What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-03 compared with 2021-10-28 · 111 added, 161 removed, 185 unchanged (60% of the section changed)

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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.

Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Report and in our other SEC filings, including particularly matters set forth under Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K.

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

Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Report and in our other filings with the Securities and Exchange Commission ( “

), including particularly matters set forth under Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K.

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

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

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We are a global public safety technology and services company organized in March 2016 delivering modern policing solutions to law enforcement and security personnel.

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

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

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.

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 and over 12 million police officers in over 100 countries we are targeting globally.

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, and over 12 million police officers in over 100 countries.

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

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The 100 largest international police agencies are estimated to have over 12.1 million law enforcement personnel.

According to Statistics MRC, a market research consulting firm, we participate in a segment of the non-lethal products global market expected to grow to $11.85 billion by 2023.

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

BolaWrap Remote Restraint Device –

According to 360iResearch, a market research consulting firm, we participate in a segment of the non-lethal products global market expected to grow to $16.1 billion by 2027.

We focus our efforts on the following products and services:

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 (" VR ") with proprietary software-enabled content.

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

In addition to the United States domestic law enforcement market, we have shipped our restraint products to 50 countries.

We have established an active distributor network with 14 domestic distributors representing all 50 states and Puerto Rico.

We have distribution agreements with 47 international distributors.

In addition to the United States law enforcement market, we have shipped our restraint products to 53 countries.

We have established an active distributor network with 12 domestic distributors representing 49 states and one dealer representing Puerto Rico.

We have distribution agreements with 47 international distributors covering 54 countries.

We focus significant sales, training and business development efforts to support our distribution network.

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We believe we have established a strong branding and market presence globally and have established significant competitive advantages in our markets.

Management Changes

As previously reported in January 2022, the Board of Directors approved and initiated a leadership transition plan to support the next phase of its corporate strategy, which is focused on diversifying the Company’s suite of products, offerings and services.

The transition and corporate strategy included the resignation of President, CEO and director Thomas P.

Smith and announcement of the planned retirement of CFO, Secretary and Treasurer James A.

Barnes expected upon appointment of a successor.

After a period of transition managed by Special Transition Committee consisting of directors Scot Cohen and Kim Sentovich and including interim contract executives, on April 18, 2022, the Company announced the appointment of director TJ Kennedy as CEO and Kevin Mullins as President.

Kennedy and Mr.

Mullins have significant leadership experience in public safety technology prior to their appointment.

Mullins will be leading go to market functions in the President role.

Business Outlook and Challenges

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

We continue to receive 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.

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

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.

We believe 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.

Social trends demanding more compassionate and safe policing practices are expected to continue to drive our global business.

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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 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.

As of March 31, 2022, over 1,040 agencies have received BolaWrap training with over 3,200 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments.

This represents a 68% increase in agencies and a 63% increase in training officers compared to March 31, 2021.

With the acquisition of NSENA in December 2020, and the 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.

In August 2021, we announced the development of a new expanded Wrap Reality Virtual Training platform powered by, and developed through, a collaboration with AWS using AWS GovCloud (US).

The new platform combines our advanced law enforcement simulator with secure cloud services to automatically track training progress and provide the ability to replay recorded training sessions.

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

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.

At March 31, 2022, we had backlog of approximately $505 thousand expected to be delivered in the next twelve months.

We had deferred revenue of $282 thousand 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 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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We expect that we will need to continue to innovate new applications for our public safety technology, develop new products and technologies to meet diverse customer requirements and identify and develop new markets for our products.

Impact of COVID-19 and Social Unrest on our Business

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 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.

While the ultimate economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business and results of operations, including our revenues, earnings and cash flows from operations, will be adversely impacted for at least the balance of 2021, including as a result of:

Delays in our ability to travel and train, especially internationally;

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 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 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.

We have experienced recent changes in management.

Changes in management and other key personnel have the potential to disrupt our business, and any such disruption could adversely affect our operations, programs, growth, financial condition or results of operations.

In addition, new members of management may have different perspectives regarding product development and opportunities for our business, which may cause us to focus on new business opportunities or reduce or change emphasis on our existing products and business.

Impact of COVID-19, Social Unrest and Geopolitical Events on our Business

In December 2019 ,  a novel strain of coronavirus 

COVID-19 ”) emerged in China.

In March 2020 ,  the World Health Organization declared the outbreak as a pandemic.

The extent to which the coronavirus impacts our operations will continue to depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

In particular, the continued spread of the coronavirus globally and emergence of new strains could adversely impact our operations, including our manufacturing, logistics and supply chain.

Our operations could be negatively affected if employees are quarantined as the result of exposure to a contagious illness.

Similarly, travel restrictions resulting from the rapid spread of contagious illnesses 

may  have a material adverse effect on our business and results of operations.

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

These events have directly or indirectly affected 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.

Our business may be impacted by global economic conditions, which have been in recent years, and continue to be, volatile.

Geopolitical conflict, such as the recent conflict in Ukraine, and related international economic sanctions and their impact may exacerbate this volatility.

Specifically, our revenues and gross margins depend significantly on global economic conditions and the demand by foreign governments and agencies for the BolaWrap in many of our target markets.

It is currently not possible to predict the magnitude or duration of the COVID-19 pandemic’s impact on our business and supply chain or the future impact of the recent, ongoing and possible future social unrest nor the impact of global economic conditions.

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:

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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.

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

The grant date fair value of stock options is determined using the Black-Scholes option-pricing model.

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.

The Black-Scholes option-pricing model requires inputs including the market price of the Company’s common stock, par value $0.0001 per share ( “

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.

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This generally could occur when certain assets are no longer consistent with our business strategy and whose expected future value has decreased.

Exit Expense .

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 Expense.

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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 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 September 30, 2021.

Segment and Related Information

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Results of Operations

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

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

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 September 30,

Three Months Ended March 31,

Product sales

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Cost of revenues

Products and services

Product line exit expense

Total cost of revenues

Gross profit (loss)

Operating expenses:

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Loss from operations

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;

however, the impact of the COVID-19 pandemic has created much uncertainty in the global marketplace by restricting our ability to travel internationally and, to a more limited extent, domestically.

We are therefore unable to predict at this time whether our sales will continue to increase materially during the remainder of the fiscal year ending December 31, 2021 due to these uncertainties.

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

We reported net revenue of $1.6 million for the three months ended March 31, 2022, as compared to $1.5 million for the quarter ended March 31, 2021, a 4% increase over the prior year.

We believe our sales during the first quarter of 2022 were negatively impacted by the transition to the BolaWrap 150 product and effects of limited ability to demonstrate and train in 2021 due to the COVID-19 pandemic, especially internationally.

We also incurred discounts of $388 thousand during the three months ended March 31, 2022, as a result of promotional programs designed to encourage customers to upgrade to the BolaWrap 150.

Gross sales were $1.99 million for the three months ended March 31, 2022, before such discounts.

The discounts compares to normal business discounts of $4 thousand in the comparable quarter of the prior year.

We expect such discounts to continue in the second quarter but thereafter decline to the norm of minimal discounts as we phase out our promotional upgrade offers.

We incurred product promotional costs of $215 thousand during the three months ended March 31, 2022, 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 $298 thousand of such product promotional costs were incurred during the three months ended March 31, 2021.

We are responding to increased demand for training as a result of expanded product and brand awareness and increased successful field use by agencies but due to awareness expect reductions in product promotional costs from the prior year.

We had $282 thousand of deferred revenue at March 31, 2022, of which $170 thousand related to virtual reality training and $112 thousand related to BolaWrap extended warranties and services.

At March 31, 2022, we had backlog of $505 thousand 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.

The impact of the COVID-19 pandemic and geopolitical conflicts, including the recent war in Ukraine, has created much uncertainty in the global marketplace, with the COVID-19 pandemic continuing to restrict our ability to travel internationally and, to a more limited extent, domestically.

These conditions are expected to continue at least through mid 2022. We are therefore unable to predict at this time whether our sales will continue to increase during fiscal year ending December 31, 2022.

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 pandemic wanes, 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. 

As a result, we believe that revenue during the fiscal year 2022 will increase compared to the revenue recorded during 2021, although no assurances can be given.

We have experienced recent changes in management.

Changes in management and other key personnel have the potential to disrupt our business, and any such disruption could adversely affect our revenue growth in future periods, especially in the near term as we execute our Management Transition plan.

Our cost of revenue for the three months ended March 31, 2022, was $932 thousand resulting in a gross margin of 42%.

The gross margin for the three months ended March 31, 2021, was 39%.

The most recent period gross margin was impacted by the promotional discounts discussed above and is expected to improve in future quarters.

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

In late 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.

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With such product updates and revisions, we have limited warranty cost experience and estimated future warranty costs can impact our gross margins.

Selling, General and Administrative 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 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 $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.

Nine Months Ended September 30,

Product sales

Other revenue

Total revenues

Cost of revenues:

Products and services

Product line exit expense

Total cost of revenues

Gross profit (loss)

Operating expenses:

Selling, general and administrative

Research and development

Total operating expenses

Loss from operations

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;

however, the impact of the COVID-19 pandemic has created much uncertainty in the global marketplace by restricting our ability to travel internationally and, to a more limited extent, domestically.

We are therefore unable to predict at this time whether our sales will continue to increase materially during the remainder of the fiscal year ending December 31, 2021 due to these uncertainties.

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.

Our global supply chain has been subject to component shortages, increased lead times, cost fluctuations, and logistics constraints that have impacted our product costs.

We expect these supply chain challenges to continue throughout 2022.

Supplier shortages, quality issues and logistic delays affect our production schedules and could in turn have a material adverse effect on our financial condition, results of operation and cash flows.

Selling, General and Administrative Expense

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 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.

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.

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 $2,920 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 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.

Selling, general and administrative ( “

SG&A ”) expense for the three months ended March 31, 2022, decreased by $372 thousand when compared to the three months ended March 31, 2021. 

Share-based compensation increased $292 primarily as a result of termination and severance accelerations of $242 thousand incurred during the three months ended March 31, 2022.

SG&A compensation increases in the current period included a $300 thousand severance expense offset by cost containment efforts resulting in a net $110 thousand increase in cash compensation costs.

A $112 thousand increase in legal fees primarily related to fees associated with management changes.

SG&A reductions included a $85 thousand decrease in product promotion costs.

In the first quarter of 2021 we incurred $803 thousand of shareholder activism costs with no such costs in the most recent quarter.

We expect expenditures for SG&A expenses for the balance of 2022 to remain below the prior year due to active cost containment efforts.

Research and Development Expense

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.

Research and development expense increased by $430 thousand for the three months ended March 31, 2022, compared to the comparable three-month period in fiscal 2021.

We incurred a $122 thousand period over period decrease in non-cash share-based compensation expense allocated to research and development personnel.

The increase in costs during the three months ended March 31, 2022, compared to the prior year included a $200 thousand increase in cash compensation costs resulting from an increase in headcount primarily associated with product development.

Outside consulting costs increased by $88 thousand for the three months ended March 31, 2022, primarily due to costs related to finalizing development and testing 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 March 31, 2021, increased $199 thousand related to BolaWrap 150 startup.

We expect our research and development costs to remain at comparable levels for the balance of 2022. 

Operating Loss

Loss from operations during the three months ended March 31, 2022, of $5.4 million was comparable to that of the three months ended March 31, 2021.

Liquidity and Capital Resources

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

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.

As of March 31, 2022, we had cash and cash equivalents of $5 million, short-term investments of $25 million, positive working capital of $34 million and had sustained cumulative losses attributable to stockholders of $55 million.

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 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 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.

During the three months ended March 31, 2022, net cash used in operating activities was $4.85 million. The net loss of $5.43 million was decreased by non-cash expense of $1.16 million consisting primarily of share-based compensation expense of $1.03 million.

Other major component changes using operating cash included an increase of $399 thousand in accounts receivable and an increase in inventories of $304 thousand.

During the three months ended March 31, 2021, net cash used in operating activities was $4.4 million. The net loss of $5.43 million was decreased by non-cash expense of $1.08 million consisting primarily of share-based compensation expense of $859 thousand and shares issued for services of $100 thousand.

Other major component changes using operating cash included an increase of $341 thousand in accounts receivable, an increase in inventories of $924 thousand, and a $136 thousand decrease in accrued liabilities.

An increase of $1.2 million in accounts payable and an increase of $156 thousand in deferred revenue reduced the cash used in operating activities.

Investing Activities

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.

During the three months ended March 31, 2022, we used $4.85 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $10 million.

During the three months ended March 31, 2021, we used $25 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $15 million.

We used $81 thousand and $160 thousand of cash for the purchase of property and equipment during the three months ended March 31, 2022, and 2021, respectively.

We invested $69 thousand and $56 thousand in patents during the three months ended March 31, 2022, and 2021, respectively.

Financing Activities

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.

Small Business Administration Promissory Note pursuant to the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act during the period.

During the three months ended March 31, 2022, we received $75 thousand in proceeds from the exercise of previously issued stock options.

During the three months ended March 31, 2021, we received $113 thousand in proceeds from the exercise of previously issued stock options and repaid $100 thousand in debt relating to the NSENA acquisition.

Contractual Obligations and Commitments

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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 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.

We are committed to aggregate lease payments on our facility lease of $82 thousand in 2022, $121 thousand in 2023, $126 thousand in 2024, and $75 thousand in 2025.

At March 31, 2022, the Company was committed for approximately $2.3 million 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 September 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 March 31, 2022, 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