Wrap Technologies, Inc.: Form 10-Q for the period ended Jun 30, 2026

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, 2025 (the “Annual Report”). This Report may contain or incorporate by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are based upon management’s assumptions, expectations, projections, intentions and beliefs about future events. Except for historical information, the use of predictive, future-tense or forward-looking 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 several 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 the Annual 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.

References in this management’s discussion and analysis to “we,” “us,” “our,” “the Company,” “our Company,” or “Wrap” refer to Wrap Technologies, Inc. and its subsidiaries.

Overview

We are a global public safety technology company that delivers non-lethal public safety solutions to law enforcement and security personnel worldwide. Management is pursuing a strategy to expand the Company from a provider of individual non-lethal products toward a provider of an integrated public safety platform that the Company refers to as WrapShield™. WrapShield is designed to connect threat detection, AI-assisted decision support, and proportionate response, with human decision-makers remaining in control. The initial focus for the platform is counter-unmanned aircraft system (“counter-UAS”) applications, and management intends to extend the architecture over time to additional public safety, critical infrastructure, and defense applications. The Company’s current commercial foundation remains the BolaWrap® 150 remote restraint device and its related products and services, and is a critical piece of the platform strategy.

Our product and service portfolio includes the BolaWrap® device, cassettes and related accessories. We also offer technology-enabled services including Wrap Reality VR training simulator, WrapTactics digital training platform, and WrapVision™ body-worn camera and digital evidence management solution, managed services and policy support.

Our core offerings are designed to provide officers and agencies with integrated non-lethal tools, training, and tactics that support safer outcomes and sustained readiness across the public safety ecosystem. BolaWrap gives officers a proactive, non-lethal tactical option through a tether deployment system sold with recurring consumable cassettes. In July 2026, the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (the “ATF”) issued a ruling classifying the BolaWrap® 150 as an instrument of restraint rather than a firearm or an “any other weapon.” Our non-lethal response offerings are designed to function as a family of instruments of restraint. In addition to the handheld BolaWrap® 150, the Company completed a first operational prototype of Wraptor MX™, a multi-shot restraint platform intended for tactical, corrections, and security environments, and is developing the DFR-X™ drone-deployed restraint system. Wraptor MX and DFR-X are in development and are not yet commercially available.

Wrap Reality and WrapTactics are designed to deliver immersive VR and subscription-based digital training focused on decision-making under stress, use of force judgment, and non-lethal response tactics. WrapVision provides a body-worn camera and cloud-based digital evidence management platform designed to meet federal procurement and data-sovereignty requirements.

We are also expanding our tether deployment technology into counter UAS and defense applications through our MERLIN program, which management expects to advance within the WrapShield platform, and which targets non-lethal drone interdiction capabilities for defense, homeland security, and critical-infrastructure protection missions.

To establish an advanced-sensing detection capability for the platform, in July 2026 the Company made a strategic investment in Frenel and obtained an exclusive license to its thermal-polarimetric imaging technology for the United States and NATO markets, as further described below under Recent Developments.

Recent Developments

The following developments occurred subsequent to June 30, 2026. Except as otherwise noted, they did not affect the Company’s financial position or results of operations for the periods presented, and their effect on future results is uncertain.

ATF Ruling 2026-2

In July 2026, ATF Ruling 2026-2 became effective, classifying the BolaWrap® 150 as an instrument of restraint and determining that it is neither a “firearm” under the Gun Control Act or an “any other weapon” under the National Firearms Act. The ruling supersedes prior ATF classifications of the BolaWrap 150. Management believes the ruling may reduce federal regulatory ambiguity that has historically complicated BolaWrap procurement in certain corrections, civilian-safety, and international channels, and may support broader adoption. The ruling addresses the BolaWrap 150 only and does not extend to the Company’s other products.

Strategic Investment in Frenel Imaging Ltd.

In July 2026, the Company made a strategic investment in Frenel, an advanced-sensing company, and obtained an exclusive license to commercialize Frenel’s TPiCore® thermal-polarimetric imaging technology in the United States and NATO markets. The Company intends to use this technology as the detection layer of the WrapShield platform. The investment and license are in an early stage, and the timing and amount of any resulting revenue are uncertain.

WrapShield Platform

In July 2026, the Company introduced WrapShield™, a platform strategy intended to integrate threat detection, AI-assisted decision support, command-and-control, and proportionate response into a single operating architecture, with an initial application in counter-UAS. WrapShield is in an early stage of development, and its commercialization, integration, and market adoption are subject to significant uncertainty.

Wraptor MX and Early Adopter Program

In July 2026, the Company completed a first operational prototype of Wraptor MX™, a multi-shot non-lethal restraint platform, and opened an early adopter program to select a limited number of law enforcement agencies for pre-commercial access. Wraptor MX is a prototype and is not commercially available. Participation in the early adopter program may not result in orders or revenue.

