We have a history of operating losses and expect to incur additional losses until we achieve sufficient revenue and resulting margins to offset our operating costs. Our net loss for the years ended December 31, 20202022 and 20192021 was $12,580,209$17.6 million and $8,325,488,$24.4 million, respectively. Our reduction in net losses in 2022 was primarily attributable to a new strategic roadmap with tighter cost controls and reduced operating expenses. Our ability to achieve future profitability is dependent on a variety of factors, many of which are outside of our control. Failure to achieve profitability or sustain profitability, if achieved, may require us to raise additional financing, which could have a material negative impact on the market value of our Common Stock.

We may need additional capital to execute our business plan, and raising additional capital, if possible, by issuing additional equity securities may cause dilution to existing stockholders. In addition, raising additional capital by issuing additional debt instruments may restrict our operations.

Although we believe we have adequate financial resources to fund our operations and capital needs for at least the next twelve months, and that we may be able to generate funds from product sales during that time, existing working capital may not be sufficient to achieve profitable operations due to product introduction costs, operating losses and other factors. Principal factors affecting the availability of internally generated funds include:

In the event we are required to raise additional capital through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be diluted significantly, and such newly issued securities may have rights, preferences or privileges senior to those of our existing stockholders. In addition, the issuance of any equity securities could be at a discount to the market price.

If we incur debt financing, the payment of principal and interest on such indebtedness may limit funds available for our business activities, and we could be subject to covenants that restrict our ability to operate our business and make distributions to our stockholders. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of our assets, as well as prohibitions on our ability to create liens, pay dividends, redeem stock or make investments. There is no assurance that any equity or debt financing transaction will be available on acceptable terms, if at all.

We expect to be dependent on sales of our BolaWrap product line for the foreseeable future, and if this product is not widely accepted, our growth prospects will be diminished.

We expect to depend on sales of the BolaWrap product line and related cassettes for the foreseeable future. A lack of demand for this product, or its failure to achieve broader market acceptance, would significantly harm our growth prospects, operating results and financial condition. To execute our business plan successfully, we will need to execute on the following objectives, either on our own or with strategic collaborators:

We face risks commercializing our virtual reality training platform and may be unsuccessful in growing revenues.

We continue to invest substantial funds in further developing and commercializing our Wrap Reality product line which is highly competitive. The commercial launch of the Wrap Reality Virtual Training product is in the early stages in a new marketplace for 3D Virtual Reality training that competes with a legacy 2D virtual training environment. We expect 2D virtual training companies to either try to buy out companies like ours or choose to have to build 3D Virtual reality to compete with us. As one of the only companies with both on premise 3D Virtual Reality and later in 2023 full cloud 3D Virtual Reality we plan to compete on both fronts, our ability to commercialize this 3D Virtual Reality product line may be influenced by many factors, including:

We are materially dependent on the acceptance of our product by the law enforcement market. If law enforcement agencies do not purchase our product or we do not meet their expectations, our revenue will be adversely affected and we may not be able to expand into other markets, or otherwise continue as a going concern.

A substantial number of law enforcement agencies may not purchase our remote restraint product. In addition, if our product is not widely accepted by the law enforcement market or we do not meet their expectations, we may not be able to expand sales of our product into other markets. Law enforcement agencies may be influenced by claims or perceptions that our product is not effective or may be used in an abusive manner. Our reputation could be damaged if we do not meet customer expectations for performance, value and quality. Sales of our product to agencies may be delayed or limited by such claims or perceptions or to any negative publicity or damage to our reputation. We now receive earned media that is often positive and helps our sales and growth and having negative earned media will create the opposite effect.

We may incur significant and unpredictable warranty costs as our products are produced, sold, and used.

We warrant our products to be free from defects in materials and workmanship for a period of up to one year from the date of purchase. Additional one-year warranties can be purchased by the customer. We may incur substantial and unpredictable warranty costs from post-production product or component failures. Future warranty costs could further adversely affect our financial position, results of operations and business prospects.

We could incur charges for excess or obsolete inventory and incur production costs for improvements or model changes.

While we strive to effectively manage our inventory, rapidly changing technology, and uneven customer demand may result in short product cycles and the value of our inventory may be adversely affected by changes in technology that affect our ability to sell the products in our inventory. If we do not effectively forecast and manage our inventory, we may need to write off inventory as excess or obsolete, which in turn can adversely affect cost of sales and gross profit.

We have experienced, and may in the future experience, improvement and model changes and unusual production costs associated with implementing production for our products. We currently have no reserve for slow moving or obsolete inventory but may incur future charges for obsolete or excess inventory.

Our international operations could be harmed by factors includingnatural disasters, fluctuations in currency exchange rates, and changes in regulations that govern international transactions.

We sell our products worldwide and have exported to multiple countries. We expect exports to continue to be a significant part of our future business. The risks inherent in international trade may reduce our international sales or impede growth and harm our business and the businesses of our customers and our suppliers. These risks include, among other things:

These and other risks may preclude or curtail international sales or increase the relative price of our products compared to those manufactured in other countries, reducing the demand for our products. Failure to comply with US and international governmental laws and regulations applicable to international business, such as the Foreign Corrupt Practices Act or US export control regulations, could have an adverse impact on our business with the US and international governments.

Global economic weakness and uncertainty, geopolitical conflict, war, and civil unrest, could adversely affect our revenues, gross margins and expenses.

Our business may be impacted by global economic conditions, which have been volatile in recent years. Geopolitical conflict, such as the recent conflict in Ukraine, and related international economic sanctions and their impact may exacerbate this volatility. Specifically, our revenues and gross margins depend significantly on global economic conditions and the demand by foreign governments and agencies for the BolaWrap and Wrap Reality in many of our target markets. Economic weakness and uncertainty in these markets have resulted, and may result in the future, in decreased revenue attributable to these markets, gross margin, earnings or business interruptions related to the COVID-19 pandemic or othergrowth rates, and difficulty managing inventory levels. Sustained uncertainty about global economic conditions and geopolitical events may negativelyadversely affect demand for the BolaWrap and could cause demand to differ materially from our expectations as foreign governments and agencies curtail or delay spending. Economic weakness and uncertainty also make it more difficult for us to make accurate forecasts of revenues, gross margins and expenses.

The continued impact of COVID-19 and uncertain market conditions may continue to adversely affect our business, financial conditionscondition and results of operations.

Substantially all of our employees are located in the U.S.US. In addition to our employees, we rely on (i) distributors, agents, and third-party logistics providers in connection with product sales and distribution and (ii) raw material and component suppliers in the U.S.,US, Canada, Europe and China.Asia. If we, or any of these third-party partners encounter any disruptions to our or their respective operations or facilities, or if we or any of these third-party partners were to shut down for any reason, including by pandemic, fire, natural disaster, such as a hurricane, tornado or severe storm, power outage, systems failure, labor dispute, or other unforeseen disruption, then we or they may be prevented or delayed from effectively operating our or their business, respectively.

We intend to continue to expand our sales marketing and training programsmarketing and our manufacturing capability. Rapid expansion may strain our managerial,staffing, financial and other resources. If we are unable to manage our growth, our business, operating results, and financial condition could be adversely affected. Our systems, procedures, controls, and management resources also may not be adequate to support our future operations.growing operations and we have started to upgrade them and will continue to do so in 2023. We will needare working to continually improve our operational, financial, and other internal systems to manage our growth effectively, and any failure to do so may lead to inefficiencies and redundancies, and result in reduced growth prospects and profitability.

revenue we expect.

Generally, law enforcement agencies consider a wide range of issues before committing to purchase a product, including product benefits, training time and costs, the cost to use our product in addition to, or in place of, other use of forceless lethal products even though they are likely more dangerous, time in market, product reliability and budget constraints. The length of our sales cycle may range from 30 days to a year or more. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our product by potential customers before they place an order if they place an order at all. If these potential customers do not purchase our product, we will have expended significant resources without corresponding revenue.

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Most of our intended end-users are subject to budgetary and political constraints that may delay or prevent sales.

Most of our and our distributors intended end-user customers are government agencies.agencies at all levels. These agencies often do not set their own budgets and therefore have little control over the amount of money they can spend. In addition, these agencies experience political pressure that may dictate the manner in whichway they spend money. As a result, even if an agency wants to acquire our product, it may be unable to purchase our product due to budgetary or political constraints. Some government agency orders may also be canceled or substantially delayed due to budgetary, political, or other scheduling delays, which frequently occur in connection with the acquisition of products by such agencies.

Our dependence on third-party suppliers for key components of our productproducts makes us vulnerable to price increases, inflation, recession, and supply shortages that could delay shipment of our products and reduce our sales.

sales or margins.

We depend on certain domestic and foreign suppliers for the delivery of components used in the assembly of our product. Approximately 70% of our supply chain is from domestic US suppliers. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or sub-assemblies and reduced control over pricing and timing of delivery of components and subassemblies. Specifically, we will depend on suppliers of sub-assemblies, machined parts,electronic components, injection molded plastic parts, and other miscellaneous custom parts for our product. product, some from sole source suppliers. In late 2022 we started to drive more diversity into our supply chain, and we plan to continue to build multiple suppliers for critical parts to reduce our dependence on a small number of suppliers. We are still subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities or changes for bugs or enhancements. Delays in our suppliers’ abilities, especially any sole suppliers, to provide us with necessary materials and components may delay production or may require us to seek alternative supply sources. Any delay in receiving supplies could impair our ability to deliver products to our customers and, accordingly, could have a material adverse effect on our business, results of operations and financial condition.

We have recently experienced, and in the future are likely to experience, disruption of the supply of some of our parts, components, and assemblies that we obtain from suppliers. For example, the rapid increase in global demand as the COVID-19 pandemic wanes has caused, and is expected to continue to cause, significant stress on global supply chains. As economies around the world have reopened, sharp increases in demand have created significant disruptions to the global supply chain, which have affected our ability to source and receive certain goods on a timely basis and at anticipated costs. Increases in input costs and freight due to price inflation and global supply chain disruptions may adversely affect our financial performance.

We do not have any long-term supply agreements with any suppliers. We actively monitor and mitigate supply chain risk, but there can be no assurance that our mitigation plans will be effective to prevent disruptions that may arise from shortages of materials that we use in the production of our products. Any interruption of supply for any material components of our products could significantly delay theproduction and shipment of our products and have a material adverse effect on our revenue, profitability, and financial condition.

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We may not be able to successfully integrate acquisitions in the future, and we may not be able to realize, revenue enhancements or other synergies from such acquisitions.

On December 14, 2020,November 30, 2022, we acquired substantially all of the virtual reality systemrights to certain software assets and businessservices to drive the rapid enhancement of NSENA. Ourour Wrap Reality Cloud platform. We believe this acquisition should help speed up our path to marketing with 3D Virtual Reality in the cloud in addition to our robust 3D Virtual Reality on premise. However, our ability to successfully implement our business plan and achieve targeted financial results and other benefits including, among other things, greater market presence and development, and enhancements to our product portfolio and customer base, is dependent on our ability to successfully identify, consummate and integrate acquisitions including NSENA as well as other businesses we may acquire in the future. We may not realize the intended benefits of the NSENA acquisition or the acquisition of other businesses in the future as rapidly as, or to the extent, anticipated by our management. There can be no assurance that we will be able to successfully integrate the NSENA business or any other acquired businesses, products or technologies without substantial expenses, delaysexpense, delay or other operational or financial problems. Acquisitions including our acquisition of NSENA, involve a number ofseveral risks, some or all of which could have a material adverse effect on our acquired businesses, products or

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technologies. Furthermore, there can be no assurance that the NSENA business or any other acquired business, product, or technology will be profitable or achieve anticipated revenues and income. Our failure to manage our acquisition and integration strategy successfully could have a material adverse effect on our business, results of operations and financial condition. The process of integrating an acquired business involves risks, including but not limited to:

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Demands on management related to changes in the size and possible locations of our businesses and employees;

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Diversion of management's attention from the management of daily operations;

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Difficulties in the assimilation of different corporate cultures, employees and business practices;

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Retaining the loyalty and business of the employees or customers of acquired businesses;

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Retaining employees that may be vital to the integration of acquired businesses or to the future prospects of the combined businesses;

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Difficulties and unanticipated expenses related to the integration of departments, information technology systems, including accounting systems, technologies, books and records, and procedures, and maintaining uniform standards, such as internal accounting controls, procedures, and policies;

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Costs and expenses associated with any undisclosed or potential liabilities, and;

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The use of more cash or other financial resources on integration and implementation activities than we expect.

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Demands on management related to changes in the size and possible locations of our businesses and employees;

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Diversion of management's attention from the management of daily operations;

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Difficulties in the assimilation of different corporate cultures, employees and business practices;

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Retaining the loyalty and business of the employees or customers of acquired businesses;

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Retaining employees that may be vital to the integration of acquired businesses or to the future prospects of the combined businesses;

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Difficulties and unanticipated expense related to the integration of departments, information technology systems, including accounting systems, technologies, books and records, and procedures, and maintaining uniform standards, such as internal accounting controls, procedures, and policies;

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Costs and expense associated with any undisclosed or potential liabilities; and

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The use of more cash or other financial resources on integration and implementation activities than we expect.

Failure to successfully integrate NSENA or any other acquired business in the future may result in reduced levels of revenue, earnings, or operating efficiency than might have been achieved if we had not acquired such businesses.

In addition, the acquisition of NSENA and any future businesses could result in additional debt and related interest expense, contingent liabilities, and amortization expensesexpense related to intangible assets, as well as the issuance of our Common Stock, which could have a material adverse effect on our financial condition, operating results, and cash flow.

Government regulation of our products may adversely affect sales.

Our BolaWrap device is classified as a firearm and the BolaWrap 150 is also classified as an "Any other Weapon (AOW). Both firearms and explosive devices are regulated by the U.S.US Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”ATF”) involving substantial regulatory compliance. ATF regulations are enforced by surveillance and inspection.inspection of federal firearms licensees (“FFLs”). If ATF finds a violation, it can institute a wide range of enforcement actions, ranging from public warnings to more severe sanctions such as fines, penalties, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions or total shutdown of production, and criminal prosecution. Any such actions could have a material adverse impact on our operations.

The federal firearms laws impose strict controls over the possession and transfers of firearms, which may impact our ability to transfer devices to customers. Because ATF has classified our devices as AOWs, we must register our devices with the ATF at the time of manufacture. Before we may transfer our registered devices to any customer, including a government agency, we must obtain approval from the ATF. The ATF processing time for transfer applications varies significantly, depending on the prospective transferee. Applications to transfer AOWs to U.S., state or local government entities are usually processed in 1-3 weeks, while transfers to private, non-licensed individuals require a longer processing time because of the required background investigation of the transferee. These types of transfers may take 6-8 months or longer.

The federal firearms laws prohibit interstate transfers of firearms to non-licensed persons or entities. Consequently, we are prohibited from transferring our devices directly to a non-government, non-licensed individual or entity in a different state. To accomplish such a transfer, we must first obtain ATF approval to transfer the device to another FFL dealer in the end-user’s state. After that transfer is completed, the FFL dealer must obtain ATF approval to transfer the device to the non-government, non-licensed individual. The ATF may deny any transfer application if such transfer would violate state law or when the transferee is prohibited from possessing a firearm.

Our device may face state restrictions, especially regarding sales to private security agencies. Our product sales may be significantly affected by international, federal, state and local regulation.regulations. Failure to comply with regulations could also result in the imposition of fines, penalties and other actions that could adversely impact our financial position, cash flows and operating results.

Our product is also controlled by the U.S.US Department of Commerce (“DOC”) for exports directly from the United States.US. Consequently, we need to obtain export licenses from the DOC for the export of our products from the United States.US. Compliance with or future changes in U.S.US export regulations could significantly and adversely affect any future international sales.

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The shipment of some of our components and our products involve conformity to regulations governing the transport of “dangerous goods”. Failure to comply with shipping regulations could result in the imposition of fines, penalties and other actions that could adversely impact our financial position, cash flows and operating results.

Certain foreign jurisdictions may restrict the importation or sale of our products, limiting our international sales opportunities.

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Our products, including the BolaWrap 100 haveand BolaWrap 150, are protected by limited issued patents orpatent and other intellectual property protection. If we are unable to protect our intellectual property, we may lose a competitive advantage or incur substantial litigation costs to protect our rights.

Our future success depends in part upon our proprietary technology. We currently own tennineteen issued U.S.US patents related to the BolaWrap 100technology and have nine U.S.eight US patents pending. We have filed foreign patent applications in the European Union (up to 38 countries) and 17seventeen other countries and reserved our rights to file additional foreign patents. Our protective measures taken thus far, including our issued patents, pending patents, issued and pending trademarks and trade secret laws, may prove inadequate to protect our proprietary rights. ThereTo date we have a total of 53 issued domestic and international patents for our small global company. During 2022 we filed thirty-three patent applications, two of which were US filings. We feel the significant investment in patent protection in the US and abroad creates a significant amount of IP and value in Wrap Technologies. However, there can be no assurance we will be granted any patent rights from pending patents. The scope of any possible patent rights may not prevent others from developing and selling competing products. The validity and breadth of claims covered in any possible patents involve complex legal and factual questions, and the resolution of such claims may be highly uncertain, lengthy, and expensive. In addition, any patents, if granted, may be held invalid upon challenge, or others may claim rights in or ownership of our patents.

Our competitive position willmay be seriously damaged if our products are found to infringe on the intellectual property rights of others.

Other companies and our competitors may currently own or obtain patents or other proprietary rights that might prevent, limit or interfere with our ability to make, use or sell our products. Any intellectual property infringement claims made against us, with or without merit, could be costly and time-consuming to defend and divert our management’s attention from our business. In the event of a successful claim of infringement against us and our failure or inabilityif we are unable to license the allegedly infringed technology, our business and operating results could be adversely affected. Any litigation or claims, whether or not valid, could result in substantial costs and diversion of our resources. An adverse result from intellectual property litigation could force us to do one or more of the following:

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Cease selling, incorporating, or using products or services that incorporate the challenged intellectual property;

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Obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; and

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Redesign products or services that incorporate the disputed technology.

If we are forced to take any of the foregoing actions, we could face substantial costs and shipment delays and our business could be materially harmed. Although we carry general liability insurance, our insurance may not cover potential claims of this type or be adequate to indemnify us for all liability that may be imposed.

In addition, it is possible that our distributors and customersothers may seek indemnity from us in the event thatif our products are found or alleged to infringe the intellectual property rights of others. Any such claim for indemnity could result in substantial expense to us that could harm our operating results.

Competition in the law enforcement market could reduce our sales, make our products obsolete or inferior and prevent us from achieving profitability.

The law enforcement market is highly competitive.competitive, and adoption of new policing tools and innovative training solutions may take time, Law enforcement adherence to currently used products may also slow adaptation to new policing tools. We face competition from numerous larger, better capitalized, more experienced and more widely known companies that make restraint devices, less-lethal weapons and other law enforcement products. One or more of our competitors may have developed or may succeed in developing technologies and products that are more effective than any of ours, rendering our technology and products obsolete or noncompetitive. Increased competition could result in reduced sales, greater pricing pressure, lower gross margins, and prevent us from achieving profitability.

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Foreign currency fluctuations may reduce our competitiveness and sales in international markets.

The relative change in currency values creates fluctuations in product pricing for future potential international customers. These changes in international end-user costs may result in lost orders and reduce the competitiveness of our products in certain international markets. These changes may also negatively affect the financial condition of some international customers and reduce or eliminate their future orders of our products.

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Our business is dependent on the continued services of our executive teamability to attract and retain key employees.

Our business and operations are substantially dependent upon the experience and continued service of our executive team including our President and Interim Chief Executive Officer, Thomas Smith. We do not maintain “key person” life insurance on Mr. Smith or any of our other executive officers and have no employment agreements or post-employment agreements to have access to important institutional knowledge should any executive officer resign or be dismissed. The loss of one or several key employees could have a material adverse effect upon our business, financial condition, results of operations and cash flows.

personnel.

We are also dependent on our ability to retain and motivate high qualityour high-quality personnel, especially managers, sales and skilled engineering and manufacturing personnel. Competition for such personnel is intense, and we may not be able to attract, assimilate or retain other highly qualified managerial, sales and technical personnel in the future. The inability to attract and retain the necessary managerial, sales and technical personnel could cause our business, operating results or financial condition to suffer.

Our current Chief Executive Officer serves

In 2022, the business went through significant transformation including the creation of our mission, vision and core values. New management built the company's first strategic roadmap to outline the market space where BolaWrap and Wrap Reality fit and have changed significant elements of the business to improve training, which has now become a revenue source over a cost center. There has been a shift to build repeatable domestic sales and build additional resources into international sales. We changed our customer service department into a customer success team. We improved our pricing on devices and cassettes. We built additional distributor relationships. In the last three quarters of 2022, the new management team significantly reduced operating expenses in an interim capacity. Our business may be adversely affected ifalmost all areas. These changes reduced overall headcount, contractor costs and spending. While greatly improving our financial foundation, it also required turnover of personnel and changes to how we are unable to effectively handle any transition in the position of Chief Executive Officer or other executive positions.

Our President Thomas Smith was appointed as interim Chief Executive Officer in October 2020. Executive leadership transitions can be inherently difficult to manage and may cause significant and costly disruption to our business. The loss of services of Mr. Smith or other members of senior management, or the inability to attract qualified permanent replacements, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

operate.

