See accompanying notes to unaudited condensed consolidated interim financial statements.
See accompanying notes to unaudited condensed consolidated interim financial statements.
The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q10-Q and Article 8 of Regulation S-XS-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“(“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying financial statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2021, 2022, included in the Company’s Annual Report on Form 10-K,10-K for the year ended December 31, 2022 (the “Annual Report”), as filed with the SEC on March 10, 2022. 2, 2023. The accompanying condensed consolidated balance sheet at December 31, 2021, 2022, has been derived from the audited consolidated balance sheet at December 31, 2021, 2022, contained in the above referenced Form 10-K.Annual Report. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.
Where necessary, the prior year’s information has been reclassified to conform to the current year presentation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions (e.g., stock-based compensation valuation, allowance for doubtful accounts, valuation of inventory and intangible assets, warranty reserve, accrued expense and recognition and measurement of contingencies) that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of revenue and expense during the reporting period. Actual results could materially differ from those estimates.
Basic loss per common share is computed by dividing net loss for the period by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss per Common Share reflects the potential dilution of securities that could share in the earnings of an entity. The Company’s losses for the periods presented cause the inclusion of potential Common Stock instruments outstanding to be antidilutive. Stock options and restricted stock units exercisable or issuable for a total of 4,117,586 and 6,458,823 shares of Common Stock were outstanding at June 30, 2022. 2023, and 2022, respectively. These securities are not included in the computation of diluted net loss per common share for the periods presented as their inclusion would be antidilutive due to losses incurred by the Company.
Assets and liabilities recorded at fair value on a recurring basis in the Condensed Consolidated Balance Sheets and assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance also establishes a three-levelthree-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-levelthree-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:
The Company’s cash equivalent Money Market Funds and short-term investments consisting of U.S. Treasury bill securities and Certificate of Deposits are classified as Level I1 because they are valued using quoted market prices.
The following table shows the Company’s cash and cash equivalents, Money Market Funds and short-term investments by significant investment category as of June 30, 2022, 2023, and December 31, 2021.2022.
Unrealized gains or losses resulting from our short-term investments are recorded in accumulated other comprehensive gain or loss.loss as they are classified as available for sale. During the three and six months ended June 30, 2023, a $0 gain and $0 loss was recorded to accumulated other comprehensive gain (loss), respectively. During the three and six months ended June 30, 2022, a $12 gain and $11 loss was recorded to accumulated other comprehensive gain (loss), respectively. During the three and six months ended June 30, 2021, $4 and $2 was recorded to accumulated other comprehensive loss, respectively.
Our financial instruments also include accounts receivable, accounts payable, accrued liabilities and business acquisition liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.
Inventory is recorded at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the FIFO cost method. Inventories consisted of the following:
- 9-
Wrap Technologies, Inc.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands, except per share and share amounts)
5. PROPERTY AND EQUIPMENT, NET | PROPERTY AND EQUIPMENT, NET
|
Property and equipment consisted of the following:
| | | June 30, | | | December 31, | |
| | | 2022 | | | 2021 | |
Production and lab equipment | | $ | 500 | | | $ | 500 | |
Tooling | | | 403 | | | | 273 | |
Computer equipment | | | 503 | | | | 467 | |
Furniture, fixtures and improvements | | | 178 | | | | 176 | |
| | | | 1,584 | | | | 1,416 | |
Accumulated depreciation | | | (677 | ) | | | (440 | ) |
Property and equipment, net | | $ | 907 | | | $ | 976 | |
| | | June 30, 2023 | | | December 31, 2022 | |
Production and lab equipment | | $ | 506 | | | $ | 513 | |
Tooling | | | 490 | | | | 448 | |
Computer equipment | | | 561 | | | | 531 | |
Furniture, fixtures and improvements | | | 181 | | | | 181 | |
| | | | 1,738 | | | | 1,673 | |
Accumulated depreciation | | | (1,150 | ) | | | (915 | ) |
Property and equipment, net | | $ | 588 | | | $ | 758 | |
Depreciation expense was $118 and $236 for the three and six months ended June 30, 2023, respectively, and $124 and $237 for the three and six months ended June 30, 2022, and was $66 and $122 for the three and six months ended June 30, 2021, respectively.
6. INTANGIBLE ASSETS, NET | INTANGIBLE ASSETS, NET
|
Intangible assets consisted of the following:
| | | June 30, | | December 31, | | |
| | | 2022 | | | 2021 | | | June 30, 2023 | | | December 31, 2022 | |
Amortizable intangible assets: | | |
Patents | | $ | 509 | | | $ | 416 | | | $ | 744 | | | $ | 575 | |
Trademarks | | 143 | | | 134 | | | 157 | | | 150 | |
Purchased software | | 1,212 | | | 1,212 | | | | 1,962 | | | | 1,962 | |
Other | | | 50 | | | | 50 | | |
| | | 1,914 | | | 1,812 | | | 2,863 | | | 2,687 | |
Accumulated amortization | | | (317 | ) | | | (174 | ) | | | (629 | ) | | | (462 | ) |
Total amortizable | | 1,597 | | | 1,638 | | | 2,234 | | | 2,225 | |
Indefinite life assets (non-amortizable) | | | 344 | | | | 344 | | | | 354 | | | | 344 | |
Total intangible assets, net | | $ | 1,941 | | | $ | 1,982 | | | $ | 2,588 | | | $ | 2,569 | |
Amortization expense was $85 and $167 for the three and six months ended June 30, 2023, respectively, and $73 and $143 for the three and six months ended June 30, 2022, and was $49 and $97 for the three and six months ended June 30, 2021, respectively.
At June 30, 2022, 2023, future amortization expense is as follows:
2022 (6 months) | | $ | 141 | |
2023 | | | 278 | |
2024 | | | 279 | |
2025 | | | 274 | |
2026 | | | 186 | |
Thereafter | | | 439 | |
Total estimated amortization expense | | $ | 1,597 | |
- 10-
Wrap Technologies, Inc.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands, except per share and share amounts)
2023 (9 months) | | $ | 259 | |
2024 | | | 518 | |
2025 | | | 513 | |
2026 | | | 290 | |
2027 | | | 42 | |
Thereafter | | | 612 | |
Total estimated amortization expense | | $ | 2,234 | |
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable includes $86$40 and $228$127 due to related party Syzygy Licensing, LLC (“Syzygy”) as of June 30, 2022, 2023 and December 31, 2021, 2022, respectively. See Notes 10,1112 and 14 for additional information on this related party information.party.
The Company consummated an offering of Series A Convertible Preferred Stock and Warrants (“Offering”), which Offering closed on July 5, 2023, resulting in gross proceeds to the Company of approximately $10 million of which $7.4 million was received on June 29, 2023. The $7.4 million received was recorded to cash with an offset to accrued expense.
Accrued liabilities consist of the following:
| | | June 30, | | December 31, | | |
| | | 2022 | | | 2021 | | | June 30, 2023 | | | December 31, 2022 | |
Patent and legal costs | | $ | 68 | | | $ | 28 | | | $ | 103 | | | $ | 135 | |
Accrued compensation | | 710 | | | 628 | | | 777 | | | 1,100 | |
Warranty costs | | 78 | | | 96 | | | 75 | | | 125 | |
| Pre-funding of the sale of shares, preferred stock and warrants | | | 7,350 | | | - | |
Taxes and other | | | 56 | | | | 72 | | | | 257 | | | | 103 | |
| | | $ | 912 | | | $ | 824 | | |
| Total | | | $ | 8,562 | | | $ | 1,463 | |
Accrued compensation includes $164 of future severance payments for the Company’s former Chief Executive Officer$80 and $1,022 in employee bonuses and commissions payable through October 2022.at June 30, 2023 and December 31, 2022, respectively.
Changes in our estimated product warranty costs were as follows:
| | | Six Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2022 | | | 2021 | | | 2023 | | | 2022 | |
Balance, beginning of period | | $ | 96 | | | $ | 48 | | | $ | 125 | | | $ | 96 | |
Warranty settlements | | (63 | ) | | (16 | ) | | (6 | ) | | (63 | ) |
Warranty provision | | | 45 | | | | 42 | | | | (44 | ) | | | 45 | |
Balance, end of period | | $ | 78 | | | $ | 74 | | | $ | 75 | | | $ | 78 | |
The Company determines if an arrangement is a lease at inception. The guidance in Topic 842 defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Operating lease right of use (“ROU”) assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. The Company’s leases do not provide an implicit rate. Due to a lack of financing history or ability, the Company uses an estimate of low-grade debt rate published by the Federal Reserve Bank as its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The ROU asset includes any lease payments made and excludes lease incentives and initial direct costs incurred.
For leases beginning on or after January 1, 2019, lease components are accounted for separately from non-lease components for all asset classes. On January 21, 2022, the Company’s lease was amended to extend the expiration date to July 31, 2025. Upon execution of the amendment, which was deemed a lease modification, the Company reassessed the lease liability using the discount rate determined at the modification date and recorded an additional ROU asset for the same amount. The Company’s lease contains renewal provisions and escalating rental clauses and generally require the Company to pay utilities, insurance, taxes and other operating expenses. The renewal provisions of the existing lease agreement was not included in the determination of the operating lease liabilities and the ROU assets. The Company also reassessed the lease classification and concluded that the lease continues to be an operating lease.
Amortization of ROU operating lease assets was $25 and $49 for the three and six months ended June 30, 2022 and was $20 and $46 for the three and six months ended June 30, 2021, respectively.
Operating lease expense for capitalized operating leases included in operating activities was $30 and $58 for the three and six months ended June 30, 2022 and was $23 and $50 for the three and six months ended June 30, 2021, respectively.
- 11-
Wrap Technologies, Inc.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands, except per share and share amounts)
Operating lease obligations recorded on the balance sheet at June 30, 2022, are:
Operating lease liability- short term | | $ | 102 | |
Operating lease liability - long term | | | 248 | |
Total Operating Lease Liability | | $ | 350 | |
Future lease payments included in the measurement of lease liabilities on the balance sheet at June 30, 2022, for future periods are as follows:
2022 (6 months) | | $ | 58 | |
2023 | | | 121 | |
2024 | | | 125 | |
2025 | | | 75 | |
Total future minimum lease payments | | | 379 | |
Less imputed interest | | | (29 | ) |
Total | | $ | 350 | |
The weighted average remaining lease term is 3.1 years, and the weighted average discount rate is 5.0%.
The Company did not have any short-term lease expense during the six months ended June 30, 2022, or 2021. The Company does not have any finance leases.
9.
| STOCKHOLDERS’ 8.STOCKHOLDERS' EQUITY
|
The Company’s authorized capital consists of 150,000,000 shares of Common Stock par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share (“Preferred Stock”).
At December 31, 2021 the Company had outstanding Common Stock purchase warrants exercisable for 1,391,667 shares that expired on June 1, 2022 and accordingly had 0 purchase warrants outstanding at June 30, 2022.
10.
9. SHARE-BASED COMPENSATION | SHARE-BASED COMPENSATION
|
On March 31, 2017, the Company adopted, and the stockholders approved, the 2017 Stock Incentive Plan (the “Plan”) authorizing 2,000,000 shares of Company Common Stock for issuance as stock options and restricted stock unitsawards to employees, directors or consultants. In May 2019, the stockholders ratified an increase in the Plan authorizing an additional 2,100,000 shares of Common Stock,Stock; in June 2020 ratified an additional 1,900,000 shares of Common Stock,Stock; in June 2021 ratified an additional 1,500,000 shares of Common StockStock; and in June 2022 ratified an additional 1,500,000 shares of Common StockStock; for a total of 9,000,000 shares subject to the Plan. At June 30, 2022, 2023, there were 1,711,2812,848,936 shares of Common Stock remaining available for grant under the Plan.
The Company generally recognizes share-based compensation expense on the grant date and over the period of vesting or period that services will be provided. In April 2023 the Company recognized severance acceleration of $178 of share-based compensation expense resulting from the resignation of the Company’s Chief Executive Officer and Chief Operating Officer due to a reduction in force that resulted in changes in the composition of the executives of the Company. In January 2022 the Company recognized severance acceleration of $242 of share-based compensation expense resulting from the resignation of the Company’s Chief Executive Officer as part of a management transition plan.
- 12-
Wrap Technologies, Inc.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands, except per share and share amounts)
Stock Options
The following table summarizes stock option activity for the six months ended June 30, 2022:2023:
| | | | | | | Weighted Average | | | | | | | | | | | Weighted Average | | | | |
| | | Options on | | | | | | Remaining | | Aggregate | | | Options on Common Shares | | | Exercise Price | | | Remaining Contractual Term | | | Aggregate Intrinsic Value | |
| | | Common | | Exercise | | Contractual | | Intrinsic | | |
| | | Shares | | | Price | | | Term | | | Value | | |
Outstanding January 1, 2022 | | 3,935,883 | | | $ | 5.24 | | | 4.79 | | | | | |
Outstanding January 1, 2023 | | | 5,491,399 | | | $ | 3.72 | | | 5.96 | | | $ | 92 | |
Granted | | 2,559,639 | | | $ | 2.92 | | | | | | | | 60,000 | | | $ | 1.34 | | | | | | |
Exercised | | (50,000 | ) | | $ | 1.50 | | | | | | | | (250 | ) | | $ | 1.5 | | | | | | |
Forfeited, cancelled, expired | | | (757,246 | ) | | $ | 7.87 | | | | | | | | | (1,982,900 | ) | | $ | 4.14 | | | | | | | |
Outstanding June 30, 2022 | | | 5,688,276 | | | $ | 3.88 | | | 6.32 | | | $ | 232,778 | | |
Exercisable June 30, 2022 | | | 2,351,826 | | | $ | 4.38 | | | 2.32 | | | $ | 232,778 | | |
Outstanding June 30, 2023 | | | | 3,568,249 | | | $ | 3.37 | | | | 8.08 | | | $ | 7 | |
Exercisable June 30, 2023 | | | | 1,052,714 | | | $ | 4.56 | | | | 6.79 | | | $ | 0 | |
At June 30, 2022 outstanding2023, there were 1,954,019 service-based stock options on 4,074,046 shares of Common Stock were service-based optionsoutstanding, and 1,614,230 performance-based stock options outstanding, which performance-based stock options were granted in April 2022 to the Company’s former Chief Executive Officer and President, were performance based subject to future market capitalization targets. A total1,049,145 of 1,049,145the 3,568,249 stock options granted included in the table above were granted in April 2022 outside the Plan as an employment inducement grant, but are subject to the terms and conditions of the Plan.
The Company uses the Black-Scholes option pricing model to determine the fair value of service-based options granted. The following table summarizes the assumptions used to compute the fair value of options granted to employees and non-employees:
| | | For the Six Months | | | For the Six Months | |
| | | Ended June 30, | | | Ended June 30, | |
| | | 2022 | | | 2021 | | | 2023 | | 2022 | |
Expected stock price volatility | | 49 | % | | 50 | % | | 49 | % | | 49 | % |
Risk-free interest rate | | 1.09 | % | | 0.92 | % | | 3.64 | % | | 1.09 | % |
Forfeiture rate | | 0 | % | | 0 | % | |
Expected dividend yield | | 0 | % | | 0 | % | |
Expected life of options - years | | 1.82 | | | 5.70 | | |
Expected life of options | | | | 6.66 | | | | 1.82 | |
Weighted-average fair value of options granted | | $ | 1.32 | | | $ | 2.46 | | | $ | 0.55 | | | $ | 1.32 | |
Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of awards. The Company’s estimated volatility was based on an average of the historical volatility of peer entities whose stock prices were publicly available. The Company’s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price. The Company records forfeitures as they are incurred.
The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options. The dividend yield of 0zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. The Company calculates the expected life of the options using the Simplified Method for the employee stock options as the Company does not have sufficient historical exercise data.
The Company used the Monte Carlo Simulation Model to value at the grant date the aggregate of 1,614,230 market condition performance options granted in April 2022 to the Company’s newly appointedformer Chief Executive Officer and a newly appointed President. The assumptions used in the Monte Carlo Simulation were stock price on date of grant of $2.89, contract term of 10 years, expected volatility of 49% and risk-free interest rate of 2.9%. Vesting is based on sustained market capitalization of $250 million, $500 million and $1 billion and resulted in implied service periods ranging from approximately 4 to 7 years.
Stock option expense was $255 and $567 for the three and six months ended June 30, 2023, respectively, and $408 and $1,145 for the three and six months ended June 30, 2022, and was $689 and $1,228 for the three and six months ended June 30, 2021, respectively.
- 13-
Wrap Technologies, Inc.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands, except per share and share amounts)
Restricted Stock Units
The Plan provides for the grant of restricted stock units (“RSUs”). RSUs are settled in shares of the Company’s Common Stock as the RSUs become vested. The following table summarizes RSU activity for the six months ended June 30, 2022:2023:
| | | | | | | Weighted Average | | Weighted Average | | Service-Based RSU's | | | Weighted Average Grant Date Fair Value | | | Weighted Average Vesting Period (Years) | |
| | | Service-Based | | Grant Date | | Vesting | |
| | | RSU's | | | Fair Value | | Period (Years) | |
Unvested at January 1, 2022 | | 269,303 | | | $ | 6.47 | | | |
Unvested at January 1, 2023 | | | 922,057 | | | $ | 2.88 | | | 2.11 | |
Granted - service based | | 619,817 | | | $ | 2.73 | | | | 625,896 | | | $ | 1.31 | | | | |
Vested | | (90,216 | ) | | $ | 5.03 | | | | (734,444 | ) | | $ | 2.87 | | | | |
Forfeited and cancelled | | | (28,357 | ) | | $ | 5.00 | | | | | (264,172 | ) | | $ | 2.49 | | | | | |
Unvested at June 30, 2022 | | | 770,547 | | | $ | 3.69 | | 2.35 | |
Unvested at June 30, 2023 | | | | 549,337 | | | $ | 2.03 | | | | 1.88 | |
A total
RSU expense was $966 and $1,282 for the three and six months ended June 30, 2023, respectively, and $319 and $611 for the three and six months ended June 30, 2022, and was $1,459 and $1,779 for the three and six months ended June 30, 2021, respectively.
Share-Based Compensation Expense
The Company recorded share-based compensation for options and RSUs in its statements of operations for the relevant periods as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Selling, general and administrative | | $ | 591 | | | $ | 2,027 | | | $ | 1,485 | | | $ | 2,629 | | | $ | 990 | | | $ | 591 | | | $ | 1,552 | | | $ | 1,485 | |
Research and development | | | 136 | | | | 121 | | | | 271 | | | | 378 | | | | 231 | | | | 136 | | | | 297 | | | | 271 | |
Total share-based expense | | $ | 727 | | | $ | 2,148 | | | $ | 1,756 | | | $ | 3,007 | | | $ | 1,221 | | | $ | 727 | | | $ | 1,849 | | | $ | 1,756 | |
As of June 30, 2022, 2023, total estimated compensation expensecost of stock options granted and outstanding but not yet vested was $4,590$2,609 which is expected to be recognized over the weighted average period of 3.53.12 years.
As of June 30, 2022, 2023, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $2,366$1,115 which is expected to be recognized over the weighted average period of 2.41.82 years.
11.
10.DEFINED CONTRIBUTION PLAN | COMMITMENTS AND CONTINGENCIES
|
Facility Lease
See Note 8.
The Company has a defined contribution savings plan for all eligible U.S. employees established under the provisions of Section 401(k) of the Internal Revenue Code. This plan was formed on January 1, 2022. Eligible employees may contribute a percentage of their salary subject to certain limitations. The Company’s contributions for each of the three and six months ended June 30, 2023 and year ended December 31, 2022 was $0.
11.COMMITMENTS AND CONTINGENCIES
Related Party Technology License Agreement
The Company is obligated to pay royalties and development and patent costs pursuant to an exclusive Amended and Restated Intellectual Property License Agreement dated as of September 30, 2016, with Syzygy, a company owned and controlled by stockholder/consultant Mr. Elwood Norris and stockholder/officerconsultant Mr. James Barnes. The agreement provides for royalty payments of 4% of revenue from products employing the licensed ensnarement device technology up to an aggregate of $1,000 in royalties or until September 30, 2026, whichever occurs earlier. The Company recorded $40 and $64 for royalties during the three and six months ended June 30, 2023, respectively, and $34 and $83 for royalties during the three and six months ended June 30, 2022, and $68 and $119 incurred for the three and six months ended respectively. The maximum payout still available under this arrangement is $217 as of June 30, 2021, respectively.2023.
Service Provider Agreement
Pursuant to the Professional Services and Technology Acquisition Agreement (the “Agreement”) entered into with Lumeto, Inc. and Spatial Industries Group, Inc. (collectively, “Service Provider”) on November 22, 2022, as amended on April 2, 2023, the Service Provider is to provide to the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform (the “Technology, Services, and License”) in consideration for a cash payment of $700 to the Service Provider.
Purchase Commitments
At June 30, 2022, 2023, the Company was committed for approximately $3.2 million$3,878 for future component deliveries that are generally subject to modification or rescheduling in the normal course of business.
Wrap Technologies, Inc.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands, except per share and share amounts)
Indemnifications and Guarantees
Our officers and directors are indemnified as to personal liability as provided by the Delaware law and the Company’s articles and bylaws. The Company may also undertake indemnification obligations in the ordinary course of business related to its operations. The Company is unable to estimate with any reasonable accuracy the liability that may be incurred pursuant to any such indemnification obligations now or in the future. Because of the uncertainty surrounding these circumstances, the Company’s current or future indemnification obligations could range from immaterial to having a material adverse impact on its financial position and its ability to continue in the ordinary course of business. The Company has no liabilities recorded for such indemnities.
Regulatory Agencies
The Company is subject to oversight from regulatory agencies regarding firearms that arises in the ordinary course of its business.
Litigation
Shareholder Derivative Litigation
On November 13, 2020, Naresh Rammohan filed a shareholder derivative action in the US District Court for the Central District of California against current and former Company officers as well as current and former Company directors alleging unjust enrichment, breach of fiduciary duty, waste of corporate assets, and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:20-cv-10444-DMG-PVCx. The derivative action was dismissed with prejudice by stipulation of the parties on May 3, 2022.
12. RELATED PARTY TRANSACTIONS | RELATED PARTY TRANSACTIONS
|
Commencing in October 2017 the Company began reimbursing Mr. Elwood Norris, a former officer, and current 10% stockholder and consultant of the Company, $1.5 per month on a month-to-month basis for laboratory facility expense, for an aggregate of $4.5 and $9 during the three and six months ended June 30, 2023, and 2022, respectively. Mr. Norris retired as the Company’s Chief Technology Officer effective June 30, 2021, and commencing July 1, 2021, respectively. was engaged as a month-to-month consultant. Mr. Norris was paid a monthly fee of $7.5 per month for aggregate consulting payments of $22.5 and $45 during each of the three and six months ended June 30, 2023 and 2022.
See Notes 7,10 11 and 1114 for additional information on related party transactions and obligations.
13. MAJOR CUSTOMERS AND RELATED INFORMATION | MAJOR CUSTOMERS AND RELATED INFORMATION
|
For the three months ended June 30, 2023, revenue from two distributors accounted for approximately 21% and 21% of revenue with no other single customer accounting for more than 10% of total revenue. For the three months ended June 30, 2022, revenuesrevenue from three distributors and one agency accounted for approximately 24%, 18%, 12% and 11% of revenuesrevenue with no other single customer accounting for more than 10% of total revenues. revenue.
For the threesix months ended June 30, 2021, revenues2023, revenue from twothree distributors accounted for approximately 37%15%, 14% and 22%13% of revenuesrevenue with no other single customer accounting for more than 10% of total revenues.
revenue. For the six months ended June 30, 2022, revenuesrevenue from one distributor accounted for approximately 25% of revenuesrevenue with no other single customer accounting for more than 10% of total revenues. For the six months ended revenue.
At June 30, 2021, revenues2023, accounts receivable from fourthree distributors accounted for approximately 20%, 17%22%, 13% and 12%13% of revenuesnet accounts receivable, with no other single customer accounting for more than 10% of total revenues.
At June 30, 2021, accounts receivable from two distributors accounted for 18% and 11% of accounts receivable with no other single customer accounting for more than 10% of the accounts receivable balance. At December 31, 2022, accounts receivable from Threeone distributorsdistributor accounted for 48%, 16% and 15%70% of net accounts receivable at December 31, 2021 with no other single customer accounting for more than 10% of the accounts receivable balance.receivable.
The following table summarizes revenuesrevenue by geographic region. Revenues areRevenue is attributed to countries based on customer’s delivery location:
| | | For the Three Months | | | For the Six Months | |
| | | Ended June 30, | | | Ended June 30, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Americas | | $ | 1,090 | | | $ | 1,123 | | | $ | 2,285 | | | $ | 1,750 | |
Europe, Middle East and Africa | | | 73 | | | | 803 | | | | 247 | | | | 1,679 | |
Asia Pacific | | | 2 | | | | 8 | | | | 232 | | | | 47 | |
| | | $ | 1,165 | | | $ | 1,934 | | | $ | 2,764 | | | $ | 3,476 | |
The Company evaluated subsequent events for their potential impact on the financial statements and disclosures through the date the financial statements were available to be issued, and determined that, except as disclosed herein, no subsequent events occurred that were reasonably expected to impact the financial statements presented herein.
| | | For the Three Months | | | For the Six Months | |
| | | Ended June 30, | | | Ended June 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Americas | | $ | 1,168 | | | $ | 1,090 | | | $ | 1,878 | | | $ | 2,285 | |
Europe, Middle East and Africa | | | 35 | | | | 73 | | | | 36 | | | | 247 | |
Asia Pacific | | | (1 | ) | | | 2 | | | | (1 | ) | | | 232 | |
| Total | | $ | 1,202 | | | $ | 1,165 | | | $ | 1,913 | | | $ | 2,764 | |
14.SUBSEQUENT EVENTS
Registered Direct Offering
On June 29, 2023, the Company entered into a Securities Purchase Agreement with a founder and director of the Company and certain accredited and institutional investors (collectively, the “Investors”), pursuant to which it agreed to sell to the Investors in a registered direct offering (the “Offering”) (i) an aggregate of 10,000 shares of the Company’s newly-designated Series A Convertible Preferred Stock, with a par value $0.0001 per share, and a stated value of $1,000 per share (“Series A Preferred”), initially convertible into up to 6,896,553 shares of the Company’s Common Stock, at a conversion price of $1.45 per share, and (ii) warrants to acquire up to an aggregate of 6,896,553 shares of Common Stock (“Warrants”). The Series A Preferred provide for the payment to holders thereof of cumulative dividends of 8% per annum, payable quarterly in arrears. The Warrants are exercisable six months after issuance at an exercise price of $1.45 per share, subject to adjustment, and expire five years from the date of issuance. The $1.45 per share conversion price of the Series A Preferred and exercise price of the Warrant represent the closing share price of the Company’s Common Stock on June 29, 2023. The Offering closed on July 5, 2023 (the “Closing”), resulting in aggregate gross proceeds from the Offering of approximately $10 million.
Although the Closing occurred subsequent to June 30, 2023, the Company received approximately $7.35 million in gross proceeds from the Offering on June 30, 2023 following the execution of the Securities Purchase Agreement and prior to the Closing, which amount is reflected in cash and cash equivalents, with an offset to accrued expense, each as reflected in the Company’s Condensed Consolidated Balance Sheet at June 30, 2023. At the Closing, the Company received additional gross proceeds from the Offering of approximately $2.65 million. After payment of placement agent fees and costs of the Offering, the net proceeds from the Offering were approximately $9 million. The Company intends to allocate the proceeds from the Offering to scale the Company’s sales team, support marketing efforts, and fuel the evolution and diversification of the Company’s product offerings.
The Company has evaluated other events subsequent to June 30, 2023 through the date the accompanying financial statements were filed with the Securities and Exchange Commission and noted that, other than as set forth above, there have been no other events or transactions which would affect the Company’s financial statements for the quarter ended June 30, 2023.
Acquisition of Intrensic, LLC
On August 9, 2023, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Intrensic, LLC, a Delaware limited liability company (“Intrensic”), and certain members of Intrensic, including Kevin Mullins, the Company’s Chief Executive Officer (collectively, “Sellers”). Under the terms of the Purchase Agreement, the Company agreed to purchase, and Sellers agreed to sell, 100% of the membership interests (the “Membership Interests”) of Intrensic for the following consideration upon the consummation of the sale of the Membership Interests (the “Intrensic Closing”): (i) $553,588 in cash, subject to adjustment based upon the outstanding indebtedness of Intrensic and Intrensic’s working capital as of the Intrensic Closing; and (ii) 1,250,000 shares of Common Stock of the Company (collectively, the “Purchase Price”) (the “Intrensic Acquisition”).
The Purchase Agreement contains representations, warranties and covenants of the Company and Sellers that are customary for a transaction of this nature, a customary indemnification provisions whereby Sellers will indemnify the Company for certain losses arising out of inaccuracies in, or breaches of, the representations, warranties and covenants of Sellers regarding Intrensic, ownership of the Membership Interest, and certain other matters, subject to certain caps and thresholds.
The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by the full text of the Purchase Agreement, a copy of which is filed as an exhibit to this Quarterly Report and is incorporated by reference in this description of the Purchase Agreement.
Kevin Mullins, a director of the Company and the Company’s Chief Executive Officer, owns approximately 9.53% of the Membership Interests, and as such, has a financial interest in the Intrensic Acquisition.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and with our audited financial statements and other information presented in our Annual Report on Form 10-K for the year ended December 31, 2021.2022 (the “Annual Report”). The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “continue,” “may,” “will,” “could,” “would,” or the negative or plural of such words and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the only means of identifying forward-looking statements. 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 filings with the Securities and Exchange Commission (“SEC”), including particularly matters set forth under Part I, Item 1A (Risk Factors) of ourthe Annual Report on Form 10-K.Report. 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. For purposes of Management's Discussion and Analysis within this Report, all monetary amounts are stated in thousands except for par values and per share amounts, unless otherwise stated.
Overview
We are a global public safety technology and services company organized in March 2016 delivering modernthat delivers safe and effective policing solutions to law enforcement and security personnel.personnel worldwide. We are a mission-driven organization focused on improving public safety encountersleading the movement for safer outcomes by equipping law enforcement with safe, non-pain compliance tools and outcomes.immersive training for the modern world. We began sales of our first public safety product, the BolaWrap 100 remote restraint device, in late 2018. In October 2021late 2020 we releasedadded a new solution to our public safety technologies, which is our virtual reality (“VR”) 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. In Q1 2022 we delivered 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 beinghas been 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 domesticOur target market for our solutions consists ofincludes approximately 900,000 full-time sworn law enforcement officers atin over 15,30018,000 federal, state, and local law enforcement agencies in the U.S. and over 12 million police officers in overmore than 100 countries. WeAdditionally, we are also exploring opportunities in other domestic markets, includingsuch as military and private security. Our international focus is on countries with the largest police forces. The 100 largest international police agencies are estimated to have over 12.1 million law enforcement personnel. According to 360iResearch, a market research consulting firm, we participate in a segment of theour non-lethal products are part of a global market segment 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 stylea seven and half-foot 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 3D 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. Wrap Reality has 38 scenarios for law enforcement and corrections and 25 scenarios at this time for societal reentry. Wrap Reality is one of the most robust 3D Virtual Reality solutions on the market for law enforcement and societal reentry today.
In addition to the United StatesUS law enforcement market, we have shipped our restraint products to 5362 countries. We have established an active distributor network with 13 domestic distributors representing 50 states and one dealer representing the US territory of Puerto Rico. We have distribution agreements with 49 international distributors covering 5654 countries. We focus significant sales, training and business development efforts to support our global distribution network.network in addition to our internal sales team.
We focus significant resources on research and development innovations and continue to enhance our products and plan to introduce new products. We believe we have established a strong brandingbrand and market presence globally and have established significant competitive advantages in our markets.
Management Changes
As previously reported in January 2022,On April 17, 2023, Kevin Mullins was named Chief Executive Officer. In connection with Mr. Mullins' appointment, TJ Kennedy agreed to immediately step down as the Company’s Chief Executive Officer and a member of the Board of Directors approved and initiated(the “Board”). Additionally, on April 17, 2023, the Company performed a leadership transition plan to supportreduction in force that resulted in changes in 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 announcementcomposition of the planned retirementexecutives of our Formerthe Company. As part of the reduction in force, Glenn Hickman stepped down as Chief Financial Officer, Secretary and Treasurer James A. Barnes, who retired in July 2022 upon the appointment of Chris DeAlmeida as our Chief FinancialOperating 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. Both Messrs. Kennedy and Mullins have significant leadership experience in public safety technology prior to their appointment. Mr. Mullins is leading go to market functions in the President role.
Business Outlook and Challenges
OurWe believe our Company's products and solutions continue to gainare gaining global recognition and awareness through active use across multiple agencies and continued acceptance worldwide awareness and recognition throughas well as various marketing channels such as demos, social media, trade shows, and media exposure, trade shows, product demonstrationsamong others. In part, this recognition and wordawareness can be attributed to positive feedback from law enforcement agencies and the successful deployment of mouthour products. As a result, our brand, Wrap, is becoming increasingly recognized on a global scale as a result of positive responses from agenciesleader in remote restraint and early adoption and deployment success. We believe Wrap is gaining traction as a recognized global brand, with innovative technology and an initial product foundation achieved throughnon-lethal solutions.
In addition, we are focused on aggressive marketing and public relations.relations efforts. We believe that we have strongare confident in the potential market opportunities for our remote restraint and VRvirtual reality solutions throughout the world in the law enforcement and security sectors as a result ofworldwide. These opportunities are driven by the increasing demandsdemand for less lethal policing and increasing threats posed by non-compliant subjects.less-lethal policing.
We continue to receive field reports of successful BolaWrap usage fromIn the law enforcement agencies. Manysector, our BolaWrap product has been successfully deployed in the field, as reported by agencies considerworldwide. BolaWrap asis now in use by almost 1,000 US law enforcement agencies and in 62 countries. Due to its safe remote restraint capabilities, many agencies do not deem its usage a very low level, or non-reportable,categorical reportable use of force option and accordingly,rather place it underneath early use of force such as handcuffs. We train law enforcement agencies deploy BolaWrap when verbal commands breakdown but long before there is justifiable escalation to pain inducing tools such as: pepper spray, pepper ball, batons, bean bags, tasers or Conducted Electrical Weapons (CEW’s) or firearms.
Agencies voluntarily report usage to Wrap. In the usage reports we have been provided; officers have reported successful outcomes in 83% of the use cases. This percentage is higher than what is often seen with less lethal tools. From the information we have been provided, the most common BolaWrap use case is for individuals with behavioral health issues, and the second most common BolaWrap use case is during domestic violence calls. Twenty-six percent of the reported persons who are wrapped with the BolaWrap are thought to be under the influence of alcohol or drugs.
There are many reasons why we may not receive reports on all the use of the BolaWrap, including, when uses are not reported to us. Othersof BolaWrap are considered evidence in ongoing criminal cases, are controlled by local policy or regulation, or require officer and are also not shared. Some law enforcementunion and other released to be shared with us. However, many agencies have shared bodycam footage of theirsuccessful field uses, some ofdeployments with us, which we are allowed tomay use in our marketing activities.training and education efforts. We believe increasedthat as the reports of avoiding escalationBolaWrap's effectiveness in de-escalation continue to increase, it will help grow revenues in the future.contribute to our future revenue growth.
We believe we haveManagement anticipates that our portfolio of safe, remote restraint products and training tools has a robuststrong and growingexpanding pipeline of market opportunities for our restraint product offering and training services withinin the law enforcement, military, corrections, and homeland security business sectors both domestically and internationally. Social trends demandingWith the increasing demand for more compassionatehumane and safesafer policing practices, are expected to continue to drivewe expect a continued surge in our global business. WeCurrently, we are pursuing largeexploring major international business prospects internationally and also pursuing businesswhile simultaneously seeking to establish relationships with large police agencies in the U.S. ItHowever, we acknowledge that it is difficultchallenging to anticipate how long it will take to closepredict the exact timeline for closing these opportunities,deals, or ifwhether they will ultimately come to fruition especially given the uncertainty of COVID-19 and social unrest, as discussed below.materialize.
To supportAs part of our increasedefforts to expand our sales and distribution activitiesoperations, we have developed and offer robustprovide a comprehensive training and class materials that certifyprogram for law enforcement officers and trainers as BolaWrap instructors in using the BolaWrap. This training equips them with knowledge about the appropriate use and limitations of the BolaWrap in conjunctiontandem with modern policing tacticstechniques for de-escalation of encounters. We believenow focus on also teaching when and why BolaWrap should be used, including the specific area of success (i.e., after verbal commands break down and before the law enforcement officer is ready to escalate to pain compliance tools. Management believes that law enforcement trainers and officers that have seen demonstrations orwho have been trained aboutto use our products, or have witnessed demonstrations, are more supportive of their department’s purchaseinclined to support the acquisition and deployment of product.our products by their respective departments to drive successful outcomes. As of June 30, 2022,2023, over 1,1301,450 agencies have received BolaWrap training with over 3,6604,827 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments. This representsdepartments, representing a 41%18% increase in agencies and a 31%16% increase in trainingtrained officers as compared to June 30, 2021.2022.
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. Inexpense for the second quarter our new management team focused on assessing all facetsof fiscal 2023 increased $0.51 million, or 10%, to $5.75 million from $5.24 million in the prior year period. The increase in operating expense was the result of the businessCompany incurring approximately $1.4 million of one-time items related to organizational changes including severance and completedlegal fees that impacted operational expense. Excluding these one-time items, operational expense for the second quarter 2023 would have been $4.35 million or a strategic roadmap17% decrease from the prior year period. We expect to drive long-term growth and produce lasting value for shareholders. Our strategic roadmapsee the full benefit of the organizational changes we made in April during the back half of 2023.
Management is centered on sustainably growing sales through building repeatable domestic BolaWrap sales, ramping international sales on the new BolaWrap 150, andconfident that 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 waschanges it made in April will lead 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 significantsubstantial sales growth and put us on a path totowards sustainable profitability. Management intends to execute on its strategic roadmap immediately driving changes in Q3. WhileAlthough geopolitical tensions and macroeconomic headwindschallenges have impacted usaffected our quarterly results in recent quarters,the past and may in the future, we remainbelieve our firm is uniquely positioned to deliver best-in-classprovide lifesaving technologies and data-driven servicestraining that can empowerenable law enforcement officers across the globeworldwide to haveconduct safe and effective encounters with minimalwhile reducing the use of force. If departments follow our Use of Force Guarantee requirements, we are confident enough to offer that in 12 months we would buy their BolaWrap devices back if they do not reduce their reportable use of force by 10%. With an increasing addressable market, Wrap hasoffers a distinctunique value proposition in a growing addressable market. Now withproposition. Our improved pricing strategy, coupled with reduced operating expenses,expense and byour growing future sales we expectoutlook, is expected to have reducedhelp reduce losses and improvedimprove cash flow.flow in the future.
We are recovering from supply chain impacts and a difficult transition from the BolaWrap 100Looking ahead to the BolaWrap 150 . We expectcoming years, we plan to make moreincrease the number of product demonstrations and conduct more training sessions, especiallyparticularly in international markets, as pandemic-related restrictions continue to ease in 2022. We also expect to see increased sales momentum inmarkets. Our new focus on the back half of 2022 internationally as we raise awareness of allwhen and why BolaWrap is used is already showing improved results. This is a departure of the BolaWrap 150 enhancements and transition countries tohardware product only approach of 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 strongpast. Our sales growth of the BolaWrap 150 and Wrap Reality. This coupled with continuedReality are expected to continue to rise, aided by our ongoing cost savings and cost control measures, which should lead to a continuingan overall reduction ofin 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.burn.
OnAt June 30, 2022,2023 we had backlog of approximately $72$25 thousand expected to be delivered in the next twelve months.third quarter of 2023. Additionally, we had deferred revenue of $344$340 thousand expected to be recognized generally over the next five years. Our deferred revenue mostly is from Wrap Reality subscription and other revenue. We expect our deferred revenue to grow in future years due to the SaaS business model on Wrap Reality. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instances, cancellation, in the normal course of business.
Since inception, 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. We believe that we have adequate financial resources to sustain our operations for the next year. InWe increased our net loss during the second quarter of fiscal 2022 we reduced our net loss2023 by more than $3$0.2 million versusas compared to the comparablesecond quarter of fiscal 2022. The decrease in net loss was primarily the result of one-time items related to the organizational changes made during the second quarter 2023 including $1.4 million of non-cash expense related to stock compensation, severance, and legal fees. Excluding the one-time items, net loss for the second quarter 2023 would have been $3.61 million or a 25% decrease from the prior year quarter.period. Net cash used in operations during the six months ended June 30, 20222023 was $4$5.43 million less than cash used in operations during the first six months ended June 30, 2022. This improvement was a result of the priorour strategic roadmap as well as our cost control measures implemented in Q2, Q3 and Q4 of our last fiscal year, and Q1 and Q2 of this fiscal year.
We expect that we will need to continue to innovate new applications for our public safety technology, open new geographies, develop new products and technologies to meet diverse customer requirements and identify and develop new markets for our products.
In March 2020, the World Health Organization ("WHO") classified the COVID-19 outbreak as a pandemic. We believe that our sales during the first six monthssecond quarter of 2022fiscal 2023 were negatively impacted by the transition to the BolaWrap 150 product and the stoppingtiming 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 obstaclesnew orders, particularly on in the coordination of business activities, including demonstrations, traininginternational market, and the negotiation and fulfillment of orders. Disruptionsassociated budgeting from our customers.
Supply chain disruptions have affected our operations in the supply chain have already impacted uspast and could negatively impact our ability to source materials, or manufacture and distribute products. We could experience a decreaseproducts 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. Thethe future. Moreover, financial markets have been subjectcontinued to experience significant volatility, that could impact ourchallenging the Company’s ability to enter into, modify,access the capital markets to provide additional working capital to fund the Company’s growth. Despite these conditions, and negotiate favorable termsfollowing an analysis of our future capital needs, the Company consummated an offering of Series A Convertible Preferred Stock and conditions relativeWarrants (“Offering”), which Offering closed on July 5, 2023, resulting in gross proceeds to equity and debt financing activities. We have $28.5the Company of approximately $10 million of which $7.4 million was received on June 29, 2023. The $7.4 million received was recorded to cash with an offset to accrued expense. As a result, we had $18.2 million in cash and cash equivalents and short-term investments as of June 30, 2022, which2023. We therefore believe we believe provideshave sufficient capital to fund our operations for at least the next twelve months and withstand the potential near-term consequences of the pandemic, althoughmonths. However, liquidity constraints and access to capital markets could adversely impactstill negatively affect our liquidity and warrantrequire 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
Future global pandemics could potentially result in lost or delayed revenue for our Company, as occurred in the years ended December 31 2021 and 2022 due to the Company: limitationsglobal COVID-19 pandemic. These potential future events could include restrictions on theour suppliers' ability of our suppliers to meet delivery requirements and commitments; limitations on the ability of our employeescommitments, employees' inability to perform their work due to illness caused by thea pandemic or local, state, or federal ordersmandates requiring employees to remain at home; limitations on thestay home. Delays in carriers' ability of carriers to deliver our products to customers;customers, unforeseen deviations from customers or foreign governments restricting the ability to do business;conduct business, and limitations on the ability of our customerscustomers' inability to pay us on a timely basis, if at all.all, could also limit our revenue.
We alsoOur Company may be adversely affectedpositively or negatively impacted by continued social unrest, protests against racial inequality, protests against police brutality and movements such as “Defundlike "Defund the Police” and suchPolice." Such unrest may be exacerbatedfurther fueled by inaccuratemisleading information or negative publicity regardingabout our solutions. We believe our solutions are actually the answer to reducing use of force and driving safer outcomes for officers and the citizens they interact with each day. Although the negativity of some of these events has been reduced, someintensity of these events may have subsided, some may still indirectly or directly or indirectly affectinfluence police agency budgets and the funding available to current and potential customers. ParticipantsIn addition, participants in these events may also attempt to create the perceptionimpression that our solutions are contributing to the perceived problems, which may adversely affect us,potentially harming our business and results of operations, including our revenues,revenue, earnings, and cash flows from operations.
Our business may be impacted by global economic conditions, which have beenChanges 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.
Changes in management and other keycritical personnel have the potential to improve and disruptnegatively affect our business, and any such disruptionbusiness. Such disruptions could potentially adversely affecthave an adverse impact on our operations, programs, growth, financial condition, or results of operations. Improvements toOn the other hand, improvements in our operations, operating expensesexpense, and go to marketgo-to-market approaches also have the opportunity to impactcould positively influence the success of our business in the business going forward.future.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. We evaluate our estimates, on an on-going basis, including those estimates related to recognition and measurement of contingencies and accrued expense. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, tax contingencies, unrecognized tax benefits, and any required valuation allowance, including taking into consideration the probability of the tax contingencies being incurred. Management assesses this probability based upon information provided by its tax advisers, its legal advisers and similar tax cases. If later our assessment of the probability of these tax contingencies changes, our accrual for such tax uncertainties may increase or decrease. Our effective tax rate for annual and interim reporting periods could be impacted if uncertain tax positions that are not recognized are settled at an amount which differs from our estimates.
Some of our accounting policies require higher degrees of judgment than others in their application. These include share-based compensation and contingencies and areas such as revenue recognition, allowance for doubtful accounts, valuation of inventory and intangible assets, estimates of product line exit costs, warranty liabilities and impairments.
Revenue Recognition. We sell our products to customers including law enforcement agencies, domestic distributors and international distributors and revenue from such transactions is recognized in the periods that products are shipped (free on board (“FOB”) shipping point) or received by customers (FOB destination), when the fee is fixed or determinable and when collection of resulting receivables is reasonably assured. 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 VR software licensing or sale. Our customers do not have the right to return product unless the product is found to be defective.
Share-Based Compensation. We follow the fair value recognition provisions issued by the Financial Accounting Standards Board (“FASB”) in Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation (“ASC 718”) and we adopted Accounting Standards Update (“ASU”) 2018-07 for share-based transactions with non-employees. 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. Each of these inputs is subjective and generally requires significant judgment to determine. The grant date fair value of restricted stock units is based upon the market price of the Company’s Common Stock on the date of the grant. We determine the amount of share-based compensation expense based on awards that we ultimately expect to vest and account for forfeitures as they occur. The fair value of share-based compensation is amortized to compensation expense over the vesting term.
Allowance for Doubtful Accounts. Our products are sold to customers in many different markets and geographic locations. We estimate our bad debt reserve on a case-by-case basis and the aging of accounts due to a limited number of customers mostly government agencies or well-established distributors. We base these estimates on many factors including customer credit worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. Our judgments and estimates regarding collectability of accounts receivable have an impact on our financial statements.
Valuation of Inventory. Our inventory is comprised of raw materials, assemblies and finished products. We must periodically make judgments and estimates regarding the future utility and carrying value of our inventory. The carrying value of our inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from our inventory is less than carrying value.
Valuation of Intangible Assets. Intangible assets consisted of (a) capitalized legal fees and filing expense related to obtaining patents and trademarks, (b) customer agreements, tradenames, software, non-solicitation and non-compete agreements acquired in business combinations and valued at fair value at the acquisition date, and (c) the purchase cost of indefinite-lived website domains. We must make judgments and estimates regarding the future utility and carrying value of intangible assets. The carrying values of such assets are periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from an individual intangible asset is less than carrying value. This generally could occur when certain assets are no longer consistent with our business strategy and whose expected future value has decreased.
Accrued Expense. We establish a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. This reserve requires us to make estimates regarding the amount and costs of warranty repairs we expect to make over a period of time. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs, and anticipated rates of warranty claims. We have very limited history to make such estimates and warranty estimates have an impact on our financial statements. Warranty expense is recorded in cost of revenues.revenue. We evaluate the adequacy of this reserve each reporting period.
We use the recognition criteria of FASB ASC Topic 450-20, “Loss Contingencies”Loss Contingencies, to estimate the amount of bonuses when it becomes probable a bonus liability will be incurred and we recognize expense ratably over the service period. We accrue bonus expense each quarter based on estimated year-end results, and then adjust the actual in the fourth quarter based on our final results compared to targets.
Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. Other than the planned production change requiring a new estimate of exit expense, there were no significant changes or modification of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the period ended June 30, 2022.2023. Our accounting policies are more fully described in Note 1. Organization and Summary of Significant Accounting in the notes to our audited consolidated financial statements included in the Annual Report.
Recent Accounting Pronouncements
New pronouncements issued for future implementation are discussed in Note 1. Organization and Summary of Significant Accounting Policies of our financial statements.
Segment and Related Information
The Company operates as a single segment. The Company’s chief operating decision maker is its Chief Executive Officer, who manages operations for purposes of allocating resources. Refer to Note 13,13. Major Customers and Related Information, in our financial statements for further discussion.
Operating ExpensesExpense
Our operating expenses includeexpense includes (i) selling, general and administrative expense, (ii) research and development expense, and in the most recent fiscal quarter, (iii) product line exit expense. Research and development expense is comprised of the costs incurred in performing research and development activities and developing production on our behalf, including compensation and consulting, design and prototype costs, contract services, patent costs and other outside expense. The scope and magnitude of our future research and development expense is difficult to predict at this time and will depend on elections made regarding research projects, staffing levels and outside consulting and contract costs. The future level of selling, general and administrative expense will be dependent on staffing levels, elections regarding expenditures on sales, marketing and customer training, the use of outside resources, public company and regulatory expense, and other factors, some of which are outside of our control.
We expect our operating costs will remain at comparable current levelsreduce from the first half of 2023 as a result of the changes implemented in the near term.April 2023, and ongoing cost containment efforts. 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 June 30, 20222023 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 June 30, | | | Change | |
| | | 2022 | | | 2021 | | | | $ | | | % | |
Revenues: | | | | | | | | | | | | | | | | |
Product sales | | $ | 969 | | | $ | 1,852 | | | $ | (883 | ) | | | (48% | ) |
Other revenue | | | 196 | | | | 82 | | | | 112 | | | | 136 | % |
Total revenues | | | 1,165 | | | | 1,934 | | | | (769 | ) | | | (40% | ) |
Cost of revenues: | | | | | | | | | | | | | | | | |
Products and services | | | 708 | | | | 1,247 | | | | (539 | ) | | | (43% | ) |
Restructuring inventory charge | | | - | | | | 747 | | | | (747 | ) | | | - | |
Total cost of revenues | | | 708 | | | | 1,994 | | | | (1,286 | ) | | | (64% | ) |
Gross profit (loss) | | | 457 | | | | (60 | ) | | | 517 | | | | (862% | ) |
| | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 3,764 | | | | 6,579 | | | | (2,815 | ) | | | (43% | ) |
Research and development | | | 1,476 | | | | 1,162 | | | | 314 | | | | 27 | % |
Total operating expenses | | | 5,240 | | | | 7,741 | | | | (2,501 | ) | | | (32% | ) |
Loss from operations | | $ | (4,783 | ) | | $ | (7,801 | ) | | $ | 3,018 | | | | (39% | ) |
Revenue
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. 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.
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.
Gross Profit
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. 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 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, | | | Change | |
| | | 2022 | | | 2021 | | | | $ | | | % | |
Revenues: | | | | | | | | | | | | | | | | |
Product sales | | $ | 2,431 | | | $ | 3,278 | | | $ | (847 | ) | | | (26% | ) |
Other revenue | | | 333 | | | | 198 | | | | 135 | | | | 68 | % |
Total revenues | | | 2,764 | | | | 3,476 | | | | (712 | ) | | | (20% | ) |
Cost of revenues: | | | | | | | | | | | | | | | | |
Products and services | | | 1,640 | | | | 2,184 | | | | (544 | ) | | | (25% | ) |
Restructuring inventory charge | | | - | | | | 747 | | | | (747 | ) | | | - | |
Total cost of revenues | | | 1,640 | | | | 2,931 | | | | (1,291 | ) | | | (44% | ) |
Gross profit | | | 1,124 | | | | 545 | | | | 579 | | | | 106 | % |
| | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 8,370 | | | | 11,557 | | | | (3,187 | ) | | | (28% | ) |
Research and development | | | 2,971 | | | | 2,227 | | | | 744 | | | | 33 | % |
Total operating expenses | | | 11,341 | | | | 13,784 | | | | (2,443 | ) | | | (18% | ) |
Loss from operations | | $ | (10,217 | ) | | $ | (13,239 | ) | | $ | 3,022 | | | | (23% | ) |
| | | Three Months Ended June 30, | | | Change | |
| | | 2023 | | | 2022 | | | $ | | | % | |
Revenue: | | | | | | | | | | | | | | | | |
Product sales | | $ | 1,034 | | | $ | 969 | | | $ | 65 | | | | 7 | % |
Other revenue | | | 168 | | | | 196 | | | | (28 | ) | | | (14 | )% |
Total revenue | | | 1,202 | | | | 1,165 | | | | 37 | | | | 3 | % |
Cost of revenue | | | 534 | | | | 708 | | | | (174 | ) | | | (24 | )% |
Gross profit | | | 668 | | | | 457 | | | | 211 | | | | 46 | % |
| | | | | | | | | | | | | | | | | |
Operating expense: | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 4,745 | | | | 3,764 | | | | 981 | | | | 26 | % |
Research and development | | | 1,002 | | | | 1,476 | | | | (474 | ) | | | (32 | )% |
Total operating expense | | | 5,747 | | | | 5,240 | | | | 507 | | | | 10 | % |
Loss from operations | | $ | (5,079 | ) | | $ | (4,783 | ) | | $ | (296 | ) | | | 6 | % |
Revenue
We reported net revenue of $2.8$1.2 million for the sixthree months ended June 30, 2022,2023, as compared to $3.5$1.2 million for the quarter ended June 30, 2021. Domestic revenues of $2.3 million for the six months reflected growth of 30%2022, a 3% increase over the prior comparable quarter of $1.8 million.year. International revenuesrevenue decreased from $1.7 million$75 thousand 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 sixthree months ended June 30, 2022 primarilyto $31 thousand for the three months ended June 30, 2023. We believe that our sales during the three months ended June 30, 2023, were impacted by the timing of new orders, particularly international and associated budgeting from our customers. We also incurred discounts of $42 thousand during the three months ended June 30, 2023, as a result of promotional programs designed to encourage domestic customers to upgrade to the BolaWrap 150. Gross sales were $1.2 million for the three months ended June 30, 2023, before such discounts. The discounts compare to normal business discounts of $81$161 thousand in the comparable six-month periodquarter of the prior year. We expect selected discounts in the third quarter but thereafter a decline to minimal discounts in 2023 as we have phased out our promotional upgrade offer.
International revenuesrevenue generally consistconsists 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 of 2022 were delayed significantly due to the change overchangeover from the BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future quarters. We believe that revenue during the fiscal year 20222023 will still be an increase overall compared to the revenue recorded during 20212022 due to growth of domestic sales and anticipated international orders from a robust pipeline, although no assurances can be given. We believe based on pipeline that these larger international deals are more likely to book and ship in the latter half of 2023.
We incurred product promotional costs of $479$41 thousand during the sixthree months ended June 30, 2022,2023, related primarily to BolaWrap 150 demonstration products and the cost of training products and accessories delivered to law enforcement agencies that were expensed as marketing costs. 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. Withand increased successful field use by agencies and greater brandbut due to awareness we expect reductions in product promotional costs to decline versusfrom the prior year.
We had $344$340 thousand of deferred revenue at June 30, 2022,2023, of which $221$217 thousand related to VR, $17 thousand was related to training and $123$106 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, 2022,2023, we had backlog of $72$25 thousand expected to be delivered in the next twelve months.third quarter of 2023. 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.
Gross Profit
Our gross profit for the three months ended June 30, 2023 was $668 thousand, or a gross margin of 56%. Our cost of revenue for the three months ended June 30, 2022 was $457 thousand resulting in a gross margin of 39%. The increase in gross profit represented an 46% increase over prior year as a result of rolling out the BolaWrap 150 product, selling price adjustments implemented in September of 2022, and a reduction of promotional pricing, offset by some supply chain issues and inventory adjustments.
As our revenue history is limited, historical margins may not accurately reflect future margins. However, we expect higher margins with the production of the BolaWrap 150 compared to previous production due to design changes and improved pricing. Our margins are also subject to variations based on the sales channels and product mix through which our products are sold. At present, our cassettes have lower margins than BolaWrap devices. As we scale cassette production, we will look to reduce our costs and drive higher cassette margins. Cassettes were a total of 19% of our overall revenue in the three months ended June 30, 2023, and will continue to grow as a recurring revenue base as more BolaWrap devices are in the field and the usage of BolaWrap increases due to the need of officers to de-escalate earlier to prevent injuries and use of higher levels of force.
We regularly introduce updates and revisions to our products, which may include changes to raw materials and components, and can impact our product costs. Given our limited experience with warranty costs, our estimated future warranty expense may affect our gross margins.
Our global supply chain has experienced notable component shortages, extended lead times, cost fluctuations, and logistical constraints, all of which have affected our product costs. Although we have seen these supply chain obstacles ease in 2023, we acknowledge that future supplier shortages, quality problems, and logistics delays could impact our production schedules and have a material negative impact on our financial condition, results of operation, and cash flows.
Selling, General and Administrative Expense
Selling, general and administrative (“SG&A”) expense of $4.8 million for the three months ended June 30, 2023 increased by $1.0 million, when compared to $3.8 million for the three months ended June 30, 2022. The increase in selling general and administrative expense was the result of the Company incurring approximately $1.4 million of one-time items related to organizational changes including severance and legal fees that impacted operational expense. Excluding these one-time items, selling general and administrative expense for the second quarter 2023 would have been $3.35 million or a 11% decrease from the prior year period.
Share-based compensation costs allocated to SG&A increased to $990 thousand compared to $589 thousand for the comparable prior quarter. This $401 thousand increase resulted primarily from changes in management and one-time costs associated with the management changes in April 2023.
Salaries and burden costs of $1.53 million for the three months ended June 30, 2023 was a decrease of $10 thousand, or a 1% decrease, due to reduced headcount and one-time recruiting expense. During three months ended June 30, 2023, as compared to same period during the prior year, we increased professional fees by $308 thousand, and increased consulting and contract services fees by $182 thousand. We expect expenditures for SG&A expense in 2023 to remain in line with 2022 despite expected revenue growth.
Advertising and promotion costs were $282 thousand for the three months ended June 30, 2023, or a decrease of $51 thousand as compared to $333 thousand during the three months ended June 30, 2022. The changes in advertising costs were related to reductions in consultants and other cost containment efforts. However, the company expects advertising costs will increase in the future due to increased investment in strategic targeting and marketing campaigns as well as building brand awareness.
Research and Development Expense
Research and development expense decreased by $474 thousand for the three months ended June 30, 2023 when compared to the three months ended June 30, 2022. We incurred a $92 thousand period over period increase in share-based compensation expense allocated to research and development expense as a result of personnel changes made in April 2023. Outside consulting costs decreased by $145 thousand and prototype related costs decreased by $155 thousand primarily due to reduced costs related to finalizing the BolaWrap 150 product and continued cost containment efforts.
Operating Loss
Loss from operations of $5.1 million during the three months ended June 30, 2023 was an increase of $0.3 million compared to loss from operations of $4.8 million during the three months ended June 30, 2022, reflecting increased margin and the focus on reducing operating costs. The increase in operating expense was the result of the Company incurring approximately $1.4 million of one-time items related to organizational changes including severance and legal fees that impacted operational expense. Excluding these one-time items, operational expense for the second quarter 2023 would have been $4.35 million or a 17% decrease from the prior year period.
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
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, | | | Change | |
| | | 2023 | | | 2022 | | | $ | | | % | |
Revenue: | | | | | | | | | | | | | | | | |
Product sales | | $ | 1,650 | | | $ | 2,431 | | | $ | (781 | ) | | | (32 | )% |
Other revenue | | | 263 | | | | 333 | | | | (70 | ) | | | (21 | )% |
Total revenue | | | 1,913 | | | | 2,764 | | | | (851 | ) | | | (31 | )% |
Cost of revenue | | | 893 | | | | 1,640 | | | | (747 | ) | | | (46 | )% |
Gross profit | | | 1,020 | | | | 1,124 | | | | (104 | ) | | | (9 | )% |
| | | | | | | | | | | | | | | | | |
Operating expense: | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 8,286 | | | | 8,370 | | | | (84 | ) | | | (1 | )% |
Research and development | | | 2,073 | | | | 2,971 | | | | (898 | ) | | | (30 | )% |
Total operating expense | | | 10,359 | | | | 11,341 | | | | (982 | ) | | | (9 | )% |
Loss from operations | | $ | (9,339 | ) | | $ | (10,217 | ) | | $ | 878 | | | | (9 | )% |
Revenue
We reported net revenue of $1.9 million for the six months ended June 30, 2023, as compared to $2.8 million for the six months ended June 30, 2022, a 31% decrease over the prior year. International revenue decreased from $479 thousand for the six months ended June 30, 2022 to $35 thousand for the six months ended June 30, 2023. We believe that our sales during the six months ended June 30, 2023 were impacted by the timing of new orders and associated budgeting from our customers. We also incurred discounts of $64 thousand during the six months ended June 30, 2023, as a result of promotional programs designed to encourage customers to upgrade to the BolaWrap 150. Gross sales were $1.98 million for the six months ended June 30, 2023, before such discounts. The discounts compare to normal business discounts of $549 thousand in the comparable six-month period of the prior year. We expect a decline to minimal discounts in 2023 as we have phased out our promotional upgrade offer.
International revenue generally consists of larger orders with the end user being large, centralized government agencies. These orders continue to be lumpy and difficult to predict as to both timing and amount. International orders anticipated in the second quarter of 2022 were delayed significantly due to the changeover from the BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future quarters. We believe that revenue during the fiscal year 2023 will increase overall compared to the revenue recorded during 2022 due to growth of domestic sales and anticipated international orders from a robust pipeline, although no assurances can be given. We believe based on pipeline that these larger international deals are more likely to book and ship in the latter half of 2023.
We incurred product promotional costs of $95 thousand during the six months ended June 30, 2023, related primarily to BolaWrap 150 demonstration products and the cost of training products and accessories delivered to law enforcement agencies that were expensed as marketing costs. We are responding to increased demand for training as a result of expanded product and brand awareness and increased successful field use by agencies but due to awareness expect reductions in product promotional costs from the prior year.
We had $340 thousand of deferred revenue at June 30, 2023, of which $217 thousand related to VR, $17 thousand was related to training and $106 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, 2023, we had backlog of $25 thousand expected to be delivered in the third quarter of 2023. 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.
Gross Profit
Our gross profit for the six months ended June 30, 2023 was $1.02 million, or a gross margin of 53%. Our cost of revenue for the six months ended June 30, 2022 was $1.6 million$1.12 thousand resulting in a gross margin of 41%. The decrease in gross margin for the six months ended June 30, 2021, was 37% after adjusting excluding $747 thousandprofit represented an 9% decrease over prior year as a result 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.decreased sales.
Due toAs our limitedrevenue history of revenueis limited, historical margins however, may not be indicative of plannedaccurately reflect future margins. TheHowever, we expect higher margins with the production of the BolaWrap 150 has higher margins than historical production.compared to previous production due to design changes and improved pricing. Our margins are also varysubject to variations based on the sales channels and product mix through which our products are sold and product mix. Currently,sold. At present, our cassettes have lower margins than BolaWrap devices. As we scale cassette production, we will look to reduce our costs and drive higher cassette margins. Cassettes were a total of 18% of our overall revenue in the six months ended June 30, 2023, and will continue to grow as a recurring revenue base as more BolaWrap devices are in the field and the usage of BolaWrap increases due to the need of officers to de-escalate earlier to prevent injuries and use of higher levels of force.
We implement productregularly introduce updates and revisions includingto our products, which may include changes to raw materialmaterials and component changes that maycomponents, and can impact our product costs. With such product updates and revisions, we haveGiven our limited experience with warranty cost experience andcosts, our estimated future warranty costs can impactexpense may affect our gross margins.
Our global supply chain has been subject toexperienced notable component shortages, increasedextended lead times, cost fluctuations, and logisticslogistical constraints, thatall of which have impactedaffected our product costs. We expectAlthough we anticipate these supply chain challengesobstacles to continue throughout 2022. Supplierease in 2023, we acknowledge that future supplier shortages, quality issuesproblems, and logisticlogistics delays affectcould impact our production schedules and could in turn have a material adverse effectnegative impact on our financial condition, results of operation, and cash flows.
Selling, General and Administrative Expense
Selling, general and administrative (“SG&A”) expense of $8.3 million for the six months ended June 30, 2023 decreased, by $0.1 million, when compared to $8.4 million for the six months ended June 30, 2022, were $8.4 million reflecting a, decrease of $3.2 million when compareddue 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.efforts.
Share-based compensation costs allocated to SG&A wasincreased to $1.6 million compared to $1.5 million for the comparable prior-year period. This $0.1 million increase resulted primarily due to changes in management, one-time costs in the prior year period, and changes in the stock price.
Salaries and burden costs of $3.0 million for the six months ended June 30, 20222023 was a decrease of $132 thousand, or a 4% decrease, due to reduced headcount and one-time recruiting expense. During six months ended June 30, 2023, as 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 insame period during the prior periodyear, we increased professional fees by $160 thousand, and increased consulting and contract services fees by $30 thousand. We expect expenditures for legacy and new directors appointedSG&A expense in April 2021.2023 to remain in line with 2022 despite expected revenue growth.
Cash compensationAdvertising and promotion costs of $3.1 millionwere $445 thousand for the six months ended June 30, 2022 was2023, or a $179decrease of $216 thousand increase from the prior year six months but included a $300as compared to $661 thousand severance expense offset by cost containment efforts. Duringduring the six months ended June 30, 2002, as compared2022. The changes in advertising costs were related to the prior year comparable six months, we incurred reduced advertisingreductions in consultants 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 activeother cost containment efforts.
Research and Development Expense
Research and development expense increaseddecreased by $744$898 thousand for the six months ended June 30, 2022,2023 when compared to the comparable six-monthsix months ended June 30, 2022. We incurred a $21 thousand period over period increase in fiscal 2021. Non-cash share-based compensation expense allocated to research and development expense as a result of personnel was $271changes made in April 2023. Outside consulting costs decreased by $252 thousand and prototype related costs decreased by $323 thousand for the six months ended June 30, 2022 compared2023, primarily due to the $378 thousand for the prior period which included effects of new hires. Cash compensationreduced 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 finalizing the BolaWrap 150 startup costs and continued improvements. We expect our research and development costs to remain at comparable levels for the balance of 2022. product.
Operating Loss
Loss from operations of $9.3 million during the six months ended June 30, 2023 was a reduction of $878 thousand compared to loss from operations of $10.2 million during the six months ended June 30, 2022, of $10.2 million was a reduction of $3.0 million compared to that ofreflecting increased margin and the six months ended June 30, 2021 reflecting second quarter reduced costs from the prior year.focus on reducing operating costs.
Liquidity and Capital Resources
Overview
We have experienced net losses and negative cash flows from operations since our inception. 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.
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. We expect our primary source of future liquidity will be from the sale of products, exercise of stock options and warrants and if required from future equity or debt financings.
We have experienced net losses and negative cash flows from operations since our inception. As of June 30, 2023, we had cash and cash equivalents of $11.7 million, short-term investments of $6.5 million, positive working capital of $16.6 million and had sustained cumulative losses attributable to stockholders of $76.4 million. Our working capital at June 30, 2023 was positively affected by an increase in inventories of approximately $2.5 million, which consisted of increases of inventory of the BolaWrap 150 in anticipation of future orders, and the receipt of $7.4 million from the Offering on June 29, 2023 that formally closed on July 5, 2023. The Offering was consummated following an analysis of our future capital needs, resulting in the issuance of Series A Convertible Preferred Stock and Warrants. The Offering generated gross proceeds to the Company of approximately $10 million. As a result, we had $18.2 million in cash and cash equivalents and short-term investments as of June 30, 2023. We therefore believe we have sufficient capital to fund our operations for the next twelve months. However, liquidity constraints and access to capital markets could still negatively affect our liquidity and require changes to our investment strategy.
Capital Requirements
Due in part to the volatility caused by COVID-19, we do not have a high degree of confidence in our estimates for ourOur future liquidity requirements or future capital needs which will depend on, among other things, capital required to introduce new products and the operational staffing and support requirements, as well as the timing and amount of future revenue and product costs. We anticipate that demands for operating and working capital may grow depending on decisions on staffing, development, production, marketing, training and other functions and based on other factors outside of our control. We believe we have sufficient capital to sustain our operations forcontrol, including the next twelve months.timing of receipt of revenue.
Our future capital requirements, cash flows and results of operations could be affected by, and will depend on, many factors, some of which are currently unknown to us, including, among other things:
| | ● | The impact and effects of the global outbreak of the COVID-19 pandemic, and other potentialAny future outbreaks pandemics or contagious diseases or fear of such outbreaks;
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| | ● | Decisions regarding staffing, development, production, marketing and other functions; |
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| | ● | The timing and extent of market acceptance of our products; |
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| | ● | Costs, timing and outcome of planned production and required customer and regulatory compliance of our products; |
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| | ● | Costs of preparing, filing and prosecuting our patent applications and defending any future intellectual property-related claims; |
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| | ● | Costs and timing of additional product development; |
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| | ● | Costs, timing and outcome of any future warranty claims or litigation against us associated with any of our products; |
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| | ● | Ability to collect accounts receivable; and |
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| | ● | Timing and costs associated with any new financing. |
Principal factors that could affect our ability to obtain cash from external sources including from exercise of outstanding warrants and options include:
| | ● | Volatility in the capital markets; and |
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| | ● | Market price and trading volume of our Common Stock. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Cash Flow
Operating Activities
During the six months ended June 30, 2023, net cash used in operating activities was $776 thousand. The net loss of $9.04 million was decreased by non-cash expense of $2.26 million consisting primarily of share-based compensation expense of $1.85 million. Other major component changes using operating cash included an increase of $2.55 million in inventories and a net increase in accounts payable and accrued liabilities of $7.66 million. A decrease in accounts receivable of $884 million 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.
Investing Activities
During the six months ended June 30, 2021, net2023, we used $2.65 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $10 million. During the six months ended June 30, 2023, we used in operating activities was $10.25 milllion. The net loss$66 thousand of $13.2 million was decreased by non-cash expensecash for the purchase of $4.3 million consisting primarily of share-based compensation expense of $3 million, restructuring inventory charges of $747 thousandproperty and shares issued for services of $239 thousand. Other major component changes using operating cash included an increase of $798equipment, and invested $176 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 Activitiespatents.
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, 2021,2022, 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.patents.
Financing Activities
During the six months ended June 30, 2023 and 2022, we received $0 and $75 thousand, respectively, in proceeds from the exercise of previously issued stock options.
During the six months ended June 30, 2021,2023 and 2022, we received $12$7.4 million and $0 million in gross proceeds from the exerciseissuance of outstanding stock warrants, $278 thousandsecurities, which amount in proceeds from the exercise of previously issued stock optionssix months ended June 30, 2023 is reflected in cash and repaid $200 thousandcash equivalents, with an offset to accrued expense, each as reflected in debt relating to the NSENA acquisition.Company’s Condensed Consolidated Balance Sheet at June 30, 2023.
Contractual Obligations and Commitments
Pursuant to that certain exclusive Amended and Restated Intellectual Property License Agreement dated September 30, 2016, by and between the Company and Syzygy Licensing, LLC (“Syzygy”), we are obligated to pay to Syzygy a 4% royalty fee on future product sales up to an aggregate amount of $1.0 million in royalty payments or until September 30, 2026, whichever occurs earlier.
WePursuant to the Professional Services and Technology Acquisition Agreement (the “Agreement”) entered into with Lumeto, Inc. and Spatial Industries Group, Inc. (collectively, “Service Provider”) on November 22, 2022, as amended on April 2, 2023, which Agreement, provided that the Service Provider provide to the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform (the “Technology, Services, and License”), in consideration for a cash payment of $700 made to the Service Provider upon the execution of the Agreement.
In January 2022 we extended our facility lease for three years through July 2025 and we are committed to aggregate lease payments on our facilitythe lease of $58$61 thousand in 2022, $121 thousandfor six months in 2023, $126 thousand in 2024 and $75 thousand in 2025.
At June 30, 2022,2023, we were committed for approximately $3.2$3.9 million for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.
On August 9, 2023, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Intrensic, LLC, a Delaware limited liability company (“Intrensic”), and certain members of Intrensic, including Kevin Mullins, the Company’s Chief Executive Officer (collectively, “Sellers”). Under the terms of the Purchase Agreement, the Company agreed to purchase, and Sellers agreed to sell, 100% of the membership interests (the “Membership Interests”) of Intrensic for the following consideration upon the consummation of the sale of the Membership Interests: (i) $553,588 in cash, subject to adjustment based upon the outstanding indebtedness of Intrensic and Intrensic’s working capital as of the closing; and (ii) 1,250,000 shares of Common Stock of the Company.
Effects of Inflation
During the six months ended June 30, 2023 and year ended December 31, 2022, we had experienced increased costs in labor and materials due to inflation. We do not believe in 2023 that inflation has had a material impact on our business, revenue orlow unemployment and higher salaries will create higher payroll costs and increased operating results duringexpense in the periods presented.business. We have seen increases in costs from multiple suppliers for materials as well as labor.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements during the period ended June 30, 2022,2023, or subsequently thereto, that we believe are of potential significance to our financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, as of June 30, 2022,2023, we conducted an evaluation of our disclosure controls and procedures as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our fiscal quarter ended June 30, 2022,2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future period are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Shareholder Derivative Litigation
On November 13, 2020, Naresh Rammohan filed a shareholder derivative action in the United States District Court for the Central District of California against current and former Company officers Tom Smith, James Barnes, Mike Rothans, Marc Thomas, and David Norris, as well as current and former Company directors Messrs. Scot Cohen, Patrick Kinsella, Michael Parris, and Wayne Walker, alleging unjust enrichment, breach of fiduciary duty, waste of corporate assets, and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:20-cv-10444-DMG-PVCx. On January 20, 2021, Ray Westerman filed a second derivative action in the same court against the same parties, alleging breach of fiduciary duty and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21-cv-00550-DMG-PVCx. On January 22, 2021, Jesse Lowe filed a third derivative action in the same court against the same parties, alleging breach of fiduciary duty and asserting various claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21-cv-00597-DMG-PVCx. The Company was named as a nominal defendant in each of these actions.
On February 16, 2021, the Honorable Dolly M. Gee issued an order consolidating the three derivative actions under the caption In re Wrap Technologies, Inc. Shareholder Derivative Litigation, Case No. 2:20-10444-DMG-PVCx, (the “Derivative Action”) and stayed the Derivative Action at least until the resolution of the action captioned In re Wrap Technologies, Inc. Securities Exchange Act Litigation, Case No. 2:20-cv-08760-DMG (the “Securities Action”). On December 20, 2021, Judge Gee dismissed the Securities Action with prejudice. On April 29, 2022 the above-mentioned parties jointly filed a stipulation of voluntary dismissal in order to dismiss the Derivative Action without prejudice to the plaintiffs, the Company, or Wrap shareholders (“the Stipulation”). The Stipulation was granted by Judge Gee on May 3, 2022.
Other Legal Information
We may become subject to other legal proceedings, as well as demands and claims that arise in the normal course of our business, including claims of alleged infringement of third-party patents and other intellectual property rights, breach of contract, employment law violations, and other matters and matters involving requests for information from us or our customers under federal or state law. Such claims, even if not meritorious, could result in the expenditure of significant financial and management resources. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed and adjusted to include the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter. At June 30, 2022,2023, we had no provision for liability under existing litigation.
An unfavorable outcome on any litigation matters could require payment of substantial damages, or, in connection with any intellectual property infringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matters, or legal proceedings could have a material adverse effect on our business, operating results, financial condition and cash flows.
Item 1A. Risk Factors
Management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2021.2022. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2021,2022, and subsequent reports filed pursuant to the Exchange Act which could materially and adversely affect the Company’s business, financial condition, results of operations, and stock price. The risks described in the Annual Report on Form 10-K and subsequent reports filed pursuant to the Exchange Act are not the only risks facing the Company. Additional risks and uncertainties not presently known to management, or that management presently believes not to be material, may also result in material and adverse effects on our business, financial condition, and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
No unregistered securities were issued during the three months ended June 30, 2022,2023, that were not previously reported.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit 31.110.1 | Separation Agreement between the Company and Mr. Kennedy, incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed on April 19, 2023. |
Exhibit 31.1 | Certification of TJ Kennedy,Kevin Mullins, Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
Exhibit 31.2 | Certification of James A. Barnes,Chris DeAlmeida, Principal FinancialAccounting Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
Exhibit 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by TJ Kennedy,Kevin Mullins, Principal Executive Officer, and James A. Barnes,Chris DeAlmeida, Principal FinancialAccounting Officer.* |
| | | Extensible Business Reporting Language (XBRL) Exhibits* |
101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101) |
* Filed concurrently herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
August 10, 2022
| WRAP TECHNOLOGIES, INC. |
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| By: | /s/ CHRIS DEALMEIDA |
August 9, 2023 | |
| | Chris DeAlmeida Chief Financial Officer and Treasurer (Principal Accounting Officer) |
