What changed in this filing

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Item 1. Financial Statements

2023-05-10 compared with 2022-11-09 · 113 added, 198 removed, 276 unchanged (53% of the section changed)

3 unchanged sentences

(in thousands, except par value and share amounts)

September 30,

Current assets:

28 unchanged sentences

par value $ 0.0001 per share;

41,125,578 and 40,851,945 shares issued and outstanding each period, respectively

41,270,300 and 41,175,993 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

Additional paid-in capital

7 unchanged sentences

(in thousands, except share and per share amounts)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended March 31,

Product sales

2 unchanged sentences

Cost of revenues

Products and services

Product line exit expense

Total cost of revenues

Operating expenses:

4 unchanged sentences

Other income (expense):

Investment income

Interest income

Net loss per basic and diluted common share

7 unchanged sentences

(in thousands, except share amounts)

Three Months Ended September 30, 2022

Comprehensive

Stockholders'

Balance at July 1, 2022

Common shares issued upon exercise of stock options

Share-based compensation expense

Common shares issued upon vesting of restricted stock units

Net unrealized gain on short-term investments

Net loss for the period

Balance at September 30, 2022

Nine Months Ended September 30, 2022

Comprehensive

Stockholders'

Balance at January 1, 2023

2 unchanged sentences

Common shares issued upon vesting of restricted stock units

Net unrealized gain on short-term investments

Net loss for the period

Balance at September 30, 2022

Three Months Ended September 30, 2021

Comprehensive

Stockholders'

Balance at July 1, 2021

Common shares issued upon exercise of stock options

Common shares issued upon vesting of restricted stock units

Share-based compensation expense

Net unrealized loss on short-term investments

Settlement –

US Treasury bills

Net loss for the period

Balance at September 30, 2021

Nine Months Ended September 30, 2021

Comprehensive

Stockholders'

Balance at March 31, 2023

Balance at January 1, 2022

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

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

Common shares issued upon exercise of stock options

Common shares issued upon vesting of restricted stock units

Common shares issued for services

Share-based compensation expense

Net unrealized loss on short-term investments

Common shares issued upon vesting of restricted stock units

Net unrealized gain (loss) on short-term investments

Net loss for the period

Balance at September 30, 2021

Balance at March 31, 2022

See accompanying notes to unaudited condensed consolidated interim financial statements.

2 unchanged sentences

(in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash Flows From Operating Activities:

1 unchanged sentence

Depreciation and amortization

Product line exit expense

Gain on sale of assets

Share-based compensation

Warranty provision

Software impairment charge

Change in contingent liability

Non-cash lease expense

Share-based compensation

Common shares issued for services

Provision for doubtful accounts

14 unchanged sentences

Investment in patents and trademarks

Purchase of intangible assets

Investment in long-term deposits

Proceeds from long-term deposits

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Cash Flows From Financing Activities:

Proceeds from exercise of warrants

Proceeds from exercise of stock options

Repayment of debt

Net cash provided by financing activities

2 unchanged sentences

Cash and cash equivalents, end of period

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

Supplemental Disclosure of Non-Cash Investing

and Financing Activities:

Change in unrealized gain on short-term investments

43 unchanged sentences

The Company’s losses for the periods presented cause the inclusion of potential Common Stock instruments outstanding to be antidilutive.

Stock options and restricted stock units exercisable or issuable for a total of 6,396,277 shares of Common Stock were outstanding at September 30, 2022.

Stock options and restricted stock units exercisable or issuable for a total of 5,127,830  and 5,350,111 shares of Common Stock were outstanding at March 31, 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.

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.

The Company has reviewed 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.

          REVENUE AND PRODUCT COSTS

On January 1, 2018, the Company adopted Topic 606 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.

Product sales includes BolaWrap products and accessories.

Revenue consists of product revenue and other revenue.

Product sales include BolaWrap products and accessories.

Other revenue includes VR revenues, service, training and shipping revenues.

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 (“

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.

The timing of revenue recognition may differ from the timing of invoicing to customers.

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 may receive consideration, per terms of a contract, from customers prior to transferring goods to the customer.

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.

2 unchanged sentences

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.

The table below details the activity in our contract liabilities during the three months ended March 31, 2023.

Balance at January 1, 2023

1 unchanged sentence

Transfer to revenue

Balance at September 30, 2022

Balance at March 31, 2023

Current portion

Long-term portion

At September 30, 2022, the Company’s deferred revenue of $ 300  consisted of $ 177 related to VR training and $ 123 related to BolaWrap extended warranties and services.

At December 31, 2021, the Company’s deferred revenue of $ 265 consisted of $ 172  related to VR training and $ 67  related to extended warranties and services. 

At March 31, 2023, the Company’s deferred revenue of $ 291 consisted of $ 175 related to VR and $ 10 related to training and $ 106 related to BolaWrap extended warranties and services.

At December 31, 2022, the Company’s deferred revenue of $ 333 consisted of $ 198 related to VR, $ 11 related to training and $ 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.

These costs are ascribed to or allocated to the underlying performance obligations in the contract.

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 cost of products sold.

          FAIR VALUE MEASUREMENTS

FINANCIAL 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.

3 unchanged sentences

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: 

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

2 unchanged sentences

The Company’s cash equivalent Money Market Funds and short-term investments consisting of U.S.

Treasury bill securities are classified as Level I 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, and December 31, 2021.

As of September 30, 2022

Treasury bill securities and Certificate of Deposits are classified as Level I 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 March 31, 2023, and December 31, 2022.

As of March 31, 2023

Money Market Funds

Treasury securities in short-term investments

Certificate of Deposits

Total Financial Assets

2 unchanged sentences

Treasury securities in short-term investments

Certificate of Deposits

Total Financial Assets

Unrealized gains or losses resulting from our short-term investments are recorded in accumulated other comprehensive gain or 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 three and nine months ended September 30, 2021, a $ 2 loss and a $ 4 loss was recorded to accumulated other comprehensive loss, respectively

Unrealized gains or losses resulting from our short-term investments are recorded in accumulated other comprehensive gain or loss as they are classified as available for sale.

During the three months ended March 31, 2023 and 2022, a $ 0 and $ (23) was recorded to accumulated other comprehensive gain (loss), respectively.

Our financial instruments also include accounts receivable, accounts payable, accrued liabilities and business acquisition liabilities.

2 unchanged sentences

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.

The cost of substantially all the Company’s inventory is determined by the FIFO cost method.

Inventories consisted of the following:

September 30,

Finished goods

4 unchanged sentences

Property and equipment consisted of the following:

September 30,

Production and lab equipment

3 unchanged sentences

Property and equipment, net

Depreciation expense was $ 121 and $ 359  for the three and nine months ended September 30, 2022 and was $ 69 and $ 191  for the three and nine months ended September 30, 2021, respectively.

Depreciation expense was $ 118 and $ 113 for the three months ended March 31, 2023 and 2022, respectively.

          INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

September 30,

Amortizable intangible assets:

4 unchanged sentences

Total intangible assets, net

Amortization expense was $ 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, future amortization expense is as follows:

Amortization expense was $ 82 and $ 70 for the three months ended March 31, 2023 and 2022, respectively.

At March 31, 2023, future amortization expense is as follows:

2023 (9 months)

2 unchanged sentences

Accounts payable includes $ 24 and $ 127 due to related party Syzygy Licensing, LLC (“

Syzygy ”) as of September 30, 2022, and December 31, 2021, respectively.

See Notes 10, 11, and 12 for additional related party information.

Syzygy ”) as of March 31, 2023 and December 31, 2022, respectively. See Notes 11 for additional information on this related party.

Accrued liabilities consist of the following:

September 30,

Patent and legal costs

2 unchanged sentences

Taxes and other

Accrued compensation includes $ 25 of future severance payments for the Company’s former Chief Executive Officer payable through October 2022.

Accrued compensation includes $ 1,005 and $ 1,022 in employee bonuses and commissions payable at March 31, 2023 and December 31, 2022, respectively.

Changes in our estimated product warranty costs were as follows:

Nine months Ended September 30,

Three Months Ended

Balance, beginning of period

2 unchanged sentences

Balance, end of period

          LEASES

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, the Company uses an estimate of low-grade debt rate published by the Federal Reserve Bank as its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments.

The ROU asset includes any lease payments made and excludes lease incentives and initial direct costs incurred.

For leases beginning on or after January 1, 2019 ,  lease components are accounted for separately from non-lease components for all asset classes.

On January 21, 2022, the Company’s lease was amended to extend the expiration date to July 31, 2025.

Upon execution of the amendment, which was deemed a lease modification, the Company reassessed the lease liability using the discount rate determined at the modification date and recorded an additional ROU asset for the same amount.

The Company’s lease contains renewal provisions and escalating rental clauses and generally require the Company to pay utilities, insurance, taxes and other operating expenses.

The renewal provisions of the existing lease agreement was not included in the determination of the operating lease liabilities and the ROU assets.

The Company also reassessed the lease classification and concluded that the lease continues to be an operating lease.

Amortization of ROU operating lease assets was $ 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

Operating lease liability - long term

Total Operating Lease Liability

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)

Total future minimum lease payments

Less imputed interest

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.

          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 (“

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

Preferred Stock ”).

At December 31, 2021 the Company had outstanding Common Stock purchase warrants exercisable for 1,391,667 shares that expired on June 1, 2022, and had no purchase warrants outstanding at September 30, 2022.

          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, in June 2020 ratified an additional 

1,900,000  shares of Common Stock, in June 2021 ratified an additional 

1,500,000  shares of Common Stock and in June 2022 ratified an additional 

1,500,000  shares of Common Stock, for a total of 

9,000,000  shares subject to the Plan.

At September 30, 2022, there were 1,624,160 shares of Common Stock remaining available for grant under the Plan.

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, in June 2020 ratified an additional 1,900,000 shares of Common Stock, in June 2021 ratified an additional 1,500,000 shares of Common Stock and in June 2022 ratified an additional 1,500,000 shares of Common Stock, for a total of 9,000,000 shares subject to the Plan.

At March 31, 2023, there were 2,735,102 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.

1 unchanged sentence

Stock Options

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

The following table summarizes stock option activity for the three months ended March 31, 2023:

Weighted Average

1 unchanged sentence

Forfeited, cancelled, expired

Outstanding September 30, 2022

Exercisable September 30, 2022

At September 30, 2022, there were 4,022,083 service-based stock options outstanding, and 1,614,230 performance-based stock options outstanding, which performance-based stock options were granted in April 2022 to the Company’s Chief Executive Officer and President, subject to future market capitalization targets.

1,049,145 of the 4,013,885 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.

Outstanding March 31, 2023

Exercisable March 31, 2023

At March 31, 2023, there were 2,576,632 service-based stock options outstanding, and 1,614,230 performance-based stock options outstanding, which performance-based stock options were granted in April 2022 to the Company’s former Chief Executive Officer and President, subject to future market capitalization targets.

1,049,145 of the 4,190,862 stock options granted included in the table above were granted in April 2022 outside the Plan as an employment inducement grant, but are subject to the terms and conditions of the Plan.

The Company uses the Black-Scholes option pricing model to determine the fair value of service-based options granted.

The following table summarizes the assumptions used to compute the fair value of options granted to employees and non-employees:

For the Nine months

Ended September 30,

For the Three Months

Ended March 31,

Expected stock price volatility

8 unchanged sentences

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.

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 appointed 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 %.

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 assumptions used in the Monte Carlo Simulation were stock price on date of grant of $ 2.89 , contract term of 10 years, expected volatility of 49 % and risk-free interest rate of 2.9 %.

Vesting is based on sustained market capitalization of $ 250 million, $ 500 million and $ 1 billion and resulted in implied service periods ranging from approximately 4 to 7 years.

Stock option expense was $ 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.

Stock option expense was $ 313 and $ 737 for the three months ended March 31, 2023 and 2022, respectively.

Restricted Stock Units

2 unchanged sentences

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:

The following table summarizes RSU activity for the three months ended March 31, 2023:

Weighted Average

5 unchanged sentences

Forfeited and cancelled

Unvested at September 30, 2022

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.

RSU expense was $ 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.

Unvested at March 31, 2023

RSU expense was $ 315 and $ 291 for the three months ended March 31, 2023 and 2022, respectively.

Share-Based Compensation Expense

1 unchanged sentence

Three Months Ended

September 30,

Nine months Ended

September 30,

Selling, general and administrative

1 unchanged sentence

Total share-based expense

As of September 30, 2022, total estimated compensation expense of stock options granted and outstanding but not yet vested was $ 3,820 which is expected to be recognized over the weighted average period of 3.5 years.

As of September 30, 2022, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 1,828 which is expected to be recognized over the weighted average period of 2.3 years.

As of March 31, 2023, total estimated compensation cost of stock options granted and outstanding but not yet vested was $ 3,061 which is expected to be recognized over the weighted average period of 3.23 years.

As of March 31, 2023, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 1,700 which is expected to be recognized over the weighted average period of 1.99 years.

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 the three months ended March 31, 2023 and year ended December 31, 2022 was $ 0 respectively.

COMMITMENTS AND CONTINGENCIES

Facility Lease

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.

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 $ 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 ended September 30, 2021, respectively.

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 $ 24 and $ 49 for royalties during the three months ended March 31, 2023 and 2022, respectively.

Maximum payout still available under this arrangement is $ 257 .

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, 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 to the Service Provider.

Purchase Commitments

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

At March 31, 2023, the Company was committed for approximately $ 3,493 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 arises in the ordinary course of its business.

Shareholder Derivative Litigation

On November 13, 2020, Naresh Rammohan filed a shareholder derivative action in the US District Court for the Central District of California against current and former Company officers as well as current and former Company directors alleging unjust enrichment, breach of fiduciary duty, waste of corporate assets, and contribution claims under the Securities Exchange Act of 1934, docketed as Case No.

2:20-cv-10444-DMG-PVCx.

The derivative action was dismissed with prejudice by stipulation of the parties on May 3, 2022.

          RELATED PARTY TRANSACTIONS

Commencing in October 2017 the Company began reimbursing Mr.

Elwood Norris, a former officer and current stockholder and consultant of the Company, $ 1.5 per month on a month-to-month basis for laboratory facility expense, for an aggregate of $ 13.5 during the nine months ended September 30, 2022, and 2021, respectively.

Elwood Norris, a former officer and current 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 during the three months ended March 31, 2023, and 2022, respectively.

Norris retired as the Company’s Chief Technology Officer effective June 30, 2021, and commencing July 1, 2021, was engaged as a month-to-month consultant.

A greater than 10% stockholder, Mr.

Norris was paid a monthly fee of $ 7.5 per month for aggregate consulting payments of $ 22.5 during each of the three months ended March 31, 2023 and 2022.

See Notes 7 and 11 for additional information on related party transactions and obligations.

          MAJOR CUSTOMERS AND RELATED INFORMATION

For the three months ended September 30, 2022, revenues from one distributor accounted for approximately 59 %, of revenues with no other single customer accounting for more than 10% of total revenues.

For the three months ended September 30, 2021, revenues from two distributors accounted for approximately 41 % and 29 % of revenues with no other single customer accounting for more than 10% of total revenues.

For the nine months ended September 30, 2022, revenues from one distributor accounted for approximately 39 % of revenues with no other single customer accounting for more than 10% of total revenues.

For the nine months ended September 30, 2021, revenues from two distributors accounted for approximately 27 % and 21 % of revenues with no other single customer accounting for more than 10% of total revenues.

At September 30, 2022, accounts receivable from two distributors accounted for 42 % and 15 % of accounts receivable with no other single customer accounting for more than 10% of the accounts receivable balance.

Three distributors accounted for 48 %, 16 % and 15 % of accounts receivable at December 31, 2021 with no other single customer accounting for more than 10% of the accounts receivable balance.

For the three months ended March 31, 2023, revenues from two distributors accounted for approximately 28 % and 15 % of revenues with no other single customer accounting for more than 10% of total revenues.

For the three months ended March 31, 2022, revenues from two distributors accounted for approximately 25 % and 14 % of revenues with no other single customer accounting for more than 10% of total revenues.

At March 31, 2023, accounts receivable from one distributor accounted for 41 % 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 one distributor accounted for 70 % of net accounts receivable.

The following table summarizes revenues by geographic region.

1 unchanged sentence

For the Three Months

For the Nine months

Ended September 30,

Ended March 31,

Europe, Middle East and Africa

Total revenues

          SUBSEQUENT EVENTS

On October 11, 2022, the company received an order from an international government agency for the purchase of over 2,000 BolaWrap devices, cassettes and other accessories totaling over $ 1.5  million.

This order will be recorded in the fourth quarter 2022.

The Company evaluated subsequent events for their potential impact on the financial statements and disclosures through the date the financial statements were available to be issued, and determined that, except as disclosed herein, no subsequent events occurred that were reasonably expected to impact the financial statements presented herein.

On April 17, 2023, Kevin Mullins was named Chief Executive Officer.

In connection with Mr.

Mullins' appointment, TJ Kennedy agreed to immediately step down as the Company’s Chief Executive Officer and a member of the Board of Directors (the “

Board ”).

Additionally, on April 17, 2023 the Company performed a reduction in force that resulted in changes in the composition of the executives of the Company.

As part of the reduction in force, Glenn Hickman stepped down as Chief Operating Officer.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements