What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2023-03-02 compared with 2022-03-10 · 259 added, 588 removed, 643 unchanged (57% of the section changed)

15 unchanged sentences

Based on this evaluation, our interim Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 2022.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm because the Company is an “emerging growth company”

under the JOBS Act.

An attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting is also not required for smaller reporting companies.

This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.

Changes in Internal Controls

5 unchanged sentences

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2022.

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

EXECUTIVE COMPENSATION.

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2022.

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

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

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before April 30, 2022.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2022.

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

PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2022.

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

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)     List of documents filed as a part of this report:

(1)    Index to Financial Statements

List of documents filed as a part of this report:

Index to Financial Statements

Report of Independent Registered Public Accounting Firm (PCAOB ID:

4 unchanged sentences

Notes to Financial Statements

(2)    Financial Statement Schedules

Financial Statement Schedules

All schedules have been omitted because the information is not applicable, is not material or because the information required is included in the financial statements or the notes thereto.

(3)    Index to Exhibits

Index to Exhibits

The exhibits listed on the accompanying index to exhibits immediately following the financial statements are filed as part of, or hereby incorporated by reference into, this Form 10-K.

Exhibit Number

Stock Purchase Agreement, dated March 22, 2017, by and between Wrap Technologies, LLC, Petro River Oil Corp., and Megawest Energy Montana Corp.

6 unchanged sentences

Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1, filed on April 17, 2017.

Amended and Restated Bylaws of the Registrant.

Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed on February 10, 2023.

Form of Common Stock Certificate.

61 unchanged sentences

Separation Agreement between the Company and Mr.

Smith, dated January 24, 2022. 

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on January 26, 2022.

Consulting Agreement between the Company and LWV Consulting, LLC, dated January 24, 2022. 

Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on January 26, 2022.

Smith, dated January 24, 2022.  Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on January 26, 2022.

Consulting Agreement between the Company and LWV Consulting, LLC, dated January 24, 2022.  Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on January 26, 2022.

Consulting Agreement between the Company and LRHIRSH, LLC, dated January 24, 2022.

Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, filed on January 26, 2022.

Employment Agreement between Wrap Technologies, Inc.

and TJ Kennedy, dated April 13, 2022.

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on April 19, 2022.

Employment Agreement between Wrap Technologies, Inc.

and Kevin Mullins, dated April 13, 2022.

Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on April 19, 2022.

Letter Agreement by and between Wrap Technologies, Inc.

and Chris DeAlmeida, executed July 20, 2022.

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on July 25, 2022.

Transition Agreement and Release of Claims, dated July 24, 2022, by and between Wrap Technologies, Inc.

and James Barnes.

Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on July 25, 2022.

Professional Services and Technology Acquisition Agreement, dated November 22, 2022, by and between Wrap Technologies, Inc., Lumeto, Inc.

and Spatial Industries Group, Inc.

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on November 29, 2022.

Code of Ethics of the Registrant Applicable to Directors, Officers and Employees.

5 unchanged sentences

Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 *

Certifications pursuant to 18 U.S.C.

Certifications pursuant to 18 USC.

Section 1350.

24 unchanged sentences

We have audited the accompanying balance sheets of Wrap Technologies, Inc.

(the “Company”) as of December 31, 2021, and 2020, and the related statements of operations and comprehensive loss, stockholders’

equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes 

(collectively referred to as the financial statements).

(the Company) as of December 31, 2022 and 2021, and the related statements of operations and comprehensive income, stockholders’

equity, and cash flows for each of the years in the two-year period ended December 31, 2022 and the related notes (collectively referred to as the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

13 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

We determined that there are no critical audit matters.

/s/ Rosenberg Rich Baker Berman, P.A.

7 unchanged sentences

Cash and cash equivalents

$ 4,937  

$ 16,647  

Short-term investments

29,983  

24,994  

Accounts receivable, net

Accounts receivable and contract assets, net

Inventories, net

1 unchanged sentence

Total current assets

41,213  

46,927  

Property and equipment, net

1 unchanged sentence

Intangible assets, net

$ 44,231  

$ 48,833  

LIABILITIES AND STOCKHOLDERS' EQUITY

1 unchanged sentence

Accounts payable

$ 1,779  

$ 1,232  

Accrued liabilities

2 unchanged sentences

Operating lease liability - short term

Business acquisition liability - short term

Total current liabilities

2 unchanged sentences

Operating lease liability - long term

Business acquisition liability - long term

Total long-term liabilities

Total liabilities

Commitments and contingencies (Note 13)

Commitments and contingencies (Note 9 and 14)

Stockholders' equity:

6 unchanged sentences

Additional paid-in capital

91,025  

71,705  

Accumulated deficit

( 49,759 )  

Accumulated other comprehensive income (loss)

Accumulated other comprehensive loss

Total stockholders' equity

41,264  

46,414  

Total liabilities and stockholders' equity

$ 44,231  

$ 48,833  

See accompanying notes to consolidated financial statements.

4 unchanged sentences

Product sales

$ 7,381  

$ 3,868  

Other revenue

6 unchanged sentences

Selling, general and administrative

20,276  

11,631  

Research and development

Total operating expenses

26,490  

14,420  

Loss from operations

( 24,495 )  

Other income (expense):

Investment income

Debt forgiveness income

$ ( 24,449 )  

Net loss per basic and diluted common share

$ ( 0.62 )  

Weighted average common shares used to compute net loss per basic and diluted common share

39,281,620  

33,846,338  

Comprehensive loss:

$ ( 24,449 )  

Net unrealized gain (loss) on short-term investments

( 21 )  

Comprehensive loss

$ ( 24,470 )  

See accompanying notes to consolidated financial statements.

6 unchanged sentences

Balance at January 1, 2021

29,829,916  

$ 31,923  

$ ( 12,730 )  

$ 19,196  

Sale of Common Stock and warrants at $ 6.00 per share in public offering, net of issuance costs

2,066,667  

11,667  

Common shares issued upon exercise of warrants at $ 3.00 per share, net of issuance costs

328,458  

Common shares issued upon exercise of warrants at $ 5.00 per share, net of issuance costs

3,890,839  

18,718  

18,719  

Common shares issued upon exercise of warrants at $ 6.00 per share, net of issuance costs

675,000  

Common shares issued upon exercise of warrants at $ 6.50 per share, net of issuance costs

261,679  

Common shares issued upon exercise of stock options

371,000  

Common shares issued upon vesting of restricted stock units

130,603  

Share-based compensation expense

Net unrealized gain on short-term investments

Net loss for the period

( 12,580 )  

Balance at December 31, 2020

37,554,162  

$ 71,705  

$ ( 25,310 )  

$ 46,414  

Common shares issued upon exercise of warrants at $ 6.50 per share

1,661,320  

10,798  

Common shares issued upon exercise of warrants at $ 8.125 per share

153,692  

Common shares issued upon exercise of stock options

915,404  

Common shares issued upon vesting of restricted stock units

524,491  

Common shares issued for services

42,876  

Share-based compensation expense

Net unrealized loss on short-term investments

( 21 )  

Net loss for the period

( 24,449 )  

Balance at December 31, 2021

40,851,945  

$ 91,025  

$ ( 49,759 )  

$ ( 6 )  

$ 41,264  

Common shares issued upon exercise of stock options

Share-based compensation expense

Common shares issued upon vesting of restricted stock units

Net unrealized gain on short-term investments

Net loss for the period

Balance at December 31, 2022

See accompanying notes to consolidated financial statements.

