Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 20222023

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to _________

 

Commission File Number: 000-55838

 

wrap20220930_10qimg001.jpgwrap20230930_10qimg001.jpg

 

Wrap Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

98-0551945

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

1817 W 4th Street

Tempe, Arizona 85281

(Address of principal executive offices) (Zip Code)

 

(800) 583-2652

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

WRAP

Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

  

Emerging growth company    ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

 

As of November 9, 202214, 2023 a total of 41,124,31244,214,169 shares of the Registrant’s common stock, par value $0.0001, (“Common Stock”) were issued and outstanding.

 


  

 

WRAP TECHNOLOGIES, INC.

 

INDEX

 

PART I. FINANCIAL INFORMATION

Page

  

Item 1.

Financial Statements:

1
 

Condensed Consolidated Balance Sheets as of September 30, 20222023 (unaudited) and December 31, 20212022

1
 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2023 and 2022 and 2021 (unaudited)

2
 

Condensed Consolidated Statements of StockholdersStockholders’ Equity for the three and nine months ended September 30, 2023 and 2022 and 2021 (unaudited)

3
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 and 2021 (unaudited)

5
 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

1618

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

2729

Item 4.

Controls and Procedures

2829
   

PART II. OTHER INFORMATION

 
   

Item 1.

Legal Proceedings

2830

Item 1A.

Risk Factors

2930

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

2930

Item 3.

Defaults Upon Senior Securities

2930

Item 4.

Mine Safety Disclosures

2931

Item 5.

Other Information

2931

Item 6.

Exhibits

2931
   

SIGNATURES

3032

 

 

  

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Wrap Technologies, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)

 

 

September 30,

    
 

2022

 

December 31,

 
 

(Unaudited)

  

2021

  

September 30,

2023

  

December 31,

2022

 

ASSETS

        

Current assets:

     

Cash and cash equivalents

 $3,828  $4,937  $4,934  $5,330 

Short-term investments

 19,865  29,983  10,000  13,949 

Accounts receivable and contract assets, net

 2,222  3,859  4,321  2,830 

Inventories, net

 2,962  1,566  5,816  3,975 

Prepaid expenses and other current assets

  600   868 

Prepaid expense and other current assets

  762   775 

Total current assets

 29,477  41,213  25,833  26,859 

Property and equipment, net

 819  976  533  758 

Operating lease right-of-use asset, net

 311  51  205  285 

Intangible assets, net

 1,900  1,982  3,319  2,569 
Goodwill, net 1,611  - 

Other assets

  11   9   166   100 

Total assets

 $32,518  $44,231  $31,667  $30,571 
  

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities:

     

Accounts payable

 $945  $1,779  $1,546  $1,419 

Accrued liabilities

 991  824  1,128  1,463 

Customer deposits

 -  43  2  - 

Deferred revenue- short term

 144  155  189  166 

Operating lease liability - short term

  106   56   116   108 
Warrants – short term  7,834   - 

Total current liabilities

  2,186   2,857   10,815   3,156 
  

Long-term liabilities:

     

Deferred revenue- long term

 156  110  176  167 

Operating lease liability - long term

  221   -  105  193 

Total long-term liabilities

  377   110   281   360 

Total liabilities

  2,563   2,967   11,096   3,516 
  

Commitments and contingencies (Note 11)

    

Commitments and contingencies (Note 12)

      
  

Stockholders' equity:

     

Preferred stock - 5,000,000 authorized; par value $0.0001 per share; none issued and outstanding

 -  - 

Common stock - 150,000,000 authorized; par value $0.0001 per share; 41,125,578 and 40,851,945 shares issued and outstanding each period, respectively

 4  4 
Preferred stock - 5,000,000 authorized; par value $0.0001 per share -  - 

Convertible Preferred Stock– 10,000 authorized, par value $0.0001 per share; 10,000 and 0 issued and outstanding at September 30, 2023 and December 31, 2022, respectively

 2,036  - 

Common stock - 150,000,000 authorized; par value $0.0001 per share; 43,289,236 and 41,175,993 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively

 4  4 

Additional paid-in capital

 93,736  91,025  97,919  94,333 

Accumulated deficit

 (63,841) (49,759) (79,388

)

 (67,376

)

Accumulated other comprehensive loss

  56   (6)  -   94 

Total stockholders' equity

  29,955   41,264   20,571   27,055 

Total liabilities and stockholders' equity

 $32,518  $44,231  $31,667  $30,571 

 

See accompanying notes to unaudited condensed consolidated interim financial statements.

 

-1-


 

 

Wrap Technologies, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

(unaudited)

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

  

Three Months Ended

September 30,

 

Nine months Ended

September 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 
Revenues:        

Revenue:

        

Product sales

 $1,612  $1,719  $4,042  $4,997  $3,248  $1,612  $4,897  $4,042 

Other revenue

  89   86   422   283   383   89   647   422 

Total revenues

  1,701   1,805   4,464   5,280 
Cost of revenues:        

Products and services

 790  1,094  2,430  3,276 

Product line exit expense

  -   -   -   747 

Total cost of revenues

  790   1,094   2,430   4,023 

Gross profit

  911   711   2,034   1,257 

Total revenue

 3,631  1,701  5,544  4,464 

Cost of revenue

  1,454   790   2,347   2,430 

Gross profit (loss)

  2,177   911   3,197   2,034 
  
Operating expenses:        

Operating expense:

        

Selling, general and administrative

 3,586  4,654  11,952  16,210  4,317  3,586  12,604  11,952 

Research and development

  1,236   2,076   4,210   4,303   610   1,236   2,683   4,210 

Total operating expenses

  4,822   6,730   16,162   20,513 

Total operating expense

  4,927   4,822   15,287   16,162 

Loss from operations

  (3,911)  (6,019)  (14,128)  (19,256)  (2,750)  (3,911

)

  (12,090)  (14,128

)

  
Other income (expense):                

Investment income

 34  13  36  22 

Interest income

 90  34  413  36 
Change in fair value of warrant liabilities (117) - (117) 

Other

  12   15   10   14   (6)  12   (25)  10 

Total other income (expense)

  (33)  46   271   46 

Net loss

 $(2,783) $(3,865

)

 $(11,819) $(14,082

)

  46   28   46   36                 

Net loss

 $(3,865) $(5,991) $(14,082) $(19,220)
Less: Convertible preferred stock dividends  (193)  -   (193)  - 
Net loss attributable to common stockholders $(2,976) $(3,865) $(12,012) $(14,082)
  

Net loss per basic and diluted common share

 $(0.09) $(0.15) $(0.34) $(0.50) $(0.07) $(0.09

)

 $(0.29) $(0.34

)

Weighted average common shares used to compute net loss per basic and diluted common share

  41,086,285   40,413,332   40,955,234   38,767,009   42,652,481   41,086,285   41,914,512   40,955,234 
  
Comprehensive loss:                

Net loss

 $(3,865) $(5,991) $(14,082) $(19,220) $(2,783) $(3,865

)

 $(11,819) $(14,082

)

Net unrealized gain (loss) on short-term investments

  73   (2)  62   (4)

Net unrealized gain on short-term investments

  -   73   -   62 

Comprehensive loss

 $(3,792) $(5,993) $(14,020) $(19,224) $(2,783) $(3,792

)

 $(11,819) $(14,020

)

 

See accompanying notes to unaudited condensed consolidated interim financial statements.

 

-2-


 

 

Wrap Technologies, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except share amounts)

(unaudited)

 

Three Months Ended September 30, 2023

  

Three Months Ended September 30, 2022

 
                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

      

Paid-In

  

Accumulated

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Deficit

  

Income

  

Equity

 

Balance at July 1, 2022

  40,992,161  $4  $92,856  $(59,976) $(17) $32,867 

Common shares issued upon exercise of stock options

  5,500   -   8   -   -   8 

Share-based compensation expense

  -   -   872   -   -   872 

Common shares issued upon vesting of restricted stock units

  127,917   -   -   -   -   - 

Net unrealized gain on short-term investments

  -   -   -   -   73   73 

Net loss for the period

  -   -   -   (3,865)  -   (3,865)

Balance at September 30, 2022

  41,125,578  $4  $93,736  $(63,841) $56  $29,955 
  

Common Stock

  

Convertible

Preferred

Stock

  

Additional Paid-In

  Accumulated  

Accumulated

Other Comprehensive

  Total Stockholders' 
  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Deficit

  

Income

  

Equity

 

Balance at July 1, 2023

  41,910,687  $4      $-  $96,182  $(76,411

)

 $-  $19,775 

Share-based compensation expense

  -   -   -   -   (201

)

  (1

)

  -   (202

)

Dividends on convertible preferred stock

  -   -   -   -   -   (193

)

  -   (193

)

Convertible preferred stock issued, net of offering costs

  -       10,000   2,036   -   -   -   2,036 

Common shares issued upon vesting of restricted stock units

  128,549   -   -   -   -   -   -   - 

Issuance of common stock for acquisition

  1,250,000   -   -   -   1,938   -   -   1,938 

Net loss for the period

  -   -   -   -   -   (2,783

)

  -   (2,783

)

Balance at September 30, 2023

  43,289,236  $4   10,000  $2,036  $97,919  $(79,388

)

 $-  $20,571 

 

  

Nine Months Ended September 30, 2022

 
                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

      

Paid-In

  

Accumulated

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Deficit

  

Income

  

Equity

 

Balance at January 1, 2022

  40,851,945  $4  $91,025  $(49,759) $(6) $41,264 

Common shares issued upon exercise of stock options

  55,500   -   83   -   -   83 

Share-based compensation expense

  -   -   2,628   -   -   2,628 

Common shares issued upon vesting of restricted stock units

  218,133   -   -   -   -   - 

Net unrealized gain on short-term investments

  -   -   -   -   62   62 

Net loss for the period

  -   -   -   (14,082)  -   (14,082)

Balance at September 30, 2022

  41,125,578  $4  $93,736  $(63,841) $56  $29,955 

-3-

  

Three Months Ended September 30, 2021

 
                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

      

Paid-In

  

Accumulated

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Deficit

  

Income

  

Equity

 

Balance at July 1, 2021

  39,911,390  $4  $87,277  $(38,539

)

 $13  $48,755 

Common shares issued upon exercise of stock options

  758,338   -   1,399   -   -   1,399 

Common shares issued upon vesting of restricted stock units

  79,133   -   -   -   -   - 

Share-based compensation expense

  -   -   1,303   -   -   1,303 

Net unrealized loss on short-term investments

  -   -   -   -   (2)  (2)

Net loss for the period

  -   -   -   (5,991)  -   (5,991)

Balance at September 30, 2021

  40,748,861  $4  $89,979  $(44,530) $11  $45,464 

Nine Months Ended September 30, 2023

 

  

Nine Months Ended September 30, 2021

 
                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In

  

Accumulated

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Deficit

  

Income

  

Equity

 

Balance at January 1, 2021

  37,554,162  $4  $71,705  $(25,310

)

 $15  $46,414 

Common shares issued upon exercise of warrants at $6.50 per share

  1,661,320   -   10,799   -   -   10,799 

Common shares issued upon exercise of warrants at $8.125 per share

  153,692   -   1,249   -   -   1,249 

Common shares issued upon exercise of stock options

  915,404   -   1,678   -   -   1,678 

Common shares issued upon vesting of restricted stock units

  421,407   -   -   -   -   - 

Common shares issued for services

  42,876   -   239   -   -   239 

Share-based compensation expense

  -   -   4,310   -   -   4,310 

Net unrealized loss on short-term investments

  -   -   -   -   (4)  (4)

Net loss for the period

  -   -   -   (19,220)  -   (19,220)

Balance at September 30, 2021

  40,748,861  $4  $89,979  $(44,530) $11  $45,464 
  

Common Stock

  

Convertible

Preferred

Stock

  

Additional Paid-In

  

Accumulated

  

Accumulated

Other Comprehensive

  

Total

Stockholders'

 
  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Deficit

  

Income

  

Equity

 

Balance at January 1, 2023

  41,175,993  $4   -  $-  $94,333  $(67,376

)

 $94  $27,055 

Common shares issued upon exercise of stock options

  250   -   -   -   -   -   -   - 

Share-based compensation expense

  -   -   -   -   1,648   -   -   1,648 

Dividends on convertible preferred stock

  -   -   -   -   -   (193

)

      (193

)

Convertible preferred stock issued, net of offering costs

  -   -   10,000   2,036   -   -   -   2,036 

Common shares issued upon vesting of restricted stock units

  862,993   -   -   -   -   -   -   - 

Issuance of common stock for acquisition

  1,250,000   -   -   -   1,938   -   -   1,938 

Settlement – US Treasury bills

  -   -   -   -   -   -   (94

)

  (94

)

Net loss for the period

  -   -   -   -   -   (11,819

)

  -   (11,819

)

Balance at September 30, 2023

  43,289,236  $4   10,000  $2,036  $97,919  $(79,388

)

 $-  $20,571 

 

See accompanying notes to unaudited condensed consolidated interim financial statements.

 

-4-
3

 

Wrap Technologies, Inc.Three Months Ended September 30, 2022

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

  

Nine Months Ended September 30,

 
  

2022

  

2021

 
Cash Flows From Operating Activities:        

Net loss

 $(14,082) $(19,220)
Adjustments to reconcile net loss to net cash used in operating activities:        

Depreciation and amortization

  574   336 

Product line exit expense

  -   747 

Gain on sale of assets

  -   (17

)

Warranty provision

  55   23 

Software impairment charge

  -   170 

Change in contingent liability

  -   (23)

Non-cash lease expense

  75   67 

Share-based compensation

  2,628   4,310 

Common shares issued for services

  -   239 

Provision for doubtful accounts

  61   27 
Changes in assets and liabilities:        

Accounts receivable

  1,576   (1,414)

Inventories

  (1,396)  (160)

Prepaid expenses and other current assets

  268   231 

Accounts payable

  (834)  271 

Operating lease liability

  (65)  (71)

Customer deposits

  (43)  19 

Accrued liabilities and other

  175   502 

Warranty settlement

  (63)  10 

Deferred revenue

  35   224 

Net cash used in operating activities

  (11,036)  (13,729)
         
Cash Flows From Investing Activities:        

Purchase of short-term investments

  (23,119)  (30,014)

Proceeds from maturities of short-term investments

  33,300   25,000 

Capital expenditures for property and equipment

  (201)  (811)

Investment in patents and trademarks

  (133)  (129)

Purchase of intangible assets

  -   (561)

Proceeds from long-term deposits

  (3)  4 

Net cash provided by (used in) investing activities

  9,844   (6,511)
         
Cash Flows From Financing Activities:        

Proceeds from exercise of warrants

  -   12,048 

Proceeds from exercise of stock options

  83   1,678 

Repayment of debt

  -   (275)

Net cash provided by financing activities

  83   13,451 
         

Net decrease in cash and cash equivalents

  (1,109)  (6,789)

Cash and cash equivalents, beginning of period

  4,937   16,647 

Cash and cash equivalents, end of period

 $3,828  $9,858 
         
Supplemental Disclosure of Non-Cash Investing and Financing Activities:        

Change in unrealized gain on short-term investments

 $62  $(2

)

Right-of-use asset and liability recorded during period

 $260  $(66

)

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

      

Paid-In

  

Accumulated

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Deficit

  

Income

  

Equity

 

Balance at July 1, 2022

  40,992,161  $4  $92,856  $(59,976

)

 $(17

)

 $32,867 

Common shares issued upon exercise of stock options

  5,500   -   8   -   -   8 

Share-based compensation expense

  -   -   872   -   -   872 

Common shares issued upon vesting of restricted stock units

  127,917   -   -   -   -   - 

Net unrealized gain on short-term investments

  -   -   -   -   73   73 

Net loss for the period

  -   -   -   (3,865

)

  -   (3,865

)

Balance at September 30, 2022

  41,125,578  $4  $93,736  $(63,841

)

 $56  

$

29,955 

Nine Months Ended September 30, 2022

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

      

Paid-In

  

Accumulated

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Deficit

  

Income

  

Equity

 

Balance at January 1, 2022

  40,851,945  $4  $91,025  $(49,759

)

 $(6

)

 $41,264 

Common shares issued upon exercise of stock options

  55,500   -   83   -   -   83 

Share-based compensation expense

  -   -   2,628   -   -   2,628 

Common shares issued upon vesting of restricted stock units

  218,133   -   -   -   -   - 

Net unrealized gain on short-term investments

  -   -   -   -   62   62 

Net loss for the period

  -   -   -   (14,082

)

  -   (14,082

)

Balance at September 30, 2022

  41,125,578  $4  $93,736  $(63,841

)

 $56  

$

29,955 

 

See accompanying notes to unaudited condensed consolidated interim financial statements.

 

-5-
4

 

Wrap Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

  

Nine months Ended September 30,

 
  

2023

  

2022

 

Cash Flows From Operating Activities:

        

Net loss

 $(11,819) $(14,082

)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Depreciation and amortization

  675   574 

Share-based compensation

  1,648   2,628 

Warranty provision

  (8)  55 
Change in fair value of warrant liabilities  117   - 

Non-cash lease expense

  80   75 

Provision for doubtful accounts

  (48)  61 

Changes in assets and liabilities:

        

Accounts receivable

  (1,353)  1,576 

Inventories

  (1,780)  (1,396

)

Prepaid expense and other current assets

  13   268 

Accounts payable

  (67)  (834

)

Operating lease liability

  (80)  (65

)

Customer deposits

  2   (43

)

Accrued liabilities and other

  (322)  175 

Warranty settlement

  (8)  (63

)

Deferred revenue

  32   35 

Net cash used in operating activities

  (12,918)  (11,036

)

         

Cash Flows From Investing Activities:

        

Purchase of short-term investments

  (6,145)  (23,119

)

Proceeds from maturities of short-term investments

  10,000   33,300 

Capital expenditures for property and equipment

  (133)  (201

)

Investment in patents and trademarks

  (277)  (133

)

Purchase of intangible assets

  (60)  - 
Net cash paid for acquisition of Intrensic  (551)  - 

Cash outlay for deposits

  (66)  (3

)

Net cash provided by investing activities

  2,768   9,844 
         

Cash Flows From Financing Activities:

        

Proceeds from exercise of stock options

  -   83 

Proceeds from issuance of warrants and convertible preferred stock, net of offering costs

  9,754   - 

Net cash provided by financing activities

  9,754   83 
         

Net decrease in cash and cash equivalents

  (396)  (1,109

)

Cash and cash equivalents, beginning of period

  5,330   4,937 

Cash and cash equivalents, end of period

 $4,934  $3,828 
         

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

        

Change in unrealized gain on short-term investments

 $(94) $62 
Issuance of common stock for acquisition $(1,938) $- 
Net assets acquired from acquisition $147  $- 
Convertible preferred stock issued, net of offering costs $(2,036) $- 
Warrant liabilities $(7,834) $- 
Dividends on convertible preferred stock $(193) $- 

Right-of-use asset and liability recorded during period

 $-  $260 

See accompanying notes to unaudited condensed consolidated interim financial statements.


Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

 

 

1.ORGANIZATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT DEVELOPMENTS

 

Organization and Business Description

 

Wrap Technologies, Inc., a Delaware corporation (the “Company”, “we”, “us”, and “our”), is a publicly traded company with our Common Stock, par value $0.0001 per share (“Common Stock”), listed on the Nasdaq Capital Market (“Nasdaq”) under the trading symbol “WRAP”. The Company is a developer and supplier of public safety products and training services for law enforcement and security personnel. The Company’s primary product is the BolaWrap® remote restraint device. The principal markets for the Company’s proprietary products and services are in North and South America, Europe, Middle East and Asia.

 

Basis of Presentation

 

The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying financial statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2021,2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 (the “Annual Report”), as filed with the SEC on March 10, 2022.2, 2023. The accompanying condensed consolidated balance sheet at December 31, 2021,2022 has been derived from the audited consolidated balance sheet at December 31, 2021,2022, contained in the Annual Report. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

 

Where necessary, the prior year’s information has been reclassified to conform to the current year presentation.

 

Principles of Consolidation

 

The Company has onetwo wholly-owned subsidiary,wholly owned subsidiaries, Wrap Reality, Inc. formed in December 2020 that sells a virtual reality (“VR”) training system primarily targeting law enforcement agencies.agencies and Intrensic, LLC which the Company acquired in August 2023 which specializes in Body Worn Camera and Digital Evidence Management solutions. The consolidated financial statements include the accounts of this subsidiarythese subsidiaries after elimination of intercompany transactions and accounts.

Business Combinations

The Company accounts for its business combinations under the provisions of Accounting Standards Codification ("ASC") Topic 805-10, Business Combinations ("ASC 805-10"), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective fair values. The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using established valuation techniques. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.

The estimated fair value of the acquired intangible assets was determined using a method which reflects the present value of the operating cash flows generated by this asset after taking into account the cost to realize the revenue, and an appropriate discount rate to reflect the time value and risk associated with the invested capital.

Certain adjustments to the assessed fair values of the assets and liabilities made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income.

Goodwill

Goodwill represents the difference, if any, between the aggregate consideration paid for an acquisition and the fair values of the underlying net assets and liabilities assumed from an acquired business. Goodwill is not amortized, but instead is tested for impairment. The Company tests goodwill for impairment on an annual basis during the fourth quarter, or more frequently if conditions indicate that such impairment could exist. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value and whether it is necessary to perform goodwill impairment process.

Definite-lived Intangible Assets 

Definite-lived intangible assets represent certain trade names, patents, licenses, software, acquired technology and customer relationships. Definite-lived intangible assets are recorded at cost less any accumulated amortization and accumulated impairment losses, if any. Definite-lived intangible assets acquired through the business combination are measured at fair value at the acquisition date. The Company amortizes these acquired definite-lived intangibles assets with a finite life on a straight-line basis, over 6 years for technology; 7 years for customer relationships; and 8 years for trademarks and trade names.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions (e.g., stock-based compensation valuation, allowance for doubtful accounts, valuation of inventory and intangible assets, warranty reserve, accrued expense and recognition and measurement of contingencies) that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of revenue and expense during the reporting period. Actual results could materially differ from those estimates.

 

6

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.

For issued warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. The Company accounts for the warrants issued in accordance with the guidance contained in ASC 815-40-15-7C, under which the warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company classifies the warrants as liabilities at their fair value and adjusts the warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s condensed consolidated statement of operations.

Convertible Preferred Stocks

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 480 and ASC 815 to determine if those instruments or embedded components of those instruments qualify as derivatives and are subject to bifurcation accounting. The Company determines that the economic characteristics and risks of the embedded derivative instrument are clearly and closely related to the economic characteristics and risks of the host contract. The convertible instruments are accounted for as a single hybrid instrument. Additionally, the convertible instruments do not have any redemption features that would preclude permanent equity classification in accordance with the guidance contained in ASC 480-10-S99.

The Company issued the Warrants, which are classified as liabilities and measured at fair value on a recurring basis, and Convertible Preferred Stocks in one transaction. The issuance proceeds were allocated by using the with-and-without method. Under this method, The Company first allocated the issuance proceeds to the Warrants based on their initial fair value measurement, and then allocated the remaining proceeds to the Convertible Preferred Stocks.

Loss per Share

 

Basic loss per common share (EPS) is computed by dividing net loss, for the periodless any dividends, accretion or decretion, redemption or induced conversion, if any, on our Series A Convertible Preferred Stock, by the weighted-averageweighted average number of shares of Common Stock outstanding during the reported period. Diluted net loss per Common Share reflects

In computing diluted EPS, we adjust the potential dilution of securities that could sharenumerator used in the earningsbasic EPS computation, subject to anti-dilution requirements, to add back the dividends (declared or cumulative undeclared) applicable to the Series A Convertible Preferred Stock. Such add-back would also include any adjustments to equity in the period to accrete the Series A Convertible Preferred Stock to its redemption price, or recorded upon a redemption or induced conversion, if any. We adjust the denominator used in the basic EPS computation, subject to anti-dilution requirements, to include the dilution from potential shares resulting from the issuance of an entity. The Company’s losses for the periods presented cause the inclusion of potential CommonSeries A Convertible Preferred Stock, instruments outstanding to be antidilutive.restricted stock units, and stock options. Stock options and restricted stock units exercisable or issuable for a total of 2,668,750 and 6,396,277 shares of Common Stock were outstanding at September 30, 2022.2023, and 2022, respectively. These securities are not included in the computation of diluted net loss per common share for the periods presented as their inclusion would be antidilutive due to losses incurred by the Company.

 

-6-

Recent Issued Accounting Guidance

 

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), to require that an acquirer recognize, and measure contract assets and contract liabilities acquired in a business combination in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606,Revenue from Contracts with Customers (“Topic 606”). At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The amendments in ASU 2021-08 should be applied prospectively and are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We do not expect the adoption of ASU 2021-08 to have a material impact on our consolidated financial statements and related disclosures.

The Company has reviewed other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoptions of any such pronouncements will be expected to cause a material impact on its financial condition or the results of operations.

 

In July 2023, the SEC adopted the final rule under SEC Release No. 33-11216, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, requiring disclosure of material cybersecurity incidents on Form 8-K and periodic disclosure of a registrant’s cybersecurity risk management, strategy and governance in annual reports. Regulation S-K Item 6 disclosure requirements under this rule will be effective for us in the fourth quarter of 2023. Incident disclosure requirements in Form 8-K will be effective for us on June 15, 2024. We are still evaluating for any impact on our financial statement disclosures from the adoption of this final rule.

Recent Developments

On August 9, 2023, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Intrensic, LLC, a Delaware limited liability company (“Intrensic”), and certain members of Intrensic, including Kevin Mullins, the Company’s Chief Executive Officer (collectively, “Sellers”). Under the terms of the Purchase Agreement, the Company agreed to purchase, and Sellers agreed to sell, 100% of the membership interests (the “Membership Interests”) of Intrensic for the following consideration upon the consummation of the sale of the Membership Interests (the “Intrensic Closing”): (i) $553,588 in cash, subject to adjustment based upon the outstanding indebtedness of Intrensic and Intrensic’s working capital as of the Intrensic Closing; and (ii) 1,250,000 shares of Common Stock of the Company (collectively, the “Purchase Price”) (the “Intrensic Acquisition”).

Kevin Mullins, a director of the Company and the Company’s Chief Executive Officer, owns approximately 9.53% of the Membership Interests, and as such, has a financial interest in the Intrensic Acquisition.

7

 

2.REVENUE AND PRODUCT COSTS

 

On January 1, 2018, the Company adopted Topic 606Revenue consists of product revenue and as it had no prior revenue or contracts with customers, there was no transition required nor any impact on prior results. Topic 606 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.

The Company enters into contracts that include various combinations of products, accessories, software and services, each of which are generally distinct and are accounted for as separate performance obligations.other revenue. Product sales includesinclude BolaWrap products and accessories. Other revenue includes VR revenues,revenue, service, training and shipping revenues.revenue.

 

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer and is the unit of account in Topic 606. For contracts with a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts with multiple performance obligations, the Company allocates the contract transaction price to each performance obligation using the Company’s estimate of the standalone selling price (“SSP” or “SSPs”) of each distinct good or service in a contract. The Company determines SSPs based on the relative SSP. If the SSP is not observable through past transactions, the Company estimates the SSP considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

Most of the Company’s products and accessories are sold through domestic and international distributors. Performance obligations to deliver products and accessories are generally satisfied at the point in time the Company ships the product, as this is when the customer obtains control of the asset under our standard terms and conditions. Periodically, certain customers request bill and hold transactions for future delivery as scheduled and designated by them. In such cases, revenue is not recognized until after control, title and risk of ownership has transferred which is generally when the customer has requested such transaction under normal billing and payment terms and has been notified that the product (i) has been completed according to customer specifications, (ii) has passed quality control inspections, and (iii) has been tagged and packed for shipment, separated from other inventory and ready for physical transfer to the customer. The value associated with custodial storage services is deemed immaterial in the context of such contracts and in total, and accordingly, none of the transaction price is allocated to such service.

 

The Company has elected to recognize shipping costs as an expense in cost of revenue when control has transferred to the customer.

Time-based VR system contracts generally include setup, training and the use of software and hardware for a fixed term, generally one to five years and support and upgrade services during the same period. The Company does not sell time-based arrangements without setup, training and support services and therefore revenues for the entire arrangement are recognized on a straight-line basis over the term. When hardware is bundled and not sold separately the Company allocates the contract transaction price to each performance obligation using the SSP of each distinct good and service in the contract.

-7-

The timing of revenue recognition may differ from the timing of invoicing to customers. The Company generally has an unconditional right to consideration when customers are invoiced, and a receivable is recorded. A contract asset is recognized when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing. The Company recognizes an asset if there are incremental costs of obtaining a contract with a customer such as commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract. The Company may receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. The Company records customer deposits as a contract liability. Additionally, the Company may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, a deferred revenue liability is recorded. The Company recognizes these contract liabilities as revenue after all revenue recognition criteria are met. The table below details the activity in our contract liabilities during the nine months ended September 30, 2022.2023.

 

 

Customer

 

Deferred

  

Customer

 

Deferred

 
 

Deposits

  

Revenue

  

Deposits

  

Revenue

 

Balance at January 1, 2022

 $43  $265 

Balance at January 1, 2023

 $-  $333 

Additions, net

 -  171  2  229 

Transfer to revenue

  (43)  (136)  -   (197

)

Balance at September 30, 2022

 $-  $300 

Balance at September 30, 2023

 $2  $365 

Current portion

 $-  $144  $2  $189 

Long-term portion

 $-  $156  $-  $176 

 

At September 30, 2022,2023, the Company’s deferred revenue of $300$365 consisted of $177$199 related to VR, $6 related to training and $123$160 related to BolaWrap extended warranties and services. At December 31, 2021,2022, the Company’s deferred revenue of $265$333 consisted of $172$198 related to VR, $11 related to training and $67$124 related to BolaWrap extended warranties and services.

The Company recognizes an asset if there are incremental costs of obtaining a contract with a customer such as commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for any such underlying performance obligations. The Company had no such assets at September 30, 2022, and December 31 2021. The Company will apply the practical expedient to expense any sales commissions related to performance obligations with an amortization of one year or less when incurred within selling, general and administrative expense.

 

Estimated costs for the Company’s standard warranty, generally one-year, are charged to cost of products sold when revenue is recorded for the related product. Royalties are also charged to the cost of products sold.

  

 

3.          FAIR VALUE MEASUREMENTSFINANCIAL INSTRUMENTS

 

Assets and liabilities recorded at fair value on a recurring basis in the Condensed Consolidated Balance Sheets and assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance also establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

8

 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

-8-

 

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 

The Company’s cash equivalent Money Market Funds and short-term investments consisting of U.S. Treasury bill securities and Certificate of Deposits are classified as Level I1 because they are valued using quoted market prices.

 

The following table shows the Company’s cash and cash equivalents, Money Market Funds and short-term investments by significant investment category as of September 30, 2022,2023, and December 31, 2021.2022.

 

 

As of September 30, 2022

  

As of September 30, 2023

 
 

Adjusted

 

Unrealized

 

Unrealized

 

Market

  

Adjusted

 

Unrealized

 

Unrealized

 

Market

 
 

Cost

  

Gains

  

Losses

  

Value

  

Cost

  

Gains

  

Losses

  

Value

 

Level 1:

  

Money Market Funds

 $3,382  $-  $-  $3,382 

U.S. Treasury securities in short-term investments

  19,803   62   -   19,865 

Certificate of Deposits

  10,000   -   -   10,000 

Total Financial Assets

 $23,185  $62  $-  $23,247  $10,000  $-  $-  $10,000 

 

 

As of December 31, 2021

  

As of December 31, 2022

 
 

Adjusted

 

Unrealized

 

Unrealized

 

Market

  

Adjusted

 

Unrealized

 

Unrealized

 

Market

 
 

Cost

  

Gains

  

Losses

  

Value

  

Cost

  

Gains

  

Losses

  

Value

 

Level 1:

  

Money Market Funds

 $1,670  $-  $-  $1,670 

U.S. Treasury securities in short-term investments

  29,989   -   (6)  29,983  9,849  100  -  9,949 

Certificate of Deposits

  4,000   -   -   4,000 

Total Financial Assets

 $31,659  $-  $(6) $31,653  $13,849  $100  $-  $13,949 

 

Unrealized gains or losses resulting from our short-term investments are recorded in accumulated other comprehensive gain or loss.loss as they are classified as available for sale. During the three and nine months ended September 30, 2023, no gain (loss) was recorded to other comprehensive gain (loss). During the three and nine months ended September 30, 2022, a $73 gain and $62 gain was recorded to accumulated other comprehensive gain (loss), respectively. During

The warrant liabilities are measured at fair value on a recurring basis. The subsequent measurement of the three and nine months endedwarrant liabilities as of September 30, 2021,2023, is classified as Level 3 due to the use of an observable market quote in a $2 lossnon-active market and a $4 loss was recorded to accumulated other comprehensive loss, respectivelythe management’s assumption of the expected stock price volatility.

 

The following table presents the fair value in the beginning of the period, the changes in the fair value, and the fair value at the end of the period of warrant liabilities (in thousands):

Level 3: 

September 30,

2023

  

December 31,

2022

 

Fair value at inception or the beginning of the period

 $7,717   - 

Change in fair value of warrant liabilities

  117   - 

Fair value as of September 30, 2023

 $7,834   - 

9

The Company uses the modified Black-Scholes option pricing model to determine the fair value of warrant liabilities. The following table summarizes the assumptions used to compute the fair value of Warrants:

  

As of

September 30,

2023

  

As of

December 31,

2022

 

Expected stock price volatility

  100

%

  -

%

Risk-free interest rate

  4.49

%

  -

%

Dividends yield

  0

%

  -

%

Expected life of warrants

  4.75   - 

Exercise price

 $1.45  $- 

Our other financial instruments also include accounts receivable, accounts payable, accrued liabilities and business acquisition liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.

  

 

4.INVENTORIES NET

 

Inventory is recorded at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the FIFO cost method. Inventories consisted of the following:

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Finished goods

 $1,974  $1,027 

Work in process

  -   2 

Raw materials

  988   537 

Inventories, net

 $2,962  $1,566 

-9-

  

September 30,

2023

  

December 31,

2022

 

Finished goods

 $2,921  $2,293 

Work in process

  -   - 

Raw materials

  2,895   1,682 

Inventories - net

 $5,816  $3,975 

  

 

5.PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

 

September 30,

 

December 31,

 
 

2022

  

2021

  

September 30,

2023

  

December 31,

2022

 

Production and lab equipment

 $500  $500  $536  $513 

Tooling

 424  273  505  448 

Computer equipment

 513  467  587  531 

Furniture, fixtures and improvements

  181   176   190   181 
 1,618  1,416  1,818  1,673 

Accumulated depreciation

  (799)  (440)  (1,285)  (915

)

Property and equipment, net

 $819  $976  $533  $758 

 

Depreciation expense was $122 and $358 for the three and nine months ended September 30, 2023, respectively, and $121 and $359 for the three and nine months ended September 30, 2022, respectively.

10

6.INTANGIBLE ASSETS AND GOODWILL

Intangible Assets, net

Intangible assets, net consisted of the following:

  

September 30,

2023

  

December 31,

2022

 

Amortizable intangible assets:

        

Patents

 $841  $575 

Trademarks

  241   150 

Purchased software and technology

  2,452   1,962 
Customer Relationships  160   - 
   3,694   2,687 

Accumulated amortization

  (778)  (462

)

Total amortizable

  2,916   2,225 

Indefinite life assets (non-amortizable)

  403   344 

Total intangible assets, net

 $3,319  $2,569 

Amortization expense was $150 and was $69 and $191$317 for the three and nine months ended September 30, 2021, respectively.

6.          INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Amortizable intangible assets:

        

Patents

 $540  $416 

Trademarks

  143   134 

Purchased software

  1,212   1,212 

Other

  50   50 
   1,945   1,812 

Accumulated amortization

  (389)  (174)

Total amortizable

  1,556   1,638 

Indefinite life assets (non-amortizable)

  344   344 

Total intangible assets, net

 $1,900  $1,982 

Amortization expense was2023, respectively, and $72 and $215 for the three and nine months ended September 30, 2022, and was $48 and $145 for the three and nine months ended September 30, 2021, respectively.

 

At September 30, 2022,2023, future amortization expense is as follows:

 

2022 (3 months)

 $72 

2023

 284 

2023 (3 months)

 $164 

2024

 284  655 

2025

 280  650 

2026

 192  427 

2027

 180 

Thereafter

  444   840 

Total estimated amortization expense

 $1,556  $2,916 

Goodwill

The table below summarizes the changes in the carrying amount of goodwill:

Balance at January 1, 2023 $- 
Acquired goodwill  1,611 
Balance at September 30, 2023 $1,611 

  

 

7.ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable includes $61$122 and $228$127 due to related party Syzygy Licensing, LLC (“Syzygy”) as of September 30, 2022,2023, and December 31, 2021,2022, respectively. See Notes 10,Note 11 and 12 for additional information on this related party information.party.

 

Accrued liabilities consist of the following:

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Patent and legal costs

 $131  $28 

Accrued compensation

  759   628 

Warranty costs

  88   96 

Taxes and other

  13   72 
  $991  $824 

-10-

  

September 30,

2023

  

December 31,

2022

 

Patent and legal costs

 $61  $135 

Accrued compensation

  786   1,100 

Warranty costs

  109   125 

Taxes and other

  172   103 

Total

 $1,128  $1,463 

 

Accrued compensation includes $25 of future severance payments for the Company’s former Chief Executive Officer$139 and $1,022 in employee bonuses and commissions payable through October 2022.at September 30, 2023 and December 31, 2022, respectively.

 

Changes in our estimated product warranty costs were as follows:

 

 

Nine months Ended September 30,

  

Nine Months Ended

September 30,

 
 

2022

  

2021

  

2023

  

2022

 

Balance, beginning of period

 $96  $48  $125  $96 

Warranty settlements

 (63) (16) (8) (63

)

Warranty provision

  55   42 

Release of warranty provision

  (8)  55 

Balance, end of period

 $88  $74  $109  $88 

11

  

 

8.          LEASESWARRANTS

 

The Company determines if an arrangement is a lease at inception. The guidance in FASB ASC Topic 842, Leases defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Operating lease right of use (ROU”) assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. The Company’s leases do not provide an implicit rate. Due to a lack of financing history or ability,On June 29, 2023, the Company uses an estimate of low-grade debt rate published by the Federal Reserve Bank as its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The ROU asset includes any lease payments made and excludes lease incentives and initial direct costs incurred.

For leases beginning on or after January 1, 2019, lease components are accounted for separately from non-lease components for all asset classes. On January 21, 2022, the Company’s lease was amended to extend the expiration date to July 31, 2025. Upon executionentered into a securities purchase agreement (the “Purchase Agreement”) with certain directors of the amendment,Company and certain accredited and institutional investors (collectively, the “Investors”), pursuant to which was deemedit agreed to sell to the Investors in a lease modification,private placement (the “Offering”): (i) warrants to acquire up to an aggregate of 6,896,553 shares of Common Stock (the “Warrants”) and (ii) Series A Convertible Preferred Stock (Note 9). The warrants are exercisable six months after issuance at an exercise price of $1.45 per share, subject to adjustment, and expire five years from the Company reassessed the lease liability using the discount rate determined at the modification date and recorded an additional ROU asset for the same amount.of issuance. The Company’s lease contains renewal provisions and escalating rental clauses and generally require the Company to pay utilities, insurance, taxes and other operating expenses. The renewal provisionsclosing of the existing lease agreementOffering occurred on July 3, 2023. The aggregate gross proceeds from the Offering were $10,000. $7,717 of $10,000 was not included inallocated to the determination of the operating lease liabilities and the ROU assets. The Company also reassessed the lease classification and concluded that the lease continues to be an operating lease.

Amortization of ROU operating lease assets was $26 and $75 for the three and nine months ended September 30, 2022 and was $21 and $67 for the three and nine months ended September 30, 2021, respectively.

Operating lease expense for capitalized operating leases included in operating activities was $30 and $88 for the three and nine months ended September 30, 2022 and was $23 and $73 for the three and nine months ended September 30, 2021, respectively. 

Operating lease obligations recorded on the balance sheet at September 30, 2022, are:

Operating lease liability- short term

 $106 

Operating lease liability - long term

  221 

Total Operating Lease Liability

 $327 

-11-

Future lease payments included in the measurement of lease liabilities on the balance sheet at September 30, 2022, for future periods are as follows:

2022 (3 months)

 $31 

2023

  121 

2024

  125 

2025

  75 

Total future minimum lease payments

  352 

Less imputed interest

  (25)

Total

 $327 

The weighted average remaining lease term is 2.83 years, and the weighted average discount rate is 5.0%.

The Company had $3 and $0 short-term lease expense during the nine months ended September 30, 2022, and 2021. The Company does not have any finance leases.Warrants.

  

 

9.STOCKHOLDERS' EQUITY

 

The Company’s authorized capital consists of 150,000,000 shares of Common Stock par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share (“Preferred Stock”).

 

At December 31, 2021On July 3, 2023, the Company had outstandingfiled a Certificate of Designations (the “Series A COD”) with the State of Delaware, designating 10,000 shares of its Preferred Stock as Series A Convertible Preferred Stock, $0.0001 per share (the “Series A Preferred”). Shares of Series A Preferred are convertible into Common Stock (the “Conversion Shares”) at an initial conversion price of $1.45 (the “Conversion Price”), subject to customary adjustments and price-based as defined in the Series A COD. Holders of Series A Preferred Shares are entitled to dividends of 8% per annum, payable quarterly, subject to adjustment upon the occurrence of certain events in accordance with the terms of the Series A COD. The holders of Series A Preferred have no voting rights on account of the Preferred Shares, other than with respect to certain matters affecting the rights of the Preferred Shares.

On June 29, 2023, the Company entered into a securities purchase warrants exercisable for 1,391,667agreement (the “Purchase Agreement”) with certain directors of the Company and certain accredited and institutional investors (collectively, the “Investors”), pursuant to which it agreed to sell to the Investors in a private placement (the “Offering”): (i) the Warrants Note 8 and (ii) an aggregate of 10,000 shares of the Company’s newly designated Series A Convertible Preferred Stock, with par value $0.0001 per share and a stated value of $1,000 per share, initially convertible into up to 6,896,553 shares of the Company’s common stock, par value $0.0001 per share at a conversion price of $1.45 per share, subject to customary adjustments and price-based as defined in the Series A Certificate of Designations (the “Convertible Preferred Stocks”). The customary adjustments include: (i) additional amounts related to declared and unpaid Dividends and any other unpaid amounts due and payable and (ii) make-whole amounts related to the accrual of any additional dividends that expiredwould have accrued up to the date of conversion including the one-year anniversary from the date of conversion. Each preferred stock has a stated value of $1,000 per share, and holders thereof are entitled to cumulative dividends of 8% per annum on June 1, 2022,the stated value, payable quarterly in arrears, subject to adjustment upon the occurrence of certain events in accordance with the terms of the Convertible Preferred Stocks. The holders of Convertible Preferred Stocks have no voting rights on account of the Convertible Preferred Stocks, other than with respect to certain matters affecting the rights of the Convertible Preferred Stocks. $2,036 of the aggregate gross proceeds was allocated to the Convertible Preferred Stocks. In September 2023, the Company authorized and had no purchase warrants outstanding atdeclared $193 dividend which was an accrued in accounts payable as of September 30, 2022.2023.

  

 

10.SHARE-BASED COMPENSATION

 

On March 31, 2017, the Company adopted, and the stockholders approved, the 2017 Stock Incentive Plan (the “Plan”) authorizing 2,000,000 shares of Common Stock for issuance as awards to employees, directors or consultants. In May 2019, the stockholders ratified an increase in the Plan authorizing an additional 2,100,000 shares of Common Stock,Stock; in June 2020 ratified an additional 1,900,000 shares of Common Stock,Stock; in June 2021 ratified an additional 1,500,000 shares of Common StockStock; and in June 2022 ratified an additional 1,500,000 shares of Common Stock,Stock; for a total of 9,000,000 shares subject to the Plan. At September 30, 2022,2023, there were 1,624,1604,438,539 shares of Common Stock remaining available for grant under the Plan.

 

The Company generally recognizes share-based compensation expense on the grant date and over the period of vesting or period that services will be provided. In April 2023 the Company recognized severance acceleration of $178 of share-based compensation expense resulting from the resignation of the Company’s Chief Executive Officer and Chief Operating Officer due to a reduction in force that resulted in changes in the composition of the executives of the Company. In January 2022 the Company recognized severance acceleration of $242 of share-based compensation expense resulting from the resignation of the Company’s Chief Executive Officer as part of a management transition plan.

 

12

Stock Options

 

The following table summarizes stock option activity for the nine months ended September 30, 2022:2023:

 

     

Weighted Average

         

Weighted Average

    
 

Options on

     

Remaining

 

Aggregate

  

Options on

Common

Shares

  

Exercise

Price

  

Remaining

Contractual

Term

  

Aggregate

Intrinsic

Value

 
 

Common

 

Exercise

 

Contractual

 

Intrinsic

 
 

Shares

  

Price

  

Term

  

Value

 

Outstanding January 1, 2022

 3,935,883  $5.24  4.79    

Outstanding January 1, 2023

 5,491,399  $3.72  5.96  $92 

Granted

 2,734,639  $2.85       60,000  $1.34      

Exercised

 (55,500) $1.50       (250

)

 $1.50      

Forfeited, cancelled, expired

  (978,709) $5.48         (3,329,476

)

 $5.54       

Outstanding September 30, 2022

  5,636,313  $3.74  6.01  $232,778 

Exercisable September 30, 2022

  2,507,744  $4.47  2.14  $232,778 

Outstanding September 30, 2023

  2,221,673  $3.56   7.65  $10 

Exercisable September 30, 2023

  1,033,504  $4.37   7.02  $- 

 

At September 30, 2022,2023, there were 4,022,0831,529,275 service-based stock options outstanding, and 1,614,230692,398 performance-based stock options outstanding, which performance-based stock options were granted in April 2022 to the Company’s former Chief Executive Officer and President, subject to future market capitalization targets. 1,049,1451,207,698 of the 4,013,8852,221,673 stock options granted included in the table above were granted in April 2022 outside the Plan as an employment inducement grant but are subject to the terms and conditions of the Plan.

-12-

 

The Company uses the Black-Scholes option pricing model to determine the fair value of service-based options granted. The following table summarizes the assumptions used to compute the fair value of options granted to employees and non-employees:

 

 

For the Nine months

  

For the Nine Months

 
 

Ended September 30,

  

Ended September 30,

 
 

2022

 

2021

  

2023

 

2022

 

Expected stock price volatility

 

49

%

 

50

%

 49

%

 49

%

Risk-free interest rate

 

1.17

%

 

0.90

%

 3.64

%

 1.17

%

Expected dividend yield

 

0

%

 

0

%

 0% 0%

Expected life of options - years

 

3.46

  

5.74

 

Expected life of options

 6.66  3.46 

Weighted-average fair value of options granted

 $

1.25

  $

2.57

  $0.55  $1.25 

 

Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of awards. The Company’s estimated volatility was based on an average of the historical volatility of peer entities whose stock prices were publicly available. The Company’s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price. The Company records forfeitures as they are incurred.

 

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. The Company calculates the expected life of the options using the Simplified Method for the employee stock options as the Company does not have sufficient historical exercise data.

 

The Company used the Monte Carlo Simulation Model to value at the grant date the aggregate of 1,614,230 market condition performance options granted in April 2022 to the Company’s newly appointedformer Chief Executive Officer and a newly appointed President. The assumptions used in the Monte Carlo Simulation were stock price on date of grant of $2.89, contract term of 10 years, expected volatility of 49% and risk-free interest rate of 2.9%. Vesting is based on sustained market capitalization of $250 million, $500 million and $1 billion and resulted in implied service periods ranging from approximately 4 to 7 years. At September 30, 2023, 921,832 of the 1,614,230 market condition performance options granted in April 2022 were cancelled.

 

Stock option expense was $(169) and $399 for the three and nine months ended September 30, 2023, respectively, and $308 and $1,448 for the three and nine months ended September 30, 2022, and was $1.302 and $4,310 for the three and nine months ended September 30, 2021, respectively.

13

 

Restricted Stock Units

 

The Plan provides for the grant of restricted stock units (“RSUs”). RSUs are settled in shares of the Company’s Common Stock as the RSUs become vested. The following table summarizes RSU activity for the nine months ended September 30, 2022:2023:

 

      

Weighted Average

  

Weighted Average

 
  

Service-Based

  

Grant Date

  

Vesting

 
  

RSU's

  

Fair Value

  

Period (Years)

 

Unvested at January 1, 2022

  269,303  $6.47     

Granted - service based

  753,817  $2.57     

Vested

  (218,133) $4.93     

Forfeited and cancelled

  (60,023) $6.57     

Unvested at September 30, 2022

  744,964  $2.97   2.32 

A total of 175,173 RSUs included in the table above were granted in April 2022 outside the Plan as an employment inducement grant but are subject to the terms and conditions of the Plan.

-13-

  

Service-Based

RSU's

  

Weighted

Average

Grant Date

Fair Value

  

Weighted

Average

Vesting

Period

(Years)

 

Unvested at January 1, 2023

  922,057  $2.88   2.11 

Granted - service based

  686,394  $1.33     

Vested

  (862,993

)

 $2.87     

Forfeited and cancelled

  (298,381

)

 $2.47     

Unvested at September 30, 2023

  447,077  $2.00   1.74 

 

RSU expense was $(33) and $1,249 for the three and nine months ended September 30, 2023, respectively, and $564 and $1,180 for the three and nine months ended September 30, 2022, and was $467 and $2,245 for the three and nine months ended September 30, 2021, respectively.

 

Share-Based Compensation Expense

 

The Company recorded share-based compensation for options and RSUs in its statements of operations for the relevant periods as follows:

 

 

Three Months Ended

September 30,

 

Nine months Ended

September 30,

  

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Selling, general and administrative

 $700  $1,093  $2,180  $3,722  $(149) $700  $1,404  $2,180 

Research and development

  172   210   448   588   (53)  172   244   448 

Total share-based expense

 $872  $1,303  $2,628  $4,310  $(202) $872  $1,648  $2,628 

 

As of September 30, 2022,2023, total estimated compensation expensecost of stock options granted and outstanding but not yet vested was $3,820$1,168 which is expected to be recognized over the weighted average period of 3.52.73 years.

As of September 30, 2022,2023, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $1,828$757 which is expected to be recognized over the weighted average period of 2.31.61 years.

 

 

11.          DEFINED CONTRIBUTION PLAN

The Company has a defined contribution savings plan for all eligible U.S. employees established under the provisions of Section 401(k) of the Internal Revenue Code. This plan was formed on January 1, 2022. Eligible employees may contribute a percentage of their salary subject to certain limitations. The Company’s contributions for each of the three and nine months ended September 30, 2023, and year ended December 31, 2022, was $0.

12.COMMITMENTS AND CONTINGENCIES

 

Facility Lease

See Note 8.

Related Party Technology License Agreement

 

The Company is obligated to pay royalties and development and patent costs pursuant to an exclusive Amended and Restated Intellectual Property License Agreement dated as of September 30, 2016, with Syzygy, a company owned and controlled by stockholder/consultant Mr. Elwood Norris and stockholder/consultant Mr. James Barnes. The agreement provides for royalty payments of 4% of revenue from products employing the licensed ensnarement device technology up to an aggregate of $1,000 in royalties or until September 30, 2026, whichever occurs earlier. The Company recorded $122 and $185 for royalties during the three and nine months ended September 30, 2023, respectively, and $61 and $147 for royalties during the three and nine months ended September 30, 2022, and $65 and $185 incurred for the three and nine months endedrespectively. The maximum payout still available under this arrangement is $95 as of September 30, 2021, respectively.2023.

 

Service Provider Agreement

Pursuant to the Professional Services and Technology Acquisition Agreement (the “Agreement”) entered into with Lumeto, Inc. and Spatial Industries Group, Inc. (collectively, “Service Provider”) on November 22, 2022, as amended on April 2, 2023, the Service Provider provided to the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform (the “Technology, Services, and License”) in consideration for a cash payment of $700 to the Service Provider, which was completed as of June 30, 2023. The Company has no ongoing or future commitments, responsibilities, or obligations related to this matter.

14

Purchase Commitments

 

At September 30, 2022,2023, the Company was committed for approximately $4,376$1,690 for future component deliveries that are generally subject to modification or rescheduling in the normal course of business.

 

Indemnifications and Guarantees

Our officers and directors are indemnified as to personal liability as provided by the Delaware law and the Company’s articles and bylaws. The Company may also undertake indemnification obligations in the ordinary course of business related to its operations. The Company is unable to estimate with any reasonable accuracy the liability that may be incurred pursuant to any such indemnification obligations now or in the future. Because of the uncertainty surrounding these circumstances, the Company’s current or future indemnification obligations could range from immaterial to having a material adverse impact on its financial position and its ability to continue in the ordinary course of business. The Company has no liabilities recorded for such indemnities.

Regulatory Agencies

The Company is subject to oversight from regulatory agencies regarding firearms that arise in the ordinary course of its business.

Litigation

The Company is subject to litigation and other claims in the ordinary course of business. The Company records a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed and adjusted to include the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter. At September 30, 2023, we had no provision for liability under existing litigation.

 

12.13.RELATED PARTY TRANSACTIONS

 

Commencing in October 2017 the Company began reimbursing Mr. Elwood Norris, a former officer, and current 10% stockholder and consultant of the Company, $1.5 per month on a month-to-month basis for laboratory facility expense, for an aggregate of $4.5 and $13.5 during the three and nine months ended September 30, 2023, and 2022, respectively. Mr. Norris retired as the Company’s Chief Technology Officer effective September 30, 2021, and commencing July 1, 2021, respectively.was engaged as a month-to-month consultant. Mr. Norris was paid a monthly fee of $7.5 per month for aggregate consulting payments of $22.5 and $67.5 during each of the three and nine months ended September 30, 2023, and 2022.

On June 29, 2023, we entered into the Purchase Agreement with certain investors, including Mr. Scot Cohen, the Executive Chairman of the Company, and V4, an entity over which Mr. Cohen exercises control and whose securities are beneficially owned by Mr. Cohen (the “Affiliated Offering”), pursuant to which the Company issued to Mr. Cohen and V4 an aggregate of 3,000 Series A Preferred and warrants to purchase up to an aggregate of 2,068,966 shares of Common Stock for aggregate gross proceeds of $3,000,000 (excluding the proceeds the Company may receive from the exercise of the warrants issued in the Affiliated Offering) (the “Affiliated Proceeds”). The Certificate of Designation for the Series A Preferred provides that Series A Preferred held by a holder who serves as a director, officer or is an employee of the Company shall only be convertible into shares of Common Stock following receipt of approval of a majority of the Company’s stockholders (“Stockholder Approval”). Similarly, any warrant issued to one of our directors may not be exercised prior to date that is the later of (x) the date on which the Company received Stockholder Approval and (y) the date that is six months from the date of issuance). Stockholder Approval was attained at a special meeting of stockholders held on September 19, 2023. 

On August 9, 2023, the Company entered into the Purchase Agreement with Intrensic and the Sellers, including Kevin Mullins, a director of the Company and its Chief Executive Officer. Under the terms of the Purchase Agreement, the Company agreed to purchase, and Sellers, including Mr. Mullins, agreed to sell, 100% of the Membership Interests of Intrensic for the following consideration: (i) $554 in cash, subject to adjustment based upon the outstanding indebtedness of Intrensic and Intrensic’s working capital; and (ii) 1,250,000 shares of Common Stock of the Company. Kevin Mullins owns approximately 9.53% of the Membership Interests, and as such, has a financial interest in the sale of Intrensic to the Company.

 

See Notes 1, 7 10 and 1112 for additional information on related party transactions and obligations.

 

13.14.MAJOR CUSTOMERS AND RELATED INFORMATION

 

For the three months ended September 30, 2022, revenues2023, revenue from onetwo distributordistributors accounted for approximately 59%,62% and 12% of revenuesrevenue with no other single customer accounting for more than 10% of total revenues.revenue. For the three months ended September 30, 2021, revenues2022, revenue from twoone distributorsdistributor accounted for approximately 41% and 29%59% of revenuesrevenue with no other single customer accounting for more than 10% of total revenues.revenue.

 

-14-15

 

For the nine months ended September 30, 2022, revenues2023, revenue from one distributor accounted for approximately 39%41% of revenuesrevenue with no other single customer accounting for more than 10% of total revenues.revenue. For the nine months ended September 30, 2021, revenues2022, revenue from twoone distributorsdistributor accounted for approximately 27% and 21%39% of revenuesrevenue with no other single customer accounting for more than 10% of total revenues.revenue.

 

At September 30, 2022,2023, accounts receivable from twoone distributorsdistributor accounted for 42% and 15%51% of net accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance. At December 31, 2022, accounts receivable from Threeone distributorsdistributor accounted for 48%, 16% and 15%70% of net accounts receivable at December 31, 2021 with no other single customer accounting for more than 10% of the accounts receivable balance.receivable.

 

The following table summarizes revenuesrevenue by geographic region. Revenues areRevenue is attributed to countries based on customer’s delivery location:

 

 

For the Three Months

 

For the Nine months

  

For the Three Months

 

For the Nine Months

 
 

Ended September 30,

 

Ended September 30,

  

Ended September 30,

 

Ended September 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Americas

 $1,478  $1,088  $3,484  $2,837  $1,347  $1,478  $3,225  $3,484 

Europe, Middle East and Africa

 220  745  435  2,424  2,284  220  2,320  435 

Asia Pacific

  3   (28)  545   

19

   -   3   (1)  545 

Total revenues

 $1,701  $1,805  $4,464  $5,280  $3,631  $1,701  $5,544  $4,464 

  

 

14.15.BUSINESS COMBINATION

The Company entered into the Purchase Agreement with Intrensic and the Sellers with an effective date of August 9, 2023 (the (“Closing”).  The Closing was consummated on August 16, 2023.  Under the terms of the Purchase Agreement, the Company agreed to purchase, and Sellers agreed to sell the  Membership Interests for the following consideration at Closing: (i) $554 in cash, subject to adjustment based upon the outstanding indebtedness of Intrensic and Intrensic’s working capital as of the Closing; and (ii) 1,250,000 shares of Common Stock of the Company valued at approximately $1,938.

The Company assessed the historical financial information of Intrensic to determine if it would materially impact Wrap's historical financial statements for the purposes of disclosing proforma financial information. The Company determined that in the current or prior reporting periods the acquired business contributed immaterially to the Company’s financial statements . Therefore, a pro forma disclosure of the Company as if the business combination had occurred is not warranted under ASC 805.

The preliminary purchase price is not finalized. The Company is still evaluating the impact of the income tax provision related to the acquisition and assessing the assumed contracts related to deferred revenue.

The table below sets forth the preliminary allocation of the fair value of Intrensic’s net assets acquired and the corresponding line item in the Company’s consolidated balance sheet at the date of acquisition.

Cash and cash equivalents

 $3 

Accounts receivable

  90 

Inventory

  61 

Net property, plant and equipment

  - 

Technology

  490 

Customer relationships (included in Intangibles)

  160 

Trademarks and trade names (included in Intangibles)

  80 

Goodwill

  1,611 

Total assets

 $2,495 
     

Liabilities

  3 

Equity

  2,492 

Total liabilities and equity

 $2,495 
     

Purchase Price:

    

Cash

  554 

Equity

  1,938 

Liabilities assumed

  3 

Total

 $2,495 

Legal fees incurred in connection with the transaction totaled approximately $38 and have been expensed as incurred.

16

16.SUBSEQUENT EVENTS

 

Appointment of Executive Chairman

On October 12, 2023, the Board of Directors (the “Board”) appointed Scot Cohen, the Company’s current Chairman of the Board, to the position of Executive Chairman, effective October 12, 2023 (the “Effective Date”). Mr. Cohen cofounded the Company in March 2016, and has previously served as the Executive Chairman of the Company from July 2017 until June 2021.

In connection with Mr. Cohen’s appointment as Executive Chairman, the Company and Mr. Cohen entered into an agreement on October 12, 2023 (the “Agreement”). Pursuant to the Agreement, unless earlier terminated pursuant to the terms therein, Mr. Cohen will serve as the Company’s Executive Chairman for an initial term of two years from the effective date of his appointment. As compensation for Mr. Cohen’s services to the Company, the Agreement entitles Mr. Cohen to an annualized base salary of $200,000 (the “Base Salary”) and eligibility to participate in customary benefits offered to other executives of the Company.

The Agreement further provides for:

A grant of that number of restricted shares (“RSAs”) of the Company’s Common Stock equal to $675,000 divided by $1.40, representing the closing price of Common Stock as reported on the Nasdaq Capital Market on October 12, 2023 (the “Closing Price”) for the date of grant (the “Grant Date”), which RSAs are subject to certain vesting conditions based on the achievement of certain targets based on total market capitalization of the Company.

A nonqualified option to purchase up to that number of shares of Common Stock with a Grant Date fair value equal to $675,000 divided by the Closing Price (the “Option”), an exercise price equal to the Closing Price, and a term of 10 years, which Option vests based on Mr. Cohen’s continued employment with the Company and the achievement of certain budgeted revenue targets established by the Board; and

A nonqualified option to purchase up to 2.25% of the number of shares of the Company’s Common Stock that are issued and outstanding (determined on a fully-diluted basis, including, without limitation, any shares issuable upon the conversion or exercise of any outstanding warrants or preferred stock) as of the Effective Date (the “Performance Option”), at an exercise price equal to the Closing Price, and a term of 10 years, which Performance Option vests, subject to Mr. Cohen’s continued employment with the Company through each vesting date, in accordance with the same vesting conditions as provided for in the RSAs.

The foregoing description of the Agreement does not purport to be complete and is qualified in its entirety by the full text of the Agreement, a copy of which is filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 16, 2023.

Resignations of Michael Parris and Wayne Walker

Effective October 11, 2022,2023 (the “Mr. Parris Resignation Date”), and October 12, 2023 (the “Mr.Walker Resignation Date”), Michael Parris and Wayne Walker, respectively, resigned from their positions as members of the company received an order from an international government agency forBoard. Neither director’s decision to resign was the purchaseresult of over 2,000 BolaWrap devices, cassettesany dispute or disagreements with the Company on any matter relating to the Company’s operations, policies or practices.

Appointment of Rajiv Srinivasan and other accessories totaling over $1.5 million. This order will be recorded inTimothy Szymanski

On October 12, 2023, Rajiv Srinivasan and Timothy Szymanski were appointed to serve as members of the fourth quarter 2022.Board to fill the vacancies created as a result of the resignations of Messrs. Parris and Walker, until the Company’s next annual meeting of stockholders or until their respective successors are duly elected and qualified.

Miami Office Lease

 

The Company has entered into an 89-month lease for 4,487 square feet of office space in Miami, Florida, starting from November 1, 2023. This leasing arrangement aims to enhance the Company's footprint on the East Coast and in international markets.

In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events for their potential impact on the financial statements and disclosures through the filing date the financial statements were available to be issued, and determined that except as disclosed herein, no additional subsequent events occurred that were reasonably expected to impact the consolidated condensed financial statements presented herein.

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion in conjunction with the financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”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, 20212022 (the “Annual Report”Annual Report). The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Words such as “expect,expect, “anticipate,anticipate, “intend,intend, “plan,plan, “believe,believe, “seek,seek, “estimate,estimate, “continue,continue, “may,may, “will,will, “could,could, “would,would, or the negative or plural of such words and similar expressions or variations of such words are intended to identify forward-looking statements but are not the only means of identifying forward-looking statements. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Report and in our other filings with the Securities and Exchange Commission (“SEC”(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. For purposes of Management's Discussion and Analysis within this Report, all monetary amounts are stated in thousands except for par values and per share amounts, unless otherwise stated.

 

Overview

 

We are a global public safety technology and services company organized in March 2016 delivering modernthat delivers safe and effective policing solutions to law enforcement and security personnel.personnel worldwide. We are a mission-driven organization focused on improving public safety encountersleading the movement for safer outcomes by equipping law enforcement with safe, non-pain compliance tools and outcomes.immersive training for the modern world. We began sales of our first public safety product, the BolaWrap 100 remote restraint device, in late 2018. In October 2021 we released a new generation product, the BolaWrap 150. The BolaWrap 150 is electronically deployed and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100 that is being phased out. Inlate 2020 we added a new solution to our public safety technologies, which is our virtual reality (“VR”) training platform – Wrap Reality. Wrap Reality is now sold to law enforcement agencies for simulation training as well as corrections departments for the societal reentry scenarios. In Q1 2022 we delivered a new generation product, the BolaWrap 150. The BolaWrap 150 is electronically deployed and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100 that has been phased out.

 

The immediate addressable domesticOur target market for our solutions consists ofincludes approximately 900,000 full-time sworn law enforcement officers atin over 15,30018,000 federal, state, and local law enforcement agencies in the U.S. and over 12 million police officers in overmore than 100 countries. WeAdditionally, we are also exploring opportunities in other domestic markets, includingsuch as military and private security. Our international focus is on countries with the largest police forces. The 100 largest international police agencies are estimated to have over 12.1 million law enforcement personnel. According to 360iResearch, a market research consulting firm, we participate in a segment of theour non-lethal products are part of a global market segment expected to grow to $16.1 billion by 2027.

 

We focus our efforts on the following products and services:

 

BolaWrap Remote Restraint Device – is a hand-held remote restraint device that discharges an eight-foot bola stylea seven and half-foot Kevlar tether to entangle an individual at a range of 10-25 feet. BolaWrap assists law enforcement to safely and effectively control encounters early in the use of force continuum without resorting to painful force options.

 

Wrap Reality – is a law enforcement 3D training system employing immersive computer graphics VR with proprietary software-enabled content. It allows up to two participants to enter a simulated training environment simultaneously, and customized weapons controllers enable trainees to engage in strategic decision making along the force continuum. Wrap Reality has 43 scenarios for law enforcement and corrections and 25 scenarios at this time for societal reentry. Wrap Reality is one of the most robust 3D Virtual Reality solutions on the market for law enforcement and societal reentry today.

Wrap Intrensic is a Body-Worn Camera (BWC) and Digital Evidence Management (DEM) solutions provider.  BWC and DEM play crucial role in capturing, storing, and managing digital evidence, such as video and audio recordings for various purposes, including criminal investigations and maintaining transparency in public interactions. The Wrap Intrensic X2 camera hardware and storage and data management capability, along with awareness of front-line operations, provides customers with a solution to meet the challenges.  Wrap Intrensic Evidence on Cloud provides an unlimited video storage platform that includes video and other evidence uploading, search, retrieval, redaction, and evidence sharing while reducing the need for resources required to manage this evidence.

 

In addition to the United StatesUS law enforcement market, we have shipped our restraint products to 5362 countries. We have established an active distributor network with 13 domestic distributors representing 50 states and one dealer representing the US territory of Puerto Rico. We have distribution agreements with 49 international distributors covering 5654 countries. We focus significant sales, training and business development efforts to support our global distribution network.network in addition to our internal sales team.

 

We focus significant resources on research and development innovations and continue to enhance our products and plan to introduce new products. We believe we have established a strong brandingbrand and market presence globally and have established significant competitive advantages in our markets.

 

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Management Changes

As previously reported in January 2022, the Board of Directors approved and initiated a leadership transition plan to support the next phase of its corporate strategy, which is focused on new leadership diversifying the Company’s suite of products, offerings and services. The transition and corporate strategy included the resignation of our President, Chief Executive Officer and director Thomas P. Smith and the announcement of the planned retirement of our Former Chief Financial Officer, Secretary and Treasurer James A. Barnes, who retired in July 2022 upon the appointment of Chris DeAlmeida as our Chief Financial Officer. After a period of transition managed by Special Transition Committee consisting of directors Scot Cohen and Kim Sentovich and including interim contract executives, on April 18, 2022, the Company appointed TJ Kennedy, a current director, as our Chief Executive Officer and Kevin Mullins as our President. Both Messrs. Kennedy and Mullins have significant leadership experience in public safety technology prior to their appointment. Mr. Mullins is leading go to market functions in the President role.

 

Business Outlook and Challenges

 

OurWe believe our Company's products and solutions continue to gainare gaining global recognition and awareness through active use across multiple agencies and continued acceptance worldwide awareness and recognition throughas well as various marketing channels such as demos, social media, trade shows, and media exposure, trade shows, product demonstrationsamong others. In part, this recognition and wordawareness can be attributed to positive feedback from law enforcement agencies and the successful deployment of mouthour products. As a result, our brand, Wrap, is becoming increasingly recognized on a global scale as a result of positive responses from agenciesleader in remote restraint and early adoption and deployment success. We believe Wrap is gaining traction as a recognized global brand, with innovative technology and an initial product foundation achieved throughnon-lethal solutions.

In addition, we are focused on aggressive marketing and public relations.relations efforts. We believe that we have strongare confident in the potential market opportunities for our solutions in remote restraint, virtual reality solutions and VR solutions throughout the worlddigital evidence management in the law enforcement and security sectors as a result ofworldwide. These opportunities are driven by the increasing demand for less-lethal policing, continued training, and transparency driven by community demands for less lethal policing and increasing threats posed by non-compliant subjects.local laws.

 

We continue to receive field reports of successful BolaWrap usage fromIn the law enforcement agencies. Manysector, our BolaWrap product has been successfully deployed in the field, as reported by agencies considerworldwide. BolaWrap asis now in use by almost 1,000 US law enforcement agencies and in 62 countries. Due to its safe remote restraint capabilities, many agencies do not deem its usage a very low level, or non-reportable,categorical reportable use of force option and accordingly,rather place it underneath early use of force such as handcuffs. We train law enforcement agencies deploy BolaWrap when verbal commands breakdown but long before there is justifiable escalation to pain inducing tools such as: pepper spray, pepper ball, batons, bean bags, tasers or Conducted Electrical Weapons (CEW’s) or firearms.

Agencies voluntarily report usage to Wrap. In the usage reports we have been provided; officers have reported successful outcomes in 83% of the use cases. This percentage is higher than what is often seen with less lethal tools. From the information we have been provided, the most common BolaWrap use case is for individuals with behavioral health issues, and the second most common BolaWrap use case is during domestic violence calls. Twenty-six percent of the reported persons who are wrapped with the BolaWrap are thought to be under the influence of alcohol or drugs.

There are many reasons why we may not receive reports on all the use of the BolaWrap, including, when uses are not reported to us. Othersof BolaWrap are considered evidence in ongoing criminal cases, are controlled by local policy or regulation, or require officer and are also not shared. Some law enforcementunion and other released to be shared with us. However, many agencies have shared bodycam footage of theirsuccessful field uses, some ofdeployments with us, which we are allowed tomay use in our marketing activities.training and education efforts. We believe increasedthat as the reports of avoiding escalationBolaWrap's effectiveness in de-escalation continue to increase, it will help grow revenues in the future.contribute to our future revenue growth.

 

We believe we haveManagement anticipates that our portfolio of products has a robuststrong and growingexpanding pipeline of market opportunities for our restraint product offering and training services withinin the law enforcement, military, corrections, and homeland security business sectors both domestically and internationally. Social trends demandingWith the increasing demand for more compassionatehumane and safesafer policing practices, are expected to continue to drivecontinued need for ongoing training, and transparency for police encounters, we expect a continued surge in our global business. WeCurrently, we are pursuing largeexploring major international business prospects internationally and also pursuing businesswhile simultaneously seeking to establish relationships with large police agencies in the U.S. ItHowever, we acknowledge that it is difficultchallenging to anticipate how long it will take to closepredict the exact timeline for closing these opportunities,deals, or ifwhether they will ultimately come to fruition especially given the uncertainty of COVID-19 and social unrest, as discussed below.materialize.

 

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To support

As part of our increasedefforts to expand our sales and distribution activitiesoperations, we have developed and offer robustprovide a comprehensive training and class materials that certifyprogram for law enforcement officers and trainers as BolaWrap instructors in using the BolaWrap. This training equips them with knowledge about the appropriate use and limitations of the BolaWrap in conjunctiontandem with modern policing tacticstechniques for de-escalation of encounters. We believenow focus on also teaching when and why BolaWrap should be used, including the specific area of success (i.e., after verbal commands break down and before the law enforcement officer is ready to escalate to pain compliance tools). Management believes that law enforcement trainers and officers that have seen demonstrations orwho have been trained aboutto use our products, or have witnessed demonstrations, are more supportive of their department’s purchaseinclined to support the acquisition and deployment of product.our products by their respective departments to drive successful outcomes. As of September 30, 2022,2023, over 1,3151,480 agencies have received BolaWrap training with over 4,3905,200 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments. This representsdepartments, representing39%14% increase in agencies and a 36%14% increase in trainingtrained officers as compared to September 30, 2021.2022. 

 

Operating expensesexpense for the third quarter of fiscal 2023 increased $0.1 million, or 2%, to $4.9 million from $4.8 million in the third fiscal quarterprior year period. The increase in operating expense was the result of 2022 reduced by 28% as compared toone-time items associated with the third fiscal quarterCompany’s finance offering and legal expenses associated with the acquisition of 2021. The focus on reducing operating expenses was an immediate focus on the new management team. In the second quarter, our new management team focused on assessing all facets of the business and completed a strategic roadmap to drive long-term growth and produce lasting value for shareholders. Our strategic roadmapIntrensic.

Management is centered on sustainably growing sales through building repeatable domestic BolaWrap sales, ramping international sales on the new BolaWrap 150, andconfident that implementing a customer success function expanding existing agencies to full patrol-wide BolaWrap deployment. We also have added a dedicated inside sales function to grow our velocity on new leads.  We will be expanding our distributor and partner relationships, and leveraging product diversification and innovation to catalyze sales growth. A key decision in the strategic roadmap waschanges it made in April are leading to improve our pricing on BolaWrap 150 devices and cassettes now that the product has proven itself to law enforcement as a significant upgrade. We have also transitioned to charging for our respected training services. We have implemented changes to how we sell Wrap Reality and have now solidified our go forward virtual reality model as a Software as a Service (“SaaS”) model. These changes will have significant positive impact on our future success and growth.

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We firmly believe that focusing on these strategic changes can drive significantsubstantial sales growth and put us on a path totowards sustainable profitability. Management intends to execute on its strategic roadmap immediately driving changes in Q3. WhileAlthough geopolitical tensions and macroeconomic headwindschallenges have impacted usaffected our quarterly results in recent quarters,the past and may in the future, we remainbelieve our firm is uniquely positioned to deliver best-in-classprovide lifesaving technologies, training, and data-driven servicesdigital evidence management that can empowerenable law enforcement officers across the globeofficers. If departments follow our Use of Force Guarantee requirements, we are confident enough to have safe, effective encounters with minimaloffer that in 12 months we would buy their BolaWrap devices back if they do not reduce their reportable use of force.force by 10%. With an increasing addressable market, Wrap hasoffers a distinctunique value proposition in a growing addressable market. Now withproposition. Our improved pricing strategy, coupled with reduced operating expenses,expense and byour growing future sales we expectoutlook, is expected to have reducedhelp reduce losses and improvedimprove cash flow.flow in the future. 

 

We are recovering from supply chain impacts and a difficult transition from the BolaWrap 100Looking ahead to the BolaWrap 150. We expectcoming years, we plan to make moreincrease the number of product demonstrations and conduct more training sessions, especially in international markets, as pandemic-related restrictions continue to ease in 2022. We also expect to see increased sales momentumboth domestically and in the back halfinternational markets. Our new focus on the when and why BolaWrap is used is already showing improved results. This is a departure of 2022 internationally as we raise awarenessthe hardware product only approach of allthe past. Our sales of the BolaWrap 150, enhancementsWrap Reality and transition countries to the BolaWrap 150. Lastly, we anticipate discount and promotional costs to decline after Q3 as we have phase out upgrade offers and prioritize growing brand awareness.  

Looking beyond 2022, we expectWrap Intrensic are expected to continue to see strong sales growth of the BolaWrap 150 and Wrap Reality.  This coupled with continuedrise, aided by our ongoing cost savings and cost control measures, which should lead to a continuingan overall reduction ofin cash burn going forward.  As a result, we anticipate moving to a cash flow break-even point by the end of fiscal 2023, and we anticipate strong sales could lead to profitability by the end of 2024.burn.

 

With the acquisition of NSENA in December 2020, and the rebranding of the NSENA business as Wrap Reality, we have continued to market our VR system while working to integrate previous scenarios into a robust platform, employing BolaWrap and additional de-escalation techniques into new Wrap Reality scenarios. The improved law enforcement simulator platform continues to be used by additional agencies. In July 2022 we announced new wins with large correction agencies in Ohio and Pennsylvania that introduced our new scenarios focused on societal reentry and preventing recidivism. We plan to increase marketing activities for our VR solution to both law enforcement and corrections.

OnAt September 30, 2022,2023, we had backlog of approximately $26$48 thousand expected to be delivered in the next twelve months.fourth quarter of 2023. Additionally, we had deferred revenue of $300$365 thousand expected to be recognized generally over the next five years. Our deferred revenue mostly is from Wrap Reality subscription and other revenue. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instances, cancellation, in the normal course of business.

 

Since inception, in March 2016, we have generated significant losses from operations and anticipate that we will continue to generate significant losses from operations for the foreseeable future. We believe that we have adequate financial resources to sustain our operations for the next year. InWe reduced our net loss during the third quarter of fiscal 2022 we reduced our net loss2023 by more than $2 thousand versus$1.1 million as compared to the comparable prior year quarter.third quarter of fiscal 2022. Net cash used in operations during the nine months ended September 30, 20222023, was $2.8$2.1 million lessmore than cash used in operations during the nine months ended September 30, 2022. This increase in net cash used during the first nine months of the prior year.2023 as primarily driven by changes in Account Receivable and Inventory.

 

We expect that we will need to continue to innovate new applications for our public safety technology, open new geographies, develop new products and technologies to meet diverse customer requirements and identify and develop new markets for our products.

 

In March 2020, the World Health Organization ("WHO") classified the COVID-19 outbreak as a pandemic. We believeSupply chain disruptions have affected our sales during the first nine months of 2022 were negatively impacted by the transition to the BolaWrap 150 product and the stopping of our BolaWrap 100 production line and the effects of limited ability to demonstrate and train in 2021 due to the COVID-19 pandemic, especially internationally. However, we are beginning to see some recovery during Q3 as full production and sales of the BolaWrap 1500 occurred. We continue to monitor developments and assess areas where there is potential for our business to be impacted by the pandemic. Businesses and governments with which we engage may be operating under restrictions and experiencing disruptions, which may create obstaclesoperations in the coordination of business activities, including demonstrations, training and the negotiation and fulfillment of orders. Disruptions in the supply chain have already impacted uspast and could negatively impact our ability to source materials, or manufacture and distribute products. We could experience a decreaseproducts in new orders from pandemic related events, which could negatively impact our revenues and reduce our liquidity and cash flows. Growth in revenue could also be impeded by these factors. Thethe future. Moreover, financial markets have been subjectcontinued to experience significant volatility, that could impact ourchallenging the Company’s ability to enter into, modify,access the capital markets to provide additional working capital to fund the Company’s growth. Despite these conditions, and negotiate favorable termsfollowing an analysis of our future capital needs, the Company consummated an offering of Series A Convertible Preferred Stock and conditions relativeWarrants (“Offering”), which Offering closed on July 5, 2023, resulting in gross proceeds to equity and debt financing activities. We have $23.7the Company of approximately $10.0 million of which $7.4 million was received on June 29, 2023. The $7.4 million received was recorded to cash with an offset to warranty liability. As a result, we had $14.9 million in cash and cash equivalents and short-term investments as of September 30, 2022, which2023. We therefore believe we believe provideshave sufficient capital to fund our operations for at least the next twelve months and withstand the potential near-term consequences of the pandemic, althoughmonths. However, liquidity constraints and access to capital markets could adversely impactstill negatively affect our liquidity and warrantrequire changes to our investment strategy. The full magnitude of the pandemic cannot be measured at this time, and therefore, any of the aforementioned circumstances, as well as other factors, may cause our results of operations to vary substantially from year to year and quarter to quarter.

 

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Based on various standards published to date, we believe the work our employees and associates perform is critical and essential. We are taking a variety of measures to promote the safety and security of our employees while ensuring the availability and functionality of our critical infrastructure. We are following Center for Disease Control and local guidelines regarding COVID-19 safety in the workplace. In addition, the following events related to the COVID-19 pandemicFuture global pandemics could potentially result in lost or delayed revenue for our Company, as occurred in the years ended December 31, 2021, and 2022 due to the Company: limitationsglobal COVID-19 pandemic. These potential future events could include restrictions on theour suppliers' ability of our suppliers to meet delivery requirements and commitments; limitations on the ability of our employeescommitments, employees' inability to perform their work due to illness caused by thea pandemic or local, state, or federal ordersmandates requiring employees to remain at home; limitations on thestay home. Delays in carriers' ability of carriers to deliver our products to customers;customers, unforeseen deviations from customers or foreign governments restricting the ability to do business;conduct business, and limitations on the ability of our customerscustomers' inability to pay us on a timely basis, if at all.all, could also limit our revenue.

 

We alsoOur Company may be adversely affectedpositively or negatively impacted by continued social unrest, riots, protests against racial inequality, protests against police brutality and movements such as “Defundlike "Defund the Police” and suchPolice." Such unrest may be exacerbatedfurther fueled by inaccuratemisleading information or negative publicity regardingabout our solutions. We believe our solutions are actually the answer to reducing use of force and driving safer outcomes for officers and the citizens they interact with each day. We recently introduced our Protest Riot Pack aimed at equipping officers with an easy to grab no-harm solution for dealing with civil unrest. Although the negativity of some of these events has been reduced, someintensity of these events may have subsided, some may still indirectly or directly or indirectly affectinfluence police agency budgets and the funding available to current and potential customers. ParticipantsIn addition, participants in these events may also attempt to create the perceptionimpression that our solutions are contributing to the perceived problems, which may adversely affect us,potentially harming our business and results of operations, including our revenues,revenue, earnings, and cash flows from operations.

 

Our business may be impacted by global economic conditions, which have beenChanges in recent years, and continue to be, volatile. Geopolitical conflict, such as the recent conflict in Ukraine, and related international economic sanctions and their impact may exacerbate this volatility. Specifically, our revenues and gross margins depend significantly on global economic conditions and the demand by foreign governments and agencies for the BolaWrap in many of our target markets.

Changes in management and other keycritical personnel have the potential to improve and disruptnegatively affect our business, and any such disruptionbusiness. Such disruptions could potentially adversely affecthave an adverse impact on our operations, programs, growth, financial condition, or results of operations. Improvements toOn the other hand, improvements in our operations, operating expensesexpense, and go to marketgo-to-market approaches also have the opportunity to impactcould positively influence the success of our business in the business going forward.future.

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Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. We evaluate our estimates, on an on-going basis, including those estimates related to recognition and measurement of contingencies and accrued expense. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, tax contingencies, unrecognized tax benefits, and any required valuation allowance, including taking into consideration the probability of the tax contingencies being incurred. Management assesses this probability based upon information provided by its tax advisers, its legal advisers and similar tax cases. If later our assessment of the probability of these tax contingencies changes, our accrual for such tax uncertainties may increase or decrease. Our effective tax rate for annual and interim reporting periods could be impacted if uncertain tax positions that are not recognized are settled at an amount which differs from our estimates.

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Some of our accounting policies require higher degrees of judgment than others in their application. These include share-based compensation and contingencies and areas such as revenue recognition, allowance for doubtful accounts, valuation of inventory and intangible assets, estimates of product line exit costs, warranty liabilities and impairments.

 

Revenue Recognition. We sell our products to customers including law enforcement agencies, domestic distributors and international distributors and revenue from such transactions is recognized in the periods that products are shipped (free on board (“FOB”) shipping point) or received by customers (FOB destination), when the fee is fixed or determinable and when collection of resulting receivables is reasonably assured. We identify customer performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue as we satisfy the performance obligations. Our primary performance obligations are products/accessories and VR software licensing or sale. Our customers do not have the right to return product unless the product is found to be defective.

 

Share-Based Compensation. We follow the fair value recognition provisions issued by the Financial Accounting Standards Board (“FASB”) in Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation (“ASC 718”) and we adopted Accounting Standards Update (“ASU”) 2018-07 for share-based transactions with non-employees. Share-based compensation expense recognized includes stock option and restricted stock unit compensation expense. The grant date fair value of stock options is determined using the Black-Scholes option-pricing model. The grant date is the date at which an employer and employee or non-employee reach a mutual understanding of the key terms and conditions of a share-based payment award. The Black-Scholes option-pricing model requires inputs including the market price of the Company’s Common Stock on the date of grant, the term that the stock options are expected to be outstanding, the implied stock volatilities of several publicly traded peers over the expected term of stock options, risk-free interest rate and expected dividend. Each of these inputs is subjective and generally requires significant judgment to determine. The grant date fair value of restricted stock units is based upon the market price of the Company’s Common Stock on the date of the grant. We determine the amount of share-based compensation expense based on awards that we ultimately expect to vest and account for forfeitures as they occur. The fair value of share-based compensation is amortized to compensation expense over the vesting term.

 

Allowance for Doubtful Accounts. Our products are sold to customers in many different markets and geographic locations. We estimate our bad debt reserve on a case-by-case basis and the aging of accounts due to a limited number of customers mostly government agencies or well-established distributors. We base these estimates on many factors including customer credit worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. Our judgments and estimates regarding collectability of accounts receivable have an impact on our financial statements.

 

Valuation of Inventory. Our inventory is comprised of raw materials, assemblies and finished products. We must periodically make judgments and estimates regarding the future utility and carrying value of our inventory. The carrying value of our inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from our inventory is less than carrying value.

 

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Valuation of Intangible Assets. Intangible assets consisted of (a) capitalized legal fees and filing expense related to obtaining patents and trademarks, (b) customer agreements, tradenames, software, non-solicitation and non-compete agreements acquired in business combinations and valued at fair value at the acquisition date, and (c) the purchase cost of indefinite-lived website domains. We must make judgments and estimates regarding the future utility and carrying value of intangible assets. The carrying values of such assets are periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from an individual intangible asset is less than carrying value. This generally could occur when certain assets are no longer consistent with our business strategy and whose expected future value has decreased.

 

Accrued Expense. We establish a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. This reserve requires us to make estimates regarding the amount and costs of warranty repairs we expect to make over a period of time. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs, and anticipated rates of warranty claims. We have very limited history to make such estimates and warranty estimates have an impact on our financial statements. Warranty expense is recorded in cost of revenues.revenue. We evaluate the adequacy of this reserve each reporting period.

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We use the recognition criteria of FASB ASC Topic 450-20, Loss Contingencies, to estimate the amount of bonuses when it becomes probable a bonus liability will be incurred and we recognize expense ratably over the service period. We accrue bonus expense each quarter based on estimated year-end results, and then adjust the actual in the fourth quarter based on our final results compared to targets.

 

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.

Business Combination. The Company accounts for its business combinations under the provisions of Accounting Standards Codification ("ASC") Topic 805-10, Business Combinations ("ASC 805-10"), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective fair values. The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using established valuation techniques. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.

The estimated fair value of the acquired intangible assets was determined using a method which reflects the present value of the operating cash flows generated by this asset after taking into account the cost to realize the revenue, and an appropriate discount rate to reflect the time value and risk associated with the invested capital.

Certain adjustments to the assessed fair values of the assets and liabilities made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income.

Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. Other than the planned production change requiring a new estimate of exit expense,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, 2022.2023. Our accounting policies are more fully described in Note 1. Organization and Summary of Significant Accounting in the notes to our audited consolidated financial statements included in the Annual Report.

Recent Accounting Pronouncements

New pronouncements issued for future implementation are discussed in Note 1. Organization and Summary of Significant Accounting Policies of our financial statements.

 

Segment and Related Information

 

The Company operates as a single segment. The Company’s chief operating decision maker is its Chief Executive Officer, who manages operations for purposes of allocating resources. Refer to Note 13,13. Major Customers and Related Information, in our financial statements for further discussion.

 

Operating ExpensesExpense

 

Our operating expenses includeexpense includes (i) selling, general and administrative expense, (ii) research and development expense, and in the most recent fiscal quarter, (iii) product line exit expense. Research and development expense is comprised of the costs incurred in performing research and development activities and developing production on our behalf, including compensation and consulting, design and prototype costs, contract services, patent costs and other outside expense. The scope and magnitude of our future research and development expense is difficult to predict at this time and will depend on elections made regarding research projects, staffing levels and outside consulting and contract costs. The future level of selling, general and administrative expense will be dependent on staffing levels, elections regarding expenditures on sales, marketing and customer training, the use of outside resources, public company and regulatory expense, and other factors, some of which are outside of our control.

 

We expect our operating costs will remain at comparable current levelsreduce from the first three fiscal quarters of 2023 as a result of the changes implemented in the near term.April 2023, and ongoing cost containment efforts. We may also incur additional non-cash share-based compensation costs depending on future option and restricted stock unit grants that are impacted by stock prices and other valuation factors. Historical expenditures are not indicative of future expenditures.

 

22

Results of Operations

 

Three Months Ended September 30, 20222023 Compared to Three Months Ended September 30, 20212022

 

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

 

  

Three Months Ended

September 30,

  

Change

 
  

2022

  

2021

  

$

  

%

 
  

(in thousands, except percentage change)

 

Revenues:

                

Product sales

 $1,612  $1,719  $(107)  (6%)

Other revenue

  89   86   3   3%

Total revenues

  1,701   1,805   (104)  (6%)

Cost of revenues:

                

Products and services

  790   1,094   (304)  (28%)

Restructuring inventory charge

  -   -   -   - 

Total cost of revenues

  790   1,094   (304)  (28%)

Gross profit

  911   711   200   28%
                 

Operating expenses:

                

Selling, general and administrative

  3,586   4,654   (1,068)  (23%)

Research and development

  1,236   2,076   (840)  (40%)

Total operating expenses

  4,822   6,730   (1,908)  (28%)

Loss from operations

 $(3,911) $(6,019) $2,108   (35%)

-21-

  

Three Months Ended

September 30,

  

Change

 
  

2023

  

2022

  

$

  

%

 
  

(in thousands, except percentage change)

 

Revenues:

                

Product sales

 $3,248  $1,612  $1,636   101

%

Other revenue

  383   89   294   330

%

Total revenues

  3,631   1,701   1,930   113

%

Cost of revenue

  1,454   790   664   84

%

Gross profit

  2,177   911   1,266   139

%

                 

Operating expenses:

                

Selling, general and administrative

  4,317   3,586   731   20

%

Research and development

  610   1,236   (626)  (51

)%

Total operating expenses

  4,927   4,822   105   2

%

Loss from operations

 $(2,750) $(3,911

)

 $1,161   (30

)%

 

Revenue

 

We reported net revenue of $1.7$3.6 million for the three months ended September 30, 2022,2023, as compared to $1.8 million for the prior year quarter. Domestic revenues increased from $1.1 million for the third quarter of 2021 to $1.3$1.7 million for the quarter ended September 30, 2022.2022, a 113% increase over the prior year. International revenues decreasedrevenue increased from $717$223 thousand for the third quarter of 2021 to $375 thousand for the quarterthree months ended September 30, 2022.2022 to $2.3 million for the three months ended September 30, 2023. The increase in international revenue was driven by certain large orders and continued strong demand for our products in the EMEA region. We also incurred discounts of $240$68 thousand during the three months ended September 30, 2022, primarily2023, as a result of promotional programs designed to encourage domestic customers to upgrade to the BolaWrap 150. TheseGross sales were $3.7 million for the three months ended September 30, 2023, before such discounts. The discounts compare to normal business discounts of $81$240 thousand in the comparable quarter of the prior year quarter.year. We expect selected discounts in the fourth quarter but thereafter a decline to minimal discounts in 2024 as we have phased out our promotional upgrade offer.

 

International revenuesrevenue generally consistconsists of larger orders with the end user being large, centralized government agencies. These orders continue to be lumpy and difficult to predict as to both timing and amount. International orders anticipated in the second quarter were delayed due to the change over from the BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future quarters. We believe that revenue during the fiscal year 20222023 will still be an increase overall compared to the revenue recorded during 20212022 due to growth of domestic sales and anticipated international orders from a robust pipeline, although no assurances can be given. We believe based on pipeline that these larger international deals are more likely to book and ship in the final quarter of 2023.

 

We incurred product promotional costs of $125$61 thousand during the quarterthree months ended September 30, 2022,2023, related primarily to BolaWrap 150 demonstration products and the cost of training products and accessories delivered to law enforcement agencies that were expensed as marketing costs. A total of $163 thousand of such product promotional costs were incurred during the prior year quarter. We are responding to increased demand for training as a result of expanded product and brand awareness with more efficient training approaches. Withand increased successful field use by agencies and greater brandbut due to awareness as well as the transition to the BolaWrap 150, we expect reductions in product promotional costs to decline versusfrom the prior year.

 

We had $300 thousand of deferred revenue at September 30, 2022, of which $177 thousand related to VR training and $123 thousand related to BolaWrap extended warranties and services. As we potentially secure increased bookings for Wrap Reality, as well as BolaWrap extended warranties, we expect our deferred revenue to grow in future quarters.

At September 30, 2022, we had backlog of $26 thousand worth of customer orders expected to be delivered in the next twelve months. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instance’s cancellation in the normal course of business.

The impact of the COVID-19 pandemic and geopolitical conflicts, including the recent war in Ukraine, has created much uncertainty in the global marketplace. The COVID-19 pandemic has and may continue to restrict our ability to travel internationally. Although no assurances can be given, we do believe, however, that the challenges to substantially increasing sales caused by COVID-19 will abate as the pandemic wanes, especially given the number of BolaWrap trials currently ongoing and the current environment where non-lethal options are being widely considered by law enforcement domestically and internationally. 

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

23

 

Gross Profit

 

Our cost of revenue for the quarter was $790 thousand resulting in a gross margin of 54%. Our cost of revenueprofit for the three months ended September 30, 20212023, was $1,094 thousand resulting in$2.2 million, or a gross margin of 39%60%. Our gross profit for the three months ended September 30, 2022, was $0.9 million, or a gross margin of 54%. The most recent quarter periodincrease in gross margin was impacted byprofit represented a 139% increase over prior year as a result of cost efficiencies with the lower sales volume, warranty costsBolaWrap 150 production, selling price adjustments implemented in September of 2022, and a reduction of promotional discounts. We also were impacted by certain higher raw material prices in the second quarter to obtain certain parts. Our margin is expected to improve in future quarters as these issues abate.pricing.

 

-22-

Due toAs our limitedrevenue history of revenueis limited, historical margins however, may not be indicative of plannedaccurately reflect future margins. TheHowever, we expect higher margins with the production of the BolaWrap 150 has higher margins than historical production.compared to previous production due to design changes and improved pricing. Our margins are also varysubject to variations based on the sales channels and product mix through which our products are sold and product mix. Currently,sold. At present, our cassettes have lower margins than BolaWrap devices. As we scale cassette production, we will look to reduce our costs and drive higher cassette margins. Cassettes were a total of 21% of our overall revenue in the three months ended September 30, 2023, and will continue to grow as a recurring revenue base as more BolaWrap devices are in the field and the usage of BolaWrap increases due to the need of officers to de-escalate earlier to prevent injuries and use of higher levels of force.

We implement productregularly introduce updates and revisions includingto our products, which may include changes to raw materialmaterials and component changes that maycomponents, and can impact our product costs. With such product updates and revisions, we haveGiven our limited experience with warranty cost experience andcosts, our estimated future warranty costs can impactexpense may affect our gross margins.

 

Our global supply chain has been subject to significantexperienced notable component shortages, increasedextended lead times, cost fluctuations, and logisticslogistical constraints, thatall of which have impactedaffected our product costs. We expectAlthough we have seen these supply chain challenges to continue throughout 2022. Supplierobstacles ease in 2023, we acknowledge that future supplier shortages, quality issuesproblems, and logisticlogistics delays affectcould impact our production schedules and could in turn have a material adverse effectnegative impact on our financial condition, results of operation, and cash flows.

 

Selling, General and Administrative Expense

 

Selling, general and administrative ((“SG&A”) expense of $4.3 million for the quarterthree months ended September 30, 2022 were $1.12023 increased by $0.7 million, less thanwhen compared to $3.6 million for the prior year comparable quarter due to cost containment effortsthree months ended September 30, 2022. The increase in selling general and due to certainadministrative expense was the result of one-time costs initems associated with the prior year quarter.Company’s financing and the acquisition of Intrensic.

 

Share-based compensation costs allocated to SG&A decreased to $700$(149) thousand compared to $1.1 million$700 thousand for the comparable prior quarter. This $393$849 thousand decrease resulted primarily from a one-time costs in the prior year period and changes in management and one-time cost offsets associated with the stock price.management changes in April 2023.

 

Salaries and burden costs of $2.2$1.6 million for the quarterthree months ended September 30, 2022 were comparable2023, was a decrease of $0.6 million, or a 25% decrease, due to change in headcount. During the three months ended September 30, 2023, as compared to same period during the prior year, as staffing remained at similar levels. During the quarter ended September 30, 2022, as compared to the prior year comparable quarter, we incurred reduced advertising and promotions costs (including product promotion costs) of $153 thousand, reducedincreased professional fees of $136by $940 thousand, and reducedincreased consulting and contract services fees of $359by $214 thousand. We expect expenditures for SG&A expensesexpense to be relatively in line with the third quarter of 2023 despite anticipated increases in Revenue.

Advertising and promotion costs were $224 thousand for the balancethree months ended September 30, 2023, or a decrease of 2022$32 thousand as compared to remain below$256 thousand during the prior yearthree months ended September 30, 2022. The changes in advertising costs were related to reductions in consultants and other cost containment efforts. However, the company expects advertising costs will increase in the future due to management’s active cost containment efforts.increased investment in strategic targeting and marketing campaigns as well as building brand awareness.

 

Research and Development Expense

 

Research and development expense decreased by $840$626 thousand for the quarterthree months ended September 30, 2022,2023, when compared to the comparablethree months ended September 30, 2022. We incurred a $225 thousand period over period decrease in the prior year. Non-cash share-based compensation expense allocated to research and development expense as a result of personnel was $172changes made in April 2023. Outside consulting costs decreased by $90 thousand for the quarter ended September 30, 2022 comparable to the $210 thousand  for the prior period. Salaries and burden costs for the quarter ended September 30, 2022 increased $45 thousand compared to the prior year primarily associated with product development. Prototypeprototype related costs for quarter ended September 30, 2022, increased $105decreased by $120 thousand primarily due to reduced costs related to finalizing the BolaWrap 150 product and continued improvements. We expect our research and development costs to remain at comparable levels for the balance of 2022. cost containment efforts.

24

 

Operating Loss

 

Loss from operations of $2.8 million during the three months ended September 30, 2023, was a reduction of $1.1 million compared to loss from operations of $3.9 million during the three months ended September 30, 2022, of $3.9 million was a reduction of $2.1 million compared to that of the three months ended September 30, 2021 reflecting increased margin and the focus on reducing operating costs.

 

-23-

Nine monthsmonths Ended September 30, 20222023, Compared to Nine monthsmonths Ended September 30, 20212022

 

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

 

  

Nine months Ended

September 30,

  

Change

 
  

2022

  

2021

  

$

  

%

 
  

(in thousands, except percentage change)

 

Revenues:

                

Product sales

 $4,042  $4,997  $(955)  (19%)

Other revenue

  422   283   139   49%

Total revenues

  4,464   5,280   (816)  (15%)

Cost of revenues:

                

Products and services

  2,430   3,276   (846)  (26%)

Restructuring inventory charge

  -   747   (747)  - 

Total cost of revenues

  2,430   4,023   (1,593)  (40%)
                 

Gross profit

  2,034   1,257   777   62%
                 

Operating expenses:

                

Selling, general and administrative

  11,952   16,210   (4,258)  (26%)

Research and development

  4,210   4,303   (93)  (2%)

Total operating expenses

  16,162   20,513   (4,351)  (21%)

Loss from operations

 $(14,128) $(19,256) $5,128   (27%)
  

Nine months Ended

September 30,

  

Change

 
  

2023

  

2022

  

$

  

%

 

Revenue:

                

Product sales

 $4,897  $4,042  $855   21

%

Other revenue

  647   422   225   53

%

Total revenue

  5,544   4,464   1,080   24

%

Cost of revenue

  2,347   2,430   (83)  (3

)%

Gross profit

  3,197   2,034   1,163   57

%

                 

Operating expense:

                

Selling, general and administrative

  12,604   11,952   652   5

%

Research and development

  2,683   4,210   (1,527)  (36

)%

Total operating expense

  15,287   16,162   (875)  (5

)%

Loss from operations

 $(12,090) $(14,128

)

 $2,039   (14

)%

 

Revenue

 

We reported net revenue of $5.5 million for the nine months ended September 30, 2023, as compared to $4.5 million for the nine months ended September 30, 2022, as compared to $5.3 million for the quarter ended September 30, 2021. Domestic revenues of $3.5 million for the nine months reflected growth of 23%a 24% increase over the prior comparable quarter of $2.8 million.year. International revenues decreasedrevenue increased from $2.4 million for the nine months ended September 30, 2021 to $1.0 million for the nine months ended September 30, 2022.2022 to $2.3 million for the nine months ended September 30, 2023. We incurred discounts of $790$132 thousand during the nine months ended September 30, 2022, primarily2023, as a result of promotional programs designed to encourage domestic customers to upgrade to the BolaWrap 150. Gross sales were $5.7 million for the nine months ended September 30, 2023, before such discounts. The discounts compare to normal business discounts of $161$790 thousand in the comparable nine-month period of the prior year. We expect selected discounts in the fourth quarter but thereafter a decline to minimal discounts in 2023 as we have phased out our promotional upgrade offer.

 

International revenuesrevenue generally consistconsists of larger orders with the end user being large, centralized government agencies. These orders continue to be lumpy and difficult to predict as to both timing and amount. International orders anticipated in the second quarter were delayed due to the change over from the BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future quarters. We believe that revenue during the fiscal year 20222023 will still be an increase overall compared to the revenue recorded during 20212022 due to growth of domestic sales and anticipated international orders from a robust pipeline, although no assurances can be given. We believe based on pipeline that these larger international deals are more likely to book and ship in the latter half of 2023.

 

We incurred product promotional costs of $616$156 thousand during the nine months ended September 30, 2022,2023, related primarily to BolaWrap 150 demonstration products and the cost of training products and accessories delivered to law enforcement agencies that were expensed as marketing costs. A total of $816 thousand of product promotional costs were incurred during the nine months ended September 30, 2021. We are responding to increased demand for training as a result of expanded product and brand awareness with more efficient training approaches. Withand increased successful field use by agencies and greater brandbut due to awareness we expect reductions in product promotional costs to decline versusfrom the prior year.

 

We had $300$365 thousand of deferred revenue aton September 30, 2022,2023, of which $177$199 thousand related to VR, $6 thousand was related to training and $123$160 thousand related to BolaWrap extended warranties and services. As we potentially secure increased bookings for Wrap Reality, as well as BolaWrap extended warranties, we expect our deferred revenue to grow in future quarters. 

 

25

At

On September 30, 2022,2023, we had backlog of $26$48 thousand worth of customer orders expected to be delivered in the next twelve months.fourth quarter of 2023. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instance’s cancellation in the normal course of business.

-24-

 

Gross Profit

 

Our costgross profit for the nine months ended September 30, 2023, was $3.2 million, or a gross margin of revenue58%. Our gross profit for the nine months ended September 30, 2022, was $2.4$2.0 million, resulting inor a gross margin of 46%. The increase in gross margin for the nine months ended September 30, 2021, was 38% after adjusting excluding $747 thousandprofit represented a 57% increase over prior year as a result of restructuring charges related to the wind down of BolaWrap 100increased sales and continue cost containment efforts on production. The most recent period gross margin was impacted by the lower sales volume and promotional discounts. We also were impacted by certain higher raw material prices in 2022 to obtain certain parts. Our margin is expected to improve in future quarters as these issues abate.

 

Due toAs our limitedrevenue history of revenueis limited, historical margins however, may not be indicative of plannedaccurately reflect future margins. TheHowever, we expect higher margins with the production of the BolaWrap 150 has higher margins than historical production.compared to previous production due to design changes and improved pricing. Our margins are also varysubject to variations based on the sales channels and product mix through which our products are sold and product mix. Currently,sold. At present, our cassettes have lower margins than BolaWrap devices. As we scale cassette production, we will look to reduce our costs and drive higher cassette margins. Cassettes were a total of 20% of our overall revenue in the nine months ended September 30, 2023, and will continue to grow as a recurring revenue base as more BolaWrap devices are in the field and the usage of BolaWrap increases due to the need of officers to de-escalate earlier to prevent injuries and use of higher levels of force.

We implement productregularly introduce updates and revisions includingto our products, which may include changes to raw materialmaterials and component changes that maycomponents, and can impact our product costs. With such product updates and revisions, we haveGiven our limited experience with warranty cost experience andcosts, our estimated future warranty costs can impactexpense may affect our gross margins.

 

Our global supply chain has been subject toexperienced notable component shortages, increasedextended lead times, cost fluctuations, and logisticslogistical constraints, thatall of which have impactedaffected our product costs. We expectAlthough we anticipate these supply chain challengesobstacles to continue throughout 2022. Supplierease in 2023, we acknowledge that future supplier shortages, quality issuesproblems, and logisticlogistics delays affectcould impact our production schedules and could in turn have a material adverse effectnegative impact on our financial condition, results of operation, and cash flows.

 

Selling, General and Administrative Expense

 

Selling, general and administrative (SG&A”) expense of $12.6 million for the nine months ended September 30, 2023 increased by $0.6 million, when compared to $12.0 million for the nine months ended September 30, 2022, were $12.0 million reflecting a decrease of $4.2 million when compareddue to $16.2 million for the nine months ended September 30, 2021. The reduction in SG&A costs reflected active cost containment efforts and nonrecurrence of certain one-time costs inassociated with severance, the prior year period.Intrensic acquisition, and the Company’s financing.

 

Share-based compensation costs allocated to SG&A wasdecreased to $1.4 million compared to $2.2 million for the nine months ended September 30, 2022 compared to $3.7 million for the comparable prior yearprior-year period. This $1.5$0.8 million decrease resulted primarily from  reduced headcountdue to changes in management, one-time costs in the prior year period, and changes in the stock price.

 

Salaries and burden costs of $6.8$4.6 million for the nine months ended September 30, 20222023, was a $2.8$2.2 million decrease compared to the prior year nine months due to cost containment efforts and reduced personnel expense.ended September 30, 2022. During the nine months ended September 30, 2022,2023, as compared to same period during the prior year, comparable nine months, we incurred reduced advertising and promotions costs (including product promotion costs) of $460 thousand, reducedincreased professional fees of $155 thousand,by $1.1 million, and reducedincreased consulting and contract services fees of $652by $243 thousand. We expect expenditures for SG&A expense in 2023 to be slightly lower than 2022 despite expected revenue growth.

Advertising and promotion costs were $669 thousand for the balancenine months ended September 30, 2023, or a decrease of 2022$246 thousand as compared to remain below$915 thousand during the prior year duenine months ended September 30, 2022. The changes in advertising costs were related to activereductions in consultants and other cost containment efforts.

 

Research and Development Expense

 

Research and development expense decreased by $93$1.5 million for the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022. We incurred a $204 thousand period over period decrease in share-based compensation expense allocated to research and development expense as a result of personnel changes made in April 2023. Outside consulting costs decreased by $342 thousand and prototype related costs decreased by $443 thousand for the nine months ended September 30, 2022, compared2023, primarily due to the comparable nine-month period in fiscal 2021. Non-cash share-based compensation expense allocated to research and development personnel was $448 thousand for the nine months ended September 30, 2022 compared to the $588 thousand for the prior period. Salaries and burdenreduced costs for the nine months ended September 30, 2022 was $2.5 million are in line with the prior year period. Prototype related costs for the nine months ended September 30, 2022, increased $359 thousand related to finalizing the BolaWrap 150 startup costs and continued improvements.product.

26

 

Operating Loss

 

Loss from operations of $12.1 million during the nine months ended September 30, 2023 was a reduction of $2.0 million compared to loss from operations of $14.1 million during the nine months ended September 30, 2022, of $14.1 million was a reduction of $5.1 million compared to that ofreflecting increased margin and the nine months ended September 30, 2021 reflecting third quarter reduced costs from the prior year.

focus on reducing operating costs.

 

Liquidity and Capital Resources

 

Overview

We have experienced net losses and negative cash flows from operations since our inception. As of September 30, 2022, we had cash and cash equivalents of $3.8 million, short-term investments of $19.9 million, positive working capital of $27.3 million and had sustained cumulative losses attributable to stockholders of $63.8 million. We believe that our cash on hand and short-term investments will sustain our operations for at least the next twelve months.

-25-

 

Our primary source of liquidity to date has been funding from our stockholders from the sale of equity securities and the exercise of derivative securities, consisting of options and warrants. We expect our primary source of future liquidity will be from the sale of products, exercise of stock options and warrants and if required from future equity or debt financings.

 

We have experienced net losses and negative cash flows from operations since our inception. As of September 30, 2023, we had cash and cash equivalents of $4.9 million, short-term investments of $10.0 million, positive working capital of $15.0 million and had sustained cumulative losses attributable to stockholders of $79.4 million. Our working capital at September 30, 2023 was positively affected by an increase in inventories of approximately $1.8 million, which consisted of increases of inventory of the BolaWrap 150 in anticipation of future orders, and the receipt of $10.0 million from the Offering on June 29, 2023 that formally closed on July 5, 2023.  The Offering was consummated following an analysis of our future capital needs, resulting in the issuance of Series A Convertible Preferred Stock and Warrants.  The Offering generated gross proceeds to the Company of approximately $10.0 million.  As a result, we had $14.9 million in cash and cash equivalents and short-term investments as of September 30, 2023. We therefore believe we have sufficient capital to fund our operations for the next twelve months. However, liquidity constraints and access to capital markets could still negatively affect our liquidity and require changes to our investment strategy.

Capital Requirements

 

Due in part to the volatility caused by COVID-19, we do not have a high degree of confidence in our estimates for ourOur future liquidity requirements or future capital needs which will depend on, among other things, capital required to introduce new products and the operational staffing and support requirements, as well as the timing and amount of future revenue and product costs. We anticipate that demands for operating and working capital may grow depending on decisions on staffing, development, production, marketing, training and other functions and based on other factors outside of our control. We believe we have sufficient capital to sustain our operations forcontrol, including the next twelve months.timing of receipt of revenue.

 

Our future capital requirements, cash flows and results of operations could be affected by, and will depend on, many factors, some of which are currently unknown to us, including, among other things:

 

 

The impact and effects of the global outbreak of the COVID-19 pandemic, and other potentialAny future outbreaks pandemics or contagious diseases or fear of such outbreaks;

 

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

27

 

Market price and trading volume of our Common Stock.

On June 29, 2023, the Company entered into a Securities Purchase Agreement with a founder and director of the Company and certain accredited and institutional investors (collectively, the “Investors”), pursuant to which it agreed to sell to the Investors in a registered direct offering (the “Offering”) (i) an aggregate of 10,000 shares of the Company’s newly-designated Series A Convertible Preferred Stock, with a par value $0.0001 per share, and a stated value of $1,000 per share (“Series A Preferred”), initially convertible into up to 6,896,553 shares of the Company’s Common Stock, at a conversion price of $1.45 per share, and (ii) warrants to acquire up to an aggregate of 6,896,553 shares of Common Stock (“Warrants”). The Series A Preferred provide for the payment to holders thereof of cumulative dividends of 8% per annum, payable quarterly in arrears. The Warrants are exercisable six months after issuance at an exercise price of $1.45 per share, subject to adjustment, and expire five years from the date of issuance. The $1.45 per share conversion price of the Series A Preferred and exercise price of the Warrant represent the closing share price of the Company’s Common Stock on June 29, 2023. The Offering closed on July 5, 2023 (the “Closing”), resulting in aggregate gross proceeds from the Offering of approximately $10.0 million.

The Company received approximately $10.0 million in gross proceeds from the Offering. After payment of placement agent fees and costs of the Offering, the net proceeds from the Offering were approximately $9.0 million. Proceeds from the Offering are being used to scale the Company’s sales team, support marketing efforts, and fuel the evolution and diversification of the Company’s product offerings.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Cash Flow

 

Operating Activities

 

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 an increase in accounts receivable of $1.4 million.

During the nine months ended September 30, 2022, net cash used in operating activities was $11$11.0 million. The net loss of $14.1 million was decreased by non-cash expense of $3.4 million consisting primarily of share-based compensation expense of $2.6 million. Other major component changes using operating cash included an increase of $1.4 million in inventories and a net reduction in accounts payable and accrued liabilities of $659 thousand. A decrease in accounts receivable of $1.6 million reduced the cash used in operating activities.

 

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Investing Activities

 

During the nine months ended September 30, 2021, net2023, we used $6.1 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $10.0 million. During the nine months ended September 30, 2023, we used in operating activities was $13.7 million. The net loss$60 thousand of $19.2 million was decreased by non-cash expensecash for the purchase of $5.9 million consisting primarilyintangible assets, $551 thousand of share-based compensation expensecash for the purchase of $4.3 million, restructuring inventory chargesIntrensic, $133 thousand of $747 thousand, depreciationcash for the purchase of property and amortization expense of $336 thousandequipment and shares issued for services of $239 thousand. Other major component changes using operating cash included an increase of $1.4 million in accounts receivable and an increase in inventories of $160 thousand. An increase of $773invested $277 thousand in accounts payable and accrued expense and an increase of $224 thousand in deferred revenue reduced the cash used in operating activities. 

Investing Activitiespatents.

 

During the nine months ended September 30, 2022, we used $23.1 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $33.3 million. During the nine months ended September 30, 2021,2022, we used $30.0 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $25 million. 

We used $201 thousand and $811 thousand of cash for the purchase of property and equipment duringand invested $133 thousand in patents.

Financing Activities

During the nine months ended September 30, 2022,2023 we received $9.8 million in gross proceeds from the issuance of securities, which is reflected in cash and 2021, respectively.cash equivalents, with an offset to accrued expense, reflected in the Company’s Condensed Consolidated Balance Sheet at September 30, 2023. We invested $133 thousand and $129 thousand in patents duringdid not receive any gross proceeds for the issuance of securities for the nine months ended September 30, 2022, and 2021, respectively.

Financing Activities20, 2022.

 

During the nine months ended September 30, 2022, we received $83 thousand in proceeds from the exercise of previously issued stock options.

During the nine months ended September 30, 2021, we received $12.0 million from previously issued stock purchase warrants and $1.7 million in We did not receive any proceeds from the exercise of previously issued stock options and repaid $275 thousand in debt relating tofor the acquisition of NSENA in December 2020.nine months ended September 31, 2023.

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Contractual Obligations and Commitments

 

Pursuant to that certain exclusive Amended and Restated Intellectual Property License Agreement dated September 30, 2016, by and between the Company and Syzygy Licensing, LLC (“Syzygy”), we are obligated to pay to Syzygy a 4% royalty fee on future product sales up to an aggregate amount of $1.0 million in royalty payments or until September 30, 2026, whichever occurs earlier.

 

WePursuant to the Professional Services and Technology Acquisition Agreement (the “Agreement”) entered into with Lumeto, Inc. and Spatial Industries Group, Inc. (collectively, “Service Provider”) on November 22, 2022, as amended on April 2, 2023, which Agreement, provided that the Service Provider provide to the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform (the “Technology, Services, and License”), in consideration for a cash payment of $700 made to the Service Provider upon the execution of the Agreement.

In January 2022 we extended our facility lease for three years through July 2025 and we are committed to aggregate lease payments on our facilitythe lease of $31 thousand in 2022, $121 thousandfor three months in 2023, $125$126 thousand in 2024 and $75 thousand in 2025.

 

At September 30, 2022,2023, we were committed for approximately $4.4$1.7 million for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

 

On August 9, 2023, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Intrensic, LLC, a Delaware limited liability company (“Intrensic”), and certain members of Intrensic, including Kevin Mullins, a director of the Company and its Chief Executive Officer (collectively, “Sellers”).  Under the terms of the Purchase Agreement, the Company agreed to purchase, and Sellers agreed to sell, 100% of the membership interests (the “Membership Interests”) of Intrensic for the following consideration upon the consummation of the sale of the Membership Interests: (i) $553,588 in cash, subject to adjustment based upon the outstanding indebtedness of Intrensic and Intrensic’s working capital as of the closing; and (ii) 1,250,000 shares of Common Stock of the Company.  

Effects of Inflation

 

We do not believe that inflation has had a material impact on our business, revenue or operating results duringDuring the periods presented.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the periodnine months ended September 30, 2023 and year ended December 31, 2022, or subsequently thereto,we had experienced increased costs in labor and materials due to inflation. We believe in 2023 that we believe are of potential significance to our financial statements.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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

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Item 4. Controls and Procedures.

 

We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, as of September 30, 2022,2023, we conducted an evaluation of our disclosure controls and procedures as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

 

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Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our fiscal quarter ended September 30, 2022,2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future period are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Shareholder Derivative Litigation

On November 13, 2020, Naresh Rammohan filed a shareholder derivative action in the United States District Court for the Central District of California against current and former Company officers Tom Smith, James Barnes, Mike Rothans, Marc Thomas, and David Norris, as well as current and former Company directors Messrs. Scot Cohen, Patrick Kinsella, Michael Parris, and Wayne Walker, alleging unjust enrichment, breach of fiduciary duty, waste of corporate assets, and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:20-cv-10444-DMG-PVCx. On January 20, 2021, Ray Westerman filed a second derivative action in the same court against the same parties, alleging breach of fiduciary duty and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21-cv-00550-DMG-PVCx. On January 22, 2021, Jesse Lowe filed a third derivative action in the same court against the same parties, alleging breach of fiduciary duty and asserting various claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21-cv-00597-DMG-PVCx. The Company was named as a nominal defendant in each of these actions.

On February 16, 2021, the Honorable Dolly M. Gee issued an order consolidating the three derivative actions under the caption In re Wrap Technologies, Inc. Shareholder Derivative Litigation, Case No. 2:20-10444-DMG-PVCx, (the “Derivative Action”) and stayed the Derivative Action at least until the resolution of the action captioned In re Wrap Technologies, Inc. Securities Exchange Act Litigation, Case No. 2:20-cv-08760-DMG (the “Securities Action”).  On December 20, 2021, Judge Gee dismissed the Securities Action with prejudice.  On April 29, 2022 the above-mentioned parties jointly filed a stipulation of voluntary dismissal in order to dismiss the Derivative Action without prejudice to the plaintiffs, the Company, or Wrap shareholders (“the Stipulation”). The Stipulation was granted by Judge Gee on May 3, 2022. 

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Other Legal Information

 

We may become subject to other legal proceedings, as well as demands and claims that arise in the normal course of our business, including claims of alleged infringement of third-party patents and other intellectual property rights, breach of contract, employment law violations, and other matters and matters involving requests for information from us or our customers under federal or state law. Such claims, even if not meritorious, could result in the expenditure of significant financial and management resources. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed and adjusted to include the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter. At September 30, 2022,2023, we had no provision for liability under existing litigation.

 

An unfavorable outcome on any litigation matters could require payment of substantial damages, or, in connection with any intellectual property infringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matters, or legal proceedings could have a material adverse effect on our business, operating results, financial condition and cash flows.

 

Item 1A. Risk Factors

 

Management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2021.2022. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2021,2022, and subsequent reports filed pursuant to the Exchange Act which could materially and adversely affect the Companys business, financial condition, results of operations, and stock price. The risks described in the Annual Report on Form 10-K and subsequent reports filed pursuant to the Exchange Act are not the only risks facing the Company. Additional risks and uncertainties not presently known to management, or that management presently believes not to be material, may also result in material and adverse effects on our business, financial condition, and results of operations.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

No unregistered securities were issued during the three months ended September 30, 2022,2023, that were not previously reported.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

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Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit 10.13.1

LetterForm of Certificate of Designations of Series A Convertible Preferred Stock, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the SEC on June 30, 2023.

Exhibit 4.1

Form of Warrant, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed with the SEC on June 30, 2023.

Exhibit 10.1

Form of Purchase Agreement, by and between Wrap Technologies, Inc. and Chris DeAlmeida, executed July 20, 2022 (incorporatedincorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on July 25, 2022).June 30, 2023.

Exhibit 10.2

Transition Agreement and Release of Claims,Engagement Letter, dated July 24, 2022,June 29, 2023 by and between Wrap Technologies, Inc. and James Barnes (incorporatedKatalyst Securities LLC, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on July 25, 2022).June 30, 2023.

Exhibit 31.110.3

Membership Interest Purchase Agreement, dated August 9, 2023, by and between Wrap Technologies, Inc., Intren Holdings Partners, LLC, Kevin Mullins, Marc Upton, Tre Mullins, Terry Nichols, Charles DeVita, Nick DeVita, David Stading, Peter Cavicchia, Timothy McAfee, Andon McAfee, Andon Dragomanov, John R. Sette, Matthew J. Dugas, and Ronald Hurley, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on August 22, 2023.**

Exhibit 31.1

Certification of TJ Kennedy,Kevin Mullins, Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

Exhibit 31.2

Certification of Chris DeAlmeida, Principal Accounting Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

Exhibit 32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by TJ Kennedy,Kevin Mullins, Principal Executive Officer, and Chris DeAlmeida, Principal Accounting Officer.*

 

Extensible Business Reporting Language (XBRL) Exhibits*

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101)

 

* Filed concurrently herewith

**  Certain portions of this exhibit (indicated by “[***]”) have been omitted as the Company has determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to the Company if publicly disclosed.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

WRAP TECHNOLOGIES, INC.

  

By:

/s/ CHRIS DEALMEIDA

November 9, 202214, 2023

 
  

Chris DeAlmeida

Chief Financial Officer and Treasurer

(Principal Accounting Officer)

 

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