Business Outlook

We believe demand for integrated non-lethal solutions will continue to be influenced by public expectations for proportional and accountable use of force, evolving legal and policy standards, and increased emphasis on officer safety, community trust, and sustained operational readiness. Modern policing operates under continuous public and legal scrutiny, creating a need for tools, training, and tactics that give officers defensible, proportional options in dynamic encounters. Our business outlook is shaped by our ability to increase adoption of our core products, deepen customer relationships through programmatic training and service delivery, expand recurring revenue, and selectively enter adjacent markets while managing costs and capital resources.

In 2026, our near-term focus is on expanding agency-wide deployments of BolaWrap, increasing utilization of our training and subscription-based offerings, including Wrap Reality and WrapTactics, and advancing commercialization efforts for WrapVision. Management believes the recent ATF ruling classifying the BolaWrap 150 as an instrument of restraint may support adoption in certain corrections, civilian-safety, and international channels, although the effect on future results is uncertain. Management also intends to advance the WrapShield platform strategy, including the integration of Frenel’s thermal-polarimetric sensing technology and the continued development of the Wraptor MX and DFR-X non-lethal response systems. These initiatives are in early stages, and the timing and scale of any resulting revenue are uncertain and depend on product development, testing, funding, and government procurement decisions. We also expect to continue evaluating development and demonstration opportunities related to our counter UAS initiatives, although the timing and scale of any resulting revenues remain uncertain and dependent on government testing, funding, and procurement decisions.

Our results will continue to be influenced by government budget cycles, procurement processes, and the availability of grant funding at the federal, state, and local levels. We also expect international sales to remain uneven due to centralized procurement processes and the timing of large orders. While we have implemented cost containment initiatives and continue to evaluate our operating structure, we expect to continue incurring operating losses until we achieve sufficient scale, margin improvement, and recurring revenue to offset our fixed costs.

Business Trends

Our ability to execute our strategy and improve our financial performance is subject to a number of risks and challenges, many of which are outside of our control. A significant portion of our revenues is derived from government customers, which exposes us to extended sales cycles, budget constraints, procurement delays, and changes in public policy or funding priorities. These factors can result in variability in the timing and amount of revenue recognized and may make it difficult to predict future operating results.

We are subject to extensive regulation, including firearms classification, export controls, procurement requirements, and data privacy and cybersecurity regulations. In July 2026, the ATF classified the BolaWrap 150 as an instrument of restraint rather than a firearm, which management believes may reduce certain regulatory friction for that product. This classification applies to the BolaWrap 150 only and does not extend to our other products, and our expansion into advanced sensing, counter-UAS, and defense applications may subject us to additional regulatory regimes, including export controls under the International Traffic in Arms Regulations and the Export Administration Regulations and applicable aviation regulations. Changes in regulatory interpretation or enforcement could adversely affect our ability to manufacture, sell, or distribute our products. Our platform strategy also depends in part on technologies developed by third parties, including Frenel, and on our ability to integrate, commercialize, and support new products.

Effects of Inflation

The Company has experienced increased costs related to labor and materials, which management attributes in part to inflationary pressures. These cost increases have been driven primarily by higher wage rates, competitive labor market conditions, and increased supplier pricing for certain materials and services. The Company has taken steps to mitigate the impact through cost containment initiatives, workforce reductions, supply chain management efforts, and selective pricing actions where appropriate. However, continued inflationary pressures could result in higher operating costs in future periods, and there can be no assurance that the Company will be able to fully offset such increases through operational efficiencies or pricing adjustments.

Segment and Related Information

The Company operates as a single segment. The Company's chief operating decision maker is Scot Cohen, the Company's Executive Chairman and Chief Executive Officer, who manages operations for purposes of allocating resources. See Note 15, Segment Information, to the condensed consolidated financial statements for the significant expense categories regularly reviewed by the CODM and the reconciliation to consolidated loss from operations.

Results of Operations

Three Months Ended June 30, 2026, Compared to Three Months Ended June 30, 2025 (Unaudited)

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.

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Revenue

We reported net revenue of $2.1 million for the three months ended June 30, 2026, as compared to $1.0 million for the three months ended June 30, 2025, representing an increase of $1.0 million, or 103%. The increase reflects higher product sales, partially offset by a decline in technology-enabled services revenue.

Product sales were $1.7 million for the three months ended June 30, 2026, compared to $50 thousand for the three months ended June 30, 2025, an increase of $1.7 million. The increase reflects higher shipments of BolaWrap 150 devices and cassettes to both domestic and international customers, as order flow continued to improve following the transition to a more direct, agency-focused go-to-market approach. Cassettes and consumables represented a growing component of product revenue, consistent with the expanding base of BolaWrap devices in active field use. Product sales for the three months ended June 30, 2025 reflected an unusually low level of shipments as compared to more typical quarterly volumes.

Technology-enabled services revenue was $0.3 million for the three months ended June 30, 2026, compared to $1.0 million for the three months ended June 30, 2025, a decrease of $0.7 million, or 68%. The decrease reflects the continued wind-down of the managed services and advisory arrangements associated with the W1 asset acquisition completed in February 2025, which contributed a higher level of revenue in the prior-year quarter and are not necessarily representative of the ongoing business. This decline was partially offset by growth in WrapVision body-worn camera and related software revenue. The Company continues to focus its technology-enabled services revenue on its higher-margin subscription and software-based offerings, including WrapTactics and Wrap Reality, as well as WrapVision evidence management subscriptions. The timing of subscription renewals and new contract activations also contributed to the year-over-year decline in this revenue category for the three months ended June 30, 2026.

Prior period "Managed services" and "Other revenue" have been reclassified into "Technology enabled services" to conform to the current period presentation.

Gross Profit

Gross profit was $1.5 million for the three months ended June 30, 2026, compared to $0.5 million for the three months ended June 30, 2025, an increase of $1.1 million, or 217%. Gross margin was 75.3% for the three months ended June 30, 2026, compared to 48.1% for the three months ended June 30, 2025. The improvement in gross margin percentage primarily reflects the higher volume of product sales, which absorbed fixed manufacturing overhead more efficiently, and a more favorable overall mix, as the prior-year quarter included a higher proportion of lower-margin managed services revenue associated with the W1 wind-down. Cost of revenues decreased $18 thousand to $0.5 million despite the higher sales volume, reflecting improved production efficiencies. We expect gross margins to continue to be influenced by the relative mix of product sales and technology-enabled services revenue in future periods.

Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expense was $3.6 million for the three months ended June 30, 2026, compared to $3.2 million for the three months ended June 30, 2025, an increase of $0.5 million, or 15%. The increase was driven primarily by higher non-cash share-based compensation expense.

Share-based compensation allocated to SG&A was $1.2 million for the three months ended June 30, 2026, compared to $0.8 million for the three months ended June 30, 2025, reflecting grants issued to new and existing employees and officers in connection with equity incentive awards granted in 2025.

Cash-based SG&A costs, including salaries and burden, occupancy, marketing, and professional fees were $2.5 million for the three months ended June 30, 2026, compared to $2.4 million for the three months ended June 30, 2025. The increase of approximately $49 thousand, or 2%, was primarily due to increased professional fees, largely offset by ongoing cost discipline across office and other general and administrative expenses.

Research and Development Expense

Research and development expense was $152 thousand for the three months ended June 30, 2026, compared to $162 thousand for the three months ended June 30, 2025, a decrease of $10 thousand, or 6%. R&D spending remained at a modest level as the Company's primary platforms — BolaWrap 150, WrapTactics, WrapVision, and Wrap Reality — remain in commercial deployment, with continued investment focused on incremental product enhancements, the WrapTactics content library, and counter-UAS development activities for the MERLIN program.

Operating Loss

Loss from operations was $2.3 million for the three months ended June 30, 2026, compared to $2.9 million for the three months ended June 30, 2025, an improvement of $0.6 million, or 21%. The decreased operating loss reflected higher gross profit driven by increased product sales, partially offset by higher SG&A expense.

Other Income (Expense), Net

Total other expense, net was $6 thousand for the three months ended June 30, 2026, compared to total other expense, net of $871 thousand for the three months ended June 30, 2025, a decrease in expense of $865 thousand. The year-over-year change is primarily attributable to the non-recurrence of a non-cash loss from the change in fair value of warrant liabilities that was recorded during the three months ended June 30, 2025, prior to the warrants' reclassification to permanent equity.

Gain on Lease Termination. The $227 thousand non-cash gain on lease termination related to the early termination of the office lease at 3480 Main Highway, Suite 202, Miami, Florida (Coconut Grove) was recognized during the three months ended March 31, 2026 in connection with a Termination and Mutual Release Agreement entered into with the landlord on February 13, 2026. No gain or loss on lease termination was recognized during the three months ended June 30, 2026.

Change in Fair Value of Warrant Liabilities. During the three months ended June 30, 2025, the Company recognized an $871 thousand non-cash loss attributable to an increase in the fair value of outstanding warrant liabilities prior to their reclassification to permanent equity. On June 30, 2025, the Company amended its warrants issued in connection with the Series A Preferred Stock offering (the “Series A Warrants”) and its warrants issued in the February 2025 private placement (the “PIPE Warrants”), resulting in their reclassification from warrant liabilities to permanent equity under ASC 815-40. Following this reclassification, the Company no longer carries warrant liabilities on its balance sheet and does not record non-cash income or expense related to changes in warrant fair value. Accordingly, no such gain or loss was recognized during the three months ended June 30, 2026, and no comparable item is expected in future periods.

Interest Income. Interest income was $2 thousand for the three months ended June 30, 2026, consistent with $2 thousand for the three months ended June 30, 2025.

Net Loss. Net loss was $2.3 million for the three months ended June 30, 2026, compared to net loss of $3.7 million for the three months ended June 30, 2025. The decreased net loss primarily reflects the non-recurrence of the $871 thousand non-cash loss on the change in fair value of warrant liabilities recorded in the prior-year quarter, together with the improvement in operating results driven by higher product sales.

Net loss attributable to common stockholders was $2.4 million, or $(0.04) per basic and diluted share, for the three months ended June 30, 2026, compared to a net loss attributable to common stockholders of $3.9 million, or $(0.07) per basic and diluted share, for the three months ended June 30, 2025. The weighted average common shares used in the calculation were approximately 55.7 million for the three months ended June 30, 2026, compared to 50.6 million for the three months ended June 30, 2025, reflecting shares issued in the February 2026 private placement and other equity issuances.

Six Months Ended June 30, 2026, Compared to Six Months Ended June 30, 2025 (Unaudited)

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.

Revenue

We reported net revenue of $3.2 million for the six months ended June 30, 2026, as compared to $1.8 million for the six months ended June 30, 2025, representing an increase of $1.4 million, or 78%. The increase reflects higher product sales, partially offset by a decline in technology-enabled services revenue.

Product sales were $2.6 million for the six months ended June 30, 2026, compared to $0.4 million for the six months ended June 30, 2025, an increase of $2.3 million, or 633%. The increase reflects higher shipments of BolaWrap 150 devices and cassettes to both domestic and international customers as order flow continued to improve following the transition to a more direct, agency-focused go-to-market approach. Cassettes and consumables represented a growing component of product revenue, consistent with the expanding base of BolaWrap devices in active field use.

Technology-enabled services revenue was $0.5 million for the six months ended June 30, 2026, compared to $1.4 million for the six months ended June 30, 2025, a decrease of $0.9 million, or 62%. The decrease reflects the strategic restructuring of our managed services offerings following the Company's decision to wind down certain advisory and investigative service arrangements associated with the W1 asset acquisition in February 2025, which are not necessarily representative of the ongoing business. This decline was partially offset by growth in WrapVision body-worn camera and related software revenue. The Company is focusing its technology-enabled services revenue on its higher-margin subscription and software-based offerings, including WrapTactics and Wrap Reality, as well as WrapVision evidence management subscriptions. The timing of subscription renewals and new contract activations contributed to the year-over-year decline in this revenue category for the six months ended June 30, 2026.

Prior period "Managed services" and "Other revenue" have been reclassified into "Technology enabled services" to conform to the current period presentation.

Gross Profit

Gross profit was $2.2 million for the six months ended June 30, 2026, compared to $1.1 million for the six months ended June 30, 2025, an increase of $1.2 million, or 106%. Gross margin was 70.7% for the six months ended June 30, 2026, compared to 60.9% for the six months ended June 30, 2025. The improvement in gross margin percentage reflects the significantly higher volume of product sales, which absorbed fixed manufacturing overhead more efficiently, partially offset by a shift in revenue mix away from higher-margin technology-enabled services. Cost of revenues increased $232 thousand to $0.9 million, consistent with the higher product volume. We expect gross margins to continue to be influenced by the relative mix of product sales and technology-enabled services revenue in future periods.

Selling, General and Administrative Expense

SG&A expense was $9.0 million for the six months ended June 30, 2026, compared to $7.3 million for the six months ended June 30, 2025, an increase of $1.7 million, or 24%. The increase was driven primarily by higher non-cash share-based compensation expense.

Share-based compensation allocated to SG&A was $3.6 million for the six months ended June 30, 2026, compared to $2.4 million for the six months ended June 30, 2025, reflecting grants issued to new and existing employees and officers in connection with equity incentive awards granted in 2025.

Cash-based SG&A costs, including salaries and burden, occupancy, marketing, and professional fees were $5.4 million for the six months ended June 30, 2026, compared to $4.9 million for the six months ended June 30, 2025. The increase of approximately $0.5 million, or 11%, was primarily due to increased professional fees, partially offset by overall declines in office expense and other general and administrative expenses as the Company maintained ongoing cost discipline.

Research and Development Expense

Research and development expense was $257 thousand for the six months ended June 30, 2026, compared to $594 thousand for the six months ended June 30, 2025, a decrease of $337 thousand, or 57%. The decrease reflects the Company's shift to a more variable-cost development model and reduced headcount dedicated to R&D activities, as the primary platforms — BolaWrap 150, WrapTactics, WrapVision, and Wrap Reality — have advanced beyond the primary development phase and are now in commercial deployment. R&D investment is expected to continue at a more modest level in 2026, focused on incremental product enhancements, the WrapTactics content library, and counter-UAS development activities for the MERLIN program.

Operating Loss

Loss from operations was $7.0 million for the six months ended June 30, 2026, compared to $6.8 million for the six months ended June 30, 2025, an increase of $243 thousand, or 4%. The increased operating loss reflected higher operating expenses, driven primarily by an increase in non-cash share-based compensation expense, substantially offset by increased gross profit.

Other Income (Expense), Net

Total other income, net was $223 thousand for the six months ended June 30, 2026, compared to $3.2 million for the six months ended June 30, 2025, a decrease of $2.9 million. The year-over-year change is primarily attributable to the non-recurrence of the net non-cash gain from the change in fair value of warrant liabilities that was recorded during the six months ended June 30, 2025, partially offset by a non-cash gain on lease termination recognized during the six months ended June 30, 2026.

Gain on Lease Termination. During the six months ended June 30, 2026, the Company recognized a $227 thousand gain on lease termination in connection with the early termination of the office lease at 3480 Main Highway, Suite 202, Miami, Florida (Coconut Grove). On February 13, 2026, the Company entered into a Termination and Mutual Release Agreement with the landlord, terminating the lease effective as of that date. Under ASC 842, upon termination the Company derecognized the carrying value of the operating lease right-of-use asset and the corresponding lease liability, resulting in the $227 thousand non-cash gain representing the excess of the liability extinguished over the right-of-use asset derecognized as of the termination date. The gain is non-cash and non-recurring in nature.

Change in Fair Value of Warrant Liabilities. During the six months ended June 30, 2025, the Company recognized a net non-cash gain of $3.2 million attributable to changes in the fair value of outstanding warrant liabilities, consisting of a $4.0 million gain recognized during the three months ended March 31, 2025, partially offset by an $871 thousand loss recognized during the three months ended June 30, 2025, prior to the warrants' reclassification to permanent equity. On June 30, 2025, the Company amended its warrants issued in connection with the Series A Preferred Stock offering (the “Series A Warrants”) and its warrants issued in the February 2025 private placement (the “PIPE Warrants”), resulting in their reclassification from warrant liabilities to permanent equity under ASC 815-40. Following this reclassification, the Company no longer carries warrant liabilities on its balance sheet and does not record non-cash income or expense related to changes in warrant fair value. Accordingly, no such gain or loss was recognized during the six months ended June 30, 2026, and no comparable item is expected in future periods.

Interest Income. Interest income was $3 thousand for the six months ended June 30, 2026, compared to $3 thousand for the six months ended June 30, 2025.

Net Loss. Net loss was $6.8 million for the six months ended June 30, 2026, compared to net loss of $3.6 million for the six months ended June 30, 2025. The increase in net loss primarily reflects the non-recurrence of the $3.2 million non-cash net gain from the change in fair value of warrant liabilities recorded in the prior-year period, partially offset by the $227 thousand non-cash gain on lease termination recognized in the current-year period.

Net loss attributable to common stockholders was $7.2 million, or $(0.13) per basic and diluted share, for the six months ended June 30, 2026, compared to a net loss attributable to common stockholders of $3.9 million, or $(0.07) per basic and diluted share, for the six months ended June 30, 2025. The weighted average common shares used in the calculation were approximately 54.9 million for the six months ended June 30, 2026, compared to 49.4 million for the six months ended June 30, 2025, reflecting shares issued in the February 2025 private placement, the February 2026 private placement, and other equity issuances.

Liquidity and Capital Resources

Overview

Our primary source of liquidity has been funding from stockholders through the sale of equity securities and the exercise of derivative securities. We expect our primary sources of future liquidity to be product and technology-enabled services revenue, proceeds from the exercise of outstanding stock options and warrants, and future equity or debt financings as needed.

As of June 30, 2026, we had cash and cash equivalents of $4.8 million and working capital of $11.6 million (total current assets of $13.2 million less total current liabilities of $1.6 million). This compares to cash and cash equivalents of $3.5 million and working capital of $9.6 million as of December 31, 2025. The $1.3 million increase in cash during the six months ended June 30, 2026 was driven primarily by $5.0 million in proceeds from the February 2026 private placement and $100 thousand from warrant exercises, partially offset by $3.7 million of cash used in operations and $108 thousand used in investing activities.

Total liabilities decreased to $2.0 million as of June 30, 2026, from $3.9 million as of December 31, 2025. This decline was principally driven by the derecognition of the operating lease liability upon termination of the Coconut Grove, Florida lease (3480 Main Highway, Suite 202, Miami, Florida), partially offset by increases in accounts payable and customer deposits associated with the Company's normal business operations. Total stockholders' equity increased to $13.3 million from $11.5 million, reflecting $5.1 million in net equity proceeds from the private placement and warrant exercises and non-cash share-based compensation expense, offset by the net loss for the period.

We believe we have sufficient capital to fund our operations for at least the next twelve months from the date of this Report based on our current operating plan, existing cash balances, and expected revenues. In the short term, we expect to use our cash and cash equivalents to fund ongoing operating needs, including personnel and talent recruitment, manufacturing of our products, supply chain purchases, sales and marketing activities, and general working capital. Over the longer term, we expect to continue funding these activities as well as making investments to support the continued growth of our business as opportunities arise. However, we have generated significant losses since inception and expect to continue to incur net losses as we invest in our business. Liquidity constraints and limited access to capital markets could negatively affect our ability to fund operations and may require changes to our operating or investment strategy. If additional capital is required, we may seek to raise funds through public or private equity offerings, debt financings, or strategic transactions; however, there can be no assurance that such financing would be available on acceptable terms or at all.

Capital Requirements

Our future liquidity requirements or future capital needs 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, including the 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:

• Decisions regarding staffing, development, production, marketing and other functions;
• The timing and extent of market acceptance of our products;
• Costs, timing and outcome of planned production and required customer and regulatory compliance of our products;
• Costs of preparing, filing and prosecuting our patent applications and defending any future intellectual property-related claims;
• Costs and timing of additional product development;
• Costs, timing and outcome of any future warranty claims or litigation against us associated with any of our products;
• Ability to collect accounts receivable; and
• 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
• Market price and trading volume of our Common Stock.

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Series A Offering

On June 29, 2023, the Company entered into a Securities Purchase Agreement (“Series A Purchase Agreement”) with certain accredited investors, including Scot Cohen, the Company’s Executive Chairman and Chief Executive Officer (collectively, the “Series A Investors”), pursuant to which we agreed to sell to the Series A Investors in a registered direct offering (the “Series A Offering”) (i) an aggregate of 10,000 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), initially convertible into up to 6,896,553 shares of the Company’s Common Stock, at an initial conversion price of $1.45 per share, and (ii) the Series A Warrants to acquire up to an aggregate of 6,896,553 shares of Common Stock (the “Series A Warrant Shares”). The closing of the Series A Offering occurred on July 3, 2023. The aggregate gross proceeds from the Series A Offering were approximately $10 million.

Series A Preferred Stock

On July 3, 2023, the Company filed the Certificate of Designations of the Series A Preferred Stock (the “Series A Certificate of Designations”) with the Secretary of State of the State of Delaware. The Series A Preferred Stock is convertible into shares of Common Stock (the “Series A Conversion Shares”) at the election of the holder at any time at an initial conversion price of $1.45. 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).

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 Series A Certificate of Designations. Upon the occurrence and during the continuance of a Triggering Event (as defined in the Series A 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 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 receipt of stockholder approval of the transactions contemplated by the Series A Purchase Agreement (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.

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 Series A Certificate of Designations are satisfied.

At any time beginning 18 months from the date of the issuance, provided 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 Series A 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 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.

Series B Offering

On August 18, 2025, the Company entered into a Securities Purchase Agreement (the “Series B Purchase Agreement”) with certain accredited investors (the “Series B Purchasers”) for the issuance and sale in a private placement (the “Series B Private Placement”) of an aggregate of (i) 4,500 shares of the Company’s Series B Preferred Stock initially convertible into up to 3,000,000 shares of Common Stock (the “Series B Conversion Shares”), at an initial conversion price of $1.50 per share, and (ii) accompanying warrants (the “Series B Warrants”) to purchase up to 3,000,000 shares of Common Stock (the “Series B Warrant Shares”), with an initial exercise price of $1.50 per share. The Series B Warrants and the shares of Series B Preferred Stock will be exercisable or convertible, respectively, into shares of Common Stock beginning on the effective date of stockholder approval of (i) under Nasdaq Stock Market Rule 5635(d), the issuance of shares of Common Stock in excess of 19.99% of the Company’s issued and outstanding shares of Common Stock at prices below the “Minimum Price” (as defined in Rule 5635 of the Rules of the Nasdaq Stock Market) on the date of the Series B Purchase Agreement pursuant to the terms of the Series B Preferred Stock and the Series B Warrants, and (ii) an increase in the authorized shares of the Company. On December 12, 2025, at the Company’s 2025 Annual Meeting of Stockholders, the Company obtained stockholder approval pursuant to the Series B Registration Rights Agreement (the “Series B Stockholder Approval”).

Series B Preferred Stock

On August 20, 2025, the Company filed the Series B Certificate of Designations, thereby creating the Series B Preferred Stock. The Series B Certificate of Designations became effective with the Secretary of State of the State of Delaware upon filing. The Series B Preferred Stock are convertible into the Series B Conversion Shares at the election of the holders of the Series B Preferred Stock at any time at an initial conversion price of $1.50 per share. The conversion price is subject to customary adjustments for stock dividends, stock splits, reclassifications, stock combinations and the like (subject to certain exceptions).

Holders of the Series B Preferred Stock shall be entitled to receive dividends when and as declared by the Board, from time to time, in its sole discretion, which dividends will be paid by the Company out of funds legally available therefor, payable, subject to the conditions and other terms of the Series B Certificate of Designations, in cash, in securities of the Company or using assets as determined by the Board on the stated value of such Series B Preferred Stock.

Series B Warrants

A holder of the Series B Warrants may not exercise any portion of such holder’s Series B Warrants to the extent that the holder, together with its affiliates, would beneficially own more than 4.99% (or, at the election of the holder, 9.99%) of the Company’s outstanding shares of Common Stock immediately after exercise, except that upon at least 61 days’ prior notice from the holder to the Company, the holder may increase the beneficial ownership limitation to up to 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise.

The Series B Warrants will expire five years from December 12, 2025, the effective date of the Series B Stockholder Approval.

February 2026 Purchase Agreement

On February 2, 2026, we entered into the February 2026 Purchase Agreement with the February 2026 Purchasers for the issuance and sale in a private placement of (i) an aggregate of 1,700,000 shares of Common Stock, (ii) Pre-Funded Warrants to purchase up to 800,000 shares of Common Stock, with an exercise price of $0.0001 per share, and (iii) February 2026 Common Warrants to purchase up to 2,500,000 shares of Common Stock, with an exercise price of $2.30 per share. The purchase price for one share of Common Stock and accompanying February 2026 Common Warrant was $2.00 and the purchase price for one Pre-Funded Warrant and accompanying February 2026 Common Warrant was $1.9999. The Pre-Funded Warrants expire when exercised in full, and the February 2026 Common Warrants expire on February 3, 2031, five years from the date of issuance.

The closing of the February 2026 Private Placement (the "February 2026 Closing") occurred on February 3, 2026. The aggregate gross proceeds from the February 2026 Closing were approximately $5.0 million, prior to deducting offering expenses payable by us.

Cash Flows

Cash Flows from Operating Activities

Net cash used in operating activities was $3.7 million for the six months ended June 30, 2026, compared to $5.0 million for the six months ended June 30, 2025. The improvement of $1.3 million year-over-year was driven by a lower cash operating loss and the non-cash gain on lease termination, partially offset by less favorable changes in working capital as compared to the prior-year period. The primary components of operating cash flow for the six months ended June 30, 2026 were the net loss of $6.8 million, adjusted for non-cash items including share-based compensation of $3.6 million and the non-cash $227 thousand gain on lease termination. Changes in working capital used approximately $0.6 million of cash during the six months ended June 30, 2026, driven by an increase in accounts receivable and contract assets of $667 thousand and an increase in prepaid expenses and other current assets of $535 thousand, partially offset by a decrease in inventories of $590 thousand and an increase in accounts payable of $144 thousand. This compares to changes in working capital that used approximately $1.0 million of cash during the six months ended June 30, 2025.

Cash Flows from Investing Activities

Net cash used in investing activities was $108 thousand for the six months ended June 30, 2026, compared to $153 thousand for the six months ended June 30, 2025. Investing outflows in the six months ended June 30, 2026 consisted of $97 thousand invested in patents and other intangible assets and $11 thousand in capital expenditures for property and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities was $5.1 million for the six months ended June 30, 2026, compared to $5.7 million for the six months ended June 30, 2025. Financing inflows in the six months ended June 30, 2026 consisted of $5.0 million in net proceeds from the February 2026 private placement and $100 thousand from the exercise of outstanding common stock purchase warrants. Financing inflows in the six months ended June 30, 2025 consisted of $5.7 million in net proceeds from the February 2025 private placement of common stock and warrants. No dividends on the Series A Convertible Preferred Stock or Series B Convertible Preferred Stock were paid in cash during the six months ended June 30, 2026; dividends of $411 thousand were settled in shares of Common Stock.

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. In 2024, the Company had incurred the maximum amount of royalties under the terms of the agreement. As of June 30, 2026, the aggregate remaining royalty obligation is $99.

In September 2023, the Company entered into a lease for office space located in Coconut Grove, Florida, with a multi-year term concluding in 2031. In February 2026, the Company terminated this lease, eliminating the remaining obligation.

As of June 30, 2026, the Company was committed to approximately $0.5 million for future component deliveries and contract services. These commitments relate primarily to inventory purchases and service agreements that are generally subject to modification or rescheduling in the normal course of business.

In August 2025, the Company entered into a lease for manufacturing and office space located in Southwest Virginia, with a multi-year term commencing in October 2025 and concluding in 2030. The Company was granted early occupancy of the facility beginning on August 18, 2025. As of June 30, 2026, aggregate remaining minimum lease payments under this lease totaled approximately $0.5 million.

In March 2026, the Company entered into a month-to-month service agreement for a business address located in Miami, Florida, at an approximate monthly cost of $165. The agreement may be terminated by either party in accordance with its terms.

The Company does not have any material long-term debt obligations as of June 30, 2026.

Off-Balance Sheet Arrangements

The Company has not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. The Company has not entered into any derivative contracts that are indexed to the Company’s shares and classified as stockholder’s equity or that are not reflected in the Company’s financial statements included in this Quarterly Report on Form 10-Q. Furthermore, the Company does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. The Company does not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2026, or subsequently thereto, that we believe are of potential significance to our financial statements.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates from those described in the Annual Report. Our critical accounting policies include revenue recognition, share-based compensation, allowance for credit losses, valuation of inventories and intangible assets. The gain on lease termination recorded in the six months ended June 30, 2026 was determined based on the carrying values of the derecognized right-of-use asset and lease liability at the termination date in accordance with ASC 842.

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Executive Chairman and Chief Executive Officer, who also serves as our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer concluded that, as of the end of the period covered in this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed by us under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.

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, 2026, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The following description of risk factors includes any material changes to, and supersedes the description of, risk factors associated with our business, financial condition and results of operations previously disclosed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2025, as filed with the SEC on March 26, 2026. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and stock price.

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-Q. The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

We depend on technology licensed from Frenel Imaging Ltd. for the detection layer of our WrapShield platform, and any loss or limitation of that license, or any failure of the underlying technology to perform as expected, could impair our platform strategy.

The detection capability of our WrapShield platform relies on Frenel's proprietary polarimetric thermal imaging software, which we license on an exclusive basis in the United States and for specified NATO channels. Frenel retains ownership of the underlying intellectual property. If the technology does not perform as expected, if Frenel fails to maintain or support it, if our license is terminated or converted to a non-exclusive license, or if Frenel is unable to protect its intellectual property, our ability to develop and commercialize WrapShield could be delayed or impaired. We may not be able to obtain an adequate substitute on acceptable terms or at all.

Our exclusive license from Frenel is subject to minimum performance milestones, and if we fail to meet them, we could lose exclusivity and the anticipated benefits of the arrangement.

Our exclusivity under the Frenel license depends on satisfying specified minimum annual commitment milestones over the initial four-year term, including establishing a U.S. value chain, completing product demonstrations and pilots, executing customer agreements, and generating specified cumulative revenue for Frenel. If we do not meet these milestones within the applicable periods or after any cure periods, the license would automatically convert to a non-exclusive license for the remainder of the term. Loss of exclusivity could reduce our competitive position and the return on our investment, and there is no assurance that we will achieve the milestones on the anticipated timeline or at all.

Our minority investment in Frenel, a privately held company organized in Israel, is illiquid and subject to risks that could result in a partial or total loss of the investment.

In July 2026 we invested $2.0 million in preferred shares of Frenel, a privately held company organized under the laws of Israel, and we hold a right to invest up to an additional $2.5 million. Our investment is illiquid and has no public market, and its value depends on Frenel's performance, financing needs, and ability to execute its business plan, over which we have limited control. As a minority holder, our information and governance rights are limited, and our rights are governed by Frenel's organizational documents and by Israeli law, which may differ from the protections available under U.S. law. Conditions in the region in which Frenel operates could also affect its business. The value of our investment could decline, and we could lose all or part of it.

Our expanding defense and international activities subject us to complex export control and trade regulations, and any failure to comply could result in penalties and restrict our ability to sell our products.

Our platform strategy and our activities with Frenel involve products and technologies that may be subject to U.S. export control and trade regulations, including the International Traffic in Arms Regulations, the Export Administration Regulations, and regulations administered by the Office of Foreign Assets Control, as well as Foreign Military Financing and Foreign Military Sales processes for NATO customers. Compliance is complex and costly, and violations could result in civil or criminal penalties, loss of export privileges, and reputational harm. Changes in these regulations, in licensing determinations, or in the classification of our products could restrict or delay our ability to sell into defense and international markets.

The involvement of our Chief Executive Officer and our President is a condition of our Frenel license, and the loss or reduced involvement of either could adversely affect that arrangement.

Under the Frenel license, Scot Cohen, our Chief Executive Officer and Chairman, and Jared Novick, our President and Chief Operating Officer, are required to remain materially and actively involved in our performance under the agreement. A material reduction in the involvement of either person that is not resolved within the prescribed period would permit Frenel to convert our exclusive license to a non-exclusive license. The loss of the services of either executive, or a reduction in their involvement, could therefore harm our operations generally and our rights under the Frenel arrangement in particular.

Our WrapShield platform strategy is in an early stage, and we may not be able to integrate, commercialize, or achieve market adoption of the platform.

We introduced WrapShield in 2026 as a strategy to integrate threat detection, decision support, and proportionate response into a single architecture, with an initial focus on counter-unmanned aircraft system applications. The platform is in an early stage of development and depends on integrating technologies developed by third parties, including Frenel, with our own products. We may encounter technical, regulatory, funding, or procurement obstacles, and the timing and scale of any resulting revenue are uncertain. There is no assurance that WrapShield will achieve commercialization or market adoption, and our investments in the platform may not yield a return.