WRAP TECHNOLOGIES, INC. 10-Q

Item 1. Financial Statements Wrap Technologies, Inc. Condensed Consolidated Balance Sheets (in thousands, except par value and share amounts)       September 30,               2022     December 31,       (Unaudited)     2021   ASSETS                 Current assets:                 Cash and cash equivalents   $ 3,828     $ 4,937   Short-term investments     19,865       29,983   Accounts receivable and contract assets, net     2,222       3,859   Inventories, net     2,962       1,566   Prepaid expenses and other current assets     600       868   Total current assets     29,477       41,213   Property and equipment, net     819       976   Operating lease right-of-use asset, net     311       51   Intangible assets, net     1,900       1,982   Other assets     11       9   Total assets   $ 32,518     $ 44,231                     LIABILITIES AND STOCKHOLDERS' EQUITY                 Current liabilities:                 Accounts payable   $ 945     $ 1,779   Accrued liabilities     991       824   Customer deposits     -       43   Deferred revenue- short term     144       155   Operating lease liability - short term     106       56   Total current liabilities     2,186       2,857                     Long-term liabilities:                 Deferred revenue- long term     156       110   Operating lease liability - long term     221       -   Total long-term liabilities     377       110   Total liabilities     2,563       2,967                     Commitments and contingencies (Note 11)                                   Stockholders' equity:                 Preferred stock - 5,000,000 authorized; par value $ 0.0001 per share; none issued and outstanding     -       -   Common stock - 150,000,000 authorized; par value $ 0.0001 per share; 41,125,578 and 40,851,945 shares issued and outstanding each period, respectively     4       4   Additional paid-in capital     93,736       91,025   Accumulated deficit     ( 63,841 )     ( 49,759 ) Accumulated other comprehensive loss     56       ( 6 ) Total stockholders' equity     29,955       41,264   Total liabilities and stockholders' equity   $ 32,518     $ 44,231     See accompanying notes to unaudited condensed consolidated interim financial statements.     -1- Table of Contents     Wrap Technologies, Inc. Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except share and per share amounts) (unaudited)       Three Months Ended September 30,     Nine Months Ended September 30,       2022     2021     2022     2021   Revenues:                                 Product sales   $ 1,612     $ 1,719     $ 4,042     $ 4,997   Other revenue     89       86       422       283   Total revenues     1,701       1,805       4,464       5,280   Cost of revenues:                                 Products and services     790       1,094       2,430       3,276   Product line exit expense     -       -       -       747   Total cost of revenues     790       1,094       2,430       4,023   Gross profit     911       711       2,034       1,257                                     Operating expenses:                                 Selling, general and administrative     3,586       4,654       11,952       16,210   Research and development     1,236       2,076       4,210       4,303   Total operating expenses     4,822       6,730       16,162       20,513   Loss from operations     ( 3,911 )     ( 6,019 )     ( 14,128 )     ( 19,256 )                                   Other income (expense):                                 Investment income     34       13       36       22   Other     12       15       10       14         46       28       46       36   Net loss   $ ( 3,865 )   $ ( 5,991 )   $ ( 14,082 )   $ ( 19,220 )                                   Net loss per basic and diluted common share   $ ( 0.09 )   $ ( 0.15 )   $ ( 0.34 )   $ ( 0.50 ) Weighted average common shares used to compute net loss per basic and diluted common share     41,086,285       40,413,332       40,955,234       38,767,009                                     Comprehensive loss:                                 Net loss   $ ( 3,865 )   $ ( 5,991 )   $ ( 14,082 )   $ ( 19,220 ) Net unrealized gain (loss) on short-term investments     73       ( 2 )     62       ( 4 ) Comprehensive loss   $ ( 3,792 )   $ ( 5,993 )   $ ( 14,020 )   $ ( 19,224 )   See accompanying notes to unaudited condensed consolidated interim financial statements.   -2- Table of Contents     Wrap Technologies, Inc. Condensed Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) (unaudited)       Three Months Ended September 30, 2022                                       Accumulated                               Additional             Other     Total       Common Stock             Paid-In     Accumulated     Comprehensive     Stockholders'       Shares     Amount     Capital     Deficit     Income     Equity   Balance at July 1, 2022     40,992,161     $ 4     $ 92,856     $ ( 59,976 )   $ ( 17 )   $ 32,867   Common shares issued upon exercise of stock options     5,500       -       8       -       -       8   Share-based compensation expense     -       -       872       -       -       872   Common shares issued upon vesting of restricted stock units     127,917       -       -       -       -       -   Net unrealized gain on short-term investments     -       -       -       -       73       73   Net loss for the period     -       -       -       ( 3,865 )     -       ( 3,865 ) Balance at September 30, 2022     41,125,578     $ 4     $ 93,736     $ ( 63,841 )   $ 56     $ 29,955           Nine Months Ended September 30, 2022                                       Accumulated                               Additional             Other     Total       Common Stock             Paid-In     Accumulated     Comprehensive     Stockholders'       Shares     Amount     Capital     Deficit     Income     Equity   Balance at January 1, 2022     40,851,945     $ 4     $ 91,025     $ ( 49,759 )   $ ( 6 )   $ 41,264   Common shares issued upon exercise of stock options     55,500       -       83       -       -       83   Share-based compensation expense     -       -       2,628       -       -       2,628   Common shares issued upon vesting of restricted stock units     218,133       -       -       -       -       -   Net unrealized gain on short-term investments     -       -       -       -       62       62   Net loss for the period     -       -       -       ( 14,082 )     -       ( 14,082 ) Balance at September 30, 2022     41,125,578     $ 4     $ 93,736     $ ( 63,841 )   $ 56     $ 29,955     -3- Table of Contents       Three Months Ended September 30, 2021                                       Accumulated                               Additional             Other     Total       Common Stock             Paid-In     Accumulated     Comprehensive     Stockholders'       Shares     Amount     Capital     Deficit     Income     Equity   Balance at July 1, 2021     39,911,390     $ 4     $ 87,277     $ ( 38,539 )   $ 13     $ 48,755   Common shares issued upon exercise of stock options     758,338       -       1,399       -       -       1,399   Common shares issued upon vesting of restricted stock units     79,133       -       -       -       -       -   Share-based compensation expense     -       -       1,303       -       -       1,303   Net unrealized loss on short-term investments     -       -       -       -       ( 2 )     ( 2 ) Net loss for the period     -       -       -       ( 5,991 )     -       ( 5,991 ) Balance at September 30, 2021     40,748,861     $ 4     $ 89,979     $ ( 44,530 )   $ 11     $ 45,464           Nine Months Ended September 30, 2021                                       Accumulated                               Additional             Other     Total       Common Stock     Paid-In     Accumulated     Comprehensive     Stockholders'       Shares     Amount     Capital     Deficit     Income     Equity   Balance at January 1, 2021     37,554,162     $ 4     $ 71,705     $ ( 25,310 )   $ 15     $ 46,414   Common shares issued upon exercise of warrants at $ 6.50 per share     1,661,320       -       10,799       -       -       10,799   Common shares issued upon exercise of warrants at $ 8.125 per share     153,692       -       1,249       -       -       1,249   Common shares issued upon exercise of stock options     915,404       -       1,678       -       -       1,678   Common shares issued upon vesting of restricted stock units     421,407       -       -       -       -       -   Common shares issued for services     42,876       -       239       -       -       239   Share-based compensation expense     -       -       4,310       -       -       4,310   Net unrealized loss on short-term investments     -       -       -       -       ( 4 )     ( 4 ) Net loss for the period     -       -       -       ( 19,220 )     -       ( 19,220 ) Balance at September 30, 2021     40,748,861     $ 4     $ 89,979     $ ( 44,530 )   $ 11     $ 45,464     See accompanying notes to unaudited condensed consolidated interim financial statements.   -4- Table of Contents     Wrap Technologies, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)       Nine Months Ended September 30,       2022     2021   Cash Flows From Operating Activities:                 Net loss   $ ( 14,082 )   $ ( 19,220 ) Adjustments to reconcile net loss to net cash used in operating activities:                 Depreciation and amortization     574       336   Product line exit expense     -       747   Gain on sale of assets     -       ( 17 ) Warranty provision     55       23   Software impairment charge     -       170   Change in contingent liability     -       ( 23 ) Non-cash lease expense     75       67   Share-based compensation     2,628       4,310   Common shares issued for services     -       239   Provision for doubtful accounts     61       27   Changes in assets and liabilities:                 Accounts receivable     1,576       ( 1,414 ) Inventories     ( 1,396 )     ( 160 ) Prepaid expenses and other current assets     268       231   Accounts payable     ( 834 )     271   Operating lease liability     ( 65 )     ( 71 ) Customer deposits     ( 43 )     19   Accrued liabilities and other     175       502   Warranty settlement     ( 63 )     10   Deferred revenue     35       224   Net cash used in operating activities     ( 11,036 )     ( 13,729 )                   Cash Flows From Investing Activities:                 Purchase of short-term investments     ( 23,119 )     ( 30,014 ) Proceeds from maturities of short-term investments     33,300       25,000   Capital expenditures for property and equipment     ( 201 )     ( 811 ) Investment in patents and trademarks     ( 133 )     ( 129 ) Purchase of intangible assets     -       ( 561 ) Proceeds from long-term deposits     ( 3 )     4   Net cash provided by (used in) investing activities     9,844       ( 6,511 )                   Cash Flows From Financing Activities:                 Proceeds from exercise of warrants     -       12,048   Proceeds from exercise of stock options     83       1,678   Repayment of debt     -       ( 275 ) Net cash provided by financing activities     83       13,451                     Net decrease in cash and cash equivalents     ( 1,109 )     ( 6,789 ) Cash and cash equivalents, beginning of period     4,937       16,647   Cash and cash equivalents, end of period   $ 3,828     $ 9,858                     Supplemental Disclosure of Non-Cash Investing and Financing Activities:                 Change in unrealized gain on short-term investments   $ 62     $ ( 2 ) Right-of-use asset and liability recorded during period   $ 260     $ ( 66 )   See accompanying notes to unaudited condensed consolidated interim financial statements.   -5- Table of Contents   Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts)     1.                 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Organization and Business Description   Wrap Technologies, Inc., a Delaware corporation (the “ Company ”, “ we ”, “ us ”, and “ our ”), is a publicly traded company with our Common Stock, par value $ 0.0001 per share (“ Common Stock ”), listed on the Nasdaq Capital Market (“ Nasdaq ”) under the trading symbol “WRAP”. The Company is a developer and supplier of public safety products and training services for law enforcement and security personnel. The Company’s primary product is the BolaWrap® remote restraint device. The principal markets for the Company’s proprietary products and services are in North and South America, Europe, Middle East and Asia.   Basis of Presentation   The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and the rules and regulations of the Securities and Exchange Commission (“ SEC ”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“ U.S. GAAP ”) have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying financial statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “ Annual Report ”), as filed with the SEC on March 10, 2022. The accompanying condensed consolidated balance sheet at December 31, 2021, has been derived from the audited consolidated balance sheet at December 31, 2021, contained in the Annual Report. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.   Where necessary, the prior year’s information has been reclassified to conform to the current year presentation.   Principles of Consolidation   The Company has one wholly-owned subsidiary, Wrap Reality, Inc. formed in December 2020 that sells a virtual reality (“ VR ”) training system primarily targeting law enforcement agencies. The consolidated financial statements include the accounts of this subsidiary after elimination of intercompany transactions and accounts.   Use of Estimates   The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions (e.g., stock-based compensation valuation, allowance for doubtful accounts, valuation of inventory and intangible assets, warranty reserve, accrued expense and recognition and measurement of contingencies) that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of revenue and expense during the reporting period. Actual results could materially differ from those estimates.   Loss per Share   Basic loss per common share is computed by dividing net loss for the period by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss per Common Share reflects the potential dilution of securities that could share in the earnings of an entity. The Company’s losses for the periods presented cause the inclusion of potential Common Stock instruments outstanding to be antidilutive. Stock options and restricted stock units exercisable or issuable for a total of 6,396,277 shares of Common Stock were outstanding at September 30, 2022. These securities are not included in the computation of diluted net loss per common share for the periods presented as their inclusion would be antidilutive due to losses incurred by the Company.   -6- Table of Contents   Recent Issued Accounting Guidance   In October 2021 , the Financial Accounting Standards Board (“ FASB ”) issued Accounting Standards Update (“ ASU ”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ ASU 2021-08 ”), to require that an acquirer recognize, and measure contract assets and contract liabilities acquired in a business combination in accordance with FASB Accounting Standards Codification (“ ASC ”) Topic 606 , Revenue from Contracts with Customers (“ Topic 606 ”). At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The amendments in ASU 2021-08 should be applied prospectively and are effective for fiscal years beginning after December 15, 2022 , including interim periods within those fiscal years. We do not expect the adoption of ASU 2021-08 to have a material impact on our consolidated financial statements and related disclosures.   The Company has reviewed other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoptions of any such pronouncements will be expected to cause a material impact on its financial condition or the results of operations.     2.           REVENUE AND PRODUCT COSTS   On January 1, 2018, the Company adopted Topic 606 and, as it had no prior revenue or contracts with customers, there was no transition required nor any impact on prior results. Topic 606 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.   The Company enters into contracts that include various combinations of products, accessories, software and services, each of which are generally distinct and are accounted for as separate performance obligations. Product sales includes BolaWrap products and accessories. Other revenue includes VR revenues, service, training and shipping revenues.   A performance obligation is a promise in a contract to transfer a distinct good or service to a customer and is the unit of account in Topic 606 .  For contracts with a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts with multiple performance obligations, the Company allocates the contract transaction price to each performance obligation using the Company’s estimate of the standalone selling price (“ SSP ” or “ SSPs ”) of each distinct good or service in a contract. The Company determines SSPs based on the relative SSP. If the SSP is not observable through past transactions, the Company estimates the SSP considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations.   Most of the Company’s products and accessories are sold through domestic and international distributors. Performance obligations to deliver products and accessories are generally satisfied at the point in time the Company ships the product, as this is when the customer obtains control of the asset under our standard terms and conditions. Periodically, certain customers request bill and hold transactions for future delivery as scheduled and designated by them. In such cases, revenue is not recognized until after control, title and risk of ownership has transferred which is generally when the customer has requested such transaction under normal billing and payment terms and has been notified that the product (i) has been completed according to customer specifications, (ii) has passed quality control inspections, and (iii) has been tagged and packed for shipment, separated from other inventory and ready for physical transfer to the customer. The value associated with custodial storage services is deemed immaterial in the context of such contracts and in total, and accordingly, none of the transaction price is allocated to such service.   The Company has elected to recognize shipping costs as an expense in cost of revenue when control has transferred to the customer.   Time-based VR system contracts generally include setup, training and the use of software and hardware for a fixed term, generally one to five years and support and upgrade services during the same period. The Company does not sell time-based arrangements without setup, training and support services and therefore revenues for the entire arrangement are recognized on a straight-line basis over the term. When hardware is bundled and not sold separately the Company allocates the contract transaction price to each performance obligation using the SSP of each distinct good and service in the contract.   -7- Table of Contents   The timing of revenue recognition may differ from the timing of invoicing to customers. The Company generally has an unconditional right to consideration when customers are invoiced, and a receivable is recorded. A contract asset is recognized when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing. The Company may receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. The Company records customer deposits as a contract liability. Additionally, the Company may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, a deferred revenue liability is recorded. The Company recognizes these contract liabilities as revenue after all revenue recognition criteria are met. The table below details the activity in our contract liabilities during the nine months ended September 30, 2022.       Customer     Deferred       Deposits     Revenue   Balance at January 1, 2022   $ 43     $ 265   Additions, net     -       171   Transfer to revenue     ( 43 )     ( 136 ) Balance at September 30, 2022   $ -     $ 300   Current portion   $ -     $ 144   Long-term portion   $ -     $ 156     At September 30, 2022, the Company’s deferred revenue of $ 300  consisted of $ 177 related to VR training and $ 123 related to BolaWrap extended warranties and services. At December 31, 2021, the Company’s deferred revenue of $ 265 consisted of $ 172  related to VR training and $ 67  related to extended warranties and services.    The Company recognizes an asset if there are incremental costs of obtaining a contract with a customer such as commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for any such underlying performance obligations. The Company had  no  such assets at September 30, 2022, and December 31 2021 .  The Company will apply the practical expedient to expense any sales commissions related to performance obligations with an amortization of one year or less when incurred within selling, general and administrative expense.   Estimated costs for the Company’s standard warranty, generally one-year, are charged to cost of products sold when revenue is recorded for the related product. Royalties are also charged to cost of products sold.     3.           FAIR VALUE MEASUREMENTS   Assets and liabilities recorded at fair value on a recurring basis in the Condensed Consolidated Balance Sheets and assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance also establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:    Level 1 —Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;   Level 2 —Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and    -8- Table of Contents   Level 3 —Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.   The Company’s cash equivalent Money Market Funds and short-term investments consisting of U.S. Treasury bill securities are classified as Level I because they are valued using quoted market prices.   The following table shows the Company’s cash and cash equivalents, Money Market Funds and short-term investments by significant investment category as of September 30, 2022, and December 31, 2021.       As of September 30, 2022       Adjusted     Unrealized     Unrealized     Market       Cost     Gains     Losses     Value   Level 1:                                 Money Market Funds   $ 3,382     $ -     $ -     $ 3,382   U.S. Treasury securities in short-term investments     19,803       62       -       19,865   Total Financial Assets   $ 23,185     $ 62     $ -     $ 23,247         As of December 31, 2021       Adjusted     Unrealized     Unrealized     Market       Cost     Gains     Losses     Value   Level 1:                                 Money Market Funds   $ 1,670     $ -     $ -     $ 1,670   U.S. Treasury securities in short-term investments     29,989       -       ( 6 )     29,983   Total Financial Assets   $ 31,659     $ -     $ ( 6 )   $ 31,653     Unrealized gains or losses resulting from our short-term investments are recorded in accumulated other comprehensive gain or loss. During the three and nine months ended September 30, 2022, a $ 73 gain and $ 62 gain was recorded to accumulated other comprehensive gain (loss), respectively. During the three and nine months ended September 30, 2021, a $ 2 loss and a $ 4 loss was recorded to accumulated other comprehensive loss, respectively   Our financial instruments also include accounts receivable, accounts payable, accrued liabilities and business acquisition liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.     4.           INVENTORIES, NET   Inventory is recorded at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the FIFO cost method. Inventories consisted of the following:       September 30,     December 31,       2022     2021   Finished goods   $ 1,974     $ 1,027   Work in process     -       2   Raw materials     988       537   Inventories, net   $ 2,962     $ 1,566     -9- Table of Contents     5.           PROPERTY AND EQUIPMENT, NET   Property and equipment consisted of the following:       September 30,     December 31,       2022     2021   Production and lab equipment   $ 500     $ 500   Tooling     424       273   Computer equipment     513       467   Furniture, fixtures and improvements     181       176         1,618       1,416   Accumulated depreciation     ( 799 )     ( 440 ) Property and equipment, net   $ 819     $ 976     Depreciation expense was $ 121 and $ 359  for the three and nine months ended September 30, 2022 and was $ 69 and $ 191  for the three and nine months ended September 30, 2021, respectively.     6.           INTANGIBLE ASSETS, NET   Intangible assets consisted of the following:       September 30,     December 31,       2022     2021   Amortizable intangible assets:                 Patents   $ 540     $ 416   Trademarks     143       134   Purchased software     1,212       1,212   Other     50       50         1,945       1,812   Accumulated amortization     ( 389 )     ( 174 ) Total amortizable     1,556       1,638   Indefinite life assets (non-amortizable)     344       344   Total intangible assets, net   $ 1,900     $ 1,982     Amortization expense was $ 72 and $ 215  for the three and nine months ended September 30, 2022 and was $ 48 and $ 145  for the three and nine months ended September 30, 2021, respectively.   At September 30, 2022, future amortization expense is as follows:   2022 (3 months)   $ 72   2023     284   2024     284   2025     280   2026     192   Thereafter     444   Total estimated amortization expense   $ 1,556       7.           ACCOUNTS PAYABLE AND ACCRUED LIABILITIES   Accounts payable includes $ 61 and $ 228 due to related party Syzygy Licensing, LLC (“ Syzygy ”) as of September 30, 2022, and December 31, 2021, respectively. See Notes 10, 11, and 12 for additional related party information.   Accrued liabilities consist of the following:       September 30,     December 31,       2022     2021   Patent and legal costs   $ 131     $ 28   Accrued compensation     759       628   Warranty costs     88       96   Taxes and other     13       72       $ 991     $ 824     -10- Table of Contents   Accrued compensation includes $ 25 of future severance payments for the Company’s former Chief Executive Officer payable through October 2022.   Changes in our estimated product warranty costs were as follows:       Nine months Ended September 30,       2022     2021   Balance, beginning of period   $ 96     $ 48   Warranty settlements     ( 63 )     ( 16 ) Warranty provision     55       42   Balance, end of period   $ 88     $ 74       8.           LEASES   The Company determines if an arrangement is a lease at inception. The guidance in FASB ASC Topic 842, Leases  defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Operating lease right of use ( “ ROU ”) assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. The Company’s leases do not provide an implicit rate. Due to a lack of financing history or ability, the Company uses an estimate of low-grade debt rate published by the Federal Reserve Bank as its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The ROU asset includes any lease payments made and excludes lease incentives and initial direct costs incurred.   For leases beginning on or after January 1, 2019 ,  lease components are accounted for separately from non-lease components for all asset classes. On January 21, 2022, the Company’s lease was amended to extend the expiration date to July 31, 2025. Upon execution of the amendment, which was deemed a lease modification, the Company reassessed the lease liability using the discount rate determined at the modification date and recorded an additional ROU asset for the same amount. The Company’s lease contains renewal provisions and escalating rental clauses and generally require the Company to pay utilities, insurance, taxes and other operating expenses. The renewal provisions of the existing lease agreement was not included in the determination of the operating lease liabilities and the ROU assets. The Company also reassessed the lease classification and concluded that the lease continues to be an operating lease.   Amortization of ROU operating lease assets was $ 26 and $ 75  for the three and nine months ended September 30, 2022 and was $ 21  and $ 67  for the three and nine months ended September 30, 2021, respectively.   Operating lease expense for capitalized operating leases included in operating activities was $ 30  and $ 88  for the three and nine months ended September 30, 2022 and was $ 23  and $ 73  for the three and nine months ended September 30, 2021, respectively.    Operating lease obligations recorded on the balance sheet at September 30, 2022, are:   Operating lease liability- short term   $ 106   Operating lease liability - long term     221   Total Operating Lease Liability   $ 327     -11- Table of Contents   Future lease payments included in the measurement of lease liabilities on the balance sheet at September 30, 2022, for future periods are as follows:   2022 (3 months)   $ 31   2023     121   2024     125   2025     75   Total future minimum lease payments     352   Less imputed interest     ( 25 ) Total   $ 327     The weighted average remaining lease term is 2.83 years, and the weighted average discount rate is 5.0 %.   The Company had $ 3 and $ 0 short-term lease expense during the nine months ended September 30, 2022, and 2021. The Company does not have any finance leases.     9.           STOCKHOLDERS' EQUITY   The Company’s authorized capital consists of 150,000,000 shares of Common Stock, par value $ 0.0001 per share, and 5,000,000 shares of preferred stock, par value $ 0.0001 per share (“ Preferred Stock ”).   At December 31, 2021 the Company had outstanding Common Stock purchase warrants exercisable for 1,391,667 shares that expired on June 1, 2022, and had no purchase warrants outstanding at September 30, 2022.     10.           SHARE-BASED COMPENSATION   On March 31, 2017 ,  the Company adopted, and the stockholders approved, the 2017 Stock Incentive Plan (the “ Plan ”) authorizing  2,000,000  shares of Common Stock for issuance as awards to employees, directors or consultants. In May 2019 ,  the stockholders ratified an increase in the Plan authorizing an additional  2,100,000  shares of Common Stock, in June 2020 ratified an additional  1,900,000  shares of Common Stock, in June 2021 ratified an additional  1,500,000  shares of Common Stock and in June 2022 ratified an additional  1,500,000  shares of Common Stock, for a total of  9,000,000  shares subject to the Plan. At September 30, 2022, there were 1,624,160 shares of Common Stock remaining available for grant under the Plan.   The Company generally recognizes share-based compensation expense on the grant date and over the period of vesting or period that services will be provided. In January 2022 the Company recognized severance acceleration of $ 242 of share-based compensation expense resulting from the resignation of the Company’s Chief Executive Officer as part of a management transition plan.   Stock Options   The following table summarizes stock option activity for the nine months ended September 30, 2022:               Weighted Average               Options on             Remaining     Aggregate       Common     Exercise     Contractual     Intrinsic       Shares     Price     Term     Value   Outstanding January 1, 2022     3,935,883     $ 5.24       4.79           Granted     2,734,639     $ 2.85                   Exercised     ( 55,500 )   $ 1.50                   Forfeited, cancelled, expired     ( 978,709 )   $ 5.48                   Outstanding September 30, 2022     5,636,313     $ 3.74       6.01     $ 232,778   Exercisable September 30, 2022     2,507,744     $ 4.47       2.14     $ 232,778     At September 30, 2022, there were 4,022,083 service-based stock options outstanding, and 1,614,230 performance-based stock options outstanding, which performance-based stock options were granted in April 2022 to the Company’s Chief Executive Officer and President, subject to future market capitalization targets. 1,049,145 of the 4,013,885 stock options granted included in the table above were granted in April 2022 outside the Plan as an employment inducement grant, but are subject to the terms and conditions of the Plan.   -12- Table of Contents   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,       2022     2021   Expected stock price volatility     49 %     50 % Risk-free interest rate     1.17 %     0.90 % Expected dividend yield     0 %     0 % Expected life of options - years     3.46       5.74   Weighted-average fair value of options granted   $ 1.25     $ 2.57     Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of awards. The Company’s estimated volatility was based on an average of the historical volatility of peer entities whose stock prices were publicly available. The Company’s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price. The Company records forfeitures as they are incurred.   The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options. The dividend yield of  zero  is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. The Company calculates the expected life of the options using the Simplified Method for the employee stock options as the Company does not have sufficient historical exercise data.   The Company used the Monte Carlo Simulation Model to value at the grant date the aggregate of 1,614,230 market condition performance options granted in April 2022 to the Company’s newly appointed Chief Executive Officer and a newly appointed President. The assumptions used in the Monte Carlo Simulation were stock price on date of grant of $ 2.89 , contract term of  10  years, expected volatility of  49 % and risk-free interest rate of 2.9 %. Vesting is based on sustained market capitalization of $ 250 million, $ 500 million and $ 1 billion and resulted in implied service periods ranging from approximately 4 to 7 years.   Stock option expense was $ 308 and $ 1,448 for the three and nine months ended September 30, 2022 and was $ 1.302 and $ 4,310 for the three and nine months ended September 30, 2021, respectively.   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, 2022:               Weighted Average     Weighted Average       Service-Based     Grant Date     Vesting       RSU's     Fair Value     Period (Years)   Unvested at January 1, 2022     269,303     $ 6.47           Granted - service based     753,817     $ 2.57           Vested     ( 218,133 )   $ 4.93           Forfeited and cancelled     ( 60,023 )   $ 6.57           Unvested at September 30, 2022     744,964     $ 2.97       2.32     A total of 175,173 RSUs included in the table above were granted in April 2022 outside the Plan as an employment inducement grant but are subject to the terms and conditions of the Plan.   -13- Table of Contents   RSU expense was $ 564 and $ 1,180 for the three and nine months ended September 30, 2022 and was $ 467 and $ 2,245 for the three and nine months ended September 30, 2021, respectively.   Share-Based Compensation Expense   The Company recorded share-based compensation for options and RSUs in its statements of operations for the relevant periods as follows:       Three Months Ended September 30,     Nine months Ended September 30,       2022     2021     2022     2021   Selling, general and administrative   $ 700     $ 1,093     $ 2,180     $ 3,722   Research and development     172       210       448       588   Total share-based expense   $ 872     $ 1,303     $ 2,628     $ 4,310     As of September 30, 2022, total estimated compensation expense of stock options granted and outstanding but not yet vested was $ 3,820 which is expected to be recognized over the weighted average period of 3.5 years. As of September 30, 2022, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 1,828 which is expected to be recognized over the weighted average period of 2.3 years.     11.            COMMITMENTS AND CONTINGENCIES   Facility Lease   See Note 8.   Related Party Technology License Agreement   The Company is obligated to pay royalties and development and patent costs pursuant to an exclusive Amended and Restated Intellectual Property License Agreement dated as of September 30, 2016, with Syzygy, a company owned and controlled by stockholder/consultant Mr. Elwood Norris and stockholder/consultant Mr. James Barnes. The agreement provides for royalty payments of  4 % of revenue from products employing the licensed ensnarement device technology up to an aggregate of $ 1,000 in royalties or until September 30, 2026 ,  whichever occurs earlier. The Company recorded $ 61  and $ 147  for royalties during the three and nine months ended September 30, 2022 and $ 65  and $ 185  incurred for the three and nine months ended September 30, 2021, respectively.   Purchase Commitments   At September 30, 2022, the Company was committed for approximately $ 4,376 for future component deliveries that are generally subject to modification or rescheduling in the normal course of business.     12.           RELATED PARTY TRANSACTIONS   Commencing in October 2017 the Company began reimbursing Mr. Elwood Norris, a former officer and current stockholder and consultant of the Company, $ 1.5 per month on a month-to-month basis for laboratory facility expense, for an aggregate of $ 13.5 during the nine months ended September 30, 2022, and 2021, respectively.   See Notes 7, 10 and 11 for additional information on related party transactions and obligations.     13.           MAJOR CUSTOMERS AND RELATED INFORMATION   For the three months ended September 30, 2022, revenues from one distributor accounted for approximately 59 %, of revenues with no other single customer accounting for more than 10% of total revenues. For the three months ended September 30, 2021, revenues from two distributors accounted for approximately 41 % and 29 % of revenues with no other single customer accounting for more than 10% of total revenues.   -14- Table of Contents   For the nine months ended September 30, 2022, revenues from one distributor accounted for approximately 39 % of revenues with no other single customer accounting for more than 10% of total revenues. For the nine months ended September 30, 2021, revenues from two distributors accounted for approximately 27 % and 21 % of revenues with no other single customer accounting for more than 10% of total revenues.   At September 30, 2022, accounts receivable from two distributors accounted for 42 % and 15 % of accounts receivable with no other single customer accounting for more than 10% of the accounts receivable balance. Three distributors accounted for 48 %, 16 % and 15 % of accounts receivable at December 31, 2021 with no other single customer accounting for more than 10% of the accounts receivable balance.   The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’s delivery location:       For the Three Months     For the Nine months       Ended September 30,     Ended September 30,       2022     2021     2022     2021   Americas   $ 1,478     $ 1,088     $ 3,484     $ 2,837   Europe, Middle East and Africa     220       745       435       2,424   Asia Pacific     3       ( 28 )     545       19   Total revenues   $ 1,701     $ 1,805     $ 4,464     $ 5,280       14.           SUBSEQUENT EVENTS   On October 11, 2022, the company received an order from an international government agency for the purchase of over 2,000 BolaWrap devices, cassettes and other accessories totaling over $ 1.5  million. This order will be recorded in the fourth quarter 2022.   The Company evaluated subsequent events for their potential impact on the financial statements and disclosures through the date the financial statements were available to be issued, and determined that, except as disclosed herein, no subsequent events occurred that were reasonably expected to impact the financial statements presented herein.   -15- Table of Contents