What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-10 compared with 2022-05-03 · 193 added, 98 removed, 198 unchanged (60% of the section changed)

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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 are a mission-driven organization focused on improving public safety encounters and outcomes.

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

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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.

In 2020 we added a new solution to our public safety technologies, which is our virtual reality training platform –

Wrap Reality.

Wrap Reality is now sold to law enforcement agencies for simulation training as well as corrections departments for the societal reentry scenarios.

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.

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We have distribution agreements with 49 international distributors covering 56 countries.

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

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

We focus significant resources on research and development innovations and continue to enhance our products and plan to introduce new products.

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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.

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 new leadership diversifying the Company’s suite of products, offerings and services.

The transition and corporate strategy included the resignation of our President, Chief Executive Officer and director Thomas P.

Smith and the announcement of the planned retirement of our Former Chief Financial Officer, Secretary and Treasurer James A.

Barnes, who retired in July 2022 upon the appointment of Chris DeAlmeida as our Chief Financial Officer.

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 appointed TJ Kennedy, a current director, as our Chief Executive Officer and Kevin Mullins as our President.

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

Mullins is leading go to market functions in the President role.

Business Outlook and Challenges

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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.

We believe that we have strong market opportunities for our remote restraint and VR solutions 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.

We continue to receive field reports of successful BolaWrap usage from law enforcement agencies.

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

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.

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, corrections, 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 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 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.

As of June 30, 2022, over 1,130 agencies have received BolaWrap training with over 3,660 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments.

This represents a 41% increase in agencies and a 31% increase in training officers compared to June 30, 2021.

Operating expenses in Q2 of 2022 reduced 39% from Q2 of 2021.

The focus on reducing operating expenses was an immediate focus on the new management team.

In the second quarter, our new management team focused on assessing all facets of the business and completed a strategic roadmap to drive long-term growth and produce lasting value for shareholders.

Our strategic roadmap is centered on sustainably growing sales through building repeatable domestic BolaWrap sales, ramping international sales on the new BolaWrap 150, and implementing a customer success function expanding existing agencies to full patrol-wide BolaWrap deployment.

We also have added a dedicated inside sales function to grow our velocity on new leads. 

We will be expanding our distributor and partner relationships, and leveraging product diversification and innovation to catalyze sales growth.

A key decision in the strategic roadmap was to improve our pricing on BolaWrap 150 devices and cassettes now that the product has proven itself to law enforcement as a significant upgrade.

We have also transitioned to charging for our respected training services.

We have implemented changes to how we sell Wrap Reality and have now solidified our go forward virtual reality model as a Software as a Service (SaaS) model.

These changes will have significant positive impact on our future success and growth.

We firmly believe that focusing on these strategic changes can drive significant sales growth and put us on a path to sustainable profitability.

Management intends to execute on its strategic roadmap immediately driving changes in Q3.

While geopolitical tensions and macroeconomic headwinds have impacted us in recent quarters, we remain uniquely positioned to deliver best-in-class technologies and data-driven services that can empower law enforcement officers across the globe to have safe, effective encounters with minimal use of force.

Wrap has a distinct value proposition in a growing addressable market.

Now with improved pricing, reduced operating expenses, and by growing future sales we expect to have reduced losses and improved cash flow.

We are recovering from supply chain impacts and a difficult transition from the BolaWrap 100 to the BolaWrap 150 .

We expect to make more product demonstrations and conduct more training sessions, especially in international markets, as pandemic-related restrictions continue to ease in 2022.

We also expect to see increased sales momentum in the back half of 2022 internationally as we raise awareness of all of the BolaWrap 150 enhancements and transition countries to the BolaWrap 150.

Lastly, we anticipate discount and promotional costs to decline after Q3 as we have phase out upgrade offers and prioritize growing brand awareness.

Looking beyond 2022, we expect to continue to see strong sales growth of the BolaWrap 150 and Wrap Reality. 

This coupled with continued cost savings and cost control, should lead to a continuing reduction of cash burn going forward. 

As a result, we anticipate moving to a cash flow break-even point by the end of 2023 and we anticipate strong sales could lead to profitability by the end of 2024.

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

The improved law enforcement simulator platform continues to be used by additional agencies.

In July 2022 we announced new wins with large correction agencies in Ohio and Pennsylvania that introduced our new scenarios focused on societal reentry and preventing recidivism.

We plan to increase marketing activities for our VR solution to both law enforcement and corrections.

On June 30, 2022, we had backlog of approximately $72 thousand expected to be delivered in the next twelve months.

Additionally, we had deferred revenue of $344 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.

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We believe that we have adequate financial resources to sustain our operations for the next year.

In the second quarter of fiscal 2022 we reduced our net loss by more than $3 million versus the comparable prior year quarter.

Net cash used in operations during the six months ended June 30, 2022 was $4 million less than cash used in operations during the first six months of the prior year.

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.

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.

In March 2020, the World Health Organization (" WHO ") classified the COVID-19 outbreak as a pandemic.

We believe our sales during the first six months of 2022 were negatively impacted by the transition to the BolaWrap 150 product and the stopping of our BolaWrap 100 production line and the effects of limited ability to demonstrate and train in 2021 due to the COVID-19 pandemic, especially internationally.

We continue to monitor developments and assess areas where there is potential for our business to be impacted by the pandemic.

Businesses and governments with which we engage may be operating under restrictions and experiencing disruptions, which may create obstacles in the coordination of business activities, including demonstrations, training and the negotiation and fulfillment of orders.

Disruptions in the supply chain have already impacted us and could negatively impact our ability to source materials or manufacture and distribute products.

We could experience a decrease in new orders from pandemic related events, which could negatively impact our revenues and reduce our liquidity and cash flows.

Growth in revenue could also be impeded by these factors.

The financial markets have been subject to significant volatility that could impact our ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing activities.

We have $28.5 million in cash and cash equivalents and short-term investments as of June 30, 2022, which we believe provides sufficient capital to fund our operations for at least the next twelve months and withstand the potential near-term consequences of the pandemic, although liquidity constraints and access to capital markets could adversely impact our liquidity and warrant changes to our investment strategy.

The full magnitude of the pandemic cannot be measured at this time, and therefore, any of the aforementioned circumstances, as well as other factors, may cause our results of operations to vary substantially from year to year and quarter to quarter.

Based on various standards published to date, we believe the work our employees and associates perform is critical and essential.

We are taking a variety of measures to promote the safety and security of our employees while ensuring the availability and functionality of our critical infrastructure.

We are following Center for Disease Control and local guidelines regarding COVID-19 safety in the workplace.

In addition, the following events related to the COVID-19 pandemic could result in lost or delayed revenue to the Company:

limitations on the ability of our suppliers to meet delivery requirements and commitments;

limitations on the ability of our employees to perform their work due to illness caused by the pandemic, or local, state or federal orders requiring employees to remain at home;

limitations on the ability of carriers to deliver our products to customers;

unforeseen deviations from customers or foreign governments restricting the ability to do business;

and, limitations on the ability of our customers to pay us on a timely basis, if at all.

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”

and such unrest may be exacerbated by inaccurate information or negative publicity regarding our solutions.

Although the negativity of some of these events has been reduced, some of these events may still 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, which may adversely affect us, our business and results of operations, including our revenues, earnings and cash flows from operations.

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

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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:

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;

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 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;

any closures of our facilities and the facilities of our customers and suppliers;

the degree to which our employees or those of our customers or suppliers become ill with COVID-19.

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

Improvements to operations, operating expenses and go to market approaches also have the opportunity to impact the success of the business going forward.

Critical Accounting Policies and Estimates

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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.

Our primary performance obligations are products/accessories and virtual reality software licensing or sale.

Our primary performance obligations are products/accessories and VR software licensing or sale.

Our customers do not have the right to return product unless the product is found to be defective.

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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, 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.

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.

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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 March 31, 2022.

Segment and Related Information

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The future level of selling, general and administrative expense will be dependent on staffing levels, elections regarding expenditures on sales, marketing and customer training, the use of outside resources, public company and regulatory expense, and other factors, some of which are outside of our control.

We do not expect any significant further material restructuring and other costs.

We expect our operating costs, excluding restructuring and other costs, will increase as we expand product distribution activities and expand our research and development, production, distribution, training, service and administrative functions in the near term.

We may also incur substantial non-cash share-based compensation costs depending on future option and restricted stock unit grants that are impacted by stock prices and other valuation factors.

We expect our operating costs will remain at comparable current levels in the near term.

We may also incur additional non-cash share-based compensation costs depending on future option and restricted stock unit grants that are impacted by stock prices and other valuation factors.

Historical expenditures are not indicative of future expenditures.

Results of Operations

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

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 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 March 31,

Three Months Ended June 30,

Product sales

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Cost of revenues:

Products and services

Restructuring inventory charge

Total cost of revenues

Gross profit (loss)

Operating expenses:

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Loss from operations

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.

We reported net revenue of $1.2 million for the three months ended June 30, 2022, as compared to $1.9 million for the prior year quarter.

While domestic revenues were constant at $1.1 million in each quarter, international revenues decreased from $0.8 million for the second quarter of 2021 to $75 thousand for the quarter ended June 30, 2022.

We incurred discounts of $161 thousand during the three months ended June 30, 2022, primarily as a result of promotional programs designed to encourage domestic customers to upgrade to the BolaWrap 150.

These discounts compares to business discounts of $77 thousand in the prior year quarter.

We expect selected discounts in the third quarter but thereafter a decline to minimal discounts as we have phased out our promotional upgrade offer.

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

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

International orders anticipated in the second quarter were delayed due to the change over from the BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future quarters.

We believe that revenue during the fiscal year 2022 will still be an increase compared to the revenue recorded during 2021 due to growth of domestic sales and anticipated international orders from a robust pipeline, although no assurances can be given.

We incurred product promotional costs of $265 thousand during the quarter ended June 30, 2022, related primarily to BolaWrap 150 demonstration products and the cost of training products and accessories delivered to law enforcement agencies that were expensed as marketing costs.

A total of $379 thousand of such product promotional costs were incurred during the prior year quarter.

We are responding to increased demand for training as a result of expanded product and brand awareness with more efficient training approaches.

With increased successful field use by agencies and greater brand awareness, as well as the transition to the BolaWrap 150, we expect reductions in product promotional costs to decline versus the prior year.

We had $344 thousand of deferred revenue at June 30, 2022, of which $221 thousand related to VR training and $123 thousand related to BolaWrap extended warranties and services.

As we potentially secure increased bookings for Wrap Reality, as well as BolaWrap extended warranties, we expect our deferred revenue to grow in future quarters.

At June 30, 2022, we had backlog of $72 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.

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.

The impact of the COVID-19 pandemic and geopolitical conflicts, including the recent war in Ukraine, has created much uncertainty in the global marketplace.

The COVID-19 pandemic has and may continue to restrict our ability to travel internationally.

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.

Our cost of revenue for the quarter was $708 thousand resulting in a gross margin of 39%.

The gross margin for the comparable prior quarter, was also 39% after excluding $747 thousand of restructuring charges related to the wind down of BolaWrap 100 production.

The most recent quarter period gross margin was impacted by the lower sales volume, warranty costs and promotional discounts.

We also were impacted by certain higher raw material prices in the second quarter to obtain certain parts.

Our margin is expected to improve in future quarters as these issues abate.

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.

The BolaWrap 150 has 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.

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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.

Our global supply chain has been subject to significant 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

Selling, general and administrative ( “

SG&A ”) expense for the quarter ended June 30, 2022 were $2.8 million less than the prior year comparable quarter due to cost containment efforts and due to certain one-time costs in the prior year quarter.

Share-based compensation costs allocated to SG&A decreased to $0.6 million compared to $2.0 million for the comparable prior quarter.

This $1.4 million decrease resulted primarily from a one-time $1.2 million cost in the prior year quarter for legacy and new directors appointed in April 2021.

Cash compensation costs of $1.5 million for the quarter ended June 30, 2022 were comparable to the prior year as staffing remained at similar levels.

During the quarter ended June 30, 2022, as compared to the prior year comparable quarter, we incurred reduced advertising and promotions costs (including product promotion costs) of $254 thousand, reduced professional fees of $116 thousand, reduced annual meeting costs of $234 thousand and reduced consulting and contract services fees of $643 thousand.

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

Research and Development Expense

Research and development expense increased by $314 thousand for the quarter ended June 30, 2022, compared to the comparable period in the prior year.

Non-cash share-based compensation expense allocated to research and development personnel was $136 thousand for the quarter ended June 30, 2022 comparable to the $121 thousand for the prior period.

Cash compensation costs for the quarter ended June 30, 2022 increased $102 thousand compared to the prior year resulting from an increase in headcount primarily associated with product development.

Prototype related costs for quarter ended June 30, 2022, increased $106 thousand related to BolaWrap 150 continued improvements.

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 June 30, 2022, of $4.8 million was a reduction of $3.0 million compared to that of the three months ended June 30, 2021 reflecting increased margin and the focus on reducing operating costs.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 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.

Six Months Ended June 30,

Product sales

Other revenue

Total revenues

Cost of revenues:

Products and services

Restructuring inventory charge

Total cost of revenues

Operating expenses:

Selling, general and administrative

Research and development

Total operating expenses

Loss from operations

We reported net revenue of $2.8 million for the six months ended June 30, 2022, as compared to $3.5 million for the quarter ended June 30, 2021.

Domestic revenues of $2.3 million for the six months reflected growth of 30% over the prior comparable quarter of $1.8 million.

International revenues decreased from $1.7 million for the six months ended June 30, 2021 to $0.5 million for the six months ended June 30, 2022.

We incurred discounts of $549 thousand during the six months ended June 30, 2022, primarily as a result of promotional programs designed to encourage domestic customers to upgrade to the BolaWrap 150.

The discounts compare to business discounts of $81 thousand in the comparable six-month period of the prior year.

We expect selected discounts in the third quarter but thereafter a decline to minimal discounts as we have phased out our promotional upgrade offer.

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

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

International orders anticipated in the second quarter were delayed due to the change over from the BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future quarters.

We incurred product promotional costs of $479 thousand during the six months ended June 30, 2022, related primarily to BolaWrap 150 demonstration products and the cost of training products and accessories delivered to law enforcement agencies that were expensed as marketing costs.

A total of $678 thousand of such product promotional costs were incurred during the six months ended June 30, 2021.

We are responding to increased demand for training as a result of expanded product and brand awareness with more efficient training approaches.

With increased successful field use by agencies and greater brand awareness we expect reductions in product promotional costs to decline versus the prior year.

We had $344 thousand of deferred revenue at June 30, 2022, of which $221 thousand related to VR training and $123 thousand related to BolaWrap extended warranties and services.

At June 30, 2022, we had backlog of $72 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.

Our cost of revenue for the six months ended June 30, 2022, was $1.6 million resulting in a gross margin of 41%.

The gross margin for the six months ended June 30, 2021, was 37% after adjusting excluding $747 thousand of restructuring charges related to the wind down of BolaWrap 100 production.

The most recent period gross margin was impacted by the lower sales volume and promotional discounts.

We also were impacted by certain higher raw material prices in 2022 to obtain certain parts.

Our margin is expected to improve in future quarters as these issues abate.

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

The BolaWrap 150 has 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.

With such product updates and revisions, 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.

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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.

SG&A ”) expense for the six months ended June 30, 2022 were $8.4 million reflecting a, decrease of $3.2 million when compared to $11.6 million for the six months ended June 30, 2021. The reduction in SG&A costs reflected active cost containment efforts and nonrecurrence of certain one-time costs in the prior year quarter.

Share-based compensation costs allocated to SG&A was $1.5 million for the six months ended June 30, 2022 compared to $2.6 million for the comparable prior period.

This $1.4 million decrease included the effect of a one-time $1.2 million cost in the prior period for legacy and new directors appointed in April 2021.

Cash compensation costs of $3.1 million for the six months ended June 30, 2022 was a $179 thousand increase from the prior year six months but included a $300 thousand severance expense offset by cost containment efforts.

During the six months ended June 30, 2002, as compared to the prior year comparable six months, we incurred reduced advertising and promotions costs (including product promotion costs) of $341 thousand, reduced professional fees of $842 thousand, reduced annual meeting costs of $234 thousand and reduced consulting and contract services fees of $748 thousand.

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 $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.

Research and development expense increased by $744 thousand for the six months ended June 30, 2022, compared to the comparable six-month period in fiscal 2021.

Non-cash share-based compensation expense allocated to research and development personnel was $271 thousand for the six months ended June 30, 2022 compared to the $378 thousand for the prior period which included effects of new hires.

Cash compensation costs for the six months ended June 30, 2022 increased $269 thousand compared to the prior year resulting from an increase in headcount primarily associated with product development.

Prototype related costs for the six months ended June 30, 2022, increased $305 thousand related to BolaWrap 150 startup costs and continued improvements.

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.

Loss from operations during the six months ended June 30, 2022, of $10.2 million was a reduction of $3.0 million compared to that of the six months ended June 30, 2021 reflecting second quarter reduced costs from the prior year.

Liquidity and Capital Resources

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

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.

As of June 30, 2022, we had cash and cash equivalents of $3.6 million, short-term investments of $24.9 million, positive working capital of $30 million and had sustained cumulative losses attributable to stockholders of $60 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.

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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.

During the six months ended June 30, 2022, net cash used in operating activities was $6.2 million. The net loss of $10.2 million was decreased by non-cash expense of $2.2 million consisting primarily of share-based compensation expense of $1.76 million.

Other major component changes using operating cash included an increase of $467 thousand in inventories and a net reduction in accounts payable and accrued liabilities of $311 thousand.

A decrease in accounts receivable of $2.4 million reduced the cash used in operating activities.

During the six months ended June 30, 2021, net cash used in operating activities was $10.25 milllion. The net loss of $13.2 million was decreased by non-cash expense of $4.3 million consisting primarily of share-based compensation expense of $3 million, restructuring inventory charges of $747 thousand and shares issued for services of $239 thousand.

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

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

Investing Activities

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.

During the six months ended June 30, 2022, we used $14.9 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $20 million.

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

We used $168 thousand and $367 thousand of cash for the purchase of property and equipment during the six months ended June 30, 2022, and 2021, respectively.

We invested $102 thousand and $96 thousand in patents during the six months ended June 30, 2022, and 2021, respectively.

Financing Activities

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.

During the six months ended June 30, 2022, we received $75 thousand in proceeds from the exercise of previously issued stock options.

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

Contractual Obligations and Commitments

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We are committed to aggregate lease payments on our facility lease of $58 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.

At June 30, 2022, we were committed for approximately $3.2 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 March 31, 2022, 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 June 30, 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