WRAP TECHNOLOGIES, INC. 10-Q

Item 1. Financial Statements Wrap Technologies, Inc. Condensed Consolidated Balance Sheets (in thousands, except par value and share amounts)       March 31, 2023     December 31, 2022   ASSETS                 Current assets:                 Cash and cash equivalents   $ 9,503     $ 5,330   Short-term investments     6,500       13,949   Accounts receivable and contract assets, net     1,151       2,830   Inventories, net     5,626       3,975   Prepaid expenses and other current assets     858       775   Total current assets     23,638       26,859   Property and equipment, net     655       758   Operating lease right-of-use asset, net     259       285   Intangible assets, net     2,618       2,569   Other assets     70       100   Total assets   $ 27,240     $ 30,571                     LIABILITIES AND STOCKHOLDERS' EQUITY                 Current liabilities:                 Accounts payable   $ 1,376     $ 1,419   Accrued liabilities     1,736       1,463   Customer deposits     1       -   Deferred revenue- short term     169       166   Operating lease liability - short term     111       108   Total current liabilities     3,393       3,156                     Long-term liabilities:                 Deferred revenue- long term     122       167   Operating lease liability - long term     164       193   Total long-term liabilities     286       360   Total liabilities     3,679       3,516                     Commitments and contingencies (Note 11)                                   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; 41,270,300 and 41,175,993 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively     4       4   Additional paid-in capital     94,961       94,333   Accumulated deficit     ( 71,404 )     ( 67,376 ) Accumulated other comprehensive loss     -       94   Total stockholders' equity     23,561       27,055   Total liabilities and stockholders' equity   $ 27,240     $ 30,571     See accompanying notes to unaudited condensed consolidated interim financial statements.     -1- Table of Contents     Wrap Technologies, Inc. Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except share and per share amounts) (unaudited)       Three Months Ended March 31,       2023     2022   Revenues:                 Product sales   $ 616     $ 1,462   Other revenue     95       137   Total revenues     711       1,599   Cost of revenues     359       932   Gross profit     352       667                     Operating expenses:                 Selling, general and administrative     3,540       4,606   Research and development     1,072       1,495   Total operating expenses     4,612       6,101   Loss from operations     ( 4,260 )     ( 5,434 )                   Other income (expense):                 Interest income     236       2   Other     ( 4 )     -         232       2   Net loss   $ ( 4,028 )   $ ( 5,432 )                   Net loss per basic and diluted common share   $ ( 0.10 )   $ ( 0.13 ) Weighted average common shares used to compute net loss per basic and diluted common share     41,415,808       40,907,266                     Comprehensive loss:                 Net loss   $ ( 4,028 )   $ ( 5,432 ) Net unrealized gain (loss) on short-term investments     -       ( 23 ) Comprehensive loss   $ ( 4,028 )   $ ( 5,455 )   See accompanying notes to unaudited condensed consolidated interim financial statements.   -2- Table of Contents     Wrap Technologies, Inc. Condensed Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) (unaudited)                                       Accumulated                               Additional             Other     Total       Common Stock     Paid-In     Accumulated     Comprehensive     Stockholders'       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     -       -       628       -       -       628   Common shares issued upon vesting of restricted stock units     94,057       -       -       -       -       -   Settlement – US Treasury bills     -       -       -       -       ( 94 )     ( 94 ) Net loss for the period     -       -       -       ( 4,028 )     -       ( 4,028 ) Balance at March 31, 2023     41,270,300     $ 4     $ 94,961     $ ( 71,404 )   $ -     $ 23,561     Balance at January 1, 2022     40,851,945     $ 4     $ 91,025     $ ( 49,759 )   $ ( 6 )   $ 41,264   Common shares issued upon exercise of stock options     50,000       -       75       -       -       75   Share-based compensation expense     -       -       1,029       -       -       1,029   Common shares issued upon vesting of restricted stock units     49,252       -       -       -       -       -   Net unrealized gain (loss) on short-term investments     -       -       -       -       ( 23 )     ( 23 ) Net loss for the period     -       -       -       ( 5,432 )     -       ( 5,432 ) Balance at March 31, 2022     40,951,197     $ 4     $ 92,129     $ ( 55,191 )   $ ( 29 )   $ 36,913       See accompanying notes to unaudited condensed consolidated interim financial statements.   -3- Table of Contents   Wrap Technologies, Inc.   Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)       Three Months Ended March 31,       2023     2022   Cash Flows From Operating Activities:                 Net loss   $ ( 4,028 )   $ ( 5,432 ) Adjustments to reconcile net loss to net cash used in operating activities:                 Depreciation and amortization     200       183   Share-based compensation     628       1,209   Warranty provision     ( 33 )     12   Non-cash lease expense     26       24   Provision for doubtful accounts     ( 8 )     18   Changes in assets and liabilities:                 Accounts receivable     1,687       ( 398 ) Inventories     ( 1,652 )     ( 304 ) Prepaid expenses and other current assets     ( 83 )     133   Accounts payable     ( 42 )     ( 51 ) Operating lease liability     ( 26 )     ( 21 ) Customer deposits     1       ( 43 ) Accrued liabilities and other     306       37   Warranty settlement     ( 