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Item 2. Management’s Discussion and Analysis

2021-10-28 compared with 2021-07-29 · 146 added, 124 removed, 200 unchanged (57% of the section changed)

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

You should read the following discussion in conjunction with the financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and with our audited financial statements and other information presented in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

Report ”

) and with our audited financial statements and other information presented in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

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

Words such as “

expect, ”

anticipate, ”

intend, ”

plan, ”

believe, ”

seek, ”

estimate, ”

continue, ”

may, ”

will, ”

could, ”

would, ”

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

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

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

The immediate addressable domestic market for our solutions consists of approximately 900,000 full-time sworn law enforcement officers at over 15,300 federal, state and local law enforcement agencies.

In October 2021 we released a new generation product, the BolaWrap 150.

The BolaWrap 150 is electronically deployed and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100 that is being phased out.

We are also exploring other domestic markets, including military and private security.

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We focus our efforts on the following products, services and solutions:

BolaWrap Remote Restraint Device – is a hand-held remote restraint device that discharges an eight-foot bola style Kevlar tether to entangle an individual at a range of 10-25 feet.

BolaWrap Remote Restraint Device –

is a hand-held remote restraint device that discharges an eight-foot bola style Kevlar tether to entangle an individual at a range of 10-25 feet.

BolaWrap assists law enforcement to safely and effectively control encounters early in the use of force continuum without resorting to painful force options.

Wrap Reality – is a law enforcement training system employing immersive computer graphics virtual reality with proprietary software-enabled content.

Wrap Reality –

is a law enforcement training system employing immersive computer graphics virtual reality with proprietary software-enabled content.

It allows up to two participants to enter a simulated training environment simultaneously, and customized weapons controllers enable trainees to engage in strategic decision making along the force continuum.

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Our products and solutions continue to gain worldwide awareness and recognition through social media, media exposure, trade shows, product demonstrations and word of mouth as a result of positive responses from agencies and early adoption and deployment success.

We believe the Wrap is gaining traction as a recognized global brand, with innovative technology and an initial product foundation achieved through aggressive marketing and public relations.

We believe Wrap is gaining traction as a recognized global brand, with innovative technology and an initial product foundation achieved through aggressive marketing and public relations.

We believe that we have strong market opportunities for our remote restraint solution throughout the world in the law enforcement and security sectors as a result of increasing demands for less lethal policing and increasing threats posed by non-compliant subjects.

During the first six months of 2021 the Company received an increased number of field reports of successful BolaWrap usage from law enforcement agencies.

During the first nine months of 2021 the Company received an increased number of field reports of successful BolaWrap usage from law enforcement agencies.

Many agencies consider BolaWrap as a very low level, or non-reportable, use of force option and, accordingly, many uses are not reported to us.

Others are considered evidence and are also not shared.

But some law enforcement agencies have shared bodycam footage of their field uses, some of which we are allowed to use in our marketing activities.

Some law enforcement agencies have shared bodycam footage of their field uses, some of which we are allowed to use in our marketing activities.

We believe increased reports of avoiding escalation will help grow revenues in the future.

We grew our business in the first six months of 2021 with revenues increasing 128% from the first six months of 2020.

Second quarter revenues increased 132% over the prior year and we continue to expand our business, both domestically and internationally, through direct and distributor sales.

We grew our business in the first nine months of 2021 with revenues increasing 109% from the first nine months of 2020.

Third quarter revenues increased 79% over the prior year and we continue to expand our business, both domestically and internationally, through direct and distributor sales.

We have a robust and growing pipeline of market opportunities for our restraint product offering and training services within the law enforcement, military and homeland security business sectors domestically and internationally.

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To support our increased sales and distribution activities we have developed and offer robust training and class materials that certify law enforcement officers and trainers as BolaWrap instructors in the use and limitations of the BolaWrap in conjunction with modern policing tactics for de-escalation of encounters.

We believe that law enforcement trainers and officers that have seen demonstrations or have been trained about our products are more supportive of their department’s purchase and deployment of product.

As of June 30, 2021 over 800 agencies have received BolaWrap training with over 2,800 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments.

This represents an 85% increase in agencies and a 106% increase in training officers compared to December 31, 2020.

With the acquisition of NSENA, Inc.

(" NSENA ") in December 2020 and rebranding of NSENA as Wrap Reality, we have continued to market our virtual reality system while working to integrate previous scenarios into a robust platform employing BolaWrap and additional de-escalation techniques into new Wrap Reality scenarios.

As of September 30, 2021 over 940 agencies have received BolaWrap training with over 3,250 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments.

This represents a 113% increase in agencies and a 140% increase in training officers compared to December 31, 2020.

With the acquisition of the NSENA, Inc.

(" NSENA ") business in December 2020 and rebranding of the NSENA business as Wrap Reality, we have continued to market our virtual reality system while working to integrate previous scenarios into a robust platform employing BolaWrap and additional de-escalation techniques into new Wrap Reality scenarios.

We also seek to enhance the Wrap Reality experience through software and platform innovation.

We plan to increase marketing activities for our virtual reality solution as our platform enhancements are introduced to market.

At June 30, 2021 we had backlog of approximately $736 expected to be delivered in the next twelve months.

At September 30, 2021 we had backlog of approximately $63 expected to be delivered in the next twelve months.

We had deferred revenue of $240 expected to be recognized generally over the next five years.

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

During the second quarter ended June 30, 2021 we began to wind down our production line for the BolaWrap 100 product line and began a shift to a new production process for the next generation product continued development, new tooling, new production equipment and processes and additional licensing.

We recorded $747 of product line exit costs related to this planned change in production activities.

If we are unable to timely transition to our next generation product as planned our business and results of operations, including our revenues, earnings and cash flows from operations, may be adversely impacted.

During the second quarter of 2021, we began to wind down our production line for the BolaWrap 100 product line and in the third quarter completed a shift to a new production process for the next generation BolaWrap 150 product that required new tooling, new production equipment and processes and additional licensing.

We recorded $747 of product line exit costs related to this change in production activities in the second quarter.

Since inception in March 2016, we have generated significant losses from operations and anticipate that we will continue to generate significant losses from operations for the foreseeable future.

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Impact of COVID-19 and Social Unrest on our Business

We face significant challenges in operating and growing our business related to the outbreak of the novel coronavirus (“ COVID-19 ”) which continues to impact the United States and the world.

The impact of COVID-19 includes continued travel restrictions, quarantines, “stay-at-home” and “shelter-in-place” orders and shutdowns of certain businesses around the world.

We continue to face significant challenges in operating and growing our business related to the global impact of the novel coronavirus (“

COVID-19 ”).

COVID-19 impact includes continued travel restrictions, quarantines, “stay-at-home” and “shelter-in-place” orders, shutdowns and slowdowns of certain businesses around the world and impacts on supply chains and logistics.

The COVID-19 pandemic has resulted in a substantial curtailment of business activities worldwide and is causing weakened economic conditions, both in the United States and many countries abroad.

As part of intensifying efforts to contain the spread of COVID-19, many companies and state, local and foreign governments continue to impose restrictions, including shelter-in-place orders and travel bans.

While some of these companies and jurisdictions have started to relax such restrictions, in some cases, the restrictions have been put back in place after having been lifted.

These factors negatively impacted our operations and results of operations for 2020 and the first six months of 2021.

While some of these companies and jurisdictions have started to relax such restrictions, in some cases, the restrictions are put back in place after having been lifted.

These factors negatively impacted our operations and results of operations for 2020 and the first nine months of 2021.

We expect that the evolving COVID-19 pandemic, associated travel restrictions and social distancing requirements, especially international, may continue to have an adverse impact on our results of operations.

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Greater funding challenges for our customer base, which may adversely affect timing of anticipated contracts and new customer sales;

Disruption to our supply chain caused by distribution and other logistical issues, which may further delay our ability to deliver product to customers;

Disruption to our supply chain caused by distribution and other logistical issues, which may further delay our ability to deliver product to customers beyond 2021;

Potential decrease in productivity of our employees or those of our customers or suppliers due to travel bans or restrictions, work-from-home or shelter-in-place policies and orders.