4 unchanged sentences

Cash Flows From Operating Activities:

$ ( 24,449 )  

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

3 unchanged sentences

Product line exit expense

Debt forgiveness income

Gain on sale of assets

( 27 )  

Warranty provision

Inventory write-offs

Software impairment charge

Change in contingent liability

( 23 )  

Non-cash lease expense

Non-cash interest expense

Provision for doubtful accounts

1 unchanged sentence

Accounts receivable

( 2,111 )  

Prepaid expenses and other current assets

( 109 )  

Accounts payable

Operating lease liability

( 94 )  

Customer deposits

Accrued liabilities and other

( 54 )  

Warranty settlement

1 unchanged sentence

Net cash used in operating activities

( 18,223 )  

Cash Flows From Investing Activities:

Purchase of short-term investments

( 55,014 )  

Proceeds from maturities of short-term investments

50,005  

10,000  

Capital expenditures for property and equipment

( 995 )  

Investment in patents and trademarks

( 187 )  

Purchase of intangible assets

( 750 )  

Business acquisition

Proceeds from long-term deposits

Net cash used in investing activities

( 6,937 )  

Net cash provided by (used in) investing activities

Cash Flows From Financing Activities:

Sale of common stock and warrants

12,400  

Offering costs paid on sale of common stock and warrants

Proceeds from exercise of warrants

12,047  

26,191  

Offering costs paid on exercise of warrants

Proceeds from exercise of stock options

Proceeds from bank note

Repayment of debt

( 275 )  

Net cash provided by financing activities

13,450  

37,961  

Net decrease in cash and cash equivalents

( 11,710 )  

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

16,647  

16,984  

Cash and cash equivalents, end of period

$ 4,937  

$ 16,647  

Supplemental Disclosure of Non-Cash Investing

and Financing Activities:

Business acquisition liability

Business acquisition cost in deferred revenue

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

Change in unrealized gain on short-term investments

$ ( 21 )  

Right-of-use asset and liability recorded during period

See accompanying notes to consolidated financial statements.

2 unchanged sentences

(in thousands, except per share and share amounts)

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

10 unchanged sentences

remote restraint device.

The principal markets for the Company’s proprietary products and services are in North and South America, Europe, Middle East and Asia.

The principal markets for the Company’s proprietary products and services are in North and South America, Europe, the Middle East and Asia.

Principles of Consolidation

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

formed in December 2020 ( see Note 3 ) that sells a virtual reality training system primarily targeting law enforcement agencies.

formed in December 2020 that sells a virtual reality (“

VR ”) training system primarily targeting law enforcement agencies.

The consolidated financial statements include the accounts of this subsidiary after elimination of intercompany transactions and accounts.

Basis of Presentation and Use of Estimates

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“

GAAP ”).

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions (e.g., share-based compensation valuation, allowance for doubtful accounts, valuation of inventory and intangible assets, warranty reserve, accrued costs, valuation allowance related to deferred tax assets and recognition and measurement of contingencies) that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the US of America (“

US GAAP ”).

The preparation of financial statements in conformity with accounting principles generally accepted in the US of America requires management to make estimates and assumptions (e.g., share-based compensation valuation, allowance for doubtful accounts, valuation of inventory and intangible assets, warranty reserve, accrued costs, valuation allowance related to deferred tax assets and recognition and measurement of contingencies) that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period.

Actual results could materially differ from those estimates.

1 unchanged sentence

Credit Risk –

Financial instruments that potentially subject the Company to concentration of credit risk consisted primarily of cash, cash equivalents, U.S.

treasury bills and accounts receivable from customers.

Financial instruments that potentially subject the Company to concentration of credit risk consisted primarily of cash, cash equivalents, US treasury bills and accounts receivable from customers.

The Company maintains its cash and cash equivalent deposits at two domestic financial institutions.

8 unchanged sentences

In particular, a single supplier is currently the sole manufacturer of the BolaWrap battery assembly, and another single supplier is the sole manufacturer of the propulsion component for BolaWrap cassettes.

Other parts are sole sourced from other suppliers.

Other parts are solely sourced from other suppliers.

If supplier shortages or logistic delays occur, or quality problems arise, production schedules could be significantly delayed or costs significantly increased, which could in turn have a material adverse effect on the Company’s financial condition, results of operation and cash flows.

Impact of COVID- 19  – In December 

2019, a novel strain of coronavirus ( “

Impact of COVID-19 –

In December 2019, a novel strain of coronavirus ( “

COVID-19 ”) emerged in China.

4 unchanged sentences

Similarly, travel restrictions resulting from the rapid spread of contagious illnesses may have a material adverse effect on our business and results of operations.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents.

Cash equivalents consist primarily of amounts invested in Money Market Funds and United States (“

”) Treasury bills and are stated at fair value.

Cash equivalents consist primarily of amounts invested in Money Market Funds and US (“

US ”) Treasury bills and are stated at fair value.

Short-Term Investments

The Company’s short-term investments consist of U.S.

Treasury bills with original maturities beyond three months at the date of purchase and one year or less from the balance sheet date.

The Company’s short-term investments consist of US Treasury bills with original maturities beyond three months at the date of purchase and one year or less from the balance sheet date.

As of December 31, 2021, all of the Company’s short-term investments were classified as available-for-sale and are carried at estimated fair value with any unrealized gains and losses, unrelated to credit loss factors, included in other comprehensive income in our consolidated statements of stockholders’

We adopted Accounting Standards Codification (“

ASC ”) Topic 326 issued by the Financial Accounting Standards Board (“

FASB ”) effective January 1, 2020, and applied the credit loss guidance related to short-term investments prospectively as we had no historical short-term investments.

Because we do not have any history of losses for our short-term investments, our expected loss allowance methodology is developed using published or estimated credit default rates for similar investments and current and future economic and market conditions. Any unrealized losses related to credit loss factors are recorded through an allowance for credit losses in other (expense) income, in our consolidated statements of operations, rather than as a reduction to the amortized cost basis in other comprehensive (loss) income, when a decline in fair value has resulted from a credit loss.

