What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-10-15 · 103 added, 103 removed, 287 unchanged (42% of the section changed)

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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.

Some agencies voluntarily report usage to us, but many do not.

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

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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.

With the increasing demand for more humane and safer policing practices, continued need for ongoing training and transparency for police encounters, 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.

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

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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 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.

As of September 30, 2024, over 1,530 agencies have received BolaWrap training with over 5,400 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments, representing a 10% increase in agencies and a 10% increase in trained officers as compared to September 30, 2023.

Operating expense of $13.0 million for the nine months ended September 30, 2024 decreased by $2.3 million, when compared to operating expense of $15.3 million for the nine months ended September 30, 2023, as a result of the Company’s cost containment initiatives enacted beginning in the first half of 2024 as well as a reduction in share-based compensation, offset by increased occupancy expenses related to our new 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 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.

As of September 30, 2024, we had backlog of approximately $156 thousand which is expected to be delivered in the fourth quarter of 2024.

Additionally, as of September 30, 2024, we had deferred revenue of $673 thousand, which consisted of $97 thousand related to VR, $463 thousand related to Intrensic, $98 thousand related to BolaWrap extended warranties and services and $15 thousand related to training.

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 twelve months.

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 believe that we have adequate financial resources to sustain our operations for the next twelve months following this Report.

We recorded net income of $1.7 million during the first nine months of fiscal 2024 as compared to net loss of $11.8 million during the first nine months of fiscal 2023, an improvement of approximately $13.5 million for the comparable period.

Net cash used in operations during the nine months ended September 30, 2024, was $6.0 million less than net cash used in operations during the nine months ended September 30, 2023.

This decrease in net cash used in operations during the first nine months of 2024 was primarily driven by the Company’s cost containment efforts initiated in the first half of 2024.

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 $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.

Nevertheless, we had $4.9 million in cash and cash equivalents as of September 30, 2024.

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

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.

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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 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.

Additionally, on May 17, 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 “ Q1 Form 10-Q ”) for the three months ended March 31, 2024, 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 three months ended June 30, 2024, 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 and on September 25, 2024, the Q1 Form 10-Q was filed with the SEC.

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.

The Company filed the Q1 Form 10-Q with the SEC on September 25, 2024, and filed the Q2 Form 10-Q with the SEC on October 14, 2024, and regained compliance with Nasdaq.

Critical Accounting Policies and Estimates

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

Other than the 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 June 30, 2024.

Our accounting policies are more fully described in Note 1.

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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, and (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 quarter of 2024 as a result of the changes from ongoing cost containment efforts.

We expect our operating costs will continue to 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 June 30, 2024, Compared to Three Months Ended June 30, 2023 (Unaudited)

Three Months Ended September 30, 2024, Compared to Three Months Ended September 30, 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 Quarterly Report on Form 10-Q.

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

Three Months Ended

(in thousands, except percentage change)

September 30,

(in thousands, except for percentage change)

Product sales

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Loss from operations

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.

We reported net revenue of $593 thousand for the three months ended September 30, 2024, as compared to $3.6 million for the three months ended September 30, 2023, an 84% decrease compared to the prior year.

The decrease in 2024 as compared to the prior year is primarily a result of 2023 revenues that included large order intake in EMEA.

We incurred product promotional costs of $1 thousand during the three months ended September 30, 2024, representing a 98% decrease as compared to $61 thousand for the three months ended September 30, 2023.

The 2023 product promotional costs were 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.

Our gross profit for the three months ended September 30, 2024, was $235 thousand, or a gross margin of 40%.

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

The 89% year-over-year decrease in gross profit was a result of lower volumes of BolaWrap 150 product sales slightly offset by 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.

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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 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.

Cassettes were a total of 10% of our overall revenue in the three months ended September 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 $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.

Selling, general and administrative (“ SG&A ”) expense of $3.3 million for the three months ended September 30, 2024, was reduced by $1.0 million when compared to $4.3 million for the three months ended September 30, 2023.

The decrease in SG&A expense was primarily the result of the Company’s cost containment initiatives enacted beginning in the first half of 2024 which was offset by an increase of $1.0 million in share-based compensation as well as by increased occupancy expenses related to our new office space.

Share-based compensation costs allocated to SG&A increased to $896 thousand for the three months ended September 30, 2024, compared to a negative $149 thousand for the three months ended September 30, 2023, resulting from forfeitures and cancellations in 2023.

Salaries and burden costs of $756 thousand for the three months ended September 30, 2024, were approximately $880 thousand lower than in the three months ended September 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.

During the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, we decreased professional and consulting fees by $907 thousand reflecting the Company’s cost containment efforts.

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

Advertising and promotion costs were $81 thousand for the three months ended September 30, 2024, or a decrease of $143 thousand as compared to $224 thousand for the three months ended September 30, 2023.

The changes in advertising costs were primarily related to reduced trade show costs offset by slight increases in digital marketing campaigns.

Research and Development Expense

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 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.

Research and development expense decreased by $83 thousand for the three months ended September 30, 2024, when compared to the three months ended September 30, 2023.

We incurred a $36 thousand period over period increase in compensation expense as well as a $71 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 $8 thousand for the three months ended September 30, 2024, when compared to the three months ended September 30, 2023, primarily due to the Company’s move to a more variable cost model.

Operating Loss

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

Loss from operations of $3.6 million during the three months ended September 30, 2024, was an increase of $876 thousand compared to loss from operations of $2.8 million during the three months ended September 30, 2023, primarily reflecting the reduced revenues offset by lower operating costs from the Company’s cost containment efforts.

Nine Months Ended September 30, 2024, Compared to Nine Months Ended September 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

Nine Months Ended

September 30,

(in thousands, except for percentage change)

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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 reported net revenue of $3.6 million for the nine months ended September 30, 2024, as compared to $5.5 million for the nine months ended September 30, 2023, a 34% decrease.

The decrease in 2024 is primarily a result of a $2.3 million decrease in sales of BolaWrap devices, cartridges and accessories to distributors in EMEA.

We incurred discounts of $18 thousand during the nine months ended September 30, 2024, compared to $132 thousand for the nine months ended September 30, 2023.

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

We incurred product promotional costs of $101 thousand during the nine months ended September 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.

As of September 30, 2024, we had deferred revenue of $673 thousand, which consisted of $97 thousand related to VR, $463 thousand related to Intrensic, $98 thousand related to BolaWrap extended warranties and services and $15 thousand related to training.

On September 30, 2024, we had backlog of $260 thousand expected to be delivered in the fourth 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.

Our gross profit for the nine months ended September 30, 2024, was $2.1 million, or a gross margin of 56%.

Our gross profit for the nine months ended September 30, 2023, was $3.2 million, or a gross margin of 58%.

The 36% year-over-year decrease in gross profit was a result of higher volumes of the BolaWrap 150 product sold to EMEA distributors in 2023 that were slightly offset by 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.

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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 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.

Cassettes were a total of 13% of our overall revenue for the nine months ended September 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.

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

Although we have seen these supply chain obstacles ease in 2024, 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 $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.

SG&A expense of $11.0 million for the nine months ended September 30, 2024, decreased by $1.6 million when compared to $12.6 million for the nine months ended September 30, 2023, as a result of the Company’s cost containment initiatives enacted beginning in the first half of 2024 offset by increased occupancy expenses related to our new office space.

Share-based compensation costs allocated to SG&A increased to $1.7 million for the nine months ended September 30, 2024, compared to $1.4 million for the nine months ended September 30, 2023.

This $331 thousand increase resulted primarily due to changes in management and changes in the Company’s stock price.

Salaries and burden costs of $3.2 million for the nine months ended September 30, 2024, was a $1.4 million decrease compared to the nine months ended September 30, 2023.

During the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, we increased our occupancy costs by $615 thousand, which was offset by a reduction of professional fees by $807 thousand and travel and entertainment costs by $211 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 beginning in the first half 2024.

Advertising and promotion costs were $552 thousand for the nine months ended September 30, 2024, or a decrease of $117 thousand as compared to $669 thousand for the nine months ended September 30, 2023.

The decrease in advertising costs was related to decreases in video and testimonial costs as well as reductions in 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.

Research and development expense decreased by $723 thousand for the nine months ended September 30, 2024, when compared to the nine months ended September 30, 2024.

We incurred a $130 thousand period over period decrease in compensation expense allocated to research and development expense as a result of personnel changes along with a $165 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.

Outside consulting costs decreased by $101 thousand and material costs were lower by $128 thousand for the nine months ended September 30, 2024, as compared to the nine months ended September 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.

Loss from operations of $10.9 million during the nine months ended September 30, 2024, represents a reduction of $1.2 million compared to loss from operations of $12.1 million during the nine months ended September 30, 2023, reflecting increased 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 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.

As of September 30, 2024, we had cash and cash equivalents of $4.9 million, working capital of $1.6 million including the $7.2 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 $97.3 million.

Our working capital net of the warrants-short term at September 30, 2024 was $8.6 million lower compared to December 31, 2023, primarily as a result of operating losses of $10.9 million for the period.

Our working capital as of September 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 following this Report.

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

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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 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”).

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

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

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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 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 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 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 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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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.

Other than Scot Cohen, V4 Global LLC or their transferees, a holder of Series A Preferred Stock cannot convert shares of its Series A Preferred Stock into shares of Common Stock if the holder and its affiliates would beneficially own more than 4.99%, or 9.99% at the election of the holder, of the outstanding Common Stock after giving effect to the conversion.

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.

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 applicable immediately before the execution and delivery of the Series A Purchase Agreement, subject to certain beneficial ownership limitations as set forth in the 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 present 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).

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.

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 and the Pre-Dividend Shares (as defined in the Certificate of Designations) with respect to each of the July Delinquent Dividend Amount and the October Dividend Amount, if applicable, shall be delivered to the Series A Investors on or prior to the twenty-first (21st) trading day prior to 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, 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 Certificate of Amendment amended 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), (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, and (C) amend the definition of “Excluded Securities” to exclude Dividend Shares (as defined in the Certificate of Designations) and shares of Common Stock issued in connection with the payments of dividends.

The Certificate of Amendment was filed with the Secretary of State of the State of Delaware on August 23, 2024.

On October 14, 2024, the Company entered into an Amendment Agreement (the “ October 2024 Series A Amendment ”) with the Required Holders.

Pursuant to the October 2024 Series A Amendment, the Required Holders agreed to further 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 is now entitled to voting rights as described therein, (ii) certain holders of the Preferred Stock are no longer subject to certain beneficial ownership limitations as described in the Certificate of Designations, and (iii) stockholder approval is no longer 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.

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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).

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

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”).

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

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

Off-Balance Sheet Arrangements

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 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.

During the nine months ended September 30, 2024, net cash used in operating activities was $6.9 million.

The net income of $1.7 million was decreased by non-cash income of $12.5 million related to the change in fair value of warrants and increased by non-cash expense of $2.4 million consisting primarily of share-based compensation expense of $1.8 million and depreciation and amortization of $619 thousand.

Other major component changes using operating cash included an increase of $529 thousand in inventories and a decrease in both accounts receivable of $2.3 million and customer deposits of $1.0 million.

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 $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.

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

Cash Flows from Investing Activities

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.

During the nine months ended September 30, 2024, we had proceeds from maturities of short-term investments of $7.5 million.

During the nine months ended September 30, 2024, we used $13 thousand of cash for the purchase of property and equipment and invested $124 thousand in patents.

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 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.

Cash Flows from Financing Activities

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.

During the nine months ended September 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 nine months ended September 30, 2023, we received $9.8 million in gross proceeds from the issuance of securities, which was reflected in cash and cash equivalents and $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 $66 thousand for royalties during the six months ended June 30, 2024.

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

Pursuant to the License Agreement, 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 $66 thousand for royalties during the nine months ended September 30, 2024.

The maximum payout was 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.

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 Sellers’ 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 ”):

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

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.

As of September 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 June 30, 2024, and the year ended December 31, 2023, we had experienced increased costs in labor and materials due to inflation.

During the nine months ended September 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.

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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