1 )     ( 54 ) Deferred revenue     ( 42 )     17   Net cash used in operating activities     ( 3,067 )     ( 4,850 )                   Cash Flows From Investing Activities:                 Purchase of short-term investments     ( 2,645 )     ( 4,996 ) Proceeds from maturities of short-term investments     10,000       10,000   Capital expenditures for property and equipment     ( 15 )     ( 81 ) Investment in patents and trademarks     ( 131 )     ( 69 ) Investment in long-term deposits     -       ( 2 ) Proceeds from long-term deposits     31       -   Net cash provided by investing activities     7,240       4,852                     Cash Flows From Financing Activities:                 Proceeds from exercise of stock options     -       75   Net cash provided by financing activities     -       75                     Net decrease in cash and cash equivalents     4,173       77   Cash and cash equivalents, beginning of period     5,330       4,937   Cash and cash equivalents, end of period   $ 9,503     $ 5,014                     Supplemental Disclosure of Non-Cash Investing                 and Financing Activities:                 Change in unrealized gain on short-term investments   $ ( 94 )   $ ( 23 ) Right-of-use asset and liability recorded during period   $ -     $ 335     See accompanying notes to unaudited condensed consolidated interim financial statements.   -4- Table of Contents   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   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, 2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “ Annual Report ”), as filed with the SEC on March 2, 2023. The accompanying condensed consolidated balance sheet at December 31, 2022, has been derived from the audited consolidated balance sheet at December 31, 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 one wholly-owned subsidiary, Wrap Reality, Inc. formed in December 2020 that sells a virtual reality (“ VR ”) training system primarily targeting law enforcement agencies. The consolidated financial statements include the accounts of this subsidiary after elimination of intercompany transactions and accounts.   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.   Loss per Share   Basic loss per common share is computed by dividing net loss for the period by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss per Common Share reflects the potential dilution of securities that could share in the earnings of an entity. The Company’s losses for the periods presented cause the inclusion of potential Common Stock instruments outstanding to be antidilutive. Stock options and restricted stock units exercisable or issuable for a total of 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.   -5- Table of Contents   Recent Issued Accounting Guidance   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.   2.           REVENUE AND PRODUCT COSTS   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.   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 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 three months ended March 31, 2023.       Customer     Deferred       Deposits     Revenue   Balance at January 1, 2023   $ -     $ 333   Additions, net     1       30   Transfer to revenue     -       ( 72 ) Balance at March 31, 2023   $ 1     $ 291   Current portion   $ 1     $ 169   Long-term portion   $ -     $ 122     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.   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.   -6- Table of Contents     3.            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. 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:   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   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 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       Adjusted     Unrealized     Unrealized     Market       Cost     Gains     Losses     Value   Level 1:                                 Money Market Funds   $ 2,764     $ -     $ -     $ 2,764   U.S. Treasury securities in short-term investments     -       -       -       -   Certificate of Deposits     6,500       -       -       6,500   Total Financial Assets   $ 9,264     $ -     $ -     $ 9,264         As of December 31, 2022       Adjusted     Unrealized     Unrealized     Market       Cost     Gains     Losses     Value   Level 1:                                 Money Market Funds   $ 3,004     $ -     $ -     $ 3,004   U.S. Treasury securities in short-term investments     9,849       100       -       9,949   Certificate of Deposits     4,000       -       -       4,000   Total Financial Assets   $ 16,853     $ -     $ -     $ 16,953     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. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.   -7- Table of Contents     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:       March 31, 2023     December 31, 2022   Finished goods   $ 3,717     $ 2,293   Work in process     -       -   Raw materials     1,909       1,682   Inventories - net   $ 5,626     $ 3,975       5.           PROPERTY AND EQUIPMENT, NET   Property and equipment consisted of the following:       March 31, 2023     December 31, 2022   Production and lab equipment   $ 503     $ 513   Tooling     451       448   Computer equipment     553       531   Furniture, fixtures and improvements     181       181         1,688       1,673   Accumulated depreciation     ( 1,033 )     ( 915 ) Property and equipment, net   $ 655     $ 758     Depreciation expense was $ 118 and $ 113 for the three months ended March 31, 2023 and 2022, respectively.      6.           INTANGIBLE ASSETS, NET   Intangible assets consisted of the following:       March 31, 2023     December 31, 2022   Amortizable intangible assets:                 Patents   $ 701     $ 575   Trademarks     155       150   Purchased software     1,962       1,962         2,818       2,687   Accumulated amortization     ( 544 )     ( 462 ) Total amortizable     2,274       2,225   Indefinite life assets (non-amortizable)     344       344   Total intangible assets, net   $ 2,618     $ 2,569     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)   $ 330   2024     518   2025     513   2026     309   2027     42   Thereafter     562   Total estimated amortization expense   $ 2,274     -8- Table of Contents      7.           ACCOUNTS PAYABLE AND ACCRUED LIABILITIES   Accounts payable includes $ 24 and $ 127 due to related party Syzygy Licensing, LLC (“ 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:       March 31, 2023     December 31, 2022   Patent and legal costs   $ 129     $ 135   Accrued compensation     1,352       1,100   Warranty costs     91       125   Taxes and other     164       103       $ 1,736     $ 1,463     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:       Three Months Ended March 31,       2023     2022   Balance, beginning of period   $ 125     $ 96   Warranty settlements     ( 1 )     ( 54 ) Warranty provision     ( 33 )     12   Balance, end of period   $ 91     $ 54     -9- Table of Contents     8.           STOCKHOLDERS' EQUITY   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 ”).   9.           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 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. 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.   -10- Table of Contents   Stock Options   The following table summarizes stock option activity for the three months ended March 31, 2023:               Weighted Average               Options on             Remaining     Aggregate       Common     Exercise     Contractual     Intrinsic       Shares     Price     Term     Value   Outstanding January 1, 2023     5,491,399     $ 3.72       5.96     $ 92   Granted     -     $ 0                   Exercised     ( 250 )   $ 1.50                   Forfeited, cancelled, expired     ( 1,300,287 )   $ 5.33                   Outstanding March 31, 2023     4,190,862     $ 3.15       7.49     $ 98   Exercisable March 31, 2023     1,299,771     $ 3.74       4.11     $ 96     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 Three Months       Ended March 31,       2023     2022   Expected stock price volatility     0 %     49 % Risk-free interest rate     0 %     1.57 % Expected dividend yield     0 %     0 % Expected life of options - years     0       1.39   Weighted-average fair value of options granted   $ 0     $ 1.72     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 former Chief Executive Officer and President. The assumptions used in the Monte Carlo Simulation were stock price on date of grant of $ 2.89 , contract term of 10 years, expected volatility of 49 % and risk-free interest rate of 2.9 %. Vesting is based on sustained market capitalization of $ 250 million, $ 500 million and $ 1 billion and resulted in implied service periods ranging from approximately 4 to 7 years.   Stock option expense was $ 313 and $ 737 for the three months ended March 31, 2023 and 2022, respectively.   -11- Table of Contents   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 three months ended March 31, 2023:               Weighted Average     Weighted Average       Service-Based     Grant Date     Vesting       RSU's     Fair Value     Period (Years)   Unvested at January 1, 2023     922,057     $ 2.88       2.11   Granted - service based     124,862     $ 1.84           Vested     ( 106,565 )   $ 2.87           Forfeited and cancelled     ( 3,386 )   $ 5.52           Unvested at March 31, 2023     936,968     $ 2.56       1.99     RSU expense was $ 315 and $ 291 for the three months ended March 31, 2023 and 2022, 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 March 31,       2023     2022   Selling, general and administrative   $ 562     $ 894   Research and development     66       135   Total share-based expense   $ 628     $ 1,029     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.   10.            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.   11.            COMMITMENTS AND CONTINGENCIES   Related Party Technology License Agreement   The Company is obligated to pay royalties and development and patent costs pursuant to an exclusive Amended and Restated Intellectual Property License Agreement dated as of September 30, 2016, with Syzygy, a company owned and controlled by stockholder/consultant Mr. Elwood Norris and stockholder/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 $ 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 .   -12- Table of Contents   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 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.   Litigation   Shareholder Derivative Litigation   On November 13, 2020, Naresh Rammohan filed a shareholder derivative action in the US District Court for the Central District of California against current and former Company officers as well as current and former Company directors alleging unjust enrichment, breach of fiduciary duty, waste of corporate assets, and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:20-cv-10444-DMG-PVCx. The derivative action was dismissed with prejudice by stipulation of the parties on May 3, 2022.   12.           RELATED PARTY TRANSACTIONS   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 $ 4.5 during the three months ended March 31, 2023, and 2022, respectively. Mr. 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.   13.           MAJOR CUSTOMERS AND RELATED INFORMATION   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.   -13- Table of Contents   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. Revenues are attributed to countries based on customer’s delivery location:       For the Three Months       Ended March 31,       2023     2022   Americas   $ 710     $ 1,194   Europe, Middle East and Africa     1       174   Asia Pacific     0       231   Total   $ 711     $ 1,599       14.           SUBSEQUENT EVENTS   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.   -14- Table of Contents