What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-08-28 compared with 2023-03-02 · 205 added, 198 removed, 168 unchanged (71% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis set forth below should be read in conjunction with the information presented in other sections of this Annual Report, including “

Business, ”

Risk Factors, ”

The discussion and analysis set forth below should be read in conjunction with the information presented in other sections of this Annual Report, including “ Item 1.

Business, ” “ Item 1A.

Risk Factors, ” and “ Item 8.

Financial Statements and Supplementary Data.

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

Words such as “

expects, ”

anticipates, ”

intends, ”

plans, ”

believes, ”

seeks, ”

estimates ”

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.

Words such as “ expects, ” “ anticipates, ” “ intends, ” “ plans, ” “ believes, ” “ seeks, ” “ estimates ” 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.

Our actual results could differ materially from those discussed in these forward-looking statements.

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 are leading the movement for safer outcomes by equipping law enforcement with safer, non-painful compliance tools and immersive training fir for modern society.

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

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

VR ”) training platform –

Wrap Reality.

In late 2020 we added a new solution to our public safety technologies, which is our virtual reality (“VR”) training platform, Wrap Reality.

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

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

In the first quarter of 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.

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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We focus our efforts on the following products and services:

BolaWrap Remote Restraint Device –

is a hand-held remote restraint device that discharges a seven and half-foot bola style 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 3D training system employing immersive computer graphics VR with proprietary software-enabled content.

BolaWrap Remote Restraint Device – 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 without resorting to painful force options.

Wrap Reality – 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.

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

Wrap Reality has 43 scenarios for law enforcement and corrections and 15 scenarios 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.

Wrap Intrensic – a Body-Worn Camera (“ BWC ”) and Digital Evidence Management (“ DEM ”) solutions provider.

BWC and DEM play crucial role in capturing, storing, and managing digital evidence, such as video and audio recordings for various purposes, including criminal investigations and maintaining transparency in public interactions.

The Wrap Intrensic X2 camera hardware and storage and data management capability, along with awareness of front-line operations, provides customers with a solution to meet their challenges.

Wrap Intrensic Evidence on Cloud provides an unlimited video storage platform that includes video and other evidence uploading, search, retrieval, redaction, and evidence sharing while reducing the need for resources required to manage this evidence.

In addition to the US law enforcement market, we have shipped our restraint products to 62 countries.

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Recent Developments

Nasdaq Deficiency Notice

On April 18, 2024, the Company received a notice (the “Initial Notice”) from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that as it has not yet filed its Annual Report on Form 10-K (the “2023 Form 10 K”) for the year ended December 31, 2023, the Company is not in compliance with Listing Rule 5250(c)(1) (the “Listing Rule”) for continued listing on Nasdaq.

Additionally, on May 17, 2024, the Company received a notice (the “May Notice") from Nasdaq notifying the Company that as it has not yet filed its Quarterly Report on Form 10-Q (the “Q1 Form 10 Q”) for the three months ended March 31, 2024, that the Company is not in compliance with the Listing Rule.

On August 16, 2024, the Company received a notice (the “August Notice," and collectively with the Initial Notice and the May Notice, the “Notices”) from Nasdaq notifying the Company that as it has not yet filed its Quarterly Report on Form 10-Q (the “Q2 Form 10 Q,” and collectively with the 2023 Form 10-K and Q1 Form 10-Q, the “Delinquent Filings”) for the six months ended June 30, 2024, that the Company is not in compliance with the Listing Rule for continued listing on Nasdaq

The Company previously submitted a plan to Nasdaq to regain compliance with respect to the delinquent 2023 Form 10-K and Q1 Form 10-Q (the “Plan”), and Nasdaq granted an exception until August 30, 2024, to file the delinquent 2023 Form 10-K and Q1 Form 10-Q.

Pursuant to the August Notice, the Company is required to submit an update to the Plan to Nasdaq no later than September 3, 2024, to regain compliance with respect to the filing requirements.

Nasdaq may grant the Company an additional exception of up to a maximum of 180 calendar days from the filing due date of the 2023 Form 10-K to file all Delinquent Filings, or until October 14, 2024, to regain compliance.

The Notices do not have an immediate effect on the listing of the Company’s common stock.

The Company is currently evaluating its options for regaining compliance.

There can be no assurance that the Company will regain compliance with the Nasdaq’s rules or maintain compliance with any of the other Nasdaq continued listing requirements.

During the year ended December 31, 2023, we accomplished the following:

Through our strategic roadmap process, determined the exact market fit for where BolaWrap and Wrap Reality operate in the law enforcement marketplace.

(See our Force Factor slide for a visual depiction)

Created and implemented a strategic roadmap to lead the company to long-term growth and produce lasting value for shareholders

Controlled our costs and reduced full year 2022 operating expenses $5.0 million or 19% as compared to 2021

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.

Customer Success did not exist as a specific function until mid Q3 of 2022 and is building on our proactive approach to expand sales in 2023 with existing customers and agencies.

Added a dedicated inside sales function to grow our velocity and follow up on new leads.  

Expanded our distributor and partner relationships

Leveraged product diversification and innovation to catalyze sales growth.

Improved pricing on BolaWrap 150 devices and cassettes now that the product has proven itself to law enforcement as a significant upgrade.

This has a direct and positive impact on future gross margins.

Adjusted our training curriculum to include the when and the why BolaWrap is used.

Transitioned to charging for our respected training services.

Documented our curriculum for submittal to all US Peace Officers Standards and Training (POST) councils.

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.

Entered into a Professional Services and Technology Acquisition Agreement with Lumeto and Spatial, whereby Lumeto and Spatial will provide the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform.

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 company strategy.

The transition and corporate strategy included the resignation of Thomas P.

Smith, our President, Chief Executive Officer and director, and the announcement of the planned retirement of James A.

Barnes our former Chief Financial Officer, Secretary and Treasurer, 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.

In late December 2022, we also brought onboard Tracey Friedlander as our General Counsel.

• The Company initiated a cost containment plan, recruitment, operations efforts, and significant customer acquisitions over the past year.

• New Board Members:

Welcomed Bruce Bernstein, an experienced securities industry leader;

Marc Savas, a skilled executive known for accelerating company revenue;

Vice Admiral (ret.) Timothy Szymanski, a former Navy SEAL with over 36 years of service leveraging his expertise in special operations and national security;

Rajiv Srinivasan, a technology sales leader with senior roles at Microsoft, VMware, and a cybersecurity startup, and accredited U.S.

Army veteran awarded with a Bronze Star.

• Launched "Use of Force Reduction Guarantee":

A new program affirming Wrap’s dedication to safer outcomes, guaranteeing a 10% reduction in an agency’s use of force with BolaWrap or a device buyback after 12 months.

• Strategic Redirection Announced:

Transitioning Wrap Technologies from a product-focused entity to a mission-based solutions provider, paving the way for purpose-driven innovation and growth.

• Capital Funding and Acquisition:

Closed a significant funding round with $10 million gross proceeds.

Acquired Intrensic, LLC, expanding into body cam and Cloud evidence services.

• Major Orders:

Received a full deployment order for BolaWrap 150 from a large Mid-Atlantic domestic agency.

• Successful Integration:

Integrated Wrap Intrensic, enhancing our offerings in Body-Worn Cameras and Digital Evidence Management.

• AI Advancements in Wrap Intrensic BWC:

Launched new AI functionalities for Body-Worn Camera and Digital Evidence Management System, including AI Video Redaction and Automated Transcription, enhancing law enforcement efficiency and accountability.

• BolaWrap 150 Expanded in Italy:

Wrap Technologies announced the adoption of the BolaWrap 150 remote restraint devices by eleven police departments across Italy, underscoring the Company's commitment to advancing public safety solutions globally.

Business Outlook and Challenges

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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.

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

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

We believe there are 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.

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

In our strategic roadmap, we clarified that law enforcement agencies deploy BolaWrap when verbal commands breakdown but long before there is justifiable escalation to 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 82% of the use cases.

In the usage reports we have been provided, officers have reported successful outcomes in 84% 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.

26% percent of the reported persons who are wrapped with the BolaWrap are thought to be under the influence of alcohol or drugs.

However, some 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.

Our company anticipates/believes 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.

We anticipate and believe 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.

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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 less lethal pain compliance tools.

Our company 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.

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

We believe 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 December 31, 2023, over 1,520 agencies have received BolaWrap training with over 5,440 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments, representing a 12% increase in agencies and a 30% increase in trained officers as compared to December 31, 2022.

Operating expenses for the full year 2022 reduced by $5.0 million or 19% as compared to the full year 2021.

Our new management team immediately prioritized reducing operating expenses, and in the second quarter, conducted a thorough top to bottom assessment of all aspects of our business.

This assessment culminated in the creation of a strategic roadmap aimed at achieving sustainable growth and delivering long-term value to our shareholders.

Operating expenses for the year ended December 31, 2023 were relatively flat with 2023 expenses equal to $21.6 million as compared to $21.5 million in 2022.

Our new management team has prioritized reducing operating expenses, and in the second quarter, conducted a thorough top to bottom assessment of all aspects of the business.

As a result of these actions, the Company recorded $1.0 million of severance related charges during 2023.

We expect to realize the results of the cost reduction actions beginning in 2024 as we expect to significantly reduce our cost profile.

This assessment culminated in the creation of a strategic roadmap aimed at achieving sustainable growth and delivering long-term value to our stockholders.

Our strategic roadmap centers on expanding our sales by building repeatable domestic BolaWrap sales, increasing international sales of the new BolaWrap 150, and expanding the deployment of BolaWrap to full patrol-wide utilization via a customer success function.

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To catalyze sales growth, we are expanding our distributor and partner relationships while simultaneously diversifying and innovating our product offerings.

As part of our strategic roadmap, we have made the decision to improve the pricing on BolaWrap 150 devices and cassettes, given the product's proven success as a significant upgrade for law enforcement.

These increased margins will drive us to breakeven and profitability more quickly.

We have also begun charging for our respected training services.

As part of our strategic roadmap, we have made the decision to improve the pricing on BolaWrap 150 devices and cassettes, given the product's success as a significant upgrade for law enforcement.

We believe these increased margins could drive us to breakeven and profitability more quickly.

We also began charging for our respected training services.

Changes have been implemented in how we sell Wrap Reality, and we have established a Software as a Service (SaaS) model for our virtual reality technology moving forward.

We acquired a cloud software capability and will now be offering both on premise and cloud 3D Virtual Reality options for Wrap Reality later in 2023.

We believe the synergy in BolaWrap to de-escalate and reduce uses of force and the immersive 3D Virtual Reality training for law enforcement and corrections create a unique well positioned law enforcement technology company that is prepared for 21 st Century policing and driving safe outcomes.

Now with our key focus on where BolaWrap and Wrap Reality fit into the Force Factor diagram below in Figure X, agencies are likely to see significant increased usage where BolaWrap is a tool that can be used every week to appropriately de-escalate a dangerous situation and save the lives and careers of the officers we serve and save the lives of the individuals they interact with on dangerous calls.

We acquired cloud software capability and both on premise and cloud 3D Virtual Reality options for Wrap Reality in 2023.

We anticipate these changes will have a significant positive impact on our future success and growth.

Our company 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 significantly, aided by our ongoing cost savings and cost control measures, which should lead to an overall reduction in cash burn.

As a result, we anticipate reaching an adjusted EBITDA break-even point by the conclusion of fiscal 2023, and if strong sales persist, we may achieve profitability by the end of 2024.

With the transaction with Lumeto in late November 2022, we have continued to invest in our VR system while working to continue to develop real-world scenarios into our robust Wrap Reality platform.

In the future, the Lumeto transaction will allow for a cloud-based option of our Wrap Reality platform including a lower initial capital commitment for hardware.

We believe the synergy in BolaWrap to de-escalate and reduce uses of force and the immersive 3D Virtual Reality training for law enforcement and corrections create a unique and well positioned law enforcement technology company that is prepared for modern policing and driving safe outcomes.

With our key focus on where BolaWrap and Wrap Reality fit into the Force Factor diagram below in Figure X, agencies are likely to see significant increased usage where BolaWrap has shown to be a tool that could appropriately de-escalate dangerous situations and save the lives and careers of officers and the individuals they interact with in such situations.

Management believes that implementing these strategic changes may 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 company 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 Use of Force Guarantee requirements, we have offered to buy back their BolaWrap devices if their reportable use of force is not reduced by 10%.

With an increasing addressable market, the Company offers what we believe is 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.

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 has shown improved results.

This is a departure from 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 we expect to lead to an overall reduction in cash burn.

We have continued to invest in our VR system while working to continue to develop real-world scenarios into our robust Wrap Reality platform.

We plan to increase marketing activities for our VR solution to both law enforcement and corrections throughout 2023 and expect to launch the cloud-based version in mid-2023.

At December 31, 2022 we had backlog of approximately $257 thousand expected to be delivered in the first quarter of 2023.

Additionally, we had deferred revenue of $333 thousand expected to be recognized generally over the next five years.

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

As of December 31, 2023 we had backlog of approximately $209 thousand was delivered in the first quarter of 2024.

Additionally, we had deferred revenue of approximately $544 thousand expected to be recognized generally over the next five years.

Our deferred revenue is generally 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.

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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.

For the full year 2022 we reduced our net loss by more than $6.8 million versus the comparable prior year.

Net cash used in operations during the full year 2022 was $3.6 million less than cash used in operations during the full year 2021.

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

We believe that we have adequate financial resources to sustain our operations for the twelve months.

For the year ended December 31, 2023 our net loss from operations increased by approximately $1.0 million compared to the year ended December 31, 2022.

Net cash used in operations during the year ended December 31, 2023 was approximately $2.1 million more than cash used in operations during the year ended December 31, 2022.

This increase in cash used in operations reflects an increase in accounts receivable during the period along with an increase in the operating loss compared to the year ended December 31, 2022.

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 in 2022, 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.

We had many customers that were happy with the BolaWrap 100 and many distributors who also like the BolaWrap 100 that were concerned about not being able to continue to expand with the first-generation device.

This device was completely turned off from sales in Q4 of 2021 and product delays kept our BolaWrap 150 from being fully delivered to customers until late Q1 in 2022.

This gap in having product to sell as well as the unhappiness in turning off the first-generation product while it was still having success in the field, created significant work throughout 2022 to get the BolaWrap 150 approved by departments as well as by import and federal authorities for international countries.

We believe that our sales during the fiscal year ended December 31, 2022, and to a lesser extent, December 31, 2023, were adversely affected by the shift to our BolaWrap 150 product and the discontinuation of the BolaWrap 100 production line in 2022, along with the limited ability to demonstrate and train customers due to the COVID-19 pandemic, particularly internationally.

Although customers were generally satisfied with the BolaWrap 100, many distributors were concerned with the Company’s ability to continue to expand with the BolaWrap 100.

This device was completely discontinued in 2021 and product delays kept the BolaWrap 150 from being fully delivered to customers until late early 2022.

This gap in having a product to sell as well as the unhappiness in phasing out the first-generation product while it was still having success in the field, created significant work throughout 2022 to get the BolaWrap 150 approved by departments as well as by import and federal authorities for international countries.

We also had a much slower than expected trade in the timeframe of BolaWrap 100 to BolaWrap 150 due to the customer affinity for our first to market device.

