TABLE OF CONTENTS

PART I

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on form 10-K (the “Annual Report”) contains forward-looking statements"forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to: statements regarding the Company's overall business; total addressable market; and expectations regarding future sales, expenses and break-even and profitability expectations, and the Company desires to take advantage of the “safe harbor” provisions thereof. Therefore,Words included in this Annual Report such as "expect", "anticipate", "should", "believe", "target", "project", "goals", "estimate", "potential", "predict", "may", "will", "could", "intend", and variations of these terms or the Company is including this statement for the express purposenegative of availing itself of the protections of such safe harbor with respectthese terms and similar expressions are intended to all of suchidentify these forward-looking statements. The forward-looking statements in this report reflect the Company’s current views with respect to future events and financial performance. TheseMoreover, forward-looking statements are subject to certaina number of risks and uncertainties, including those discussed herein,many of which involve factors or circumstances that could causeare beyond the Company's control. The Company's actual results tocould differ materially from historical resultsthose stated or those anticipated. In this report,implied in forward-looking statements due to a number of factors, including but not limited to: the words “anticipates,”“believes,”“expects,”“intends,”“future”Company's ability to successfully implement training programs for the use of its products; the Company's ability to manufacture and similar expressions identify forward-looking statements. Readersproduce product for its customers; the Company's ability to develop sales for its new product solution; the acceptance of existing and future products, including the acceptance of the BolaWrap 150; the risk that distributor and customer orders for future deliveries are cautionedmodified, rescheduled or cancelled in the normal course of business; the availability of funding to considercontinue to finance operations; the specificcomplexity, expense and time associated with sales to law enforcement and government entities; the lengthy evaluation and sales cycle for the Company's product solution; product defects; litigation risks from alleged product-related injuries; risks of government regulations; the business impact of health crises or outbreaks of disease, such as epidemics or pandemics; the impact resulting from geopolitical conflicts and any resulting sanctions; the ability to obtain export licenses for countries outside of the US; the ability to obtain patents and defend IP against competitors; the impact of competitive products and solutions; and the Company's ability to maintain and enhance its brand, as well as other risk factors described below and not to place undue reliance on theincluded in this Annual Report. These forward-looking statements contained herein, which speak onlyare made as of the date hereof. Theof this Annual Report and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. Except as required by law, the Company undertakes no duty or obligation to publicly revise theseupdate any forward-looking statements to reflectcontained in this Annual Report as a result of new information, future events or circumstances that may arise after the date hereof.changes in its expectations.

For purposes of this Annual Report, the terms “we,” “us,” “our” “Wrap” and the “Company” refer to Wrap Technologies, Inc. and its consolidated subsidiary.

Use of Market and Industry Data

This Annual Report includes market and industry data that we have obtained from third party sources, including industry publications, as well as industry data prepared by our management based on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge). Management has developed its knowledge of such industries through its experience and participation in these industries. While our management believes the third-party sources referred to in this Annual Report are reliable, neither we nor our management have independently verified any of the data from such sources referred to in this Annual Report or ascertained the underlying economic assumptions relied upon by such sources. Furthermore, references in this Annual Report to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report, survey or article. The information in any such publication, report, survey or article is not incorporated by reference in this Annual Report.

Forecasts and other forward-looking information obtained from these sources involve risks and uncertainties and are subject to change based on various factors, including those discussed in sections entitled “Forward-Looking Statements,” “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.

TRADEMARKS, TRADE NAMES AND SERVICE MARKS

BolaWrapOur trademarks include Wrap, the Wrap logo, BolaWrap®, and Wrap Reality™, many of which are registered trademarks in the U.S.US and certain other jurisdictions. They, along with our other common law trademarks, service marks or trade names appearing in this Annual Report are the property of the Company. Other trademarks, service marks or trade names appearing in this Annual Report are the property of their owners. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement of or sponsorship of us by, any other companies. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this Annual Report.

ITEM 1. BUSINESS

Overview

We are a global public safety technology and services company organized in March 2016 delivering modern policing solutions to law enforcement and security personnel. We began salesare a mission-driven organization focused on improving public safety encounters and outcomes. In late 2018, we commenced the sale of our firstinitial public safety product, the BolaWrap 100 remote restraint device, in late 2018.device. In October 20212020, we releasedexpanded our public safety technology offerings by introducing a new generationvirtual reality training platform called Wrap Reality, which is now being sold to law enforcement and corrections departments for simulation training and societal reentry scenarios. In early 2022, we delivered an improved version of our flagship product, the BolaWrap 150. The BolaWrap 150, which is electronically deployed, and is more robust, smaller, lighter, and simpler to deploy thanuse compared to the BolaWrap 100 that is being phased out.

BolaWrap 150 Remote Restraint Device		BolaWrap 150 Remote Restraint Device and Cassette

As an alternative to more traditional means of restraint and detainment, BolaWrap represents a breakthrough in the development of a less-lethal tool on the low end of the applied force continuum. As communities continue to ask for more compassionate and safe policing practices, BolaWrap is rapidly gaining worldwide awareness and recognition through media exposure, trade show participation, product demonstrations and word of mouth.100s. 

TheWe believe our solutions have an immediate addressable domestic market for our solutions consistsconsisting of approximatelyabout 900,000 full-time sworn law enforcement officers at over 15,30018,000 federal, state, and local law enforcement agencies in the United States. WeUS, as well as 12.4 million police officers in more than 100 countries. Additionally, we are also exploring other domestic markets includingsuch as military and private security. Our international focus is onsecurity when allowable, while also targeting countries with the largest police forces. The 100 largestforces as part of our international police agencies are estimated to have over 12.1 million law enforcement personnel. According to 360iResearch, a market research firm, we participatefocus. We operate in a segment of the non-lethal products global market, which is expected to grow toreach $16.1 billion by 2027.2027, as projected by 360iResearch, a market research consulting firm. 

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

BolaWrap Remote Restraint Device – is a safe hand-held remote restraint device that discharges an eight-foot bola stylea seven and a half-foot Kevlar tether to entanglewrap an individual at a range of 10-25 feet. BolaWrap assists law enforcement to safely detain individuals without the need for pain compliance and effectively control encounters early in the use of force continuum without resorting to painful force options.higher uses-of-force.

Wrap Reality – is a law enforcementvirtual reality training system utilizingemploying immersive computer graphics virtual reality with proprietary software-enabled content. It allows up to two participants to enter a simulated training environment simultaneously andwith customized weaponsweapon controllers that enable trainees to engage in strategic decision making along the force continuum.including non-use-of-force and verbal training.

In addition to the United StatesUS law enforcement market, we have shipped our restraint products to 5159 countries. We have established an active distributor network with 12 domestic distributors representing 4950 states and one dealer representing Puerto Rico. We have distribution agreements with 4749 international distributors covering 54 countries. We focus on significant sales, training and business development efforts to support our global distribution network.

We focusallocate significant resources onto research and development innovationsfor product innovation and continue to enhance our products and plan to introduce new products.product improvement. We believe we have establishedbuilt a strong brandingrobust brand and global market presence, globally and have established significantwith notable competitive advantages in our industry. Wrap is at the forefront of designing remote restraint tools that focus on de-escalating law enforcement encounters by wrapping up a subject to prevent mobility and fighting which reduces risk of injury to the officer and to the individuals with whom they are interacting.

Recent Developments

In November 2022, the Company entered into a Professional Services and Technology Acquisition Agreement (the “Agreement”) with Lumeto, Inc. (“Lumeto”) and Spatial Industries Group, Inc. (“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. The Company expects to realize the benefit of an upgraded cloud virtual reality platform as a result of the Agreement, as well as capabilities and resources to support its growth of law enforcement and corrections virtual reality training modules and enhanced capabilities. Wrap Reality’s Cloud VR platform also has significant value in the firearms safety, concealed weapons, and civilian training space in addition to law enforcement, corrections, military and private security markets.

Industry Background

The market for use-of-force relatednon-lethal and less-lethal products and devices includesserves law enforcement agencies, correctional facilities, military agencies, private security guard companies, and retail consumers. We believe law enforcement officials are the opinionAs thought leaders regarding market acceptance ofin new public safety products. We are focusedproducts, we focus on the law enforcement agency segment of the market forwith our BolaWrap remote restraint solution and the Wrap Reality virtual reality system.

A number of well-publicized national Recent events, such as the death of George Floyd, the protesting thereafter, the Capitol riots and other publicized encounters and events throughout 2020 and 2021, have highlighted some of the challenges of modern policing and emphasized the need for more hands-off, less-lethal engagements and new approaches for more extensive officer training. Policerise in mental health cases, police reform, and reorganization of police departments, have now becomestarted a topic with heightened community focus and public engagement. We believe these eventsgrowing conversation on the need for de-escalation before pain-compliance policing policy across the country. As this de-escalation movement unfolds, there are garnering additional government funding and community support for new law enforcement solutions and more focused training. In conversations with industry leading organizations such as the Major City Chiefs Association ("MCCA"), International Association of Chiefs of Police ("IACP"), and others, police reform is a priority and area of focus in the Biden-Harris administration.

Currently, law enforcement agencies authorize a continuum of force options ranging from verbal commands to lethal force. Studies have concluded that most police officers never deploy lethal force in the course of their careers. Although a majoritythousands of law enforcement, officers aroundpolice, and sheriff’s offices focusing on training, policies, and the world are armed with firearms, onlyuse of more non-lethal restraining solutions. This movement highlights a small percentagegrowing need for new approaches, which we believe will actually ever use them. Officers, however, use less-lethal force on a regular basis. Traditional tactics such as using a control hold, baton, club, or combat to control a suspect may result not only in a risk of injury to the suspect, but also a risk that the officer will be injured. Other force options including chemical spray, impact munitionsdrive demand for our innovative and CEWs, not only risk injury, but are often controversial. Each weapon available tosafe law enforcement has distinct advantages and disadvantages, and we believesolutions.

When law enforcement agencies require a variety of different tools for different situations.

We believe BolaWrapseeks to detain an individual, there usually is a necessary tool to meet modern policing requirements when individuals do not respond to verbal commands. At the same time, the public is demanding less-lethal policing. This is even more apparent in police interactions with persons in crisis and the mentally ill. According to a report by The State of Mental Health in America, 2018, published by The Mental Health America an estimated 40 million adults in the U.S. suffer from mental health issues. And, in a 2015 report on The Role of Mental Illness in Fatal Law Enforcement Encounters, the Treatment Advocacy Center: Office of Research & Public Affairs, 7.9 million individuals have severe mental illness that affect their thinking and behavior. Amounting to somewhat fewer than four in every 100 adults in America, individuals with severe mental illness generate no less than one in ten calls for police service and occupy at least one in five prison and jail beds in the U.S. An estimated one in three individuals transported to hospital emergency rooms in psychiatric crisis are taken there by police. BolaWrap enables officers to more safely and humanely take subjects into custody without injury to get them the help they need. BolaWrap restraint of individuals at a distance may offer reduced frequency of deployment of other control techniques, including CEWs, especially in encounters with the mentally ill.

Litigation and insurance costs involving use of force for law enforcementcontinuum that an agency follows, starting with officer presence and verbal commands. If verbal commands break down, agencies may authorize the use of less lethal pain inducing compliance tools, such as pepper spray, pepper ball, wooden batons or metal collapsible batons, launchers and bean bags, and conducted energy weapons, such as Taser®. Our BolaWrap product offers an alternative. It can be significant, with settlementsused in many cases to restrain an individual after verbal commands break down and prior to the millionsneed to use pain-inducing compliance tools. The use of dollars for many departments. Reducing the frequency of need for othernonlethal solutions like BolaWrap potentially could lead to a reduction in use of force tools and the number of injuries and fatalities caused by law enforcement officers may reduceincidents that result in ending careers as well as the number of legal cases filed against agencies for excessive use of force, wrongful death, and injury.injury, thus decreasing expensive litigation, settlements, and insurance costs.

We believeanticipate that use of the BolaWrap increasesby public safety agencies can increase goodwill between public safety agencies and their communities. Community relations considerations can be particularly important atcommunities, especially in a time when almost anyevery interaction with public safety officers can be recordedis subject to public and scrutinized bymedia scrutiny. We believe the media and the public.

The industrylaw enforcement community’s response to BolaWrap confirmsdemonstrates the need to fill a gap between verbal commandsfor the product and pain inducing compliance tools. During 2021 dozens of agency released body or dash camera videos from actual police uses which demonstrated theits utility of BolaWrap toin safely detain persons often for transport for medical help.detaining individuals. Our goal is to equip every public safety officer with the BolaWrap remote restraint solution.solution that they carry with them each day.

Markets

We participate in the global non-lethal market that, according to the January 2022 report by 360iResearch, was estimated to be $8.3 billion in 2020, $9 billion in 2021 and expected to grow to $16.1 billion in 2027. The following segments are our target markets:

Domestic and International Law Enforcement

Federal,Our products and services are primarily targeted at federal, state, and local law enforcement agencies in the United States currently represent the primary target market for our products and services. According to the FBI’s Criminal Justice Information Services Division inUS. As of 2018, there were over 18,000 law enforcement agencies and 800,000 full-time local and state full-time law enforcement officers in the U.S. In October 2019,US, while the U.S.US Department of Justice reported that based on 2016 data, there were over 100,000 full-time federal officers primarily providing police protection, and over 15,300 general purpose law enforcement agencies in the U.S.

Federal officers include over 37,000 customs and border patrol officers. We believe ourbased on 2016 data. Our product line, including BolaWrap, can be an effective tool to safely assist infor safe detention of individuals subject tounder the agency’s jurisdiction. The BolaWrap offers an additional tool for frontline agents to de-escalate encounters while effecting agent responsibilities.jurisdiction of these agencies.

Additionally, weWe have estimatedalso identified an addressable international market opportunity of over 12.1 million police officers in the 100 largest police forces gathered from individual country statistics outside the U.S.US. We have delivered our first international order in 2018products to 59 countries and in 2019have entered into agreements with our first international distributors. Through December 31, 2021, we have delivered BolaWrap products to 51 countries,distributors, with international sales representing a significant portion of our revenues during 2021 representing 60% of total revenues.in 2022. We currently anticipate that sales attributable to international markets will continue to represent a significant portion of our sales in the fiscal year ending December 31, 2022. Our belief is based onfuture due in part to the fact that sales of our products within the U.S. to larger agencies are characterized by longer sales cycles compared to international sales, wherecentralized purchase decisions are largely centralizeddecision-making process at the national level.level in these markets. Often, the international markets have large national police forces. Conversely, in the US, the market is more fragmented with many smaller agencies and longer procurement and sales cycles. We expect international sales to continue to be lumpy due the timing of purchase decisions and relatively large size of orders.

Correctional Facilities

In 2005,2019, the United StatesUS Bureau of Justice statistics (“Census of State and Federal Correctional Facilities, 2005,2019,” U.S.US Department of Justice, Bureau of Justice Statistics, published October 2008)November 2021) estimated that there were 295,000240,000 correctional officers in over 1,8001,000 federal and state correctional facilities in the United States, thereforeUS, representing a large potential market for our products and services. Most correctional facilities fall under federal, state or local law enforcement jurisdiction and we believe these facilities could leverage Wrap Reality for law enforcement and societal reentry platforms as well as BolaWrap inside and outside of the correctional facility.

Private Security Firms and Guard Services

According to 2019 Bureau of Labor Statistics estimates (“Occupational Employment Statistics,” United StatesUS Department of Labor), there were approximately 1.1 million privately employed security guards in the U.S.US They represent a broad range of individuals, including those employed by investigation and security services, hospitals, schools, local government, and others. We believe that some security personnel armed with the BolaWrap could be effective to de-escalate some encounters without eliminating other devices available today. Providing guards with the BolaWrap may reduce the potential liability of private security companies and personnel in such encounters.

In mostToday, ATF classifications play a role in restricting Wrap's ability to transfer easily to non-government security firms. We believe the classification is overly onerous and we will continue to work with the ATF and others to change our nonlethal product's classification. We note that some of our international customer countries private security personnel outnumbers police officers. Research produced and reported by The Guardian suggests there were over 20 million private security workers worldwide in 2017 and that global spending on private security was anticipated to exceed $240 billion in 2020. Just the ten largest target countries outside the U.S. had approximately 17 million security workers in 2017.

Although there are use cases in private security, correctional facilities and in military policing, we are currently targeting our products and services for law enforcement. We do not currently plan a consumer version ofhave any transfer or possession restrictions on the device.non-lethal BolaWrap devices and we believe this should be the future for BolaWrap.  

Virtual Reality Training Market

According to a 2019 report published by Allied Market Research, theThe virtual training and simulation market size was valued at $204.41 billion in 2019 and is projected to grow to $601.85reach $602 billion by 2027.2027, according to a 2019 report by Allied Market Research. We believeexpect the growth of virtual reality and simulation will expand into continue expanding into many nascent industries, including law enforcement. Althoughenforcement, corrections, military, school, and private security although it currently represents a relatively small segment today,of the overall market. The law enforcement and military sectors are important segments of thisthe market, and increasing awareness of the rise in awareness regardingbenefits of virtual training and simulation drivesis driving market growth. Technology innovationsAdvancements in technology now allowenable virtual reality to bring real world situations into the virtual spacerecreate real-world scenarios in a 360-degree immersion.immersive environment.   

Wrap Products and Services

BolaWrap Remote Restraint

TheOur BolaWrap product line includes the BolaWrap 100, which was our first remote restraint product, withand the BolaWrap 150, (collectively withdelivered to the BolaWrap 100, the "BolaWrap") releasedmarket in October 2021.Q1 of 2022. The BolaWrap 150 is electronically deployedoffers electronic deployment and is more robust, smaller, lighter, and simpler to deploy than the BolaWrap 100 that is being phased out.use. The BolaWrap is a hand-heldhandheld remote restraint device that discharges an eight-foota seven and a half-foot Kevlar tether, to entangleentangling an individual atfrom a range of 10-25 feet. Inspired byDeveloped in collaboration with law enforcement professionals, thethis device allowsenables safe and effective control of low-force encounters, providing a valuable tool for law enforcement to safely and effectively control encounters on the low end of the applied-force continuum.officers. 

The BolaWrap functions by wrappingis a remote restraint device that safely wraps around an individual’sindividual's arms and/or legs impeding a subject from fleeing a scene, rapidly approaching an officer, or inducingto impede movement and prevent harm to themselves or others. ThisThe device enablesprovides a valuable tool for law enforcement officers to safely and humanely help take subjects into custody without injury, in order to get them the help they need.especially when verbal commands are ignored.

TheWith a wide effectiveness zone and a guiding seven dot green laser for accurate placement of the Kevlar tether, the BolaWrap mitigates the risk of injury to both the subject and officer. Its small, light, butand rugged BolaWrap is designeddesign allows officers to provide remote restraint whilemaintain other use of force continuum options remain open. The design of the device ensureswhile providing a wide device-effectiveness zone; it will impede a subject’s movement when deployed at the arms or legs. A guiding laser ensures accurate placement of the Kevlar tether, mitigating the risk of injury to subject and officer by quickly ending an encounter. Quick ejection and rapid replacement of BolaWrap cassettes allows one device to be reused in a single encounter or in multiple encounters.

There are limited effective options for remote engagement, so when verbal commands are ignored, law enforcement is faced with either going “hands on” or escalatingnon-lethal alternative to potentially injurious less-lethal forces or a firearm. The BolaWrap has shown to be effectivefirearms.

BolaWrap's effectiveness in restraining individuals and hindering the flight ability and reducing thetheir ability to flee or fight allowing effective officer action. We believe our tool is essentialhas been proven. Not only does it allow officers to meet modern policing requirementsact safely and effectively in working with subjects who are incapable of responding to verbal commands. With increased public attention paid to mental illness and implicit bias, there has also been increased agency demand for an effective non-lethal tool that does not rely on pain compliance. We believe our device minimizesdifficult situations by minimizing the need to employfor other uses of force, including hand-to-hand combat and other less-lethal weapons.more injurious less lethal or lethal weapons, but also it helps minimize injury and prevent the force frenzy that can occur after chasing a fleeing subject.

TheUnlike other less-lethal tools that rely on pain compliance and may lead to escalation of incidents and serious injuries, the BolaWrap does not rely on pain to gain compliance or electricity-enabled neuromuscular incapacitation for effectiveness. The wrapping effect is intended to impede flight whileincapacitation. BolaWrap does not inducing uncontrolledinduce paralyzed falls or injury. There is no issue of recovery time, asmaking the BolaWrap an ideal non-lethal tool for law enforcement officers. The fight or flight response that comes from less lethal tools that cause pain and injury is the case with CEW, impact munitions or chemical devices. Other less-lethal weapons relying on “pain compliance” have been shown to have an adverse effect, sometimes causing an incident to escalate into one causing injury to both subjects and officers.minimized by being wrapped by a BolaWrap device.

We spend significant resources training law enforcement on the safe and effective use of the BolaWrap in conjunction with de-escalation and apprehension techniques. However, like any restraining action, some injuries may result from the use of BolaWrap or as a consequencebecause of its use. Our training includes primary use cases that fall into the three broad categories routinely encountered by law enforcement and security personnel:

Law enforcement encounters with the mentally ill or those sufferinginvolving individuals experiencing a mentalbehavioral health crisis present a difficult challenge, often generatingcan be challenging, resulting in public controversy and costly consequences. According to theThe Treatment Advocacy Center: Office of Research & Public Affairs reported that one in a 2015 report onten police encounters involve individuals with mental illness, with at least one in four fatal police encounters involving individuals with mental illness (Overlooked in the Undercounted: The Role of Mental Illness in Fatal Law Enforcement Encounters one in ten police encounters involve the mentally ill and a minimum of one in four fatal police encounters involve the mentally ill.(2015)).

Reports from dozens of field deployments by law enforcement agencies during 2020 and 2021, on stationary as well as moving targets, have been encouraging and we expect additional use data in 2022. A field deployment is generallyshould be considered ‘successful’successful by law enforcement agencies if compliance is achieved, and no additional higher-level use of force tool is required after the BolaWrap is exposeddisplayed or used. Agencies have reported achieving compliance by utilizing the BolaWrap in the following ways:

We request thatWhile we encourage all law enforcement agencies to fill out a Use of Device Report when the BolaWrap is used during an encounter in the field. However,field, agencies do not always report all field deployments are reported to us by law enforcementdeployments. Some agencies as many consider the deployment of the BolaWrap to be low levela non-use of force or a de minimis use of force that does not constitute a reportable use of force. Somerequire any reporting. While some deployments to date have been captured on bodycam and shared with the public. Otherspublic, others were reported by the agency or the media but were not captured on bodycam. Some agencies capture deployments on body worn cameras but do not allow the sharing of the video or allow them to be shared for learning purposes but not publicized for other marketing purposes. Some local jurisdictions have department policies, collective bargaining agreements, and city, county or state laws regarding the distribution of body worn camera video.

As more agencies adoptincorporate the BolaWrap onto their duty belts and carry it every day on shift we believe we will continueexpect to see an increase in the rate of field deployments, which we anticipatebelieve will contribute to even further adoption of the device by law enforcement agencies worldwide. In 2022, following the release of our strategic roadmap in mid Q3, we focused our customer service team on modifying their approach to become a customer success operation. As part of this strategic change, our team focuses on reaching out to drive agency wide adoption. We made this pivot in part because many agencies in the first few years of BolaWrap only deployed a small number of trial units without the immediate follow-up to grow their deployment to agency-wide. We have trained our sales team to focus on agency-wide deployment to drive the highest level of immediate success with the device and to integrate it into department-wide use of force polices. In January 2023, we launched our Use of Force Reduction Guarantee whereby we will buy back an agency’s devices when they deploy agency wide and do not see a reduction in Use –of -Force by at least 10%, after meeting certain criteria.

BolaWrap 150

We announced a newIn late Q1 2022, we delivered the latest generation of our BolaWrap 150 device, in October 2021 and discontinued productionthe BolaWrap 150. Production of the legacy product,previous model, the BolaWrap 100. The BolaWrap 100, used removable cartridges, and we planceased in 2021. We intend to continue to providesupply cartridges for the BolaWrap 100 to our customers as long as they are available; however, we have no plans to produce new cartridges. Thefor the foreseeable future. Unlike the BolaWrap 100, the BolaWrap 150 employsutilizes cassettes that are customunique to the device and not interchangeablecannot be interchanged between models. We have declared that the BolaWrap 150 will be our primary product and will be supported for 5 to 10 years from the product launch date.

SinceTo support the October announcement ofincreased production volume for the BolaWrap 150, we have been developingimplemented a more automated supply chain in the production, quality control, and testing lines necessary to support the volume of production anticipated for the BolaWrap 150. We continue to make product improvements based on internal testing and field experience.in 2022.

We believe the improved, fully electronic BolaWrap 150 offers important benefits, including:

The BolaWrap 150 employs two micro-gas generators to individually expel each entangling projectile. Micro-gas generators are micro explosive parts used in a variety of industrial products, including automobile airbags.

We are unable to predict the market acceptance of the BolaWrap 150 product or the level of future sales. We believe we can grow orders and shipments during 2022. We plan to extend the product line with additional models and features in the future. However, there can be no assurance of the timing or quantity of orders or sales in future periods. See “Risk Factors” included below in this Annual Report for additional information regarding risks and uncertainties associated with our business.

Wrap Reality

DuringIn 2019, we partnered with an independent technology company to scope and configurecreate a virtual reality system with training scenarios. We demonstrated the virtual reality system and training scenarios during two large trade shows in October and November 2019. In December 2020 we acquired NSENA Inc. (“NSENA”),in December 2020, a developer and provider of a law enforcement training system employing immersive computer graphics virtual reality with proprietary software-enabled content. The NSENA system leveraged high-quality enterprise head-mounted devices ("HMDs") and a high-GPU gaming personal computer to power proprietary software. We have rebrandedbranded the system software and business as Wrap Reality Virtual Training and believe our content library containing over 35 trainingkept building and improving that platform and today it offers 38 built out scenarios is one of the largest available targeting law enforcement. Wrap Reality’sCountless additional scenarios were developedcan be made by and for police officers, and cover a wide array of skills and scenarios including de-escalation, conflict resolution, and all levels of use-of-force.

using the Wrap Reality Virtual Trainingadapt functionality to pick and choose key components to build a scenario. It takes advantage of some of the most advanced virtual reality hardware available. The Wrap Reality systemavailable and allows up to two participants to enter the simulated training environment simultaneously, and customized weapons controllers enable trainees to engage in strategic decision making along the force continuum.simultaneously.

In August 2021, we announced the development of a newan expanded Wrap Reality Virtual Training platform powered by, and developed through,with a collaboration with Amazon Web Services ("AWS") using AWS GovCloud (US)(AWS). TheThis new platform combines our advanced law enforcement simulator with secure cloud services to automatically track training progress and provide the ability to replay recorded training sessions. By embedding AWS storage services, we offer a fully-integrated training and training record management solution targeting agencies of all sizes. We believe these agencies have limited choices to meet the growing public safety training demands. This next generation platform is in beta testing and we expect to formally release the new platform by mid-2022.

While we are marketing and selling the Wrap Reality Virtual Training system, we continue to upgrade existing scenarios and develop de-escalation techniques into new scenarios. We alsoscenarios and seek to enhance the Wrap Reality experience through continued software and platform innovation. The expanded platform developed

Additionally, we entered into a Professional Services and Technology Acquisition Agreement with AWSLumeto and Spatial in November 2022, which is expected to enhanceprovide the scopeCompany with an upgraded cloud virtual reality platform, capabilities, and resources to support the growth of our offering to law enforcement customers.and corrections virtual reality training modules and enhanced capabilities.

We are optimistic about the potential for future growth of WRAP Reality by public safety agencies, given our early adoption and deployment of robust virtual reality training technology. By leveraging our existing platform and our investment in cloud software with the Lumeto Acquisition, we now will have the opportunity to develop and offer critical training scenarios at very competitive price points.

We have the ability to offer both on-premises and full cloud capabilities with multiple hardware options. This expansion enables us to deliver the platform to a broad range of customers, including law enforcement agencies, public and private security, corrections and the general public for firearms, concealed weapon, and safety training.

Selling, Marketing and Training

Our sales, marketing and training organizations work together closely to drive revenue growth by enhancing market awareness of our solutions, generating leads, building a strong sales pipeline, and cultivating customer and distributor relationships. Our training not only supports our sales, but it also provides revenue due to the extreme value our customers place on our training services. We started charging for our training services in Q3 of 2022.

Sales

LawOur primary target market is law enforcement agencies representin the US and globally. The purchasing decision for our primary target market. In this market, we expect that the decision to purchase BolaWrap productproducts and accessories will normally beis typically made by a group of people including the agency head, his/herheads, procurement, training staff, and use of force experts, and weapons experts. The decision sometimes involvesmay involve political decision-makers such as city council members and various committees. Although we expect themembers. The decision-making process for a remote restraint device will be less complicated than for other less-lethal products such as CEWs, the process may take as little as a fewseveral weeks or as long asto over a year or more partially due to budgeting reasonsbudget constraints and other distractions of agencies. For instance, during the summer of 2020, the U.S. had a significant number of protests in many major cities, which took agency time away from proactive planning actions.distractions.

We utilizeuse product demonstrations as a primary sales steptool and follow up with demonstrations scheduled from the over 12,000 law enforcement leads created by our marketing activities since 2018. Demonstrations are generally followed by sales activities or delivery of product for test and evaluation and training with appropriate selected agencies. Some of these deliveries are paid sales and some are issued as an incentive, with theactivities. Our goal and expectation of larger future sales of devices and cartridges/cassettes. We have demonstrated our products to more than 1,000 agencies and are achieving significant brand awareness among law enforcement. We and our distributors seek, when possible,is to convert demonstration and training deliveries to sales or after a trial period to have the devices returned for use as further demonstration or training devices. We consider training as an integral element of ourinto sales and marketing approach andlong-term expansion. We provide fee-based training services to agencies, as we believe that departments that have trainedwith knowledgeable instructors to be knowledgeable about our product will beare more likely to purchase devices. We provide our product training as a service to agencies; however, training may be fee-based in the future.products.

Initial sales in 2018 and early 2019 were made by our executive and sales employees. In June 2019, we implementedadopted a channel distribution strategyapproach, in whichtandem with our internal sales team, where we sellsupply our products to existing independent regional police equipment distributors, who thenin turn sell to local law enforcement agencies. We are focusingOur current focus is on cultivating partnerships with major agencies and providing active assistance to our internaldistributors through our dedicated sales, sales support and business development, resources on building relationships with large agencies and actively supporting distributors. Our sales forcesupport teams. We sell through distributors in most cases and go direct to our end customers where the right distributor skill set, and capability is currently comprised of 19 professionals. This team includes sales and business development personnel primarily in the field working directly with agencies, distributors and their customers and persons providing sales support including supporting demonstration and training contractors. In addition to full-time sales, sales support and business development personnel from time to time we utilize part-time consultants with law enforcement or government agency expertise to support our sales and marketing activities. Our 12 domestic distributors have an estimated 120 sales representatives that represent BolaWrap primarily to smaller agencies.not available.

We currently have distribution agreements with 12 domestica network of distributors representing 4950 states and one dealer representing Puerto Rico. These nonexclusive and cancelable agreements provide certain territorial rights to distributors butand allow us to sell direct to certain agencies under certain terms.

We have distribution agreements with 4749 international distributors covering 54 countries. These agreements are generally exclusive, requirerequiring minimum sales and follow up performance and allow us to sell direct to customers subject to certain compensation.if performance is not being met. We focus significant sales and business development efforts to support our international distributors.

While management is focused on sales of Wrap Reality virtual reality systems, we areWe have invested in training our sales, distribution, demonstration, training, and other staff andcustomer success teams, as well as our distributors, on our virtual reality training product to build awareness and grow sales. Wedrive sales of our BolaWrap and our Wrap Reality virtual reality training product. Additionally, we are alsoactively seeking to partnerpartnerships with other organizations to further enhance our virtual reality sales, marketing, and technology. In 2021 we collaborated with the National Tactical Officers Association ("NTOA") to assist in creating virtual reality training scenarios responsive to the needs of their 40,000 members from specialties that include patrol, Tactical Emergency Medical Support ("TEMS"), crisis negotiations, canine, corrections, sniper, protective operations, explosives, command, tactical dispatchers, behavioral sciences and others.technology efforts. We workengage with other industry experts in law enforcement as part of our goal of makingto ensure our virtual reality scenarios compliantalign with industry standards of engagement.

Marketing

Prospective customers learn aboutbecome aware of Wrap solutions through a variety of ways, including targetedmarketing channels such as social media, paid advertising, media coverage, press releases, web site searches, sales calls, and public relations. We have distributed agencyalso distribute body and dash camera videos demonstrating effectiveof successful BolaWrap use of BolaWrap in a variety of policing encounters.

Whenencounters to generate leads. Once a lead is generated, throughit is qualified by our marketing activitiesinside sales team, and qualified, we connect them with a sales representative and/or a distributor communicates with the prospective customer to discuss their needs and the solutions in which they are interested. we offer.

We track our marketing and sales activities to provide immediate previewinsight into activities, leads, quotes, and pipeline opportunities. We believe we are developing a strong pipeline of opportunities for Wrap solutions.

Our marketing staff also engages with local, statelaw enforcement agencies, personnel, and federal agencies and personnel both directly and through professional firms that advocate less-lethal engagements and increased education and training.

We work with risk management organizations serving law enforcement to educate them on the benefits of BolaWrap remote restraint, to reduce incidentsas well as Wrap Reality and costs of escalation. In December 2021 the Arizona Municipal Risk Retention Pool (AMRRP) Board of Trustees voted funding to assist its 60 rural police agencies to procure BolaWrap devices for active-duty police officers. We are working with other similar entities to increase awareness of the BolaWrap solution.

We actively promote our brands and believe the Wrap and BolaWrap tradenames are becoming increasingly known world-wide as the pioneer and leader in remote restraint. Wewe participate in a variety ofvarious domestic and international trade shows and conferences both directly and withto promote our distributors. We expect our marketing efforts will also continue to benefit from significant free media coverage.

brands. We intend to increase the use of our trademarks throughout our product distribution chain to enhance brand awareness and believe growing brand awareness will assist in expanding our business. We believe ourstrong reputation as a pioneer in the new category of remote restraint, strongwith excellent training and product support, providegives us a competitive advantages.edge.

Demonstration, Training and SupportCustomer Success

The Company maintains a demonstration and training department as aAs part of its sales and marketing activities, the company has a department dedicated to conducting demonstrations and does not charge for product demonstrations or training. Training is not a condition or requirement of sale as many sales are made through distributors to their end customers. The Company conducts local and regionalcompany offers in-person, webinar, and on-lineonline demonstrations, andas well as paid use of force and de-escalation training, to support law enforcement agencies with no purchase requirement. Suchagencies. The training may occurcan take place before or after the initial or subsequent purchase or field deployment of the Company’scompany's products. The Companycompany believes that providing training and demonstrations to law enforcement officers and trainers increases their support for purchasing and officers that have seen demonstrations or have been trained about itsdeploying the products are more supportive ofwithin their departments purchase and deployment of product.departments.

Most law enforcement and correctionsGenerally, agencies will not purchase new use of force devices until a training program is in place to certify officers in their proper use. Generally, they also must adapt any new tools to their use of force policiespolicy to take remote restraint and clearthe BolaWrap into a key new area of their policy for non-invasive tools that did not previously exist. BolaWrap is typically not a categorical use with any relevant committeesof force, or review boards.if classified as force, is typically at the lowest level on a department policy, below all other less lethal weapons like pepper spray, pepperball, batons, bean bags, Tasers® and conducted energy weapons. We have developed and offer robust training and class materials that certify law enforcement officers and trainers as BolaWrap Instructors in the use and limitations of the BolaWrap solution.

Recognizing the needIn order to provide robustcomprehensive training and sales support, we launchedinitiated the Wrap “Train"Train the Trainer”Trainer" program in October 2018. The program is designedstructured such that our Master BolaWrap Instructors train localeducate BolaWrap Instructors at local agencies, who then train linefront-line officers in accordancecompliance with an agency’sthe agency's policies.

BolaWrap Master Instructors are considered independent contractors and are required to have law enforcement training experience and be effective communicators. In order to be certified as a Master Instructor, candidates must complete a two-day Master Instructor school at our Tempe training facility, observe a Train the Trainer course and then be observed teaching a Train the Trainer Course. We have engaged 81 Master Instructors, residing in 30 states that have completed the two-day course allowing them to conduct Instructor Certification Training. In addition, we have nine Master Instructors who have been designated Senior Master Instructors qualified to assist with teaching and certifying other Master Instructors. Of these Senior Master Instructors, six also comprise our Training Advisory Board.

BolaWrap Instructors are generallytypically sworn law enforcement officers, typicallywho are commonly department trainers, defensive tactic instructors, or SWAT officers. To be certified as a BolaWrap Instructor, individuals must attendThey undergo a five-hour BolaWrap Instructor certification course, passwhich includes passing a written exam and showdemonstrating proficiency in deploying and using the BolaWrap. We also assist Instructors onprovide support to the instructors to share lessons learned and best practices for teaching line officers in the use of BolaWrap. The nature and extent of line officer training is at each agency’s discretion. Instructor certification is effectivevalid for two years and requires renewal afterward. BolaWrap training curriculum is submitted by departments to their Post Officers Standards and Training (POST) for credit for in-service training hours. Most departments who leverage the BolaWrap across all field officers incorporate BolaWrap training into most other training materials and in service training throughout the year. An example would be officers doing an in-service training on Driving under the Influence (DUI) arrests being updated on BolaWrap and practice using the BolaWrap during the arrest portion of training on individuals under the influence of alcohol or drugs. If departments are conducting in-service training on responding to those in a mental health crisis, they also need to train and have ongoing practice on deploying BolaWrap on those in crisis and practice taking these individuals safely into protective custody. Another in service training example would be when departments practice warrant service, and during the arrest and apprehension efforts, they leverage BolaWrap after which it requires renewal.verbal commands breakdown but before they are justified in using pain compliance tools such as pepper spray, pepperball, batons, Tasers or conducted electrical weapons.

We employ a cloud-based software system, the Wrap Learning Management System,In order to schedule and organize training events, registration, and training records.records, we utilize a cloud-based software system called the Wrap Learning Management System. This softwaresystem is also hostshome to a Resource Library thatwhich we highly encourage distributors and purchasers and other interested parties are highly encouraged to utilizeuse to educate themselves on BolaWrap use.the use of BolaWrap. 

We have assembled a teamIn the modern world of five experiencedpolicing, we understand that it is crucial to provide equipment and well-known trainers from different regions across the U.S.services that form the Wrap Training Academy Advisory Board. The Wrap Training Academy Advisory Board provides guidance to maintain a high-quality training program for Wrap products.

Since launching our ‘Train the Trainer’ program in October 2018, we now have at least one individual at over 1,000 U.S. police departmentsare well-supported, and that has received formalofficers receive proper training and over 3,000 officers are currently certified BolaWrap instructors qualifiedprocedures to perform their duties effectively and certifiedsafely. As a result, we have developed a professional team dedicated to train line officers. We encourage training prior to use of the BolaWrap by individual departments but the nature and extent of training, if any, is at the discretion of each individual agency.

We also have two experienced trainers that install, demonstrate and provide training on our Wrap Reality platform and modules.

We believe our professional training and sales support, team andas well as the necessary systems to provide boththis support. This approach not only gives us a competitive advantage andedge but also creates a significant barrier to new competition. The nature of modern policing requiresWe are confident that equipment and services be supported and that line officers have access to training and procedures to properly perform their duties and minimize the policing risks. We believe we have positioned our training and support teams are equipped to respond toassist agencies of all sizes.

Our Strategy

Our product and training solutions continue to gain worldwide awareness and recognition through media exposure, product demonstrations, and word of mouth as a result of positive responses and increased acceptance of our solutions. We believe we have a strong global brand, technology and product foundation, which we continue to expand to serve new markets and customers for greater business growth. We believe we have strong market opportunities for our product solutions throughoutIn the world in theof law enforcement, defense, public safety, and security, sectorsour product and training solutions are gaining recognition and worldwide awareness. We have a strong global brand and product foundation that we are continuously expanding to reach new markets and customers, thereby contributing to significant business growth. We are confident that we can capitalize on the growing demand for non-lethal policing in the world, particularly as a result of increasing threats by non-compliant individuals and the demand for less-lethal policing. We believe ourcontinue to pose a threat. Our training programs and virtual reality platform are also well positioned to grow rapidly in rapid growth markets worldwide.global markets.

Our commercialization strategy focusesconcentrates on the immediate addressable domestic market, of approximately 900,000 full-time sworn officers in over 15,300comprising more than 18,000 federal, state, and local law enforcement agencies, andwith approximately 900,000 full-time sworn officers in just the 12.1 million plus police officers inUS alone. We also aim to target the 100 largest police forces internationally.internationally, which have over 12 million police officers. Our goalobjective is to realizeunlock the full potential of our entire suite of technology solutions targetingsuite, which targets law enforcement and security personnel worldwide.on a global scale.

In 2022the coming year of 2023, we intendplan to continue operating withmaintain financial discipline in orderprudence and deliver value to create value for our stockholders. We intend to continue the pursuit of domestic and internationalshareholders. Our focus will remain on expanding our revenues through pursuing business opportunities withboth domestically and internationally. In addition to enhancing our network of well-established distributors and grow our revenues. We plancurrent product portfolio, we aim to develop new and improved and new products, to our portfolio including products for usewhich can be utilized by security personnel and related personnel.professionals. We also seek to pursue strategic business initiatives and opportunitiescollaborations, including potential acquisitions, and collaborations that may be complementary to complement our existing productofferings and service offerings through our sales network.

Manufacturing and Suppliers

Manufacturing

We believe that maintaining scalable assembly capabilities is essentialcrucial to the performance of our products and the growth of our business. Our assembly processes involve unique systems and materials. Wematerials, and we contract with third-party suppliers to produce various parts, components, and subassemblies. We established initial startup production in a Las Vegas facility in 2018. In2018, and in October 2019, we completed a move and startedbegan production at our newcurrent facility in Tempe, Arizona. This facility now includes our corporate administration, sales, training, engineering, manufacturing and warehousing. In our Tempethis facility, we complete theperform manufacturing, final assembly, testtesting, and shipshipping of our products. We have refined our internal processes to improve how we design, test, and qualify products. Weproducts, and we continue to implement rigorous manufacturing and quality processes to track production and field issues. We periodically implement design and component changes periodically to reduce our product costs and improve product reliability and manufacturability. We aim to continually improve our operations to meet the growing demand for our products and better serve our customers.

Suppliers

We minimize inventories and maximize the efficiency of our supply chain by having a number of components and sub-assemblies produced by outside suppliers. In particular, a single supplier is currently the sole manufacturer of the BolaWrap 150 battery assembly and another single supplier is the sole manufacturer of the propulsion component for BolaWrap 150 cassettes. Other parts are sole sourced from other suppliers. We believe we have developedestablished strong relationships with our key suppliers. Oursuppliers, and their timely and reliable delivery is crucial to our ability to meet customer demand depends,demand. However, we are subject to challenges in part, on our ability to obtain timely and adequate delivery of components for our products. Our global supply chain, has been subject tosuch as component shortages, increased lead times, cost fluctuations, and logistics constraints. We expect these supply chain challenges to continue throughout 2022. Supplier shortages, quality issues and logistic delaysconstraints, which can affect our production schedules and couldhave a negative impact on our financial performance. In late 2022, we have started to ensure we have more final product inventory on hand to meet new business needs. While we anticipate supply chain challenges to improve in turn2023, we recognize that future supplier shortages and logistics issues could have a material adverse effect on our operations and financial condition, results of operation and cash flows.results.

Backlog

At December 31, 2021,2022, we had backlog of approximately $268$257 thousand expected to be delivered in the first quarter of 2022.2023. The amount of backlog at any point in time is dependent upon order timing, scheduled delivery dates to our customers and product lead times. Most orders are shipped shortly after order and backlog is typically associated with larger internationalpolice agency orders. Because of our history of shipping shortly after order, at this time we do not currently believe backlog at any period end is predictive of future order volume or revenues beyond the reported amount. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instances, cancellation in the normal course of business.

Warranties

We warrant ourOur products to be free from defects in materialscome with a warranty that guarantees their quality and workmanshipperformance for a period up to one year from the date of purchase. TheThis warranty will beis generally a limited warranty, and in some instances imposemay include certain shipping costs onfor the customer. Some jurisdictions require two-year or otherWe also offer the option for our customers to purchase additional one-year warranty periods and we seek to comply with local or distributor requirements regarding warranties. We expect in most cases it will be more economical and effective to replace the defective device rather than repair.increments for their products. 

Competition

We targetOur company positions the BolaWrap product as a new non-invasive remote restraint solution for law enforcement and not asrather than a replacement for other devices currently in use. When looking at the use of force continuum we place our solution in a category completely separate from common less lethal solutions that use pain compliance and can cause serious injuries or even death in some circumstance. We believe every law enforcement officer in the world who carries handcuffs should carry a BolaWrap at the same time. BolaWrap is leveraged just prior to handcuffs, and we are doing everything we can to educate the public and agencies about the important need to adopt this critical non-invasive and safe tool.

However, we do compete with other use of force products for budget dollar allocations. Law enforcement agenciesThe BolaWrap product may also determine that we arebe perceived as an alternative to other solutions despite suchour valuable and separate positioning. Because the BolaWrap will likely be used so much more often than all of the other tools combined, we believe we stand in a category of our own.

OtherIndirectly, other use of force devices including conducted electrical weapons (“CEWs”)such as tasers (CEWs), pepper spray, pepperball, batons, and impact weapons may try to compete with the BolaWrap product indirectly. Manyproduct. However, many law enforcement and corrections personnel consider such less-lethal weaponsthese to be distinct tools, each best-suited to a particular set of higher use of force circumstances. Consistent with this tool kit approach, purchasing any givenPurchasing one tool does not preclude the purchase of one or several more. In other cases,others, but budgetary considerations and limited space limitations on officers’officer’s belts dictate that only a limitedmay limit the number of devices will be purchased and carried. We believe the BolaWrap’sThe BolaWrap's unique remote restraint use, effectiveness, and low possibility of injury will enablepositions it to compete effectivelyas an effective competitor against all other alternatives. We believe that in time the non-invasive BolaWrap will be prioritized over these other less lethal devices for its ease of use, safety, and high probability of use throughout a given year to officers in the field.

ThereIn the virtual reality training space, there are a number ofnumerous competitors offering virtual reality simulators for law enforcement, to compete with Wrap Reality. We also compete againstincluding established video-based 2D simulators. There areFurthermore, other virtual reality providers and developers focused on other applications that may in the future electchoose to develop and compete in the law enforcement training space.market in the future.

ManyWe recognize that some of our present and potential future competitors have, or may have substantially greater resources to devote to compete in the law enforcement market and to further technological and new product developments. Also, these competitors or others may introduce products with features and performance competitive to our product. However, we believe that our unique positioning, strong product and technology foundation, and dedicated professional training and sales support team provide a competitive advantage.

Overall, we are extremely impressed with the depth and capability of our 3D Virtual Reality (VR) Wrap Reality Capability. We have 38 fully formed law enforcement scenarios and 25 corrections and societal reentry scenarios in 3D plus the customizability of Wrap Reality Adapt which we believe provides more robust 3D options than the competitive. The largest capitalized competitor in space currently offers only three 3D scenarios and is selling subscriptions of more than six million dollars a year.

Government Regulation

Globally,As a global company, we are subject to numerousa wide range of domestic, federal, state, and local laws and regulations, and theas well as international laws and regulations of global jurisdictions relating to matters regarding shipments, customs, import, export, safe working conditions, manufacturing practices, environmental protection, and disposal of hazardous or potentially hazardous substances. In addition, we have to ensure compliancesubstances disposal. Compliance with economic sanctions and/or restrictions on individuals, corporations or countries, and other government regulations affecting trade that may apply to our international cross border business activities. We may incur significant costs to comply with suchthese laws and regulations nowmay entail significant costs, and failure to comply may result in penalties or in the future.other enforcement actions.

TheOur BolaWrap 100 and the BolaWrap 150products are each classified as a “firearm” by the U.S. Bureau of Alcohol, Tobacco, Firearmsfirearms and Explosives (“ATF”), and are subject to federal firearms-related regulations. We hold two Federal Firearms Manufacturing Licenses that expire in 2022 through 2023. The BolaWrap 150, and the related BolaWrap 150 cassette, are also regulated as exempt special explosive devicesAOWs by the ATF, which requires adherenceand we hold the necessary licenses to explosive manufacturingmanufacture and handlingdeal in such firearms. We believe these devices have been classified as AOW due to the lack of updates to outdated statutes and implementing firearms regulations. We hold one explosives manufacturing licenseare actively working to improve the legislation and one explosives import license, both expiringto allow our products to be directly transferred to private security forces and private individuals due to its safe effective capabilities standing alone in 2024.the non-invasive non-lethal category.

ATF regulationsWe are enforced by surveillance and inspection. If the 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.

Many states also have regulations restricting the sale and use of certain firearms and explosives and may determine their own classification and restrictions irrespective of ATF regulation. In most cases, the law enforcement and corrections market are subject to different ATFstate and stateinternational regulations, or exemptions thanwhich may vary. We comply with shipping regulations for dangerous goods, and our products comply with standard safety requirements in the private citizen market,US and we do not expect additional state restrictions or approvals for sales to law enforcement. Where differentinternational markets. We follow data protection laws and have a privacy policy in place. We work with distributors and advisors familiar with applicable import regulations exist, we expect that the regulations affecting the private citizen market may also apply to the private security markets, except as the applicable regulations otherwise specifically provide.in our international markets.

Our BolaWrap cartridges, cassettes, and lithium-ion battery packs are generally considered dangerous goods for shipment regulation. The shipping of dangerous goods, whether via air or ground, falls under the jurisdiction of many state, federal and international agencies. The quality of the packaging that protects a product is critical in determining whether it will arrive at its destination in a satisfactory condition. Many of the regulations for transporting dangerous goods in the United States are determined by international rules formulated under the auspices of the United Nations. 

The International Civic Aviation Organization ("ICAO") is the United Nations organization that develops regulations (“Technical Instructions”) for the safe transport of dangerous goods by air. If shipment is by air, compliance with the rules established by the International Air Transport Association ("IATA") is required. The IATA is a trade association made up of airlines and air cargo couriers that publishes annual editions of the IATA Dangerous Goods Regulations. These regulations interpret and add to the ICAO Technical Instructions to reflect industry practices. When we ship dangerous goods, we follow strict and stringent guidelines.

We are subject to a variety of government laws and regulations that apply to companies engaged in international operations, including, among others, the Foreign Corrupt Practices Act, U.S. Department of Commerce export controls, local government regulations and procurement policies and practices (including regulations relating to import-export control, investments, exchange controls and repatriation of earnings). The BolaWrap 100 and the BolaWrap 150 devices are also considered a crime control product by the U.S. government. Accordingly, the export of our devices is regulated under export administration regulations. As a result, we must obtain export licenses from the Department of Commerce for all shipments outside the U.S. We do not expect the need to obtain these licenses will cause a material delay in our foreign shipments. Export regulations also prohibit the further shipment of our products from foreign markets in which we hold a valid export license to markets in which we do not hold an export license for our products. We are seeking export classification of our virtual reality training product but do not currently believe export licenses will be required. International destination regulations, which may affect our products and services, and sale thereof, are numerous and often unclear. We work with our international distributors, agents and advisors who are familiar with the applicable import regulations in each of our targeted international markets.

Our products are produced to comply with standard product safety requirements for sale in the U.S. and similar requirements for sale in international markets. We expect to meet the electrical and other regulatory requirements for any electronic systems or components we sell throughout the world. As part of our manufacturing operations, we are subject to various federal, state, local and non-U.S. laws and regulations relating to environmental protection, including the discharge, treatment, storage, disposal and remediation of hazardous substances and wastes. We continually assess our compliance status and management of environmental matters to ensure our operations are in substantial compliance with all applicable environmental laws and regulations.

Our Wrap Reality training software services offer agencies the option for us to store certain training records and related information. We are committed to complying with, and helping our customers comply with, data protection laws globally. We monitor guidance from industry and regulatory bodies, meet with our supplier partners and update our product features and contractual commitments when necessary to meet new or evolving privacy legal requirements. We maintain a privacy policy that describes how we collect, uses and disclose information, and what choices organizations and users have.

Intellectual Property Rights and Proprietary Information

We intend to vigorously protecthave a policy of protecting our intellectual property assets, includingwhich include issued domestic and international patents, pending patents, trademarks, copyrights, trade craft,secrets, and contractual obligations and trade secrets such as know-how. Our policy is toobligations. We enter into confidentiality and nondisclosure agreements with key employees, consultants, and consultants or third partyparties to whom any of ourwe disclose proprietary information is disclosed.information. These agreements prohibit the disclosure of confidential information to others, both during and subsequent to employment orafter the duration of the working relationship. TheseHowever, we recognize that such agreements may not always prevent disclosure of confidential information or provide adequate remedies for any breach. We rely on copyrights, trade secrets, and other proprietary rights to protect the content of our training services, including the Wrap Reality VR training software and content.

In addition to suchWe believe that strong product offerings that are continually upgraded and enhanced, combined with factors such as innovation, technological expertise, and experienced personnel, we believe strong product offerings that are continually upgraded and enhanced will keep us competitive, andcompetitive. Therefore, we seek patent and other intellectual property protection on important technological improvements that we make. Prior to theBefore filing and granting offor patents, our policy is towe disclose key features to patent counsel and maintain these features as trade secrets prior to product introduction. PatentHowever, patent applications may not result in issued patents covering all important claims, and there is a risk that they could be denied in their entirety.

We currently have thirteennineteen issued U.S.US patents related to the BolaWrap technology and fifteeneight additional U.S.US patents pending. In September 2018, we commenced filing our first foreign patent applications targeting the European Union (38 countries) and 17seventeen other countries, of which sixthirty-four have been issued to date. To date we have a total of 53 issued domestic and international patents for our small global company. During 20212022 we filed additional foreignthirty-three patent applications, two of which were US filings. We feel the significant investment in patent protection in the US and we have reserved rights to file additional foreign patents.abroad creates a significant amount of IP and value in Wrap Technologies. The failure to obtain patent protection or the loss of patent protection on our existing and future technologies or the circumvention of our patents by competitors could have a material adverse effect on our ability to compete successfully.

We have been granted trade name protection for “BolaWrap” and “Wrap” in multiple countries and expect to employ a combination of registered and common law trade names, trademarks and service marks in our business. We rely on a variety of intellectual property protections for our products and technologies, including contractual obligations, and we intend to pursue a policy of vigorously enforcing such rights.

The law enforcement product and services industry isindustries are characterized by frequent litigation regarding patent and other intellectual property rights. Others, including academic institutions and competitors, hold numerous patents in less-lethalless lethal and related technologies. Although we are not aware of any existing patents that would materially inhibit our ability to commercialize our technology, others may assert claims in the future. Such claims, with or without merit, may have a material adverse effect on our financial condition, results of operations or cash flows.

Research and Development

Our research and development initiatives are led by our internal personnel and make use of specialized consultants when necessary. These initiatives include basic research, mechanical and electrical engineering design and testing. Future development projects will focus on new versions of the BolaWrap technology, virtual reality and new public safety technologies.technologies that focus on safe and effective policing, especially in our strategic space that does not use pain compliance.

For the fiscal years ended December 31, 20212022, and 2020,2021, we spent approximately $6.2$5.1 million and $2.8$6.2 million, respectively, on company-sponsored research and development. This equates to 63% of revenue in 2022 and 80% of revenue in 2021. Future levels of research and development expendituresexpenditure will vary depending on the timing of further new product development and the availability of funds to carry on new and additional research and development on currently owned technologies or in other areas. During 20222023 in addition to continued development and enhancement of our remote restraint products we expect to incur additional costs improving our training systems including enhancing our Wrap Reality simulatoron premise and cloud platforms and related content. As mentioned earlier we believe we are ahead of many in the law enforcement 3D virtual reality training space and have built up significant capability to compete globally in the law enforcement and corrections VR space.

Related Party License and Royalties

We are obligated to pay royalties pursuant to an exclusive Amended and Restated Intellectual Property License Agreement, dated as of September 30, 2016, with Syzygy Licensing, LLC (“Syzygy”), a private technology invention, consulting and licensing company owned and controlled by Elwood G. Norris, a founder and former officer and current stockholder of the Company, and James A. Barnes, ana former officer and stockholder of the Company. Syzygy has no ongoing operations, and does not engage in any manufacturing, production or other related activities.

The agreement provides for the payment of royalties of 4% of revenue from products employing the licensed device technology up to the earlier to occur of (i) the payment by the Company of an aggregate of $1.0 million in royalties, or (ii) September 30, 2026. All development and patent costs have been paid by us and patent applications and the technology related to the BolaWrap 100 and the BolaWrap 150 have been completely and solely assigned to the Company, subject to thethis royalty obligation.

As of December 31, 2022 $720 thousand have been paid out under this royalty obligation leaving a partmaximum of our acquisition of NSENA$280 thousand to be paid out in December 2020, we agreed to pay additional earn-out consideration equal to 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 consummation of the acquisition and June 30, 2022. No royalties were earned or are payable under the agreement.future.

Seasonality

We do not expect to experience any significantfind that local and international law enforcement does have seasonality trends. However, seasonality trends may occurin how they purchase and expend funds. Many local law enforcement agencies in the future.US are on a July 1 to June 30th calendar year resulting in increased spending in Q3 and Q4 of the fiscal year. The US federal government is on an October 1 to September 30^th budget year resulting in use or loose spending that often occurs in Q3 of the fiscal year. Some domestic and international budgets are on a calendar fiscal year resulting in Q4 typically being the largest buying quarter of the year.

Financial Information about Customer Concentration and Geographic Areas

Financial information regarding customer concentration and geographic areas in which we operate is contained in Note 16,17, Major Customers and Related Information to our consolidated financial statements.

Human Capital

Executive Officers

The Company’s executive officers serve at the discretion of the board of directors. The current executive officers of Wrap Technologies, Inc. and their ages and business experience are set forth below.

LW Varner, Jr.,TJ Kennedy, age 71, joined51,was appointed as a director of the Company as Interimin April 2021, and Chief Executive Officer of the Company in JanuaryApril 2022. Mr. Varner will servePrior to his appointment as Interimthe Company’s Chief Executive Officer, underMr. Kennedy served as the termsChief Executive Officer, president, and member of a Consulting Agreement datedthe board of directors of Qumu, Inc. (NASDAQ: QUMU) (“Qumu”) from July 2020 to April 2022. Qumu was acquired in 2023 by Enghouse Systems. From January 24, 2022, by and between the Company and LWV Consulting, LLC.2019 to July 2020, Mr. Varner has significant experienceKennedy served as a corporate executive and director in transition and turnaround situations. From June 2020 through November 2021, Mr. Varner was the Chief Executive Officer and member of the board of directors of Allerio, Inc., and a director of Select Interior Concepts,the Public Safety Network from January 2018 to July 2020. From July 2013 to January 2018, Mr. Kennedy served as the President/Deputy Executive Director of FirstNet – the First Responder Network Authority and independent authority of the US federal government. FirstNet was the federal authority created by the US Congress to build out the first nationwide public safety broadband network for first responders in the world. Mr. Kennedy negotiated the public private partnership that was a publicly traded company focusedresult of the $100B IDIQ contract with the US federal government. Mr. Kennedy holds a Bachelor of Science in Health Promotion and Education from the University of Utah, and a Master of Business Administration from Johns Hopkins University.

Kevin Mullins, age 53, began serving as the Company’s President on the building product space.April 18, 2022. Prior to that, from July 2012 to May 2018, he was Chief Executive Officer of United Subcontractors, led a transformation ofbeing appointed as the business through organic growth and strategic transactions that resulted in USI achieving double digit EBITDA margins and an eventual sale, creating significant value for shareholders. From 2004 to 2012,Company’s President, Mr. VarnerMullins served as the President and Chief Executive Officer of Aquilex Corporation, a leading provider of specialty services to the energy sector. Under his leadership, the company grew revenues by fivefoldIntrensic, LLC since 2015, which provides digital evidence and achieved record earnings. Prior to joining in 2004,video management software solutions for law enforcement agencies. Mr. Varner served as President for several global businesses in various industries orchestrating their growth in new markets through expansion of service and product offerings. He is a graduate of The Citadel in Charleston, South Carolina, and has served on various philanthropic, industry and community boards. HeMullins has also served on the board of directors of SaferMobility, LLC since 2013, a provider of a campus security solution that delivers personal safety through an easy-to-use smartphone application that connects directly to your security or law enforcement teams. Mr. Mullins received a Bachelor of Arts in Business Administration from Virginia’s College at Wise, Virginia, and a Master in Business Administration from the University of Virginia in Charlottesville, Virginia.

Chris DeAlmeida, age 45, was appointed as Chief Financial Officer of the Company in July 2022. Mr. DeAlmeida is an accomplished senior financial executive, with experience in financial management and analysis, financial reporting, and mergers and acquisitions activity. Prior to his appointment, Mr. DeAlmeida was Chief Financial Officer of Encore Dredging Partners since January 2020, and acted as a directorconsulting partner at BCH Group since 2018. Additional roles include Executive Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer at Orion Group Holdings, Inc. (NYSE: ORN) from 2012 to 2018, Vice President Accounting and Finance at Orion Group Holdings, Inc. from 2007 to 2012 and Investor Relations at Continental Airlines, Inc. (NYSE: UAL) from 2005 to 2007. Mr. DeAlmeida holds a Bachelor of Bartlett Holdings, Aquilex Inc., USI and The Identity Group, and currently serves onScience in Finance from the BoardUniversity of Directors of Acousti Engineering, a portfolio company of Ardian, a global private equity firm.Houston at Clear Lake.

Glenn Hickman, age 34, was appointed as the Company’s Chief Operating Officer (“COO”) on July 1, 2021. Prior to his appointment, since March 2021, Mr. Hickman served as a consultant to the Company. From 2014 to 2019, Mr. Hickman served as Vice President of Research and Development for Axon Enterprises (formerly TASER International). At Axon, Hickman led the launch of six hardware products, all connected to an ecosystem of cloud software and mobile apps. He created engineering and supply chain processes and grew the engineering team from 35 to 70. Hickman was responsible for establishing Axon’s first manufacturing line in Shenzhen, China, and an optics engineering team in Finland. Mr. Hickman graduated with distinction from Stanford University, receiving his Bachelor and Master of Science in Mechanical Engineering, and his MBA with honors from Northwestern University’s Kellogg School of Management with a double major in Strategy and Marketing.

James A. Barnes age 67, cofounded the Company with Messrs. Elwood Norris and Scot Cohen in March 2016, and currently serves as Chief Financial Officer, Secretary and Treasurer. He served as Manager until the Company’s incorporation in March 2017 when he was appointed President and Chief Financial Officer. He served as a member of the Company’s Board of Directors from March 2017 to November 2018. In January 2018 he was appointed to the additional positions of Secretary and Treasurer and resigned as President. He has served as the President of Sunrise Capital, Inc., a private venture capital and financial and regulatory consulting firm, since 1984. He was Chief Financial Officer of Parametric Sound Corporation (now Turtle Beach Corporation) from 2010 to February 2015, and from February 2015 to February 2017 served as Vice President Administration at Turtle Beach Corporation. Since 1999, he has been Manager of Syzygy Licensing LLC, a private technology invention and licensing company he owns with Mr. Elwood Norris. He previously practiced as a certified public accountant and management consultant with Ernst & Ernst, Touche Ross & Co., and as a principal in J. McDonald & Co. Ltd., Phoenix, Arizona. He graduated from the University of Nebraska with a Bachelor of Arts Degree in Business Administration in 1976 and is a certified public accountant (status: inactive).

Pending his planned retirement, Mr. Barnes will continue to serve as Chief Financial Officer, Treasurer and Secretary of the Company until the earlier of his retirement or the naming of his replacement by the Company. In this regard, the Board of Directors has commenced a formal search to identify a highly qualified candidate to serve in the capacity of Chief Financial Officer.

Executive officers serve at the discretion of the board of directors.

Employees

We employ 6869 full-time employees with 4766 in the United States and threeUS, two located in the United Kingdom.Kingdom and one located in Australia. In addition to our threefour executive officers, we had 1916 persons engaged in sales, marketing, sales support and training, 2128 in production, 1513 in research and development and 108 in administration. In addition, we engage consultants from time to time to provide additional sales, marketing, training and research and development services, and anticipate engaging consultants going forward to supplement our full- and part-time personnel.

We are dedicatedIn our commitment to preserving operational excellence and remaining anmaintaining a favorable employer of choice. We provide and maintainreputation, we strive to create a work environment that is designed to attract, developattracts, develops, and retain top talent through offering ourretains the best talents in the industry. Our employees are offered an engaging work experience that contributes to their professional growth and career development.advancement. We recognizeacknowledge that the success of our successbusiness is baseddependent on the collective talents and dedication of those we employ,our employees, and we are highly investedcommitted to investing in their professional growth and success.

Available Information

As a public company, we are required to file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and other information (including any amendments) with the Securities and Exchange Commission (the “SEC”). The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You can find our SEC filings at the SEC’s website at www.sec.gov.

Our Internet address is www.wrap.com. Information contained on our website is not part of this Annual Report. Our SEC filings (including any amendments) are also made available free of charge on www.wrap.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

ITEM 1A. RISK FACTORS

An investment in our Company involves a high degree of risk. In addition to the other information included in this Annual Report, you should carefully consider the following risk factors in evaluating an investment in our Company. You should consider these matters in conjunction with the other information included or incorporated by reference in this Annual Report. If any of the following risks actually occurs, our business, reputation, financial condition, results of operations, revenue, and future prospects could be negatively impacted. In that event, the market price of our Common Stock could decline, and you could lose part or all of your investment.

Risk Factors Relating to Our Business and Industry

We have a history of operating losses, expect additional losses and may not achieve or sustain profitability.

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, 2022 and 2021 was $17.6 million and 2020 was $24.4 million, respectively. Our reduction in net losses in 2022 was primarily attributable to a new strategic roadmap with tighter cost controls and $12.6 million, respectively.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.

The continued spread of COVID-19 and uncertain market conditions may adversely affect our business, financial condition and results of operations.

We are monitoring the impact of the COVID-19 pandemic, which has caused significant uncertainty and disruption to global financial markets and supply chains, beginning in early calendar year 2020. The Company's business, operating results, and financial condition could continue to be adversely affected due to the COVID-19 pandemic. The significance of the operational and financial impact of the COVID-19 pandemic will depend on how long and widespread the uncertainty and disruption continue. The extent to which the COVID-19 pandemic continues to impact our financial conditions and results of operations, or those of our third-party suppliers, will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including the duration of the outbreak, new information which may emerge concerning the severity of COVID-19 and the actions being taken to contain COVID-19 or treat its impact, among others. Uncertainty surrounds the duration and broader impact of the COVID-19 pandemic and therefore, the effects it will have on our financial results and operations. If economic or market conditions in key global markets deteriorate, we may experience material adverse effects on our business, financial condition and results from operations.

Factors deriving from the domestic and international response to the COVID-19 pandemic that may negatively impact sales and gross margin in the future include but are not limited to: limitations on the ability of our suppliers to meet delivery requirements and commitments; limitations on the ability of employees to perform their work due to illness caused by the pandemic or local, state or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver products to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; and limitations on the ability of our customers to pay us on a timely basis.

Substantially all of our employees are located in the U.S. 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., Canada, Europe and 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. Any losses or damages we incur could have a material adverse effect on our financial results and our ability to conduct business as expected. 

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 may experience difficulties in integrating and transitioning from the BolaWrap 100 to the BolaWrap 150.

The success of our new generation product, the BolaWrap 150, depends on a number of factors including, but not limited to, timely and successful product development, market acceptance, the Company’s ability to manage the risks associated with new product production ramp-up issues and supply chain challenges, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and costs to meet anticipated demand, and the risk that new products may have quality or other defects or deficiencies in the early stages of introduction.

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

We do not have extensive experience with virtual reality training, and are relying on new hires and consultants with expertise in the field. We continue to invest substantial funds in further developing and commercializing thisour Wrap Reality product line which is highly competitive. The commercial launch of the Wrap Reality Virtual Training product is in the early stages. Ourstages 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 introducedproduced, sold, and produced.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 U.S.US and international governmental laws and regulations applicable to international business, such as the Foreign Corrupt Practices Act or U.S.US export control regulations, could have an adverse impact on our business with the U.S.US and international governments.

Global economic weakness and uncertainty, including 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, and continue to be, volatile.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 growth rates, and difficulty managing inventory levels. Sustained uncertainty about global economic conditions and geopolitical events may adversely 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 condition and results of operations.

The COVID-19 pandemic, which has caused significant uncertainty and disruption to global financial markets and supply chains since  early calendar year 2020, continues to adversely affect the Company’s business, operating results, and financial condition, although such disruptions and uncertainties have abated. The extent to which the COVID-19 pandemic continues to impact our financial conditions and results of operations, or those of our third-party suppliers, will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including the continued duration of the outbreak in the markets we target, new information which may emerge concerning the severity of COVID-19 and its variants, and the actions being taken to contain COVID-19 or treat its impact, among others. Uncertainty surrounds the duration and broader impact of the COVID-19 pandemic and therefore, the effects it will have on our financial results and operations. If economic or market conditions in key global markets deteriorate, we may experience material adverse effects on our business, financial condition, and results from operations.

Factors deriving from the domestic and international response to the COVID-19 pandemic that may negatively impact sales and gross margin in the future include but are not limited to: limitations on the ability of our suppliers to meet delivery requirements and commitments; limitations on the ability of employees to perform their work due to illness caused by the pandemic or local, state or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver products to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; and limitations on the ability of our customers to pay us on a timely basis.

Substantially all our employees are located in the 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 US, Canada, Europe and 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. Any losses or damages we incur could have a material adverse effect on our financial results and our ability to conduct business as expected. 

We anticipate that a significant portion of our revenue in the short-term will be generated from international sales, which may adversely affect our ability to timely collect accounts receivable.

During the year ended December 31, 2021,2022, we generated approximately 60%34% of our revenue from international sales. Due principally to the longer sales cycle, logisticprocurement delays and regulatory issues associated with domestic sales versus international sales, we currently anticipate that a significant portion of our sales in the year endedending December 31, 20222023 will be generated from international orders. In the event we are unable to timely collect account receivables associated with international sales, or timing of such international sales areis delayed, our financial condition could be adversely and materially affected.

If we are unable to manage our projected growth, our growth prospects may be limited, and our future profitability may be adversely affected.

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.

We may face personal injury and other liability claims that harm our reputation and adversely affect our sales and financial condition.

Our product is intended to be used in confrontations to de-escalate the situation and reduce the chance for injury to officers and the subjects that they interact with. There is always a chance that use could result in injury to those involved, whether or not involving our product. Our product may cause or be associated with such injuries. A person injured in a confrontation or otherwise in connection with the use of our product may bring legal action against us to recover damages based on the basis of theories including personal injury, wrongful death, negligent design, dangerous product, or inadequate warning. We may also be subject to lawsuits involving allegations of misuse of our product. If successful, personal injury, misuse, and other claims could have a material adverse effect on our operating results and financial condition. Although we carry product liability insurance, significant litigation could also result in a diversion of management’s attention and resources, negative publicity, and an award of monetary damages in excess of our insurance coverage.

The nature of our business may result in undesirable press coverage or other negative publicity.

Our solutions are used to assist law enforcement and first responders in volatile encounters. Even when our device works as intended, incidents can lead to injury, loss of life and other negative outcomes, and such events are likely to receive negative publicity.publicity even if not directly caused by BolaWrap. If our product fails to help de-escalate an encounter, related adverse outcomes may receive negative media attention. At times, body or dash camera images or other images of use of our product may become a matter of public record due to legal or other obligations (for example, as a resultbecause of public-records requests or subpoenas to provide information or to testify in court), and we may receive negative media attention as a result.

We may be subject to criticism and unflattering media coverage regarding the effectiveness of our remote restraint solutions and the cost of our solutions to our customers, or the appropriateness of use on persons in crisis or the mentally ill. Such negative publicity could have an adverse impact on new sales, which would adversely impact our financial results and future prospects.

Our future success is dependent on our ability to expand sales, through distributors, and our inability to grow our sales force or maintain and grow distributors would negatively affect our sales.

Our distribution strategy is to pursue sales through multiple channels with an emphasis on direct sales, as well as independent distributors, domestically and internationally. Our inability to recruit and retain sales personnel and maintain and add police equipment distributors who can successfully sell our products could adversely affect our sales. If we do not competitively price our products, provide high quality big free products and solutions, meet the requirements of any future distributors or end-users, provide adequate marketing support, or comply with the terms of any distribution arrangements, such distributors may fail to aggressively market our product or may terminate their relationships with us. These developments would likely have a material adverse effect on our sales. Our reliance on the sales of our products by distributors for a large portion of our sales also makes it more difficult to predict our revenue, cash flow and operating results.

We expect to expend significant resources to generate sales due to our lengthy sales cycle, and such efforts may not result in the level of sales or revenue.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.

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 product makeproducts makes us vulnerable to price increases, inflation, recession, and supply shortages that could delay shipment of our products and reduce our 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 depend on suppliers of sub-assemblies, electronic components, injection molded plastic parts, and other miscellaneous custom parts for our 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.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 production and shipment of our products and have a material adverse effect on our revenue, profitability, and financial condition.

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 we may acquire in the future. We may not realize the intended benefits of 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 any other acquired businesses, products or technologies without substantial expense, delay or other operational or financial problems. Acquisitions involve a number ofseveral risks, some or all of which could have a material adverse effect on our acquired businesses, products or

technologies. Furthermore, there can be no assurance that any 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:

Failure to successfully integrate any 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 any future businesses could result in additional debt and related interest expense, contingent liabilities, and amortization expense 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 exempt special explosive device."Any other Weapon (AOW). Both firearms and explosive devices are regulated by the U.S.US Bureau of Alcohol, Tobacco, Firearms and Explosives (“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.

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.

Our products, including the BolaWrap 100 and BolaWrap 150, haveare 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 thirteennineteen issued U.S.US patents related to the BolaWrap technology and have fifteen 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:

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.

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.

Our business is dependent on the continued services of certain executivesability to attract and retain key employees.personnel.

Our business and operations are substantially dependent upon the experience and continued service of certain executives and certain key sales and research employees. We have no employment agreements or post-employment agreements to have access to important institutional knowledge should any key person 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.

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.

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 have experienced recent changeschanged 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 management.almost all areas. These changes have the potential to disruptreduced overall headcount, contractor costs and spending. While greatly improving our business, and any such disruption could adversely affect our operations, product development, growth, financial condition or results from operations.

We had significant changes in management in the past three years, most recently in January 2022 when LW Varner, Jr. was appointed to serve as interim Chief Executive Officer pursuant to a consulting agreement following the departurefoundation, it also required turnover of Thomas P. Smith as the Company’s Chief Executive Officer. Also in January 2022, the Company entered into a consulting agreement with Lawrence Hirsh to provide certain services to Mr. Varner and the Company with respect to finance and related matters. The Board of Directors have commenced a search to identify a permanent Chief Executive Officer.

In addition, the Board of Directors has commenced a formal search to identify a highly qualified candidate to serve in the capacity of Chief Financial Officer upon the earlier of the retirement of James A. Barnes, the Company’s current Chief Financial Officer, or the Board of Directors’ naming of his replacement.

Executive leadership transitions can be inherently difficult to manage, may cause significant and costly disruption to our business, might lead to additional departures of existing personnel and could have a material adverse effect on our business, operating results, financial condition and internal controls over financial reporting.changes to how we 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:

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.

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:

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.

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, 2021,2022, 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.

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:

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.

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. Our motion to dismiss the putative class actionThe lawsuit was successfuldismissed in December 2021.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.

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 and certain directors owned approximately 34% of our Common Stock at December 31, 2021. 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. 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.

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, 2021,2022, we had warrants,we had outstanding options and restrictedunvested stock units outstandingof on 5.66.4 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 5.0 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.

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, 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 expense 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.

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 4th 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 currentlywere $8,120 per month, increasing 3% for 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 expense and real estate taxes. In January 2022 we renewed this lease for three years with aggregate payments of $9,905 commencing August 2022, increasing 4% annually through the term ending July 31, 2025.

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.

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 1864,000 square foot space in Buffalo, New York on a month-to-month rental agreement, which payments are currently $1,750$2,750 per month.

ITEM 3. LEGAL PROCEEDINGS

Securities Litigation

On November 15, 2021, the Hon. Dolly M. Gee of the United States District Court for the Central District of California (the “Court”) granted the motion to dismiss filed by the Company, David Norris (“Norris”), James A. Barnes (“Barnes”), Thomas Smith (“Smith”), Mike Rothans (“Rothans”) and Marc Thomas (“Thomas”) (collectively, “Defendants”) in the action captioned In re Wrap Technologies, Inc. Securities Exchange Act Litigation (the “Securities Action”).  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 granted Plaintiff leave to file a second 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 with prejudice. On December 20, 2021, following Plaintiff’s failure to file a second amended complaint, the Court dismissed the Securities Action with prejudice. 

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,current and Norris,former Company officers as well as directors Messrs. Scot Cohen, Patrick Kinsella, Michael Parris,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 Company is named as a nominal defendant. 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 January 27, 2021, Judge Gee entered an order to show cause why the derivative actions should not be consolidated and stayed pending the resolutionaction was dismissed with prejudice by stipulation of the Securities Action, given the “apparent substantial overlap” between the cases. On February 16, 2021, Judge Gee issued an order consolidating the derivative actions under the caption In re Wrap Technologies, Inc. Shareholder Derivative Litigation, Case No. 2:20-10444-DMG-PVCx, (the “Derivative Action”), and stayed the Derivative Action at least until the resolution of the Securities Action, which has been dismissed with prejudice. The Company believes that the Derivative Action is without merit and will vigorously defend against the claims raised therein.parties on May 3, 2022. 

Other Legal Proceeding 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, 20212022, 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.

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

At March 9,December 31, 2022 there were 40,939,37141,175,993 shares of Common Stock outstanding and approximately 2519 stockholders of record.

Equity Compensation Plan Information

On March 31, 2017, the Company adopted, and the stockholders approved, the 2017 Stock Incentive Plan (as amended from time to time, the “Plan”). The 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 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.

In May 2019, stockholdersStockholders ratified an increase into the Plan authorizingshares authorized under the plan of an additional 2,100,000 shares of Common Stock;in May 2019, an additional 1,900,000 shares in June 2020, stockholders ratified an increase in the Plan authorizing an additional of 1,900,000 shares of Common Stock; and in June 2021, stockholders ratified an increase in the Plan authorizing an additional 1,500,000 shares of Common Stock,in June 2021, and an additional 1,500,000 shares in May 2022, for a total of 7,500,0009,000,000 shares reserved for issuance under the Plan as of the date of this Report. At December 31, 2021,2022, there were 1,380,8161,556,291 shares of Common Stock available for grant under the Plan.

The following table sets forth information as of December 31, 2021,2022, with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance, aggregated as follows: 

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.

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.

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 1. Business,” “Item 1A. Risk Factors,” and “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,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “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 modernthat 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 sales of our first public safety product, the BolaWrap 100 remote restraint device, in late 2018. In October 2021late 2020 we releasedadded 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 BolaWrap 150 is electronically deployed and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100 that is beinghas been phased out.

The immediate addressable domesticOur 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 in the US and over 12 million police officers in overmore than 100 countries. WeAdditionally, 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 estimated to have over 12.1 million law enforcement personnel. According to 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 $16.1 billion by 2027.

We focus our efforts on the following products and 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 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 reality ("VR") 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 Reality has 38 scenarios for law enforcement and 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 StatesUS law enforcement market, we have shipped our restraint products to 5159 countries. We have established an active distributor network with 12 domestic distributors representing 4950 states and one dealer representing the US territory of Puerto Rico. We have distribution agreements with 4749 international 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.

Recent Developments

During the year ended December 31, 20212022, we accomplished the following:

Management RestructuringChanges

OnAs previously reported in January 24, 2022, the Board of Directors approved and initiated a leadership transition plan to support the next phase of its corporate strategy, which is focused on diversifying the Company’s suite of products, offerings and services.company strategy. The transition and corporate strategy included the resignation of Thomas P. Smith, our President, CEOChief Executive Officer and director, Thomas P. Smith; appointment of LW Varner, Jr. as a consultant and Interim CEO; appointment of Lawrence Hirsh as a financial consultant;the announcement of the planned retirement of CFO,James A. Barnes our former Chief Financial Officer, Secretary and Treasurer, James A. Barnes expectedwho retired in July 2022 upon the appointment of Chris DeAlmeida as our Chief Financial Officer. After a successor; appointmentperiod of director Wayne Walker as Chairmantransition managed by Special Transition Committee consisting of the Board; and acceptance of the resignation of directors Patrick Kinsella and Jeffrey Kukowski. The Board of Directors announced they are conducting a formal process to identify highly qualified candidates for the CEO and CFO roles and also announced that directors Scot Cohen and Kim Sentovich were appointed as a Special Transition Committee of the Board of Directors to support and oversee theincluding interim management team which in addition to Mr. Varner and Mr. Hirsh includes Chief Operating Officer Glenn Hickman (the "Management Transition"). Pursuant to a Cooperation Agreement betweencontract executives, on April 18, 2022, the Company appointed TJ Kennedy, a current director, as our Chief Executive Officer and Elwood G. Norris, a former officer ofKevin Mullins as our President. Both Messrs. Kennedy and Mullins have significant leadership experience in public safety technology prior to their appointment. Mr. Mullins is leading go to market functions in the Company and current shareholder, dated March 4, 2021, Mr. Norris may have certain rights to nominate a replacement board candidatePresident role. In late December 2022, we also brought onboard Tracey Friedlander as a result of Mr. Kukowski’s resignation.our General Counsel.

Business Outlook and Challenges

OurWe 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.

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 as a result ofworldwide. These opportunities are driven by the increasing demandsdemand for less lethal policing and increasing threats posed by non-compliant subjects.less-lethal policing.

DuringIn the year ended December 31, 2021, the Company received an increased number of field reports of successful BolaWrap usage from law enforcement sector, our BolaWrap product has been successfully deployed in the field, as reported by many agencies. ManyBolaWrap is now in use by over 900 US law enforcement agencies consider BolaWrap asand in 59 countries. Due to its safe remote restraint capabilities, some agencies do not deem its usage a very low level, or non-reportable,categorical reportable use of force option and accordingly,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 tools. From the information we have been provided, the most common BolaWrap use case is for individuals with behavioral health issues, and the 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 are not reported to us. Othersof BolaWrap are considered evidence in ongoing criminal cases, are controlled by local policy or regulation, or require officer and are also not shared. Some law enforcementunion and other released to be shared with us. However, some agencies have shared bodycam footage of theirsuccessful field uses, some ofdeployments with us, which we are allowed tomay use in our marketing activities.training and education efforts. We believe increasedthat as the reports of avoiding escalationBolaWrap's effectiveness in de-escalation continue to increase, it will help grow revenues in the future.contribute to our future revenue growth.

Revenues for the year ended December 31, 2021 increased 96% over the prior year,Our company anticipates/believes that our portfolio of safe, remote restraint products and we continue to expand our business, both domesticallytraining services has a strong and internationally, through direct and distributor sales. We have a robust and growingexpanding pipeline of market opportunities for our restraint product offering and training services withinin the law enforcement, military, corrections, and homeland security business sectors both domestically and internationally. Social trends demandingWith the increasing demand for more compassionatehumane and safesafer policing practices, are expected to continue to drivewe expect a continued surge in our global business. WeCurrently, 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 come to fruition especially given the uncertainty of COVID-19 and social unrest, as discussed below.materialize.

To supportAs part of our increasedefforts to expand our sales and distribution activities,operations, 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. We believenow 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 that have seen demonstrations orwho have been trained aboutto use our products, or have witnessed demonstrations, are more supportive of their department’s purchaseinclined to support the acquisition and deployment of our products. Over 1,000products by their respective departments to drive successful outcomes. As of December 31, 2022, over 1,360 agencies have received BolaWrap training with over 3,0004,580 training officers at those agencies actively certified as BolaWrap instructors and qualified to train the rest of their departments. The number ofdepartments, representing a 32% increase in agencies and traininga 30% increase in trained officers has doubledas compared to the year ended 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.

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 acquisition of NSENAtransaction with Lumeto in December 2020, and the rebranding of the NSENA business as Wrap Reality,late November 2022, we have continued to marketinvest in our virtual realityVR system while working to integrate previouscontinue to develop real-world scenarios into aour robust platform, employing BolaWrap and additional de-escalation techniques into new Wrap Reality scenarios.platform. In August 2021 we announced the developmentfuture, the Lumeto transaction will allow for a cloud-based option of a new expandedour Wrap Reality Virtual Training platform powered by, and developed through,including a collaboration with AWS using AWS GovCloud (US). The new platform combines our advanced law enforcement simulator with secure cloud services to automatically track training progress and provide the ability to replay recorded training sessions.lower initial capital commitment for hardware. We plan to increase marketing activities for our virtual realityVR solution as our platform enhancements are introduced to market.both law enforcement and corrections throughout 2023 and expect to launch the cloud-based version in mid-2023.

At December 31, 20212022 we had backlog of approximately $268$257 thousand expected to be delivered in the first quarter of 2022. We2023. Additionally, we had deferred revenue of $265$333 thousand expected to be recognized generally over the next 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 instances, cancellation, in the normal course of business.

During the second quarter of 2021, we began to wind down our production line for the BolaWrap 100 product line and in the third quarter completed a shift to a new production process for the next generation BolaWrap 150 product, which required new tooling, new production equipment and processes, and additional licensing. We recorded $747 thousand of product line exit costs related to this change in production activities in the second quarter.

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.