What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-10 compared with 2023-05-10 · 174 added, 101 removed, 234 unchanged (54% of the section changed)

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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.

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 U.S.

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.

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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.

BolaWrap assists law enforcement to safely and effectively control encounters early without resorting to painful force options.

Wrap Reality –

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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.

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

BolaWrap is now in use by almost 1,000 US law enforcement agencies and in 62 countries.

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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.

Agencies voluntarily report usage to Wrap.

In the usage reports we have been provided;

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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.

Management anticipates that our portfolio of safe, remote restraint products and training tools 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.

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

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

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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.

As of June 30, 2023, over 1,450 agencies have received BolaWrap training with over 4,827 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments, representing a 18% increase in agencies and a 16% increase in trained officers as compared to June 30, 2022. 

Operating expense for the second quarter of fiscal 2023 increased $0.51 million, or 10%, to $5.75 million from $5.24 million in the prior year period.

The increase in operating expense was the result of the Company incurring approximately $1.4 million of one-time items related to organizational changes including severance and legal fees that impacted operational expense.

Excluding these one-time items, operational expense for the second quarter 2023 would have been $4.35 million or a 17% decrease from the prior year period.

We expect to see the full benefit of the organizational changes we made in April during the back half of 2023.

Management is confident that implementing the strategic changes it made in April 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%.

If departments follow our 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. 

Our improved pricing strategy, coupled with reduced operating expense 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.

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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.

At June 30, 2023 we had backlog of approximately $25 thousand expected to be delivered in the third quarter of 2023.

Additionally, we had deferred revenue of $340 thousand expected to be recognized generally over the next five years.

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

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 increased our net loss during the second quarter of fiscal 2023 by more than $0.2 million as compared to the second quarter of fiscal 2022.

The decrease in net loss was primarily the result of one-time items related to the organizational changes made during the second quarter 2023 including $1.4 million of non-cash expense related to stock compensation, severance, and legal fees.

Excluding the one-time items, net loss for the second quarter 2023 would have been $3.61 million or a 25% decrease from the prior year period.

Net cash used in operations during the six months ended June 30, 2023 was $5.43 million less than cash used in operations during the six months ended June 30, 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 and Q2 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.

We believe that our sales during the second quarter of fiscal 2023 were impacted by the timing of new orders, particularly on in the international market, and associated budgeting from our customers. 

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

Moreover, financial markets have continued to experience significant volatility, challenging the Company’s ability to access the capital markets to provide additional working capital to fund the Company’s growth.

Despite these conditions, and following an analysis of our future capital needs, the Company consummated an offering of Series A Convertible Preferred Stock and Warrants (“

Offering ”), which Offering closed on July 5, 2023, resulting in gross proceeds to the Company of approximately $10 million of which $7.4 million was received on June 29, 2023.

The $7.4 million received was recorded to cash with an offset to accrued expense.

As a result, we had $18.2 million in cash and cash equivalents and short-term investments as of June 30, 2023.

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

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.

Future global pandemics could potentially result in lost or delayed revenue for our Company, as occurred in the years ended December 31 2021 and 2022 due to the global COVID-19 pandemic.

These potential future events could 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.

Our Company may be positively or negatively impacted by 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.

Changes in our management and other critical personnel have the potential to 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.

On the other hand, improvements in our operations, operating expense, 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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We have very limited history to make such estimates and warranty estimates have an impact on our financial statements.

Warranty expense is recorded in cost of revenues.

Warranty expense is recorded in cost of revenue.

We evaluate the adequacy of this reserve each reporting period.

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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 March 31, 2023.

Our accounting policies are more fully described in Note 1.

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

Operating Expenses

Our operating expenses include (i) selling, general and administrative expense, (ii) research and development expense, and in the most recent fiscal quarter, (iii) product line exit expense.

Operating Expense

Our operating expense includes (i) selling, general and administrative expense, (ii) research and development expense, and in the most recent fiscal quarter, (iii) product line exit expense.

Research and development expense is comprised of the costs incurred in performing research and development activities and developing production on our behalf, including compensation and consulting, design and prototype costs, contract services, patent costs and other outside expense.

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The future level of selling, general and administrative expense will be dependent on staffing levels, elections regarding expenditures on sales, marketing and customer training, the use of outside resources, public company and regulatory expense, and other factors, some of which are outside of our control.

We expect our operating costs will remain at comparable current levels in the near term.

We may also incur additional non-cash share-based compensation costs depending on future option and restricted stock unit grants that are impacted by stock prices and other valuation factors.

We expect our operating costs will reduce from the first half of 2023 as a result of the changes implemented in April 2023, and ongoing cost containment efforts.

We may incur additional non-cash share-based compensation costs depending on future option and restricted stock unit grants that are impacted by stock prices and other valuation factors.

Historical expenditures are not indicative of future expenditures.

Results of Operations

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

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 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 March 31,

Three Months Ended

Product sales

Other revenue

Total revenues

Cost of revenues

Operating expenses:

Total revenue

Cost of revenue

Operating expense:

Selling, general and administrative

Research and development

Total operating expenses

Total operating expense

Loss from operations

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 reported net revenue of $1.2 million for the three months ended June 30, 2023, as compared to $1.2 million for the quarter ended June 30, 2022, a 3% increase over the prior year.

International revenue decreased from $75 thousand for the three months ended June 30, 2022 to $31 thousand for the three months ended June 30, 2023.

We believe that our sales during the three months ended June 30, 2023, were impacted by the timing of new orders, particularly international and associated budgeting from our customers. We also incurred discounts of $42 thousand during the three months ended June 30, 2023, as a result of promotional programs designed to encourage customers to upgrade to the BolaWrap 150.

Gross sales were $1.2 million for the three months ended June 30, 2023, before such discounts.

The discounts compare to normal business discounts of $161 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.

International revenue generally consists 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 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 incurred product promotional costs of $41 thousand during the three months ended June 30, 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.

We had $340 thousand of deferred revenue at June 30, 2023, of which $217 thousand related to VR, $17 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 March 31, 2023, we had backlog of $21 thousand expected to be delivered in the second quarter of 2023.

At June 30, 2023, we had backlog of $25 thousand expected to be delivered in the third 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.

Our gross profit for the three months ended June 30, 2023 was $668 thousand, or a gross margin of 56%.

Our cost of revenue for the three months ended June 30, 2022 was $457 thousand resulting in a gross margin of 39%.

The increase in gross profit represented an 46% 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.

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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.

Cassettes were a total of 19% of our overall revenue in the three months ended June 30, 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.

Given our limited experience with warranty costs, our estimated future warranty expense 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 have seen these supply chain obstacles 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 of $4.8 million for the three months ended June 30, 2023 increased by $1.0 million, when compared to $3.8 million for the three months ended June 30, 2022.

The increase in selling general and administrative expense was the result of the Company incurring approximately $1.4 million of one-time items related to organizational changes including severance and legal fees that impacted operational expense.

Excluding these one-time items, selling general and administrative expense for the second quarter 2023 would have been $3.35 million or a 11% decrease from the prior year period.

Share-based compensation costs allocated to SG&A increased to $990 thousand compared to $589 thousand for the comparable prior quarter.

This $401 thousand increase resulted primarily from changes in management and one-time costs associated with the management changes in April 2023.

Salaries and burden costs of $1.53 million for the three months ended June 30, 2023 was a decrease of $10 thousand, or a 1% decrease, due to reduced headcount and one-time recruiting expense.

During three months ended June 30, 2023, as compared to same period during the prior year, we increased professional fees by $308 thousand, and increased consulting and contract services fees by $182 thousand.

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

Advertising and promotion costs were $282 thousand for the three months ended June 30, 2023, or a decrease of $51 thousand as compared to $333 thousand during the three months ended June 30, 2022.

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

However, the company expects advertising costs will increase in the future due to increased investment in strategic targeting and marketing campaigns as well as building brand awareness.

Research and Development Expense

Research and development expense decreased by $474 thousand for the three months ended June 30, 2023 when compared to the three months ended June 30, 2022.

We incurred a $92 thousand period over period increase in share-based compensation expense allocated to research and development expense as a result of personnel changes made in April 2023.

Outside consulting costs decreased by $145 thousand and prototype related costs decreased by $155 thousand primarily due to reduced costs related to finalizing the BolaWrap 150 product and continued cost containment efforts.

Operating Loss

Loss from operations of $5.1 million during the three months ended June 30, 2023 was an increase of $0.3 million compared to loss from operations of $4.8 million during the three months ended June 30, 2022, reflecting increased margin and the focus on reducing operating costs.

Excluding these one-time items, operational expense for the second quarter 2023 would have been $4.35 million or a 17% decrease from the prior year period.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 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.

Six Months Ended

Product sales

Other revenue

Total revenue

Cost of revenue

Operating expense:

Selling, general and administrative

Research and development

Total operating expense

Loss from operations

We reported net revenue of $1.9 million for the six months ended June 30, 2023, as compared to $2.8 million for the six months ended June 30, 2022, a 31% decrease over the prior year.

International revenue decreased from $479 thousand for the six months ended June 30, 2022 to $35 thousand for the six months ended June 30, 2023.

We believe that our sales during the six months ended June 30, 2023 were impacted by the timing of new orders and associated budgeting from our customers. We also incurred discounts of $64 thousand during the six months ended June 30, 2023, as a result of promotional programs designed to encourage customers to upgrade to the BolaWrap 150.

Gross sales were $1.98 million for the six months ended June 30, 2023, before such discounts.

The discounts compare to normal business discounts of $549 thousand in the comparable six-month period of the prior year.

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

International revenue generally consists 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.

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 $95 thousand during the six months ended June 30, 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.

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 June 30, 2023, we had backlog of $25 thousand expected to be delivered in the third 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 six months ended June 30, 2023 was $1.02 million, or a gross margin of 53%.

Our cost of revenue for the six months ended June 30, 2022 was $1.12 thousand resulting in a gross margin of 41%.

The decrease in gross profit represented an 9% decrease over prior year as a result of decreased sales.

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 18% of our overall revenue in the six months ended June 30, 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 expense 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.

1 unchanged sentence

Selling, general and administrative ( “

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 $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.

SG&A ”) expense of $8.3 million for the six months ended June 30, 2023 decreased, by $0.1 million, when compared to $8.4 million for the six months ended June 30, 2022, due to cost containment efforts.

Share-based compensation costs allocated to SG&A increased to $1.6 million compared to $1.5 million for the comparable prior-year period.

This $0.1 million increase resulted primarily due to changes in management, one-time costs in the prior year period, and changes in the stock price.

Salaries and burden costs of $3.0 million for the six months ended June 30, 2023 was a decrease of $132 thousand, or a 4% decrease, due to reduced headcount and one-time recruiting expense.

During six months ended June 30, 2023, as compared to same period during the prior year, we increased professional fees by $160 thousand, and increased consulting and contract services fees by $30 thousand.

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

Advertising and promotion costs were $445 thousand for the six months ended June 30, 2023, or a decrease of $216 thousand as compared to $661 thousand during the six months ended June 30, 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 $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.

Research and development expense decreased by $898 thousand for the six months ended June 30, 2023 when compared to the six months ended June 30, 2022.

We incurred a $21 thousand period over period increase in share-based compensation expense allocated to research and development expense as a result of personnel changes made in April 2023.

Outside consulting costs decreased by $252 thousand and prototype related costs decreased by $323 thousand for the six months ended June 30, 2023, primarily due to reduced costs related to finalizing the BolaWrap 150 product.

Operating Loss

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.

Loss from operations of $9.3 million during the six months ended June 30, 2023 was a reduction of $878 thousand compared to loss from operations of $10.2 million during the six months ended June 30, 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 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 from future equity or debt financings.

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

As of June 30, 2023, we had cash and cash equivalents of $11.7 million, short-term investments of $6.5 million, positive working capital of $16.6 million and had sustained cumulative losses attributable to stockholders of $76.4 million.

Our working capital at June 30, 2023 was positively affected by an increase in inventories of approximately $2.5 million, which consisted of increases of inventory of the BolaWrap 150 in anticipation of future orders, and the receipt of $7.4 million from the Offering on June 29, 2023 that formally closed on July 5, 2023. 

The Offering was consummated following an analysis of our future capital needs, resulting in the issuance of Series A Convertible Preferred Stock and Warrants. 

The Offering generated gross proceeds to the Company of approximately $10 million. 

As a result, we had $18.2 million in cash and cash equivalents and short-term investments as of June 30, 2023.

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

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

Capital Requirements

Due in part to the volatility caused by COVID-19, we do not have a high degree of confidence in our estimates for our future liquidity requirements or future capital needs, which will depend on, among other things, capital required to introduce new products and the operational staffing and support requirements, as well as the timing and amount of future revenue and product costs.

We anticipate that demands for operating and working capital may grow depending on decisions on staffing, development, production, marketing, training and other functions and based on other factors outside of our control.

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 liquidity requirements or future capital needs will depend on, among other things, capital required to introduce new products and the operational staffing and support requirements, as well as the timing and amount of future revenue and product costs.

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:

The impact and effects of the global outbreak of the COVID-19 pandemic, and other potential pandemics or contagious diseases or fear of such outbreaks;

Any future outbreaks pandemics or contagious diseases or fear of such outbreaks;

Decisions regarding staffing, development, production, marketing and other functions;

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Operating Activities

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.

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.

During the six months ended June 30, 2023, net cash used in operating activities was $776 thousand.

The net loss of $9.04 million was decreased by non-cash expense of $2.26 million consisting primarily of share-based compensation expense of $1.85 million.

Other major component changes using operating cash included an increase of $2.55 million in inventories and a net increase in accounts payable and accrued liabilities of $7.66 million.

A decrease in accounts receivable of $884 million reduced the cash used in operating activities.

During the six months ended June 30, 2022, net cash used in operating activities was $6.2 million. The net loss of $10.2 million was decreased by non-cash expense of $2.2 million consisting primarily of share-based compensation expense of $1.76 million.

Other major component changes using operating cash included an increase of $467 thousand in inventories and a net reduction in accounts payable and accrued liabilities of $311 thousand.

A decrease in accounts receivable of $2.4 million reduced the cash used in operating activities.

Investing Activities

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.

During the six months ended June 30, 2023, we used $2.65 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $10 million.

During the six months ended June 30, 2023, we used $66 thousand of cash for the purchase of property and equipment, and invested $176 thousand in patents.

During the six months ended June 30, 2022, we used $14.9 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $20 million.

During the six months ended June 30, 2022, we used $168 thousand of cash for the purchase of property and equipment and invested $102 thousand in patents.

Financing Activities

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.

During the six months ended June 30, 2023 and 2022, we received $0 and $75 thousand, respectively, in proceeds from the exercise of previously issued stock options.

During the six months ended June 30, 2023 and 2022, we received $7.4 million and $0 million in gross proceeds from the issuance of securities, which amount in the six months ended June 30, 2023 is reflected in cash and cash equivalents, with an offset to accrued expense, each as reflected in the Company’s Condensed Consolidated Balance Sheet at June 30, 2023.

Contractual Obligations and Commitments

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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.

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 $61 thousand for six months in 2023, $126 thousand in 2024 and $75 thousand in 2025.

At June 30, 2023, we were committed for approximately $3.9 million for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

On August 9, 2023, the Company entered into a Membership Interest Purchase Agreement (the “

Purchase Agreement ”) with Intrensic, LLC, a Delaware limited liability company (“

Intrensic ”), and certain members of Intrensic, including Kevin Mullins, the Company’s Chief Executive Officer (collectively, “

Sellers ”). 

Under the terms of the Purchase Agreement, the Company agreed to purchase, and Sellers agreed to sell, 100% of the membership interests (the “

Membership Interests ”) of Intrensic for the following consideration upon the consummation of the sale of the Membership Interests:

(i) $553,588 in cash, subject to adjustment based upon the outstanding indebtedness of Intrensic and Intrensic’s working capital as of the closing;

and (ii) 1,250,000 shares of Common Stock of the Company.  

Effects of Inflation

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.

During the six months ended June 30, 2023 and year ended December 31, 2022, we had experienced increased costs 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 expense in the business.

We have seen increases in costs 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 March 31, 2023, 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 June 30, 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