We determine realized gains or losses on the sale of investments on a specific identification method, and record such gains or losses as other (expense) income, in our consolidated statements of operations. We did not record a credit loss reserve for short-term investments during the years ended December 31, 2021 and 2020.

Share-Based Compensation

4 unchanged sentences

The grant date fair value of stock options is determined using the Black-Scholes option-pricing model.

The grant date is the date at which an employer and employee or non-employee reach a mutual understanding of the key terms and conditions of a share-based payment award.

The grant date is the date at which an employer and employee or non-employee reach a mutual understanding of the key terms and conditions of a share-based payment award and approved by the Company’s Board of Directors.

The Black-Scholes option-pricing model requires inputs including the market price of the Company’s Common Stock on the date of grant, the term that the stock options are expected to be outstanding, the implied stock volatilities of several publicly traded peers over the expected term of stock options, risk-free interest rate and expected dividend.

1 unchanged sentence

The grant date fair value of restricted stock units is based upon the market price of the Company’s Common Stock on the date of the grant.

We determine the amount of share-based compensation expense based on awards that we ultimately expect to vest and account for forfeitures as they occur. The fair value of share-based compensation is amortized to compensation expense over the vesting term.

We determine the amount of share-based compensation expense based on awards that we ultimately expect to vest and account for forfeitures as they occur.

The fair value of share-based compensation is amortized to compensation expense over the vesting term.

Loss per Share

2 unchanged sentences

The Company’s losses for the periods presented cause the inclusion of potential Common Stock instruments outstanding to be antidilutive.

Stock options, restricted stock units and warrants exercisable or issuable for a total of 5,596,853 and 7,566,502 shares of Common Stock were outstanding at December 31, 2021 and 2020, respectively.

Stock options and restricted stock units exercisable or issuable for a total of 6,413,546  and 5,596,853 shares of Common Stock were outstanding at December 31, 2022 and 2021, respectively.

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

Accounts Receivable and Allowance for Credit Losses

2016 - 13,  

2016-13, Financial Instruments - Credit Losses (Topic 326) requires that financial assets measured at amortized cost be presented at the net amount expected to be collected.

5 unchanged sentences

If a major customer’s creditworthiness deteriorates, or actual defaults exceed our historical experience, such estimates could change and impact our future reported financial results.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

Inventories are valued at the lower of cost or net realizable value.

8 unchanged sentences

Business Combinations

Transactions in which the Company obtains control of a business are accounted for according to the acquisition method as described in ASC 805,  Business Combinations.

Transactions in which the Company obtains control of a business are accounted for according to the acquisition method as described in ASC 805, Business Combinations.

The assets acquired and liabilities assumed are recognized and measured at their fair values as of the date control is obtained.

3 unchanged sentences

Intangible Assets

Intangible assets consisted of (a) capitalized legal fees and filing costs related to obtaining patents and trademarks, (b) customer agreements, tradenames, software, non-solicitation and non-compete agreements acquired in business combinations and valued at fair value at the acquisition date, (c) purchased software, and (d) the purchase cost of indefinite-lived website domains.

Intangible assets consist of (a) capitalized legal fees and filing costs related to obtaining patents and trademarks, (b) tradenames and software, (c) purchased software, and (d) the purchase cost of indefinite-lived website domains.

The estimated useful lives of identifiable intangible assets with definite useful lives have been estimated to be between one and twenty years.

5 unchanged sentences

If the sum of undiscounted expected future cash flows is less than the carrying amount of the asset or if changes in facts and circumstances indicate, an impairment loss is recognized and measured using the asset’s fair value.

An impairment charge of $ 170 for purchased software was recorded in 2021.

The Company did not recognize any other impairment loss during the years ended December 31, 2022 and 2021.

4 unchanged sentences

Advertising and Promotion Costs

Advertising costs are charged to expense as incurred and were $ 145 and $ 287 for the years ended December 

31, 2021 and 2020, respectively.

Advertising costs are charged to expense as incurred and were $ 426 and $ 145 for the years ended December 31, 2022 and 2021, respectively.

The Company also incurred product promotion costs for demonstration products delivered to prospective customers of $ 688 and $ 924 for the years ended December 31, 2022 and 2021, respectively.

Advertising and promotion costs are included in selling, general and administrative expenses in the accompanying statements of operations.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

Demonstration and Training Costs

9 unchanged sentences

The Company may provide parts and components to such parties from time to time but recognizes no revenue or markup on such transactions.

The Company adopted ASC Topic 842, Leases (“Topic 842”

) on January 1, 2019.

The Company adopted ASC Topic 842, Leases (“

Topic 842 ”) on January 1, 2019.

In accordance with the guidance in Topic 842, the Company recognizes lease liabilities and corresponding right-of-use-assets for all leases with terms of greater than 12 months.

2 unchanged sentences

Revenue Recognition

In May 2014, the FASB issued ASU 2014 - 09, Revenue from Contracts with Customers (“

ASU 2014 - 09 ”) and ASC Subtopic 340 - 40, Other Assets and Deferred Costs - Contracts with Customers (“

ASC 340 - 40 ”), (collectively, “

Topic 606 ”).

On January 1, 2018, the Company adopted Topic 606 and, as it had no prior revenue or contracts with customers, there was no transition required nor any impact on prior results.

ASU 2014 - 09 requires entities to recognize revenue through the application of a five -step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.

See Note 2 for additional information.

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

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

Product sales include BolaWrap products and accessories.

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

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer and is the unit of account in Topic 606.

For contracts with a single performance obligation, the entire transaction price is allocated to the single performance obligation.

For contracts with multiple performance obligations, the Company allocates the contract transaction price to each performance obligation using the Company’s estimate of the standalone selling price (“

SSPs ”) of each distinct good or service in a contract.

The Company determines SSPs based on the relative SSP.

If the SSP is not observable through past transactions, the Company estimates the SSP considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

Most of the Company’s products and accessories are sold through domestic and international distributors.

Periodically, certain customers request bill and hold transactions for future delivery as scheduled and designated by them.

In such cases, revenue is not recognized until after control, title and risk of ownership has transferred which is generally when the customer has requested such transaction under normal billing and payment terms and has been notified that the product (i) has been completed according to customer specifications, (ii) has passed quality control inspections, and (iii) has been tagged and packed for shipment, separated from other inventory and ready for physical transfer to the customer.

The value associated with custodial storage services is deemed immaterial in the context of such contracts and in total, and accordingly, none of the transaction price is allocated to such service.

The Company has elected to recognize shipping costs as an expense in cost of revenue when control has transferred to the customer.

Time-based VR system contracts generally include setup, training and the use of software and hardware for a fixed term, generally one to five years and support and upgrade services during the same period.

The Company does not sell time-based arrangements without setup, training and support services and therefore revenues for the entire arrangement are recognized on a straight-line basis over the term.

When hardware is bundled and not sold separately the Company allocates the contract transaction price to each performance obligation using the SSP of each distinct good and service in the contract.

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

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

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

The Company may receive consideration, per terms of a contract, from customers prior to transferring goods to the customer.

The Company records customer deposits as a contract liability.

Additionally, the Company may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed.

In such instances, a deferred revenue liability is recorded.

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

Estimated costs for the Company’s standard warranty, generally one-year, are charged to cost of products sold when revenue is recorded for the related product.

Royalties are also charged to cost of products sold.

Shipping and Handling Costs

7 unchanged sentences

The $ 747 of exit costs were recorded as a component of cost of revenues.

There was no such expense recorded during the prior year.

There was no such expense recorded during the year ended December 31, 2022.

Development and start-up expense of new products are expensed as incurred except for capitalized equipment and tooling.

3 unchanged sentences

The Company currently provides direct warranty service.

International market warranties are generally similar to the U.S.

International market warranties are generally similar to the US market.

The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenues are recognized.

3 unchanged sentences

Actual warranty costs could differ from estimates.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

Segment Information

12 unchanged sentences

Recently Issued Accounting Guidance

Adopted First Quarter of 2021:

December 2019, 

the FASB issued ASU 

2019 - 12,  

Income Taxes (Topic  

Simplifying the Accounting for Income Taxes  (“

2019 - 12 ”), which is intended to simplify various aspects related to accounting for income taxes.

2019 - 12  removes certain exceptions to the general principles in Topic 

740 and also clarifies and amends existing guidance to improve consistent application.

We adopted ASU 

2019 - 12  in the first quarter ended March 31, 2021 and it did not have a significant impact on our financial statements.

Other Pronouncements:

In August 2020, the FASB issued ASU 2020 - 06,  

Debt —

Debt with Conversion and Other Options ( “

Subtopic 470 - 20 ”

) and Derivatives and Hedging —

Contracts in Entity ’

s Own Equity “

(Subtopic 815 - 40 ”

Accounting for Convertible Instruments and Contracts in an Entity ’

s Own Equity , which simplifies accounting for convertible instruments by removing major separation models required under current U.S.

The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas.

This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted.

The Company is currently evaluating the impact of this standard on its financial statements and related disclosures.

In May 2021, the FASB issued ASU No.

2021 - 05,  Leases (Topic 842 ), Lessors - Certain Leases with Variable Lease Payments.

This ASU addresses an issue related to a lessor's accounting for certain leases with variable lease payments.

The amendments in this Update affect lessors with lease contracts that ( 1 ) have variable lease payments that do not depend on a reference index or a rate and ( 2 ) would have resulted in the recognition of a selling loss at lease commencement if classified as a sales-type lease or a direct financing lease.

For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021.

The Company does not expect that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

In October 2021, the FASB issued ASU 2021 - 08 (“ASU No.

2021 - 08”

), Business Combinations (Topic 805 ):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers.

In October 2021 , the Financial Accounting Standards Board (“

FASB ”) issued Accounting Standards Update (“

ASU ”) 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“

ASU 2021-08 ”), to require that an acquirer recognize, and measure contract assets and contract liabilities acquired in a business combination in accordance with FASB Accounting Standards Codification (“

ASC ”) Topic 606 , Revenue from Contracts with Customers (“

Topic 606 ”).

At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts.

The amendments in this update should be applied prospectively and are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

We do not expect the adoption of this standard to have a material impact on our consolidated financial statements and related disclosures.

The amendments in ASU 2021-08 should be applied prospectively and are effective for fiscal years beginning after December 15, 2022 , including interim periods within those fiscal years.

We do not expect the adoption of ASU 2021-08 to have a material impact on our consolidated financial statements and related disclosures.

The Company has reviewed other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoptions of any such pronouncements will be expected to cause a material impact on its financial condition or the results of operations.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

REVENUE AND PRODUCT COSTS

On January 1, 2018, the Company adopted FASB ASC Topic 606, Revenue from contracts with customers ( “

Topic 606 ”

) and, as it had no prior revenue or contracts with customers, there was no transition required nor any impact on prior results.

Topic 606 requires entities to recognize revenue through the application of a five -step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account in Topic 606.

For contracts with a single performance obligation, the entire transaction price is allocated to the single performance obligation.

SSPs ”) of each distinct good or service in a contract.

The Company determines SSPs based on the relative SSP.

Most of the Company’s products and accessories are sold through domestic and international distributors.

Performance obligations to deliver products and accessories are generally satisfied at the point in time the Company ships the product, as this is when the customer obtains control of the asset under our standard terms and conditions. Periodically, certain customers request bill and hold transactions for future delivery as scheduled and designated by them.

The Company has elected to recognize shipping costs as an expense in cost of revenue when control has transferred to the customer.

Time-based virtual reality system contracts generally include setup, training and the use of software and hardware for a fixed term, generally one to five years and support and upgrade services during the same period.

The Company does not sell time-based arrangements without setup, training and support services and therefore revenues for the entire arrangement are recognized on a straight-line basis over the term.

When hardware is bundled and not sold separately the Company allocates the contract transaction price to each performance obligation using the SSP of each distinct good and service in the contract.

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

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

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

At December 31, 2021 the Company’s deferred revenue totaled $ 265 including $ 172 related to virtual reality training and $ 67 related to extended warranties.

At December 31, 2020 the Company’s deferred revenue totaled $ 16 , of which $ 14 related to virtual reality training and $ 2 related to extended warranties. 

The Company may also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer.

The Company records customer deposits as a contract liability.

Revenues consist of product revenue and other revenue.

Product sales include BolaWrap products and accessories.

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

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

Balance at January 1, 2022

Additions, net

Transfer to revenue

Balance at December 31, 2022

Current portion

Long-term portion

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

At December 31, 2021, the Company’s deferred revenue of $ 265 consisted of $ 172 related to VR training and $ 67 related to extended warranties and services.

The Company recognizes an asset if there are incremental costs of obtaining a contract with a customer such as commissions.

These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for any such underlying performance obligations.

The Company had no such assets at December 31, 2021 and December 31, 2020.

The Company had no such assets at December 31, 2022 and 2021 .

The Company will apply the practical expedient to expense any sales commissions related to performance obligations with an amortization of one year or less when incurred within selling, general and administrative expense.

Estimated costs for the Company’s standard one -year warranty are charged to cost of products sold when revenue is recorded for the related product.