A lesson learned by the company was to continue to sell BolaWrap 100 cartridges and to announce in late 2022 that we will build and supply the BolaWrap 150 for at least five years from its launch date.

This will allow departments that are going to do very large agency wide deployments to count on the BolaWrap 150 to be available even if we bring to market a newer device that has new features.

However, we witnessed a rebound in the second half of 2022, following the full-scale production and sales of the BolaWrap 150.

New device supply chain and product issues improved.

We got on the road and demonstrated the new and enhanced capabilities of the BolaWrap 150 and customers clearly saw the enhanced capabilities and have come to respect and want the new technology.

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 $19.3 million in cash and cash equivalents and short-term investments as of December 31, 2022, 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 pandemic 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 the 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.

We realized a rebound in sales of the BolaWrap 150 in the second half of 2022, following the full-scale production and sales of the BolaWrap 150.

New device supply chain and product issues improved, but did not completely abate until the first half of 2023, at which point, management was able to fully resume international travel and demonstrate the new and enhanced capabilities of the BolaWrap 150.

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

Moreover, financial markets continue to experience 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 had $11.5 million in cash and cash equivalents and short-term investments as of December 31, 2023, which we believe provides sufficient capital to fund our operations in the short-term and absorb the potential near-term impacts of economic uncertainty.

However, we may require additional working capital and liquidity constraints and access to capital markets could still negatively affect our liquidity and require changes to our plan of operations.

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.

We believe our solutions are 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.

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Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the US (“

US GAAP ”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities.

The preparation of financial statements in accordance with accounting principles generally accepted in the US (“ US GAAP ”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities.

We evaluate our estimates, on an on-going basis, including those estimates related to recognition and measurement of contingencies and accrued expense.

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Revenue Recognition .

FOB ”) shipping point) or received by customers (FOB destination), when the fee is fixed or determinable and when collection of resulting receivables is reasonably assured.

We sell our products to customers including law enforcement agencies, domestic distributors and international distributors and revenue from such transactions is recognized in the periods that products are shipped (free on board (“ FOB ”) shipping point) or received by customers (FOB destination), when the fee is fixed or determinable and when collection of resulting receivables is reasonably assured.

We identify customer performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue as we satisfy the performance obligations.

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Our customers do not have the right to return product unless the product is found to be defective.

Periodically, certain customers request bill and hold transactions for future delivery as scheduled and designated by them.

In such cases, revenue is not recognized until after control, title and risk of ownership has transferred which is generally when the customer has requested such transaction under normal billing and payment terms and has been notified that the product (i) has been completed according to customer specifications, (ii) has passed quality control inspections, and (iii) has been tagged and packed for shipment, separated from other inventory and ready for physical transfer to the customer. The value associated with custodial storage services is deemed immaterial in the context of such contracts and in total, and accordingly, none of the transaction price is allocated to such service.

Share-Based Compensation.

We follow the fair value recognition provisions issued by the Financial Accounting Standards Board (“

FASB ”) in Accounting Standards Codification (“

ASC ”) Topic 718, Stock Compensation (“

ASC 718 ”) and we adopted Accounting Standards Update (“

ASU ”) 2018-07 for share-based transactions with non-employees.

We follow the fair value recognition provisions issued by the Financial Accounting Standards Board (“ FASB ”) in Accounting Standards Codification (“ ASC ”) Topic 718, Stock Compensation (“ ASC 718 ”) and we adopted Accounting Standards Update (“ ASU ”) 2018-07 for share-based transactions with non-employees.

Share-based compensation expense recognized includes stock option and restricted stock unit compensation expense.

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The grant date is the date at which an employer and employee or non-employee reach a mutual understanding of the key terms and conditions of a share-based payment award.

The Black-Scholes option-pricing model requires inputs including the market price of the Company’s Common Stock on the date of grant, the term that the stock options are expected to be outstanding, the implied stock volatilities of several publicly traded peers over the expected term of stock options, risk-free interest rate and expected dividend.

Each of these inputs is subjective and generally requires significant judgment to determine.

The grant date fair value of restricted stock units is based upon the market price of the Company’s Common Stock on the date of the grant.

We determine the amount of share-based compensation expense based on awards that we ultimately expect to vest and account for forfeitures as they occur.

The grant date fair value of restricted stock units is based upon the market price of the Company’s Common Stock on the date of the grant.

We determine the amount of share-based compensation expense based on awards that we ultimately expect to vest and account for forfeitures as they occur.

The fair value of share-based compensation is amortized to compensation expense over the vesting term.

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The Company operates as a single segment.

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

The Company’s chief operating decision maker is Scot Cohen, the Company’s Executive Chairman and Chief Executive Officer, who manages operations for purposes of allocating resources.

Refer to Note 18, Major Customers and Related Information, in our financial statements for further discussion.

Operating Expense

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.

Our operating expenses include (i) selling, general and administrative expense, (ii) research and development expense, (iii) and in the most recent fiscal quarter, 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 following table and narrative sets forth for the periods indicated certain items of our statement of operations, expressed in thousands of dollars.

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

The financial information and the discussion below should be read in conjunction with the financial statements and notes contained in this Annual Report on Form 10-K.

