What changed in this filing

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Item 1. Financial Statements

2023-11-14 compared with 2023-08-10 · 303 added, 127 removed, 335 unchanged (56% of the section changed)

3 unchanged sentences

(in thousands, except par value and share amounts)

September 30,

Current assets:

3 unchanged sentences

Inventories, net

Prepaid expense and other current assets

Prepaid expense and other current assets

Total current assets

2 unchanged sentences

Intangible assets, net

Goodwill, net

LIABILITIES AND STOCKHOLDERS' EQUITY

5 unchanged sentences

Operating lease liability - short term

Warrants –

Total current liabilities

8 unchanged sentences

par value $ 0.0001 per share

none issued and outstanding

Convertible P referred S tock–

10,000 authorized, par value $ 0.0001 per share;

10,000 and 0 issued and outstanding at September 30, 2023 and December 31, 2022, respectively

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

43,289,236  and 41,175,993 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively

Additional paid-in capital

8 unchanged sentences

Three Months Ended

Six Months Ended

September 30,

Nine m onths Ended

September 30,

Product sales

10 unchanged sentences

Interest income

Change in fair value of warrant liabilities

Total other income (expense)

Convertible preferred stock dividends

Net loss attributable to common stockholders

Net loss per basic and diluted common share

1 unchanged sentence

Comprehensive loss:

Net unrealized gain (loss) on short-term investments

Net unrealized gain on short-term investments

Comprehensive loss

3 unchanged sentences

(in thousands, except share amounts)

Three Months Ended June 30, 2023

Comprehensive

Stockholders'

Balance at April 1, 2023

Common shares issued upon exercise of stock options

Three Months Ended September 30, 2023

Additional Paid-In

Other Comprehensive

Total Stockholders'

Balance at July 1, 2023

Share-based compensation expense

Dividends on convertible preferred stock

Convertible preferred stock issued, net of offering costs

Common shares issued upon vesting of restricted stock units

Issuance of common stock for acquisition

Net loss for the period

Balance at June 30, 2023

Six Months Ended June 30, 2023

Comprehensive

Balance at September 30, 2023

Nine Months Ended September 30, 2023

Additional Paid-In

Other Comprehensive

Stockholders'

2 unchanged sentences

Share-based compensation expense

Dividends on convertible preferred stock

Convertible preferred stock issued, net of offering costs

Common shares issued upon vesting of restricted stock units

Issuance of common stock for acquisition

Settlement –

1 unchanged sentence

Net loss for the period

Balance at June 30, 2023

Three Months Ended June 30, 2022

Balance at September 30, 2023

See accompanying notes to unaudited condensed consolidated interim financial statements.

Three Months Ended September 30, 2022

Comprehensive

Stockholders'

Balance at April 1, 2022

Balance at July 1, 2022

Common shares issued upon exercise of stock options

Share-based compensation expense

2 unchanged sentences

Net loss for the period

Balance at June 30, 2022

Six Months Ended June 30, 2022

Balance at September 30, 2022

Nine Months Ended September 30, 2022

Comprehensive

4 unchanged sentences

Common shares issued upon vesting of restricted stock units

Common shares issued for services

Net unrealized loss on short-term investments

Net unrealized gain on short-term investments

Net loss for the period

Balance at June 30, 2022

Balance at September 30, 2022

See accompanying notes to unaudited condensed consolidated interim financial statements.

2 unchanged sentences

(in thousands)

Six Months Ended June 30,

Nine m onths Ended September 30,

Cash Flows From Operating Activities:

3 unchanged sentences

Warranty provision

Change in fair value of warrant liabilities

Non-cash lease expense

2 unchanged sentences

Accounts receivable

Prepaid expense and other current assets

Prepaid expense and other current assets

Accounts payable

11 unchanged sentences

Purchase of intangible assets

Investment in long-term deposits

Proceeds from long-term deposits

Net cash paid for acquisition of Intrensic

Cash outlay for deposits

Net cash provided by investing activities

1 unchanged sentence

Proceeds from exercise of stock options

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

Net cash provided by financing activities

4 unchanged sentences

Change in unrealized gain on short-term investments

Issuance of common stock for acquisition

Net assets acquired from acquisition

Convertible preferred stock issued, net of offering costs

Warrant liabilities

Dividends on convertible preferred stock

Right-of-use asset and liability recorded during period

4 unchanged sentences

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT DEVELOPMENTS

Organization and Business Description

24 unchanged sentences

Principles of Consolidation

The Company has one wholly-owned subsidiary, Wrap Reality, Inc.

The Company has two wholly owned subsidiaries, 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.

VR ”) training system primarily targeting law enforcement agencies and Intrensic, LLC which the Company acquired in August 2023 which specializes in Body Worn Camera and Digital Evidence Management solutions.

The consolidated financial statements include the accounts of these subsidiaries after elimination of intercompany transactions and accounts.

Business Combinations

The Company accounts for its business combinations under the provisions of Accounting Standards Codification ("ASC") Topic 805-10, Business Combinations ("ASC 805-10"), which requires that the purchase method of accounting be used for all business combinations.

Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective fair values.

The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using established valuation techniques.

ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill.

Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination.

Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.

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

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

Any adjustments subsequent to the measurement period are recorded in income.

Goodwill represents the difference, if any, between the aggregate consideration paid for an acquisition and the fair values of the underlying net assets and liabilities assumed from an acquired business.

Goodwill is not amortized, but instead is tested for impairment.

The Company tests goodwill for impairment on an annual basis during the fourth quarter, or more frequently if conditions indicate that such impairment could exist.

The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value and whether it is necessary to perform goodwill impairment process.

Definite-lived Intangible Assets  

Definite-lived intangible assets represent certain trade names, patents, licenses, software, acquired technology and customer relationships.

Definite-lived intangible assets are recorded at cost less any accumulated amortization and accumulated impairment losses, if any.

Definite-lived intangible assets acquired through the business combination are measured at fair value at the acquisition date.

The Company amortizes these acquired definite-lived intangibles assets with a finite life on a straight-line basis, over 6 years for technology;

7 years for customer relationships;

and 8 years for trademarks and trade names.

Use of Estimates

2 unchanged sentences

Actual results could materially differ from those estimates.

The Company accounts for warrants as liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”).

The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common shares and whether the warrant holders could potentially require “net cash settlement”

in a circumstance outside of the Company’s control, among other conditions for equity classification.

This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

For issued warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter.

The Company accounts for the warrants issued in accordance with the guidance contained in ASC 815-40-15-7C, under which the warrants do not meet the criteria for equity treatment and must be recorded as liabilities.

Accordingly, the Company classifies the warrants as liabilities at their fair value and adjusts the warrants to fair value at each reporting period.

This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s condensed consolidated statement of operations.

Convertible Preferred Stocks

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 480 and ASC 815 to determine if those instruments or embedded components of those instruments qualify as derivatives and are subject to bifurcation accounting.

The Company determines that the economic characteristics and risks of the embedded derivative instrument are clearly and closely related to the economic characteristics and risks of the host contract.

The convertible instruments are accounted for as a single hybrid instrument.

Additionally, the convertible instruments do not have any redemption features that would preclude permanent equity classification in accordance with the guidance contained in ASC 480-10-S99.

The Company issued the Warrants, which are classified as liabilities and measured at fair value on a recurring basis, and Convertible Preferred Stocks in one transaction.

The issuance proceeds were allocated by using the with-and-without method.

Under this method, The Company first allocated the issuance proceeds to the Warrants based on their initial fair value measurement, and then allocated the remaining proceeds to the Convertible Preferred Stocks.

Loss per Share

Basic loss per common share 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.

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

In computing diluted EPS, we adjust the numerator used in the basic EPS computation, subject to anti-dilution requirements, to add back the dividends (declared or cumulative undeclared) applicable to the Series A Convertible Preferred Stock.

Such add-back would also include any adjustments to equity in the period to accrete the Series A Convertible Preferred Stock to its redemption price, or recorded upon a redemption or induced conversion, if any.

We adjust the denominator used in the basic EPS computation, subject to anti-dilution requirements, to include the dilution from potential shares resulting from the issuance of the Series A Convertible Preferred Stock, restricted stock units, and stock options.

Stock options and restricted stock units exercisable or issuable for a total of 2,668,750  and 6,396,277 shares of Common Stock were outstanding at September 30, 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.

1 unchanged sentence

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.

In July 2023, the SEC adopted the final rule under SEC Release No.

33-11216, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, requiring disclosure of material cybersecurity incidents on Form 8-K and periodic disclosure of a registrant’s cybersecurity risk management, strategy and governance in annual reports.

Regulation S-K Item 6 disclosure requirements under this rule will be effective for us in the fourth quarter of 2023.

Incident disclosure requirements in Form 8-K will be effective for us on June 15, 2024.

We are still evaluating for any impact on our financial statement disclosures from the adoption of this final rule.

Recent Developments

On August 9, 2023, the Company entered into a Membership Interest Purchase Agreement (the “

Purchase Agreement ”) with Intrensic, LLC, a Delaware limited liability company (“

Intrensic ”), and certain members of Intrensic, including Kevin Mullins, the Company’s Chief Executive Officer (collectively, “

Sellers ”).

Under the terms of the Purchase Agreement, the Company agreed to purchase, and Sellers agreed to sell, 100 % of the membership interests (the “

Membership Interests ”) of Intrensic for the following consideration upon the consummation of the sale of the Membership Interests (the “

Intrensic Closing ”):

(i) $ 553,588 in cash, subject to adjustment based upon the outstanding indebtedness of Intrensic and Intrensic’s working capital as of the Intrensic Closing;

and (ii) 1,250,000 shares of Common Stock of the Company (collectively, the “

Purchase Price ”) (the “

Intrensic Acquisition ”).

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

15 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 six months ended June 30, 2023.

The table below details the activity in our contract liabilities during the nine months ended September 30, 2023.

Balance at January 1, 2023

1 unchanged sentence

Transfer to revenue

Balance at June 30, 2023

Balance at September 30, 2023

Current portion

Long-term portion

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 September 30, 2023, the Company’s deferred revenue of $ 365 consisted of $ 199 related to VR, $ 6 related to training and $ 160 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.

Royalties are also charged to the cost of products sold.

9 unchanged sentences

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.

The Company’s 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

Money Market Funds

Treasury securities in short-term investments

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

As of September 30, 2023

Certificate of Deposits

1 unchanged sentence

As of December 31, 2022

Money Market Funds

Treasury securities in short-term investments

2 unchanged sentences

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.

During the three and nine months ended September 30, 2023, no gain (loss) was recorded to other comprehensive gain (loss).

During the three and nine months ended September 30, 2022, a $ 73 gain and $ 62 gain was recorded to other comprehensive gain (loss), respectively.

The warrant liabilities are measured at fair value on a recurring basis.

The subsequent measurement of the warrant liabilities as of September 30, 2023, is classified as Level 3 due to the use of an observable market quote in a non-active market and the management’s assumption of the expected stock price volatility.

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

September 30,

Fair value at inception or the beginning of the period

Change in fair value of warrant liabilities

Fair value as of September 30, 2023

The Company uses the modified Black-Scholes option pricing model to determine the fair value of warrant liabilities.

The following table summarizes the assumptions used to compute the fair value of Warrants:

September 30,

Expected stock price volatility

Risk-free interest rate

Dividends yield

Expected life of warrants

Exercise price

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

Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.

3 unchanged sentences

Inventories consisted of the following:

September 30,

Finished goods

5 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 $ 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.

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

INTANGIBLE ASSETS AND GOODWILL

Intangible Assets, net

Intangible assets consisted of the following:

Intangible assets, net consisted of the following:

September 30,

Amortizable intangible assets:

Purchased software

Purchased software and technology

Customer Relationships

Accumulated amortization

2 unchanged sentences

Total intangible assets, net

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:

Amortization expense was $ 150  and $ 317  for the three and nine months ended September 30, 2023, respectively, and $ 72 and $ 215  for the three and nine months ended September 30, 2022, respectively.

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

2023 (3 months)

Total estimated amortization expense

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

Balance at January 1, 2023

Acquired goodwill

Balance at September 30, 2023

1 unchanged sentence

Accounts payable includes $ 122 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.

Syzygy ”) as of September 30, 2023, and December 31, 2022, respectively.

See Note 11 for additional information on this related party.

Accrued liabilities consist of the following:

September 30,

Patent and legal costs

1 unchanged sentence

Warranty costs

Pre-funding of the sale of shares, preferred stock and warrants

Taxes and other

Accrued compensation includes $ 80 and $ 1,022 in employee bonuses and commissions payable at June 30, 2023 and December 31, 2022, respectively.

Accrued compensation includes $ 139 and $ 1,022 in employee bonuses and commissions payable at September 30, 2023 and December 31, 2022, respectively.

Changes in our estimated product warranty costs were as follows:

Six Months Ended

Nine Months Ended

September 30,

Balance, beginning of period

Warranty settlements

Warranty provision

Release of warranty provision

Balance, end of period

On June 29, 2023, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain directors of the Company and certain accredited and institutional investors (collectively, the “Investors”), pursuant to which it agreed to sell to the Investors in a private placement (the “Offering”):

(i) warrants to acquire up to an aggregate of 6,896,553 shares of Common Stock (the “Warrants”) and (ii) Series A Convertible Preferred Stock (Note 9).

The warrants are exercisable six months after issuance at an exercise price of $ 1.45 per share, subject to adjustment, and expire five years from the date of issuance.

The closing of the Offering occurred on July 3, 2023.

The aggregate gross proceeds from the Offering were $ 10,000 .

$ 7,717 of $ 10,000 was allocated to the Warrants.

STOCKHOLDERS' EQUITY

1 unchanged sentence

Preferred Stock ”).

On July 3, 2023, the Company filed a Certificate of Designations (the “

Series A COD ”) with the State of Delaware, designating 10,000 shares of its Preferred Stock as Series A Convertible Preferred Stock, $ 0.0001 per share (the “

Series A Preferred ”).

Shares of Series A Preferred are convertible into Common Stock (the “

Conversion Shares ”) at an initial conversion price of $ 1.45 (the “

Conversion Price ”), subject to customary adjustments and price-based as defined in the Series A COD.

Holders of Series A Preferred Shares are entitled to dividends of 8 % per annum, payable quarterly, subject to adjustment upon the occurrence of certain events in accordance with the terms of the Series A COD.

The holders of Series A Preferred have no voting rights on account of the Preferred Shares, other than with respect to certain matters affecting the rights of the Preferred Shares.

(i) the Warrants Note 8 and (ii) an aggregate of 10,000 shares of the Company’s newly designated Series A Convertible Preferred Stock, with par value $ 0.0001 per share and a stated value of $ 1,000 per share, initially convertible into up to 6,896,553 shares of the Company’s common stock, par value $ 0.0001 per share at a conversion price of $ 1.45 per share, subject to customary adjustments and price-based as defined in the Series A Certificate of Designations (the “Convertible Preferred Stocks”).

The customary adjustments include:

(i) additional amounts related to declared and unpaid Dividends and any other unpaid amounts due and payable and (ii) make-whole amounts related to the accrual of any additional dividends that would have accrued up to the date of conversion including the one-year anniversary from the date of conversion.

Each preferred stock has a stated value of $ 1,000 per share, and holders thereof are entitled to cumulative dividends of 8 % per annum on the stated value, payable quarterly in arrears, subject to adjustment upon the occurrence of certain events in accordance with the terms of the Convertible Preferred Stocks.

The holders of Convertible Preferred Stocks have no voting rights on account of the Convertible Preferred Stocks, other than with respect to certain matters affecting the rights of the Convertible Preferred Stocks.

$ 2,036 of the aggregate gross proceeds was allocated to the Convertible Preferred Stocks.

In September 2023, the Company authorized and declared $ 193 dividend which was an accrued in accounts payable as of September 30, 2023.

7 unchanged sentences

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.

At September 30, 2023, there were 4,438,539 shares of Common Stock remaining available for grant under the Plan.

The Company generally recognizes share-based compensation expense on the grant date and over the period of vesting or period that services will be provided.

2 unchanged sentences

Stock Options

The following table summarizes stock option activity for the six months ended June 30, 2023:

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

Weighted Average

1 unchanged sentence

Forfeited, cancelled, expired

Outstanding June 30, 2023

Exercisable June 30, 2023

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.

Outstanding September 30, 2023

Exercisable September 30, 2023

At September 30, 2023, there were 1,529,275 service-based stock options outstanding, and 692,398 performance-based stock options outstanding, which performance-based stock options were granted in April 2022 to the Company’s former Chief Executive Officer and President, subject to future market capitalization targets.

1,207,698 of the 2,221,673 stock options granted included in the table above were granted in April 2022 outside the Plan as an employment inducement grant but are subject to the terms and conditions of the Plan.

1 unchanged sentence

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,

For the Nine Months

Ended September 30,

Expected stock price volatility

Risk-free interest rate

Expected life of options

Expected dividend yield

Expected life of options

Weighted-average fair value of options granted

11 unchanged sentences

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.

At September 30, 2023, 921,832 of the 1,614,230 market condition performance options granted in April 2022 were cancelled.

Stock option expense was $( 169 ) and $ 399 for the three and nine months ended September 30, 2023, respectively, and $ 308 and $ 1,448 for the three and nine months ended September 30, 2022, 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 six months ended June 30, 2023:

The following table summarizes RSU activity for the nine months ended September 30, 2023:

Service-Based

2 unchanged sentences

Forfeited and cancelled

Unvested at June 30, 2023

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.

Unvested at September 30, 2023

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

Share-Based Compensation Expense

1 unchanged sentence

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Selling, general and administrative

1 unchanged sentence

Total share-based expense

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.

As of September 30, 2023, total estimated compensation cost of stock options granted and outstanding but not yet vested was $ 1,168 which is expected to be recognized over the weighted average period of 2.73 years.

As of September 30, 2023, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 757 which is expected to be recognized over the weighted average period of 1.61 years.

4 unchanged sentences

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 .

The Company’s contributions for each of the three and nine months ended September 30, 2023, and year ended December 31, 2022, was $ 0 .

5 unchanged sentences

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.

The Company recorded $ 122 and $ 185  for royalties during the three and nine months ended September 30, 2023, respectively, and $ 61  and $ 147  for royalties during the three and nine months ended September 30, 2022, respectively.

The maximum payout still available under this arrangement is $ 95 as of September 30, 2023.

Service Provider Agreement

3 unchanged sentences

(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.

Service Provider ”) on November 22, 2022, as amended on April 2, 2023, the Service Provider provided to the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform (the “

Technology, Services, and License ”) in consideration for a cash payment of $ 700 to the Service Provider, which was completed as of June 30, 2023.

The Company has no ongoing or future commitments, responsibilities, or obligations related to this matter.

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.

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

Indemnifications and Guarantees

5 unchanged sentences

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.

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

The Company is subject to litigation and other claims in the ordinary course of business.

The Company records a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

These provisions are reviewed and adjusted to include the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter.

At September 30, 2023, we had no provision for liability under existing litigation.

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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.

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.

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.

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 $ 13.5 during the three and nine months ended September 30, 2023, and 2022, respectively.

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

Norris was paid a monthly fee of $ 7.5 per month for aggregate consulting payments of $ 22.5 and $ 67.5 during each of the three and nine months ended September 30, 2023, and 2022.

On June 29, 2023, we entered into the Purchase Agreement with certain investors, including Mr.

Scot Cohen, the Executive Chairman of the Company, and V4, an entity over which Mr.

Cohen exercises control and whose securities are beneficially owned by Mr.

Cohen (the “

Affiliated Offering ”), pursuant to which the Company issued to Mr.

Cohen and V4 an aggregate of 3,000 Series A Preferred and warrants to purchase up to an aggregate of 2,068,966 shares of Common Stock for aggregate gross proceeds of $ 3,000,000 (excluding the proceeds the Company may receive from the exercise of the warrants issued in the Affiliated Offering) (the “

Affiliated Proceeds ”). The Certificate of Designation for the Series A Preferred provides that Series A Preferred held by a holder who serves as a director, officer or is an employee of the Company shall only be convertible into shares of Common Stock following receipt of approval of a majority of the Company’s stockholders (“

Stockholder Approval ”).

Similarly, any warrant issued to one of our directors may not be exercised prior to date that is the later of (x) the date on which the Company received Stockholder Approval and (y) the date that is six months from the date of issuance). Stockholder Approval was attained at a special meeting of stockholders held on September 19, 2023. 

On August 9, 2023, the Company entered into the Purchase Agreement with Intrensic and the Sellers, including Kevin Mullins, a director of the Company and its Chief Executive Officer.

Under the terms of the Purchase Agreement, the Company agreed to purchase, and Sellers, including Mr.

Mullins, agreed to sell, 100 % of the Membership Interests of Intrensic for the following consideration:

(i) $ 554 in cash, subject to adjustment based upon the outstanding indebtedness of Intrensic and Intrensic’s working capital;

and (ii) 1,250,000 shares of Common Stock of the Company.

Kevin Mullins owns approximately 9.53% of the Membership Interests, and as such, has a financial interest in the sale of Intrensic to the Company.

See Notes 1, 7 and 12 for additional information on related party transactions and obligations.

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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.

For the three months ended September 30, 2023, revenue from two distributors accounted for approximately 62 % and 12 % of revenue with no other single customer accounting for more than 10% of total revenue.

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

For the nine months ended September 30, 2023, revenue from one distributor accounted for approximately 41 % of revenue with no other single customer accounting for more than 10% of total revenue.

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

At September 30, 2023, accounts receivable from one  distributor accounted for 51 % of net accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

At December 31, 2022, accounts receivable from one distributor accounted for 70 % of net accounts receivable.

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For the Three Months

For the Six Months

Ended June 30,

For the Nine Months

Ended September 30,

Europe, Middle East and Africa

Total revenues

BUSINESS COMBINATION

The Company entered into the Purchase Agreement with Intrensic and the Sellers with an effective date of August 9, 2023 (the (“Closing”). 

The Closing was consummated on August 16, 2023. 

Under the terms of the Purchase Agreement, the Company agreed to purchase, and Sellers agreed to sell the 

Membership Interests for the following consideration at Closing:

(i) $554 in cash, subject to adjustment based upon the outstanding indebtedness of Intrensic and Intrensic’s working capital as of the Closing;

and (ii) 1,250,000 shares of Common Stock of the Company valued at approximately $1,938.

The Company assessed the historical financial information of Intrensic to determine if it would materially impact Wrap's historical financial statements for the purposes of disclosing proforma financial information.

The Company determined that in the current or prior reporting periods the acquired business contributed immaterially to the Company’s financial statements .

Therefore, a pro forma disclosure of the Company as if the business combination had occurred is not warranted under ASC 805.

The preliminary purchase price is not finalized.

The Company is still evaluating the impact of the income tax provision related to the acquisition and assessing the assumed contracts related to deferred revenue.

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

Cash and cash equivalents

Accounts receivable

Net property, plant and equipment

Customer relationships (included in Intangibles)

Trademarks and trade names (included in Intangibles)

Total liabilities and equity

Purchase Price:

Liabilities assumed

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

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.

Appointment of Executive Chairman

On October 12, 2023, the Board of Directors (the “

Board ”) appointed Scot Cohen, the Company’s current Chairman of the Board, to the position of Executive Chairman, effective October 12, 2023 (the “

Effective Date ”).

Cohen cofounded the Company in March 2016, and has previously served as the Executive Chairman of the Company from July 2017 until June 2021.

In connection with Mr.

Cohen’s appointment as Executive Chairman, the Company and Mr.

Cohen entered into an agreement on October 12, 2023 (the “

Agreement ”).

Pursuant to the Agreement, unless earlier terminated pursuant to the terms therein, Mr.

Cohen will serve as the Company’s Executive Chairman for an initial term of two years from the effective date of his appointment.

As compensation for Mr.

Cohen’s services to the Company, the Agreement entitles Mr.

Cohen to an annualized base salary of $ 200,000 (the “

Base Salary ”) and eligibility to participate in customary benefits offered to other executives of the Company.

The Agreement further provides for:

A grant of that number of restricted shares (“

RSAs ”) of the Company’s Common Stock equal to $ 675,000 divided by $1.40, representing the closing price of Common Stock as reported on the Nasdaq Capital Market on October 12, 2023 (the “

Closing Price ”) for the date of grant (the “

Grant Date ”), which RSAs are subject to certain vesting conditions based on the achievement of certain targets based on total market capitalization of the Company.

A nonqualified option to purchase up to that number of shares of Common Stock with a Grant Date fair value equal to $ 675,000 divided by the Closing Price (the “

Option ”), an exercise price equal to the Closing Price, and a term of 10 years, which Option vests based on Mr.

Cohen’s continued employment with the Company and the achievement of certain budgeted revenue targets established by the Board;

A nonqualified option to purchase up to 2.25 % of the number of shares of the Company’s Common Stock that are issued and outstanding (determined on a fully-diluted basis, including, without limitation, any shares issuable upon the conversion or exercise of any outstanding warrants or preferred stock) as of the Effective Date (the “

Performance Option ”), at an exercise price equal to the Closing Price, and a term of 10 years, which Performance Option vests, subject to Mr.

Cohen’s continued employment with the Company through each vesting date, in accordance with the same vesting conditions as provided for in the RSAs.

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

Resignations of Michael Parris and Wayne Walker

Effective October 11, 2023 (the “

Parris Resignation Date ”), and October 12, 2023 (the “

Walker Resignation Date ”), Michael Parris and Wayne Walker, respectively, resigned from their positions as members of the Board.

Neither director’s decision to resign was the result of any dispute or disagreements with the Company on any matter relating to the Company’s operations, policies or practices.

Appointment of Rajiv Srinivasan and Timothy Szymanski

On October 12, 2023, Rajiv Srinivasan and Timothy Szymanski were appointed to serve as members of the Board to fill the vacancies created as a result of the resignations of Messrs.

Parris and Walker, until the Company’s next annual meeting of stockholders or until their respective successors are duly elected and qualified.

Miami Office Lease

The Company has entered into an 89 -month lease for 4,487 square feet of office space in Miami, Florida, starting from November 1, 2023.

This leasing arrangement aims to enhance the Company's footprint on the East Coast and in international markets.

In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events through the filing date and determined that no additional subsequent events occurred that were reasonably expected to impact the consolidated condensed financial statements presented herein.

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