WRAP TECHNOLOGIES INC

Previous wording

Some agencies voluntarily report usage to us, but many do not. In the usage reports we have been provided, officers have reported successful outcomes in 84% of the use cases. 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. 26% of the reported persons who are wrapped with the BolaWrap are thought to be under the influence of alcohol or drugs.

Current wording

Some agencies voluntarily report usage to Wrap but many do not. In the usage reports we have been provided, officers have reported successful outcomes in 84% 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. 26% of the reported persons who are wrapped with the BolaWrap are thought to be under the influence of alcohol or drugs.

Previous wording

As part of our efforts to expand our sales and distribution operations, we provide a comprehensive training program for law enforcement officers and trainers in using the BolaWrap. This training equips them with knowledge about the appropriate use and limitations of BolaWrap in tandem with modern policing techniques for de-escalation of encounters. We now focus on also teaching when and why BolaWrap should be used, including the specific area of success, such as after verbal commands break down and before the law enforcement officer is ready to escalate to less lethal pain compliance tools. We believe that law enforcement trainers and officers who have been trained to use our products, or have witnessed demonstrations, are more inclined to support the acquisition and deployment of our products by their respective departments to drive successful outcomes. As of September 30, 2024, over 1,530 agencies have received BolaWrap training with over 5,400 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments, representing a 10% increase in agencies and a 10% increase in trained officers as compared to September 30, 2023.

Current wording

As part of our efforts to expand our sales and distribution operations, we provide a comprehensive training program for law enforcement officers and trainers in using the BolaWrap. This training equips them with knowledge about the appropriate use and limitations of BolaWrap in tandem with modern policing techniques for de-escalation of encounters. We now focus on also teaching when and why BolaWrap should be used, including the specific area of success, such as after verbal commands break down and before the law enforcement officer is ready to escalate to less lethal pain compliance tools. We believe that law enforcement trainers and officers who have been trained to use our products, or have witnessed demonstrations, are more inclined to support the acquisition and deployment of our products by their respective departments to drive successful outcomes. As of March 31, 2024, over 1,530 agencies have received BolaWrap training with over 5,400 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments, representing an 10% increase in agencies and a 10% increase in trained officers as compared to March 31, 2024.

Previous wording

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

Current wording

Operating expense of $4.5 million for the three months ended March 31, 2025 decreased by $458 thousand, when compared to $5.0 million for the three months ended March 31, 2024, as a result of the Company’s cost containment initiatives enacted beginning during the first half of 2024.

Previous wording

As of September 30, 2024, we had backlog of approximately $156 thousand which is expected to be delivered in the fourth quarter of 2024. Additionally, as of September 30, 2024, we had deferred revenue of $673 thousand, which consisted of $97 thousand related to VR, $463 thousand related to Intrensic, $98 thousand related to BolaWrap extended warranties and services and $15 thousand related to training. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instances, cancellation, in the normal course of business.

Current wording

As of March 31, 2025, we had backlog of approximately $64 thousand which was expected to be delivered in the second quarter of 2025. Additionally, as of March 31, 2025, we had deferred revenue of $350 thousand consisting of $57 thousand related to VR, $234 thousand related to Intrensic, $54 thousand related to BolaWrap extended warranties and services and $5 thousand related to training. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instances, cancellation, in the normal course of business.

Previous wording

Since inception, we have generated significant losses from operations and anticipate that we will continue to generate significant losses from operations for the foreseeable future. We believe that we have adequate financial resources to sustain our operations for the next twelve months following this Report. We recorded net income of $1.7 million during the first nine months of fiscal 2024 as compared to net loss of $11.8 million during the first nine months of fiscal 2023, an improvement of approximately $13.5 million for the comparable period. Net cash used in operations during the nine months ended September 30, 2024, was $6.0 million less than net cash used in operations during the nine months ended September 30, 2023. This decrease in net cash used in operations during the first nine months of 2024 was primarily driven by the Company’s cost containment efforts initiated in the first half of 2024.

Current wording

Since inception, we have generated significant losses from operations and anticipate that we will continue to generate significant losses from operations for the foreseeable future. We believe that we have adequate financial resources to sustain our operations for the twelve months. We recorded net income of $109 thousand during the three months ended March 31, 2025, which was in-line with the net income of $117 thousand for the three months ended March 31, 2024. Net cash used in operations during the three months ended March 31, 2025, was $0.7 million less than net cash used in operations during the three months ended March 31, 2024. This decrease in net cash used in operations during the three months ended March 31, 2024, was primarily driven by the Company’s continued cost containment efforts.

Previous wording

Supply chain disruptions also affected our operations and could negatively impact our ability to source materials, manufacture and distribute products in the future. Moreover, financial markets continue to experience significant volatility, which could potentially affect our ability to enter into or modify favorable terms and conditions regarding equity and debt financing activities. Nevertheless, we had $4.9 million in cash and cash equivalents as of September 30, 2024. We therefore believe we have sufficient capital to fund our operations for the next twelve months following this Report. However, we may require additional working capital and liquidity constraints and access to capital markets could still negatively affect our liquidity and may require changes to our plan of operations.

Current wording

Supply chain disruptions also affected our operations and could negatively impact our ability to source materials, manufacture and distribute products in the future. Moreover, financial markets continue to experience significant volatility, which could potentially affect our ability to enter into or modify favorable terms and conditions regarding equity and debt financing activities. Nevertheless, we had $6.2 million in cash and cash equivalents as of March 31, 2025. We therefore believe we have sufficient capital to fund our operations for the next twelve months following this Report on Form 10-Q. However, we may require additional working capital and liquidity constraints and access to capital markets could still negatively affect our liquidity and may require changes to our plan of operations.

Previous wording

*Warrants.*The Company accounts for warrants as liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

Current wording

*Warrants.*The Company accounts for warrants as liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own shares of Common Stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

Previous wording

Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. Other than the warrants and business combination described above, there were no significant changes or modification of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the period ended September 30, 2024. Our accounting policies are more fully described in Note 1. Organization and Summary of Significant Accounting Policies in the notes to our audited consolidated financial statements included in the Annual Report.

Current wording

Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. Other than the warrants and business combination described above, there were no significant changes or modification of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the period ended March 31, 2025. Our accounting policies are more fully described in Note 1. Organization and Summary of Significant Accounting Policies in the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2024, as filed with the SEC on March 31, 2025.

Previous wording

We expect our operating costs will continue to reduce from the first quarter of 2024, as a result of the changes from ongoing cost containment efforts. We may incur additional non-cash share-based compensation costs depending on future option and restricted stock unit grants that are impacted by stock prices and other valuation factors. Historical expenditures are not indicative of future expenditures.

Current wording

We expect our operating costs will continue to stabilize or decline slightly from the first quarter of 2025 as a result of the changes from ongoing cost containment efforts. We may incur additional non-cash share-based compensation costs depending on future options and restricted stock unit grants that are impacted by stock prices and other valuation factors. Historical expenditures are not indicative of future expenditures.

Previous wording

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.

Current wording

The following table sets forth for the periods indicated certain items of our condensed consolidated statement of operations. The financial information and the discussion below should be read in conjunction with the financial statements and notes contained in this Quarterly Report on Form 10-Q.

Previous wording

Our gross profit for the three months ended September 30, 2024, was $235 thousand, or a gross margin of 40%. Our gross profit for the three months ended September 30, 2023, was $2.2 million, or a gross margin of 60%. The 89% year-over-year decrease in gross profit was a result of lower volumes of BolaWrap 150 product sales slightly offset by the added high-margin revenue from the Company’s Intrensic acquisition in August 2023.

Current wording

Our gross profit for the three months ended March 31, 2025, was $595 thousand, or a gross margin of 78%. Our gross profit for the three months ended March 31, 2024, was $836 thousand, or a gross margin of 57%. The decrease in gross profit represented a 29% decrease compared to the three months ended March 31, 2024, as a result of lower volume of the Bola Wrap 150 product sales offset by the added high-margin revenue from the Company’s Intrensic acquisition in August 2023 and acquisition ofW1 in February 2025.

Previous wording

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, as well as our higher margin revenue from the Intrensic product offerings. 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 10% of our overall revenue in the three months ended September 30, 2024, and will continue to grow as a recurring revenue base as more BolaWrap devices are in the field and the usage of BolaWrap increases due to the need of officers to de-escalate earlier to prevent injuries and use of higher levels of force.

Current wording

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 as well as our higher margin revenue from the Intrensic product offerings. 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 10% of our overall revenue in the three months ended March 31, 2025, and is expected to 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. Additionally, we expect that gross margins will be impacted by the added managed services and software revenue contributions in the second half of 2025.

Previous wording

Selling, general and administrative (“SG&A”) expense of $3.3 million for the three months ended September 30, 2024, was reduced by $1.0 million when compared to $4.3 million for the three months ended September 30, 2023. The decrease in SG&A expense was primarily the result of the Company’s cost containment initiatives enacted beginning in the first half of 2024 which was offset by an increase of $1.0 million in share-based compensation as well as by increased occupancy expenses related to our new office space.

Current wording

Selling, general and administrative (“SG&A”) expense of $4.1 million for the three months ended March 31, 2025, was reduced by $0.1 million when compared to $4.2 million for the three months ended March 31, 2024. The decrease in SG&A expense was primarily the result of the Company’s cost containment initiatives enacted beginning during the first half of 2024 which were offset by an increase of $1.0 million in share-based compensation as well as by increased occupancy expenses related to the new the office space in Florida.

Previous wording

Salaries and burden costs of $756 thousand for the three months ended September 30, 2024, were approximately $880 thousand lower than in the three months ended September 30, 2023. This reduction reflects an approximate 32% reduction in the Company’s workforce including a reduction of certain C-Level positions. During the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, we decreased professional and consulting fees by $907 thousand reflecting the Company’s cost containment efforts. We expect expenditures for SG&A expenses in 2024 to continue to decline in the last quarter of 2024, as a result of the Company’s cost cutting initiatives.

Current wording

Salaries and burden costs of $799 thousand for the three months ended March 31, 2025, were approximately $0.6 million lower than the three months ended March 31, 2024. This reduction reflects the reduction in the Company’s workforce including a reduction of certain C-Level positions. During the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, we decreased professional and consulting fees by $95 thousand reflecting the Company’s cost containment efforts. We expect expenditures for SG&A expenses in 2025 to increase from the first quarter’s run-rate as a result of the W1 acquisition.

Previous wording

Advertising and promotion costs were $81 thousand for the three months ended September 30, 2024, or a decrease of $143 thousand as compared to $224 thousand for the three months ended September 30, 2023. The changes in advertising costs were primarily related to reduced trade show costs offset by slight increases in digital marketing campaigns.

Current wording

Advertising and promotion costs were $81 thousand for the three months ended March 31, 2025, or a decrease of $182 thousand as compared to $263 thousand during the three months ended March 31, 2024. The changes in advertising costs were primarily related to reduced trade show costs offset by slight increases in digital marketing campaigns.

Previous wording

Research and development expense decreased by $83 thousand for the three months ended September 30, 2024, when compared to the three months ended September 30, 2023. We incurred a $36 thousand period over period increase in compensation expense as well as a $71 thousand period over period decrease in share-based compensation expense allocated to research and development expense as a result of reduction of personnel. Outside consulting costs decreased by $8 thousand for the three months ended September 30, 2024, when compared to the three months ended September 30, 2023, primarily due to the Company’s move to a more variable cost model.

Current wording

Research and development expense totaling $378 thousand decreased by $377 thousand for the three months ended March 31, 2025, when compared to the three months ended March 31, 2024. We incurred a $309 thousand period-over-period decrease in compensation expense as well as a $34 thousand period-over-period increase in share-based compensation expense allocated to research and development expense as a result of reduction of personnel. Outside consulting costs decreased by $21 thousand for the three months ended March 31, 2025, when compared to the three months ended March 31, 2024, primarily due to the Company’s move to a more variable cost model.

Previous wording

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

Current wording

Loss from operations of $3.9 million during the three months ended March 31, 2025, was a decrease of $0.2 million compared to loss from operations of $4.1 million during the three months ended March 31, 2024, primarily reflecting the reduced revenues offset by lower operating costs from the Company’s cost containment efforts.

Previous wording

We have experienced net losses and negative cash flows from operations since our inception. As of September 30, 2024, we had cash and cash equivalents of $4.9 million, working capital of $1.6 million including the $7.2 million value of the Series A Warrants recorded in connection with the issuance of the Series A Preferred Stock in July 2023, and had sustained cumulative losses attributable to stockholders of $97.3 million. Our working capital net of the warrants-short term at September 30, 2024 was $8.6 million lower compared to December 31, 2023, primarily as a result of operating losses of $10.9 million for the period. Our working capital as of September 30, 2024 was negatively affected by the continued operating losses during the prior twelve months. We believe we have sufficient capital to fund our operations for the next twelve months following this Report. However, liquidity constraints and access to capital markets could still negatively affect our liquidity and may require changes to our investment strategy.

Current wording

We have experienced net losses and negative cash flows from operations since our inception. As of March 31, 2025, we had cash of $6.2 million, negative working capital of $0.3 million including the $11.3 million of the Series A Warrants recorded in connection with the issuance of the Series A Preferred Stock in July 2023 as well as the PIPE Warrants (as defined herein) issued in connection with the Private Placement (as defined herein), and had sustained cumulative losses attributable to stockholders of $105.1 million. Our working capital net of the warrants-short term as of March 31, 2025, was $3.6 million higher compared to December 31, 2024, primarily as a result of the cash received in the Private Placement offset by operating losses of $3.9 million for the three months ended March 31, 2025. We believe we have sufficient capital to fund our operations for the next twelve months from the date of this Quarterly Report on Form 10-Q. However, liquidity constraints and access to capital markets could still negatively affect our liquidity and may require changes to our investment strategy.

Previous wording

The terms of the Series A Preferred Stock are as set forth in the form of Certificate of Designations of the Series A Preferred Stock. The Series A Preferred Stock is convertible into shares of Common Stock (the “Conversion Shares”) at the election of the holder at any time at an initial conversion price of $1.45 per share (the “Conversion Price”). The Conversion Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for Common Stock, at a price below the then-applicable Conversion Price (subject to certain exceptions).

Current wording

On July 3, 2023, the Company filed the Certificate of Designations of the Series A Preferred Stock (the “Certificate of Designations”) with the Secretary of State of the State of Delaware, designating 10,000 shares of its Preferred Stock as Series A Convertible Preferred Stock. The Series A Preferred Stock is convertible into shares of Common Stock (the “Conversion Shares”) at the election of the holder at any time at an initial conversion price of $1.45 (the “Conversion Price”). The Conversion Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for Common Stock, at a price below the then-applicable Conversion Price (subject to certain exceptions).

Previous wording

The holders of the Series A Preferred Stock are entitled to dividends of 8% per annum, compounded monthly, which are payable in cash or shares of Common Stock, or a combination thereof, at the Company’s option in accordance with the terms of the Certificate of Designations. Upon the occurrence and during the continuance of a Triggering Event (as defined in the Certificate of Designations), the Series A Preferred Stock will accrue dividends at the rate of 20% per annum. If the Company elects to pay any dividends in shares of Common Stock, the Conversion Price used to calculate the number of shares issuable will be equal to the lower of (i) the then applicable Conversion Price and (ii) 85% of the arithmetic average of the three (3) lowest closing prices of the Common Stock during the twenty (20) consecutive trading day period ending on the trading day immediately preceding the dividend payment date, provided that such price shall not be lower than the lower of (x) $0.2828 (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events ) and (y) 20% of the “Minimum Price” (as defined in Nasdaq Stock Market Rule 5635) on the date of the Nasdaq Stockholder Approval (as defined herein) (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events) or, in any case, such lower amount as permitted, from time to time, by the Nasdaq Stock Market.

Current wording

The holders of the Series A Preferred Stock are entitled to dividends of 8% per annum, compounded monthly, which are payable in cash or shares of Common Stock, or a combination thereof, at the Company’s option in accordance with the terms of the Certificate of Designations. Upon the occurrence and during the continuance of a Triggering Event (as defined in the Certificate of Designations), the Series A Preferred Stock will accrue dividends at the rate of 20% per annum. If the Company elects to pay any dividends in shares of Common Stock, the Conversion Price used to calculate the number of shares issuable will equal to the lower of (i) the then applicable Conversion Price and (ii) 85% of the arithmetic average of the three (3) lowest closing prices of the Company’s Common Stock during the twenty (20) consecutive trading day period ending on the trading day immediately preceding the dividend payment date, provided that such price shall not be lower than the lower of (x) $0.2828 (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events ) and (y) 20% of the “Minimum Price” (as defined in Nasdaq Stock Market Rule 5635) on the date of the Stockholder Approval (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events) or, in any case, such lower amount as permitted, from time to time, by the Nasdaq Stock Market.

Previous wording

On August 19, 2024, the Company entered into an Amendment Agreement (the “Series A Amendment”) with the Required Holders (as defined in the Certificate of Designations). Pursuant to the Series A Amendment, the Required Holders agreed that (A) the unpaid and accrued dividends on the Series A Preferred Stock due July 1, 2024 (the “July Delinquent Dividend Amount”), shall be payable, at the option of the Company, in (i) cash and/or (ii) shares of Common Stock, at a price per share of Common Stock equal to the lower of (x) $1.00 and (y) the Dividend Conversion Price (as defined in the Certificate of Designations), using July 1, 2024, as the applicable date of determination in accordance with the Certificate of Designations; (B) the dividends due on October 1, 2024 (the “October Dividend Amount” and, together with the July Delinquent Dividend Amount, the “Delinquent Dividend Amounts”), shall be payable in shares of Common Stock based on a per share price of Common Stock equal to 80% of the arithmetic average of the three (3) lowest closing sale prices of the Common Stock during the month of September 2024; and (C) such Delinquent Dividend Amounts and any Dividend Balance Shares (as defined in the Certificate of Designations), with respect thereto, if applicable, shall be delivered on October 1, 2024 and the Pre-Dividend Shares (as defined in the Certificate of Designations) with respect to each of the July Delinquent Dividend Amount and the October Dividend Amount, if applicable, shall be delivered to the Series A Investors on or prior to the twenty-first (21st) trading day prior to October 1, 2024. The Company and the Required Holders further agreed pursuant to the Series A Amendment to amend (i) the Certificate of Designations, as described below, by filing a Certificate of Amendment to the Certificate of Designations (the “Certificate of Amendment”) and (ii) the Series A Purchase Agreement to amend the definition of “Excluded Securities.”

Current wording

On August 19, 2024, the Company entered into an Amendment Agreement (the “August 2024 Amendment”) with the Required Holders (as defined in the Certificate of Designations). Pursuant to the August 2024 Amendment, the Required Holders agreed that (A) the unpaid and accrued dividends on the Series A Preferred Stock due July 1, 2024 (the “July Delinquent Dividend Amount”), shall be payable, at the option of the Company, in (i) cash and/or (ii) shares of Common Stock, at a price per share of Common Stock equal to the lower of (x) $1.00 and (y) the Dividend Conversion Price (as defined in the Certificate of Designations), using July 1, 2024, as the applicable date of determination in accordance with the Certificate of Designations; (B) the dividends due on October 1, 2024 (the “October Dividend Amount” and, together with the July Delinquent Dividend Amount, the “Delinquent Dividend Amounts”), shall be payable in shares of Common Stock based on a per share price of Common Stock equal to 80% of the arithmetic average of the three (3) lowest closing sale prices of the Common Stock during the month of September 2024; and (C) such Delinquent Dividend Amounts and any Dividend Balance Shares (as defined in the Certificate of Designations), with respect thereto, if applicable, shall be delivered on October 1, 2024. The Company and the Required Holders further agreed pursuant to the August 2024 Amendment to amend (i) the Certificate of Designations, as described below, by filing a Certificate of Amendment to the Certificate of Designations (the “August 2024 Certificate of Amendment”) and (ii) the Series A Purchase Agreement to amend the definition of “Excluded Securities.” The August 2024 Certificate of Amendment amends the Certificate of Designations to, among other things, (A) allow for the payment of dividends in the form of Common Stock to a holder of the Series A Preferred Stock who serves as a director, officer or employee of the Company; provided that such issuance is approved by the Company’s stockholders prior to such issuance, and (B) amend certain conditions required for (i) a mandatory conversion of the Series A Preferred Stock, and (ii) the Company’s right to redeem, all or a portion, of the Series A Preferred Stock outstanding pursuant to an optional redemption, in each case, pursuant to the terms of the Certificate of Designations.

Previous wording

On October 14, 2024, the Company entered into an Amendment Agreement (the “October 2024 Series A Amendment”) with the Required Holders. Pursuant to the October 2024 Series A Amendment, the Required Holders agreed to further amend the Certificate of Designations (the “October 2024 Certificate of Amendment”). Pursuant to the October 2024 Certificate of Amendment, (i) the Series A Preferred Stock is now entitled to voting rights as described therein, (ii) certain holders of the Preferred Stock are no longer subject to certain beneficial ownership limitations as described in the Certificate of Designations, and (iii) stockholder approval is no longer required in connection with the payment of dividends in the form of Common Stock to a holder of the Series A Preferred Stock who serves as a director, officer or employee of the Company. The October 2024 Certificate of Amendment was filed with the Secretary of State of the State of Delaware on October 14, 2024.

Current wording

On October 14, 2024, the Company entered into an Amendment Agreement with the Required Holders (as defined in the Certificate of Designations), pursuant to which, the Required Holders agreed to amend the Certificate of Designations of the Company’s Series A Preferred Stock, as described below, by filing a Certificate of Amendment to the Certificate of Designations (the “October 2024 Certificate of Amendment”). The October 2024 Certificate of Amendment amends the Certificate of Designations to, among other things, provide that, except as required by applicable law, the holders of the Series A Preferred Stock will be entitled to vote with holders of the Common Stock on an as converted basis, with the number of votes to which each holder of Series A Preferred Stock is entitled to be calculated assuming a conversion price of $1.414 per share, which was the Minimum Price (as defined in Rule 5635 of the Rule of the Nasdaq Stock Market) applicable immediately before the execution and delivery of the Series A Purchase Agreement, subject to certain beneficial ownership limitations as set forth in the Certificate of Designations. The October 2024 Certificate of Amendment further provides that (i) certain holders of the Series A Preferred Stock will not be subject to certain beneficial ownership limitations as described in the Certificate of Designations, and (ii) stockholder approval will not be required in connection with the payment of dividends in the form of Common Stock to a holder of the Series A Preferred Stock who serves as a director, officer or employee of the Company. The October 2024 Certificate of Amendment was filed with the Secretary of State of the State of Delaware, effective as of October 14, 2024.The holders of the Series A Preferred Stock have no voting rights, other than with respect to certain matters affecting the rights of the Series A Preferred Stock.

Previous wording

The Company may require holders to convert their Series A Preferred Stock into shares of Common Stock if the closing price of the Common Stock exceeds $8.00 per share (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events) for 20 consecutive trading days and the daily dollar trading volume of the Common Stock exceeds $2,000,000 per day during the same period and certain equity conditions described in the Certificate of Designations are satisfied.

Current wording

The Company may require holders to convert their shares of Series A Preferred Stock into shares of Common Stock if the closing price of the Company’s Common Stock exceeds $8.00 per share (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events) for 20 consecutive trading days and the daily dollar trading volume of the Common Stock exceeds $2,000,000 per day during the same period, provided that certain equity conditions described in the Certificate of Designations are satisfied.

Previous wording

At any time beginning 18 months from the date of the issuance, provided that certain equity conditions described in the Certificate of Designations are satisfied, and provided further that the Company has filed all reports required to be filed by it pursuant to the Exchange Act on a timely basis for a continuous period of one year, the Company has the right to redeem in cash all or some of the shares of the Series A Preferred Stock outstanding at such time at a redemption price equal to the product of (x) 125% multiplied by (y) the sum of (A) the stated value of the Series A Preferred Stock plus (B) all declared and unpaid dividends on such Series A Preferred Stock and any other unpaid amounts then due and payable hereunder with respect to such Series A Preferred Stock, plus (C) the make-whole amount, plus (D) any accrued and unpaid late charges with respect to such stated value and amounts payable pursuant to clause (B) as of such date of determination.

Current wording

At any time beginning 18 months from the date of the issuance, provided that provided that that the Company has filed all reports required to be filed by it pursuant to the Exchange Act on a timely basis for a continuous period of one year and provided further that certain equity conditions described in the Certificate of Designations are satisfied, the Company has the right to redeem in cash all or some of the shares of the Series A Preferred Stock outstanding at such time at a redemption price equal to the product of (x) 125% multiplied by (y) the sum of (A) the stated value of the Series A Preferred Stock plus (B) all declared and unpaid Dividends on such Preferred Stock and any other unpaid amounts then due and payable hereunder with respect to such Series A Preferred Stock, plus (C) the make-whole amount, plus (D) any accrued and unpaid late charges with respect to such stated value and amounts payable pursuant to clause (B) as of such date of determination.

Previous wording

The Certificate of Amendment amended the Certificate of Designations to, among other things, (A) allow for the payment of dividends in the form of Common Stock to a holder of the Series A Preferred Stock who serves as a director, officer or employee of the Company; provided that such issuance is approved by the Company’s stockholders prior to such issuance, which was subsequently further amended by the October 2024 Certificate of Amendment (as defined below), (B) amend certain conditions required for (i) a mandatory conversion of the Series A Preferred Stock, and (ii) the Company’s right to redeem, all or a portion, of the Series A Preferred Stock outstanding pursuant to an optional redemption, in each case, pursuant to the terms of the Certificate of Designations, and (C) amend the definition of “Excluded Securities” to exclude Dividend Shares (as defined in the Certificate of Designations) and shares of Common Stock issued in connection with the payments of dividends. The Certificate of Amendment was filed with the Secretary of State of the State of Delaware on August 23, 2024.

Current wording

The Certificate of Amendment amends the Certificate of Designations to, among other things, (A) allow for the payment of dividends in the form of Common Stock to a holder of the Series A Preferred Stock who serves as a director, officer or employee of the Company; provided that such issuance is approved by the Company’s stockholders prior to such issuance, and (B) amend certain conditions required for (i) a mandatory conversion of the Series A Preferred Stock, and (ii) the Company’s right to redeem, all or a portion, of the Series A Preferred Stock outstanding pursuant to an optional redemption, in each case, pursuant to the terms of the Certificate of Designations.

Previous wording

The Company’s ability to issue Conversion Shares and Series A Warrant Shares is subject to certain limitations set forth in the Certificate of Designations. Prior to receiving the Nasdaq Stockholder Approval (as defined below), such limitations included a limit on the number of shares that may be issued until the time, if any, that the Company’s stockholders have approved the issuance of more than 19.99% of the Company’s outstanding shares of Common Stock in accordance with the rules of the Nasdaq Stock Market (the “Nasdaq Stockholder Approval”). Such Nasdaq Stockholder Approval was received at a special meeting of stockholders held on September 19, 2023.

Current wording

The Company’s ability to issue Conversion Shares and Series A Warrant Shares using shares of Common Stock is subject to certain limitations set forth in the Certificate of Designations. Prior to receiving the Nasdaq Stockholder Approval, such limitations included a limit on the number of shares that may be issued until the time, if any, that the Company’s stockholders have approved the issuance of more than 19.99% of the Company’s outstanding shares of Common Stock in accordance with the rules of the Nasdaq Stock Market (the “Nasdaq Stockholder Approval”). Such Nasdaq Stockholder Approval was received at a special meeting of stockholders held on September 19, 2023.

Previous wording

During the nine months ended September 30, 2023, net cash used in operating activities was $12.9 million. The net loss of $11.8 million was decreased by non-cash expense of $2.5 million consisting primarily of share-based compensation expense of $1.6 million. Other major component changes using operating cash included an increase of $1.8 million in inventories and a net increase in accounts receivable of $1.4 million.

Current wording

During the three months ended March 31, 2025, net cash used in operating activities was $3.1 million. The net income of $109 thousand was decreased by non-cash income of $4.0 million related to the change in fair value of warrants and increased by non-cash expense of $1.9 million consisting primarily of share-based compensation expense of $1.7 million and depreciation and amortization of $155 thousand. Other major component changes using operating cash included an increase of $404 thousand in prepaids and a $184 thousand increase in accounts receivable as well as a decrease in both accounts payable of $115 thousand and accrued liabilities of $272 thousand.

Previous wording

During the nine months ended September 30, 2024, net cash used in operating activities was $6.9 million. The net income of $1.7 million was decreased by non-cash income of $12.5 million related to the change in fair value of warrants and increased by non-cash expense of $2.4 million consisting primarily of share-based compensation expense of $1.8 million and depreciation and amortization of $619 thousand. Other major component changes using operating cash included an increase of $529 thousand in inventories and a decrease in both accounts receivable of $2.3 million and customer deposits of $1.0 million.

Current wording

During the three months ended March 31, 2024, net cash used in operating activities was $3.7 million. The net income of $117 thousand was decreased by non-cash income of $4.2 million related to the change in fair value of warrants and increased by non-cash expense of $1.1 million consisting primarily of share-based compensation expense of $848 thousand. Other major component changes using operating cash included an increase of $584 thousand in inventories and a decrease in accounts receivable of $683 thousand.

Previous wording

During the nine months ended September 30, 2024, we had proceeds from maturities of short-term investments of $7.5 million. During the nine months ended September 30, 2024, we used $13 thousand of cash for the purchase of property and equipment and invested $124 thousand in patents.

Current wording

During the three months ended March 31, 2024, we had proceeds from maturities of short-term investments of $2.5 million. During the three months ended March 31, 2024, we used $14 thousand cash for the purchase of property and equipment and invested $66 thousand in patents and equipment.

Previous wording

During the nine months ended September 30, 2024, we received $588 thousand in proceeds from the exercise of previously issued stock options and paid $120 thousand in cash dividends on the Company’s Series A Preferred Stock.

Current wording

During the three months ended March 31, 2024, we received $588 thousand in proceeds from the exercise of previously issued stock options and paid $60 thousand in cash dividends on the Company’s Series A Preferred Stock.

Previous wording

Pursuant to the License Agreement, we are obligated to pay to Syzygy a 4% royalty fee on future product sales up to an aggregate amount of $1.0 million in royalty payments or until September 30, 2026, whichever occurs earlier. We recorded $66 thousand for royalties during the nine months ended September 30, 2024. The maximum payout was satisfied as of June 30, 2024.

Current wording

Pursuant to that certain exclusive Amended and Restated Intellectual Property License Agreement dated September 30, 2016, by and between the Company and Syzygy Licensing, LLC (“Syzygy”), we are obligated to pay to Syzygy a 4% royalty fee on future product sales up to an aggregate amount of $1.0 million in royalty payments or until September 30, 2026, whichever occurs earlier. We recorded $66 thousand for royalties during the three months ended March 31, 2025. The maximum payout has been reached as of June 30, 2024, and we have included $81 thousand in our accrued liabilities.

Previous wording

As of September 30, 2024, we were committed for approximately $941 thousand for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

Current wording

As of March 31, 2025, we were committed to approximately $509 thousand for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

Previous wording

During the nine months ended September 30, 2024, and the year ended December 31, 2023, we had experienced increased costs in labor and materials due to inflation. We believe throughout 2024 that low unemployment and higher salaries will create higher payroll costs and increased operating expense in the business. We have seen increases in costs from multiple suppliers for materials as well as labor.

Current wording

During the three months ended March 31, 2025, and for the year ended December 31, 2024, we had experienced increased costs in labor and materials due to inflation. We believe throughout 2025 that low unemployment and higher salaries will create higher payroll costs and increased operating expense in the business. We have seen increases in costs from multiple suppliers for materials as well as labor.