Year Ended December 31,

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Products and services

Product line exit expense

Total cost of revenues

Operating expenses:

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Loss from operations

We reported revenue of $8.0 million for the year ended December 31, 2022 (“

Fiscal 2022 ”) as compared to revenue of $7.7 million for the year ended December 31, 2021 (" Fiscal 2021 "), a 4% increase over the prior year.

International revenues decreased from $4,372 thousand for the year ended December 31, 2021 to $2,734 thousand for the year ended December 31, 2022.

We incurred discounts of $898 thousand during the year ended December 31, 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 $561 thousand in the prior year.

We reported revenue of approximately $6.1 million for the year ended December 31, 2023, as compared to revenue of approximately $8.0 million for the year ended December 31, 2022, an approximate 29% decrease.

International revenues decreased from approximately $2.7 million for the year ended December 31, 2022 to approximately $2.3 million for the year ended December 31, 2023.

The decrease in international revenue was driven by the prior year having certain large orders and continued stronger demand for our products in the EMEA region during 2022.

We incurred discounts of approximately $169 thousand during the year ended December 31, 2023, compared to approximately $898 thousand during the year ended December 31, 2022, primarily as a result of promotional programs designed to encourage domestic customers to upgrade to the BolaWrap 150.

We expect a decline to minimal discounts in 2024 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 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 $688 thousand for Fiscal 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 $924 thousand of such product promotional costs were incurred during the Fiscal 2021.

We had $333 thousand of deferred revenue at December 31, 2022, of which $198 thousand related to VR, $11 thousand was related to training and $124 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 December 31, 2022, we had backlog of $257 thousand expected to be delivered in the first 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 Fiscal 2022 was $3.7 million or a gross margin of 46%.

Excluding the non-cash charge related to a restructuring inventory charge, our gross profit for Fiscal 2021 was $2.7 million resulting in a gross margin of 35%.

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.

We anticipate a revenue increase in 2024 compared to 2023 for two key reasons:

(i) from an international perspective, there is growing demand for less-lethal alternatives like BolaWrap, especially in regions where lethal force is often prohibited, and (ii) from a domestic perspective, despite a saturated market for less-lethal use-of-force solutions, BolaWrap stands out as what we believe to be the only pain-free compliance tool.

We incurred product promotional costs of approximately $249 thousand for the year ended December 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 2022.

A total of approximately $688 thousand of such product promotional costs were incurred during the year ended December 31, 2022.

As of December 31, 2023, the Company’s deferred revenue of approximately $544 thousand consisted of approximately $139 thousand related to BolaWrap extended warranties and services, approximately $216 thousand related to Intrensic extended warranties and services, $171 thousand related to VR, and $18 thousand related to increased training for Wrap Reality and BolaWrap extended warranties.

As of December 31, 2023, we had backlog of approximately $209 thousand which was delivered in the first quarter of 2024.

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 year ended December 31, 2023 was approximately $2.9 million, or a gross margin of 47%.

Our gross profit for year ended December 31, 2022 was approximately $3.7 million, or a gross margin of 46%.

For the year ended December 31, 2023, gross profit represented a 22% decrease compared to December 31, 2022, as a result of lower sales slightly offset by continued cost containment efforts on production.

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

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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.

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

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

Cassettes in 2022 were a total of 23% of our overall revenue 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 19.5% of our overall revenue in the year ended December 31, 2023, and may continue to grow as a recurring revenue base as more BolaWrap devices are used in the field and as the use of BolaWrap increases due to the need of officers to de-escalate to prevent injuries and the 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.

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

Selling, General and Administrative Expense

Selling, general and administrative (“

SG&A ”) expense decreased significantly by $3.9 million during Fiscal 2022 when compared to Fiscal 2021 due to cost containment efforts.

Share-based compensation costs allocated to SG&A decreased to $2.7 million compared to $4.6 million for the comparable prior year.

This $1.9 million 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 $6.5 million for Fiscal 2022 was an increase of $951 thousand or a 17% increase due to higher bonus accrual as a result of meeting full year targets, and one-time recruiting expenses associated with changes in management.

During Fiscal 2022, as compared to the prior year, we incurred reduced advertising and promotions costs (including product promotion costs) of $769 thousand, increased professional fees of $377 thousand, and reduced consulting and contract services fees of $905 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 $1.1 million for during Fiscal 2022 or a decrease of $0.8 million as compared to $1.9 Million during Fiscal 2021.

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

Selling, general and administrative (“SG&A”) expense increased by approximately $2.0 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, due to one-time costs associated with severance, the Intrensic acquisition, and the Company’s financing.

Advertising and promotion costs were approximately $1.2 million during the year December 31, 2023, or a decrease of approximately $0.1 million as compared to approximately $1.1 million during the year December 31, 2022.

The decrease in advertising costs was related to reductions in consultants and other cost containment efforts.

Share-based compensation costs allocated to SG&A was $1.5 for the year ended December 31, 2023, a decrease of approximately $1.2 million, compared to approximately $2.7 million for the year ended December 31, 2022.

The decrease resulted primarily due to changes in management, one-time costs in the prior year period, and changes in the Company’s stock price.

Salaries and burden costs was $6.0 million for the year ended December 31, 2023, an approximately $0.5 million or 8% decrease compared to approximately $6.5 million for year ended December 31, 2022.

During 2023, we recorded approximately $1.0 million of severance cost related to management restructuring efforts.

During year ended December 31, 2023, compared to December 31, 2022, we increased professional fees by approximately $0.8 million, and increased consulting and contract services fees by approximately $350 thousand.

We expect expenditures for SG&A expense in 2024 to be slightly lower than 2023, as a result of restructuring actions taken in late 2023 and early 2024.

Research and Development Expense

Research and development expense decreased by $1.1 million for Fiscal 2022, when compared to Fiscal 2021.

We incurred a $257 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 $847 thousand and prototype related costs decreased by $2 thousand for Fiscal 2022, primarily due to reduced costs related to finalizing the BolaWrap 150 product.

Research and development expense was approximately $3.3 million for the year ended December 31, 2023, a decrease of approximately $1.8 million, compared to $5.1 million for year ended December 31, 2022.

In 2023, we incurred a $252 thousand period over period decrease 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 $332 thousand and prototype related costs decreased by $443 thousand for the year ended December 31, 2023, primarily due to reduced costs related to finalizing the BolaWrap 150 product.

Operating Loss

Loss from operations during Fiscal 2022 of $17.6 million was a reduction of $6.8 million when compared to Fiscal 2021, reflecting increased margin and the focus on reducing operating costs and implementation of our strategic roadmap.

Loss from operations during the year December 31, 2023 was approximately $18.8 million, an increase of approximately $1.1 million compared to approximately $17.7 million during the year December 31, 2022, reflecting increased margin and the Company’s 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 December 31, 2022, we had cash and cash equivalents of $5.3 million, short-term investments of  $13.9 million, positive working capital of $23.7 million and had sustained cumulative losses attributable to stockholders of $67.4 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.

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

As of December 31, 2023, we had cash and cash equivalents of approximately $4.0 million, negative working capital of approximately $2.3 million primarily reflecting the approximate $19.7 value of the Series A Warrants (as defined herein) recorded in connection with the issuance of the Series A Preferred Stock in July 2023, and had sustained cumulative losses attributable to stockholders of approximately $98.0 million.

Our working capital net of the Warrants-short term at December 31, 2023 was approximately $17.4, a decrease of approximately $6.3 million compared to December 31, 2022, as a result of the operating losses offset by an increase in inventories of approximately $1.8 million, an increase in customer deposits totaling approximately $1.0 million in 2023 and the receipt of $8.9 million in net proceeds from the Offering.

As a result, we had approximately $4.0 million in cash and cash equivalents and short-term investments as of December 31, 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 grow product revenues and the 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.

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 speed at which BolaWrap is accepted to be on every officer and the speed at which departments move from small deployments to all field officers;

The speed of new sales being booked and the success of our marketing efforts;

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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Market price and trading volume of our common stock.

2023 Offering

On June 29, 2023, the Company entered into a Series Purchase Agreement (“Series A Purchase Agreement”) with certain accredited investors, including the Company’s Executive Chairman and Chief Executive Officer (collectively, the “Series A Investors”), pursuant to which it agreed to sell to the Series A Investors in a registered direct offering (the “Series A Offering”) (i) an aggregate of 10,000 shares of Series A Preferred Stock, initially convertible into up to 6,896,553 shares of the Company’s common stock, at an initial conversion price of $1.45 per share, and (ii) warrants (the “Series A Warrants”) to acquire up to an aggregate of 6,896,553 shares of Common Stock (the “Series A Warrant Shares”).

The conversion price of the Series A Preferred Stock is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for Common Stock, at a price below the then-applicable conversion price (subject to certain exceptions).

The closing of the Series A Offering occurred on July 3, 2023.

The aggregate gross proceeds from the Series A Offering were $10 million.

The Company expects to use the net proceeds from the Series A Offering for general corporate purposes.

The Company engaged Katalyst Securities LLC (the “Placement Agent”) to act as exclusive placement agent in connection with the Series A Offering.

Pursuant to an Engagement Letter with the Placement Agent, we paid to the Placement Agent or its designees (i) a cash fee equal to 8% of the gross proceeds of the Series A Offering and (ii) warrants to purchase an aggregate of 551,725 shares of Common Stock (equal to 8% of the shares of Common Stock underlying the Series A Preferred Stock sold in the Series A Offering) at an exercise price of $1.45 per share.

Series A Preferred Stock

The terms of the Series A Preferred Stock are as set forth in the form of Certificate of Designations of the Series A Preferred Stock.

The Series A Preferred Stock is convertible into shares of common stock (the “Conversion Shares”) at the election of the holder at any time at an initial conversion price of $1.45 (the “Conversion Price”).

The Conversion Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of common stock, or securities convertible, exercisable or exchangeable for common stock, at a price below the then-applicable Conversion Price (subject to certain exceptions).

The holders of the Series A Preferred Stock are entitled to dividends of 8% per annum, compounded monthly, which are payable in cash or shares of Common Stock, or a combination thereof, at the Company’s option in accordance with the terms of the Certificate of Designations.

Upon the occurrence and during the continuance of a Triggering Event (as defined in the Certificate of Designations), the Series A Preferred Stock will accrue dividends at the rate of 20% per annum.

If the Company elects to pay any dividends in shares of Common Stock, the Conversion Price used to calculate the number of shares issuable will equal to the lower of (i) the then applicable Conversion Price and (ii) 85% of the arithmetic average of the three (3) lowest closing prices of the Common Stock during the twenty (20) consecutive trading day period ending on the trading day immediately preceding the dividend payment date, provided that such price shall not be lower than the lower of (x) $0.2828 (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events ) and (y) 20% of the “Minimum Price” (as defined in Nasdaq Stock Market Rule 5635) on the date of the Nasdaq Stockholder Approval (as defined herein) (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events) or, in any case, such lower amount as permitted, from time to time, by the Nasdaq Stock Market.

The Company may require holders to convert their Series A Preferred Stock into shares of Common Stock if the closing price of the Common Stock exceeds $8.00 per share (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events) for 20 consecutive trading days and the daily dollar trading volume of the Common Stock exceeds $2,000,000 per day during the same period and certain equity conditions described in the Certificate of Designations are satisfied.

At any time beginning 18 months from the date of the issuance, provided that certain equity conditions described in the Certificate of Designations are satisfied, and provided further that the Company has filed all reports required to be filed by it pursuant to the 1934 Act on a timely basis for a continuous period of one year, the Company has the right to redeem in cash all or some of the shares of the Series A Preferred Stock outstanding at such time at a redemption price equal to the product of (x) 125% multiplied by (y) the sum of (A) the stated value of the Series A Preferred Stock plus (B) all declared and unpaid dividends on such Preferred Stock and any other unpaid amounts then due and payable hereunder with respect to such Series A Preferred Stock, plus (C) the make-whole amount, plus (D) any accrued and unpaid late charges with respect to such stated value and amounts payable pursuant to clause (B) as of such date of determination.

On August 19, 2024, the Company entered into an Amendment Agreement (the “Series A Amendment”) with the Required Holders (as defined in the Certificate of Designations).

Pursuant to the Series A Amendment, the Required Holders agreed that (A) the unpaid and accrued dividends on the Series A Preferred Stock due July 1, 2024 (the “July Delinquent Dividend Amount”), shall be payable, at the option of the Company, in (i) cash and/or (ii) shares of Common Stock, at a price per share of Common Stock equal to the lower of (x) $1.00 and (y) the Dividend Conversion Price (as defined in the Certificate of Designations), using July 1, 2024, as the applicable date of determination in accordance with the Certificate of Designations; (B) the dividends due on October 1, 2024 (the “October Dividend Amount” and, together with the July Delinquent Dividend Amount, the “Delinquent Dividend Amounts”), shall be payable in shares of Common Stock based on a per share price of Common Stock equal to 80% of the arithmetic average of the three (3) lowest closing sale prices of the Common Stock during the month of September 2024; and (C) such Delinquent Dividend Amounts and any Dividend Balance Shares (as defined in the Certificate of Designations), with respect thereto, if applicable, shall be delivered on October 1, 2024.

The Company and the Required Holders further agreed pursuant to the Agreement to amend (i) the Certificate of Designations, as described below, by filing a Certificate of Amendment to the Certificate of Designations (the “Certificate of Amendment”) and (ii) the Series A Purchase Agreement to amend the definition of “Excluded Securities.”

The Certificate of Amendment amends the Certificate of Designations to, among other things, (A) allow for the payment of dividends in the form of Common Stock to a holder of the Series A Preferred Stock who serves as a director, officer or employee of the Company; provided that such issuance is approved by the Company’s stockholders prior to such issuance, and (B) amend certain conditions required for (i) a mandatory conversion of the Series A Preferred Stock, and (ii) the Company’s right to redeem, all or a portion, of the Series A Preferred Stock outstanding pursuant to an optional redemption, in each case, pursuant to the terms of the Certificate of Designations.

There is no established public trading market for the Series A Preferred Stock and we do not intend to list the Series A Preferred Stock on any national securities exchange or nationally recognized trading system.

The Company issued the Series A Warrants to purchase up to an aggregate of 6,896,553 shares of Common Stock.

Each Series A Warrant has an exercise price of $1.45, became exercisable after the date that was six months from the date of issuance and will expire 5 years following the date of issuance.

The exercise price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for Common Stock, at a price below the then-applicable exercise price (subject to certain exceptions).

Nasdaq Stockholder Approval

The Company’s ability to issue Conversion Shares and Series A Warrant Shares using shares of Common Stock is subject to certain limitations set forth in the Certificate of Designations.

Prior to receiving the Nasdaq Stockholder Approval, such limitations included a limit on the number of shares that may be issued until the time, if any, that the Company’s stockholders have approved the issuance of more than 19.99% of the Company’s outstanding shares of Common Stock in accordance with the rules of the Nasdaq Stock Market (the “Nasdaq Stockholder Approval”).

Such Nasdaq Stockholder Approval was received at a special meeting of stockholders held on September 19, 2023.

Off-Balance Sheet Arrangements

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Operating Activities

During Fiscal 2022, net cash used in operating activities was $14.6 million. The net loss of $17.6 million was decreased by non-cash expense of $4.4 million consisting primarily of share-based compensation expense of $3.2 million.

Other major component changes using operating cash included an increase of $2.4 million in inventories and a net increase in accounts payable and accrued liabilities of $250 thousand.

A decrease in accounts receivable of $957 thousand increased the cash used in operating activities.

During Fiscal 2021, net cash used in operating activities was $18.2 million. The net loss of $24.4 million was decreased by non-cash expense of $7.2 million, consisting primarily of share-based compensation expense of $5.4 million, restructuring inventory charges of $747 thousand, depreciation and amortization expense of $478 thousand, and shares issued for services of $239 thousand.

Other major component changes using operating cash included an increase of $2.1 million in accounts receivable, and an increase in prepaid expense of $109 thousand.

A decrease in inventories of $559 thousand, an increase in accounts payable and accrued expense of $492 thousand, and an increase of $249 thousand in deferred revenue reduced the cash used in operating activities.

During year ended December 31, 2023, net cash used in operating activities was approximately $16.7 million.

The net loss of approximately $30.3 million was decreased by non-cash expense of approximately $16.8 million consisting primarily of change in fair value of warrant liabilities of approximately $12.0 million and share-based compensation expense of approximately $2.0 million.

Other major component changes using operating cash included an increase of approximately $2.2 million in inventories and an increase in customer deposits of $1.0 million.

During year ended December 31, 2022, net cash used in operating activities was approximately $14.6 million.

The net loss of approximately $17.6 million was decreased by non-cash expense of approximately $4.4 million consisting primarily of share-based compensation expense of approximately $3.2 million.

Other major component changes using operating cash included an increase of approximately $2.4 million in inventories and a net increase in accounts payable and accrued liabilities of approximately $250 thousand.

A decrease in accounts receivable of approximately $957 thousand increased the cash used in operating activities.

Investing Activities

During Fiscal 2022, we used $30.5 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $46.6 million.

During Fiscal 2021, we used $55 million of cash to purchase short-term investments and had proceeds from maturities of short-term investments of $50 million.

We used $256 thousand and $995 thousand of cash for the purchase of property and equipment during Fiscal 2022 and Fiscal 2021, respectively.

We invested $173 thousand and $187 thousand in patents during Fiscal 2022 and Fiscal 2021, respectively.

During the year ended December 31, 2023, we used approximately $10.0 million of cash to purchase short-term investments, $554 thousand of cash for the purchase of Intrensic, $230 thousand of cash for the purchase of property and equipment and invested approximately $396 thousand in patents and trademarks.

During the year ended December 31, 2023, we had proceeds from maturities of short-term investments of approximately $16.4 million.

During the year ended December 31, 2022, we used approximately $30.5 million of cash to purchase short-term investments, $256 thousand of cash for the purchase of property and equipment and invested $173 thousand in patents and trademarks.

During the year ended December 31, 2022, we had proceeds from maturities of short-term investments of approximately $46.6 million.

Financing Activities

During Fiscal 2022, we received $83 thousand in proceeds from the exercise of previously issued stock options.

During Fiscal 2021, we received $12 million from previously issued stock purchase warrants, $1.7 million in proceeds from the exercise of previously issued stock options and paid $275 thousand in debt relating to the December 2020 acquisition of NSENA.

During the year ended December 31, 2023 we received approximately $10.0 million in gross proceeds from the issuance of securities, which is reflected in cash and cash equivalents, with an offset to accrued expense, reflected in the Company’s Condensed Consolidated Balance Sheet at December 31, 2023.

During year ended December 31, 2023, we received approximately $208 thousand in proceeds from the exercise of previously issued stock options and paid out approximately $58 thousand in preferred stock dividends.

During year ended December 31, 2022, we received approximately $83 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.

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

Agreement ”) entered into with Lumeto, Inc.

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 (“Syzyg y ”), 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, dated as of November 22, 2022, and as amended on April 2, 2023, by and among the Company, Lumeto, Inc.

and Spatial Industries Group, Inc.

(collectively, “

Service Provider ”), which Agreement provides that the Service Provider will 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 ”), we are obligated to pay to the Service Provider (a) a cash payment upon the execution of the Agreement of $700,000, (b) a cash payment of $125,000 upon the completion of certain project delivery milestones expected in Q1, and (c) a cash payment of $125,000 upon the completion and delivery of the final Technology, Services, and License which is expected in Q2.

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 $121 thousand in 2023, $126 thousand in 2024 and $75 thousand in 2025.

(collectively, “Service Provider”), the Service Provider provides 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 thousand 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 facility lease of $126 thousand in 2024 and $75 thousand in 2025.

In September 2023, we committed to a lease of office space in Coconut Grove, Florida in a multi-year term concluding in 2031 which includes aggregate lease payments totaling $3.6 million.

At December 31, 2023, we were committed for approximately $0.7 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 “Intrensic Purchase Agreement”) with certain members of Intrensic, including Kevin Mullins, the Company’s former Chief Executive Officer (collectively, “Sellers”) and Buford Ortale, as the Seller’s representative.

Under the terms of the Intrensic 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 (the “Intrensic Closing”):

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

and (ii) 1,250,000 shares of Common Stock of the Company the “Intrensic Acquisition”).

The Intrensic Acquisition closed on August 16, 2023, in accordance with the terms of the Purchase Agreement.

Effects of Inflation

In 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.

In 2023 we experienced increased costs in labor and materials due to inflation.

We believe in 2024 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

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis