What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-09-25 compared with 2023-11-14 · 180 added, 264 removed, 157 unchanged (74% of the section changed)

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

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

Report ”

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

Annual Report ”

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

Words such as “

expect, ”

anticipate, ”

intend, ”

plan, ”

believe, ”

seek, ”

estimate, ”

continue, ”

may, ”

will, ”

could, ”

would, ”

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

You should read the following discussion in conjunction with the financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and with our audited financial statements and other information presented in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “Annual Report”).

This Report may contain or incorporate by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Such forward-looking statements are based upon management’s assumptions, expectations, projections, intentions and beliefs about future events.

Except for historical information, the use of predictive, future-tense or forward-looking words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “continue,” “may,” “will,” “could,” “would,” or the negative or plural of such words and similar expressions or variations of such words are intended to identify forward-looking statements but are not the only means of identifying forward-looking statements.

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

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

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

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

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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 fit 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 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 since been phased out.

In late 2020 we added a new solution to our public safety technologies, our virtual reality (“VR”) training platform, Wrap Reality, and in August 2023 we acquired Intrensic, LLC, a Delaware limited liability company (“Intrensic”), which added a Body-Worn Camera (“BWC”) and Digital Evidence Management (“DEM”) solution to our portfolio of policing solutions.

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.

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 U.S.

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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 Kevlar tether to entangle an individual at a range of 10-25 feet.

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 –

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

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 43 scenarios for law enforcement and corrections and 25 scenarios at this time for societal reentry.

Wrap Reality has 45 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 –

is 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 the 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.

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

Wrap Intrensic – a Body-Worn Camera and Digital Evidence Management solutions provider.

BWC and DEM play crucial roles 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 our cloud-based video storage platform 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 U.S.

law enforcement market, we have shipped our restraint products to 62 countries.

We have established an active distributor network representing 50 states and one dealer representing the U.S.

territory of Puerto Rico.

We have distribution agreements with 35 international distributors covering 75 countries.

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Business Outlook and Challenges

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

We believe our Company's products and solutions are gaining global recognition and awareness through various channels such as social media, trade shows, and media exposure, among others.

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

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

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

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

These opportunities are driven by the increasing demand for less-lethal policing, continued training, and transparency driven by community demands and local laws.

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.

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

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

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

Agencies voluntarily report usage to Wrap.

In the usage reports we have been provided;

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

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.

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

BolaWrap is now in use by over 900 U.S.

law enforcement agencies and in 62 countries.

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 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.

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

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.

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.

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.

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

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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 pain compliance tools).

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

As of September 30, 2023, over 1,480 agencies have received BolaWrap training with over 5,200 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments, representing a 14% increase in agencies and a 14% increase in trained officers as compared to September 30, 2022. 

Operating expense for the third quarter of fiscal 2023 increased $0.1 million, or 2%, to $4.9 million from $4.8 million in the prior year period.

The increase in operating expense was the result of one-time items associated with the Company’s finance offering and legal expenses associated with the acquisition of Intrensic.

Management is confident that implementing the strategic changes it made in April are leading 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, training, and digital evidence management that enable law enforcement officers.

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 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, both domestically and in the 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, Wrap Reality and Wrap Intrensic 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.

At September 30, 2023, we had backlog of approximately $48 thousand expected to be delivered in the fourth quarter of 2023.

Additionally, we had deferred revenue of $365 thousand expected to be recognized generally over the next five years.

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

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 March 31, 2024, over 1,480 agencies have received BolaWrap training with over 5,200 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments, representing an 11% increase in agencies and a 13% increase in trained officers as compared to March 31, 2023.

Operating expense as of March 31, 2024 increased $363 thousand, or 8%, to $5.0 million from $4.6 million as of March 31, 2023.

The increase in operating expense was the result of increased occupancy expenses related to the new the office space and stock based compensation offset by lower research and development costs.

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.

As of March 31, 2024, we had backlog of approximately $734 thousand which was delivered in the second quarter of 2024.

Additionally, as of March 31, 2024, we had deferred revenue of $491 thousand which consisted of $153 thousand related to VR, $212 thousand related to Intrensic, $7 thousand related to training, and $119 thousand related to BolaWrap extended warranties and services.

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

Since inception, 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.

We reduced our net loss during the third quarter of fiscal 2023 by more than $1.1 million as compared to the third quarter of fiscal 2022.

Net cash used in operations during the nine months ended September 30, 2023, was $2.1 million more than cash used in operations during the nine months ended September 30, 2022.

This increase in net cash used during the first nine months of 2023 as primarily driven by changes in Account Receivable and Inventory.

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

We recorded net income of $117 thousand during the first quarter of fiscal 2024 as compared to net loss of $4.0 million during the first quarter of fiscal 2023, an improvement of approximately $4.1 million for the comparable period.

Net cash used in operations during the three months ended March 31, 2024, was $657 thousand more than net cash used in operations during the three months ended March 31, 2023.

This increase in net cash used in operations during the first three months of 2024 was primarily driven by a reduction in customer deposits.

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.

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 $10.0 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 warranty liability.

As a result, we had $14.9 million in cash and cash equivalents and short-term investments as of September 30, 2023.

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 $8.2 million in cash and cash equivalents and short-term investments as of March 31, 2024.

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.

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 social unrest, riots, 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 recently introduced our Protest Riot Pack aimed at equipping officers with an easy to grab no-harm solution for dealing with civil unrest.

However, we may require additional working capital and liquidity constraints and access to capital markets could still negatively affect our liquidity and may 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 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 revenue, earnings, and cash flows from operations.

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

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

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

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

Nasdaq Listing Requirements

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 the Nasdaq Capital Market.

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 Q1 Form 10-Q, the “Delinquent Filings”) for the three months ended June 30, 2024, that the Company is not in compliance with the Listing Rule for continued listing on the Nasdaq Capital Market.

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.

On August 28, 2024, the 2023 Form 10-K was filed with the SEC.

Nasdaq granted 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 the Delinquent Filings, or until October 14, 2024, to regain compliance.

Critical Accounting Policies and Estimates

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

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 United States (“ U.S.

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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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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We accrue bonus expense each quarter based on estimated year-end results, and then adjust the actual in the fourth quarter based on our final results compared to targets.

The Company accounts for warrants as liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”).

The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common shares and whether the warrant holders could potentially require “net cash settlement”

in a circumstance outside of the Company’s control, among other conditions for equity classification.

This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

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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 warrants and business combination described above, there were no significant changes or modification of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the period ended September 30, 2023.

Our accounting policies are more fully described in Note 1.

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

Recent Accounting Pronouncements

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

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

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

Segment and Related Information

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.

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

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 15.

Major Customers and Related Information, in our financial statements for further discussion.

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.

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 reduce from the first three fiscal quarters of 2023 as a result of the changes implemented in April 2023, and ongoing cost containment efforts.

We expect our operating costs will reduce from the first quarter of 2024 as a result of the changes from 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.

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Results of Operations

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Three Months Ended March 31, 2024, Compared to Three Months Ended March 31, 2023 (Unaudited)

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.

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

Three Months Ended

September 30,

(in thousands, except percentage change)

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Loss from operations

We reported net revenue of $3.6 million for the three months ended September 30, 2023, as compared to $1.7 million for the quarter ended September 30, 2022, a 113% increase over the prior year.

International revenue increased from $223 thousand for the three months ended September 30, 2022 to $2.3 million for the three months ended September 30, 2023.

The increase in international revenue was driven by certain large orders and continued strong demand for our products in the EMEA region.

We also incurred discounts of $68 thousand during the three months ended September 30, 2023, as a result of promotional programs designed to encourage customers to upgrade to the BolaWrap 150.

Gross sales were $3.7 million for the three months ended September 30, 2023, before such discounts.

The discounts compare to normal business discounts of $240 thousand in the comparable quarter of the prior year.

We expect a decline to minimal discounts in 2024 as we have phased out our promotional upgrade offer.

We reported net revenue of $1.5 million for the three months ended March 31, 2024, as compared to $711 thousand for the quarter ended March 31, 2023, a 108% increase over the prior year.

International revenue increased from $1 thousand for the three months ended March 31, 2023, to $13 thousand for the three months ended March 31, 2024.

As expected, the discounts were reduced to $1 thousand for the first three months of 2024 as compared to $22 thousand in the comparable quarter of the prior year reflecting the phasing out of our promotional upgrade offer.

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

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We believe that revenue during the fiscal year 2024 will increase overall compared to the revenue recorded during 2023 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 final quarter of 2023.

We incurred product promotional costs of $61 thousand during the three months ended September 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.

Our gross profit for the three months ended September 30, 2023, was $2.2 million, or a gross margin of 60%.

Our gross profit for the three months ended September 30, 2022, was $0.9 million, or a gross margin of 54%.

The increase in gross profit represented a 139% increase over prior year as a result of cost efficiencies with the BolaWrap 150 production, selling price adjustments implemented in September of 2022, and a reduction of promotional pricing.

We incurred product promotional costs of $36 thousand during the three months ended March 31, 2024, representing a 33% reduction from the comparable prior year period 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 continued reductions in product promotional costs from the prior year.

Our gross profit for the three months ended March 31, 2024, was $836 thousand, or a gross margin of 57%.

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

The increase in gross profit represented a 138% increase over the prior year as a result of higher volume of the Bola Wrap 150 product with higher margins as compared to previous production due to design changes and improved pricing.

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 21% of our overall revenue in the three months ended September 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.

Cassettes were a total of 15% of our overall revenue in the three months ended March 31, 2024, 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.

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Selling, General and Administrative Expense

Selling, general and administrative (“

SG&A ”) expense of $4.3 million for the three months ended September 30, 2023 increased by $0.7 million, when compared to $3.6 million for the three months ended September 30, 2022.

The increase in selling general and administrative expense was the result of one-time items associated with the Company’s financing and the acquisition of Intrensic.

Share-based compensation costs allocated to SG&A decreased to $(149) thousand compared to $700 thousand for the comparable prior quarter.

This $849 thousand decrease resulted primarily from changes in management and one-time cost offsets associated with the management changes in April 2023.

Salaries and burden costs of $1.6 million for the three months ended September 30, 2023, was a decrease of $0.6 million, or a 25% decrease, due to change in headcount.

During the three months ended September 30, 2023, as compared to same period during the prior year, we increased professional fees by $940 thousand, and increased consulting and contract services fees by $214 thousand.

We expect expenditures for SG&A expense to be relatively in line with the third quarter of 2023 despite anticipated increases in Revenue.

Advertising and promotion costs were $224 thousand for the three months ended September 30, 2023, or a decrease of $32 thousand as compared to $256 thousand during the three months ended September 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 $626 thousand for the three months ended September 30, 2023, when compared to the three months ended September 30, 2022.

We incurred a $225 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 $90 thousand and prototype related costs decreased by $120 thousand primarily due to reduced costs related to finalizing the BolaWrap 150 product and continued cost containment efforts.

Operating Loss

Loss from operations of $2.8 million during the three months ended September 30, 2023, was a reduction of $1.1 million compared to loss from operations of $3.9 million during the three months ended September 30, 2022, reflecting increased margin and the focus on reducing operating costs.

Nine m onths Ended September 30, 2023, Compared to Nine m onths Ended September 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.

Nine m onths Ended

September 30,

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 $5.5 million for the nine months ended September 30, 2023, as compared to $4.5 million for the nine months ended September 30, 2022, a 24% increase over the prior year.

International revenue increased from $1.0 million for the nine months ended September 30, 2022 to $2.3 million for the nine months ended September 30, 2023.

We incurred discounts of $132 thousand during the nine months ended September 30, 2023, as a result of promotional programs designed to encourage customers to upgrade to the BolaWrap 150.

Gross sales were $5.7 million for the nine months ended September 30, 2023, before such discounts.

The discounts compare to normal business discounts of $790 thousand in the comparable nine-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 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 $156 thousand during the nine months ended September 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 had $365 thousand of deferred revenue on September 30, 2023, of which $199 thousand related to VR, $6 thousand was related to training and $160 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. 

On September 30, 2023, we had backlog of $48 thousand expected to be delivered in the fourth 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 nine months ended September 30, 2023, was $3.2 million, or a gross margin of 58%.

Our gross profit for the nine months ended September 30, 2022, was $2.0 million, or a gross margin of 46%.

The increase in gross profit represented a 57% increase over prior year as a result of increased sales and continue cost containment efforts on production.

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 20% of our overall revenue in the nine months ended September 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.

Selling, General and Administrative Expense

Selling, general and administrative ( “

SG&A ”) expense of $12.6 million for the nine months ended September 30, 2023 increased by $0.6 million, when compared to $12.0 million for the nine months ended September 30, 2022, due to cost one-time costs associated with severance, the Intrensic acquisition, and the Company’s financing.

Share-based compensation costs allocated to SG&A decreased to $1.4 million compared to $2.2 million for the comparable prior-year period.

This $0.8 million decrease 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 $4.6 million for the nine months ended September 30, 2023, was a $2.2 million decrease compared to the prior year nine months ended September 30, 2022.

During nine months ended September 30, 2023, as compared to same period during the prior year, we increased professional fees by $1.1 million, and increased consulting and contract services fees by $243 thousand.

We expect expenditures for SG&A expense in 2023 to be slightly lower than 2022 despite expected revenue growth.

Advertising and promotion costs were $669 thousand for the nine months ended September 30, 2023, or a decrease of $246 thousand as compared to $915 thousand during the nine months ended September 30, 2022.

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

Selling, general and administrative (“SG&A”) expense of $4.2 million for the three months ended March 31, 2024, increased by $680 thousand, when compared to $3.5 million for the three months ended March 31, 2023.

The increase in SG&A expense was primarily the result of increased occupancy expenses related to the new the office space and stock-based compensation.

Share-based compensation costs allocated to SG&A increased to $820 thousand for the three months ended March 31, 2024, compared to $562 thousand for the comparable prior year quarter.

Salaries and burden costs of $1.4 million for the three months ended March 31, 2024, were in line with the comparable period in 2023.

During the three months ended March 31, 2024, as compared to the same period during the prior year, we increased professional fees by $94 thousand, while decreasing consulting and contract services fees by $25 thousand.

We expect expenditures for SG&A expenses in 2024 to decline in the second half of 2024, as a result of the Company’s cost cutting initiatives.

Advertising and promotion costs were $263 thousand for the three months ended March 31, 2024, or an increase of $100 thousand as compared to $163 thousand during the three months ended March 31, 2023.

The changes in advertising costs were primarily related to a $120 thousand increase in digital marketing campaigns.

Research and Development Expense

Research and development expense decreased by $1.5 million for the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022.

We incurred a $204 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 $342 thousand and prototype related costs decreased by $443 thousand for the nine months ended September 30, 2023, primarily due to reduced costs related to finalizing the BolaWrap 150 product.

Research and development expense decreased by $317 thousand for the three months ended March 31, 2024, when compared to the three months ended March 31, 2023.

We incurred a $96 thousand period over period decrease in compensation expense as well as a $38 thousand period over period decrease in share-based compensation expense allocated to research and development expense as a result of reduction of personnel.

Outside consulting costs decreased by $120 thousand for the three months ended March 31, 2024, when compared to the three months ended March 31, 2023, primarily due to the Company’s cost cutting initiatives.

Operating Loss

Loss from operations of $12.1 million during the nine months ended September 30, 2023 was a reduction of $2.0 million compared to loss from operations of $14.1 million during the nine months ended September 30, 2022, reflecting increased margin and the focus on reducing operating costs.

Loss from operations of $4.1 million during the three months ended March 31, 2024, was a reduction of $121 thousand compared to loss from operations of $4.3 million during the three months ended March 31, 2023, primarily reflecting increased margin from higher sales.

Liquidity and Capital Resources

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

As of September 30, 2023, we had cash and cash equivalents of $4.9 million, short-term investments of $10.0 million, positive working capital of $15.0 million and had sustained cumulative losses attributable to stockholders of $79.4 million.

Our working capital at September 30, 2023 was positively affected by an increase in inventories of approximately $1.8 million, which consisted of increases of inventory of the BolaWrap 150 in anticipation of future orders, and the receipt of $10.0 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 $10.0 million. 

As a result, we had $14.9 million in cash and cash equivalents and short-term investments as of September 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.

As of March 31, 2024, we had cash and cash equivalents of $8.2 million, negative working capital of $736 thousand primarily reflecting the $15.5 million value of the Series A Warrants recorded in connection with the issuance of the Series A Preferred Stock in July 2023 and had sustained cumulative losses attributable to stockholders of $98.0 million.

Our working capital net of the warrants-short term at March 31, 2024 was $2.6 million less compared to December 31, 2023, as a result of operating losses of $14.8 million as adjusted to exclude the $15.5 million related to the valuation of the Series A Warrants associated with the 2023 Series A Preferred Stock issuance.

Our working capital as of March 31, 2024, was negatively affected by the continued operating losses during the prior twelve months.

We 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 may require changes to our investment strategy.

Capital Requirements

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Market price and trading volume of our Common Stock.

On June 29, 2023, the Company entered into a Securities Purchase Agreement with a founder and director of the Company and certain accredited and institutional investors (collectively, the “

Investors ”), pursuant to which it agreed to sell to the Investors in a registered direct offering (the “

Offering ”) (i) an aggregate of 10,000 shares of the Company’s newly-designated Series A Convertible Preferred Stock, with a par value $0.0001 per share, and a stated value of $1,000 per share (“

Series A Preferred ”), initially convertible into up to 6,896,553 shares of the Company’s Common Stock, at a conversion price of $1.45 per share, and (ii) warrants to acquire up to an aggregate of 6,896,553 shares of Common Stock (“

Warrants ”).

The Series A Preferred provide for the payment to holders thereof of cumulative dividends of 8% per annum, payable quarterly in arrears.

The Warrants are exercisable six months after issuance at an exercise price of $1.45 per share, subject to adjustment, and expire five years from the date of issuance.

The $1.45 per share conversion price of the Series A Preferred and exercise price of the Warrant represent the closing share price of the Company’s Common Stock on June 29, 2023.

The Offering closed on July 5, 2023 (the “

Closing ”), resulting in aggregate gross proceeds from the Offering of approximately $10.0 million.

The Company received approximately $10.0 million in gross proceeds from the Offering.

After payment of placement agent fees and costs of the Offering, the net proceeds from the Offering were approximately $9.0 million.

Proceeds from the Offering are being used to scale the Company’s sales team, support marketing efforts, and fuel the evolution and diversification of the Company’s product offerings.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Operating Activities

During the nine months ended September 30, 2023, net cash used in operating activities was $12.9 million.

The net loss of $11.8 million was decreased by non-cash expense of $2.5 million consisting primarily of share-based compensation expense of $1.6 million.

Other major component changes using operating cash included an increase of $1.8 million in inventories and an increase in accounts receivable of $1.4 million.

During the nine months ended September 30, 2022, net cash used in operating activities was $11.0 million. The net loss of $14.1 million was decreased by non-cash expense of $3.4 million consisting primarily of share-based compensation expense of $2.6 million.

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 c ommon s tock, 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 c ommon s tock (the “Conversion Shares”) at the election of the holder at any time at an initial conversion price of $1.45 per share (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 c ommon s tock, or securities convertible, exercisable or exchangeable for c ommon s tock, 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 be 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 Exchange 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 Series A 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 Series A Amendment 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 per share, 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 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.

The Company has not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties.

The Company has not entered into any derivative contracts that are indexed to the Company’s shares and classified as stockholder’s equity or that are not reflected in the Company’s financial statements included in this Quarterly Report on Form 10-Q.

Furthermore, the Company does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.

The Company does not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Cash Flows from Operating Activities

During the three months ended March 31, 2024, net cash used in operating activities was $3.7 million.

The net income of $117 thousand was decreased by non-cash income of $4.2 million related to the change in fair value of warrants and increased by non-cash expense of $1.1 million consisting primarily of share-based compensation expense of $848 thousand.

Other major component changes using operating cash included an increase of $584 thousand in inventories and a decrease in accounts receivable of $683 thousand.

During the three months ended March 31, 2023, net cash used in operating activities was $3.1 million.

The net loss of $4.0 million was decreased by non-cash expense of $813 thousand consisting primarily of share-based compensation expense of $628 thousand.

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

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

Investing Activities

During the nine months ended September 30, 2023, we used $6.1 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $10.0 million.

During the nine months ended September 30, 2023, we used $60 thousand of cash for the purchase of intangible assets, $551 thousand of cash for the purchase of Intrensic, $133 thousand of cash for the purchase of property and equipment and invested $277 thousand in patents.

During the nine months ended September 30, 2022, we used $23.1 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $33.3 million. During the nine months ended September 30, 2022, we used $201 thousand of cash for the purchase of property and equipment and invested $133 thousand in patents.

Financing Activities

During the nine months ended September 30, 2023 we received $9.8 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 September 30, 2023.

We did not receive any gross proceeds for the issuance of securities for the nine months ended September 20, 2022.

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

We did not receive any proceeds from the exercise of previously issued stock options for the nine months ended September 31, 2023.

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

Cash Flows from Investing Activities

During the three months ended March 31, 2024, we had proceeds from maturities of short-term investments of $2.5 million.

During the three months ended March 31, 2024, we used $14 thousand of cash for the purchase of property and equipment and invested $66 thousand in patents.

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, 2023, we used $15 thousand of cash for the purchase of property and equipment and invested $131 thousand in patents.

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

Cash Flows from Financing Activities

During the three months ended March 31, 2024, we received $588 thousand in proceeds from the exercise of previously issued stock options and paid $60 thousand in cash dividends on the Company’s preferred stock.

During the three months ended March 31, 2023, we received $0 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.

and Spatial Industries Group, Inc.

(collectively, “

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

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

In January 2022 we extended our facility lease for three years through July 2025 and we are committed to aggregate lease payments on the lease of $31 thousand for three months in 2023, $126 thousand in 2024 and $75 thousand in 2025.

At September 30, 2023, we were committed for approximately $1.7 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 “

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

Intrensic ”), and certain members of Intrensic, including Kevin Mullins, a director of the Company and its 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.  

Pursuant to that certain exclusive Amended and Restated Intellectual Property License Agreement dated September 30, 2016, by and between the Company and Syzygy Licensing, LLC (“Syzygy”), we are obligated to pay to Syzygy a 4% royalty fee on future product sales up to an aggregate amount of $1.0 million in royalty payments or until September 30, 2026, whichever occurs earlier.

We recorded $46 thousand for royalties during the three months ended March 31, 2024.

The maximum payout still available under this arrangement is $35 thousand as of March 31, 2024.

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.

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) $554 thousand 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 Intrensic Purchase Agreement.

As of March 31, 2024, we were committed for approximately $933 thousand for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

Effects of Inflation

During the nine months ended September 30, 2023 and year ended December 31, 2022, we had experienced increased costs in labor and materials due to inflation.

During the three months ended March 31, 2024, and year ended December 31, 2023, we had 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.

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Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

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-Q

Item 2. Management’s Discussion and Analysis