Risk Factors Relating to Our Financial Statements and Operating Results

We cannot predict our future operating results. Our quarterly and annual results will likely be subject to fluctuations caused by many factors, any of which could result in our failure to achieve our expectations.

We currently expect that the BolaWrap product will be the primary source of our revenue in the foreseeable future.2023. We expect our revenue to vary significantly due to a number ofseveral factors. Many of these factors are beyond our control. Any one or more of these factors, including those listed below, could cause us to fail to achieve our revenue expectations. These factors include, among others:

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Our ability to develop and supply product to customers;

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Market acceptance of, and changes in demand for, our products;

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Gains or losses of significant customers, distributors or strategic relationships;

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Unpredictable volume and timing of customer orders;

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The availability, pricing and timeliness of delivery of components for our products;

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Fluctuations in the availability of manufacturing capacity or manufacturing yields and related manufacturing costs;

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Timing of new technological advances, product announcements or introductions by us and by our competitors;

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Unpredictable warranty costs associated with our products;

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Budgetary cycles and order delays by customers or production delays by us or our suppliers;

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Regulatory changes affecting the marketability of our products;

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Logistics challenges of obtaining supplies and components and shipping products resulting from the pandemic;

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General economic conditions that could affect the timing of customer orders and capital spending and result in order cancellations or rescheduling; and

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General political conditions in this country and in various other parts of the world that could affect spending for the products that we intend to offer.

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Our ability to develop, manufacture, ship and supply product to customers;

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Market acceptance of, and changes in demand for, our products;

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Gains or losses of significant customers, distributors, or strategic relationships;

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Unpredictable volume and timing of customer orders;

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The availability, pricing, and timeliness of delivery of components in our supply chain for our products;

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Fluctuations in the availability of manufacturing capacity or manufacturing yields and related manufacturing costs;

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Timing of new technological advances, product announcements or introductions by us and by our competitors;

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Unpredictable warranty costs associated with our products;

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Budgetary cycles and order delays by customers or production delays by us or our suppliers;

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Regulatory changes affecting the marketability of our products;

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Logistics challenges of obtaining supplies and components and shipping products resulting from the pandemic;

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General economic conditions that could affect the timing of customer orders and capital spending and result in order cancellations or rescheduling;

	●	General political conditions in this country and in various other parts of the world that could affect spending for the products that we intend to offer; and
	●	Seasonality of purchasing timeframes and procurement delays impact sales.

Some or all of these factors could adversely affect demand for our products and, therefore, adversely affect our future operating results. As a result of these and other factors, we believe that period-to-period comparisons of our operating results may not be meaningful in the near term, and accordingly you should not rely upon our performance in a particular period as indicative of our performance in any future period.

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Our expenseexpenses may vary from period to period, which could affect quarterly results and our stock price.

If we incur additional expenseexpenses in a quarter in which we do not experience increased revenue, our results of operations will be adversely affected, and we may incur larger losses than anticipated for that quarter. Factors that could cause our expense to fluctuate from period to period include:

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The timing and extent of our research and development efforts;

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Investments and costs of maintaining or protecting our intellectual property;

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Marketing and sales efforts to promote our products and technologies; and

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The timing of personnel and consultant hiring.

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The timing and extent of our research and development efforts;

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Investments and costs of maintaining or protecting our intellectual property;

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Marketing and sales efforts to promote our products and technologies;

	●	The timing of personnel and consultant hiring; and
	●	Supply chain and inventory cost variations.

Most of our operating expenses are relatively fixed in the short term. We may be unable to rapidly adjust spending to compensate for any unexpected sales shortfalls, which could harm our quarterly operating results and our stock price. We do not have the ability to predict future operating results with any certainty.

Our disclosure controls and procedures may not prevent or detect all acts of fraud.

Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our management expects that our disclosure controls and procedures and internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within our company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and we cannot assure that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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Failure to maintain an effective system of internal control over financial reporting could harm stockholder and business confidence in our financial reporting, our ability to obtain financing and other aspects of our business.

Maintaining an effective system of internal control over financial reporting is necessary for us to provide reliable financial reports. Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") and the related rules and regulations promulgated by the SEC require us to include in our Form 10-K a report by management regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of the respective fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. While our management has concluded that our internal control over financial reporting was effective as of December 31, 2020,2022, it is possible that material weaknesses will be identified in the future. In addition, components of our internal control over financial reporting may require improvement from time to time. If management is unable to assert that our internal control over financial reporting is effective in any future period, investors may lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on the Company’s stock price.

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Risk Factors Relating to Our Common Stock

Our stock price is volatile and may continue to be volatile or may decline regardless of our operating performance, resulting in substantial losses for investors.

The market price of our Common Stock has fluctuated significantsignificantly to date and in the future may fluctuate significantly in response to numerous factors, many of which are beyond our control, including the factors listed below and other factors described in this “Risk Factors” section:

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Actual or anticipated fluctuations in our operating results; 

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Failure of securities analysts to initiate or maintain coverage of our Company, changes in financial estimates by any securities analysts who follow our Company, or our failure to meet these estimates or the expectations of investors; 

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Rating changes by any securities analysts who follow our Company; 

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Changes in the availability of federal funding to support local law enforcement efforts, or local budgets;

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Announcements by us of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

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Changes in operating performance and stock market valuations of other security product companies generally;

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Price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

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Announcements of merger or acquisition transactions;

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Changes in our board of directors or management;

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Sales of large blocks of our Common Stock, including sales by our executive officers, directors and significant stockholders;

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Lawsuits threatened or filed against us;

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Short sales, hedging and other derivative transactions involving our capital stock;

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General economic conditions in the United States and abroad; and

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Other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

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Actual or anticipated fluctuations in our operating results;

●

Failure of securities analysts to initiate or maintain coverage of our Company, changes in financial estimates by any securities analysts who follow our Company, or our failure to meet these estimates or the expectations of investors;

●

Rating changes by any securities analysts who follow our Company;

●

Changes in the availability of federal funding to support local law enforcement efforts, or local budgets;

●

International budget changes or changeover in government leadership;

●

Announcements by us of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

●

Changes in operating performance and stock market valuations of other security product companies generally;

●

Price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

●

Announcements of merger or acquisition transactions;

●

Changes in our board of directors or management and key personnel;

●

Sales of large blocks of our Common Stock, including sales by our founders, executive officers, directors and significant stockholders;

●

Lawsuits threatened or filed against us;

●

Short sales, hedging and other derivative transactions involving our capital stock;

●

General economic conditions in the US and abroad; and

●

Other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many security and technology companies. Stock prices of many security and technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.

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Stock prices of nanocap securities and small cap securities have fluctuated even more than medium and large cap companies in recent years.

We are and, in the future, may be subject to securities litigation, which may be expensive and could divert management attention.

Our share price is volatile, and in the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. For instance, in September 2020 a putative class action lawsuit and in November 2020 a shareholder derivative lawsuit were filed against us and certain of our directors and officers.

The lawsuit was dismissed in May 2022.

Lawsuits of this nature divert financial and management resources that would otherwise be used to benefit our operations. Although we denydenied the material allegations in the lawsuits and intend to defenddefended ourselves vigorously, defending the lawsuits may result in substantial costs. Any lawsuit to which we or our directors or officers are a party, with or without merit, may result in an unfavorable judgment. We also may decide to settle lawsuits on unfavorable terms. Any such negative outcome could result in payments of substantial damages or fines, damage to our reputation or adverse changes to our offerings or business practices. Any of these results could adversely affect our business.

In addition, we may be the target of securities-related litigation in the future. Such litigation may divert our management’s attention and resources, result in substantial costs, and have an adverse effect on our business, results of operations and financial condition. We maintain director and officer insurance that we regard as reasonably adequate to protect us from potential claims; however, we cannot assure you that it will. Further, if we are subject to future litigation, the costs of insurance may increase, and the availability of coverage may decrease. As a result, we may not be able to maintain our current levels of insurance at a reasonable cost, or at all, which might make it more difficult to attract qualified candidates to serve as executive officers or directors of the Company.

Our officers and directors are among our largest stockholders and may have certain personal interests that may affect the Company.

Management and certain directors owned more than 10% of our Common Stock at December 31, 2022. As a result, our management and certain directors, acting individually or as a group, has the potential ability to exert influence on the outcome of issues requiring approval by our stockholders.

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Sales of a substantial number of shares of our Common Stock may adversely affect the market price of our Common Stock.

Sales or distributions of a substantial number of shares of our Common Stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our Common Stock. Many of the outstanding shares of our Common Stock, other than the shares held by executive officers and directors, are eligible for immediate resale in the public market. Substantial selling of our Common Stock could adversely affect the market price of our Common Stock.

Our Common Stock could be delisted from the Nasdaq Stock Market.

Nasdaq’s continued listing standards for our Common Stock require, among other things, that (i) we maintain a closing bid price for our Common Stock of at least $1.00, and (ii) we maintain: (A) stockholders’ equity of $2.5 million; (B) market value of listed securities of $35 million; or (C) net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. Any failures to satisfy any continued listing requirements could lead to the receipt of a deficiency notice from Nasdaq and ultimately to a delisting from trading of our Common Stock. If our Common Stock were delisted from Nasdaq, among other things, this could result in a number of negative implications, including reduced liquidity in our Common Stock as a result of the loss of market efficiencies associated with Nasdaq and the loss of federal preemption of state securities laws as well as the potential loss of confidence by suppliers, customers and employees, institutional investor interest, fewer business development opportunities, greater difficulty in obtaining financing and possible breaches of certain contractual obligations.

Our officers and directors are among our largest stockholders and may have certain personal interests that may affect the Company.

Management owned approximately 41% of our Common Stock at December 31, 2020. As a result, our management, acting individually or as a group, has the potential ability to exert influence on the outcome of issues requiring approval by our stockholders. This concentration of ownership may have effects such as delaying or preventing a change in control of the Company that may be favored by other stockholders or preventing transactions in which stockholders might otherwise recover a premium for their shares over current market prices.

We may issue additional shares of Common Stock in the future. The issuance of additional shares of Common Stock may reduce the value of your Common Stock.

We may issue additional shares of Common Stock without further action by our stockholders. Moreover, the economic and voting interests of each stockholder will be diluted as a result of any such issuances. Although the number of shares of Common Stock that stockholders presently own will not decrease, such shares will represent a smaller percentage of the total shares that will be outstanding after the issuance of additional shares. The issuance of additional shares of Common Stock may cause the market price of our Common Stock to decline.

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Sales of shares of Common Stock issuable upon the exercise of any future options or warrants and vesting of restricted stock units may lower the price of our Common Stock.

At December 31, 2020,2022, we had warrants,we had outstanding options and restrictedunvested stock units outstandingof on 7.66.4 million shares of our Common Stock. The issuance of shares of Common Stock issuable upon the exercise of options or warrants or issuance from restricted stock units or the exercise of warrants that may be outstanding in the future could cause substantial dilution to existing holders of our Common Stock, and the sale of those shares in the market could cause the market price of our Common Stock to decline. The potential dilution from the issuance of these shares could negatively affect the terms on which we are able to obtain equity financing.

We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value of your Common Stock.

We are authorized to issue up to 55.0 million shares of preferred stock in one or more series. Our Board of Directors may determine the terms of future preferred stock offerings without further action by our stockholders. If we issue preferred stock, it could affect your rights or reduce the value of your Common Stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party. Preferred stock terms may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions.

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We incur substantial costs as a result of being a public company.

As a public company, we incur significant levels of legal, accounting, insurance, exchange listing fees and other expenses that we did not incur as a private company. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act, of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Act, the listing requirements of the Nasdaq Capital Market and other applicable securities rules and regulations. Compliance with these rules and regulations increases our legal and financial compliance costs, makes some activities more difficult, time-consuming or costly and increases demand on our systems and resources as compared to when we operated as a private company. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may need to hire more corporate employees in the future or engage outside consultants to comply with these requirements, which would increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expensesexpense and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. 

As a result of disclosure of information in this report and in the filings that we are required to make as a public company, our business, operating results, and financial condition have become more visible, which has resulted in, and may in the future result in threatened or actual litigation, increased competition due to this insight, including by key competitors and other third parties. If any such claims are successful, our business, operating results and financial condition could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, operating results and financial condition.

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The payment of dividends will be at the discretion of our Board of Directors.

We have never declared dividends on our Common Stock, and currently do not anticipate that we will do so in the foreseeable future. The declaration and amount of future dividends, if any, will be determined by our Board of Directors and will depend on our financial condition, earnings, capital requirements, financial covenants, regulatory constraints, industry practice and other factors our Board of Directors deems relevant.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our executive offices, sales, training, assembly, and warehouse facilities are located at 1817 West 4th4th Street, Tempe, Arizona. The lease of 11,256 square feet commenced in June 2019 and expireswas for an initial lease term through July 2022. The aggregate monthly payments are currently $7,884were $8,120 per month, increasing 3% eachfor June and July 2022 during the lease term, plus other certain costs and charges as specified in the lease agreement, including the Company’s proportionate share of the building operating expensesexpense and real estate taxes.

The Company also leases 1,987 square feet In January 2022 we renewed this lease for three years with aggregate payments of office and warehousing space located at 4620 Arville Street, Suite E, Las Vegas, Nevada 89103, pursuant to a lease amendment that commenced January 2021 and terminates at$9,905 commencing August 2022, increasing 4% annually through the endterm ending July 31, 2025.

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Table of March 2021. The monthly rate is $1,683 plus shared operating expenses. In February 2019, we entered into a two-year lease expiring at the end of February 2021 for 1,906 square feet of office and warehousing space located at20331 Lake Forest Drive, Suite C-11, Lake Forest, California 92630.The monthly rate is currently $2,649 per month plus shared operating costs. We intend to vacate the Nevada and California facilities at the end of the respective lease terms consolidating operations at the Tempe facility. We are evaluating our facility requirements and expect we may need additional space during the next 12 months.Contents

Beginning in October 2017, we commenced reimbursing former officer, stockholder and consultant, Mr. Elwood Norris, $1,500 per month on a month-to-month basis for laboratory facility costs. From November 2018 through November 2020, we paid $5,000 per month on a month-to-month basis for a 50% share of 1,000 square feet at 55 Fifth Ave, Suite 1702, New York, NY 10003.

We rent space from time to time rent executive space on a month-to-month basis for remotely located employees.

We currently have three Wrap Reality employees located in a 4,000 square foot space in Buffalo, New York on a month-to-month rental agreement, which payments are currently $2,750 per month.

ITEM 3. LEGAL PROCEEDINGS

Securities Litigation

On September 23, 2020, Carone Cobden filed a putative class action complaint against the Company, former Chief Executive Officer David Norris (“Norris”), Chief Financial Officer James A. Barnes (“Barnes”) and President Thomas Smith (“Smith”) in the United States District Court for the Central District of California, docketed as Case No. 2-20-cv-08760-DMG-PVCx (the “Cobden Complaint”). The Cobden Complaint alleges that the named defendants, in their capacities as officers of the Company, knowingly made false or misleading statements or omissions regarding trials of the Company’s BolaWrap product conducted by the Los Angeles Police Department (the “BolaWrap Pilot Program”).  The Cobden Complaint also alleges that the conduct of the named defendants artificially inflated the price of the Company’s traded securities, and that the disclosure of certain adverse information to the public led to a decline in the market value of the Company’s securities.  The Cobden Complaint further alleges violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and defines the class period as July 31, 2020 through September 23, 2020.  

On October 1, 2020, Joseph Mercurio filed a second putative class action complaint against the Company, Norris, Smith, and Barnes in the same court, which contains substantially the same factual allegations and legal claims as set forth in the Cobden Complaint, and is docketed as Case No. 2-20-cv-09030-DMG-PVCx (the “Mercurio Complaint”).  On October 15, 2020, Paula Earley filed a third putative class action complaint against the Company, Smith, Norris, Barnes, Chief Strategy Officer Mike Rothans (“Rothans”), and former Chief Executive Officer Marc Thomas (“Thomas”) in the same court, which contains many of the same factual allegations and legal claims as set forth in the Cobden and Mercurio Complaints, but defines the class period as April 29, 2020 through September 23, 2020, and alleges additional false or misleading statements in connection with BolaWrap and the BolaWrap Pilot Program (the “Earley Complaint”).  The Earley Complaint is docketed as Case No. 2-20-cv-09444-DMG-PVCx.  

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On November 3, 2020, the Hon. Dolly M. Gee consolidated the three above-mentioned cases under the caption In re Wrap Technologies, Inc. Securities Exchange Act Litigation, Case No. 20-8760-DMG (PVCx) (the “Securities Action”).  On January 7, 2021, the Court appointed a lead plaintiff in the Securities Action, who designated its attorneys as lead counsel.  On January 21, 2021, Judge Gee ordered that a consolidated amended complaint be filed in the Securities Action on or before March 12, 2021, with defendants’ motion to dismiss to be filed on or before April 26, 2021, and a hearing on the motion to dismiss to be held on July 23, 2021.  The Company believes that the complaints underlying the Securities Action are without merit and intends to vigorously defend against the claims raised therein.

Shareholder Derivative Litigation

On November 13, 2020, Naresh Rammohan filed a shareholder derivative action in the United StatesUS District Court for the Central District of California against Smith, Barnes, Rothans, Thomas, Norris, Scot Cohen, Patrick Kinsella, Michael Parris,current and Wayne Walker,former Company officers as well as current and former Company directors alleging unjust enrichment, breach of fiduciary duty, waste of corporate assets, and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:20-cv-10444-DMG-PVCx (the “Rammohan Complaint”).20-cv-10444-DMG-PVCx. The Rammohan Complaint names the Company as a nominal defendant and recites manyderivative action was dismissed with prejudice by stipulation of the allegations set forth in the Securities Action relating to the BolaWrap Pilot Program.  On January 20, 2021, Ray Westerman filed a second derivative complaint in the same court against the same parties alleging breach of fiduciary duty and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21-cv-00550-DMG-PVCx (the “Westerman Complaint”).  On January 22, 2021, Jesse Lowe filed a third derivative complaint in the same court against the same parties, alleging breach of fiduciary duty and asserting various claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21-cv-00597-DMG-PVCx (the “Lowe Complaint”).  

The above-mentioned derivative cases (collectively, the “Derivative Actions”) each been have been transferred to Judge Gee as cases related to the Securities Action.  On January 27, 2021, Judge Gee issued an order to show cause why the Derivative Actions should not be consolidated under the caption In re Wrap Technologies, Inc. Shareholder Derivative Litigation, Case No. 2:20-10444-DMG-PVCx and stayed pending the resolution of the anticipated motion to dismiss in the Securities Action.  On February 5, 2021, the parties in the Derivative Actions responded jointly to the order to show cause, stipulating that the case should be consolidated and stayed as suggested by the Court.  We believe that the Derivative Actions will be consolidated and stayed by the Court.  As with the Securities Action, the Company believes that the Derivative Actions are without merit and intends to vigorously defend against the claims raised therein. 

on May 3, 2022. 

Other Legal Information

We may become subject to other legal proceedings, as well as demands and claims that arise in the normal course of our business, including claims of alleged infringement of third-party patents and other intellectual property rights, breach of contract, employment law violations, and other matters and matters involving requests for information from us or our customers under federal or state law. Such claims, even if not meritorious, could result in the expenditure of significant financial and management resources. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed and adjusted to include the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter. AtOn December 31, 20202022, we had no provision for liability under existing litigation.

An unfavorable outcome on any litigation matters could require payment of substantial damages, or, in connection with any intellectual property infringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matters, or legal proceedings could have a material adverse effect on our business, operating results, financial condition and cash flows.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is listed on the Nasdaq Capital Market under the symbol “WRAP”.

Holders

AtMarch 3, 2021 December 31, 2022 there were 37,644,55641,175,993 shares of Common Stock outstanding and approximately25 19 stockholdersof record.

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Equity Compensation Plan Information

Our

On March 31, 2017, the Company adopted, and the stockholders approved, the 2017 Stock Incentive Plan (the(as amended from time to time, the “2017 Plan”) was adopted by our Board of Directors on March 31, 2017, and approved by a majority of our stockholders on March 31, 2017.. The 2017 Plan reserved 2.0 million shares of our Common Stock for issuance as one of four types of equity incentive awards: (i) stock options, (ii) shares of Common Stock, (iii) restricted stock awards, and (iv) restricted stock units. The 2017 Plan permits the qualification of awards under the plan as “performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code.

The Board of the Company approved

Stockholders ratified an increase into the Plan authorizingshares authorized under the plan of an additional 2,100,000 shares of Common Stock on March 16,in May 2019, ratified by stockholders on May 23, 2019, and a further increase authorizing an additional 1,900,000 shares on April 8,in June 2020, ratified by stockholders onan additional 1,500,000 shares in June 5, 2020,2021, and an additional 1,500,000 shares in May 2022, for a total of 6,000,000 9,000,000 shares of Common Stock reserved for issuance under the 2017 Plan as of the date of this Report.

At December 31, 2022, there were 1,556,291 shares of Common Stock available for grant under the Plan.

The following table sets forth information as of December 31, 2020,2022, with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance, aggregated as follows: 

			Number of securities
			remaining available for
	Number of securities to be	Weighted-average exercise	future issuance under
	issued upon exercise of	price of outstanding	equity compensation plans
	outstanding options,	options, warrants and	(excluding securities
Plan Category	warrants and rights	rights	reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	4,359,592	$4.58	1,150,055
Equity compensation plans not approved by security holders	-	-	-
Total	4,359,592	$4.58	1,150,055

Plan Category		Number of securities to be issued upon exercise of outstanding options and rights				Weighted-average exercise price of outstanding options and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)				(b)				(c)
Equity compensation plans approved by security holders			5,491,399			$	4.55				1,556,291
Equity compensation plans not approved by security holders			-				-				-
Total			5,491,399			$	4.55				1,556,291

Recent Sales of Unregistered Securities

No unregistered securities were issued during the fiscal year that were not previously reported in a Quarterly Report on Form 10-Q or Current Report on Form 8-K.

Transfer Agent

Our Transfer Agent and Registrar for our Common Stock is Colonial Stock Transfer, located at 66 Exchange Place, Suite 100, Salt Lake City, Utah 84111.

Issuer Purchases of Equity Securities

Not applicable.

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ITEM 6. SELECTED FINANCIAL DATA

Information requested by this Item is not included, as we are electing to take advantage of scaled disclosure requirements available to Smaller Reporting Companies.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis set forth below should be read in conjunction with the information presented in other sections of this Annual Report, including “Item“Item 1. Business,” “Item“Item 1A. Risk Factors,” and “Item“Item 8. Financial Statements and Supplementary Data.” The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Words such as “expects,“expects,” “anticipates,“anticipates,” “intends,“intends,” “plans,“plans,” “believes,“believes,” “seeks,“seeks,” “estimates”“estimates” and similar expressions or variations of such words are intended to identify forward-looking statements but are not the only means of identifying forward-looking statements. Our actual results could differ materially from those discussed in these forward-looking statements.

Overview

We are a global public safety technology and services company organized in March 2016 delivering modern that delivers safe and effective policing solutions to law enforcement and security personnel. personnel worldwide. We are leading the movement for safer outcomes by equipping law enforcement with safe, non-pain compliance tools and immersive training for the modern world. We began product sales of our first public safety product, the BolaWrap 100 remote restraint device, in late 2018.

In late 2020 we added a new solution to our public safety technologies, which is our virtual reality (“VR”) training platform – Wrap Reality. Wrap Reality is now sold to law enforcement agencies for simulation training as well as corrections departments for the societal reentry scenarios. In Q1 2022 we delivered a new generation product, the BolaWrap 150. The immediate addressable domesticBolaWrap 150 is electronically deployed and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100 that has been phased out.

Our target market for our solutions consists ofincludes approximately 900,000 full-time sworn law enforcement officers atin over 15,30018,000 federal, state, and local law enforcement agencies. Weagencies in the US and over 12 million police officers in more than 100 countries. Additionally, we are also exploring opportunities in other domestic markets, includingsuch as military and private security. Our international focus is on countries with the largest police forces. The 100 largest international police agencies are estimatedAccording to have over 12.1 million law enforcement personnel. According to Statistics MRC,360iResearch, a market research consulting firm, we participate in a segment of theour non-lethal products are part of a global market segment expected to grow to $11.85$16.1 billion by 2023.

Our2027.

We focus our efforts on the following products services and solutions include:

services:

BolaWrap Remote Restraint Device – is a hand-held remote restraint device that discharges an eight-foota seven and half-foot bola style Kevlar tether to entangle an individual at a range of 10-25 feet. BolaWrap 100 assists law enforcement to safely and effectively control encounters early in the use of force continuum without resorting to painful force options.

Wrap Reality – is a law enforcement 3D training system employing immersive computer graphics virtual realityVR with proprietary software-enabled content. It allows up to two participants to enter a simulated training environment simultaneously, and customized weapons controllers enable trainees to engage in strategic decision making along the force continuum.

Wrap Armor – we offer a light-weight rifle rated police shieldReality has 38 scenarios for law enforcement and a pistol rated patrol shield that offers police agencies an affordable defense against increasingly sophisticated threats.

corrections and 25 scenarios at this time for societal reentry. Wrap Reality is one of the most robust 3D Virtual Reality solutions on the market for law enforcement and societal reentry today.

In addition to the United States domesticUS law enforcement market, we have soldshipped our restraint products to 3659 countries. We have established an active distributor network with 14 domestic distributors representing all 50 states and one dealer representing the US territory of Puerto Rico. We have distribution agreements with 3549 international distributors.distributors covering 54 countries. We focus significant sales, training and business development efforts to support our distribution network.

network in addition to our internal sales team.

We focus significant resources on research and development innovations and continue to enhance our products and plan to introduce new products. We believe we have established a strong brandingbrand and market presence globally and have established significant competitive advantages in our markets.

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2020 Developments

Proceeds from Public Offering

In June 2020, we consummated a registered direct public offering resulting in net proceedsTable of approximately $11.67 million (“June 2020 Offering”). We sold 2,066,667 units (“June 2020 Units”), with each unit consisting of (i) one share of Common Stock and (ii) a warrant to purchase one share of Common Stock. The June 2020 Units were offered and sold to Investors at a public offering price of $6.00 per unit. Each of the warrants offered and sold in the June 2020 Offering are exercisable for a period of 24 months from the date of issuance, are non-transferrable and have an exercise price of $6.00 per share.

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Contents

Proceeds from Warrant Exercises

Recent Developments

During the year ended December 31, 20202022, we accomplished the following:

●

Through our strategic roadmap process, determined the exact market fit for where BolaWrap and Wrap Reality operate in the law enforcement marketplace. (See our Force Factor slide for a visual depiction)

●

Created and implemented a strategic roadmap to lead the company to long-term growth and produce lasting value for shareholders

●

Controlled our costs and reduced full year 2022 operating expenses $5.0 million or 19% as compared to 2021

●

Our strategic roadmap is centered on sustainably growing sales through building repeatable domestic BolaWrap sales, ramping international sales on the new BolaWrap 150, and implementing a customer success function expanding existing agencies to full patrol-wide BolaWrap deployment. Customer Success did not exist as a specific function until mid Q3 of 2022 and is building on our proactive approach to expand sales in 2023 with existing customers and agencies.

●

Added a dedicated inside sales function to grow our velocity and follow up on new leads.

●

Expanded our distributor and partner relationships

●

Leveraged product diversification and innovation to catalyze sales growth.

●

Improved pricing on BolaWrap 150 devices and cassettes now that the product has proven itself to law enforcement as a significant upgrade. This has a direct and positive impact on future gross margins.

●

Adjusted our training curriculum to include the when and the why BolaWrap is used. Transitioned to charging for our respected training services. Documented our curriculum for submittal to all US Peace Officers Standards and Training (POST) councils.

●

Implemented changes to how we sell Wrap Reality and have now solidified our go forward virtual reality model as a Software as a Service (“SaaS”) model.

●

Entered into a Professional Services and Technology Acquisition Agreement with Lumeto and Spatial, whereby Lumeto and Spatial will provide the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform.

Management Changes

As previously reported in January 2022, the Board of Directors approved and initiated a leadership transition plan to support the next phase of its company strategy. The transition and corporate strategy included the resignation of Thomas P. Smith, our President, Chief Executive Officer and director, and the announcement of the planned retirement of James A. Barnes our former Chief Financial Officer, Secretary and Treasurer, who retired in July 2022 upon the appointment of Chris DeAlmeida as our Chief Financial Officer. After a period of transition managed by Special Transition Committee consisting of directors Scot Cohen and Kim Sentovich and including interim contract executives, on April 18, 2022, the Company received gross proceeds of $26,190,483 from the exercise of 5,155,976 warrantsappointed TJ Kennedy, a current director, as our Chief Executive Officer and paid $1,016,645Kevin Mullins as an agent feeour President. Both Messrs. Kennedy and Mullins have significant leadership experience in public safety technology prior to facilitate exercise of certain warrants resulting in net proceeds of $25,173,838. Elwood Norris, the Company’s Chief Technology Officer, exercised 333,334 of these warrants at $5.00 per share for cash of $1,666,670.

PPP Loan

In May 2020, we obtained $414,362 in proceeds from a U.S. Small Business Administration ("SBA") Promissory Note (the "PPP Loan") pursuanttheir appointment. Mr. Mullins is leading go to the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") as administered by the SBA. Under the terms of the CARES Act, the Company subsequently applied for and in December 2020 was granted forgiveness for the PPP Loan plus interest. The Company’s PPP Loanmarket functions in the amount of $414,362 and accrued interest was forgiven in full by the Small Business Administration. The Company recognized $416,683 in debt forgiveness incomePresident role. In late December 2022, we also brought onboard Tracey Friedlander as a result of the forgiveness.

Asset Purchase Agreement with NSENA

On December 14, 2020, the Company, through a new wholly owned subsidiary Wrap Reality, Inc. (“Wrap Reality”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with NSENA Inc, a Delaware corporation (“NSENA”) and Ethan Moeller (“Moeller”), the majority stockholder of NSENA and acquired NSENA’s immersive virtual reality technology and business (the “Transaction”). In addition, the Company hired three NSENA persons as employees (including Moeller) (“Key Employees”) and retained two NSENA consultants (“Consultants”).

Wrap Reality paid NSENA cash consideration of $210,000 and agreed to pay $100,000 on March 15, 2021, $100,000 on June 15, 2021 and $75,000 on September 15, 2021. In addition, Wrap Reality assumed $15,000 of liabilities related to funds received by NSENA but unearned on existing revenue related contract arrangements. As additional earn-out consideration, Wrap Reality has agreed to pay NSENA 10% of net revenues (or a lesser amount equal to 50% of direct profit) from specific identified prospects that become revenue customers (“NSENA Earn-out Consideration”) before September 30, 2021, but only on amounts collected between consummation of the acquisition and June 30, 2022.

Each of the Key Employees executed an At-Will Employment, Confidential Information, Non-Compete/Non-Solicitation, Invention Assignment, and Arbitration Agreement and the Key Employees were issued service-based stock options exercisable for an aggregate of 150,000 shares of the Company’s Common Stock exercisable for ten years at $5.46 per share, vesting over two years unless accelerated by certain events. Mr. Moeller was granted an additional ten-year performance-based stock option exercisable at $5.46 per share on 100,000 shares of Common Stock based on achieving certain virtual reality revenue targets by December 1, 2024. Each of the two Consultants were granted service-based stock options exercisable for 20,000 shares of the Company’s Common Stock for five years at $5.46 per share, vesting over two years unless accelerated under the terms of the stock options. 

our General Counsel.

Business Outlook and Challenges

Our

We believe our Company's products and solutions continue to gain worldwideare gaining global recognition and awareness and recognition through various channels such as social media, trade shows, and media exposure, trade shows, product demonstrationsamong others. In part, this recognition and wordawareness can be attributed to positive feedback from law enforcement agencies and the successful deployment of mouthour products. As a result, our brand, Wrap, is becoming increasingly recognized on a global scale as a resultleader in remote restraint and non-lethal solutions.

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Table of positive responses from agencies and early adoption and deployment success. We believe the Wrap is gaining traction as a recognized global brand, with innovative technology and an initial product foundation achieved throughContents

In addition, we are focused on aggressive marketing and public relations.relations efforts. We believe that we have strongare confident in the potential market opportunities for our remote restraint solution throughout the worldand virtual reality solutions in the law enforcement and security sectors worldwide. These opportunities are driven by the increasing demand for less-lethal policing.

In the law enforcement sector, our BolaWrap product has been successfully deployed in the field, as reported by many agencies. BolaWrap is now in use by over 900 US law enforcement agencies and in 59 countries. Due to its safe remote restraint capabilities, some agencies do not deem its usage a resultcategorical reportable use of increasing demands forforce and rather place it underneath early use of force such as handcuffs. In our strategic roadmap, we clarified that law enforcement agencies deploy BolaWrap when verbal commands breakdown but long before there is justifiable escalation to pepper spray, pepper ball, batons, bean bags, tasers or Conducted Electrical Weapons (CEW’s) or firearms.

Some agencies voluntarily report usage to Wrap but many do not. In the usage reports we have been provided; officers have reported successful outcomes in 82% of the use cases. This percentage is higher than what is often seen with less lethal policingtools. From the information we have been provided, the most common BolaWrap use case is for individuals with behavioral health issues, and increasing threats posedthe second most common BolaWrap use case is during domestic violence calls. Twenty-six percent of the reported persons who are wrapped with the BolaWrap are thought to be under the influence of alcohol or drugs.

There are many reasons why we may not receive reports on all the use of the BolaWrap, including, when uses of BolaWrap are considered evidence in ongoing criminal cases, are controlled by non-compliant subjects.

local policy or regulation, or require officer and union and other released to be shared with us. However, some agencies have shared bodycam footage of successful field deployments with us, which we may use in our training and education efforts. We grew our businessbelieve that as the reports of BolaWrap's effectiveness in 2020 with revenues increasing 460% andde-escalation continue to expandincrease, it will contribute to our businessfuture revenue growth.

Our company anticipates/believes that our portfolio of safe, remote restraint products and training services has a strong and expanding pipeline of market opportunities in 2021,the law enforcement, military, corrections, and homeland security sectors both domestically and internationally, through directinternationally. With the increasing demand for more humane and distributor sales. We havesafer policing practices, we expect a robust and growing pipeline of opportunities andcontinued surge in our global business. Currently, we are pursuing largeexploring major international business prospects internationally and also pursuing businesswhile simultaneously seeking to establish relationships with large police agencies in the U.S. ItUS. However, we acknowledge that it is difficultchallenging to anticipate how long it will take to closepredict the exact timeline for closing these opportunities,deals, or ifwhether they will ultimately comematerialize.

As part of our efforts to fruition.

To supportexpand our increased sales and distribution activitiesoperations, we have developed and offer robustprovide a comprehensive training and class materials that certifyprogram for law enforcement officers and trainers as BolaWrap Instructors in using the BolaWrap. This training equips them with knowledge about the appropriate use and limitations of the BolaWrap in conjunctiontandem with modern policing tacticstechniques for de-escalation of encounters. Over 520We now focus on also teaching when and why BolaWrap should be used, including the specific area of success (I.e., after verbal commands break down and before the law enforcement officer is ready to escalate to less lethal pain compliance tools. Our company believes that law enforcement trainers and officers who have been trained to use our products, or have witnessed demonstrations, are more inclined to support the acquisition and deployment of our products by their respective departments to drive successful outcomes. As of December 31, 2022, over 1,360 agencies have received BolaWrap training with over 1,5504,580 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments.departments, representing a 32% increase in agencies and a 30% increase in trained officers as compared to December 31, 2021.

Operating expenses for the full year 2022 reduced by $5.0 million or 19% as compared to the full year 2021. Our new management team immediately prioritized reducing operating expenses, and in the second quarter, conducted a thorough top to bottom assessment of all aspects of our business. This assessment culminated in the creation of a strategic roadmap aimed at achieving sustainable growth and delivering long-term value to our shareholders. Our strategic roadmap centers on expanding our sales by building repeatable domestic BolaWrap sales, increasing international sales of the new BolaWrap 150, and expanding the deployment of BolaWrap to full patrol-wide utilization via a customer success function. Additionally, we have established a dedicated inside sales leader to increase our velocity on new leads. To catalyze sales growth, we are expanding our distributor and partner relationships while simultaneously diversifying and innovating our product offerings. As part of our strategic roadmap, we have made the decision to improve the pricing on BolaWrap 150 devices and cassettes, given the product's proven success as a significant upgrade for law enforcement. These increased margins will drive us to breakeven and profitability more quickly. We have also begun charging for our respected training services.

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Changes have been implemented in how we sell Wrap Reality, and we have established a Software as a Service (SaaS) model for our virtual reality technology moving forward. We acquired a cloud software capability and will now be offering both on premise and cloud 3D Virtual Reality options for Wrap Reality later in 2023. We believe the synergy in BolaWrap to de-escalate and reduce uses of force and the immersive 3D Virtual Reality training for law enforcement and corrections create a unique well positioned law enforcement technology company that is prepared for 21^st Century policing and driving safe outcomes. Now with our key focus on where BolaWrap and Wrap Reality fit into the Force Factor diagram below in Figure X, agencies are likely to see significant increased usage where BolaWrap is a tool that can be used every week to appropriately de-escalate a dangerous situation and save the lives and careers of the officers we serve and save the lives of the individuals they interact with on dangerous calls. We anticipate these changes will have a significant positive impact on our future success and growth.

Our company is confident that implementing these strategic changes will lead to substantial sales growth and put us on a path towards sustainable profitability. Although geopolitical tensions and macroeconomic challenges have affected our quarterly results in the past and may in the future, we believe our firm is uniquely positioned to provide lifesaving technologies and training that enable law enforcement officers worldwide to conduct safe and effective encounters while reducing the use of force. If departments follow our newly released Use of Force Guarantee requirements, we are confident enough to offer that in 12 months we would buy their BolaWrap devices back if they do not reduce their reportable use of force by 10%. With an increasing addressable market, Wrap offers a unique value proposition. Our improved pricing strategy, coupled with reduced operating expenses and our growing sales outlook, is expected to help reduce losses and improve cash flow in the future. 

Looking ahead to the coming years, we plan to increase the number of product demonstrations and training sessions, particularly in international markets. Our new focus on the when and why BolaWrap is used is already showing improved results. This is a departure of the hardware product only approach of the past. Our sales of the BolaWrap 150 and Wrap Reality are expected to continue to rise significantly, aided by our ongoing cost savings and cost control measures, which should lead to an overall reduction in cash burn. As a result, we anticipate reaching an adjusted EBITDA break-even point by the conclusion of fiscal 2023, and if strong sales persist, we may achieve profitability by the end of 2024.

With the transaction with Lumeto in late November 2022, we have continued to invest in our VR system while working to continue to develop real-world scenarios into our robust Wrap Reality platform. In the future, the Lumeto transaction will allow for a cloud-based option of our Wrap Reality platform including a lower initial capital commitment for hardware. We plan to increase marketing activities for our VR solution to both law enforcement and corrections throughout 2023 and expect to launch the cloud-based version in mid-2023.

At December 31,, 2020, 2022 we had backlog of approximately $120,000$257 thousand expected to be delivered in the first quarter of 2023. Additionally, we had deferred revenue of $333 thousand expected to be recognized generally over the next twelve months.five years. Our deferred revenue mostly is from Wrap Reality subscription and other revenue. We expect our deferred revenue to grow in future years due to the SaaS business model on Wrap Reality. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instance’sinstances, cancellation, in the normal course of business.

Since inception, in March 2016, we have generated significant losses from operations and anticipate that we will continue to generate significant losses from operations for the foreseeable future. We believe that we have adequate financial resources to sustain our operations for the next year. For the full year.

2022 we reduced our net loss by more than $6.8 million versus the comparable prior year. Net cash used in operations during the full year 2022 was $3.6 million less than cash used in operations during the full year 2021. This improvement was a result of our strategic roadmap as well as our cost control measures implemented in Q2, Q3 and Q4 of last year.

We expect that we will need to continue to innovate new applications for our public safety technology, open new geographies, develop new products and technologies to meet diverse customer requirements and identify and develop new markets for our products.

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COVID-19 Impact

We face significant challengesbelieve that our sales in operating2022, were significantly adversely affected by the shift to our BolaWrap 150 product and growing our business related to the outbreakdiscontinuation of the novel coronavirus (“COVID-19”) which continues to spread throughoutBolaWrap 100 production line, along with the United States and the World. The outbreak of COVID-19 has resulted in travel restrictions, quarantines, “stay-at-home” and “shelter-in-place” orders and extended shutdown of certain businesses around the world. We are monitoring the outbreak of COVID-19 and the related business and travel restrictions and changes to behavior intended to reduce its spread, in addition to the impact on our employees. We continued to operate with some modifications, and we took actions intended to protect our employees and our customers that adversely affected our results by increasing costs during a period of stalled sales and production activity.

Starting during the second quarter of 2020 our customers experienced staffing issues limiting ourlimited ability to demonstrate and train.train customers in 2021 due to the COVID-19 pandemic, particularly internationally. We believehad many customers that were happy with the BolaWrap 100 and many distributors who also like the BolaWrap 100 that were concerned about not being able to continue to expand with the first-generation device. This device was completely turned off from sales in Q4 of 2021 and product delays kept our BolaWrap 150 from being fully delivered to customers until late Q1 in 2022. This gap in having product to sell as well as the unhappiness in turning off the first-generation product while it was still having success in the field, created significant work throughout 2022 to get the BolaWrap 150 approved by departments as well as by import and federal authorities for international countries. We also had a much slower than expected trade in the timeframe of BolaWrap 100 to BolaWrap 150 due to the customer affinity for our first to market device. A lesson learned by the company was to continue to sell BolaWrap 100 cartridges and to announce in late 2022 that we made an important transition duringwill build and supply the second quarter including remote sales and training through webinars and expect thisBolaWrap 150 for at least five years from its launch date. This will allow departments that are going to do very large agency wide deployments to count on the BolaWrap 150 to be an ongoing aspect of our business. We curtailed most sales and training travel and reduced our production personnel until lateavailable even if we bring to market a newer device that has new features.

However, we witnessed a rebound in the second quarter when some customer locations domesticallyhalf of 2022, following the full-scale production and internationally eased restrictionssales of the BolaWrap 150. New device supply chain and we beganproduct issues improved. We got on the road and demonstrated the new and enhanced capabilities of the BolaWrap 150 and customers clearly saw the enhanced capabilities and have come to again close business prospects. Inrespect and want the third quarter we continued to face some domesticnew technology.

Supply chain disruptions have also affected our operations and substantial international restrictions that affectedcould negatively impact our ability to travelsource materials, manufacture and train customers. Wedistribute products. Moreover, financial markets are experiencing significant volatility, which could potentially affect our ability to enter into or modify favorable terms and conditions regarding equity and debt financing activities. Nevertheless, we currently have $19.3 million in cash and cash equivalents and short-term investments as of December 31, 2022, which we believe this had an adverse effect onprovides sufficient capital to fund our sales inoperations for the thirdnext twelve months and fourth quarters. Severe international travel restrictions persist and impactabsorb the timing of future international orders. It is uncertain when these restrictions will ease allowing our sales and training personnel to travel to many international destinations.

The magnitude and the durationpotential near-term impacts of the pandemic and other economic uncertainty. However, liquidity constraints and access to capital markets could still negatively affect our liquidity and require changes to our investment strategy.

We acknowledge that the extentwork carried out by our employees and durationassociates is critical and essential, as per various published standards. We have taken several measures to ensure the safety and security of our employees, while also ensuring the pandemic’s adverse effectavailability and functionality of our critical infrastructure. In compliance with the guidelines issued by the Centers for Disease Control and local authorities, we have implemented COVID-19 safety measures in the workplace. Nevertheless, we recognize that events related to the pandemic could potentially result in lost or delayed revenue for our Company. These events include restrictions on economic and social activity, consumer confidence, customer spending and preferences, labor and healthcare costs, and unemployment rates is uncertain as of the date of this Report. Ourour suppliers' ability to sell, trainmeet delivery requirements and servicecommitments, employees' inability to perform their work due to illness caused by the pandemic or local, state, or federal mandates requiring employees to stay home. Delays in carriers' ability to deliver our products to customers, unforeseen deviations from customers or foreign governments restricting the ability to conduct business, and conductcustomers' inability to pay us on a timely basis, if at all, could also limit our revenue.

Our Company may be positively or negatively impacted by continued social unrest, protests against racial inequality, and movements like "Defund the Police." Such unrest may be further fueled by misleading information or negative publicity about our solutions. We believe our solutions are actually the answer to reducing use of force and driving safer outcomes for officers and the citizens they interact with each day. Although the intensity of these events may have subsided, some may still indirectly or directly influence police agency budgets and the funding available to current and potential customers. In addition, participants in these events may attempt to create the impression that our solutions are contributing to the perceived problems, potentially harming our business may be adversely impacted as a result of continuing or future pandemic related travel restrictions, mandatory business closures, and stay-at home or similar orders; temporary reductionsoperations, including our revenues, earnings, and cash flows from operations.

Changes in our workforce, closuresmanagement and other critical personnel have the potential to positively or negatively affect our business. Such disruptions could have an adverse impact on our operations, programs, growth, financial condition, or results of operations. On the other hand, improvements in our operations, operating expenses, and go-to-market approaches could positively influence the success of our offices and facilities andbusiness in the abilityfuture.

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Table of our customers and suppliers to continue their operations as a result of the pandemic. While there could ultimately be a material impact on operations and liquidity of the Company, at the time of issuance of this Report, the impact cannot be determined.Contents

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United StatesUS (“U.S.US GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. We evaluate our estimates, on an on-going basis, including those estimates related to recognition and measurement of contingencies and accrued costs.expense. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, tax contingencies, unrecognized tax benefits, and any required valuation allowance, including taking into consideration the probability of the tax contingencies being incurred. Management assesses this probability based upon information provided by its tax advisers, its legal advisers and similar tax cases. If at a later time our assessment of the probability of these tax contingencies changes, our accrual for such tax uncertainties may increase or decrease. Our effective tax rate for annual and interim reporting periods could be impacted if uncertain tax positions that are not recognized are settled at an amount which differs from our estimates.

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Some of our accounting policies require higher degrees of judgment than others in their application. These include share-based compensation and contingencies and areas such as revenue recognition, allowance for doubtful accounts, valuation of inventory and intangible assets, operating lease liabilities,estimates of product line exit costs, warranty liabilities and impairments.

Revenue Recognition. We sell our products to customers including law enforcement agencies, domestic distributors and international distributors and revenue from such transactions is recognized in the periods that products are shipped (free on board (“FOB”) shipping point) or received by customers (FOB destination), when the fee is fixed or determinable and when collection of resulting receivables is reasonably assured. We identify customer performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue as we satisfy the performance obligations. Our primary performance obligations are products/accessories and virtual realityVR software licensing or sale. Our customers do not have the right to return product unless the product is found to be defective.

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.

Share-Based Compensation. We follow the fair value recognition provisions issued by the Financial Accounting Standards Board (“FASB”) in Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation (“ASC 718”) and we adopted Accounting Standards Update (“ASU”) 2018-07 for share-based transactions with non-employees. Share-based compensation expense recognized during 2020 and 2019 includes stock option and restricted stock unit compensation expense. The grant date fair value of stock options is determined using the Black-Scholes option-pricing model. The grant date is the date at which an employer and employee or non-employee reach a mutual understanding of the key terms and conditions of a share-based payment award. The Black-Scholes option-pricing model requires inputs including the market price of the Company’s Common Stock on the date of grant, the term that the stock options are expected to be outstanding, the implied stock volatilities of several publicly-tradedpublicly traded peers over the expected term of stock options, risk-free interest rate and expected dividend. Each of these inputs is subjective and generally requires significant judgment to determine. The grant date fair value of restricted stock units is based upon the market price of the Company’s Common Stock on the date of the grant. We determine the amount of share-based compensation expense based on awards that we ultimately expect to vest and account for forfeitures as they occur. The fair value of share-based compensation is amortized to compensation expense over the vesting term.

Allowance for Doubtful Accounts. Our products are sold to customers in many different markets and geographic locations. We estimate our bad debt reserve on a case-by-case basis and the aging of accounts due to a limited number of customers mostly government agencies or well-established distributors. We base these estimates on many factors including customer credit worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. Our judgments and estimates regarding collectability of accounts receivable have an impact on our financial statements.

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Valuation of Inventory. Our inventory is comprised of raw materials, assemblies and finished products. We must periodically make judgments and estimates regarding the future utility and carrying value of our inventory. The carrying value of our inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from our inventory is less than carrying value.

Valuation of Intangible Assets. Intangible assets consisted of (a) capitalized legal fees and filing costsexpense related to obtaining patents and trademarks, (b) customer agreements, tradenames, software, non-solicitation and non-compete agreements acquired in business combinations and valued at fair value at the acquisition date, and (c) the purchase cost of indefinite-lived website domains. We must make judgments and estimates regarding the future utility and carrying value of intangible assets. The carrying values of such assets are periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from an individual intangible asset is less than carrying value. This generally could occur when certain assets are no longer consistent with our business strategy and whose expected future value has decreased.

Accrued Expenses.Expense. We establish a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. This reserve requires us to make estimates regarding the amount and costs of warranty repairs we expect to make over a period of time. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs, and anticipated rates of warranty claims. We have very limited history to make such estimates and warranty estimates have an impact on our financial statements. Warranty expense is recorded in cost of revenues. We evaluate the adequacy of this reserve each reporting period.

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We use the recognition criteria of FASB ASC Topic 450-20, “Loss Contingencies”Loss Contingencies, to estimate the amount of bonuses when it becomes probable a bonus liability will be incurred and we recognize expense ratably over the service period. We accrue bonus expense each quarter based on estimated year-end results, and then adjust the actual in the fourth quarter based on our final results compared to targets.

Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. ThereOther than the planned production change requiring a new estimate of exit expense, there were no significant changes or modification of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the yearperiod ended December 31, 2020.

2022.

Recent Accounting Pronouncements

New pronouncements issued for future implementation are discussed in Note 1 to our financial statements.

Segment and Related Information

The Company operates as a single segment. The Company’s chief operating decision maker is its Chief Executive Officer, who manages operations for purposes of allocating resources. Refer to Note 16,17, Major Customers and Related Information, in our financial statements for further discussion.

Operating Expense

Our operating expense includesexpenses include (i) selling, general and administrative expense, and (ii) research and development expense, and in the most recent fiscal quarter, (iii) product line exit expense. Research and development expense is comprised of the costs incurred in performing research and development activities and developing production on our behalf, including compensation and consulting, design and prototype costs, contract services, patent costs and other outside expenses.expense. The scope and magnitude of our future research and development expense is difficult to predict at this time and will depend on elections made regarding research projects, staffing levels and outside consulting and contract costs. The future level of selling, general and administrative expense will be dependent on staffing levels, elections regarding expenditures on sales, marketing and customer training, the use of outside resources, public company and regulatory costs,expense, and other factors, some of which are outside of our control.

We expect our operating costs will increase as we expand product distribution activities and expand our research and development, production, distribution, training, service and administrative functionsremain at comparable current levels in the near term. We may also incur substantialadditional non-cash stock-basedshare-based compensation costs depending on future option and restricted stock unit grants that are impacted by stock prices and other valuation factors. Historical expenditures are not indicative of future expenditures.

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Results of Operations

Year Ended December 31, 20202022 Compared to Year Ended December 31, 2019

2021

The following table and narrative sets forth for the periods indicated certain items of our condensed statement of operations.operations, expressed in thousands of dollars. The financial information and the discussion below should be read in conjunction with the financial statements and notes contained in this Report.

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	Year Ended December 31,		Change
	2020	2019	$	%
Revenues:
Product sales	$3,868,384	$656,071	$3,212,313	490%
Other revenue	75,673	40,719	34,954	86%
Total revenues	3,944,057	696,790	3,247,267	466%
Cost of revenues	2,601,323	420,016	2,181,307	519%
Gross profit	1,342,734	276,774	1,065,960	385%
Operating expenses:
Selling, general and administrative	11,630,644	6,653,465	4,977,179	75%
Research and development	2,788,887	2,236,985	551,902	25%
Total operating expenses	14,419,531	8,890,450	5,529,081	62%
Loss from operations	$(13,076,797)	$(8,613,676)	$(4,463,121)	52%

		Year Ended December 31,								Change
		2022				2021				$				%
(in thousands)
Revenues:
Product sales		$	7,481			$	7,381			$	100				1	%
Other revenue			568				348				220				63	%
Total revenues			8,049				7,729				320				4	%
Cost of revenues
Products and services			4,315				4,987				(672	)			(13	%)
Product line exit expense			-				747				(747	)			(100	%)
Total cost of revenues			4,315				5,734				(1,419	)			(25	%)
Gross profit			3,734				1,995				1,739				87	%
Operating expenses:
Selling, general and administrative			16,386				20,276				(3,890	)			(19	%)
Research and development			5,078				6,214				(1,136	)			(18	%)
Total operating expenses			21,464				26,490				(5,026	)			(19	%)
Loss from operations		$	(17,730	)		$	(24,495	)		$	6,765				28	%

Revenue

We reported revenue of $3,944,057$8.0 million for the year ended December 31, 20202022 (“Fiscal 2020”2022”) as compared to revenue of $696,790$7.7 million for the year ended December 31, 2019 (Fiscal 2019”2021 ("Fiscal 2021"), a 466%4% increase over the prior year. International revenues decreased from $4,372 thousand for the year ended December 31, 2021 to $2,734 thousand for the year ended December 31, 2022. We incurred discounts of $898 thousand during the year ended December 31, 2022, primarily as a result of promotional programs designed to encourage domestic customers to upgrade to the BolaWrap 150. These discounts compare to business discounts of $561 thousand in the prior year. We expect a decline to minimal discounts in 2023 as we have phased out our promotional upgrade offer.

International revenues generally consist of larger orders with the end user being large, centralized government agencies. These orders continue to be lumpy and difficult to predict as to both timing and amount. International orders anticipated in the second quarter were delayed significantly due to the changeover from the BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future quarters. Some key international customers had approved the BolaWrap 100 and even purchased just prior to our announcement of the BolaWrap 150 a significant number of devices and cartridges. Because of the large size of these agencies, they wanted to grow on a single device and not multiple devices, but Wrap management made the decision to shut down the BolaWrap 100 product line for new devices in 2021. We believe our salesthat revenue during the second, thirdfiscal year 2023 will increase overall compared to the revenue recorded during 2022 due to growth of domestic sales and fourth quartersanticipated international orders from a robust pipeline, although no assurances can be given. We believe based on pipeline that these larger international deals are more likely to book and ship in the latter half of Fiscal 2020 were negatively impacted by the COVID-19 pandemic as we were limited in our ability to make product demonstrations and conduct training especially in our international markets. As some areas of the United States eased restrictions, we were able to commence limited in-person demonstrations and training to supplement our webinar capabilities. 2023.

We incurred product promotional costs of $747,443$688 thousand for Fiscal 20202022, related primarily to BolaWrap 150 demonstration products and the cost of demonstrationtraining products and accessories delivered to law enforcement agencies that were expensed as marketing costs. A total of $924 thousand of such product promotional costs were incurred during the Fiscal 2021.

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We had $16,015$333 thousand of deferred revenue at December 31, 2020,2022, of which $14,125$198 thousand related to virtual realityVR, $11 thousand was related to training and $1,890$124 thousand related to BolaWrap extended warranties.

We believe and services. As we can grow sales in the future but the impact of the COVID-19 pandemic has created much uncertainty in the global marketplace. We are unable to predict the impact on demandpotentially secure increased bookings for our products in future periods. We expect sales levels may be uneven as we grow both our domestic and international customer base andWrap Reality, as well as from the continued impact of COVID-19 restrictions. WhileBolaWrap extended warranties, we plan for increased revenuesexpect our deferred revenue to grow in 2021, there can be no assurance, especially given the uncertainties of the COVID-19 pandemic, that we can achieve revenue growth.

future quarters.

At December 31, 2020,2022, we had backlog of $120,260$257 thousand expected to be delivered in the next twelve months.first quarter of 2023. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instance’s cancellation in the normal course of business.

Gross Profit

Our cost of revenuegross profit for Fiscal 20202022 was $2,601,323$3.7 million or a gross margin of 46%. Excluding the non-cash charge related to a restructuring inventory charge, our gross profit for Fiscal 2021 was $2.7 million resulting in a gross margin of 34%35%. We curtailed production for ten weeks duringThe Fiscal 2022 gross profit represented an 87% increase over prior year as a result of rolling out the second quarterBolaWrap 150 product, selling price adjustments implemented in September of Fiscal 2020 due to the COVID-19 restrictions in Arizona2022, and this down time negatively impacteda reduction of promotional pricing, offset by some supply chain issues and inventory adjustments.

As our gross margin. The gross margin for Fiscal 2019 of 40% was assessed on a small revenue base.

Due to ourhistory is limited, history of revenue and startup costs incurred to establish volume manufacturing, historical margins may not be indicative ofaccurately reflect future margins. In addition, ourHowever, we expect higher margins varywith the production of the BolaWrap 150 compared to previous production due to design changes and improved pricing. Our margins are also subject to variations based on the sales channels and product mix through which our products are sold and product mix. Due to timing of international orderssold. At present, our mix of cartridges was higher during Fiscal 2020 than Fiscal 2019. Currently, our cartridgescassettes have lower margins than BolaWrap devices, however, latedevices. As we scale cassette production, we will look to reduce our costs and drive higher cassette margins. Cassettes in 2020 we implemented initiatives to improve gross margins attributable to2022 were a total of 23% of our cartridges. Weoverall revenue and will continue to implement productgrow as a recurring revenue base as more BolaWrap devices are in the field and the usage of BolaWrap increases due to the need of officers to de-escalate earlier to prevent injuries and use of higher levels of force.

We regularly introduce updates and revisions includingto our products, which may include changes to raw materialmaterials and component changes that maycomponents, and can impact our product costs. With such product updates and revisions, we haveGiven our limited experience with warranty cost experience andcosts, our estimated future warranty costs canexpenses may affect our gross margins.

Our global supply chain has experienced notable component shortages, extended lead times, cost fluctuations, and logistical constraints, all of which have affected our product costs. Although we anticipate these supply chain obstacles to ease in 2023, we acknowledge that future supplier shortages, quality problems, and logistics delays could impact our gross margins.

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In September 2019 we relocated manufacturing operationsproduction schedules and commenced production athave a material negative impact on our new facility in Tempe, Arizona. While this significantly increases our capacity, we continue to implement productionfinancial condition, results of operation, and process changes targeted to improve efficiency.

cash flows.

Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expense increaseddecreased significantly by $4,977,179$3.9 million during Fiscal 2020,2022 when compared to Fiscal 2019. We incurred a $546,723 increase in non-cash stock-based2021 due to cost containment efforts.

Share-based compensation expensecosts allocated to selling, general and administrative expense that totaled $1,956,818 in the Fiscal 2020 asSG&A decreased to $2.7 million compared to $1,410,095$4.6 million for the comparable prior year. This $1.9 million decrease resulted primarily from changes in the Fiscal 2019. Other increases included a $2,043,748 increasemanagement, one-time costs in cash compensation and recruiting costs from an increase in headcount over the prior year period, and changes in the stock price.

Salaries and burden costs of $6.5 million for Fiscal 2022 was an increase of $951 thousand or a $276,64517% increase in public company related costs. Marketing and promotion costs increased $979,833 due primarily to promotional products and online advertising. Travel efforts resumed during the third quarter of the year ended December 31, 2020, however, due to the COVID-19 pandemic, travel was still limited. Our travel costs related to sales, demonstrations and training decreased by $107,768 from the prior year even though the number of sales and training personnel increased from the prior year.

Due in part to our receipt of $414,362 in PPP Loan proceeds, we maintained staffing in April 2020, and were able to respond to limited re-openings commencing late in the second quarter of Fiscal 2020. We developed and deployed new tools such as webinars to communicate with prospective and existing customers. We believe these decisions positioned us to respond to increased opportunities resulting from recent highly publicized policing issues and an increased focus on less lethal engagement. The Company’s PPP Loan in the amount of $414,362 and accrued interest was forgiven in full in December 2020 by the Small Business Administration. The Company recognized $416,683 in debt forgiveness incomehigher bonus accrual as a result of meeting full year targets, and one-time recruiting expenses associated with changes in management. During Fiscal 2022, as compared to the forgiveness.

In 2021,prior year, we incurred reduced advertising and promotions costs (including product promotion costs) of $769 thousand, increased professional fees of $377 thousand, and reduced consulting and contract services fees of $905 thousand. We expect expenditures for SG&A expenses in 2023 to spend increased resources on the marketingremain in line with 2022 despite expected revenue growth.

Advertising and sellingpromotion costs were $1.1 million for during Fiscal 2022 or a decrease of our products, training distributors$0.8 million as compared to $1.9 Million during Fiscal 2021. The changes in advertising costs were related to reductions in consultants and customers and administratively supporting our operations to respond to increased opportunities, but amounts could vary depending on sales levels, the impactother cost containment efforts.

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Table of the COVID-19 pandemic and other factors outside of our control.Contents

Research and Development Expense

Research and development expense increaseddecreased by $551,902$1.1 million for Fiscal 2020,2022, when compared to Fiscal 2019.2021. We incurred a $153,925$257 thousand period over period increasedecrease in non-cash share-based compensation expense allocated to research and development expense as a result of new award grantscost containment efforts and vesting timing. The increasechanges in costs during Fiscal 2020 when compared to the prior year included a $485,910 increase in cash compensation costs resulting from an increase in headcount primarily associated with product development. Prototype related costs increased by $18,984 for Fiscal 2020, which increase was primarily related to development efforts to improve our BolaWrap 100 product and develop new products.personnel. Outside consulting costs decreased by $48,766$847 thousand and prototype related costs decreased by $2 thousand for Fiscal 2020,2022, primarily due to the addition of permanent staff. Travelreduced costs related to research and development decreased $100,822 for Fiscal 2020 when compared to Fiscal 2019 primarily due to COVID-19 restrictions and completion offinalizing the Arizona facility setup. We expect our research and development costs to increase in the future as we add staff and expand our research initiatives in response to market opportunities. 

NetBolaWrap 150 product.

Operating Loss

Loss from operations during Fiscal 2020 increased by $4,463,1212022 of $17.6 million was a reduction of $6.8 million when compared to Fiscal 2019, resulting primarily from2021, reflecting increased margin and the focus on reducing operating costs due to increased personnel, marketing and selling and supporting activities.

implementation of our strategic roadmap.

Liquidity and Capital Resources

Overview

We have experienced net losses and negative cash flows from operations since our inception. As of December 31, 2020,2022, we had cash and cash equivalents of $16,646,811,$5.3 million, short-term investments of  $24,994,360,$13.9 million, positive working capital of $44,586,395$23.7 million and had sustained cumulative losses attributable to stockholders of $25,310,033.$67.4 million. We believe that our cash on hand and short-term investments will sustain our operations for at least the next twelve months from the date of this Report.

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During Fiscal 2020 we received $11,667,206 of net proceeds resulting from the consummation of a registered offering of our Common Stock in June 2020, $25,879,188 of net proceeds from the exercise of previously issued warrants and stock options and obtained $414,362 in proceeds from the PPP Loan.

months.

Our primary source of liquidity to date has been funding from our stockholders from the sale of equity securities and the exercise of derivative securities, consisting of options and warrants. We expect our primary source of future liquidity will be from the sale of products, exercise of stock options and warrants and if required from future equity or debt financings.

Capital Requirements

Due in part to the volatility caused by COVID-19, we do not have a high degree of confidence in our estimates for our future liquidity requirements or future capital needs, which will depend on, among other things, capital required to introduce our productsgrow product revenues and the staffing and support requirements, as well as the timing and amount of future revenue and product costs. We anticipate that demands for operating and working capital may grow depending on decisions on staffing, development, production, marketing, training and other functions and based on other factors outside of our control. We believe we have sufficient capital to sustain our operations for the next twelve months.

Our future capital requirements, cash flows and results of operations could be affected by, and will depend on, many factors, some of which are currently unknown to us, including, among other things:

	●	The speed at which BolaWrap is accepted to be on every officer and the speed at which departments move from small deployments to all field officers;
	●	The speed of new sales being booked and the success of our marketing efforts;
	●	Decisions regarding staffing, development, production, marketing, and other functions;

●

The timing and extent of market acceptance of our products;

●

Costs, timing and outcome of planned production and required customer and regulatory compliance of our products;

●

Costs of preparing, filing and prosecuting our patent applications and defending any future intellectual property-related claims;

●

Costs and timing of additional product development;

●

Costs, timing and outcome of any future warranty claims or litigation against us associated with any of our products;

●

Ability to collect accounts receivable; and

●

Timing and costs associated with any new financing.

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●

The impact and effectsTable of the global outbreak of the COVID-19 pandemic, and other potential pandemics or contagious diseases or fear of such outbreaks;Contents

●

Decisions regarding staffing, development, production, marketing and other functions;

●

The timing and extent of market acceptance of our products;

●

Costs, timing and outcome of planned production and required customer and regulatory compliance of our products;

●

Costs of preparing, filing and prosecuting our patent applications and defending any future intellectual property-related claims;

●

Costs and timing of additional product development;

●

Costs, timing and outcome of any future warranty claims or litigation against us associated with any of our products;

●

Ability to collect accounts receivable; and

●

Timing and costs associated with any new financing.

Principal factors that could affect our ability to obtain cash from external sources including from exercise of outstanding warrants and options include:

●

Volatility in the capital markets; and

●

Market price and trading volume of our common stock.

●

Volatility in the capital markets; and

●

Market price and trading volume of our common stock.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Cash Flow

Operating Activities

During Fiscal 2020,2022, net cash used in operating activities was $12,186,924.$14.6 million. The net loss of $12,580,209$17.6 million was decreased by non-cash expense of $2,079,882$4.4 million consisting primarily of share-based compensation expense of $2,236,743 less debt forgiveness income of $416,683 related to the PPP loan.$3.2 million. Other major component changes using operating cash included an increase of $1,685,727 in accounts receivable, an increase$2.4 million in inventories of $342,741, a $341,629 decrease in customer deposits and a $508,498net increase in prepaid expenses and other current assets. An increase of $825,382 in accounts payable and an increase of $492,564 in accrued liabilities reducedof $250 thousand. A decrease in accounts receivable of $957 thousand increased the cash used in operating activities.

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During Fiscal 2019,2021, net cash used in operating activities was $8,485,637.$18.2 million. The net loss of $8,325,488$24.4 million was decreased by non-cash expense of $1,585,699$7.2 million, consisting primarily of share-based compensation expense of $1,536,096.$5.4 million, restructuring inventory charges of $747 thousand, depreciation and amortization expense of $478 thousand, and shares issued for services of $239 thousand. Other major component changes using operating cash included a $1,892,768 increase in inventories, an increase of $190,951$2.1 million in accounts receivable, a $136,084and an increase in prepaid expenses and other current assets and a $96,000 reductionexpense of $109 thousand. A decrease in deferred compensation. Aninventories of $559 thousand, an increase of $286,398 in accounts payable and accrued liabilitiesexpense of $492 thousand, and new customer depositsan increase of $343,724$249 thousand in deferred revenue reduced the cash used in operating activities.

Investing Activities

During Fiscal 2020,2022, we used $34,979,511$30.5 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $10,000,000. We$46.6 million.

During Fiscal 2021, we used $55 million of cash to purchase short-term investments and had noproceeds from maturities of short-term investment activity in 2019.

investments of $50 million.

We used $248,897$256 thousand and $256,742$995 thousand of cash for the purchase of property and equipment during Fiscal 20202022 and 2019,Fiscal 2021, respectively. We invested $128,914$173 thousand and $114,274$187 thousand in patents during the Fiscal 20202022 and 2019,Fiscal 2021, respectively.

Financing Activities

During Fiscal 2020, we purchased $543,563 of indefinite life intangible assets and software and paid $210,000 for the first installment of the NSENA acquisition.

Financing Activities

During the year ended December 31, 2020,2022, we received $11,667,206 of net proceeds resulting from a registered offering of our Common Stock$83 thousand in June 2020, $25,879,188 of net proceeds from the exercise of previously issued stock options.

During Fiscal 2021, we received $12 million from previously issued stock purchase warrants, and stock options and $414,362$1.7 million in proceeds from a PPP Loan.

During the year ended December 31, 2019, we received $11,351,214 of net proceeds from the June 2019 Follow-On Offering and obtained $2,141,576 of net proceeds from the exercise of previously issued warrantsstock options and stock options.paid $275 thousand in debt relating to the December 2020 acquisition of NSENA.

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Contractual Obligations and Commitments

Pursuant to that certain exclusive Amended and Restated Intellectual Property License Agreement dated September 30, 2016, by and between the Company and Syzygy Licensing, LLC (“Syzygy”), we are obligated to pay to Syzygy a 4% royalty fee on future product sales up to an aggregate amount of $1.0 million in royalty payments or until September 30, 2026, whichever occurs earlier.

Weearlier.

Pursuant to the Professional Services and Technology Acquisition Agreement (the “Agreement”) entered into with Lumeto, Inc. and Spatial Industries Group, Inc. (collectively, “Service Provider”), which Agreement provides that the Service Provider will provide to the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform (the “Technology, Services, and License”), we are obligated to pay to the Service Provider (a) a cash payment upon the execution of the Agreement of $700,000, (b) a cash payment of $125,000 upon the completion of certain project delivery milestones expected in Q1, and (c) a cash payment of $125,000 upon the completion and delivery of the final Technology, Services, and License which is expected in Q2.

In January 2022 we extended our facility lease for three years through July 2025 and we are committed to aggregate lease payments on facility leasesthe lease of $94,011$121 thousand in 20212023, $126 thousand in 2024 and $56,006$75 thousand in 2022.

2025.

At December 31, 2020 the Company was2022 we were committed for approximately $2.2$3.6 million for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

Pursuant to the NSENA Asset Purchase Agreement dated December 14, 2020 we are obligated to pay to NSENA cash consideration of $100,000 on March 15, 2021, $100,000 on June 15, 2021 and $75,000 on September 15, 2021. In addition, Wrap Reality assumed $15,000 of liabilities related to funds received by NSENA but unearned on existing revenue related contract arrangements. As additional earn-out consideration Wrap Reality has agreed to pay NSENA 10% of net revenues (or a lesser amount equal to 50% of direct profit) from specific identified prospects that become revenue customers before September 30, 2021 but only on amounts collected between Closing and June 30, 2022.

Effects of Inflation

In 2022 we had increased in labor and materials due to inflation. We do not believe in 2023 that inflation has had a material impact on our business, revenue orlow unemployment and higher salaries will create higher payroll costs and increased operating results duringexpenses in the periods presented.

business. We have seen increases from multiple suppliers for materials as well as labor.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2020,2022, or subsequently thereto, that we believe are of potential significance to our financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements of the Company required to be included in this Item 8 are set forth in a separate section of this report following Item 15 commencing on Page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no disagreements or any reportable events requiring disclosure under Item 304(b) of Regulation S-K.

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ITEM 9A. CONTROLS AND PROCEDURES.

We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in our Exchange Act reports is accumulated and communicated to management, including our interim Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our interim Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 20202022 and, based on this evaluation, our interim Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s

Management’s Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of GAAP.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. 

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With our participation, an evaluation of the effectiveness of our internal control over financial reporting was conducted as of December 31, 2022, based on the framework and criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our interim Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 2022.

This Annual Report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the Company’s registered public accounting firm because the Company is an “emerging growth company” under the JOBS Act. An attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting is alsoreporting. Management’s report was not required for smaller reporting companies.

subject to attestation by the independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2020,2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.

ITEM 9B. OTHER INFORMATION

None.

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None.

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PART III

Certain information required by this Part III is omitted from this report and is incorporated by reference to our Definitive Proxy Statement to be filed with the SEC in connection with the Annual Meeting of Stockholders to be held in 20212023 (the “Proxy Statement”), which must be filed no later than 120 days after the close of the fiscal year ended December 31, 2020,2022, pursuant to Regulation 14A.

14A.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2021.

May 1, 2023.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2021.

May 1, 2023.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before April 30, 2021.

May 1, 2023.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2021.

May 1, 2023.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2021.May 1, 2023.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	List of documents filed as a part of this report:
	(1)	Index to Financial Statements
		Report of Independent Registered Public Accounting Firm (PCAOB ID: 89)		F-2
		Balance Sheets as of December 31, 20202022 and 20192021		F-3
		Statements of Operations and Comprehensive Loss for the Years Ended December 31, 20202022 and 20192021		F-4
		Statements of Stockholders’ Equity for the Years Ended December 31, 20202022 and 20192021		F-5
		Statements of Cash Flows for the Years Ended December 31, 20202022 and 20192021		F-6
		Notes to Financial Statements		F-7
	(2)	Financial Statement Schedules
		All schedules have been omitted because the information is not applicable, is not material or because the information required is included in the financial statements or the notes thereto.
	(3)	Index to Exhibits
		The exhibits listed on the accompanying index to exhibits immediately following the financial statements are filed as part of, or hereby incorporated by reference into, this Form 10-K.

Exhibit Number	Description
2.1
2.1	Stock Purchase Agreement, dated March 22, 2017, by and between Wrap Technologies, LLC, Petro River Oil Corp., and Megawest Energy Montana Corp. Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-1, filed on April 17, 2017.
2.2	Merger Agreement between Wrap Technologies, LLC and Megawest Energy Montana Corp., dated March 30, 2017. Incorporated by reference to Exhibit 2.2 to the Registration Statement on Form S-1, filed on April 17, 2017.
3.1	Amended and Restated Certificate of Incorporation of the Registrant. Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1, filed on April 17, 2017.
3.2	Bylaws of the Registrant. Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1, filed on April 17, 2017.
4.13.3	Amended and Restated Bylaws of the Registrant. Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed on February 10, 2023.
4.1	Form of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-1, filed on May 30, 2017.
4.2	Form of Investor Warrant, dated October 30, 2018. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on November 5, 2018.
4.3	Form of Placement Agent Warrant, dated October 30, 2018. Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on November 5, 2018.
4.4	Form of Investor Warrant, dated June 18, 2019. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on June 18, 2019.
4.5	Form of Offering Agent Warrant, dated June 18, 2019. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on June 18, 2019.
4.6	Form of Warrant Agreement. Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on June 2, 2020.
10.1	Amended and Restated Intellectual Property License Agreement, dated September 30, 2016, by and between Wrap Technologies, LLC and Syzygy Licensing LLC. Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1, filed on April 17, 2017.
10.2+	2017 Equity Compensation Plan. Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1, filed on April 17, 2017.
10.3	Form of Placement Agent Agreement, dated October 30, 2018. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on November 5, 2018.
10.4	Form of Registration Rights Agreement, dated October 30, 2018. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on November 5, 2018.
10.5	Supplemental Engagement Letter by and between Wrap Technologies, Inc. and Katalyst Securities LLC, dated June 7, 2019. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on June 13, 2019.
10.6	Engagement Letter by and between Wrap Technologies, Inc., Dinosaur Financial Group, LLC and Katalyst Securities LLC, dated June 12, , 2019.Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on June 18, 2019.
10.7	Amended 2017 Equity Compensation Plan. Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on June 24, 2019.
10.8	Industrial Real Estate Lease, dated May 10, 2019, by and between Wrap Technologies, Inc. and JM Sky Harbor Properties LLC. Incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed on June 6, 2019. 2019.

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10.9	Promissory Note by and between Wrap Technologies, Inc. and Bank of America, N.A. dated May 1, 2020. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on May 5, 2020.
10.10	Consulting Agreement by and between the Company and V3, effective April 1, 2020. Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on May 29, 2020.
10.11	Amendment No. 2 to the Wrap Technologies, Inc. 2017 Equity Compensation Plan. Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on June 17, 2020.
10.12	Form of Subscription Agreement. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on June 2, 2020.
10.13	Employment Agreement by and between Wrap Technologies, Inc., and Marc T. Thomas, dated July 30, 2020. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on July 31, 2020.
10.14	At-Will Employment, Confidential Information, Non-Compete/Non-Solicitation, Invention Assignment, and Arbitration Agreement, dated September 9, 2020 between the Company and Thomas Smith. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on September 14, 2020.
10.15	Asset Purchase Agreement between NSENA Inc. and Wrap Reality, Inc. dated as of December 14, 2020. In accordance with the instructions to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to the Asset Purchase Agreement are not filed herewith.  The Asset Purchase Agreement identifies such schedules and exhibits, including the general nature of their content.  The Company undertakes to provide such schedules and exhibits to the SEC upon request. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed on September 14, 2020.
10.16	Form of At-Will Employment, Confidential Information, Non-Compete/ Non-Solicitation, Invention Assignment, and Arbitration Agreement between the Key Employees and the Company dated December 14, 2020. Incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K, filed on September 14, 2020.
14.110.17	Cooperation Agreement by and between the Company and Elwood G. Norris and certain of his affiliates dated March 4, 2021. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on March 9, 2021.
10.18	Amendment No. 3 to the Wrap Technologies, Inc. 2017 Equity Compensation Plan. Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on November 5, 2021.
10.19	Separation Agreement between the Company and Mr. Smith, dated January 24, 2022.  Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on January 26, 2022.
10.20	Consulting Agreement between the Company and LWV Consulting, LLC, dated January 24, 2022.  Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on January 26, 2022.
10.21	Consulting Agreement between the Company and LRHIRSH, LLC, dated January 24, 2022. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, filed on January 26, 2022.
10.22	Employment Agreement between Wrap Technologies, Inc. and TJ Kennedy, dated April 13, 2022. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on April 19, 2022.
10.23	Employment Agreement between Wrap Technologies, Inc. and Kevin Mullins, dated April 13, 2022. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on April 19, 2022.
10.24	Letter Agreement by and between Wrap Technologies, Inc. and Chris DeAlmeida, executed July 20, 2022. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on July 25, 2022.
10.25	Transition Agreement and Release of Claims, dated July 24, 2022, by and between Wrap Technologies, Inc. and James Barnes. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on July 25, 2022.
10.26	Professional Services and Technology Acquisition Agreement, dated November 22, 2022, by and between Wrap Technologies, Inc., Lumeto, Inc. and Spatial Industries Group, Inc. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on November 29, 2022.
14.1	Code of Ethics of the Registrant Applicable to Directors, Officers and Employees.* Incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-K, filed on March 4, 2021.
21.1	Subsidiaries of Wrap Technologies, Inc.* Incorporated by reference to Exhibit 21.1 to the Annual Report on Form 10-K, filed on March 4, 2021.
23.1	Consent of Independent Registered Public Accounting Firm - Rosenberg Rich Baker Berman, P.A. *
31.1	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 *
31.2	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 *
32.1	Certifications pursuant to 18 U.S.C.USC. Section 1350. This certification is being furnished solely to accompany this Annual Report on Form 10-K and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.*

	Extensible Business Reporting Language (XBRL) Exhibits*
101.INS
101.INS	Inline XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	Inline XBRL Taxonomy Extension Schema.Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase.Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase.Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Labels Linkbase.Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase.Linkbase Document
104	Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101)

* Filed concurrently herewith.

+ Management contract or compensatory plan or arrangement.

 

 

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WRAP TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm (PCAOB ID: 89)		F-2
Consolidated Balance Sheets as of December 31, 20202022 and 20192021		F-3
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 20202022 and 20192021		F-4
Consolidated Statements of Stockholders’ Equity for Years Ended December 31, 20202022 and 20192021		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 20202022 and 20192021		F-6
Notes to Consolidated Financial Statements		F-7

F-1

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F-1

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Wrap Technologies, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Wrap Technologies, Inc. (the Company) as of December 31, 20202022 and 2019,2021, and the related statements of operations and comprehensive loss,income, stockholders’ equity, and cash flows for each of the years in the two yeartwo-year period ended December 31, 2020,2022 and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the years in the two yeartwo-year period ended December 31, 2020,2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

/s/ Rosenberg Rich Baker Berman, P.A.
We have served as the Company’s auditor since 2016.
Somerset, New Jersey
March 4, 20212, 2023

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F-2

Wrap Technologies, Inc.

Consolidated Balance Sheets

(in thousands, except par value and share amounts)

		December 31, 2022				December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents		$	5,330			$	4,937
Short-term investments			13,949				29,983
Accounts receivable and contract assets, net			2,830				3,859
Inventories, net			3,975				1,566
Prepaid expenses and other current assets			775				868
Total current assets			26,859				41,213
Property and equipment, net			758				976
Operating lease right-of-use asset, net			285				51
Intangible assets, net			2,569				1,982
Other assets			100				9
Total assets		$	30,571			$	44,231
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	1,419			$	1,779
Accrued liabilities			1,463				824
Customer deposits			-				43
Deferred revenue- short term			166				155
Operating lease liability - short term			108				56
Total current liabilities			3,156				2,857
Long-term liabilities:
Deferred revenue- long term			167				110
Operating lease liability - long term			193				-
Total long-term liabilities			360				110
Total liabilities			3,516				2,967
Commitments and contingencies (Note 9 and 14)
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; 41,175,993 and 40,851,945 shares issued and outstanding each period, respectively			4				4
Additional paid-in capital			94,333				91,025
Accumulated deficit			(67,376	)			(49,759	)
Accumulated other comprehensive loss			94				(6	)
Total stockholders' equity			27,055				41,264
Total liabilities and stockholders' equity		$	30,571			$	44,231

	December 31,
	2020	2019
ASSETS
Current assets:
Cash and cash equivalents	$16,646,811	$16,983,864
Short-term investments	24,994,360	-
Accounts receivable, net	1,870,934	195,347
Inventories, net	2,655,390	2,244,541
Prepaid expenses and other current assets	759,445	250,947
Total current assets	46,926,940	19,674,699
Property and equipment, net	357,287	242,876
Operating lease right-of-use asset, net	139,088	260,931
Intangible assets, net	1,396,484	230,283
Other assets	12,681	12,681
Total assets	$48,832,480	$20,421,470
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$1,232,349	$406,967
Accrued liabilities	721,075	194,294
Customer deposits	2,095	343,724
Deferred revenue	16,015	2,684
Operating lease liability - short term	94,011	128,131
Business acquisition liability - short term	275,000	-
Total current liabilities	2,340,545	1,075,800
Long-term liabilities:
Operating Lease Liability - long term	56,006	150,018
Business acquisition liability - long term	22,500	-
Total long-term liabilities	78,506	150,018
Total liabilities	2,419,051	1,225,818
Commitments and contingencies (Note 13)
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; 37,554,162 and 29,829,916 shares issued and outstanding each period, respectively	3,756	2,983
Additional paid-in capital	71,704,857	31,922,493
Accumulated deficit	(25,310,033)	(12,729,824)
Accumulated other comprehensive income	14,849	-
Total stockholders' equity	46,413,429	19,195,652
Total liabilities and stockholders' equity	$48,832,480	$20,421,470

See accompanying notes to consolidated financial statements.

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F-3

Wrap Technologies, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

		Year Ended December 31,
		2022				2021
Revenues:
Product sales		$	7,481			$	7,381
Other revenue			568				348
Total revenues			8,049				7,729
Cost of revenues
Products and services			4,315				4,987
Product line exit expense			-				747
Total cost of revenues			4,315				5,734
Gross profit			3,734				1,995
Operating expenses:
Selling, general and administrative			16,386				20,276
Research and development			5,078				6,214
Total operating expenses			21,464				26,490
Loss from operations			(17,730	)			(24,495	)
Other income (expense):
Investment income			52				31
Other			61				15
			113				46
Net loss		$	(17,617	)		$	(24,449	)
Net loss per basic and diluted common share		$	(0.43	)		$	(0.62	)
Weighted average common shares used to compute net loss per basic and diluted common share			41,174,812				39,281,620
Comprehensive loss:
Net loss		$	(17,617	)		$	(24,449	)
Net unrealized gain (loss) on short-term investments			100				(21	)
Comprehensive loss		$	(17,517	)		$	(24,470	)

	Year Ended December 31,
	2020	2019
Revenues:
Product sales	$3,868,384	$656,071
Other revenue	75,673	40,719
Total revenues	3,944,057	696,790
Cost of revenues	2,601,323	420,016
Gross profit	1,342,734	276,774
Operating expenses:
Selling, general and administrative	11,630,644	6,653,465
Research and development	2,788,887	2,236,985
Total operating expenses	14,419,531	8,890,450
Loss from operations	(13,076,797)	(8,613,676)
Other income (expense):
Interest income	83,272	291,494
Debt forgiveness income	416,683	-
Other	(3,367)	(3,306)
	496,588	288,188
Net loss	$(12,580,209)	$(8,325,488)
Net loss per basic and diluted common share	$(0.37)	$(0.29)
Weighted average common shares used to compute net loss per basic and diluted common share	33,846,338	28,652,625
Comprehensive loss:
Net loss	$(12,580,209)	$(8,325,488)
Net unrealized gain on short-term investments	14,849	-
Comprehensive loss	$(12,565,360)	$(8,325,488)

See accompanying notes to consolidated financial statements.

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F-4

Wrap Technologies, Inc.

Consolidated Statements of Stockholders' Equity

(in thousands, except share and per share amounts)

																		Accumulated
										Additional								Other				Total
		Common Stock								Paid-In				Accumulated				Comprehensive				Stockholders'
		Shares				Amount				Capital				Deficit				Income (Loss)				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				-				10,798				-				-				10,798
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			524,491				-				-				-				-				-
Common shares issued for services			42,876				-				239				-				-				239
Share-based compensation expense			-				-				5,356				-				-				5,356
Net unrealized loss on short-term investments			-				-				-				-				(21	)			(21	)
Net loss for the period			-				-				-				(24,449	)			-				(24,449	)
Balance at December 31, 2021			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			-				-				3,225				-				-				3,225
Common shares issued upon vesting of restricted stock units			268,548				-				-				-				-				-
Net unrealized gain on short-term investments			-				-				-				-				100				100
Net loss for the period			-				-				-				(17,617	)			-				(17,617	)
Balance at December 31, 2022			41,175,993			$	4			$	94,333			$	(67,376	)		$	94			$	27,055

					Accumulated
			Additional		Other	Total
	Common Stock		Paid-In	Accumulated	Comprehensive	Stockholders'
	Shares	Amount	Capital	Deficit	Income	Equity
Balance at December 31, 2018	27,364,607	$2,736	$16,791,254	$(4,404,336)	$-	$12,389,654
Sale of Common Stock and warrants at $6.50 per share and placement agent warrants in public offering, net of issuance costs	1,923,076	192	11,351,022	-	-	11,351,214
Common shares issued upon exercise of warrants at $3.00 per share	127,649	13	382,934	-	-	382,947
Common shares issued upon exercise of warrants at $5.00 per share	345,834	35	1,700,469	-	-	1,700,504
Common shares issued upon exercise of stock options	38,750	4	58,121	-	-	58,125
Share-based compensation expense			1,536,096	-	-	1,536,096
Common shares issued for services	30,000	3	102,597	-	-	102,600
Net loss for the period	-	-	-	(8,325,488)	-	(8,325,488)
Balance at December 31, 2019	29,829,916	$2,983	$31,922,493	$(12,729,824)	$-	$19,195,652
Sale of Common Stock and warrants at $6.00 per share in public offering, net of issuance costs	2,066,667	207	11,666,999	-	-	11,667,206
Common shares issued upon exercise of warrants at $3.00 per share, net of issuance costs	328,458	33	960,993	-	-	961,026
Common shares issued upon exercise of warrants at $5.00 per share, net of issuance costs	3,890,839	389	18,718,605	-	-	18,718,994
Common shares issued upon exercise of warrants at $6.00 per share, net of issuance costs	675,000	68	3,847,432	-	-	3,847,500
Common shares issued upon exercise of warrants at $6.50 per share, net of issuance costs	261,679	26	1,646,292	-	-	1,646,318
Common shares issued upon exercise of stock options	371,000	37	705,313	-	-	705,350
Common shares issued upon vesting of restricted stock units	130,603	13	(13)	-	-	-
Share-based compensation expense	-	-	2,236,743	-	-	2,236,743
Net unrealized gain on short-term investments	-	-	-	-	14,849	14,849
Net loss for the period	-	-	-	(12,580,209)	-	(12,580,209)
Balance at December 31, 2020	37,554,162	$3,756	$71,704,857	$(25,310,033)	$14,849	$46,413,429

See accompanying notes to consolidated financial statements.

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F-5

Wrap Technologies, Inc.

Consolidated Statements of Cash Flows

(in thousands)

		Year Ended December 31,
		2022				2021
Cash Flows From Operating Activities:
Net loss		$	(17,617	)		$	(24,449	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			762				478
Share-based compensation			3,225				5,356
Common shares issued for services			-				239
Product line exit expense			-				747
Gain on sale of assets			-				(27	)
Warranty provision			210				10
Software impairment charge			-				170
Change in contingent liability			-				(23	)
Non-cash lease expense			101				88
Provision for doubtful accounts			72				123
Changes in assets and liabilities:
Accounts receivable			957				(2,111	)
Inventories			(2,410	)			559
Prepaid expenses and other current assets			93				(109	)
Accounts payable			(360	)			546
Operating lease liability			(91	)			(94	)
Customer deposits			(43	)			41
Accrued liabilities and other			611				(54	)
Warranty settlement			(181	)			38
Deferred revenue			68				249
Net cash used in operating activities			(14,603	)			(18,223	)
Cash Flows From Investing Activities:
Purchase of short-term investments			(30,466	)			(55,014	)
Proceeds from maturities of short-term investments			46,600				50,005
Capital expenditures for property and equipment			(256	)			(995	)
Investment in patents and trademarks			(173	)			(187	)
Purchase of intangible assets			(700	)			(750	)
Proceeds from long-term deposits			(92	)			4
Net cash provided by (used in) investing activities			14,913				(6,937	)
Cash Flows From Financing Activities:
Proceeds from exercise of warrants			-				12,047
Proceeds from exercise of stock options			83				1,678
Repayment of debt			-				(275	)
Net cash provided by financing activities			83				13,450
Net (decrease) increase in cash and cash equivalents			393				(11,710	)
Cash and cash equivalents, beginning of period			4,937				16,647
Cash and cash equivalents, end of period		$	5,330			$	4,937
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Change in unrealized gain on short-term investments		$	100			$	(21	)
Right-of-use asset and liability recorded during period		$	234			$	-

	Year Ended December 31,
	2020	2019
Cash Flows From Operating Activities:
Net loss	$(12,580,209)	$(8,325,488)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization	163,262	46,945
Warranty provision	30,364	13,495
Inventory obsolescence	(68,108)	(193,506)
Non-cash lease expense	121,843	80,069
Share-based compensation	2,236,743	1,536,096
Debt forgiveness income	(416,683)	-
Non-cash interest expense	2,321	-
Common shares issued for services	-	102,600
Provision for doubtful accounts	10,140	-
Changes in assets and liabilities:
Accounts receivable	(1,685,727)	(190,951)
Inventories	(342,741)	(1,892,768)
Prepaid expenses and other current assets	(508,498)	(136,084)
Accounts payable	825,382	174,052
Operating lease liability	(128,132)	(62,851)
Customer deposits	(341,629)	343,724
Accrued liabilities and other	492,564	112,346
Deferred compensation	-	(96,000)
Warranty settlement	3,853	-
Deferred revenue	(1,669)	2,684
Net cash used in operating activities	(12,186,924)	(8,485,637)
Cash Flows From Investing Activities:
Purchase of short-term investments	(34,979,511)	-
Proceeds from maturities of short-term investments	10,000,000	-
Capital expenditures for property and equipment	(248,897)	(256,742)
Investment in patents and trademarks	(128,914)	(114,274)
Purchase of intangible assets	(543,563)	-
Business acquisition	(210,000)	-
Long-term deposits	-	(11,169)
Net cash used in investing activities	(26,110,885)	(382,185)
Cash Flows From Financing Activities:
Sale of common stock and warrants	12,400,002	12,499,994
Offering costs paid on sale of common stock and warrants	(732,796)	(1,148,780)
Proceeds from exercise of warrants	26,190,483	2,112,117
Offering costs paid on exercise of warrants	(1,016,645)	(28,666)
Proceeds from exercise of stock options	705,350	58,125
Proceeds from bank note	414,362	-
Net cash provided by financing activities	37,960,756	13,492,790
Net increase (decrease) in cash and cash equivalents	(337,053)	4,624,968
Cash and cash equivalents, beginning of period	16,983,864	12,358,896
Cash and cash equivalents, end of period	$16,646,811	$16,983,864
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Business acquisition liability	$297,500	$-
Business acquisition cost in deferred revenue	$15,000	$-
Change in unrealized gain on short-term investments	$14,849	$-
Right-of-use assets and liabilities recorded during period	$-	$341,000
Issuance costs relating to warrants issued to public offering selling agent	$-	$205,894

See accompanying notes to consolidated financial statements.

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Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

 

F-6

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business Description

Wrap Technologies, Inc., a Delaware corporation (the(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, the Middle East and Asia.

Principles of Consolidation

The Company has one wholly-owned wholly owned subsidiary, Wrap Reality, Inc. formed in December 2020 (see Note 3) and has commenced selling itsthat 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.

Basis of Presentation and Use of Estimates

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United StatesUS of America (“U.S.US GAAP”). The preparation of financial statements in conformity with accounting principles generally accepted in the United StatesUS of America requires management to make estimates and assumptions (e.g., share-based compensation valuation, allowance for doubtful accounts, valuation of inventory and intangible assets, warranty reserve, accrued costs, valuation allowance related to deferred tax assets 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 revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Concentrations of Risk

Credit Risk – Financial instruments that potentially subject the Company to concentration of credit risk consisted primarily of cash, cash equivalents, U.S.US treasury bills and accounts receivable from customers. The Company maintains its cash and cash equivalent deposits at two domestic financial institutions. The Company is exposed to credit risk in the event of default by a financial institution to the extent that cash and cash equivalents are in excess of the amount insured by the Federal Deposit Insurance Corporation. The Company places its cash and cash equivalents with high-credit quality financial institutions and are managed within established guidelines to mitigate risks. To date, the Company has not experienced any losses on its cash and cash equivalents.

Concentrations of Accounts Receivable and Revenue – TheThe Company has a limited number of domestic and international customers.customers. The Company may experience concentrations in both accounts receivable and revenue due to the timing of sales and collections of related payments (see Note 16)17).

Concentration of Suppliers – The Company relies onassembles its BolaWrap products in-house using components and subassemblies from a limited number of component suppliers and contract suppliers. In particular, a single supplier is currently the sole manufacturer of the Company’s laserBolaWrap battery assembly, with someand another single supplier is the sole manufacturer of the propulsion component for BolaWrap cassettes. Other parts soleare solely sourced from other suppliers. If supplier shortages or logistic delays occur, or quality problems arise, production schedules could be significantly delayed or costs significantly increased, which could in turn have a material adverse effect on the Company’s financial condition, results of operation and cash flows.

Impact of COVID-19 – In December 2019, a novel strain of coronavirus(“COVID-19”) emerged in China.In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic.While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it spread to other countries and infections have been reported globally. The extent to which the coronavirus impacts our operations will continue to depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. In particular, the continued spread of the coronavirus globally orand emergence of new strains could adversely impact our operations, including our manufacturing, logistics and supply chain. Our operations could be negatively affected if employees are quarantined as the result of exposure to a contagious illness. Similarly, travel restrictions resulting from the rapid spread of contagious illnesses may have a material adverse effect on our business and results of operations.

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Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. Cash equivalents consist primarily of amounts invested in Money Market Funds and United StatesUS (“U.S.US”) Treasury bills and are stated at fair value.

Short-Term Investments

The Company’s short-term investments consist of U.S.US Treasury bills with original maturities beyond three months at the date of purchase and one year or less from the balance sheet date. As of December 31, 2020,2021, all of the Company’s short-term investments were classified as available-for-sale and are carried at estimated fair value with any unrealized gains and losses, unrelated to credit loss factors, included in other comprehensive income in our consolidated statements of stockholders’ equity.

We adopted Accounting Standards Codification (“ASC”) Topic 326 issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2020, and applied the credit loss guidance related to short-term investments prospectively as we had no historical short-term investments. Because we do not have any history of losses for our short-term investments, our expected loss allowance methodology is developed using published or estimated credit default rates for similar investments and current and future economic and market conditions. Any unrealized losses related to credit loss factors are recorded through an allowance for credit losses in other (expense) income, in our consolidated statements of operations, rather than as a reduction to the amortized cost basis in other comprehensive (loss) income, when a decline in fair value has resulted from a credit loss. We determine realized gains or losses on the sale of investments on a specific identification method, and record such gains or losses as other (expense) income, in our consolidated statements of operations. We did not record a credit loss reserve for short-term investments during the year ended December 31, 2020.

Share-Based Compensation

The Company follows the fair value recognition provisions issued by the Financial Accounting Standards Board (“FASB”) in Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation (“ASC 718”) and has adopted Accounting Standards Update (“ASU”) 2018-07 for share-based transactions with non-employees. Share-based compensation expense recognized during 20202022 and 20192021 includes stock option and restricted stock unit compensation expense. The grant date fair value of stock options is determined using the Black-Scholes option-pricing model. The grant date is the date at which an employer and employee or non-employee reach a mutual understanding of the key terms and conditions of a share-based payment award. award and approved by the Company’s Board of Directors. The Black-Scholes option-pricing model requires inputs including the market price of the Company’s Common Stock on the date of grant, the term that the stock options are expected to be outstanding, the implied stock volatilities of several publicly-tradedpublicly traded peers over the expected term of stock options, risk-free interest rate and expected dividend. Each of these inputs is subjective and generally requires significant judgment to determine. The grant date fair value of restricted stock units is based upon the market price of the Company’s Common Stock on the date of the grant. We determine the amount of share-based compensation expense based on awards that we ultimately expect to vest and account for forfeitures as they occur. The fair value of share-based compensation is amortized to compensation expense over the vesting term.

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 and warrants exercisable or issuable for a total of 7,566,5026,413,546 and 9,857,4575,596,853 shares of Common Stock were outstanding at December 31, 20202022 and 2019,2021, 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.

F-8

Accounts Receivable and Allowance for Doubtful Accounts

Credit Losses

ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The expected credit losses are developed using an estimated loss rate method that considers historical collection experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The estimated loss rates are applied to accounts receivables with similar risk characteristics such as the length of time the balance has been outstanding and the location of the customer. In certain instances, the Company carriesmay identify individual accounts receivable at historical cost, lessassets that do not share risk characteristics with other accounts receivables, in which case the Company records its expected credit losses on an allowance for doubtful accounts. On a periodicindividual asset basis. If an accounts receivable asset is evaluated on an individual basis, the Company evaluatesexcludes those assets from the portfolios of accounts receivable and establishes an allowance for doubtful accounts for estimated losses. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, when available any published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions andreceivables evaluated on a reviewcollective basis.

F-8

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Table of the current status of customers' trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.Contents

At December 31, 20202022 and 2021, the Company had an allowance for credit losses related to accounts receivable of $10,140 resulting in part from global uncertainty resulting from the COVID-19 virus.There was no allowance for doubtful accounts recorded at December 31, 2019.$205 and $134, respectively. If a major customer’s creditworthiness deteriorates, or actual defaults exceed our historical experience, such estimates could change and impact our future reported financial results.

Inventories

Inventories are valued 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. Inventory is comprised of raw materials, assemblies and finished products intended for sale to customers. The Company evaluates the need for reserves for excess and obsolete inventories determined primarily based upon estimates of future demand for the Company’s products.

At December 31, 20202022 and 20192021 the Company had no reserve for obsolescence.

Contract Manufacturers

The Company employs contract manufacturers for production of certain components and sub-assemblies. The Company may provide parts and components to such parties from time to time, but recognizes no revenue or markup on such transactions. During 2020 and 2019, the Company performed assembly of products in-house using components and sub-assemblies from a variety of contract manufacturers and suppliers.

Property, Equipment and Depreciation

Property and equipment is stated at cost. Depreciation on property and equipment is computed over the estimated useful lives of three years using the straight-line method. The Company intends, onOn any retirement or disposition of property and equipment, that the related cost and accumulated depreciation or amortization will beis removed, and a gain or loss recorded.

Business Combinations

Transactions in which the Company obtains control of a business are accounted for according to the acquisition method as described in ASC 805, Business Combinations. The assets acquired and liabilities assumed are recognized and measured at their fair values as of the date control is obtained. The Company measures goodwill as the excess of consideration transferred, which the Company also measures at fair value, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. Acquisition related costs in connection with a business combination are expensed as incurred. Contingent consideration is recognized and measured at fair value at the acquisition date and until paid is re-measured on a recurring basis and classified as a liability.

Intangible Assets

Intangible assets consistedconsist of (a) capitalized legal fees and filing costs related to obtaining patents and trademarks, (b) customer agreements, tradenames and software, non-solicitation(c) purchased software, and non-compete agreements acquired in business combinations and valued at fair value at the acquisition date, and (c)(d) the purchase cost of indefinite-lived website domains. The estimated useful lives of identifiable intangible assets with definite useful lives have been estimated to be between one and twenty years. Purchased website domain costs with an indefinite useful life are not subject to amortization, but are subject to an annual impairment test, by comparing their carrying amount with their corresponding fair value. For any given intangible asset with an indefinite useful life, if its fair value exceeds its carrying amount no impairment loss shall be recognized.

The carrying value of intangibles is periodically reviewed and impairments, if any, are recognized when the future undiscounted cash flows realized from the assets is less than its carrying value.

F-9

Impairment of Long-Lived Assets

Long-lived assets and identifiable intangibles held for use are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of undiscounted expected future cash flows is less than the carrying amount of the asset or if changes in facts and circumstances indicate, an impairment loss is recognized and measured using the asset’s fair value. The Company did not recognize any other impairment loss during the years ended December 31, 20202022 and 2019.

2021.

Classification and Valuation of Warrants

The Company accounts for warrants as either equity or liabilities based upon the characteristics and provisions of each particular instrument. Warrants valued and classified as equity are recorded as additional paid-in capital based on the issue date fair value and no further adjustment to valuation is made. As of December 31, 2020,2022, the Company has no warrants or other derivative financial instruments that require separate accounting as liabilities and periodic revaluation.

F-9

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Advertising and Promotion Costs

Advertising costs are charged to expense as incurred and were $287,266$426 and $165,119$145 for the years ended December 31, 20202022 and 2019,2021, respectively. The Company also incurred product promotion costs for demonstration products delivered to prospective customers of $747,443$688 and $433,172$924 for the years ended December 31, 20202022 and 2019,2021, respectively. Advertising and promotion costs are included in selling, general and administrative expenses in the accompanying statements of operations.

Demonstration and Training Costs

The Company maintains a demonstration and training department as a part of its sales and marketing activities and does not charge for product demonstrations or training. Training is not a condition or requirement of sale as most sales are made through distributors to their end customers. The Company conducts local and regional in-person, webinar and on-line demonstrations and use of force and escalation training to support law enforcement agencies with no purchase requirement. Such training, when provided, may occur before or after initial or subsequent purchase or field deployment of the Company’s products. The Company believes that law enforcement trainers and officers that have seen demonstrations or have been trained about its products are more supportive of their departments purchase and deployment of product.

Research and Development Costs

Research and development costs consist primarily of contract development costs and experimental work materials and certain startup costs. Research and development costs with no alternative use are expensed as incurred.

Contract Manufacturers

The Company employs contract manufacturers for production of certain components and sub-assemblies. The Company may provide parts and components to such parties from time to time but recognizes no revenue or markup on such transactions.

Leases

At

The Company adopted ASC Topic 842, Leases (“Topic 842”) on January 1, 2019. In accordance with the commencement date of a lease,guidance in Topic 842, the Company recognizes lease liabilities and corresponding right-of-use-assets for all leases with terms of greater than 12 months. Leases with a liabilityterm of 12 months or less will be accounted for in a manner similar to make lease payments and an asset representing the rightguidance for operating leases prior to use the underlying asset during the lease term. The lease liability is measured at the present valueadoption of lease payments over the lease term. As its leases typically do not provide an implicit rate and dueTopic 842. Refer to lack of borrowing history or ability, the Company uses as its incremental borrowing rate a low-grade debt rate published by the Federal Reserve Bank. The right-of-use (“ROU”) asset is measured at cost, which includes the initial measurement of the lease liability and initial direct costs incurred by the Company and excludes lease incentives. Lease liabilities are recorded as a current liabilityNote 9, Leases for the portion due within one year with the balance as a long-term liability. ROU assets are recorded as operating lease right-of-use asset, net.

more information.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09,

The Company adopted ASC Topic 606, Revenue from Contracts with Customers (“ASU 2014-09”) and ASC Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers (“ASC 340-40”), (collectively, “Topic 606”). Onon 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. ASU 2014-09 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. See Note 2 for additional information.

F-10

Shipping and Handling Costs

Shipping and handling costs are included in cost of revenues. Shipping and handling costs invoiced to customers are included in revenue. Actual shipping and handling costs were $75,106 and $22,177 for the years ended December 31, 2020 and 2019, respectively. Actual revenues from shipping and handling were $62,679 and $21,414 for the years ended December 31, 2020 and 2019, respectively.

Warranty Reserves

The Company warrants its products and accessories to be free from defects in materials and workmanship for a period of one year from the date of purchase. The warranty is generally limited. The Company currently provides direct warranty service. International market warranties are generally similar to the U.S. market.

The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenues are recognized. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs and anticipated rates of warranty claims. The Company evaluates the adequacy of the provision for warranty costs each reporting period. The warranty reserve was $48,140 and $13,923 at December 31, 2020 and 2019. Actual warranty costs could differ from estimates.

Segment Information

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Income Taxes

No income tax expense was recorded for the periods ended December 31, 2020 and 2019 due to losses incurred. Deferred tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes.

The Company maintains a valuation allowance with respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the Federal tax laws. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimates.

Subsequent Events

Management has evaluated events subsequent to December 31, 2020 through the date the accompanying financial statements were filed with the Securities and Exchange Commission and noted that there have been no events or transactions which would affect the Company’s financial statements for the year ended December 31, 2020.

Recently Issued Accounting Guidance

Adopted First Quarter of 2020:

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (“Topic 820”): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, to improve the effectiveness of fair value measurement disclosures by removing or modifying certain disclosure requirements and adding other requirements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The adoption of this standard in the first quarter ended March 31, 2020 had no impact on the Company’s financial statements or disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments which was further updated and clarified by the FASB through issuance of additional related ASUs. Under ASU 2016-13, existing guidance on reporting credit losses for trade and other receivables and available for sale debt securities have been replaced with a new forward-looking “expected loss” model that has resulted in the earlier recognition of allowances for losses. The adoption of these standards in the first quarter ended March 31, 2020 had no impact on the Company’s financial statements or disclosures. As part of our assessment of the adequacy of our allowances for credit losses, we consider a number of factors including, but not limited to, customer credit ratings, bankruptcy filings, published or estimated credit default rates, age of receivables, expected loss rates and collateral exposures.

F-11

Other Guidance:

In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We do not expect that the adoption of this ASU will have a significant impact on our financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (“Subtopic 470-20”) and Derivatives and Hedging—Contracts in Entity’s Own Equity “(Subtopic 815-40”): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact of this standard on its 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

2018. The Company enters into contracts that include various combinations of products, accessories.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.

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 standalone selling pricesSSPs based on the price at which the performance obligation is sold separately.relative SSP. If the standalone selling priceSSP is not observable through past transactions, the Company estimates the standalone selling priceSSP 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.

F-12

Time-based virtual realityVR 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.

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. At December 31, 2020 the Company’s deferred revenue totaled $16,015, of which $14,125 related to virtual reality training and $1,890 related to extended warranties. At December 31, 2019 the Company had deferred revenue of $2,684 related to future training contracted as part of a sale.

The Company may also 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.

Shipping and Handling Costs

Shipping and handling costs are included in cost of revenues. Shipping and handling costs invoiced to customers are included in revenue. Actual shipping and handling costs were $296 and $167 for the years ended December 31, 2022 and 2021, respectively. Actual revenues from shipping and handling were $109 and $88 for the years ended December 31, 2022 and 2021, respectively.

Exit Activity Expense

During 2021 the Company recorded $747 of product line exit costs related to the wind down and closure of the BolaWrap 100 product line related to a shift in production efforts to a new BolaWrap 150 generation product requiring new tooling, new production equipment and processes and additional licensing. These non-cash inventory costs included end of life raw material write offs of $641 and tooling retirement costs of $106.

The $747 of exit costs were recorded as a component of cost of revenues. There was no such expense recorded during the year ended December 31, 2022. Development and start-up expense of new products are expensed as incurred except for capitalized equipment and tooling.

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Warranty Reserves

The Company warrants its products and accessories to be free from defects in materials and workmanship for a period of one year from the date of purchase. The warranty is generally limited. The Company currently provides direct warranty service. International market warranties are generally similar to the US market.

The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenues are recognized. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs and anticipated rates of warranty claims. The Company evaluates the adequacy of the provision for warranty costs each reporting period. The warranty reserve was $125 and $96 at December 31, 2022 and 2021. Actual warranty costs could differ from estimates.

Segment Information

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Income Taxes

No income tax expense was recorded for the periods ended December 31, 2022 and 2021 due to losses incurred. Deferred tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes.

The Company maintains a valuation allowance with respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the Federal tax laws. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimates.

Recently 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.

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2. REVENUE AND PRODUCT COSTS

Revenues consist of product revenue and other revenue. Product sales include BolaWrap products and accessories. Other revenue includes VR revenues, service, training and shipping revenues.

The table below details the activity in our contract liabilities during the year ended December 31, 2022.

		Customer				Deferred
		Deposits				Revenue
Balance at January 1, 2022		$	43			$	265
Additions, net			-				301
Transfer to revenue			(43	)			(233	)
Balance at December 31, 2022		$	-			$	333
Current portion		$	-			$	166
Long-term portion		$	-			$	167

At December 31, 2022, the Company’s deferred revenue of $333 thousand of deferred revenue at December 31, 2022, of which $198 thousand related to VR, $11 thousand was related to training and $124 thousand 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 December 31, 20202022 and December 31, 2019.2021. 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.

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Estimated costs for the Company’s standard one-year warranty 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.

ASSET ACQUISITION

On December 14, 2020, the Company, through a new wholly-owned subsidiary,November 22, 2022, Wrap Reality,Technologies, Inc. (the “Company”), entered into an Asset Purchasea Professional Services and Technology Acquisition Agreement (the “Agreement”) with NSENA Inc, a Delaware corporation,Lumeto, Inc. and Spatial Industries Group, Inc. (collectively, “Service Provider”), pursuant to acquire all of NSENA’s tangiblewhich Service Provider will provide to the Company certain technology, services, and intangible assets, properties, and rights heldperpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform (the “Technology, Services, and License”), in connectionexchange for (a) a cash payment upon the execution of the Agreement of $700, (b) a cash payment of $125 upon the completion of certain project delivery deadlines, with NSENA’ssuch delivery deadline projected to be on February 13, 2023, and (c) a cash payment of $125 upon the completion and delivery of the final Technology, Services, and License. Among other things, the Company expects to realize the benefit of an upgraded cloud virtual reality platform as well as capabilities and resources to support its growth of law enforcement and corrections virtual reality training business. The acquisition enhances the Company’s training services primarily targeting law enforcement agencies.

The Company paid to NSENA cash consideration of $210,000modules and recorded a short-term business acquisition liability of $275,000. The liability is payable $100,000 on March 15, 2021, $100,000 on June 15, 2021 and $75,000 on September 15, 2021. In addition, the Company assumed a $15,000 liability for unearned revenues. As additional earn-out consideration, the Company agreed to pay NSENA 10% of net revenues (or a lesser amount equal to 50% of direct profit) from specific identified prospects that become revenue customers before September 30, 2021 but only on amounts collected between Closing and June 30, 2022.The fair value of contingent consideration determined as $22,500 is included as a long-term business acquisition liability on our consolidated balance sheet.

The acquisition was accounted for under the acquisition method of accounting. Under acquisition accounting, the acquired tangible andenhanced capabilities. Identified intangible assets and liabilitiesassociated with this acquisition included software of NSENA have been recorded at their respective fair values.$700. The following table summarizes the estimates of fair valueuseful life of the assets acquired and liabilitiessoftware is 3 years. There is no assumed on December 14, 2020:

residual value for the software.

 

Equipment	$10,250
Software	460,250
Customer contracts	40,000
Tradenames	2,000
Noncompete agreements	10,000
Deferred revenue	(15,000)
Total consideration	$507,500

F-13

A portion of the fair value of the consideration transferred has been assigned to identifiable intangible assets as follows:

Description	Useful life in years	Fair Value
Software	5	$460,250
Customer contracts	1	40,000
Tradenames	1	2,000
Noncompete agreements	2	10,000
Total acquired intangible assets		$512,250

All assets acquired were determined to be finite-lived intangible assets and are being amortized on a straight-line basis over its estimated useful life with no residual value.

4.

FINANCIAL INSTRUMENTS

Assets and liabilities recorded at fair value on a recurring basis in the 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—2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3—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.

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The Company’s cash equivalent Money Market Funds and short-term investments consisting of U.S.US Treasury bill securities are classified as Level 1 because they are valued using quoted market prices.

The following table shows the Company’s cash and cash equivalents, Money Market Funds and short-term investments by significant investment category as of December 31, 2020. The Company only had cash2022 and cash equivalents, including Money Market Funds of $16,618,498 at December 31, 2019 all which were considered Level 1.

	As of December 31, 2020
	Adjusted	Unrealized	Unrealized	Market
	Cost	Gains	Losses	Value
Level 1:
Money Market Funds	$6,034,757	$-	$-	$6,034,757
U.S. Treasury securities considered cash equivalents	9,997,812	-	-	9,997,812
U.S. Treasury securities in short-term investments	24,979,511	14,849		24,994,360
Total Financial Assets	$41,012,080	$14,849	$-	$41,026,929

F-14

2021.

		As of December 31, 2022
		Adjusted				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
Level 1:
Money Market Funds		$	3,004			$	-			$	-			$	3,004
US Treasury securities in short-term investments			9,849				100				-				9,949
Certificate of Deposits			4,000				-				-				4,000
Total Financial Assets		$	16,853			$	100			$	-			$	16,953

		As of December 31, 2021
		Adjusted				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
Level 1:
Money Market Funds		$	1,670			$	-			$	-			$	1,670
US 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. As ofDuring the year ended December 31, 2020, $14,8492022 and 2021, $100 and $(21) was recorded to accumulated other comprehensive gain.

loss and gain, 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.

sheets.

 

5.

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:

	December 31,	December 31,
	2020	2019
Finished goods	$1,248,893	$653,323
Work in process	64,451	413
Raw materials	1,342,046	1,590,805
Inventories, net	$2,655,390	$2,244,541

During

		December 31,
		2022				2021
Finished goods		$	2,293			$	1,027
Work in process			-				2
Raw materials			1,682				537
Inventories - net		$	3,975			$	1,566

As part of product line exit costs end of life raw material costs aggregating $621 were written off during the yearsyear ended December 31, 2020 and 2019 the Company wrote off $68,108 and $193,506, respectively,2021.

F-14

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Table of raw material and scrap parts primarily due to startup production, model changes and improvements.Contents

 

6.

PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following:

	December 31,	December 31,
	2020	2019
Production and lab equipment	$147,781	$44,454
Tooling	80,936	59,004
Computer equipment	180,573	83,368
Furniture, fixtures and improvements	165,465	128,782
	574,755	315,608
Accumulated depreciation	(217,468)	(72,732)
Property and equipment, net	$357,287	$242,876

		December 31,
		2022				2021
Production and lab equipment		$	513			$	500
Tooling			448				273
Computer equipment			531				467
Furniture, fixtures and improvements			181				176
			1,673				1,416
Accumulated depreciation			(915	)			(440	)
Property and equipment, net		$	758			$	976

Depreciation expense was $144,736$475 and $44,239$297 for the years ended December 31, 20202022 and 2019,2021, respectively.

As part of product line exit costs unamortized production tooling costs of $106 were written off in the second quarter of 2021.

 

F-15

7. INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

	December 31,	December 31,
	2020	2019
Amortizable intangible assets:
Patents	$279,294	$176,425
Trademarks	83,964	57,919
Purchased software	662,250	-
Other	50,000	-
	1,075,508	234,344
Accumulated amortization	(22,587)	(4,061)
Total amortizable	1,052,921	230,283
Indefinite life assets (non-amortizable)	343,563	-
Total intangible assets-net	$1,396,484	$230,283

		December 31,
		2022				2021
Amortizable intangible assets:
Patents		$	575			$	416
Trademarks			150				134
Purchased software			1,962				1,212
Other			-				50
			2,687				1,812
Accumulated amortization			(462	)			(174	)
Total amortizable			2,225				1,638
Indefinite life assets (non-amortizable)			344				344
Total intangible assets, net		$	2,569			$	1,982

Amortization expense was $18,526$287 and $2,706$182 for the years ended December 31, 20202022 and 2019,2021, respectively.

An additional impairment charge of $170 for purchased software was recorded in the second quarter of 2021.

At December 31, 2020,2022, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:

2023		$	498
2024			518
2025			513
2026			212
2027			42
Thereafter			442
Total estimated amortization expense		$	2,225

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2021	$186,266
2022	150,766
2023	145,766
2024	145,766
2025	145,766
Thereafter	278,591
Total estimated amortization expense	$1,052,921

8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable includes $52,950$127 and $228 due to related party Syzygy Licensing, LLC (“Syzygy”) as of December 31, 2020. Accounts payable at December 31, 2020 also included $10,000 due to related party V3 Capital Partners, LLC (see Note 14).

2022 and 2021, respectively.

Accrued liabilities consist of the following:

	December 31,	December 31,
	2020	2019
Patent and legal costs	$64,800	$9,851
Accrued compensation	562,792	144,193
Warranty costs	48,140	13,923
Consulting costs	2,083	7,500
Taxes and other	43,260	18,827
Accrued liabilities	$721,075	$194,294

		December 31,
		2022				2021
Patent and legal costs		$	135			$	28
Accrued compensation			1,100				628
Warranty costs			125				96
Taxes and other			103				72
		$	1,463			$	824

Accrued compensation includes $555,000$1,022 and $305 in employee bonuses and $7,792 in commissions payable at December 31, 2020.

2022 and 2021, respectively.

Changes in our estimated product warranty costs were as follows:

		Year Ended December 31,
		2022				2021
Balance, beginning of period		$	96			$	48
Warranty settlements			(181	)			(62	)
Warranty provision			210				110
Balance, end of period		$	125			$	96

 

F-16

9. LEASES

The Company adopted ASU 2016-02, Leases (“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 modified retrospective approach. The Company has elected not to apply ASC Topic 842 to arrangements with lease terms of 12 months or less. The adoption ofdiscount rate determined at the standard resulted in the recognition of a ROU assetmodification date and lease liability of $12,900 for one operating lease as of January 1, 2019, with no impact to retained earnings. Prior year amounts have not been restated. That lease is for 1,890 square feet of improved office and warehouse space in Las Vegas, Nevada. In January 2019, the Company recorded an additional $17,101 ROU remeasurement asset for the same amount. The Company’s lease contains renewal provisions and liability from an extensionescalating rental clauses and generally requires the Company to pay utilities, insurance, taxes and other operating expenses. The renewal provisions of the facilityexisting lease to December 31, 2020. In March 2019,agreement were not included in the Company recorded a $57,587 ROU asset and liability for a two-year facilitydetermination of the operating lease for 1,906 square feet of improved officeliabilities and warehouse space in Lake Forest, California expiring in February 2021. In June 2019, the ROU assets. The Company recorded a $253,412 ROU assetalso reassessed the lease classification and liability for a 38-month facilityconcluded that the lease continues to be an operating lease for 11,256 square feet of improved office, assembly, training and warehouse space in Tempe, Arizona expiring in July 2022.

lease.

Amortization of ROU operating lease assets was $121,844$101 and $80,069$88 for the years ended December 31, 20202022 and 2019,2021, respectively.

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Table of Contents

Operating lease expense for capitalized operating leases included in operating activities was $137,228$118 and $94,599$95 for the years ended December 31, 20202022 and 2019,2021, respectively. Operating lease obligations recorded on the balance sheet at December 31, 20202022 are:

Operating lease liability- short term	$94,011
Operating lease liability - long term	56,006
Total Operating Lease Liability	$150,017

Operating lease liability- short term		$	108
Operating lease liability - long term			193
Total Operating Lease Liability		$	301

Future lease payments included in the measurement of lease liabilities on the balance sheet at December 31, 20202022 for future periods are as follows:

2021	101,406
2022	57,328
Total future minimum lease payments	158,734
Less imputed interest	(8,717)
Total	$150,017

2023		$	121
2024			126
2025			75
Total future minimum lease payments			322
Less imputed interest			(21	)
Total		$	301

The weighted average remaining lease term is 1.542.58 years, and the weighted average discount rate is 7.0%5.0%.

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 did not have anyhad $39 and $29 variable lease expenses during year ended December 31, 2022 or 2021.

The Company had $11 and $0 short-term lease expense during the yearsyear ended December 31, 2020 and December 31, 2019.2022, or 2021. The Company does not have any finance leases.

 

10.

DEBT

The Company’s debt at December 31, 20202022 and 2021 included operating lease liabilities (see Note 9) and business acquisition liabilities (see Note 3). DebtThe Company’s debt at December 31, 2019 consisted of operating lease2021 also included business acquisition liabilities.

 

On May 1, 2020, the Company received loan proceeds of $414,362 from Bank of America, N.A. (the “Lender”), as a potentially forgivable loan (the “PPP Loan”) from the U.S. Small Business Administration pursuant to the Paycheck Protection Program (the “PPP”) enacted by Congress under Division A, Title 1 of the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the “CARES Act”), which was enacted March 27, 2020. The PPP Loan was in the form of a two-year Promissory Note dated May 1, 2020 payable to the Lender (the “PPP Note”), bearing interest at a rate of 1% per annum.

Under the terms of the CARES Act, the Company subsequently applied for and in December 2020 was granted forgiveness for the PPP Loan plus interest. The Company’s PPP Loan in the amount of $414,362 and accrued interest was forgiven in full by the Small Business Administration. The Company recognized $416,683 in debt forgiveness income as a result of the forgiveness.

11.

STOCKHOLDERS’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”).

F-17

2019 Follow-On Public Offering

On June 18, 2019, the Company consummated the June 2019 Follow-On Offering, pursuant to which a total of 1,923,076 Units were offered and sold at the public offering price of $6.50 per Unit. Each Unit sold consisted of one share of Common Stock and one detachable two-year warrant to purchase one share of Common Stock at an exercise price of $6.50 per share. The offering resulted in the Company’s receipt of gross cash proceeds of $12.5 million, or net cash proceeds of $11.35 million after deduction of commissions and offering costs.

In connection with the June 2019 Follow-On Offering, the Company also issued placement agent warrants exercisable for 153,846 shares of Common Stock for two years at an exercise price of $8.125 per share. The estimated fair value of these warrants was $205,894, as determined using the Black-Scholes methodology (assuming estimated volatility of 49%, risk-free interest rate of 1.86%, and expected dividend yield of 0.0%). This amount was recorded as both an increase to additional paid in capital and as a non-cash issuance cost of the offering.

2020 Follow-On Public Offering

On June 2, 2020, the Company consummated a follow-on public offering (the “Unit Offering”) whereby the Company offered and sold certain securities consisting of one share of Common Stock and one detachable two-year warrant to purchase one share of Common Stock at an exercise price of $6.00 per share (a “Unit”) at the public offering price of $6.00 per Unit. Pursuant to the Unit Offering, the Company sold 2,066,667 Units, resulting in the Company’s receipt of gross cash proceeds of $12.4 million and net cash proceeds of $11.67 million after deduction of commissions and offering costs.

Summary of Stock Purchase Warrants

The following table summarizes warrant activity during the years ended December 31, 2020 and 2019:

	Number	Average Purchase Price Per Share
Shares purchasable under outstanding warrants at December 31, 2018	5,017,181	$4.82
Stock purchase warrants issued	2,076,922	$6.62
Stock purchase warrants exercised	(473,483)	$4.46
Shares purchasable under outstanding warrants at December 31, 2019	6,620,620	$5.41
Stock purchase warrants issued	2,066,667	$6.00
Stock purchase warrants exercised	(5,155,976)	$5.08
Stock purchase warrants cancelled	(324,401)	$5.00
Shares purchasable under outstanding warrants at December 31, 2020	3,206,910	$6.36

During the year ended December 31, 20202021, the Company received gross proceeds of $26,190,483$12,047 from the exercise of 5,155,976 warrants and paid $1,016,645 as an agent fee to facilitate exercise of certain warrants resulting in net proceeds of $25,173,838. Company officer Elwood Norris exercised 333,334 of these warrants at $5.00 per share for cash of $1,666,670.

During the year ended1,815,012 warrants. At December 31, 20192021 the Company received gross proceeds of $2,112,117 from the exercise of 2,076,922 warrants and paid an agent fee of $28,666 for net proceeds of $2,083,451.

F-18

The Company hashad outstanding Common Stock purchase warrants as ofexercisable for 1,391,667 shares that expired on June 1, 2022, and had no purchase warrants outstanding at December 31, 2020 as follows:

2022.

 

	Number of	Exercise Price
Description	Common Shares	Per Share	Expiration Date
Purchase Warrants	1,661,397	$6.50	June 18, 2021
Agent Warrants	153,846	$8.125	June 18, 2021
Purchase Warrants	1,391,667	$6.00	June 1, 2022
	3,206,910

F-19

12.

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 Company Common Stock for issuance as stock options and restricted stock units (“RSUs”)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, and in June 2020 ratified a further authorizationan additional 1,900,000 shares of 1,900,000Common 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 6,000,0009,000,000 shares subject to the Plan.

Plan. At December 31, 2022, there were 1,556,291 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.

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Stock Options

The following table summarizes stock option activity for the yearsyear ended December 31, 2019 and 2020:

		Weighted Average
	Options on		Remaining	Aggregate
	Common	Exercise	Contractual	Intrinsic
	Shares	Price	Term	Value
Outstanding December 31, 2018	2,067,500	$1.68	4.44
Granted	1,000,000	$5.41	-
Exercised	(38,750)	$1.50	-
Forfeited, cancelled, expired	(100,000)	$1.50	-
Outstanding December 31, 2019	2,928,750	$2.96	3.71
Granted	1,423,836	$6.66	-
Exercised	(371,000)	$1.90	-
Forfeited, cancelled, expired	(50,000)	$3.00	-
Outstanding December 31, 2020	3,931,586	$4.41	4.89	$5,176,337
Vested and exercisable at December 31, 2020	2,091,084	$2.68	2.60	$4,965,155

In connection with the NSENA acquisition in December 2020 the Company granted 190,000 service-based options and 100,000 performance-based options for future services as employees and consultants at an exercise price of $5.46 per share. Other than the 100,000 performance-based options, all outstanding options at2022:

						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			4,153,885			$	3.64
Exercised			(55,500	)		$	1.50
Forfeited, cancelled, expired			(2,542,869	)		$	5.79
Outstanding December 31, 2022			5,491,399			$	3.72				5.96			$	92
Exercisable December 31, 2022			2,465,110			$	4.55				2.13			$	92

At December 31, 2020 are2022, there were 3,877,169 service-based options.

Subsequent to December 31, 2020 a total of 58,500stock options outstanding, and 1,614,230 performance-based stock options outstanding, which performance-based stock options were exercised for cash proceedsgranted in April 2022 to the Company’s Chief Executive Officer and President, subject to future market capitalization targets. 1,049,145 of $87,750.

the 4,153,885 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.

The Company uses the Black-Scholes option pricing model to determine the fair value of theservice-based options granted. The following table summarizes the assumptions used to compute the fair value of options granted to employees and non-employees:

F-20

	For the Year Ended
	December 31,
	2020	2019
Expected stock price volatility	47%	49%
Risk-free interest rate	0.38%	2.41%
Forfeiture rate	0%	0%
Expected dividend yield	0%	0%
Expected life of options - years	5.64	3.50
Weighted-average fair value of options granted	$2.90	$2.06

		For the Year Ended
		December 31,
		2022				2021
Expected stock price volatility			49	%			50	%
Risk-free interest rate			2.47	%			0.90	%
Forfeiture rate			0	%			0	%
Expected dividend yield			0	%			0	%
Expected life of options - years			5.96				5.74
Weighted-average fair value of options granted		$	0.88			$	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.US 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.

F-18

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Table of Contents

Stock option expense was $1,770 and $2,608 for the years ended December 31, 2022 and 2021, respectively.

The following table summarizes information about stock options outstanding at December 31, 2020:

		Weighted
		Average	Weighted		Weighted
		Remaining	Average		Average
Range of	Number	Contractual	Exercise	Number	Exercise
Exercise Prices	Outstanding	Life (Years)	Price	Exercisable	Price
$1.50	1,422,750	2.39	$1.50	1,422,750	$1.50
$3.15 - $3.61	85,000	2.86	$3.75	85,000	$3.75
$4.26 - $6.58	2,073,836	5.89	$5.29	583,334	$5.41
$11.22	350,000	9.58	$11.22	-	-

2022:

								Weighted
								Average				Weighted								Weighted
								Remaining				Average								Average
Range of				Number				Contractual				Exercise				Number				Exercise
Exercise Prices				Outstanding				Life (Years)				Price				Exercisable				Price
$	1.50 –2.27				820,750				0.39			$	1.62				481,750			$	1.50
$	2.55 –3.83				876,409				0.87			$	2.92				35,000			$	3.61
$	3.85 –5.78				2,050,010				2.19			$	5.24				1,869,613			$	5.28
$	5.88 –8.82				130,000				6.25			$	6.42				78,747			$	6.36

Restricted Stock Units

The Plan provides for the grant of restricted stock units (“RSUs”RSUs”). RSUs are settled in shares of the Company’s Common Stock as the RSUs become vested. In January 2019 the Company granted 263,087 service-based RSUs to officers and employees vesting over a period of three years. In August and September 2019, the Company granted 45,000 service-based RSUs to employees vesting over a period of three years. In January 2020 the Company granted 73,992 service-based RSUs to officers and directors vesting over a period of three years. In April 2020 the Company granted 122,222 service-based RSUs to employees vesting over a period of three years. Also, in April 2020 the Company granted an officer 35,211 performance-based RSUs. During the period July 2020 to December 2020 the Company granted 114,660 service-based RSU’s to employees vesting over three and four years.

F-21

The following table summarizes RSU activity under the Plan for the years ended December 31, 20192022 and 2020:

		Weighted Average	Weighted Average
	Service-Based	Grant Date	Vesting
	RSU's	Fair Value	Period
Unvested at December 31, 2018	-	-
Granted - service based	308,087	$6.77	3.00 Years
Unvested at December 31, 2019	308,087	$6.77
Granted - service based	310,874	$6.02	3.02 Years
Granted - performance based	35,211	$4.26
Vested	(144,687)	$5.17
Forfeited and cancelled	(81,479)	$6.47
Unvested at December 31, 2020	428,006	$6.13	2.27 Years

2021:

						Weighted Average				Weighted Average
		Service-Based				Grant Date				Vesting
		RSU's				Fair Value				Period (Years)
Unvested at January 1, 2021			428,006			$	6.13				2.3
Granted - service based			398,662			$	5.59
Vested			(524,491	)		$	5.55
Forfeited and cancelled			(32,874	)		$	6.10
Unvested at December 31, 2021			269,303			$	6.47				2.0
Granted - service based			988,850			$	2.49
Vested			(268,548	)		$	4.13
Forfeited and cancelled			(67,273	)		$	6.45
Unvested at December 31, 2022			922,057			$	2.88				2.11

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.

RSU expense was $1,455 and $2,748 for the years ended December 31, 2022 and 2021, respectively.

Share-Based Compensation Expense

The Company recorded share-based compensation in its statements of operations for the relevant periods for options and RSUs as follows:

	For the Year Ended
	December 31,
	2020	2019
Selling, general and administrative	$1,956,818	$1,410,095
Research and development	279,925	126,001
Total share-based expense	$2,236,743	$1,536,096

		For the Year Ended
		December 31,
		2022				2021
Selling, general and administrative		$	2,684			$	4,558
Research and development			541				798
Total share-based expense		$	3,225			$	5,356

As of December 31, 2020,2022, total estimated compensation cost of stock options granted and outstanding but not yet vested was $4.6 million$3,327 which is expected to be recognized over the weighted average period of 2.83.38 years. As of December 31, 2020,2022, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $2.2 million$1,900 which is expected to be recognized over the weighted average period of 2.32.11 years.

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13. DEFINED CONTRIBUTION PLAN

The Company has a defined contribution savings plan for all eligible U.S. employees established under the provisions of Section 401(k) of the Internal Revenue Code. This plan was formed on January 1, 2022. Eligible employees may contribute a percentage of their salary subject to certain limitations. The Company’s contributions for the year ended December 31, 2022 was $0 respectively.

13.

14. COMMITMENTS AND CONTINGENCIES

Facility Leases

Lease

See Note 9.

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 stockholders/officersstockholder/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 $1,000,000$1,000 in royalties or until September 30, 2026, whichever occurs earlier.earlier The Company recorded $143,390$274 and $23,297$278 for royalties incurred during the years ended December 31, 20202022 and 2019,2021, respectively.

Maximum payout still available under this arrangement is $280.

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”), which Agreement provides that the Service Provider will provide to the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform (the “Technology, Services, and License”), we are obligated to pay to the Service Provider (a) a cash payment upon the execution of the Agreement of $700, (b) a cash payment of $125 upon the completion of certain project delivery milestones expected in Q1and (c) a cash payment of $125 upon the final completion and delivery of the final Technology, Services, and License in Q2.

Purchase Commitments

At December 31, 20202022 the Company was committed for approximately $2.2 million$3,626 for future component deliveries and contract services 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.

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Regulatory Agencies

The Company may beis subject to oversight from regulatory agencies regarding firearms that arisearises in the ordinary course of its business.

Litigation

Securities Litigation

On September 23, 2020, Carone Cobden filed a putative class action complaint againstNovember 15, 2021, the Company, former Chief Executive Officer David Norris (“Norris”), Chief Financial Officer, James A. Barnes (“Barnes”), and President, Thomas Smith (“Smith”) inHon. Dolly M. Gee of the United StatesUS District Court for the Central District of California docketed as Case No. 2-20-cv-08760-DMG-PVCx (the “Cobden ComplaintCourt”). The Cobden Complaint alleges that granted the named defendants, in their capacities as officers ofmotion to dismiss filed by the Company, knowingly made false or misleading statements or omissions regarding trials of the Company’s BolaWrap product conducted by the Los Angeles Police Department (the “BolaWrap Pilot ProgramDavid Norris (“Norris”).  The Cobden Complaint also alleges that the conduct of the named defendants artificially inflated the price of the Company’s traded securities, and that the disclosure of certain adverse information to the public led to a decline in the market value of the Company’s securities.  The Cobden Complaint further alleges violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and defines the class period as July 31, 2020 through September 23, 2020. 

On October 1, 2020, Joseph Mercurio filed a second putative class action complaint against the Company, Norris,, James A. Barnes (“Barnes”), Thomas Smith and Barnes in the same court, which contains substantially the same factual allegations and legal claims as set forth in the Cobden Complaint, and is docketed as Case No. 2-20-cv-09030-DMG-PVCx (the “Mercurio Complaint(“Smith”).  On October 15, 2020, Paula Earley filed a third putative class action complaint against the Company, Smith, Norris, Barnes, Chief Strategy Officer, Mike Rothans (“Rothans”Rothans”), and former Chief Executive Officer, Marc Thomas (“Thomas”) (collectively, “Defendants”) in the same court, which contains many of the same factual allegations and legal claims as set forth in the Cobden and Mercurio Complaints, but defines the class period as April 29, 2020 through September 23, 2020, and alleges additional false or misleading statements in connection with BolaWrap and the BolaWrap Pilot Program (the “Earley Complaint”).  The Earley Complaint is docketed as Case No. 2-20-cv-09444-DMG-PVCx. 

On November 3, 2020, the Hon. Dolly M. Gee consolidated the three above-mentioned cases under the caption action captioned In re Wrap Technologies, Inc. Securities Exchange Act Litigation, Case No. 20-8760-DMG (“PVCx”) (the “Securities Action”). On January 7, 2021,The Court granted Defendants’ motion on the grounds that the complaint failed to identify any statement by Defendants that was either false or made with scienter. Concurrently, the Court appointedgranted Plaintiff leave to file a lead plaintiffsecond amended complaint on or before December 6, 2021, noting that a failure to file a second amended complaint by that date would result in dismissal of the Securities Action who designated its attorneys as lead counsel.with prejudice. On January 21,December 20, 2021, Judge Gee ordered thatfollowing Plaintiff’s failure to file a consolidatedsecond amended complaint, be filed inthe Court dismissed the Securities Action on or before March 12, 2021, with defendants’ motion to dismiss to be filed on or before April 26, 2021, and a hearing on the motion to dismiss to be held on July 23, 2021.  The Company believes that the complaints underlying the Securities Action are without merit and intends to vigorously defend against the claims raised therein.prejudice.

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Shareholder Derivative Litigation

On November 13, 2020, Naresh Rammohan filed a shareholder derivative action in the United StatesUS District Court for the Central District of California against Smith, Barnes, Rothans, Thomas, Norris,current and Messrs. Scot Cohen, Patrick Kinsella, Michael Parris,former Company officers as well as current and Wayne Walker,former Company directors alleging unjust enrichment, breach of fiduciary duty, waste of corporate assets, and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:20-cv-10444-DMG-PVCx (the “Rammohan Complaint”).20-cv-10444-DMG-PVCx. The Rammohan Complaint names the Company as a nominal defendant and recites manyderivative action was dismissed with prejudice by stipulation of the allegations set forth in the Securities Action relating to the BolaWrap Pilot Program.  On January 20, 2021, Ray Westerman filed a second derivative complaint in the same court against the same parties alleging breach of fiduciary duty and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21-cv-00550-DMG-PVCx (the “Westerman Complaint”).  On January 22, 2021, Jesse Lowe filed a third derivative complaint in the same court against the same parties, alleging breach of fiduciary duty and asserting various claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21-cv-00597-DMG-PVCx (the “Lowe Complaint”). 

on May 3, 2022.

 

The above-mentioned derivative cases (collectively, the “Derivative Actions”) each been have been transferred to Judge Gee as cases related to the Securities Action.  On January 27, 2021, the Judge Gee issued an order to show cause why the Derivative Actions should not be consolidated under the caption In re Wrap Technologies, Inc. Shareholder Derivative Litigation, Case No. 2:20-10444-DMG-PVCx and stayed pending the resolution of the anticipated motion to dismiss in the Securities Action.  On February 5, 2021, the parties in the Derivative Actions responded jointly to the order to show cause, stipulating that the case should be consolidated and stayed as suggested by the Court.  We believe that the Derivative Actions will be consolidated and stayed by the Court.  As with the Securities Action, the Company believes that the Derivative Actions are without merit and intends to vigorously defend against the claims raised therein.

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14.

15. RELATED PARTY TRANSACTIONS

Commencing in October 2017 the Company began reimbursing Mr. Elwood Norris, ana former officer and current stockholder and consultant of the Company, $1,500$1.5 per month on a month-to-month basis for laboratory facility costs,expense, for an aggregate of $18,000$18 during the yearyears months ended December 31, 20202022, and 2019,2021, respectively.

From April 2020 through December 2020 the Company engaged V3 Capital Partners, LLC (“V3”), a company owned and controlled by Scot Cohen, Mr. Norris retired as the Company’s Executive Chairman, to provide certain investor, shareholderChief Technology Officer effective June 30, 2021 and marketing services, in considerationcommencing July 1 was engaged as a month-to-month consultant. A greater than 10% stockholder, Mr. Norris was paid a monthly fee of $7.5 per month for aggregate consulting payments of $90 for the payment to V3 of $10,000 per month on a month-to-month basis for an aggregate of $90,000 during the yearperiod ended December 31, 2020. In addition,2022, and $45 for the Company paid V3 a bonus of $175,000 for assistance in a financing that was consummated in July 2020.

six-month period ended December 31, 2021.

See Notes 8 11 and 1314 for additional information on related party transactions and obligations.

 

15.

16. INCOME TAXES

Until its reverse recapitalization on March 31, 2017, the Company was treated as a partnership for federal and state income tax purposes and did not incur income taxes. The Company accounts for income taxes under ASC 740. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is "more likely than not" that some component or all of the benefits of deferred tax assets will not be realized.

The Company did not provide any current or deferred U.S.US federal income tax provision or benefit for the periods presented because of operating losses since inception. As of December 31, 2020,2022, the Company has federal net operating loss carryforwards of approximately $24,449,000$51,774 to reduce future taxable income thatincome. Approximately $703 will expire beginning in 2038.2037 with the balance having an indefinite carryforward period. Certain changes in stock ownership can result in a limitation on the amount of net operating loss and tax credit carryovers that can be utilized each year. As of December 31, 2020,2022, management has not determined the extent of any such limitations, if any.

The Company is subject to taxation in the US and various state jurisdictions. All the Company’s historical tax years are subject to examination by the Internal Revenue Service and various state jurisdictions due to the generation of net operating losses and credit carryforwards.

The Company provided a full valuation allowance on the net deferred tax asset, consisting primarily of net operating loss carry forwards, because management has determined that it is more likely than not that the Company will not earn income sufficient to realize the deferred tax assets during the carry forward period. As a result of the change in future Federal statutory tax rates due to the passing of the Tax Cuts and Jobs Act of 2017, management determined that the deferred tax assets and liabilities should be valued at a federal statutory rate of 21%.

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The Company has not taken a tax position that, if challenged, would have a material effect on the financial statements for the periods ended December 31, 20202022, and 20192021 applicable under FASB ASC 740. The Company did not recognize any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet. All tax returns for the Company remain open.

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The provision for (benefit from) income taxes consist of the following:

	Year Ended December 31,
	2020	2019
Current tax benefit	$-	$-
Deferred tax benefit	3,158,000	1,800,000
Change in valuation allowance	(3,158,000)	(1,800,000)
Income tax benefit (provision)	$-	$-

		Year Ended December 31,
		2022				2021
Current tax benefit		$	-			$	-
Deferred tax benefit			3,756				6,409
Change in valuation allowance			(3,756	)			(6,409	)
Income tax benefit (provision)		$	-			$	-

A reconciliation of the provision for income taxes at the federal statutory rate of 21% to the Company’s provision for income tax is as follows:

	Year Ended December 31,
	2020	2019
Income taxes benefit computed at federal statutory rate	$2,642,000	$1,748,000
State income taxes, net of federal effect	216,000	114,000
Permanent differences and other	300,000	(62,000)
Change in valuation allowance	(3,158,000)	(1,800,000)
Income tax benefit (provision)	$-	$-

		Year Ended December 31,
		2022				2021
Income taxes benefit computed at federal statutory rate		$	3,700			$	5,139
State income taxes, net of federal effect			345				480
Permanent differences and other			(289	)			790
Change in valuation allowance			(3,756	)			(6,409	)
Income tax benefit (provision)		$	-			$	-

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities for the periods presented:

	December 31,
	2020	2019
Deferred tax assets:
Net operating losses	$5,444,000	$2,430,000
Research tax credits	45,000	26,000
Stock compensation	542,000	239,000
Accruals and other	169,000	9,000
	6,200,000	2,704,000
Deferred tax liabilities:
Depreciation and other	396,000	58,000
	396,000	58,000
Net deferred tax assets	5,804,000	2,646,000
Less valuation allowance	(5,804,000)	(2,646,000)
Net deferred taxes after valuation allowance	$-	$-

		December 31,
		2022				2021
Deferred tax assets:
Net operating losses		$	14,898			$	11,773
Research tax credits			65				60
Stock compensation			1,216				847
Accruals and other			324				211
			16,503				12,891
Deferred tax liabilities:
Depreciation and other			534				678
			534				678
Net deferred tax assets			15,969				12,213
Less valuation allowance			(15,969	)			(12,213	)
Net deferred taxes after valuation allowance		$	-			$	-

In accordance with ASU 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, the Company recognizes windfall tax benefits associated with the exercise of stock options as a component of tax expense (rather than equity). Accordingly, our federal and state operating loss carryforwards include net windfall tax deductions from stock option exercises and RSU vesting of approximately $720,000$(597) and $144,000$3,168 during the years ended December 31, 20202022 and 2019,2021, respectively.

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16.

17. MAJOR CUSTOMERS AND RELATED INFORMATION

Major Customers

For the year ended December 31, 2020,2022, revenues from two distributors accounted for approximately 17%36% and 16%25% of revenues with no other single customer accounting for more than 10% of total revenues. These distributorsAccounts receivable from one distributor accounted for 28% and 26%70% of net accounts receivable at December 31, 2020. 2022.

For the year ended December 31, 2019,2021, revenues from one distributorthree distributors accounted for 22%approximately 26%, 19% and 17% of revenues with no other single customer accounting for more than 10% of total revenues. This customerAccounts receivable from three distributors accounted for 54%48%, 16% and 15% of net accounts receivable at December 31, 2019.

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2021.

The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’s delivery location.

	For the Year
	Ended December 31,
	2020	2019
Americas	$1,442,822	$481,622
Europe, Middle East and Africa	1,046,499	116,547
Asia Pacific	1,454,736	98,621
	$3,944,057	$696,790

		For the Year
		Ended December 31,
		2022				2021
Americas		$	5,315			$	3,357
Europe, Middle East and Africa			2,487				2,385
Asia Pacific			247				1,987
Total revenues		$	8,049			$	7,729

See Note 1 – Concentrations of Risks for information on reliance on suppliers.

 

18. SUBSEQUENT EVENTS

The Company has evaluated other events subsequent to December 31, 2022 through the date the accompanying financial statements were filed with the Securities and Exchange Commission and noted that there have been no other events or transactions which would affect the Company’s financial statements for the year ended December 31, 2022.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tempe, State of Arizona, on the 4th2nd day of March 2021.

2023.

	WRAP TECHNOLOGIES, INC
Date: March 4, 2021 2, 2023	By:	/s/ Thomas Smith TJ Kennedy
		Thomas Smith TJ Kennedy
		Interim Chief (Principal Executive Officer Officer)

In

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name		Position		Date
/s/ THOMAS SMITHTJ Kennedy		Interim Chief Executive Officer		March4, 2021 2, 2023
Thomas Smith TJ Kennedy		(Principal Executive Officer)
/s/ JAMES A. BARNESChris DeAlmeida		Chief Financial Officer, Secretary and Treasurer		March4, 2021 2, 2023
James A. Barnes Chris DeAlmeida		(Principal Accounting Officer)
/s/ SCOT COHENWayne R. Walker		Executive Chair Chairman of the Board		March4, 2021 2, 2023
Scot Cohen
/s/DAVID G. NORRIS		Director		March4, 2021
David G. Norris
/s/PATRICK KINSELLA		Director		March4, 2021
Patrick Kinsella
/s/MICHAEL PARRIS		Director		March4, 2021
Michael Parris Wayne R. Walker
/s/WAYNE R. WALKER Scot Cohen		Director		March4, 2021 2, 2023
Wayne R. Walker Scot Cohen
/s/ Michael Parris		Director		March 2, 2023
Michael Parris
/s/ Kevin Sherman		Director		March 2, 2023
Kevin Sherman
/s/Kimberly Sentovich		Director		March 2, 2023
Kimberly Sentovich

 

F-27