pronouncements issued for future implementation are discussed in Note 1.

Organization and Summary of Significant Accounting Policies of our financial statements.

Segment and Related Information

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The Company’s chief operating decision maker is its Chief Executive Officer, who manages operations for purposes of allocating resources.

Refer to Note 13, Major Customers and Related Information, in our financial statements for further discussion.

Refer to Note 13. Major Customers and Related Information, in our financial statements for further discussion.

Operating Expenses

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Results of Operations

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

The following table sets forth for the periods indicated certain items of our condensed consolidated statement of operations.

The financial information and the discussion below should be read in conjunction with the financial statements and notes contained in this Report.

Three Months Ended

September 30,

(in thousands, except percentage change)

Three Months Ended March 31,

Product sales

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Cost of revenues

Products and services

Restructuring inventory charge

Total cost of revenues

Operating expenses:

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Loss from operations

We reported net revenue of $1.7 million for the three months ended September 30, 2022, as compared to $1.8 million for the prior year quarter.

Domestic revenues increased from $1.1 million for the third quarter of 2021 to $1.3 million for the quarter ended September 30, 2022.

International revenues decreased from $717 thousand for the third quarter of 2021 to $375 thousand for the quarter ended September 30, 2022.

We incurred discounts of $240 thousand during the three months ended September 30, 2022, primarily as a result of promotional programs designed to encourage domestic customers to upgrade to the BolaWrap 150.

These discounts compare to business discounts of $81 thousand in the prior year quarter.

We expect selected discounts in the fourth quarter but thereafter a decline to minimal discounts as we have phased out our promotional upgrade offer.

We reported net revenue of $711 thousand for the three months ended March 31, 2023, as compared to $1.6 million for the quarter ended March 31, 2022, a 56% decrease over the prior year.

International revenues decreased from $405 thousand for the three months ended March 31, 2022 to $1 thousand for the three months ended March 31, 2023.

We believe that our sales during the three months ended March 31, 2023 were impacted by the timing of new orders and associated budgeting from our customer. We also incurred discounts of $22 thousand during the three months ended March 31, 2023, as a result of promotional programs designed to encourage customers to upgrade to the BolaWrap 150.

Gross sales were $733 million for the three months ended March 31, 2023, before such discounts.

The discounts compares to normal business discounts of $388 thousand in the comparable quarter of the prior year.

We expect a decline to minimal discounts in 2023 as we have phased out our promotional upgrade offer.

International revenues generally consist of larger orders with the end user being large, centralized government agencies.

These orders continue to be lumpy and difficult to predict as to both timing and amount.

International orders anticipated in the second quarter were delayed due to the change over from the BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future quarters.

We believe that revenue during the fiscal year 2022 will still be an increase compared to the revenue recorded during 2021 due to growth of domestic sales and anticipated international orders from a robust pipeline, although no assurances can be given.

We incurred product promotional costs of $125 thousand during the quarter ended September 30, 2022, related primarily to BolaWrap 150 demonstration products and the cost of training products and accessories delivered to law enforcement agencies that were expensed as marketing costs.

A total of $163 thousand of such product promotional costs were incurred during the prior year quarter.

We are responding to increased demand for training as a result of expanded product and brand awareness with more efficient training approaches.

With increased successful field use by agencies and greater brand awareness, as well as the transition to the BolaWrap 150, we expect reductions in product promotional costs to decline versus the prior year.

We had $300 thousand of deferred revenue at September 30, 2022, of which $177 thousand related to VR training and $123 thousand related to BolaWrap extended warranties and services.

International orders anticipated in the second quarter of 2022 were delayed significantly due to the changeover from the BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future quarters.

Some key international customers had approved the BolaWrap 100 and even purchased just prior to our announcement of the BolaWrap 150 a significant number of devices and cartridges.

Because of the large size of these agencies, they wanted to grow on a single device and not multiple devices, but Wrap management made the decision to shut down the BolaWrap 100 product line for new devices in 2021.

We believe that revenue during the fiscal year 2023 will increase overall compared to the revenue recorded during 2022 due to growth of domestic sales and anticipated international orders from a robust pipeline, although no assurances can be given.

We believe based on pipeline that these larger international deals are more likely to book and ship in the latter half of 2023.

We incurred product promotional costs of $54 thousand during the three months ended March 31, 2023, related primarily to BolaWrap 150 demonstration products and the cost of training products and accessories delivered to law enforcement agencies that were expensed as marketing costs.

We are responding to increased demand for training as a result of expanded product and brand awareness and increased successful field use by agencies but due to awareness expect reductions in product promotional costs from the prior year.

We had $291 thousand of deferred revenue at March 31, 2023, of which $175 thousand related to VR, $10 thousand was related to training and $106 thousand related to BolaWrap extended warranties and services.

As we potentially secure increased bookings for Wrap Reality, as well as BolaWrap extended warranties, we expect our deferred revenue to grow in future quarters.

At September 30, 2022, we had backlog of $26 thousand worth of customer orders expected to be delivered in the next twelve months.

Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instance’s cancellation in the normal course of business.

The impact of the COVID-19 pandemic and geopolitical conflicts, including the recent war in Ukraine, has created much uncertainty in the global marketplace.

The COVID-19 pandemic has and may continue to restrict our ability to travel internationally.

Although no assurances can be given, we do believe, however, that the challenges to substantially increasing sales caused by COVID-19 will abate as the pandemic wanes, especially given the number of BolaWrap trials currently ongoing and the current environment where non-lethal options are being widely considered by law enforcement domestically and internationally. 

We have experienced recent changes in management.

Changes in management and other key personnel have the potential to disrupt our business, and any such disruption could adversely affect our revenue growth in future periods, especially in the near term as we execute our Management Transition plan.

Our cost of revenue for the quarter was $790 thousand resulting in a gross margin of 54%.

Our cost of revenue for the three months ended September 30, 2021 was $1,094 thousand resulting in a gross margin of 39%.

The most recent quarter period gross margin was impacted by the lower sales volume, warranty costs and promotional discounts.

We also were impacted by certain higher raw material prices in the second quarter to obtain certain parts.

Our margin is expected to improve in future quarters as these issues abate.

Due to our limited history of revenue historical margins, however, may not be indicative of planned future margins.

The BolaWrap 150 has higher margins than historical production. Our margins also vary based on the sales channels through which our products are sold and product mix.

Currently, our cassettes have lower margins than BolaWrap devices.

We implement product updates and revisions, including raw material and component changes that may impact product costs.

With such product updates and revisions, we have limited warranty cost experience and estimated future warranty costs can impact our gross margins.

Our global supply chain has been subject to significant component shortages, increased lead times, cost fluctuations, and logistics constraints that have impacted our product costs.

We expect these supply chain challenges to continue throughout 2022.

Supplier shortages, quality issues and logistic delays affect our production schedules and could in turn have a material adverse effect on our financial condition, results of operation and cash flows.

At March 31, 2023, we had backlog of $21 thousand expected to be delivered in the second quarter of 2023.

Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instance’s cancellation in the normal course of business. 

Our gross profit for the three months ended March 31, 2023 was $352 thousand, or a gross margin of 50%.

Our gross profit for the three months ended March 31, 2022, was $667 thousand resulting in a gross margin of 42%.

The Fiscal 2022 gross profit represented an 87% increase over prior year as a result of rolling out the BolaWrap 150 product, selling price adjustments implemented in September of 2022, and a reduction of promotional pricing, offset by some supply chain issues and inventory adjustments.

As our revenue history is limited, historical margins may not accurately reflect future margins.

However, we expect higher margins with the production of the BolaWrap 150 compared to previous production due to design changes and improved pricing.

Our margins are also subject to variations based on the sales channels and product mix through which our products are sold.

At present, our cassettes have lower margins than BolaWrap devices.

As we scale cassette production, we will look to reduce our costs and drive higher cassette margins.

Cassettes were a total of 17% of our overall revenue in the three months ended March 31, 2023, and will continue to grow as a recurring revenue base as more BolaWrap devices are in the field and the usage of BolaWrap increases due to the need of officers to de-escalate earlier to prevent injuries and use of higher levels of force.

We regularly introduce updates and revisions to our products, which may include changes to raw materials and components, and can impact our product costs.

Given our limited experience with warranty costs, our estimated future warranty expenses may affect our gross margins.

Our global supply chain has experienced notable component shortages, extended lead times, cost fluctuations, and logistical constraints, all of which have affected our product costs.

Although we anticipate these supply chain obstacles to ease in 2023, we acknowledge that future supplier shortages, quality problems, and logistics delays could impact our production schedules and have a material negative impact on our financial condition, results of operation, and cash flows.

Selling, General and Administrative Expense

Selling, general and administrative ( “

SG&A ”) expense for the quarter ended September 30, 2022 were $1.1 million less than the prior year comparable quarter due to cost containment efforts and due to certain one-time costs in the prior year quarter.

SG&A ”) expense of $3.5 million for the three months ended March 31, 2023 decreased significantly, by $1.1 million, when compared to $4.6 million for the three months ended March 31, 2022, due to cost containment efforts.

Share-based compensation costs allocated to SG&A decreased to $562 thousand compared to $891 million for the comparable prior quarter.

This $393 thousand decrease resulted primarily from a one-time costs in the prior year period and changes in the stock price.

Salaries and burden costs of $2.2 million for the quarter ended September 30, 2022 were comparable to the prior year as staffing remained at similar levels.

During the quarter ended September 30, 2022, as compared to the prior year comparable quarter, we incurred reduced advertising and promotions costs (including product promotion costs) of $153 thousand, reduced professional fees of $136 thousand, and reduced consulting and contract services fees of $359 thousand.

We expect expenditures for SG&A expenses for the balance of 2022 to remain below the prior year due to management’s active cost containment efforts.

Research and Development Expense

Research and development expense decreased by $840 thousand for the quarter ended September 30, 2022, compared to the comparable period in the prior year.

Non-cash share-based compensation expense allocated to research and development personnel was $172 thousand for the quarter ended September 30, 2022 comparable to the $210 thousand  for the prior period.

Salaries and burden costs for the quarter ended September 30, 2022 increased $45 thousand compared to the prior year primarily associated with product development.

Prototype related costs for quarter ended September 30, 2022, increased $105 thousand related to BolaWrap 150 continued improvements.

We expect our research and development costs to remain at comparable levels for the balance of 2022. 

Operating Loss

Loss from operations during the three months ended September 30, 2022, of $3.9 million was a reduction of $2.1 million compared to that of the three months ended September 30, 2021 reflecting increased margin and the focus on reducing operating costs.

Nine months Ended September 30, 2022 Compared to Nine months Ended September 30, 2021

The following table sets forth for the periods indicated certain items of our condensed consolidated statement of operations.

The financial information and the discussion below should be read in conjunction with the financial statements and notes contained in this Report.

Nine months Ended

September 30,

(in thousands, except percentage change)

Product sales

Other revenue

Total revenues

Cost of revenues:

Products and services

Restructuring inventory charge

Total cost of revenues

Operating expenses:

Selling, general and administrative

Research and development

Total operating expenses

Loss from operations

We reported net revenue of $4.5 million for the nine months ended September 30, 2022, as compared to $5.3 million for the quarter ended September 30, 2021.

Domestic revenues of $3.5 million for the nine months reflected growth of 23% over the prior comparable quarter of $2.8 million.

International revenues decreased from $2.4 million for the nine months ended September 30, 2021 to $1.0 million for the nine months ended September 30, 2022.

We incurred discounts of $790 thousand during the nine months ended September 30, 2022, primarily as a result of promotional programs designed to encourage domestic customers to upgrade to the BolaWrap 150.

The discounts compare to business discounts of $161 thousand in the comparable nine-month period of the prior year.

We expect selected discounts in the fourth quarter but thereafter a decline to minimal discounts as we have phased out our promotional upgrade offer.

International revenues generally consist of larger orders with the end user being large, centralized government agencies.

These orders continue to be lumpy and difficult to predict as to both timing and amount.

International orders anticipated in the second quarter were delayed due to the change over from the BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future quarters.

We incurred product promotional costs of $616 thousand during the nine months ended September 30, 2022, related primarily to BolaWrap 150 demonstration products and the cost of training products and accessories delivered to law enforcement agencies that were expensed as marketing costs.

A total of $816 thousand of product promotional costs were incurred during the nine months ended September 30, 2021.

We are responding to increased demand for training as a result of expanded product and brand awareness with more efficient training approaches.

With increased successful field use by agencies and greater brand awareness we expect reductions in product promotional costs to decline versus the prior year.

We had $300 thousand of deferred revenue at September 30, 2022, of which $177 thousand related to VR training and $123 thousand related to BolaWrap extended warranties and services.

At September 30, 2022, we had backlog of $26 thousand worth of customer orders expected to be delivered in the next twelve months.

Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instance’s cancellation in the normal course of business.

Our cost of revenue for the nine months ended September 30, 2022, was $2.4 million resulting in a gross margin of 46%.

The gross margin for the nine months ended September 30, 2021, was 38% after adjusting excluding $747 thousand of restructuring charges related to the wind down of BolaWrap 100 production.

The most recent period gross margin was impacted by the lower sales volume and promotional discounts.

We also were impacted by certain higher raw material prices in 2022 to obtain certain parts.

Our margin is expected to improve in future quarters as these issues abate.

Due to our limited history of revenue historical margins, however, may not be indicative of planned future margins.

The BolaWrap 150 has higher margins than historical production. Our margins also vary based on the sales channels through which our products are sold and product mix.

Currently, our cassettes have lower margins than BolaWrap devices.

We implement product updates and revisions, including raw material and component changes that may impact product costs.

With such product updates and revisions, we have limited warranty cost experience and estimated future warranty costs can impact our gross margins.

Our global supply chain has been subject to component shortages, increased lead times, cost fluctuations, and logistics constraints that have impacted our product costs.

We expect these supply chain challenges to continue throughout 2022.

Selling, General and Administrative Expense

Selling, general and administrative ( “

SG&A ”) expense for the nine months ended September 30, 2022 were $12.0 million reflecting a decrease of $4.2 million when compared to $16.2 million for the nine months ended September 30, 2021. The reduction in SG&A costs reflected active cost containment efforts and nonrecurrence of certain one-time costs in the prior year period.

Share-based compensation costs allocated to SG&A was $2.2 million for the nine months ended September 30, 2022 compared to $3.7 million for the comparable prior year period.

This $1.5 million decrease resulted primarily from  reduced headcount and changes in the stock price.

Salaries and burden costs of $6.8 million for the nine months ended September 30, 2022 was a $2.8 million decrease compared to the prior year nine months due to cost containment efforts and reduced personnel expense.

During the nine months ended September 30, 2022, as compared to the prior year comparable nine months, we incurred reduced advertising and promotions costs (including product promotion costs) of $460 thousand, reduced professional fees of $155 thousand, and reduced consulting and contract services fees of $652 thousand.

We expect expenditures for SG&A expense for the balance of 2022 to remain below the prior year due to active cost containment efforts.

This $329 thousand decrease resulted primarily from changes in management, one-time costs in the prior year period, and changes in the stock price.

Salaries and burden costs of $1.4 million for the three months ended March 31, 2023 was a decrease of $122 thousand, or a 8% decrease, due to reduced headcount and one-time recruiting expenses.

During three months ended March 31, 2023, as compared to same period during the prior year, we reduced professional fees by $149 thousand, and reduced consulting and contract services fees by $153 thousand.

We expect expenditures for SG&A expenses in 2023 to remain in line with 2022 despite expected revenue growth.

Advertising and promotion costs were $163 thousand for during the three months ended March 31, 2023, or a decrease of $164 thousand as compared to $327 thousand during the three months ended March 31, 2022.

The changes in advertising costs were related to reductions in consultants and other cost containment efforts.

Research and Development Expense

Research and development expense decreased by $93 thousand for the nine months ended September 30, 2022, compared to the comparable nine-month period in fiscal 2021.

Non-cash share-based compensation expense allocated to research and development personnel was $448 thousand for the nine months ended September 30, 2022 compared to the $588 thousand for the prior period.

Salaries and burden costs for the nine months ended September 30, 2022 was $2.5 million are in line with the prior year period.

Prototype related costs for the nine months ended September 30, 2022, increased $359 thousand related to BolaWrap 150 startup costs and continued improvements.

Research and development expense decreased by $423 thousand for the three months ended March 31, 2023 when compared to the three months ended March 31, 2022.

We incurred a $71 thousand period over period decrease in share-based compensation expense allocated to research and development expense as a result of cost containment efforts and changes in personnel.

Outside consulting costs decreased by $107 thousand and prototype related costs decreased by $168 thousand for the three months ended March 31, 2023, primarily due to reduced costs related to finalizing the BolaWrap 150 product.

Operating Loss

Loss from operations during the nine months ended September 30, 2022, of $14.1 million was a reduction of $5.1 million compared to that of the nine months ended September 30, 2021 reflecting third quarter reduced costs from the prior year.

Loss from operations of $4.3 million during the three months ended March 31, 2023 was a reduction of $1.2 million compared to loss from operations of $5.4 million during the three months ended March 31, 2022, reflecting increased margin and the focus on reducing operating costs.

Liquidity and Capital Resources

We have experienced net losses and negative cash flows from operations since our inception.

As of September 30, 2022, we had cash and cash equivalents of $3.8 million, short-term investments of $19.9 million, positive working capital of $27.3 million and had sustained cumulative losses attributable to stockholders of $63.8 million.

As of March 31, 2023, we had cash and cash equivalents of $9.5 million, short-term investments of $6.5 million, positive working capital of $20.2 million and had sustained cumulative losses attributable to stockholders of $71.4 million.

We believe that our cash on hand and short-term investments will sustain our operations for at least the next twelve months.

Our primary source of liquidity to date has been funding from our stockholders from the sale of equity securities and the exercise of derivative securities, consisting of options and warrants.

We expect our primary source of future liquidity will be from the sale of products, exercise of stock options and warrants and if required from future equity or debt financings.

We expect our primary source of future liquidity will be from the sale of products, exercise of stock options and warrants and from future equity or debt financings.

Capital Requirements

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We believe we have sufficient capital to sustain our operations for the next twelve months.

Although the Company has adequate capital to sustain its operations during the next twelve months, management will continue to evaluate attractive sources of additional capital.

Our future capital requirements, cash flows and results of operations could be affected by, and will depend on, many factors, some of which are currently unknown to us, including, among other things:

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Operating Activities

During the nine months ended September 30, 2022, net cash used in operating activities was $11 million. The net loss of $14.1 million was decreased by non-cash expense of $3.4 million consisting primarily of share-based compensation expense of $2.6 million.

During the three months ended March 31, 2023, net cash used in operating activities was $3.07 million.

The net loss of $4.03 million was decreased by non-cash expense of $813 thousand consisting primarily of share-based compensation expense of $628 thousand.

Other major component changes using operating cash included an increase of $1.65 million in inventories and a net reduction in accounts payable and accrued liabilities of $264 thousand.

A decrease in accounts receivable of $1.6 million reduced the cash used in operating activities.

During the nine months ended September 30, 2021, net cash used in operating activities was $13.7 million. The net loss of $19.2 million was decreased by non-cash expense of $5.9 million consisting primarily of share-based compensation expense of $4.3 million, restructuring inventory charges of $747 thousand, depreciation and amortization expense of $336 thousand and shares issued for services of $239 thousand.

Other major component changes using operating cash included an increase of $1.4 million in accounts receivable and an increase in inventories of $160 thousand.

An increase of $773 thousand in accounts payable and accrued expense and an increase of $224 thousand in deferred revenue reduced the cash used in operating activities. 

An increase in accounts receivable of $1.69 million reduced the cash used in operating activities.

During the three months ended March 31, 2022, net cash used in operating activities was $4.85 million. The net loss of $5.43 million was decreased by non-cash expense of $1.16 million consisting primarily of share-based compensation expense of $1.03 million.

Other major component changes using operating cash included an increase of $399 thousand in accounts receivable and an increase in inventories of $304 thousand.

Investing Activities

During the nine months ended September 30, 2022, we used $23.1 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $33.3 million.

During the nine months ended September 30, 2021, we used $30.0 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $25 million. 

We used $201 thousand and $811 thousand of cash for the purchase of property and equipment during the nine months ended September 30, 2022, and 2021, respectively.

We invested $133 thousand and $129 thousand in patents during the nine months ended September 30, 2022, and 2021, respectively.

During the three months ended March 31, 2023, we used $2.6 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $10 million.

During the three months ended March 31, 2022, we used $4.85 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $10 million.

We used $15 thousand and $81 thousand of cash for the purchase of property and equipment during the three months ended March 31, 2023 and 2022, respectively.

We invested $131 thousand and $69 thousand in patents during the three months ended March 31, 2023 and 2022, respectively.

We had proceeds from long-term deposits of $31 thousand and $0 during the three months ended March 31, 2023 and 2022, respectively.

Financing Activities

During the nine months ended September 30, 2022, we received $83 thousand in proceeds from the exercise of previously issued stock options.

During the nine months ended September 30, 2021, we received $12.0 million from previously issued stock purchase warrants and $1.7 million in proceeds from the exercise of previously issued stock options, and repaid $275 thousand in debt relating to the acquisition of NSENA in December 2020.

During the three months ended March 31, 2023 and 2022, we received $0 and $75 thousand in proceeds from the exercise of previously issued stock options.

Contractual Obligations and Commitments

Pursuant to that certain exclusive Amended and Restated Intellectual Property License Agreement dated September 30, 2016, by and between the Company and Syzygy Licensing, LLC (“

Syzygy ”), we are obligated to pay to Syzygy a 4% royalty fee on future product sales up to an aggregate amount of $1.0 million in royalty payments or until September 30, 2026, whichever occurs earlier.

We are committed to aggregate lease payments on our facility lease of $31 thousand in 2022, $121 thousand in 2023, $125 thousand in 2024, and $75 thousand in 2025.

At September 30, 2022, we were committed for approximately $4.4 million for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

Syzygy ”), we are obligated to pay to Syzygy a 4% royalty fee on future product sales up to an aggregate amount of $1.0 million in royalty payments or until September 30, 2026, whichever occurs earlier.

Pursuant to the Professional Services and Technology Acquisition Agreement (the “

Agreement ”) entered into with Lumeto, Inc.

and Spatial Industries Group, Inc.

(collectively, “

Service Provider ”) on November 22, 2022, as amended on April 2, 2023, which Agreement, provided that the Service Provider provide to the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform (the “

Technology, Services, and License ”), in consideration for a cash payment of $700 made to the Service Provider upon the execution of the Agreement.

In January 2022 we extended our facility lease for three years through July 2025 and we are committed to aggregate lease payments on the lease of $91 thousand for nine months in 2023, $126 thousand in 2024 and $75 thousand in 2025.

At March 31, 2023, we were committed for approximately $3.493 million for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

Effects of Inflation

We do not believe that inflation has had a material impact on our business, revenue or operating results during the periods presented.

During the three months ended March 31, 2023 and year ended December 31, 2022, we had increased in labor and materials due to inflation.

We believe in 2023 that low unemployment and higher salaries will create higher payroll costs and increased operating expenses in the business.

We have seen increases from multiple suppliers for materials as well as labor.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the period ended September 30, 2022, or subsequently thereto, that we believe are of potential significance to our financial statements.

There have been no recent accounting pronouncements or changes in accounting pronouncements during the period ended March 31, 2023, or subsequently thereto, that we believe are of potential significance to our financial statements.

Quantitative and Qualitative Disclosures about Market Risk.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis