What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2024-09-25 compared with 2023-11-14 · 262 added, 362 removed, 276 unchanged (69% of the section changed)

3 unchanged sentences

(in thousands, except par value and share amounts)

September 30,

March 31, 2024

Current assets:

8 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;

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

0 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

Common stock - 150,000,000 authorized;

par value $ 0.0001 per share;

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

44,373,107 and 43,855,503 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

Convertible Preferred Stock - 10,000 authorized, par value $ 0.0001 per share;

9,798 and 9,898 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

Additional paid-in capital

Accumulated deficit

Accumulated other comprehensive loss

Total stockholders' equity

4 unchanged sentences

(in thousands, except share and per share amounts)

Three Months Ended

September 30,

Nine m onths Ended

September 30,

Three Months ended March 31,

Product sales

Other revenue

Total revenue

Cost of revenue

Gross profit (loss)

Operating expense:

Total revenues

Cost of revenues

Operating expenses:

Selling, general and administrative

Research and development

Total operating expense

Total operating expenses

Loss from operations

1 unchanged sentence

Interest Income

Change in fair value of warrant liabilities

Total other income (expense)

Change in fair value of warranty liabilities

Total other income (expense), net

Net income (loss)

Convertible preferred stock dividends

3 unchanged sentences

Comprehensive loss:

Net unrealized gain on short-term investments

Net income (loss)

Comprehensive loss

3 unchanged sentences

(in thousands, except share amounts)

Three Months Ended September 30, 2023

Preferred Stock

Additional Paid-In

Other Comprehensive

Accumulated 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 September 30, 2023

Nine Months Ended September 30, 2023

Additional Paid-In

Other Comprehensive

Stockholders'

Income (Loss)

Balance at January 1, 2023

1 unchanged sentence

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 –

US Treasury bills

Net loss for the period

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 July 1, 2022

Common shares issued upon exercise of stock options

Share-based compensation expense

Common shares issued upon vesting of restricted stock units

Net unrealized gain on short-term investments

Settlement – US Treasury bills

Net loss for the period

Balance at September 30, 2022

Nine Months Ended September 30, 2022

Comprehensive

Stockholders'

Balance at March 31, 2023

Balance at January 1, 2024

1 unchanged sentence

Share-based compensation expense

Dividends on convertible preferred stock

Common shares issued upon convertible preferred stock exercising conversion rights

Common shares issued upon vesting of restricted stock units

Net unrealized gain on short-term investments

Net loss for the period

Balance at September 30, 2022

See accompanying notes to unaudited condensed consolidated interim financial statements.

Net income for the period

Balance at March 31, 2024

Wrap Technologies, Inc.

1 unchanged sentence

(in thousands)

Nine m onths Ended September 30,

Three Months ended March 31,

Cash Flows From Operating Activities:

Net income (loss)

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

5 unchanged sentences

Provision for doubtful accounts

Inventory obsolescence reserve

Changes in assets and liabilities:

Accounts receivable

Prepaid expense and other current assets

Prepaid expenses and other current assets

Accounts payable

10 unchanged sentences

Investment in patents and trademarks

Purchase of intangible assets

Net cash paid for acquisition of Intrensic

Cash outlay for deposits

Proceeds from long-term 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

Dividends settled in Cash

Net cash provided by financing activities

Net decrease in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

2 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

See accompanying notes to unaudited condensed consolidated interim financial statements.

Dividends settled with common stock

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Notes to Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

ORGANIZATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT DEVELOPMENTS

Organization and Business Description

Wrap Technologies, Inc., a Delaware corporation (the “

Company ”, “

we ”, “

us ”, and “

our ”), is a publicly traded company with our Common Stock, par value $ 0.0001 per share (“

Common Stock ”), listed on the Nasdaq Capital Market (“

Nasdaq ”) under the trading symbol “WRAP”.

Wrap Technologies, Inc., a Delaware corporation (the “ Company ”, “ we ”, “ us ”, and “ our ”), is a publicly traded company with its 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.

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 (“

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.

generally accepted accounting principles (“ U.S.

GAAP ”) have been condensed or omitted pursuant to such rules and regulations.

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.

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, 2023, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “ Annual Report ”), as filed with the SEC on August 28, 2024.