We may be adversely affected by continued social unrest, protests against racial inequality, protests against police brutality and movements such as “Defund the Police”.

We also may be adversely affected by continued social unrest, protests against racial inequality, protests against police brutality and movements such as “Defund the Police”.

These events may directly or indirectly affect police agency budgets and funding available to current and potential customers.

Participants in these events may also attempt to create the perception that our solutions are contributing to the perceived problems or ineffective as a solution, which may adversely affect us, our business and results of operations, including our revenues, earnings and cash flows from operations.

It is currently not possible to predict the magnitude or duration of the COVID-19 pandemic’s impact on our business or the future impact of the recent, ongoing and possible future unrest.

The extent to which these events impact our business will depend on numerous evolving factors that we may not be able to control or accurately predict, including without limitation:

the duration and scope of the challenges created by the COVID-19 pandemic or by ongoing social unrest;

governmental, business and individuals’ actions that have been and continue to be taken in response to these events;

governmental, business and individuals’ actions that have been and continue to be taken in response to these events;

the impact of the COVID-19 pandemic and social unrest on economic activity and actions taken in response;

the effect on our customers and demand for our products and services;

our ability to continue to sell our products and services, including as a result of travel restrictions and people working from home, or restrictions on access to our potential customers;

our ability to continue to sell and deliver our products and services, including as a result of travel restrictions, logistic and supply chain challenges, people working from home, or restrictions on access to our potential customers;

the ability of our customers to pay for our products and services;

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Critical Accounting Policies and Estimates

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

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

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

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

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

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Revenue Recognition .

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

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

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

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Share-Based Compensation.

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

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

FASB ”) in Accounting Standards Codification (“

ASC ”) Topic 718, Stock Compensation (“

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

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

Share-based compensation expense recognized during 2020 and 2019 includes stock option and restricted stock unit compensation expense.

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

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

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

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

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

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

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

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

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Exit Expense .

Our product line exit expenses included estimates of end of product life raw material write offs, estimates of accrual for noncancelable raw material purchase orders and retirement of unamortized production tooling costs.

Our product line exit expense included estimates of end of product life raw material write offs, costs of noncancelable raw material purchase orders and retirement of unamortized production tooling costs.

We make these estimates based on current production plans and these judgments and estimates have an impact on our financial statements.

Accrued Expenses.

Accrued Expense.

We establish a warranty reserve based on anticipated warranty claims at the time product revenue is recognized.

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We evaluate the adequacy of this reserve each reporting period.

We use the recognition criteria of ASC 450-20, “Loss Contingencies” to estimate the amount of bonuses when it becomes probable a bonus liability will be incurred and we recognize expense ratably over the service period.

We use the recognition criteria of ASC 450-20, “Loss Contingencies”

to estimate the amount of bonuses when it becomes probable a bonus liability will be incurred and we recognize expense ratably over the service period.

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

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

Other than the planned production change requiring a new estimate of exit expense, there were no significant changes or modification of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the period ended June 30, 2021.

Segment and Related Information

The Company operates as a single segment.

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

Refer to Note 14, Major Customers and Related Information, in our financial statements for further discussion.

Operating Expense

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

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 expenses.

Operating Expenses

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

The scope and magnitude of our future research and development expense is difficult to predict at this time and will depend on elections made regarding research projects, staffing levels and outside consulting and contract costs.

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Results of Operations

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

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

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

Three Months Ended June 30,

Three Months Ended September 30,

Product sales

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Loss from operations

We reported revenue of $1,934 for the three months ended June 30, 2021 as compared to $833 for the quarter ended June 30, 2020, a 132% increase over the prior year.

We believe our sales during the second quarter of 2021 were negatively impacted by the COVID-19 pandemic as we were limited in our ability to make product demonstrations and conduct training primarily internationally.

We incurred product promotional costs of $379 during the three months ended June 30, 2021 related primarily to the cost of demonstration and training products and accessories delivered to law enforcement agencies that were expensed as marketing costs.

A total of $125 of such product marketing costs were incurred during the three months ended June 30, 2020.

We had $186 of deferred revenue at June 30, 2021, of which $105 related to virtual reality training and $81 related to BolaWrap extended warranties and training services.

We reported revenue of $1,805 for the three months ended September 30, 2021 as compared to $1,007 for the quarter ended September 30, 2020, a 79% increase over the prior year.

We believe our sales during the third quarter of 2021 were negatively impacted by the COVID-19 pandemic as we were limited in our ability to make product demonstrations and conduct training primarily internationally.

We also believe some customers delayed purchase decisions during the quarter in anticipation of the introduction of our second generation product, the BolaWrap 150.

We incurred product promotional costs of $183 during the three months ended September 30, 2021 related primarily to the cost of demonstration and training products and accessories delivered to law enforcement agencies that were expensed as marketing costs.

A total of $261 of such product marketing costs were incurred during the three months ended September 30, 2020.

While we continue broad training activities our increased number of successful field uses and brand awareness reduces the need for demonstration product.

We had $240 of deferred revenue at September 30, 2021, of which $152 related to virtual reality training and $88 related to BolaWrap extended warranties and training services.

We believe we can substantially grow sales in future periods;

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Although no assurances can be given, we do believe, however, that the challenges to substantially increasing sales caused by COVID-19 will abate as the rate of vaccinations increase globally, especially given the number of BolaWrap trials currently ongoing and the current environment where non-lethal options are being widely considered by law enforcement domestically and internationally.

At June 30, 2021, we had backlog of $736 expected to be delivered in the next twelve months.

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

Our cost of revenue for the three months ended June 30, 2021 was $1,994 and included $747 of restructuring inventory charges related to the planned wind down and closure of the BolaWrap 100 product line related to a significant shift in production efforts to a new generation product requiring continued development, new tooling, new production equipment and processes and additional licensing.

These costs included end of life inventory charges of $531 and tooling write-downs of $106.

An additional $110 has been recorded in accrued liabilities as a restructuring reserve for estimated non-cancelable purchase commitments.

Excluding this $747 charge, the gross margin for the three months ended June 30, 2021 was 36%.

The gross margin for the three months ended June 30, 2020 was 32%.

Due to our limited history of revenue and startup costs incurred to establish volume manufacturing, historical margins may not be indicative of future margins.

In the third quarter we expect to start production of a new generation product with different material inputs and manufacturing processes such that historical margins may not be indicative of future margins.

In addition, our margins vary based on the sales channels through which our products are sold and product mix.

Currently, our cartridges have lower margins than BolaWrap devices.

At September 30, 2021, we had backlog of $63 expected to be delivered in the next twelve months.

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

Since we generally ship domestic product from inventory shortly after order period backlog generally varies depending on larger foreign orders.

Our cost of revenue for the three months ended September 30, 2021 was $1,094 resulting in a gross margin of 39%.

The gross margin for the three months ended September 30, 2020 was 32%.

Due to our limited history of revenue historical margins may not be indicative of future margins.

During the third quarter ended September 30, 2021, we began production of our new generation BolaWrap 150 product with different material inputs and manufacturing processes such that historical margins may not be indicative of future margins.

We expect that the BolaWrap 150, after a startup period, will have higher margins than historical production. Our margins also vary based on the sales channels through which our products are sold and product mix.

Currently, our cassettes have lower margins than BolaWrap devices.

We implement product updates and revisions, including raw material and component changes that may impact product costs.

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Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expense for the three months ended June 30, 2021 increased by $4,041when compared to the three months ended June 30, 2020.

The largest driver of this increase was related to an increase of $1,531 in share-based compensation, of which $1,166 was for legacy directors and new directors appointed in April 2021.

The remaining $365 was incentive for management and employees.

We continue to invest in our marketing and promotion, which augments the media attention we receive from external sources, such as news broadcasts.

During the second quarter, we incurred $298 increase related to public relations initiatives and $218 increase related to advertising and promotional products.

Other SG&A expense increases included a $1,045 increase in cash compensation, recruiting and consultancy costs resulting from our planned growth in personnel over the prior year and a $430 increase in public company related expense.

Selling, general and administrative (“SG&A”) expense for the three months ended September 30, 2021 increased by $1,399 when compared to the three months ended September 30, 2020. 

The largest driver of this increase was related to an increase of $624 in share-based compensation, related to incentives for management and employees.

Other SG&A expense increases included a $607 increase in cash compensation, recruiting and consultancy costs resulting from planned growth in personnel over the prior year and a $136 increase in public company related expense.

In addition, our travel costs related to sales, demonstrations and training increased by $88 as a result of increased travel by sales and training personnel.

In the second quarter of 2020, we had virtually no travel expense due to the COVID-19 pandemic and the various travel restrictions that were in place.

Despite the growth in the second quarter of 2021, we are still well below historical norms for our travel expense but expect travel expense to increase as international travel restrictions ease.

In the third quarter of 2020, we had virtually no travel expense due to the COVID-19 pandemic and the various travel restrictions that were in place.

Despite the growth in the third quarter of 2021, we are still well below historical norms for our travel expense but expect travel expense to increase as international travel restrictions ease.

The increase in SG&A expense was partially offset by a $296 decrease in advertising and promotional product expense resulting from reduced demonstration product costs and a planned shift in production efforts to a new generation product.

Research and Development Expense

Research and development expense increased by $585 for the three months ended June 30, 2021, when compared to the comparable three-month period in fiscal 2020.

We incurred a $68 period over period increase in non-cash share-based compensation expense allocated to research and development expense as a result of new award grants to new personnel and vesting timing.

The increase in costs during the three months ended June 30, 2021 when compared to the prior year included a $176 increase in cash compensation costs resulting from an increase in headcount primarily associated with product development.

Outside consulting costs increased by $288 for the three months ended June 30, 2021, primarily due to costs related to a new generation BolaWrap product, initiatives to develop new products and increased development of virtual reality scenarios.

Prototype related costs for three months ended June 30, 2021 were $115 comparable to $105 for the prior comparable three-month period.

We expect our research and development costs to increase in the future as we add staff and expand our research initiatives in response to market opportunities.

Loss from operations during the three months ended June 30, 2021 increased by $4,954 when compared to the three months ended June 30, 2020, resulting, primarily, from increased share-based compensation and increased operating costs due to increased personnel, marketing and selling, public company costs and supporting activities.

We also incurred a one-time non-cash product line exit expense of $747 during the period that we do not expect to recur.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Research and development expense increased by $1,149 for the three months ended September 30, 2021, compared to the comparable three-month period in fiscal 2020.

We incurred a $132 period over period increase in non-cash share-based compensation expense allocated to research and development expense as a result of new award grants to new personnel and vesting timing.

The increase in costs during the three months ended September 30, 2021 compared to the prior year included a $301 increase in cash compensation costs resulting from an increase in headcount primarily associated with product development.

Outside consulting costs increased by $417 for the three months ended September 30, 2021, primarily due to costs related to the development of our next generation BolaWrap 150 product, initiatives to develop new products and increased development of virtual reality software.

Prototype related costs for three months ended September 30, 2021 were $251 comparable to $274 for the prior comparable three-month period.

We expect our research and development costs to increase in the future as we add staff and expand our research initiatives in response to market opportunities. 

Loss from operations during the three months ended September 30, 2021 increased by $2,156 compared to the three months ended September 30, 2020, resulting, primarily, from increased share-based compensation and increased operating costs due to increased personnel, public company costs, research and development efforts and supporting activities.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

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 June 30,

Nine Months Ended September 30,

Product sales

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Loss from operations

We reported revenue of $3,476 for the six months ended June 30, 2021 as compared to $1,522 for the six months ended June 30, 2020, a 128% increase over the prior year.

We believe our sales during the first six months of 2021 were negatively impacted by the COVID-19 pandemic as we were limited in our ability to make product demonstrations and conduct training primarily internationally.

We incurred product promotional costs of $678 during the six months ended June 30, 2021 related primarily to the cost of demonstration and training products and accessories delivered to law enforcement agencies that were expensed as marketing costs.

A total of $313 of such product marketing costs were incurred during the six months ended June 30, 2020.

We had $186 of deferred revenue at June 30, 2021, of which $105 related to virtual reality training and $81 related to BolaWrap extended warranties and training services.

We reported revenue of $5,280 for the nine months ended September 30, 2021 as compared to $2,529 for the nine months ended September 30, 2020, a 109% increase over the prior year.

We believe our sales during the first nine months of 2021 were negatively impacted by the COVID-19 pandemic as we were limited in our ability to make product demonstrations and conduct training primarily internationally.

We also believe some customers delayed purchase decisions during the third quarter in anticipation of the second generation product, the BolaWrap 150.

We incurred product promotional costs of $862 during the nine months ended September 30, 2021 related primarily to the cost of demonstration and training products and accessories delivered to law enforcement agencies that were expensed as marketing costs.

A total of $575 of such product marketing costs were incurred during the nine months ended September 30, 2020.

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

We had $240 of deferred revenue at September 30, 2021, of which $152 related to virtual reality training and $88 related to BolaWrap extended warranties and training services.

We believe we can substantially grow sales in future periods;

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Our cost of revenue for the six months ended June 30, 2021 was $2,931 and included $747 of restructuring inventory charge.

Excluding this $747 charge, the gross margin for the six months ended June 30, 2021 was 37%.

The gross margin for the six months ended June 30, 2020 was 36%.

Our cost of revenue for the nine months ended September 30, 2021 was $4,023 and included $747 of restructuring inventory charge.

Excluding this non-cash $747 charge, the gross margin for the nine months ended September 30, 2021 was 38%.

The gross margin for the nine months ended September 30, 2020 was 34%.

We have limited warranty cost experience and estimated future warranty costs can impact our gross margins.

Selling, General and Administrative Expense

SG&A expense for the six months ended June 30, 2021 increased by $6,879 when compared to the six months ended June 30, 2020.

The largest driver of this increase was related to an increase of $1,704 in share-based compensation, of which $1,174 was for legacy directors and new directors appointed in April 2021.

SG&A expense for the nine months ended September 30, 2021 increased by $8,277 compared to the nine months ended September 30, 2020. 

The largest driver of this increase was related to an increase of $2,329 in share-based compensation, of which $1,397 was for director compensation.

The remaining $932 was incentive for management and employees.

We continue to invest in our marketing and promotion, which augments the media attention we receive from external sources, such as news broadcasts.

During the first six months of 2021, we incurred increases of $405 related to public relations initiatives and $358 related to advertising and promotional products.

For the first six months of 2021, our public reporting expenses increased by $1,334.

This includes shareholder activism costs of $818 in connection with actions by a former executive officer/shareholder seeking changes in the composition of our Board of Directors and candidates to stand for election at the 2021 Annual Shareholders’ Meeting, changes to the Executive Chairman position as well as other related matters.

During the first nine months of 2021, we incurred increases of $407 related to public relations initiatives and $62 related to advertising and promotional products.

For the first nine months of 2021, our public reporting expense increased by $1,467.

Meeting, changes to the Executive Chairman position as well as other related matters.

There were no comparable costs in 2020.

This matter was settled in March 2021 and we do not expect significant additional costs during the rest of 2021.

Other SG&A expense increases included a $2,235 increase in cash compensation, recruiting and consultancy costs resulting from our planned growth in personnel over the prior year.

Other SG&A expense increases included a $2,920 increase in cash compensation, recruiting and consultancy costs resulting from our planned growth in personnel over the prior year.

In addition, our travel costs related to sales, demonstrations and training increased by $339 as a result of increased travel by sales and training personnel.

In the second quarter of 2020, we had virtually no travel due to the COVID-19 pandemic and the various travel restrictions that were in place.

Despite the growth in the first half of 2021, we are still well below historical norms for our travel expense but expect travel expense to increase as international travel restrictions ease.

In the second and third quarters of 2020, we had virtually no travel due to the COVID-19 pandemic and the various travel restrictions that were in place.

Despite the growth in 2021 to date, we are still well below historical norms for our travel expense but expect travel expense to increase as international travel restrictions ease.

Research and Development Expense

Research and development expense increased by $1,116 for the six months ended June 30, 2021, when compared to the comparable six-month period in fiscal 2020.

We incurred a $287 period over period increase in non-cash share-based compensation expense allocated to research and development expense as a result of new award grants to new personnel and vesting timing.

The increase in costs during the six months ended June 30, 2021 when compared to the prior year included a $334 increase in cash compensation costs resulting from an increase in headcount primarily associated with product development.

Outside consulting costs increased by $419 for the six months ended June 30, 2021, primarily due to costs related to a new generation BolaWrap product, initiatives to develop new products and increased development of virtual reality scenarios.

The increase in research and development expense is partially offset by the decrease of $43 relating to prototype related costs for six months ended June 30, 2021, compared to the comparable period in 2020.

We expect our research and development costs to increase in the future as we add staff and expand our research initiatives in response to market opportunities.

The $13,239 loss from operations during the six months ended June 30, 2021 increased by $8,001 when compared to the six months ended June 30, 2020, resulting, primarily, from increased share-based compensation and increased operating costs due to increased personnel, marketing and selling, public company costs and supporting activities.

Research and development expense increased by $2,265 for the nine months ended September 30, 2021, compared to the comparable nine-month period in fiscal 2020.

We incurred a $419 period over period increase in non-cash share-based compensation expense allocated to research and development expense as a result of new award grants to new personnel and vesting timing.

The increase in costs during the nine months ended September 30, 2021 compared to the prior year included a $636 increase in cash compensation costs resulting from an increase in headcount primarily associated with product development.

Outside consulting costs increased by $917 for the nine months ended September 30, 2021, primarily due to costs related to a new generation BolaWrap product, initiatives to develop new products and increased development of virtual reality scenarios.

The increase in research and development expense is partially offset by the decrease of $66 relating to prototype related costs for nine months ended September 30, 2021, compared to the comparable period in 2020.

We expect our research and development costs to increase in the future as we add staff and expand our research initiatives in response to market opportunities. 

The $19,256 loss from operations during the nine months ended September 30, 2021 increased by $10,155 compared to the nine months ended September 30, 2020, resulting, primarily, from increased share-based compensation and increased operating costs due to increased personnel, marketing and selling, public company costs and supporting activities.

We also incurred a one-time non-cash product line exit expense of $747 during the period that we do not expect to recur.

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

As of June 30, 2021, we had cash and cash equivalents of $13,050, short-term investments of $30,002, positive working capital of $46,759 and had sustained cumulative losses attributable to stockholders of $38,538.

As of September 30, 2021, we had cash and cash equivalents of $9,858, short-term investments of $30,004, positive working capital of $42,869 and had sustained cumulative losses attributable to stockholders of $44,530.

We believe that our cash on hand and short-term investments will sustain our operations for at least the next twelve months from the date of this Report.

During the six months ended June 30, 2021 we received $12,326 of proceeds from the exercise of previously issued stock purchase warrants and stock options.

During the nine months ended September 30, 2021 we received $13,726 of proceeds from the exercise of previously issued stock purchase warrants and from the exercise of stock options.

Our primary source of liquidity to date has been funding from our stockholders from the sale of equity securities and the exercise of derivative securities, consisting of options and warrants.

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Operating Activities

During the six months ended June 30, 2021, net cash used in operating activities was $10,254.

The net loss of $13,228 was decreased by non-cash expense of $4,303 consisting primarily of share-based compensation expense of $3,007, restructuring inventory charges of $747 and shares issued for services of $239.

Other major component changes using operating cash included an increase of $798 in accounts receivable and an increase in inventories of $713.

An increase of $101 in accounts payable and accrued expenses and an increase of $170 in deferred revenue reduced the cash used in operating activities.

During the six months ended June 30, 2020, net cash used in operating activities was $3,895.

The net loss of $5,162 was decreased by non-cash expense of $1,110 consisting primarily of stock-based compensation expense of $1,016.

Other major component changes using operating cash included an increase of $306 in accounts receivable and an $193 decrease in customer deposits.

A decrease in inventories of $206 and an increase of $541 in accounts payable and accrued liabilities reduced the cash used in operating activities.

During the nine months ended September 30, 2021, net cash used in operating activities was $13,729. The net loss of $19,220 was decreased by non-cash expense of $5,879 consisting primarily of share-based compensation expense of $4,310, restructuring inventory charges of $747, depreciation and amortization expense of $336 and shares issued for services of $239.

Other major component changes using operating cash included an increase of $1,414 in accounts receivable and an increase in inventories of $160.

An increase of $773 in accounts payable and accrued expense and an increase of $224 in deferred revenue reduced the cash used in operating activities.

During the nine months ended September 30, 2020, net cash used in operating activities was $7,693. The net loss of $9,024 was decreased by non-cash expense of $1,771 consisting primarily of stock-based compensation expense of $1,563.

Other major component changes using operating cash included an increase of $985 in accounts receivable, a $216 decrease in customer deposits and a $50 increase in prepaid expense and other current assets.

A decrease of $294 in inventories and an increase of $610 in accounts payable and accrued liabilities reduced the cash used in operating activities.

Investing Activities

During the six months ended June 30, 2021, we used $25,009 of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $20,000.

We had no short-term investment activity during the six months ended June 30, 2020.

We used $367 and $69 of cash for the purchase of property and equipment during the six months ended June 30, 2021 and 2020, respectively.

We invested $96 and $82 in patents during the six months ended June 30, 2021 and 2020, respectively.

During the nine months ended September 30, 2021, we used $30,014 of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $25,000.

We purchased $25,000 of short-term investments during the nine months ended September 30, 2020.

We used $811 and $202 of cash for the purchase of property and equipment during the nine months ended September 30, 2021 and 2020, respectively.

We invested $129 and $101 in patents during the nine months ended September 30, 2021 and 2020, respectively.

Financing Activities

During the six months ended June 30, 2021, we received $12,048 from previously issued stock purchase warrants and $278 in proceeds from the exercise of previously issued stock options, and repaid $200 in debt relating to the acquisition of NSENA in December 2020.

During the six months ended June 30, 2020 we received $11,667 of net proceeds resulting from the consummation of a registered offering of our Common Stock in June 2020, and obtained $10,368 of net proceeds from the exercise of previously issued warrants and stock options.

During the nine months ended September 30, 2021, we received $12,048 from previously issued stock purchase warrants and $1,678 in proceeds from the exercise of previously issued stock options, and repaid $275 in debt relating to the acquisition of NSENA in December 2020.

During the nine months ended September 30, 2020 we received $11,667 of net proceeds resulting from the consummation of a registered offering of our Common Stock in June 2020, and obtained $24,029 of net proceeds from the exercise of previously issued warrants and stock options.

We also obtained $414 in proceeds from a U.S.

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Contractual Obligations and Commitments

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

Pursuant to 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 are committed to aggregate lease payments on our facility lease of $24 in 2021 and $58 in 2022.

At June 30, 2021 the Company was committed for approximately $1,005 for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

Pursuant to that certain Asset Purchase Agreement between Wrap Reality, Inc., and NSENA, dated December 14, 2020 we are obligated to pay to NSENA cash consideration of $75 on September 15, 2021.

As additional earn-out consideration, Wrap Reality has agreed to pay NSENA 10% of net revenues (or a lesser amount equal to 50% of direct profit) from specific identified prospects that become revenue customers before September 30, 2021, but only on amounts collected to June 30, 2022.

At September 30, 2021 the Company was committed for approximately $713 for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

Effects of Inflation

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Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the period ended June 30, 2021, or subsequently thereto, that we believe are of potential significance to our financial statements.

There have been no recent accounting pronouncements or changes in accounting pronouncements during the period ended September 30, 2021, or subsequently thereto, that we believe are of potential significance to our financial statements.

Quantitative and Qualitative Disclosures about Market Risk.

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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