What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-15 compared with 2024-09-25 · 120 added, 67 removed, 270 unchanged (41% of the section changed)

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Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

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

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

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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.

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

26% 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 permission to be shared with us.

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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.

As of June 30, 2024, over 1,500 agencies have received BolaWrap training with over 5,300 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments, representing an 12% increase in agencies and a 18% increase in trained officers as compared to June 30, 2023.

Operating expense as of $7.7 million for the six months ended June 30, 2024 decreased by $591 thousand, when compared to $8.3 million for the six months ended June 30, 2023, as a result of the Company’s cost containment initiatives enacted beginning during the first half of 2024 as well as a reduction in share-based compensation, offset by increased occupancy expenses related to the new the office space.

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.

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Our sales of the BolaWrap 150 and Wrap Reality are expected to continue to rise, aided by our ongoing cost savings and cost control measures, which 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.

As of June 30, 2024, we had backlog of approximately $260 thousand which was delivered in the third quarter of 2024.

Additionally, as of June 30, 2024, we had deferred revenue of $585 thousand which consisted of $122 thousand related to VR, $358 thousand related to Intrensic, and $105 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.

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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 recorded net loss of $268 thousand during the first half of fiscal 2024 as compared to net loss of $9.0 million during the first half of fiscal 2023, an improvement of approximately $8.7 million for the comparable period.

Net cash used in operations during the six months ended June 30, 2024, was $6.5 million more than net cash used in operations during the six months ended June 30, 2023.

This increase in net cash used in operations during the first six months of 2024 was primarily driven by an increase in accrued liabilities primarily resulting from deposits made in June 2023 in advance of the preferred stock issued in July 2023 accounted for as a

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.

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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.

Nevertheless, we had $4.6 million in cash and cash equivalents and short-term investments as of June 30, 2024.

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

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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.

On August 16, 2024, the Company received a notice 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 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.

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

On August 28, 2024, the 2023 Form 10-K was filed with the SEC and on September 25, 2024, the Q1 Form 10-Q 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.

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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 March 31, 2024.

Our accounting policies are more fully described in Note 1.

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Results of Operations

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

Three Months Ended June 30, 2024, Compared to Three Months Ended June 30, 2023 (Unaudited)

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

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Loss from operations

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.

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

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 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.

We reported net revenue of $1.6 million for the three months ended June 30, 2024, as compared to $1.2 million for the three months ended June 30, 2023, a 31% increase over the prior year.

The increase in 2024 is a result of added revenues of $197 thousand from the Company’s acquisition of Intrensic in August 2023 as well as approximately $69 thousand increase in Wrap Reality sales.

We incurred product promotional costs of $94 thousand during the three months ended June 30, 2024, representing a 58% increase compared to the three months ended June 30, 2023, related primarily to BolaWrap 150 demonstration products and the cost of training products and accessories delivered to law enforcement agencies that were expensed as marketing costs.

We are responding to increased demand for training as a result of expanded product and brand awareness and increased successful field use by agencies.

Our gross profit for the three months ended June 30, 2024, was $984 thousand, or a gross margin of 63%.

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

The increase in gross profit represented a 47% increase compared to the three months ended June 30, 2023, 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 well as the added high-margin revenue from the Company’s Intrensic acquisition in August 2023.

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.

However, we expect higher margins with the production of the BolaWrap 150 compared to previous production due to design changes and improved pricing as well as our higher margin revenue from the Intrensic product offerings.

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

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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 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.

Cassettes were a total of 11% of our overall revenue in the three months ended June 30, 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 $4.2 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.

Selling, general and administrative (“SG&A”) expense of $3.5 million for the three months ended June 30, 2024, was reduced by $1.2 million when compared to $4.7 million for the three months ended June 30, 2023.

The decrease in SG&A expense was primarily the result of the Company’s cost containment initiatives enacted beginning during the first half of 2024 as well as a reduction in share-based compensation, offset by increased occupancy expenses related to the new the office space.

Share-based compensation costs allocated to SG&A decreased to $208 thousand for the three months ended June 30, 2024, compared to $990 thousand for the three months ended June 30, 2023.

Salaries and burden costs of $1.0 million for the three months ended June 30, 2024, were approximately $546 thousand lower than the three months ended June 30, 2023.

This reduction reflects an approximate 32% reduction in the Company’s workforce including a reduction of certain C-Level positions.

During the three months ended June 30, 2024, as compared to the three months ended June 30, 2023, we increased professional and consulting fees by $46 thousand reflecting the added variable resource needs as a result of the reduction in the Company’s full-time headcount.

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

Advertising and promotion costs were $207 thousand for the three months ended June 30, 2024, or a decrease of $74 thousand as compared to $281 thousand during the three months ended June 30, 2023.

The changes in advertising costs were primarily related to a $118 thousand decrease in trade show costs offset by slight increases in digital marketing campaigns.

Research and Development Expense

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.

Research and development expense decreased by $323 thousand for the three months ended June 30, 2024, when compared to the three months ended June 30, 2023.

We incurred a $60 thousand period over period decrease in compensation expense as well as a $197 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.

Outside consulting costs increased by $27 thousand for the three months ended June 30, 2024, when compared to the three months ended June 30, 2023, primarily due to the Company’s move to a more variable cost model.

Operating Loss

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.

Loss from operations of $3.2 million during the three months ended June 30, 2024, was a reduction of $1.9 million compared to loss from operations of $5.1 million during the three months ended June 30, 2023, primarily reflecting the reduced operating costs and increased gross margins from new products.

Six M onths Ended June 30, 2024, Compared to Six M onths Ended June 30, 2023

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

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

Six Months Ended

(in thousands, except for percentage change)

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 $3.0 million for the six months ended June 30, 2024, as compared to $1.9 million for the six months ended June 30, 2023, a 59% increase.

The increase in 2024 is primarily a result of increased sales of BolaWrap devices, cartridges and accessories of $532 thousand, added revenues of $287 thousand from the Company’s acquisition of Intrensic in August 2023, as well as approximately $151 thousand increase in Wrap Reality.

We incurred discounts of $18 thousand during the six months ended June 30, 2024, compared to $64 thousand for the six months ended June 30, 2023.

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

We incurred product promotional costs of $155 thousand during the six months ended June 30, 2024, 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 increased awareness, expect reductions in product promotional costs throughout 2024.

We had $585 thousand of deferred revenue on June 30, 2024, of which $122 thousand is related to VR, $358 thousand is related to Intrensic, and $105 thousand is 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 June 30, 2024, we had backlog of $260 thousand expected to be delivered in the third quarter of 2024.

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

Our gross profit for the six months ended June 30, 2024, was $1.8 million, or a gross margin of 60%.

Our gross profit for the six months ended June 30, 2023, was $1.0 million, or a gross margin of 53%.

The increase in gross profit represented a 78% increase over 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 as well as the added high-margin revenue from the Company’s Intrensic acquisition in August 2023.

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 13% of our overall revenue for the six months ended June 30, 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.

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 of $7.7 million for the six months ended June 30, 2024 decreased by $591 thousand, when compared to $8.3 million for the six months ended June 30, 2023, as a result of the Company’s cost containment initiatives enacted beginning during the first half of 2024 as well as a reduction in share-based compensation, offset by increased occupancy expenses related to the new the office space.

Share-based compensation costs allocated to SG&A decreased to $856 thousand for the six months ended June 30, 2024, compared to $1.6 million for the six months ended June 30, 2023.

This $696 thousand 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 of $1.0 million for the six months ended June 30, 2024, was a $534 thousand decrease compared to the six months ended June 30, 2023.

During six months ended June 30, 2024, as compared to the six months ended June 30, 2023, we increased our occupancy costs by $336 thousand, professional fees by $115 thousand and our digital marketing costs by $117 thousand.

We expect expenditures for SG&A expense in 2024 to be lower than 2023 as a result of the Company’s cost containment initiatives enacted in the first half of 2024.

Advertising and promotion costs were $470 thousand for the six months ended June 30, 2024, or an increase of $25 thousand as compared to $445 thousand during the six months ended June 30, 2023.

The increase in advertising costs was related to increases in video and testimonial costs offset by reductions trade shows and other cost containment efforts.

Research and Development Expense

Research and development expense decreased by $639 thousand for the six months ended June 30, 2024, when compared to the six months ended June 30, 2024.

We incurred a $156 thousand period over period decrease in compensation expense allocated to research and development expense as a result of personnel changes along with a $230 thousand period over period decrease in share-based compensation expense allocated to research and development expense as a result of personnel changes.

Outside consulting costs decreased by $93 thousand and material costs were lower by $68 thousand for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023.

Operating Loss

Loss from operations of $7.3 million during the six months ended June 30, 2024, represents a reduction of $2.0 million compared to loss from operations of $9.3 million during the six months ended June 30, 2023, reflecting increased margin and the focus on reducing operating costs.

Liquidity and Capital Resources

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

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.

As of June 30, 2024, we had cash and cash equivalents of $4.6 million, negative working capital of $1.1 million primarily reflecting the $12.8 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 $99.0 million.

Our working capital net of the warrants-short term at June 30, 2024 was $5.8 million lower compared to December 31, 2023, as a result of operating losses of $7.3 million for the period.

Our working capital as of June 30, 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.

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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”).

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, 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).

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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 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.

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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.

The Series A Preferred Stock cannot be converted to Common Stock if the holder, other than Scot Cohen, V4 Global LLC or their transferees, and its affiliates would beneficially own more than 4.99%, or 9.99% at the election of the holder, of the outstanding Common Stock.

However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon notice to us, provided that any increase in this limitation will not be effective until 61 days after such notice from the holder to us and such increase or decrease will apply only to the holder providing such notice.

Except as required by law (including without limitation, the Delaware General Corporation Law (the “DGCL”)), the holders of the Series A Preferred Stock are entitled to vote with holders of the Common Stock on as as-converted basis, with the number of votes to which each holder of Series A Preferred Stock is entitled to be calculated assuming a conversion price of $1.414 per share, which was the Minimum Price (as defined in Rule 5635 of the Rule of the Nasdaq Stock Market) applicable immediately before the execution and delivery of the Series A Purchase Agreement, subject to certain beneficial ownership limitations as set forth in the Series A Certificate of Designations.

To the extent that under the DGCL the vote of the holders of shares of Series A Preferred Stock, voting separately as a class or series, as applicable, is required to authorize a given action of the Company, the affirmative vote or consent of a majority of the outstanding shares of Series A Preferred Stock, voting together in the aggregate and not in separate series unless required under the DGCL, represented at a duly held meeting at which a quorum is presented or by written consent of such majority (except as otherwise may be required under the DGCL) shall constitute the approval of such action by both the class or the series, as applicable.

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).

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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.

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, which was subsequently further amended by the October 2024 Certificate of Amendment (as defined below), 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.

On October 14, 2024, the Company entered into an Amendment Agreement (the “October 2024 Series A Amendment”) with the Required Holders (as defined in the Certificate of Designations).

Pursuant to the October 2024 Series A Amendment, the Required Holders agreed to amend the Certificate of Designations (the “October 2024 Certificate of Amendment”).

Pursuant to the October 2024 Certificate of Amendment, (i) the Series A Preferred Stock will be entitled to voting rights as described therein, (ii) certain holders of the Preferred Stock will not be subject to certain beneficial ownership limitations as described in the Certificate of Designations, and (iii) stockholder approval will not be required in connection with 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.

The October 2024 Certificate of Amendment was filed with the Secretary of State of the State of Delaware on October 14, 2024.

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.

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

Off-Balance Sheet Arrangements

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.

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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.

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

During the six months ended June 30, 2024, net cash used in operating activities was $7.2 million.

The net loss of $268 thousand was decreased by non-cash income of $6.9 million related to the change in fair value of warrants and increased by non-cash expense of $1.4 million consisting primarily of share-based compensation expense of $918 thousand and depreciation and amortization of $451 thousand.

Other major component changes using operating cash included an increase of $707 thousand in inventories and a decrease in customer deposits of $1.0 million.

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

The net loss of $9.0 million was decreased by non-cash expense of $2.3 million consisting primarily of share-based compensation expense of $1.9 million.

Other major component changes using operating cash included an increase of $2.6 million in inventories and a net increase in accounts payable and accrued liabilities of $7.7 million.

A decrease in accounts receivable of $884 thousand 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.

During the six months ended June 30, 2024, we had proceeds from maturities of short-term investments of $5.0 million.

During the six months ended June 30, 2024, we used $13 thousand of cash for the purchase of property and equipment and invested $97 thousand in patents.

During the six months ended June 30, 2023, we used $2.7 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $10 million.

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

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.

During the six months ended June 30, 2024, we received $588 thousand in proceeds from the exercise of previously issued stock options and paid $120 thousand in cash dividends on the Company’s Series A Preferred Stock.

During the six months ended June 30, 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.

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.

We recorded $66 thousand for royalties during the six months ended June 30, 2024.

The maximum payout has been satisfied as of June 30, 2024.

In January 2022, we extended our Tempe, Arizona 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 remaining 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.

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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.

As of June 30, 2024, we were committed for approximately $941 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 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.

During the three months ended June 30, 2024, and the year ended December 31, 2023, we had experienced increased costs in labor and materials due to inflation.

We believe throughout 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.

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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