The accompanying condensed consolidated balance sheet as of December 31, 2023 has been derived from the audited consolidated balance sheet as of December 31, 2023, 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 two wholly owned subsidiaries, Wrap Reality, Inc.

formed in December 2020 that sells a virtual reality (“

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 Company has two wholly owned subsidiaries, Wrap Reality, Inc., an Arizona corporation, formed in December 2020 that sells a virtual reality (“ VR ”) training system primarily targeting law enforcement agencies and Intrensic, LLC (“Intrensic”), 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.

Segment and Related Information

The Company operates as a single segment.

The Company’s chief operating decision maker is Scot Cohen, the Company’s Executive Chairman and Chief Executive Officer, who manages operations for purposes of allocating resources.

Refer to Note 15.

Major Customers and Related Information for further discussion.

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.

2 unchanged sentences

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.

6 unchanged sentences

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.

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, valuation of warrants, 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.

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.

2 unchanged sentences

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

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.

Series A Preferred Stock

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.

2 unchanged sentences

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 Company issued the Series A Warrants (as defined herein), which are classified as liabilities and measured at fair value on a recurring basis, and Series A Preferred Stock (as defined herein) 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.

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

Revenue Recognition

The Company adopted ASC Topic 606, Revenue from Contracts with Customers on January 1, 2018.

The Company enters into contracts that include various combinations of products, accessories, software and services, each of which are generally distinct and are accounted for as separate performance obligations.

Product sales include BolaWrap products and accessories.

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

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

The Company generally has an unconditional right to consideration when customers are invoiced, and a receivable is recorded.

A contract asset is recognized when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing.

The Company 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.

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.

Loss per Share

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.

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 Preferred Stock, by the weighted average number of shares outstanding during the reported period.

Such add-back would also include any adjustments to equity in the period to accrete the Series A 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 Preferred Stock, restricted stock units, and stock options.

Stock options and restricted stock units exercisable or issuable for a total of 5,476,219 and 5,127,830 shares of Common Stock were outstanding as of March 31, 2024 and 2023, respectively.

These securities are not included in the computation of diluted net loss per common share for the periods presented as their inclusion would be antidilutive due to losses incurred by the Company.

Recent Issued Accounting Guidance

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.

Recently Issued Accounting Guidance

In November 2023, the Financial Accounting Standards Board (FASB) issued ASU No.

2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires an enhanced disclosure of significant segment expenses on an annual and interim basis.

This guidance will be effective for the annual periods beginning the year ended December 31, 2024, and for interim periods beginning January 1, 2025.

Early adoption is permitted.

Upon adoption, the guidance should be applied retrospectively to all prior periods presented in the financial statements.

The Company is currently evaluating segment disclosures related to its annual report for fiscal year 2024.

In December 2023, the FASB issued ASU No.

2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures (ASU 2023-09), which improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the effective tax rate reconciliation and income taxes paid disaggregated by jurisdiction.

It also includes certain other amendments to improve the effectiveness of income tax disclosures.

This guidance will be effective for the annual periods beginning the year ended December 31, 2025.

Early adoption is permitted.

Upon adoption, the guidance can be applied prospectively or retrospectively.

The Company is currently evaluating income tax disclosures related to its annual report for fiscal year 2025.

REVENUE AND PRODUCT COSTS

2 unchanged sentences

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.

8 unchanged sentences

The Company recognizes these contract liabilities as revenue after all revenue recognition criteria are met.

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

The table below details the activity in our contract liabilities during the three months ended March 31, 2024.

Balance at January 1, 2024

1 unchanged sentence

Transfer to revenue

Balance at September 30, 2023

Balance at March 31, 2024

Current portion

Long-term portion

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 the cost of products sold.

As of March 31, 2024, the Company’s deferred revenue of $ 491 consisted of $ 153 related to VR, $ 212 related to Intrensic, $ 7 related to training and $ 119 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 the cost of products sold.

FINANCIAL INSTRUMENTS

5 unchanged sentences

The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

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

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

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 short-term investments consisting of U.S.

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

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 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 short-term investments by significant investment category as of September 30, 2023, and December 31, 2022.

As of September 30, 2023

The following table shows the Company’s short-term investments by significant investment category as of March 31, 2024 and December 31, 2023.

As of March 31, 2024

Money Market Funds

Certificate of Deposits

1 unchanged sentence

As of December 31, 2023

Treasury securities in short-term investments

Money Market Funds

Certificate of Deposits

1 unchanged sentence

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 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.

During the three months ended March 31, 2024 as well as the three months ended March 31, 2023, no gain (loss) was recorded to comprehensive 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,

The subsequent measurement of the warrant liabilities as of March 31, 2024, 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:

Fair value at inception or the beginning of the period

Change in fair value of warrant liabilities

Fair value as of September 30, 2023

Fair value as of March 31, 2024

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,

The following table summarizes the assumptions used to compute the fair value of the Company’s warrants:

Expected stock price volatility

1 unchanged sentence

Dividends yield

Expected life of warrants

Expected life of warrants (years)

Exercise price

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

Our other financial instruments also include accounts receivable, accounts payable, accrued liabilities and customer deposits.

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

Inventory is recorded at the lower of cost or net realizable value.

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

Inventories consisted of the following:

September 30,

Finished goods

Work in process

Raw materials

Reserve for Obsolescence

Inventories - net

PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following:

September 30,

Production and lab equipment

3 unchanged sentences

Property and equipment, net

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.

Depreciation expense was $ 116 and $ 118 for the three months ended March 31, 2024 and 2023, respectively.

INTANGIBLE ASSETS AND GOODWILL

1 unchanged sentence

Intangible assets, net consisted of the following:

September 30,

Amortizable intangible assets:

5 unchanged sentences

Total intangible assets, net

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:

Amortization expense was $ 107 and $ 82 for the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, future amortization expense is as follows:

2024 (9 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

There has been no change to the value of goodwill from December 31, 2023 through the period ended March 31, 2024.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable includes $ 122 and $ 127 due to related party Syzygy Licensing, LLC (“

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

See Note 11 for additional information on this related party.

We are obligated to pay royalties pursuant to an exclusive Amended and Restated Intellectual Property License Agreement (the “License Agreement”), dated as of September 30, 2016, with Syzygy Licensing, LLC (“Syzygy”), a private technology invention, consulting and licensing company owned and controlled by Elwood G.

Norris, a founder and former officer and current 5% stockholder of the Company, and James A.

Barnes, a former officer and stockholder of the Company (see Note 13).

Accounts payable includes $ 61 and $ 14 due to Syzygy as of March 31, 2024 and December 31, 2023, respectively.

Accrued liabilities consist of the following:

September 30,

Patent and legal costs

2 unchanged sentences

Taxes and other

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:

Nine Months Ended

September 30,

Three Months Ended

Balance, beginning of period

Warranty settlements

Release of warranty provision

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.

On June 29, 2023, the Company entered into a Securities Purchase Agreement (the “Series A Purchase Agreement”) with certain directors of the Company and certain accredited and institutional investors (collectively, the “Series A Investors”), pursuant to which it agreed to sell to the Series A Investors in a registered direct offering (the “Series A Offering”) (i) 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 (the “Series A Preferred Stock”), initially convertible into up to 6,896,553 shares of c ommon s tock, at an initial conversion price of $ 1.45 per share (the “Conversion Price”), and (ii) warrants to acquire up to an aggregate of 6,896,553 shares of Common Stock (the “Series A Warrants”).

Each Series A Warrant has an exercise price of $ 1.45 per share, became exercisable after the date that was six months from the date of issuance and will expire 5 years following the date of issuance.

The exercise price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for Common Stock, at a price below the then-applicable exercise price (subject to certain exceptions).

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

The aggregate gross proceeds from the Series A Offering were $ 10,000 , of which $ 7,717 was allocated to the Series A Warrants.

The Company determines if an arrangement is a lease at inception.

The guidance in FASB ASC Topic 842, Leases defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.

Operating lease right of use (“ROU”) assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date.

The Company’s leases do not provide an implicit rate.

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

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

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

On January 21, 2023, the Company’s lease was amended to extend the expiration date to July 31, 2025.

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

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

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

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

Amortization of ROU operating lease assets was $ 71 and $ 26 for the three months ended March 31, 2024, and 2023, respectively.

Operating lease expense for capitalized operating leases included in operating activities was $ 249 and $ 49 for the three months ended March 31, 2024, and 2023, respectively.

Operating lease obligations recorded on the balance sheet at March 31, 2024 are:

Operating lease liability- short term

Operating lease liability - long term

Total Operating Lease Liability

Future lease payments included in the measurement of lease liabilities on the balance sheet at March 31, 2024 for future periods are as follows:

2024 (9 months)

Total future minimum lease payments

Less imputed interest

The weighted average remaining lease term is 6.60 years, and the weighted average discount rate is 14.3 %.

Certain leases contain provisions for payment of real estate taxes, insurance and maintenance costs by the Company.

These expenses are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred.

The Company had $ 9 and $ 14 variable lease expenses during the three months ended March 31, 2024, and 2023, respectively.

The Company had $ 11 and $ 14 short-term lease expense during the three months ended March 31, 2024, and 2023, respectively.

The Company does not have any finance leases.

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 ”).

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.

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”), of which 10,000 are designated as Series A Preferred Stock.

The terms of the Series A Preferred Stock are as set forth in the form of Certificate of Designations of the Series A Preferred Stock (the “Certificate of Designations”), as filed with the Secretary of State of the State of Delaware on July 3, 2023.

The Series A Preferred Stock is convertible into shares of c ommon s tock (the “Conversion Shares”) at the election of the holder at any time at an initial conversion price of $ 1.45 per share.

The Conversion Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of c ommon s tock, or securities convertible, exercisable or exchangeable for c ommon s tock, at a price below the then-applicable Conversion Price (subject to certain exceptions).

The holders of the Series A Preferred Stock are entitled to dividends of 8 % per annum, compounded monthly, which are payable in cash or shares of Common Stock, or a combination thereof, at the Company’s option in accordance with the terms of the Certificate of Designations.

Upon the occurrence and during the continuance of a Triggering Event (as defined in the Certificate of Designations), the Series A Preferred Stock will accrue dividends at the rate of 20 % per annum.

If the Company elects to pay any dividends in shares of Common Stock, the Conversion Price used to calculate the number of shares issuable will be equal to the lower of (i) the then-applicable Conversion Price and (ii) 85% of the arithmetic average of the three (3) lowest closing prices of the Common Stock during the twenty (20) consecutive trading day period ending on the trading day immediately preceding the dividend payment date, provided that such price shall not be lower than the lower of (x) $0.2828 (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events ) and (y) 20% of the “Minimum Price” (as defined in Nasdaq Stock Market Rule 5635) on the date of the Nasdaq Stockholder Approval (as defined herein) (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events) or, in any case, such lower amount as permitted, from time to time, by the Nasdaq Stock Market.

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

The Company may require holders to convert their shares of Series A Preferred Stock into shares of Common Stock if the closing price of the Company’s Common Stock exceeds $ 8.00 per share (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events) for 20 consecutive trading days and the daily dollar trading volume of the Common Stock exceeds $ 2,000,000 per day during the same period, provided that certain equity conditions described in the Certificate of Designations are satisfied.

At any time beginning 18 months from the date of the issuance, provided that that the Company has filed all reports required to be filed by it pursuant to the Securities Exchange Act of 1934, as amended, on a timely basis for a continuous period of one year and provided further that certain equity conditions described in the Certificate of Designations are satisfied, the Company has the right to redeem in cash all or some of the shares of the Series A Preferred Stock outstanding at such time at a redemption price equal to the product of (x) 125% multiplied by (y) the sum of (A) the stated value of the Series A Preferred Stock plus (B) all declared and unpaid dividends on such Series A Preferred Stock and any other unpaid amounts then due and payable hereunder with respect to such Series A Preferred Stock, plus (C) the make-whole amount, plus (D) any accrued and unpaid late charges with respect to such stated value and amounts payable pursuant to clause (B) as of such date of determination.

On August 19, 2024, the Company entered into an Amendment Agreement (the “Series A Amendment”) with the Required Holders (as defined in the Certificate of Designations).

Pursuant to the Series A Amendment, the Required Holders agreed that (A) the unpaid and accrued dividends on the Series A Preferred Stock due July 1, 2024 (the “July Delinquent Dividend Amount”), shall be payable, at the option of the Company, in (i) cash and/or (ii) shares of Common Stock, at a price per share of Common Stock equal to the lower of (x) $1.00 and (y) the Dividend Conversion Price (as defined in the Certificate of Designations), using July 1, 2024, as the applicable date of determination in accordance with the Certificate of Designations; (B) the dividends due on October 1, 2024 (the “October Dividend Amount” and, together with the July Delinquent Dividend Amount, the “Delinquent Dividend Amounts”), shall be payable in shares of Common Stock based on a per share price of Common Stock equal to 80% of the arithmetic average of the three (3) lowest closing sale prices of the Common Stock during the month of September 2024; and (C) such Delinquent Dividend Amounts and any Dividend Balance Shares (as defined in the Certificate of Designations), with respect thereto, if applicable, shall be delivered on October 1, 2024.

The Company and the Required Holders further agreed pursuant to the Series A Amendment to amend (i) the Certificate of Designations, as described below, by filing a Certificate of Amendment to the Certificate of Designations (the “Certificate of Amendment”) and (ii) the Series A Purchase Agreement to amend the definition of “Excluded Securities.”

The Certificate of Amendment amends the Certificate of Designations to, among other things, (A) allow for the payment of dividends in the form of Common Stock to a holder of the Series A Preferred Stock who serves as a director, officer or employee of the Company; provided that such issuance is approved by the Company’s stockholders prior to such issuance, and (B) amend certain conditions required for (i) a mandatory conversion of the Series A Preferred Stock, and (ii) the Company’s right to redeem, all or a portion, of the Series A Preferred Stock outstanding pursuant to an optional redemption, in each case, pursuant to the terms of the Certificate of Designations.

The Certificate of Amendment was filed with the Secretary of State of the State of Delaware on August 23, 2024.

At the time of issuance, $ 2,036 of the net proceeds less transaction cost of the Series A Purchase Agreement was allocated to the 10,000 shares of Series A Preferred Stock initially issued.

During the three months ended December 31, 2023, 102 shares of the Series A Preferred Stock were converted into 76,440 shares of c ommon s tock, and during the three months ended March 31, 2024 an additional 100 shares of Series A Preferred Stock were converted into 74,484 shares of c ommon s tock.

As of March 31, 2024, the Company has authorized and declared $ 189 in dividends of which $ 60 was accrued in accounts payable as of March 31, 2024.

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.

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;

3 unchanged sentences

for a total of 9,000,000 shares subject to 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.

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.

As of March 31, 2024, there were 629,966 shares of Common Stock remaining available for grant under the Plan.

Stock Options

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

The following table summarizes stock option activity for the three months ended March 31, 2024:

Weighted Average

1 unchanged sentence

Forfeited, cancelled, expired

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.

Outstanding March 31, 2024

Exercisable March 31, 2024

As of March 31, 2024, there were 2,845,417 service-based stock options outstanding, and 1,982,564 performance-based stock options outstanding, of which 692,398 performance-based stock options were granted in April 2022 to the Company’s previous Chief Executive Officer and 1,290,166 were granted in October 2023 to the Company's current Chief Executive Officer subject to future market capitalization targets.

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

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

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

Expected stock price volatility

3 unchanged sentences

Weighted-average fair value of options granted

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.

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.

4 unchanged sentences

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.

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.

Stock option expense was $ 484 and $ 313 for the three months ended March 31, 2024 and 2023, 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 nine months ended September 30, 2023:

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 vest.

The following table summarizes RSU activity for the three months ended March 31, 2024:

Service-Based

2 unchanged sentences

Forfeited and cancelled

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.

Unvested at March 31, 2024

The Company used the Monte Carlo Simulation Model to value at the grant date the aggregate of 632,911 market condition performance RSUs granted in January 2024 to the Company’s Chief Executive Officer.

The assumptions used in the Monte Carlo Simulation were stock price on the date of grant of $ 3.40 , a contract term of 10 years, expected volatility of 78 % and risk-free interest rate of 4.10 %.

Vesting is based on sustained market capitalization of $ 1 billion, and the derived service period is 4.3 years.

RSU expense was $ 191 and $ 315 for the three months ended March 31, 2024 and 2023, respectively.

Share-Based Compensation Expense

1 unchanged sentence

Three Months Ended

September 30,

Nine Months Ended

September 30,

Selling, general and administrative

1 unchanged sentence

Total share-based expense

As of September 30, 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.

As of March 31, 2024, total estimated compensation cost of stock options granted and outstanding but not yet vested was $ 4,409 which is expected to be recognized over the weighted average period of 2.58 years.

As of March 31, 2024, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 2,554 which is expected to be recognized over the weighted average period of 5.01 years.

DEFINED CONTRIBUTION PLAN

3 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 nine months ended September 30, 2023, and year ended December 31, 2022, was $ 0 .

The Company’s contributions for each of the three months ended March 31, 2024 and 2023 was $ 0 .

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.

The Company is obligated to pay royalties and development and patent costs pursuant to the 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.

1 unchanged sentence

The agreement provides for royalty payments of 4 % of revenue from products employing the licensed ensnarement device technology up to an aggregate of $ 1,000 in royalties or until September 30, 2026 , whichever occurs earlier.

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

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

The Company recorded $ 46 and $ 24 for royalties during the three months ended March 31, 2024 and 2023, respectively.

The maximum payout still available under this arrangement is $ 35 as of March 31, 2024.

Purchase Commitments

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.

As of March 31, 2024, the Company was committed for approximately $ 933 for future component deliveries that are generally subject to modification or rescheduling in the normal course of business.

Indemnifications and Guarantees

Our officers and directors are indemnified as to personal liability as provided by the Delaware law and the Company’s articles and bylaws.

The Company may also undertake indemnification obligations in the ordinary course of business related to its operations.

The Company is unable to estimate with any reasonable accuracy the liability that may be incurred pursuant to any such indemnification obligations now or in the future.

Because of the uncertainty surrounding these circumstances, the Company’s current or future indemnification obligations could range from immaterial to having a material adverse impact on its financial position and its ability to continue in the ordinary course of business.

The Company has no liabilities recorded for such indemnities.

Regulatory Agencies

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

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.

1 unchanged sentence

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.

As of March 31, 2024, the Company had no provision for liability under existing litigation.

RELATED PARTY TRANSACTIONS

Series A Preferred Stock

On June 29, 2023, the Company entered into the Series A Purchase Agreement with certain investors, including Scot Cohen, the Company’s Chief Executive Officer, and V4 Global LLC (“V4”).

Cohen has voting and dispositive control with respect to the securities and is deemed to be the beneficial owner of the securities held by V4.

Pursuant to the Series A Purchase Agreement, the Company issued Mr.

Cohen and V4 an aggregate of 3,000 shares of Series A Preferred Stock and Series A Warrants to purchase up to an aggregate of 2,068,966 shares of Common Stock for aggregate gross proceeds of $ 3,000 .

For the three months ended March 31, 2024, Mr.

Cohen earned dividends totaling $60 from his Series A Preferred Stock.

Consulting Services

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 $ 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.

Elwood Norris, a former officer, current 5% stockholder and consultant of the Company, $ 1.5 per month on a month-to-month basis for laboratory facility costs which was terminated in January 2024 and $ 7.5 per month on a month-to month basis for invention consulting services, which was terminated in February 2024 for an aggregate of $ 15 and $ 23 during each of the three months ended March 31, 2024 and 2023, respectively.

The Company is obligated to pay royalties and development and patent costs pursuant to the License Agreement dated September 30, 2016, with Syzygy, a company owned and controlled by a 5% stockholder of the Company, Mr.

Elwood Norris, and a former officer of the Company, Mr.

James Barnes.

During the three months ended March 31, 2024 and 2023, the Company incurred royalties to Syzygy of $ 46 and $ 24 , respectively.

See Notes 1, 7 and 13 for additional information on related party transactions and obligations.

MAJOR CUSTOMERS AND RELATED INFORMATION

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.

The following table summarizes revenue by geographic region.

Revenue is attributed to countries based on customer’s delivery location:

For the three months ended March 31, 2024, revenue from one distributor accounted for approximately 68 % of revenue with no other single customer accounting for more than 10% of total revenue.

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

At March 31, 2024, accounts receivable from one distributor accounted for 68 % of net accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

At December 31, 2023, accounts receivable from one distributor accounted for 67 % of net accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

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 Nine Months

Ended September 30,

Ended March 31,

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

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.

On April 5, 2024, the Board of Directors appointed Mr.

Cohen to the position of Interim Principal Financial Officer and Principal Accounting Officer.

On April 24, 2024, the Company received notice from Rosenberg Rich Baker Berman, P.A.

(“RRBB P.A.”) that it had resigned as the Company’s independent registered public accounting firm, effective immediately.

The reports of RRBB P.A.

on the Company’s financial statements for the fiscal years ended December 31, 2022 and 2021, did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

During the fiscal years ended December 31, 2022 and 2021, and the subsequent interim period through April 24, 2024, there were no disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) with RRBB P.A.

on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of RRBB P.A., would have caused RRBB P.A.

to make reference to the subject matter of the disagreements in connection with its reports on the Company’s financial statements for such periods.

Also during this time, there were no “reportable events,” as defined in Item 304(a)(1)(v) of Regulation S-K.

On May 7, 2024, Kevin Mullins notified the Company of his intention to resign from his position as President of the Company, effective May 23, 2024.

Mullins’ resignation was not the result of any disagreement regarding any matter relating to the Company’s operations, policies, or practices.

On May 7, 2024, the Audit Committee of the Board of Directors of the Company engaged HTL International, LLC (“HTL”) as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2023, effective May 7, 2024.

During the fiscal years ended December 31, 2023, 2022 and 2021, and the subsequent interim period from January 1, 2024 through May 7, 2024, neither the Company nor anyone on its behalf has consulted with HTL regarding (i) the application of accounting principles to any specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, and neither a written report nor oral advice was provided to the Company that HTL concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a “disagreement” as defined in Item 304(a)(1)(iv) of Regulation S-K, or a “reportable event” as defined in Item 304(a)(1)(v) of Regulation S-K.

On May 28, 2024, Kevin Mullins tendered his resignation from his role as director of the Company, effective as of May 28, 2024.

Mullins’s resignation from the Board of Directors was not in connection with any disagreement between Mr.

Mullins and the Company, its management, the Board of Directors or any committee of the Board of Directors on any matter relating to the Company’s operations, policies or practices, or any other matter.

Nasdaq Deficiency Notice

On April 18, 2024, the Company received a notice (the “Initial Notice”) from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that as it has not yet filed its Annual Report on Form 10-K (the “2023 Form 10-K”) for the year ended December 31, 2023, the Company is not in compliance with Listing Rule 5250(c)(1) (the “Listing Rule”) for continued listing on the Nasdaq Capital Market.

Additionally, on May 17, 2024, the Company received a notice (the “May Notice") from Nasdaq notifying the Company that as it has not yet filed its Quarterly Report on Form 10-Q (the “Q1 Form 10-Q”) for the three months ended March 31, 2024, that the Company is not in compliance with the Listing Rule.

On August 16, 2024, the Company received a notice (the “August Notice," and collectively with the Initial Notice and the May Notice, the “Notices”) from Nasdaq notifying the Company that as it has not yet filed its Quarterly Report on Form 10-Q (the “Q2 Form 10-Q,” and collectively with the Q1 Form 10-Q, the “Delinquent Filings”) for the three months ended June 30, 2024, that the Company is not in compliance with the Listing Rule for continued listing on the Nasdaq Capital Market.

The Company previously submitted a plan to Nasdaq to regain compliance with respect to the delinquent 2023 Form 10-K and Q1 Form 10-Q (the “Plan”), and Nasdaq granted an exception until August 30, 2024, to file the delinquent 2023 Form 10-K and Q1 Form 10-Q.

On August 28, 2024, the 2023 Form 10-K was filed with the SEC.

Nasdaq granted the Company an additional exception of up to a maximum of 180 calendar days from the filing due date of the 2023 Form 10-K to file the Delinquent Filings, or until October 14, 2024, to regain compliance.

The Notices do not have an immediate effect on the listing of the Company’s c ommon s tock on the Nasdaq Capital Market.

The Company is currently evaluating its options for regaining compliance.

There can be no assurance that the Company will regain compliance with the Nasdaq’s rules or maintain compliance with any of the other Nasdaq continued listing requirements.

Series A Preferred Stock Amendment

On August 19, 2024, the Company entered into the Series A Amendment with the Required Holders.

Pursuant to the Series A Amendment, the Required Holders agreed that (A) the July Delinquent Dividend Amount, shall be payable, at the option of the Company, in (i) cash and/or (ii) shares of Common Stock, at a price per share of Common Stock equal to the lower of (x) $ 1.00 and (y) the Dividend Conversion Price, using July 1, 2024, as the applicable date of determination in accordance with the Certificate of Designations; (B) the October Dividend Amount, shall be payable in shares of Common Stock based on a per share price of Common Stock equal to 80% of the arithmetic average of the three (3) lowest closing sale prices of the Common Stock during the month of September 2024; and (C) such Delinquent Dividend Amounts and any Dividend Balance Shares, with respect thereto, if applicable, shall be delivered on October 1, 2024.

The Company and the Required Holders further agreed pursuant to the Series A Amendment to amend (i) the Certificate of Designations, as described below, by filing the Certificate of Amendment and (ii) the Series A Purchase Agreement to amend the definition of “Excluded Securities.”

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