WRAP TECHNOLOGIES, INC. 10-Q

Item 1. Financial Statements   Wrap Technologies, Inc. Condensed Consolidated Balance Sheets (in thousands, except par value and share amounts)       June 30, 2023     December 31, 2022   ASSETS                 Current assets:                 Cash and cash equivalents   $ 11,688     $ 5,330   Short-term investments     6,500       13,949   Accounts receivable and contract assets, net     1,949       2,830   Inventories, net     6,520       3,975   Prepaid expense and other current assets     722       775   Total current assets     27,379       26,859   Property and equipment, net     588       758   Operating lease right-of-use asset, net     232       285   Intangible assets, net     2,588       2,569   Other assets     69       100   Total assets   $ 30,856     $ 30,571                     LIABILITIES AND STOCKHOLDERS' EQUITY                 Current liabilities:                 Accounts payable   $ 1,928     $ 1,419   Accrued liabilities     8,562       1,463   Customer deposits     3       -   Deferred revenue- short term     211       166   Operating lease liability - short term     113       108   Total current liabilities     10,817       3,156                     Long-term liabilities:                 Deferred revenue- long term     129       167   Operating lease liability - long term     135       193   Total long-term liabilities     264       360   Total liabilities     11,081       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; 41,910,687  and 41,175,993 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively     4       4   Additional paid-in capital     96,182       94,333   Accumulated deficit     ( 76,411 )     ( 67,376 ) Accumulated other comprehensive loss     -       94   Total stockholders' equity     19,775       27,055   Total liabilities and stockholders' equity   $ 30,856     $ 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 June 30,     Six Months Ended June 30,       2023     2022     2023     2022   Revenue:                                 Product sales   $ 1,034     $ 969     $ 1,650     $ 2,431   Other revenue     168       196       263       333   Total revenue     1,202       1,165       1,913       2,764   Cost of revenue     534       708       893       1,640   Gross profit (loss)     668       457       1,020       1,124                                     Operating expense:                                 Selling, general and administrative     4,745       3,764       8,286       8,370   Research and development     1,002       1,476       2,073       2,971   Total operating expense     5,747       5,240       10,359       11,341   Loss from operations     ( 5,079 )     ( 4,783 )     ( 9,339 )     ( 10,217 )                                   Other income (expense):                                 Interest income     88       -       324       2   Other     ( 16 )     ( 2 )     ( 20 )     ( 2 ) Total other income (expense)     72       ( 2 )     304       -   Net loss   $ ( 5,007 )   $ ( 4,785 )   $ ( 9,035 )   $ ( 10,217 )                                   Net loss per basic and diluted common share   $ ( 0.12 )   $ ( 0.12 )   $ ( 0.22 )   $ ( 0.25 ) Weighted average common shares used to compute net loss per basic and diluted common share     41,709,718       40,978,820       41,483,669       40,943,241                                     Comprehensive loss:                                 Net loss   $ ( 5,007 )   $ ( 4,785 )   $ ( 9,035 )   $ ( 10,217 ) Net unrealized gain (loss) on short-term investments     -       12       -       ( 11 ) Comprehensive loss   $ ( 5,007 )   $ ( 4,773 )   $ ( 9,035 )   $ ( 10,228 )   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)   Three Months Ended June 30, 2023                                       Accumulated                               Additional             Other     Total       Common Stock     Paid-In     Accumulated     Comprehensive     Stockholders'       Shares     Amount     Capital     Deficit     Income     Equity   Balance at April 1, 2023     41,270,300     $ 4     $ 94,961     $ ( 71,404 )   $ -     $ 23,561   Common shares issued upon exercise of stock options     -       -       -       -       -       -   Share-based compensation expense     -       -       1,221       -       -       1,221   Common shares issued upon vesting of restricted stock units     640,387       -       -       -       -       -   Net loss for the period     -       -       -       ( 5,007 )     -       ( 5,007 ) Balance at June 30, 2023     41,910,687     $ 4     $ 96,182     $ ( 76,411 )   $ -     $ 19,775     Six Months Ended June 30, 2023                                       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     -       -       1,849       -       -       1,849   Common shares issued upon vesting of restricted stock units     734,444       -       -       -       -       -   Settlement – US Treasury bills     -       -       -       -       ( 94 )     ( 94 ) Net loss for the period     -       -       -       ( 9,035 )     -       ( 9,035 ) Balance at June 30, 2023     41,910,687     $ 4     $ 96,182     $ ( 76,411 )   $ -     $ 19,775     -3- Table of Contents   Three Months Ended June 30, 2022                                       Accumulated                               Additional             Other     Total       Common Stock     Paid-In     Accumulated     Comprehensive     Stockholders'       Shares     Amount     Capital     Deficit     Income     Equity   Balance at April 1, 2022     40,951,197     $ 4     $ 92,129     $ ( 55,191 )   $ ( 29 )   $ 36,913   Share-based compensation expense     -       -       727       -       -       727   Common shares issued upon vesting of restricted stock units     40,964       -       -       -       -       -   Net unrealized gain on short-term investments     -       -       -       -       12       12   Net loss for the period     -       -       -       ( 4,785 )     -       ( 4,785 ) Balance at June 30, 2022     40,992,161     $ 4     $ 92,856     $ ( 59,976 )   $ ( 17 )   $ 32,867     Six Months Ended June 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     50,000       -       75       -       -       75   Share-based compensation expense     -       -       1,756       -       -       1,756   Common shares issued upon vesting of restricted stock units     90,216       -       -       -       -       -   Common shares issued for services     -       -       -       -       -       -   Net unrealized loss on short-term investments     -       -       -       -       ( 11 )     ( 11 ) Net loss for the period     -       -       -       ( 10,217 )     -       ( 10,217 ) Balance at June 30, 2022     40,992,161     $ 4     $ 92,856     $ ( 59,976 )   $ ( 17 )   $ 32,867     See accompanying notes to unaudited condensed consolidated interim financial statements.   -4- Table of Contents     Wrap Technologies, Inc.   Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)       Six Months Ended June 30,       2023     2022   Cash Flows From Operating Activities:                 Net loss   $ ( 9,035 )   $ ( 10,217 ) Adjustments to reconcile net loss to net cash used in operating activities:                 Depreciation and amortization     403       380   Share-based compensation     1,849       1,756   Warranty provision     ( 44 )     45   Non-cash lease expense     53       49   Provision for doubtful accounts     ( 4 )     8   Changes in assets and liabilities:                 Accounts receivable     884       2,446   Inventories     ( 2,545 )     ( 467 ) Prepaid expense and other current assets     53       168   Accounts payable     508       ( 417 ) Operating lease liability     ( 52 )     ( 41 ) Customer deposits     3       ( 39 ) Accrued liabilities and other     7,149       106   Warranty settlement     ( 6 )     ( 63 ) Deferred revenue     8       79   Net cash used in operating activities     ( 776 )     ( 6,207 )                   Cash Flows From Investing Activities:                 Purchase of short-term investments     ( 2,645 )     ( 14,890 ) Proceeds from maturities of short-term investments     10,000       20,000   Capital expenditures for property and equipment     ( 66 )     ( 168 ) Investment in patents and trademarks     ( 176 )     ( 102 ) Purchase of intangible assets     ( 10 )     -   Investment in long-term deposits     -       ( 2 ) Proceeds from long-term deposits     31       -   Net cash provided by investing activities     7,134       4,838                     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     6,358       ( 1,294 ) Cash and cash equivalents, beginning of period     5,330       4,937   Cash and cash equivalents, end of period   $ 11,688     $ 3,643                     Supplemental Disclosure of Non-Cash Investing and Financing Activities:                 Change in unrealized gain on short-term investments   $ ( 94 )   $ ( 11 ) Right-of-use asset and liability recorded during period   $ -     $ 335     See accompanying notes to unaudited condensed consolidated interim financial statements.   -5- 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 4,117,586 and 6,458,823 shares of Common Stock were outstanding at June 30, 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- 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 revenue, service, training and shipping revenue.   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 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 six months ended June 30, 2023.         Customer     Deferred       Deposits     Revenue   Balance at January 1, 2023   $ -     $ 333   Additions, net     3       124   Transfer to revenue     -       ( 117 ) Balance at June 30, 2023   $ 3     $ 340   Current portion   $ 3     $ 211   Long-term portion   $ -     $ 129     At June 30, 2023, the Company’s deferred revenue of $ 340 consisted of $ 217 related to VR, $ 17 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.   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.     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;   -7- Table of Contents   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 1 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 June 30, 2023, and December 31, 2022.       As of June 30, 2023       Adjusted     Unrealized     Unrealized     Market       Cost     Gains     Losses     Value   Level 1:                                 Money Market Funds   $ 2,774     $ -     $ -     $ 2,774   U.S. Treasury securities in short-term investments     -       -       -       -   Certificate of Deposits     6,500       -       -       6,500   Total Financial Assets   $ 9,274     $ -     $ -     $ 9,274         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     $ 100     $ -     $ 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 and six months ended June 30, 2023, a $ 0 gain and $ 0 loss was recorded to accumulated other comprehensive gain (loss), respectively. During the three and six months ended June 30, 2022, a $ 12 gain and $ 11 loss 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.     4.            INVENTORIES   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:       June 30, 2023     December 31, 2022   Finished goods   $ 3,793     $ 2,293   Work in process     -       -   Raw materials     2,727       1,682   Inventories - net   $ 6,520     $ 3,975     -8- Table of Contents     5.            PROPERTY AND EQUIPMENT, NET   Property and equipment consisted of the following:       June 30, 2023     December 31, 2022   Production and lab equipment   $ 506     $ 513   Tooling     490       448   Computer equipment     561       531   Furniture, fixtures and improvements     181       181         1,738       1,673   Accumulated depreciation     ( 1,150 )     ( 915 ) Property and equipment, net   $ 588     $ 758     Depreciation expense was $ 118 and $ 236  for the three and six months ended June 30, 2023, respectively, and $ 124 and $ 237 for the three and six months ended June 30, 2022, respectively.     6.            INTANGIBLE ASSETS, NET   Intangible assets consisted of the following:       June 30, 2023     December 31, 2022   Amortizable intangible assets:                 Patents   $ 744     $ 575   Trademarks     157       150   Purchased software     1,962       1,962         2,863       2,687   Accumulated amortization     ( 629 )     ( 462 ) Total amortizable     2,234       2,225   Indefinite life assets (non-amortizable)     354       344   Total intangible assets, net   $ 2,588     $ 2,569     Amortization expense was $ 85 and $ 167 for the three and six months ended June 30, 2023, respectively, and $ 73 and $ 143 for the three and six months ended June 30, 2022, respectively.   At June 30, 2023, future amortization expense is as follows:   2023 (9 months)   $ 259   2024     518   2025     513   2026     290   2027     42   Thereafter     612   Total estimated amortization expense   $ 2,234       7.            ACCOUNTS PAYABLE AND ACCRUED LIABILITIES   Accounts payable includes $ 40 and $ 127 due to related party Syzygy Licensing, LLC (“ Syzygy ”) as of June 30, 2023 and December 31, 2022, respectively. See Notes 11 for additional information on this related party.   The Company consummated an offering of Series A Convertible Preferred Stock and Warrants (“ Offering ”), which Offering closed on July 5, 2023, resulting in gross proceeds to the Company of approximately $ 10 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 accrued expense.   Accrued liabilities consist of the following:       June 30, 2023     December 31, 2022   Patent and legal costs   $ 103     $ 135   Accrued compensation     777       1,100   Warranty costs     75       125   Pre-funding of the sale of shares, preferred stock and warrants     7,350       -   Taxes and other     257       103   Total   $ 8,562     $ 1,463     -9- Table of Contents   Accrued compensation includes $ 80 and $ 1,022 in employee bonuses and commissions payable at June 30, 2023 and December 31, 2022, respectively.   Changes in our estimated product warranty costs were as follows:       Six Months Ended June 30,       2023     2022   Balance, beginning of period   $ 125     $ 96   Warranty settlements     ( 6 )     ( 63 ) Warranty provision     ( 44 )     45   Balance, end of period   $ 75     $ 78       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 June 30, 2023, there were 2,848,936 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.   Stock Options   The following table summarizes stock option activity for the six months ended June 30, 2023:               Weighted Average               Options on Common Shares     Exercise Price     Remaining Contractual Term     Aggregate Intrinsic Value   Outstanding January 1, 2023     5,491,399     $ 3.72       5.96     $ 92   Granted     60,000     $ 1.34                   Exercised     ( 250 )   $ 1.5                   Forfeited, cancelled, expired     ( 1,982,900 )   $ 4.14                   Outstanding June 30, 2023     3,568,249     $ 3.37       8.08     $ 7   Exercisable June 30, 2023     1,052,714     $ 4.56       6.79     $ 0     -10- Table of Contents   At June 30, 2023, there were 1,954,019 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 3,568,249 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 Six Months       Ended June 30,       2023     2022   Expected stock price volatility     49 %     49 % Risk-free interest rate     3.64 %     1.09 % Expected life of options     6.66       1.82   Weighted-average fair value of options granted   $ 0.55     $ 1.32     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 $ 255 and $ 567 for the three and six months ended June 30, 2023, respectively, and $ 408 and $ 1,145 for the three and six months ended June 30, 2022, respectively.   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 six months ended June 30, 2023:       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     625,896     $ 1.31           Vested     ( 734,444 )   $ 2.87           Forfeited and cancelled     ( 264,172 )   $ 2.49           Unvested at June 30, 2023     549,337     $ 2.03       1.88     -11- Table of Contents   RSU expense was $ 966 and $ 1,282 for the three and six months ended June 30, 2023, respectively, and $ 319 and $ 611 for the three and six months ended June 30, 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 June 30,     Six Months Ended June 30,       2023     2022     2023     2022   Selling, general and administrative   $ 990     $ 591     $ 1,552     $ 1,485   Research and development     231       136       297       271   Total share-based expense   $ 1,221     $ 727     $ 1,849     $ 1,756     As of June 30, 2023, total estimated compensation cost of stock options granted and outstanding but not yet vested was $ 2,609 which is expected to be recognized over the weighted average period of 3.12 years.   As of June 30, 2023, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 1,115 which is expected to be recognized over the weighted average period of 1.82 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 each of the three and six months ended June 30, 2023 and year ended December 31, 2022 was $ 0 .     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 $ 40 and $ 64  for royalties during the three and six months ended June 30, 2023, respectively, and $ 34 and $ 83 for royalties during the three and six months ended June 30, 2022, respectively. The maximum payout still available under this arrangement is $ 217 as of June 30, 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 is to 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 June 30, 2023, the Company was committed for approximately $ 3,878 for future component deliveries that are generally subject to modification or rescheduling in the normal course of business.   -12- Table of Contents   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, 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 $ 9 during the three and six months ended June 30, 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. Mr. Norris was paid a monthly fee of $ 7.5 per month for aggregate consulting payments of $ 22.5 and $ 45 during each of the three and six months ended June 30, 2023 and 2022.   See Notes 7, 11 and 14 for additional information on related party transactions and obligations.     13.            MAJOR CUSTOMERS AND RELATED INFORMATION   For the three months ended June 30, 2023, revenue from two distributors accounted for approximately 21 % and 21 % of revenue with no other single customer accounting for more than 10% of total revenue. For the three months ended June 30, 2022, revenue from three distributors and one agency accounted for approximately 24 %, 18 %, 12 % and 11 % of revenue with no other single customer accounting for more than 10% of total revenue.   For the six months ended June 30, 2023, revenue from three distributors accounted for approximately 15 %, 14 % and 13 % of revenue with no other single customer accounting for more than 10% of total revenue. For the six months ended June 30, 2022, revenue from one distributor accounted for approximately 25 % of revenue with no other single customer accounting for more than 10% of total revenue.   At June 30, 2023, accounts receivable from three distributors accounted for 22 %, 13 % and 13 % 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 revenue by geographic region. Revenue is attributed to countries based on customer’s delivery location:       For the Three Months     For the Six Months       Ended June 30,     Ended June 30,       2023     2022     2023     2022   Americas   $ 1,168     $ 1,090     $ 1,878     $ 2,285   Europe, Middle East and Africa     35       73       36       247   Asia Pacific     ( 1 )     2       ( 1 )     232   Total   $ 1,202     $ 1,165     $ 1,913     $ 2,764     -13- Table of Contents     14.            SUBSEQUENT EVENTS   Registered Direct Offering   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 million.   Although the Closing occurred subsequent to June 30, 2023, the Company received approximately $ 7.35 million in gross proceeds from the Offering on June 30, 2023 following the execution of the Securities Purchase Agreement and prior to the Closing, which amount is reflected in cash and cash equivalents, with an offset to accrued expense, each as reflected in the Company’s Condensed Consolidated Balance Sheet at June 30, 2023. At the Closing, the Company received additional gross proceeds from the Offering of approximately $ 2.65 million. After payment of placement agent fees and costs of the Offering, the net proceeds from the Offering were approximately $ 9 million. The Company intends to allocate the proceeds from the Offering to scale the Company’s sales team, support marketing efforts, and fuel the evolution and diversification of the Company’s product offerings.   The Company has evaluated other events subsequent to June 30, 2023 through the date the accompanying financial statements were filed with the Securities and Exchange Commission and noted that, other than as set forth above, there have been no other events or transactions which would affect the Company’s financial statements for the quarter ended June 30, 2023.   Acquisition of Intrensic, LLC   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 ”).   The Purchase Agreement contains representations, warranties and covenants of the Company and Sellers that are customary for a transaction of this nature, a customary indemnification provisions whereby Sellers will indemnify the Company for certain losses arising out of inaccuracies in, or breaches of, the representations, warranties and covenants of Sellers regarding Intrensic, ownership of the Membership Interest, and certain other matters, subject to certain caps and thresholds.   The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by the full text of the Purchase Agreement, a copy of which is filed as an exhibit to this Quarterly Report and is incorporated by reference in this description of the Purchase Agreement.   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.   -14- Table of Contents