Royalties are also charged to cost of products sold.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

On December 14, 2020, the Company, through a new wholly-owned subsidiary, Wrap Reality, Inc., entered into an Asset Purchase Agreement with NSENA Inc, a Delaware corporation, to acquire all of NSENA’s tangible and intangible assets, properties, and rights held for use in connection with NSENA’s virtual reality training business.

The acquisition enhances the Company’s training services primarily targeting law enforcement agencies.

The Company paid to NSENA cash consideration of $ 210 and recorded a short-term business acquisition liability of $ 275 .

The liability was paid $ 100 by March 15, 2021, $ 100 by June 15, 2021 and $ 75 by September 15, 2021.

In addition, the Company assumed a $ 15 liability for unearned revenues.

As additional earn-out consideration, the Company agreed to pay NSENA contingent revenue-based consideration based on certain specific prospects that became customers before September 30, 2021.

The fair value of the contingent consideration was determined as a $ 23 additional business acquisition liability but was revalued to $ 0 in the third quarter of 2021 resulting in a $ 23 gain included in other income.

The acquisition was accounted for under the acquisition method of accounting.

Under acquisition accounting, the acquired tangible and intangible assets and liabilities of NSENA were recorded at their respective fair values.

The following table summarizes the estimates of fair value of the assets acquired and liabilities assumed on December 14, 2020:

Customer contracts

Noncompete agreements

Deferred revenue

Total consideration

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

Useful life in years

Customer contracts

Noncompete agreements

Total acquired intangible assets

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

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

ASSET ACQUISITION

On November 22, 2022, Wrap Technologies, Inc.

(the “

Company ”), entered into a Professional Services and Technology Acquisition Agreement (the “

Agreement ”) with Lumeto, Inc.

and Spatial Industries Group, Inc.

(collectively, “

Service Provider ”), pursuant to which Service Provider will provide to the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform (the “

Technology, Services, and License ”), in exchange for (a) a cash payment upon the execution of the Agreement of $ 700 , (b) a cash payment of $ 125 upon the completion of certain project delivery deadlines, with such delivery deadline projected to be on February 13, 2023, and (c) a cash payment of $ 125 upon the completion and delivery of the final Technology, Services, and License.

Among other things, the Company expects to realize the benefit of an upgraded cloud virtual reality platform as well as capabilities and resources to support its growth of law enforcement and corrections virtual reality training modules and enhanced capabilities.

Identified intangible assets associated with this acquisition included software of $ 700 .

The useful life of the software is 3 years.

There is no assumed residual value for the software.

FINANCIAL INSTRUMENTS

4 unchanged sentences

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity.

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

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

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

1 unchanged sentence

Level 3 —Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The Company’s cash equivalent Money Market Funds and short-term investments consisting of U.S.

Treasury bill securities are classified as Level 

1 because they are valued using quoted market prices.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

The following table shows the Company’s cash and cash equivalents, Money Market Funds and short-term investments by significant investment category as of 

December 31, 2021 and 2020.

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

The following table shows the Company’s cash and cash equivalents, Money Market Funds and short-term investments by significant investment category as of December 31, 2022 and 2021.

As of December 31, 2022

Money Market Funds

$ 1,670  

Treasury securities considered cash equivalents

Treasury securities in short-term investments

29,989  

29,983  

US Treasury securities in short-term investments

Certificate of Deposits

Total Financial Assets

$ 31,659  

$ ( 6 )  

$ 31,653  

As of December 31, 2021

Money Market Funds

$ 6,035  

Treasury securities considered cash equivalents

Treasury securities in short-term investments

24,979  

24,994  

US Treasury securities in short-term investments

Total Financial Assets

$ 41,012  

$ 41,027  

Unrealized gains or losses resulting from our short-term investments are recorded in accumulated other comprehensive gain or loss.

2 unchanged sentences

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

INVENTORIES, NET

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

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

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

Inventories consisted of the following:

December 31,  

Finished goods

$ 1,027  

$ 1,249  

Work in process

1 unchanged sentence

Inventories - net

$ 1,566  

$ 2,655  

As part of product line exit costs (see Note 1 ) end of life raw material costs aggregating $ 621 were written off during the year ended December 31, 2021.

During the year ended December 31, 2020 the Company wrote off $68 of raw material and scrap parts primarily due to startup production, model changes and improvements.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

As part of product line exit costs end of life raw material costs aggregating $ 621 were written off during the year ended December 31, 2021.

PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following:

December 31,  

Production and lab equipment

2 unchanged sentences

Accumulated depreciation

( 440 )  

Property and equipment, net

Depreciation expense was $ 475 and $ 297 for the years ended December 31, 2022 and 2021, respectively.

As part of product line exit costs (see Note 1 ) unamortized production tooling costs of $ 106 were written off in the second quarter of 2021.

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

INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

December 31,  

Amortizable intangible assets:

Purchased software

Accumulated amortization

( 174 )  

Total amortizable

1 unchanged sentence

Total intangible assets, net

$ 1,982  

$ 1,397  

Amortization expense was $ 287 and $ 182 for the years ended December 31, 2022 and 2021, respectively.

2 unchanged sentences

Total estimated amortization expense

$ 1,638  

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

1 unchanged sentence

Syzygy ”) as of December 31, 2022 and 2021, respectively.

Accounts payable at December 31, 2020 also included $ 10 due to related party V3 Capital Partners, LLC.

Accrued liabilities consist of the following:

4 unchanged sentences

Accrued compensation includes $ 1,022 and $ 305 in employee bonuses and commissions payable at December 31, 2022 and 2021, respectively.

Changes in our estimated product warranty costs were as follows:

Year Ended December 31,

Balance, beginning of period

Warranty settlements

Warranty provision

Balance, end of period

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

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

Operating lease ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date.

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

Operating lease right of use ( “

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

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

2 unchanged sentences

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

The Company’s leases may contain renewal provisions and escalating rental clauses and generally require the Company to pay utilities, insurance, taxes and other operating expenses.

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

At December 31, 2021 the Company was party to one operating leases for office and production facilities under an agreement that expires in July 2022.

The Company has elected the short-term lease exemption such that the new lease standard was applied to leases greater than one year in duration.

Leases with an initial term of twelve months or less are not recorded on the balance sheet.

The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

On January 21, 2022, the Company’s lease was amended to extend the expiration date to July 31, 2025.

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

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

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

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

Amortization of ROU operating lease assets was $ 101 and $ 88 for the years ended December 31, 2022 and 2021, respectively.

4 unchanged sentences

Total Operating Lease Liability

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

Future lease payments included in the measurement of lease liabilities on the balance sheet at December 31, 2022 for future periods are as follows:

2 unchanged sentences

The weighted average remaining lease term is 2.58 years, and the weighted average discount rate is 5.0 %.

Variable lease payments totaled $ 29 and are comprised of taxes and other miscellaneous costs.

The Company did not have any short-term lease expense during the years ended December 31, 2021 and December 31, 2020.

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

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

The Company had $ 39 and $ 29 variable lease expenses during year ended December 31, 2022 or 2021.

The Company had $ 11 and $ 0 short-term lease expense during year ended December 31, 2022, or 2021.

The Company does not have any finance leases.

The Company’s debt at December 31, 2022 and 2021 included operating lease liabilities (see Note 9).

The Company’s debt at December 31, 2020 also included business acquisition liabilities (see Note 3 ).

On May 1, 2020, the Company received loan proceeds of $ 414 from Bank of America, N.A.

(the “

Lender ”), as a potentially forgivable loan (the “

PPP Loan ”) from the U.S.

Small Business Administration pursuant to the Paycheck Protection Program (the “

PPP ”) enacted by Congress under Division A, Title 1 of the Coronavirus Aid, Relief, and Economic Security Act ( 15 U.S.C.

636 (a)( 36 )) (the “

CARES Act ”), which was enacted March 27, 2020.

The PPP Loan was in the form of a two -year Promissory Note dated May 1, 2020 payable to the Lender (the “

PPP Note ”), bearing interest at a rate of 1 % per annum.

Under the terms of the CARES Act, the Company subsequently applied for and in December 2020 was granted forgiveness for the PPP Loan plus interest.

The Company’s PPP Loan in the amount of $ 414 and accrued interest was forgiven in full by the Small Business Administration.

The Company recognized $ 417 in debt forgiveness income as a result of the forgiveness.

The Company’s debt at December 31, 2021 also included business acquisition liabilities.

STOCKHOLDERS ’

1 unchanged sentence

Preferred Stock ”).

2020 Follow-On Public Offering

On June 2, 2020, the Company consummated a follow-on public offering (the “

Unit Offering ”) whereby the Company offered and sold certain securities consisting of one share of Common Stock and one detachable two -year warrant to purchase one share of Common Stock at an exercise price of $ 6.00 per share (a “Unit”) at the public offering price of $ 6.00 per Unit.

Pursuant to the Unit Offering, the Company sold 2,066,667 Units, resulting in the Company’s receipt of gross cash proceeds of $ 12.4 million and net cash proceeds of $ 11.67 million after deduction of commissions and offering costs.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

Summary of Stock Purchase Warrants

The following table summarizes warrant activity during the years ended December 31, 2020 and 2021:

Average Price Per Share

Shares purchasable under outstanding warrants at January 1, 2020

6,620,620  

$ 5.41  

Stock purchase warrants issued

2,066,667  

$ 6.00  

Stock purchase warrants exercised

( 5,155,976 )  

$ 5.08  

Stock purchase warrants expired

( 324,401 )  

$ 5.00  

Shares purchasable under outstanding warrants at December 31, 2020

3,206,910  

$ 6.36  

Stock purchase warrants issued

Stock purchase warrants exercised

( 1,815,012 )  

$ 6.64  

Stock purchase warrants expired

( 231 )  

$ 7.58  

Shares purchasable under outstanding warrants at December 31, 2021

1,391,667  

$ 6.00  

During the year ended December 31, 2020 the Company received gross proceeds of $ 26,190 from the exercise of 5,155,976 warrants and paid $ 1,017 as an agent fee to facilitate exercise of certain warrants resulting in net proceeds of $ 25,174 .

Elwood Norris was a Company officer at the time he exercised 333,334 of these warrants at $ 5.00 per share for cash of $ 1,667 .

During the year ended December 31, 2021, the Company received proceeds of $ 12,047 from the exercise of 1,815,012 warrants.

The Company has outstanding Common Stock purchase warrants as of December 31, 2021 as follows:

Exercise Price

Common Shares

Expiration Date

Purchase Warrants

1,391,667  

$ 6.00  

At December 31, 2021 the Company had outstanding Common Stock purchase warrants exercisable for 1,391,667 shares that expired on June 1, 2022, and had no purchase warrants outstanding at December 31, 2022.

SHARE-BASED COMPENSATION

On March 31, 2017, the Company adopted, and the stockholders approved, the 2017 Stock Incentive Plan (the “

Plan ”) authorizing 2,000,000 shares of Company Common Stock for issuance as stock options and restricted stock units to employees, directors or consultants.

In May 2019, the stockholders ratified an increase in the Plan authorizing an additional 2,100,000 shares of Common Stock and in June 2020 ratified a further authorization of 1,900,000 shares of Common Stock for a total of 6,000,000 shares subject to the Plan.

In June 2021, the stockholders ratified an increase in the 2017 Stock Incentive Plan authorizing an additional 1,500,000 shares of Common Stock to a total of 7,500,000 shares.

At December 31, 2021 there were 1,380,816 shares of Common Stock available for grant under the Plan.

Plan ”) authorizing 2,000,000 shares of Common Stock for issuance as awards to employees, directors or consultants.

In May 2019, the stockholders ratified an increase in the Plan authorizing an additional 2,100,000 shares of Common Stock, in June 2020 ratified an additional 1,900,000 shares of Common Stock, in June 2021 ratified an additional 1,500,000 shares of Common Stock and in June 2022 ratified an additional 1,500,000 shares of Common Stock, for a total of 9,000,000 shares subject to the Plan.

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

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

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

Stock Options

The following table summarizes stock option activity for the years ended December 31, 2020 and 2021:

In January 2022 the Company recognized severance acceleration of $ 242 of share-based compensation expense resulting from the resignation of the Company’s Chief Executive Officer as part of a management transition plan.

The following table summarizes stock option activity for the year ended December 31, 2022:

Weighted Average

Outstanding January 1, 2022

2,928,750  

$ 2.96  

1,423,836  

$ 6.66  

( 371,000 )  

$ 1.90  

Forfeited, cancelled, expired

( 50,000 )  

$ 3.00  

Outstanding December 31, 2022

3,931,586  

$ 4.41  

1,254,500  

$ 5.33  

( 915,404 )  

$ 1.83  

Forfeited, cancelled, expired

( 334,799 )  

$ 5.14  

Outstanding December 31, 2021

3,935,883  

$ 5.24  

$ 1,608  

Exercisable December 31, 2022

2,415,063  

$ 5.19  

$ 1,608  

All outstanding options at December 31, 2021 are service-based options.

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

At December 31, 2022, there were 3,877,169  service-based stock options outstanding, and 1,614,230 performance-based stock options outstanding, which performance-based stock options were granted in April 2022 to the Company’s Chief Executive Officer and President, subject to future market capitalization targets.

1,049,145 of the 4,153,885 stock options granted included in the table above were granted in April 2022 outside the Plan as an employment inducement grant but are subject to the terms and conditions of the Plan.

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

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

2 unchanged sentences

Risk-free interest rate

0.90 %  

Forfeiture rate

Expected dividend yield

1 unchanged sentence

Weighted-average fair value of options granted

$ 2.57  

$ 2.90  

Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of awards.

2 unchanged sentences

The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S.

Treasury bonds whose maturity period is appropriate for the term of the options.

The Company records forfeitures as they are incurred.

The risk-free interest rate assumption is based upon observed interest rates on zero coupon US Treasury bonds whose maturity period is appropriate for the term of the options.

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends.

The Company calculates the expected life of the options using the Simplified Method for the employee stock options as the Company does not have sufficient historical data.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

The Company calculates the expected life of the options using the Simplified Method for the employee stock options as the Company does not have sufficient historical exercise data.

The Company used the Monte Carlo Simulation Model to value at the grant date the aggregate of 1,614,230 market condition performance options granted in April 2022 to the Company’s newly appointed Chief Executive Officer and a newly appointed President.

The assumptions used in the Monte Carlo Simulation were stock price on date of grant of $ 2.89 , contract term of 10 years, expected volatility of 49 % and risk-free interest rate of 2.9 %.

Vesting is based on sustained market capitalization of $ 250 million, $ 500 million and $ 1 billion and resulted in implied service periods ranging from approximately 4 to 7 years.

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

The following table summarizes information about stock options outstanding at December 31, 2022:

Exercise Prices

$ 1.50 - 3.61  

652,750  

$ 1.61  

652,750  

$ 1.61  

$ 3.85 - 5.775  

2,638,133  

$ 5.20  

1,373,564  

$ 5.33  

$ 5.88 - 8.82  

295,000  

$ 6.58  

38,749  

$ 6.34  

$ 11.22  

350,000  

$ 11.22  

350,000  

$ 11.22  

1.50 –

2.55 –

3.85 –

5.88 –

Restricted Stock Units

2 unchanged sentences

RSUs are settled in shares of the Company’s Common Stock as the RSUs become vested.

In January 2019 the Company granted 263,087 service-based RSUs to officers and employees vesting over a period of three years.

In August and September 2019, the Company granted 45,000 service-based RSUs to employees vesting over a period of three years.

In January 2020 the Company granted 73,992 service-based RSUs to officers and directors vesting over a period of three years.

In April 2020 the Company granted 122,222 service-based RSUs to employees vesting over a period of three years.

Also, in April 2020 the Company granted an officer 35,211 performance-based RSUs.

During the period July 2020 to December 2020 the Company granted 114,660 service-based RSU’s to employees vesting over three and four years.

The following table summarizes RSU activity under the Plan for the years ended December 31, 2020 and 2021:

The following table summarizes RSU activity for the years ended December 31, 2022 and 2021:

Weighted Average

3 unchanged sentences

Unvested at January 1, 2021

308,087  

$ 6.77  

Granted - service based

310,874  

$ 6.02  

Granted - performance based

35,211  

$ 4.26  

( 144,687 )  

$ 5.17  

Forfeited and cancelled

( 81,479 )  

$ 6.47  

Unvested at December 31, 2021

428,006  

$ 6.13  

Granted - service based

398,662  

$ 5.59  

( 524,491 )  

$ 5.55  

Forfeited and cancelled

( 32,874 )  

$ 6.10  

Unvested at December 31, 2022

269,303  

$ 6.47  

A total of 175,173 RSUs included in the table above were granted in April 2022 outside the Plan as an employment inducement grant but are subject to the terms and conditions of the Plan.

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

Share-Based Compensation Expense

2 unchanged sentences

Selling, general and administrative

$ 4,558  

$ 1,957  

Research and development

Total share-based expense

$ 5,356  

$ 2,237  

As of December 31, 2021, total estimated compensation cost of stock options granted and outstanding but not yet vested was $ 3.0 million which is expected to be recognized over the weighted average period of 2.2 years.

As of December 31, 2021, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 1.4 million which is expected to be recognized over the weighted average period of 2.0 years.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

As of December 31, 2022, total estimated compensation cost of stock options granted and outstanding but not yet vested was $ 3,327  which is expected to be recognized over the weighted average period of 3.38 years.

As of December 31, 2022, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 1,900 which is expected to be recognized over the weighted average period of 2.11 years.

DEFINED CONTRIBUTION PLAN

The Company has a defined contribution savings plan for all eligible U.S.

employees established under the provisions of Section 401(k) of the Internal Revenue Code.

This plan was formed on January 1, 2022.

Eligible employees may contribute a percentage of their salary subject to certain limitations.

The Company’s contributions for the year ended December 31, 2022 was $ 0 respectively.

COMMITMENTS AND CONTINGENCIES

Facility Leases

Facility Lease

Related Party Technology License Agreement

The Company is obligated to pay royalties and development and patent costs pursuant to an exclusive Amended and Restated Intellectual Property License Agreement dated as of September 30, 2016, with Syzygy, a company owned and controlled by stockholder/consultant Mr.

Elwood Norris and stockholder/officer Mr.

Elwood Norris and stockholder/consultant Mr.

James Barnes.

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

The Company recorded $ 278 and $ 143 for royalties incurred during the years ended December 31, 2021 and 2020, respectively.

The agreement provides for royalty payments of 4 % of revenue from products employing the licensed ensnarement device technology up to an aggregate of $ 1,000 in royalties or until September 30, 2026 , whichever occurs earlier The Company recorded $ 274 and $ 278 for royalties incurred during the years ended December 31, 2022 and 2021, respectively.

Maximum payout still available under this arrangement is $ 280 .

Service Provider Agreement

Pursuant to the Professional Services and Technology Acquisition Agreement (the “

Agreement ”) entered into with Lumeto, Inc.

and Spatial Industries Group, Inc.

(collectively, “

Service Provider ”), which Agreement provides that the Service Provider will provide to the Company certain technology, services, and perpetual licenses for use within the Company’s Wrap Reality virtual simulation training platform (the “

Technology, Services, and License ”), we are obligated to pay to the Service Provider (a) a cash payment upon the execution of the Agreement of $ 700 , (b) a cash payment of $ 125 upon the completion of certain project delivery milestones expected in Q1and (c) a cash payment of $ 125 upon the final completion and delivery of the final Technology, Services, and License in Q2.

Purchase Commitments

At December 31, 2021 the Company was committed for approximately $ 1,466 for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

At December 31, 2022 the Company was committed for approximately $ 3,626 for future component deliveries that are generally subject to modification or rescheduling in the normal course of business.

Indemnifications and Guarantees

8 unchanged sentences

On November 15, 2021, the Hon.

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’

Gee of the US 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. 

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 States District Court for the Central District of California against Smith, Barnes, Rothans, Thomas, and Norris, as well as directors Messrs.

Scot Cohen, Patrick Kinsella, Michael Parris, and Wayne Walker, 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 ”). 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 resolution 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.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

On November 13, 2020, Naresh Rammohan filed a shareholder derivative action in the US District Court for the Central District of California against current and former Company officers as well as current and former Company directors alleging unjust enrichment, breach of fiduciary duty, waste of corporate assets, and contribution claims under the Securities Exchange Act of 1934, docketed as Case No.

2:20-cv-10444-DMG-PVCx.

The derivative action was dismissed with prejudice by stipulation of the parties on May 3, 2022.

RELATED PARTY TRANSACTIONS

Commencing in October 2017 the Company began reimbursing Mr.

Elwood Norris, a consultant and stockholder of the Company, $ 1.5 per month on a month-to-month basis for laboratory facility costs, for an aggregate of $ 18 during each year ended December 31, 2021 and 2020, respectively.

Elwood Norris, a former officer and current stockholder and consultant of the Company, $ 1.5 per month on a month-to-month basis for laboratory facility expense, for an aggregate of $ 18 during the years months ended December 31, 2022, and 2021, respectively.

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

A greater than 10% stockholder, Mr.

Norris was paid a monthly fee of $ 7.5 per month for aggregate consulting payments of $ 45 for the six month period ended December 31, 2021.

From April 2020 through December 2020 the Company engaged V3 Capital Partners, LLC (“

V3 ”), a company owned and controlled by Scot Cohen, the Company’s Executive Chairman, to provide certain investor, shareholder and marketing services, in consideration for the payment to V3 of $ 10 per month on a month-to-month basis for an aggregate of $ 90 during the year ended December 31, 2020.

In addition, the Company paid V3 a bonus of $ 175 for assistance in a financing that was consummated in July 2020.

Norris was paid a monthly fee of $ 7.5 per month for aggregate consulting payments of $ 90 for the period ended December 31, 2022, and $ 45 for the six-month period ended December 31, 2021.

See Notes 8 and 14 for additional information on related party transactions and obligations.

Until its reverse recapitalization on March 31, 2017, the Company was treated as a partnership for federal and state income tax purposes and did not incur income taxes.

2 unchanged sentences

Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is "more likely than not" that some component or all of the benefits of deferred tax assets will not be realized.

The Company did not provide any current or deferred U.S.

federal income tax provision or benefit for the periods presented because of operating losses since inception.

The Company did not provide any current or deferred US federal income tax provision or benefit for the periods presented because of operating losses since inception.

As of December 31, 2022, the Company has federal net operating loss carryforwards of approximately $ 51,774 to reduce future taxable income.

2 unchanged sentences

As of December 31, 2022, management has not determined the extent of any such limitations, if any.

The Company is subject to taxation in the U.S.

and various state jurisdictions.

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

The Company is subject to taxation in the US and various state jurisdictions.

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

The Company provided a full valuation allowance on the net deferred tax asset, consisting primarily of net operating loss carry forwards, because management has determined that it is more likely than not that the Company will not earn income sufficient to realize the deferred tax assets during the carry forward period.

2 unchanged sentences

The Company did not recognize any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

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

3 unchanged sentences

Change in valuation allowance

( 6,409 )  

Income tax benefit (provision)

2 unchanged sentences

Income taxes benefit computed at federal statutory rate

$ 5,139  

$ 2,642  

State income taxes, net of federal effect

1 unchanged sentence

Change in valuation allowance

( 6,409 )  

Income tax benefit (provision)

3 unchanged sentences

Net operating losses

$ 11,773  

$ 5,444  

Research tax credits

1 unchanged sentence

Accruals and other

12,891  

Deferred tax liabilities:

1 unchanged sentence

Net deferred tax assets

12,213  

Less valuation allowance

( 12,213 )  

Net deferred taxes after valuation allowance

In accordance with ASU 

2016 - 09,  

Compensation-Stock Compensation (Topic 718 ) Improvements to Employee Share-Based Payment Accounting , the Company recognizes windfall tax benefits associated with the exercise of stock options as a component of tax expense (rather than equity).

In accordance with ASU 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting , the Company recognizes windfall tax benefits associated with the exercise of stock options as a component of tax expense (rather than equity).

Accordingly, our federal and state operating loss carryforwards include net windfall tax deductions from stock option exercises and RSU vesting of approximately $( 597 ) and $ 3,168 during the years ended December 31, 2022 and 2021, respectively.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

MAJOR CUSTOMERS AND RELATED INFORMATION

Major Customers

For the year ended December 31, 2022, revenues from two distributors accounted for approximately 36 % and 25 % of revenues with no other single customer accounting for more than 10% of total revenues.

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

For the year ended December 31, 2021, revenues from three distributors accounted for approximately 26 %, 19 % and 17 % of revenues with no other single customer accounting for more than 10% of total revenues.

Accounts receivable from three distributors accounted for 48 %, 16 % and 15 % of net accounts receivable at December 31, 2021.

For the year ended December 31, 2020, revenues from two distributors accounted for approximately 17 % and 16 % of revenues with no other single customer accounting for more than 10% of total revenues.

These distributors accounted for 28 % and 26 % of net accounts receivable at December 31, 2020.

The following table summarizes revenues by geographic region.

1 unchanged sentence

Ended December 31,

$ 3,357  

$ 1,443  

Europe, Middle East and Africa

$ 7,729  

$ 3,944  

Total revenues

See Note 1 –

Concentrations of Risks for information on reliance on suppliers.

SUBSEQUENT EVENTS

In January 2022 the Company extended the lease term of its Tempe Arizona office and production facility lease from July 31, 2022 to July 31, 2025.

The monthly rate commencing August 1, 2022 will be $ 10 with 4 % annual increases.

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

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tempe, State of Arizona, on the 10th day of March 2022.

WRAP TECHNOLOGIES, INC

1 unchanged sentence

By:  

/s/ LW Varner, Jr

LW Varner, Jr

/s/ TJ Kennedy

(Principal Executive Officer)

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

/s/ LW Varner, Jr

Interim Chief Executive Officer

/s/ TJ Kennedy

Chief Executive Officer

March 2, 2023

LW Varner, Jr

(Principal Executive Officer)

/s/ Chris DeAlmeida

Chief Financial Officer, Secretary and Treasurer

March 2, 2023

Chris DeAlmeida

(Principal Accounting Officer)  

3 unchanged sentences

March 2, 2023

/s/ TJ Kennedy

March 10, 2022

/s/ Michael Parris

8 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures