What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-10 compared with 2021-03-04 · 304 added, 747 removed, 30 unchanged (97% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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.

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 “

Business, ”

“Item 1A.

Risk Factors, ”

and “Item 8.

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.

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 product sales of our first public safety

product, the BolaWrap 100 remote restraint device, in late

immediate addressable domestic market for our solutions consists of

approximately 900,000 full-time sworn law enforcement officers

at over 15,300 federal, state and

local law enforcement agencies.

We are also exploring other domestic markets,

including 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 Statistics

MRC, a market research consulting firm, we participate in a segment

of the non-lethal products global market expected to grow to $11.85

billion by 2023.

products, services and solutions include:

BolaWrap Remote Restraint Device

is a hand-held remote

restraint device that discharges an eight-foot bola style Kevlar

tether to entangle an individual at a range of 10-25 feet.

100 assists law enforcement to safely and effectively control

encounters early in the use of force continuum without resorting to

painful force options.

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.

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 sales of our first public safety product, the BolaWrap 100 remote restraint device, in late 2018.

In October 2021 we released 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 being phased out.

The immediate addressable domestic market for our solutions consists of approximately 900,000 full-time sworn law enforcement officers at over 15,300 federal, state and local law enforcement agencies, and over 12 million police officers in over 100 countries.

We are also exploring other domestic markets, including 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 the non-lethal products global market 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-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 –

enforcement training system employing immersive computer graphics

virtual reality with proprietary software-enabled content.

allows up to two participants to enter

a simulated training environment simultaneously, and customized

weapons controllers enable trainees to engage in strategic decision

making along the force continuum.

Wrap Armor –

light-weight rifle rated police shield and a pistol rated patrol

shield that offers police agencies an affordable defense against

increasingly sophisticated threats.

addition to the United States domestic law enforcement market, we

have sold our restraint products to 36 countries.

established an active distributor network with 14 domestic distributors representing all 50

states and Puerto Rico.

We have distribution agreements with 35

international distributors.

We focus significant sales, training

and business development efforts to support our distribution

focus significant resources on research and development innovations

and continue to enhance our products and plan to introduce new

We believe we have established a strong branding and

market presence globally and have established significant

competitive advantages in our markets.

2020 Developments

Proceeds from Public Offering

In June 2020, we consummated a registered direct public offering

resulting in net proceeds of approximately $11.67 million

Offering ”).

2,066,667 units (“

Units ”), with each unit

consisting of (i) one share of Common Stock and (ii) a

warrant to purchase one share of Common Stock.

The June 2020 Units were offered and sold to

Investors at a public offering price of $6.00 per unit .

Each of the warrants offered and sold

in the June 2020 Offering are exercisable for a period of 24 months

from the date of issuance, are non-transferrable and have an

exercise price of $6.00 per share.

Proceeds from Warrant Exercises

the year ended December 31, 2020 the Company received gross

proceeds of $26,190,483 from the exercise of 5,155,976 warrants and

paid $1,016,645 as an agent fee to facilitate exercise of certain

warrants resulting in net proceeds of $25,173,838.

Elwood Norris,

the Company’s Chief Technology Officer, exercised 333,334 of

these warrants at $5.00 per share for cash of

In May 2020, we obtained $414,362 in proceeds from a U.S.

Small Business Administration (" SBA ") Promissory Note (the

" PPP Loan ") pursuant to the

Paycheck Protection Program (" PPP ") of the Coronavirus Aid, Relief,

and Economic Security Act (the " CARES Act ") as administered by the SBA.

Under the terms of the CARES Act, the

Company subsequently applied for and in December 2020 was granted

forgiveness for the PPP Loan plus interest.

The Company’s PPP

Loan in the amount of $414,362 and accrued interest was forgiven in

full by the Small Business Administration.

The Company recognized

$416,683 in debt forgiveness income as a result of the

Asset Purchase Agreement with NSENA

On December 14, 2020, the Company, through a new wholly owned

subsidiary Wrap Reality, Inc.

Reality ”), entered into

an Asset Purchase Agreement (the “

Asset Purchase

Agreement ”) with NSENA

Inc, a Delaware corporation (“

NSENA ”) and Ethan Moeller

Moeller ”), the majority stockholder of NSENA and

acquired NSENA’s immersive virtual reality technology and

business (the “

Transaction ”).

In addition, the Company hired three

NSENA persons as employees (including Moeller)

Employees ”) and retained

two NSENA consultants (“

Consultants ”).

Wrap Reality paid NSENA cash consideration of $210,000 and agreed

to pay $100,000 on March 15, 2021, $100,000 on June 15, 2021 and

$75,000 on September 15, 2021.

In addition, Wrap Reality assumed

$15,000 of liabilities related to funds received by NSENA but

unearned on existing revenue related contract arrangements.

additional earn-out consideration, Wrap Reality has agreed to pay

NSENA 10% of net revenues (or a lesser amount equal to 50% of

direct profit) from specific identified prospects that become

revenue customers (“

NSENA Earn-out

Consideration ”) before

September 30, 2021, but only on amounts collected between

consummation of the acquisition and June 30,

Each of the Key Employees executed an At-Will Employment,

Confidential Information, Non-Compete/Non-Solicitation, Invention

Assignment, and Arbitration Agreement and the Key Employees were

issued service-based stock options exercisable for an aggregate of

150,000 shares of the Company’s Common Stock exercisable for

ten years at $5.46 per share, vesting over two years unless

accelerated by certain events.

Moeller was granted an

additional ten-year performance-based stock option exercisable at

$5.46 per share on 100,000 shares of Common Stock based on

achieving certain virtual reality revenue targets by December 1,

Each of the two Consultants were granted service-based stock

options exercisable for 20,000 shares of the Company’s Common

Stock for five years at $5.46 per share, vesting over two years

unless accelerated under the terms of the stock

is a law enforcement 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.

In addition to the United States law enforcement market, we have shipped our restraint products to 51 countries.

We have established an active distributor network with 12 domestic distributors representing 49 states and one dealer representing Puerto Rico.

We have distribution agreements with 47 international distributors covering 54 countries.

We focus significant sales, training and business development efforts to support our distribution network.

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 branding and market presence globally and have established significant competitive advantages in our markets.

Recent Developments

During the year ended December 31, 2021 we accomplished the following:

Received an aggregate of $12.0 million in proceeds from the exercise of 1,815,012 warrants.

Received an aggregate of $1.7 million in proceeds from the exercise of 915,404 stock options.

Shipped BolaWrap products to 15 new countries, with BolaWrap products now being used in 51 countries.

Granted three new U.S.

patents, and filed 16 new U.S.

patent applications.

Expanded the geographic scope of our international patent and trademark applications, which now cover up to 38 countries in Europe, and 17 other countries.

Earned the ISO 9001:2015 Certification for our Quality Management System, a demonstration of our commitment to excellence in providing quality products and services.

Extended our pilot program with the Los Angeles Police Department for one year, positioning the deployment of the BolaWrap 150 planned in the first quarter of 2022.

Announced the first 50 reported field uses of the BolaWrap tabulated from police agencies, with the BolaWrap effectively assisting in taking a suspect into custody without excessive force, and thereby facilitating a successful outcome, in more than 80% of the reported field uses.

Increased our focus on sustainability by becoming a participant of the United Nations Global Compact, the largest corporate citizenship and sustainability initiative, and publishing our initial Environmental, Social and Governance (" ESG ") letter.

Announced a collaboration with Amazon Web Services (" AWS ") to deliver the Wrap Reality Virtual Training platform, and the capability to keep and maintain training records, to law enforcement, built on AWS GovCloud (US).

Upgraded the Wrap Reality Virtual Training platform and began offering a subscription-based service model while beta testing the platform developed with AWS.

Unveiled the next generation BolaWrap 150 remote restraint device featuring electronic deployment, and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100.

Received a favorable non-firearm classification of the BolaWrap 150 from the Royal Canadian Mounted Police (" RCMP ").

Obtained the first risk pool funding to support agency purchases of BolaWrap from the Arizona Municipal Risk Retention Pool (" AMRRP ").

Increased revenue to $7.7 million, an increase of 96% over revenue in 2020.

Management Restructuring

On 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.

The transition and corporate strategy included the resignation of President, CEO and director Thomas P.

appointment of LW Varner, Jr.

as a consultant and Interim CEO;

appointment of Lawrence Hirsh as a financial consultant;

announcement of the planned retirement of CFO, Secretary and Treasurer James A.

Barnes expected upon appointment of a successor;

appointment of director Wayne Walker as Chairman 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 the 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 between the Company and Elwood G.

Norris, a former officer of the Company and current shareholder, dated March 4, 2021, Mr.

Norris may have certain rights to nominate a replacement board candidate as a result of Mr.

Kukowski’s resignation.

Business Outlook and Challenges

products and solutions continue to gain worldwide awareness and

recognition through social media, media exposure, trade shows,

product demonstrations and word of mouth as a result of positive

responses from agencies and early adoption and deployment success.

We believe the Wrap is gaining traction as a recognized global

brand, with innovative technology and an initial product foundation

achieved through aggressive marketing and public relations.

believe that we have strong market opportunities for our remote

restraint solution throughout the world in the law enforcement and

security sectors as a result of increasing demands for less lethal

policing and increasing threats posed by non-compliant

We grew our business in 2020 with revenues increasing 460% and

continue to expand our business in 2021, both domestically and

internationally, through direct and distributor sales.

robust and growing pipeline of opportunities and are pursuing large

business prospects internationally and also pursuing business with

large police agencies in the U.S.

It is difficult to anticipate how

long it will take to close these opportunities, or if they

will ultimately come to fruition.

To support our increased sales and distribution activities 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 in

conjunction with modern policing tactics for de-escalation of

Over 520 agencies have received BolaWrap training with

over 1,550 training officers at those agencies certified as

BolaWrap instructors qualified to train the rest of their

December 31 , 2020, we had

backlog of approximately $120,000 expected to be delivered in the

next twelve months.

Distributor and customer orders for future

deliveries are generally subject to modification, rescheduling or

in some instance’s cancellation in the normal course of

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

We believe that we have adequate financial resources

to sustain our operations for the next year .

We expect that we will need to continue to innovate new

applications for our public safety technology, develop new products

and technologies to meet diverse customer requirements and identify

and develop new markets for our products.

COVID-19 Impact

We face significant challenges in operating and growing our

business related to the outbreak of the novel coronavirus

COVID-19 ”) which continues to spread throughout the

United States and the World.

The outbreak of COVID-19 has resulted

in travel restrictions, quarantines,

“stay-at-home” and

“shelter-in-place” orders and extended shutdown of

certain businesses around the world.

We are monitoring the outbreak

of COVID-19 and the related business and travel restrictions and

changes to behavior intended to reduce its spread, in addition to

the impact on our employees.

We continued to operate with some

modifications, and we took actions intended to protect our

employees and our customers that adversely affected our results by

increasing costs during a period of stalled sales and production

Starting during the second quarter of 2020 our customers

experienced staffing issues limiting our ability to demonstrate and

We believe we made an important transition during the second

quarter including remote sales and training through webinars and

expect this to be an ongoing aspect of our business.

most sales and training travel and reduced our production personnel

until late in the second quarter when some customer locations

domestically and internationally eased restrictions and we began to

again close business prospects.

In the third quarter we continued

to face some domestic and substantial international restrictions

that affected our ability to travel and train customers.

this had an adverse effect on our sales in the third and fourth

Severe international travel restrictions persist and

impact the timing of future international orders.

It is uncertain

when these restrictions will ease allowing our sales and training

personnel to travel to many international

destinations.

The magnitude and the duration of the pandemic and the extent and

duration of the pandemic’s adverse effect on economic and

social activity, consumer confidence, customer spending and

preferences, labor and healthcare costs, and unemployment rates is

uncertain as of the date of this Report.

Our ability to sell, train

and service our products and conduct our business may be adversely

impacted as a result of continuing or future pandemic related

travel restrictions, mandatory business closures, and stay-at home

or similar orders;

temporary reductions in our workforce, closures

of our offices and facilities and the ability of our customers and

suppliers to continue their operations as a result of the pandemic.

While there could ultimately be a material impact on operations and

liquidity of the Company, at the time of issuance of this Report,

the impact cannot be determined.

Our products and solutions continue to gain worldwide awareness and recognition through social media, media exposure, trade shows, product demonstrations and word of mouth as a result of positive responses from agencies and early adoption and deployment success.

We believe Wrap is gaining traction as a recognized global brand, with innovative technology and an initial product foundation achieved through aggressive marketing and public relations.

We believe that we have strong market opportunities for our remote restraint solution throughout the world in the law enforcement and security sectors as a result of increasing demands for less lethal policing and increasing threats posed by non-compliant subjects.

During the year ended December 31, 2021, the Company received an increased number of field reports of successful BolaWrap usage from law enforcement agencies.

Many agencies consider BolaWrap as a very low level, or non-reportable, use of force option and, accordingly, many uses are not reported to us.

Others are considered evidence and are also not shared.

Some law enforcement agencies have shared bodycam footage of their field uses, some of which we are allowed to use in our marketing activities.

We believe increased reports of avoiding escalation will help grow revenues in the future.

Revenues for the year ended December 31, 2021 increased 96% over the prior year, and we continue to expand our business, both domestically and internationally, through direct and distributor sales.

We have a robust and growing pipeline of market opportunities for our restraint product offering and training services within the law enforcement, military and homeland security business sectors domestically and internationally.

Social trends demanding more compassionate and safe policing practices are expected to continue to drive our global business.

We are pursuing large business prospects internationally and also pursuing business with large police agencies in the U.S.

It is difficult to anticipate how long it will take to close these opportunities, or if they will ultimately come to fruition especially given the uncertainty of COVID-19 and social unrest, as discussed below.

To support our increased sales and distribution activities, 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, in conjunction with modern policing tactics for de-escalation of encounters.

We believe law enforcement trainers and officers that have seen demonstrations or have been trained about our products are more supportive of their department’s purchase and deployment of our products.

Over 1,000 agencies have received BolaWrap training, with over 3,000 training officers at those agencies actively certified as BolaWrap instructors, qualified to train the rest of their departments.

The number of agencies and training officers has doubled compared to the year ended December 31, 2021.

With the acquisition of NSENA in December 2020, and the rebranding of the NSENA business as Wrap Reality, we have continued to market our virtual reality system while working to integrate previous scenarios into a robust platform, employing BolaWrap and additional de-escalation techniques into new Wrap Reality scenarios.

In August 2021 we announced the development of a new expanded Wrap Reality Virtual Training platform powered by, and developed through, 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.

We plan to increase marketing activities for our virtual reality solution as our platform enhancements are introduced to market.

At December 31, 2021 we had backlog of approximately $268 thousand expected to be delivered in the first quarter of 2022.

We had deferred revenue of $265 thousand expected to be recognized generally over the next five years.

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.

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

We have experienced recent changes in management.

Changes in management and other key personnel have the potential to disrupt our business, and any such disruption could adversely affect our operations, programs, growth, financial condition or results of operations.

In addition, new members of management may have different perspectives regarding product development and opportunities for our business, which may cause us to focus on new business opportunities or reduce or change emphasis on our existing products and business.

Impact of COVID-19 and Social Unrest on our Business

We continue to face significant challenges in operating and growing our business related to the global impact of the novel coronavirus (“

COVID-19 ”).

COVID-19 impact includes continued travel restrictions, quarantines, “stay-at-home” and “shelter-in-place” orders, shutdowns and slowdowns of certain businesses around the world and impacts on supply chains and logistics.

The COVID-19 pandemic has resulted in a substantial curtailment of business activities worldwide and is causing weakened economic conditions, both in the United States and many countries abroad.

As part of intensifying efforts to contain the spread of COVID-19, many companies and state, local and foreign governments continue to impose restrictions, including shelter-in-place orders and travel bans.

While some of these companies and jurisdictions have started to relax such restrictions, in some cases, the restrictions are put back in place after having been lifted.

These factors negatively impacted our operations and results of operations for 2020 and 2021.

We expect that the evolving COVID-19 pandemic, associated travel restrictions and social distancing requirements, especially internationally, may continue to have an adverse impact on our results of operations.

While the ultimate economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business and results of operations, including our revenues, earnings and cash flows from operations, will be adversely impacted during 2022, including as a result of:

Delays in our ability to travel and train, especially internationally;

Greater funding challenges for our customer base, which may adversely affect timing of anticipated contracts and new customer sales;

Disruption to our supply chain caused by distribution and other logistical issues, which may further delay our ability to deliver product to customers during and beyond 2022;

Potential decrease in productivity of our employees or those of our customers or suppliers due to travel bans or restrictions, work-from-home or shelter-in-place policies and orders.

We also may be adversely affected by continued social unrest, protests against police and movements such as “Defund the Police”.

These events may directly or indirectly affect police agency budgets and funding available to current and potential customers.

Participants in these events may also attempt to create the perception that our solutions are contributing to the perceived problems or ineffective as a solution, which may adversely affect us, our business and results of operations, including our revenues, earnings and cash flows from operations.

It is currently not possible to predict the magnitude or duration of the COVID-19 pandemic’s impact on our business or the future impact of the recent, ongoing and possible future unrest.

The extent to which these events impact our business will depend on numerous evolving factors that we may not be able to control or accurately predict, including without limitation:

the duration and scope of the challenges created by the COVID-19 pandemic or by ongoing social unrest;

governmental, business and individuals’ actions that have been and continue to be taken in response to these events;

the impact of the COVID-19 pandemic and social unrest on economic activity and actions taken in response;

the effect on our customers and demand for our products and services;

our ability to continue to sell and deliver our products and services, including as a result of travel restrictions, logistic and supply chain challenges, people working from home, or restrictions on access to our potential customers;

the ability of our customers to pay for our products and services;

any closures of our facilities and the facilities of our customers and suppliers;

the degree to which our employees or those of our customers or suppliers become ill with COVID-19.

Critical Accounting Policies and Estimates

preparation of financial statements in accordance with accounting

principles generally accepted in the United States

GAAP ”)

requires us to make estimates and judgments that affect the

reported amounts of assets, liabilities, revenue and expense, and

related disclosure of contingent assets and liabilities.

evaluate our estimates, on an on-going basis, including those

estimates related to recognition and measurement of contingencies

and accrued costs.

We base our estimates on historical experience

and on various other assumptions we believe to be reasonable under

the circumstances.

Actual results may differ from these estimates

under different assumptions or conditions.

of the process of preparing our financial statements, we are

required to estimate our provision for income taxes.

management judgment is required in determining our provision for

income taxes, deferred tax assets and liabilities, tax

contingencies, unrecognized tax benefits, and any required

valuation allowance, including taking into consideration the

probability of the tax contingencies being incurred.

assesses this probability based upon information provided by its

tax advisers, its legal advisers and similar tax cases.

later time our assessment of the probability of these tax

contingencies changes, our accrual for such tax uncertainties may

increase or decrease.

Our effective tax rate for annual and interim

reporting periods could be impacted if uncertain tax positions that

are not recognized are settled at an amount which differs from our

our accounting policies require higher degrees of judgment than

others in their application.

These include share-based compensation

and contingencies and areas such as revenue recognition, allowance

for doubtful accounts, valuation of inventory and intangible

assets, operating lease liabilities, warranty liabilities and

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“

GAAP ”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities.

We evaluate our estimates, on an on-going basis, including those estimates related to recognition and measurement of contingencies and accrued expense.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances.

Actual results may differ from these estimates under different assumptions or conditions.

As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes.

Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, tax contingencies, unrecognized tax benefits, and any required valuation allowance, including taking into consideration the probability of the tax contingencies being incurred.

Management assesses this probability based upon information provided by its tax advisers, its legal advisers and similar tax cases.

If later our assessment of the probability of these tax contingencies changes, our accrual for such tax uncertainties may increase or decrease.

Our effective tax rate for annual and interim reporting periods could be impacted if uncertain tax positions that are not recognized are settled at an amount which differs from our estimates.

Some of our accounting policies require higher degrees of judgment than others in their application.

These include share-based compensation and contingencies and areas such as revenue recognition, allowance for doubtful accounts, valuation of inventory and intangible assets, estimates of product line exit costs, warranty liabilities and impairments.

Revenue Recognition .

We sell our products to customers

including law enforcement agencies, domestic distributors and

international distributors and revenue from such transactions is

recognized in the periods that products are shipped (free on board

FOB ”)

shipping point) or received by customers (FOB destination), when

the fee is fixed or determinable and when collection of resulting

receivables is reasonably assured.

We identify customer performance

obligations, determine the transaction price, allocate the

transaction price to the performance obligations and recognize

revenue as we satisfy the performance obligations.

performance obligations are products/accessories and virtual

reality software licensing or sale.

Our customers do not have the

right to return product unless the product is found to be

We sell our products to customers including law enforcement agencies, domestic distributors and international distributors and revenue from such transactions is recognized in the periods that products are shipped (free on board (“

FOB ”) shipping point) or received by customers (FOB destination), when the fee is fixed or determinable and when collection of resulting receivables is reasonably assured.

We identify customer performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue as we satisfy the performance obligations.

Our primary performance obligations are products/accessories and virtual reality software licensing or sale.

Our customers do not have the right to return product unless the product is found to be defective.

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

In such cases, revenue is not recognized until after control, title and risk of ownership has transferred which is generally when the customer has requested such transaction under normal billing and payment terms and has been notified that the product (i) has been completed according to customer specifications, (ii) has passed quality control inspections, and (iii) has been tagged and packed for shipment, separated from other inventory and ready for physical transfer to the customer. The value associated with custodial storage services is deemed immaterial in the context of such contracts and in total, and accordingly, none of the transaction price is allocated to such service.

Share-Based Compensation.

We follow the fair value

recognition provisions issued by the Financial Accounting Standards

Board (“

FASB ”)

in Accounting Standards Codification (“

ASC ”) Topic 718, Stock

Compensation (“

718 ”) and we adopted Accounting Standards Update

ASU ”) 2018-07

for share-based transactions with non-employees.

compensation expense recognized during 2020 and 2019 includes stock

option and restricted stock unit compensation expense.

The grant date fair

value of stock options is determined using the Black-Scholes

option-pricing model.

The grant date is the date at which an

employer and employee or non-employee reach a mutual understanding

of the key terms and conditions of a share-based payment award.

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.

Each of these inputs

is subjective and generally requires significant judgment to

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 follow the fair value recognition provisions issued by the Financial Accounting Standards Board (“

FASB ”) in Accounting Standards Codification (“

ASC ”) Topic 718, Stock Compensation (“

ASC 718 ”) and we adopted Accounting Standards Update (“

ASU ”) 2018-07 for share-based transactions with non-employees.

Share-based compensation expense recognized during 2020 and 2019 includes stock option and restricted stock unit compensation expense.

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

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

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

Each of these inputs is subjective and generally requires significant judgment to determine.

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

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

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

Allowance for Doubtful Accounts.

Our products are sold to

customers in many different markets and geographic locations.

estimate our bad debt reserve on a case-by-case basis due to a

limited number of customers mostly government agencies or

well-established distributors.

We base these estimates on many

factors including customer credit worthiness, past transaction

history with the customer, current economic industry trends and

changes in customer payment terms.

Our judgments and estimates

regarding collectability of accounts receivable have an impact on

our financial statements.

Our products are sold to customers in many different markets and geographic locations.

We estimate our bad debt reserve on a case-by-case basis and the aging of accounts due to a limited number of customers mostly government agencies or well-established distributors.

We base these estimates on many factors including customer credit worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms.

Our judgments and estimates regarding collectability of accounts receivable have an impact on our financial statements.

Valuation of Inventory .

Our inventory is comprised of raw

materials, assemblies and finished products.

We must periodically

make judgments and estimates regarding the future utility and

carrying value of our inventory.

The carrying value of our

inventory is periodically reviewed and impairments, if any, are

recognized when the expected future benefit from our inventory is

less than carrying value.

Our inventory is comprised of raw materials, assemblies and finished products.

We must periodically make judgments and estimates regarding the future utility and carrying value of our inventory.

The carrying value of our inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from our inventory is less than carrying value.

Valuation of Intangible Assets.

Intangible assets consisted

of (a) capitalized legal fees and filing 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, and (c) the purchase cost of indefinite-lived website

We must make judgments and estimates regarding the future

utility and carrying value of intangible assets.

values of such assets are periodically reviewed and impairments, if

any, are recognized when the expected future benefit to be derived

from an individual intangible asset is less than carrying value.

This generally could occur when certain assets are no longer

consistent with our business strategy and whose expected future

value has decreased.

Accrued Expenses.

We establish a warranty reserve based on

anticipated warranty claims at the time product revenue is

This reserve requires us to make estimates regarding

the amount and costs of warranty repairs we expect to make over a

period of time.

Factors affecting warranty reserve levels include

the number of units sold, anticipated cost of warranty repairs, and

anticipated rates of warranty claims.

We have very limited history

to make such estimates and warranty estimates have an impact on our

financial statements.

Warranty expense is recorded in cost of

We evaluate the adequacy of this reserve each reporting

the recognition criteria of ASC 450-20, “Loss

Contingencies”

to estimate the amount of bonuses when it

becomes probable a bonus liability will be incurred and we

recognize expense ratably over the service period.

We accrue bonus

expense each quarter based on estimated year-end results, and then

adjust the actual in the fourth quarter based on our final results

compared to targets.

Historically,

our assumptions, judgments and estimates relative to our critical

accounting policies have not differed materially from actual

There were no significant changes or modification of our

critical accounting policies and estimates involving management

valuation adjustments affecting our results for the year ended

December 31, 2020.

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

We must make judgments and estimates regarding the future utility and carrying value of intangible assets.

The carrying values of such assets are periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from an individual intangible asset is less than carrying value.

This generally could occur when certain assets are no longer consistent with our business strategy and whose expected future value has decreased.

Exit Expense .

Our product line exit expense included estimates of end of product life raw material write offs, costs of noncancelable raw material purchase orders and retirement of unamortized production tooling costs.

We make these estimates based on current production plans and these judgments and estimates have an impact on our financial statements.

Accrued Expense.

We establish a warranty reserve based on anticipated warranty claims at the time product revenue is recognized.

This reserve requires us to make estimates regarding the amount and costs of warranty repairs we expect to make over a period of time.

Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs, and anticipated rates of warranty claims.

We have very limited history to make such estimates and warranty estimates have an impact on our financial statements.

Warranty expense is recorded in cost of revenues.

We evaluate the adequacy of this reserve each reporting period.

We use the recognition criteria of ASC 450-20, “Loss Contingencies”

to estimate the amount of bonuses when it becomes probable a bonus liability will be incurred and we recognize expense ratably over the service period.

We accrue bonus expense each quarter based on estimated year-end results, and then adjust the actual in the fourth quarter based on our final results compared to targets.

Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

Other than the planned production change requiring a new estimate of exit expense, there were no significant changes or modification of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the period ended December 31, 2021.

Recent Accounting Pronouncements

pronouncements issued for future implementation are discussed in

Note 1 to our financial statements.

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

Segment and Related Information

Company operates as a single segment.

The Company’s chief

operating decision maker is its Chief Executive Officer, who

manages operations for purposes of allocating resources.

Note 16 , Major Customers and

Related Information, in our financial statements for further

The Company operates as a single segment.

The Company’s chief operating decision maker is its Chief Executive Officer, who manages operations for purposes of allocating resources.

Refer to Note 16, Major Customers and Related Information, in our financial statements for further discussion.

Operating Expense

operating expense includes (i) selling, general and administrative

expense, and (ii) research and development expense.

development expense is comprised of the costs incurred in

performing research and development activities and developing

production on our behalf, including compensation and consulting,

design and prototype costs, contract services, patent costs and

other outside expenses.

The scope and magnitude of our future

research and development expense is difficult to predict at this

time and will depend on elections made regarding research projects,

staffing levels and outside consulting and contract costs.

future level of selling, general and administrative expense will be

dependent on staffing levels, elections regarding expenditures on

sales, marketing and customer training, the use of outside

resources, public company and regulatory costs, and other factors,

some of which are outside of our control.

expect our operating costs will increase as we expand product

distribution activities and expand our research and development,

production, distribution, training, service and administrative

functions in the near term.

We may also incur substantial non-cash

stock-based compensation costs depending on future option and

restricted stock unit grants that are impacted by stock prices and

other valuation factors.

Historical expenditures are not indicative

of future expenditures.

Our operating expense includes (i) selling, general and administrative expense, and (ii) research and development expense.

Research and development expense is comprised of the costs incurred in performing research and development activities and developing production on our behalf, including compensation and consulting, design and prototype costs, contract services, patent costs and other outside expense.

The scope and magnitude of our future research and development expense is difficult to predict at this time and will depend on elections made regarding research projects, staffing levels and outside consulting and contract costs.

The future level of selling, general and administrative expense will be dependent on staffing levels, elections regarding expenditures on sales, marketing and customer training, the use of outside resources, public company and regulatory costs, and other factors, some of which are outside of our control.

We expect our operating costs will increase as we expand product distribution activities and expand our research and development, production, distribution, training, service and administrative functions in the near term.

We may also incur substantial non-cash stock-based compensation costs depending on future option and restricted stock unit grants that are impacted by stock prices and other valuation factors.

Historical expenditures are not indicative of future expenditures.

Results of Operations

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

following table sets forth for the periods indicated certain items

of our condensed statement of operations.

The financial information

and the discussion below should be read in conjunction with the

financial statements and notes contained in this

The following table and narrative sets forth for the periods indicated certain items of our condensed statement of operations, expressed in thousands of dollars.

The financial information and the discussion below should be read in conjunction with the financial statements and notes contained in this Report.

Year Ended December 31,

  Product

$ 3,868,384  

$ 656,071  

$ 3,212,313  

  Other

75,673  

40,719  

34,954  

3,944,057  

696,790  

3,247,267  

2,601,323  

420,016  

2,181,307  

1,342,734  

276,774  

1,065,960  

Operating expenses:

  Selling,

general and administrative

11,630,644  

6,653,465  

4,977,179  

  Research

and development

2,788,887  

2,236,985  

551,902  

(in thousands)

Product sales

Other revenue

Total revenues

Cost of revenues

Products and services

Product line exit expense

Total cost of revenues

Operating expenses:

14,419,531  

8,890,450  

5,529,081  

from operations

$ (13,076,797 )

$ (8,613,676 )

$ (4,463,121 )

reported revenue of $ 3,944,057

for the year ended December 31, 2020 (“Fiscal 2020”) as

compared to revenue of $696,790 for the year ended December 31,

2019 (Fiscal 2019”), a 466 % increase over the prior year.

believe our sales during the second, third and fourth quarters of

Fiscal 2020 were negatively impacted by the COVID-19 pandemic as we

were limited in our ability to make product demonstrations and

conduct training especially in our international markets.

areas of the United States eased restrictions, we were able to

commence limited in-person demonstrations and training to

supplement our webinar capabilities.

We incurred product

promotional costs of $ 747,443

for Fiscal 2020 related to the cost of demonstration products and

accessories delivered to law enforcement agencies that were

expensed as marketing costs.

$ 16,015 of deferred revenue at

December 31, 2020, of which $14,125 related to virtual reality

training and $1,890 related to extended warranties .

believe we can grow sales in the future but the impact of the

COVID-19 pandemic has created much uncertainty in the global

We are unable to predict the impact on demand for our

products in future periods.

We expect sales levels may be uneven as we grow both our

domestic and international customer base and as well as from the

continued impact of COVID-19 restrictions .

While we plan for

increased revenues in 2021, there can be no assurance, especially

given the uncertainties of the COVID-19 pandemic, that we can

achieve revenue growth.

December 31, 2020, we had backlog of $120,260 expected to be

delivered in the next twelve months.

Distributor and customer

orders for future deliveries are generally subject to modification,

rescheduling or in some instance’s cancellation in the normal

course of business.

cost of revenue for Fiscal 2020 was $ 2,601,323 resulting in a gross margin of

We curtailed production

for ten weeks during the second quarter of Fiscal 2020 due to the

COVID-19 restrictions in Arizona and this down time negatively

impacted our gross margin.

The gross margin for Fiscal 2019 of 40%

was assessed on a small revenue base.

our limited history of revenue and startup costs incurred to

establish volume manufacturing, historical margins may not be

indicative of future margins.

addition, our margins vary based on the sales channels through

which our products are sold and product mix.

Due to timing of

international orders our mix of cartridges was higher during Fiscal

2020 than Fiscal 2019.

Currently, our cartridges have lower margins

than BolaWrap devices, however, late in 2020 we implemented

initiatives to improve gross margins attributable to our

We continue to implement product updates and revisions,

including raw material and component changes that may impact

product costs.

With such product updates and revisions, we have

limited warranty cost experience and estimated future warranty

costs can impact our gross margins.

In September 2019 we relocated manufacturing operations and

commenced production at our new facility in Tempe, Arizona.

this significantly increases our capacity, we continue to implement

production and process changes targeted to improve

Selling, general and administrative

Research and development

Total operating expenses

Loss from operations

We reported revenue of $7.7 million for the year ended December 31, 2021 (“

Fiscal 2021 ”) as compared to revenue of $3.9 million for the year ended December 31, 2020 (" Fiscal 2020 "), a 96% increase over the prior year.

We believe our sales during Fiscal 2021 were negatively impacted by the COVID-19 pandemic as we were limited in our ability to make product demonstrations and conduct training especially in our international markets.

We also believe some customers delayed purchase decisions during the last quarter of Fiscal 2021 in anticipation of the introduction of our second-generation product, the BolaWrap 150.

As some areas of the United States eased restrictions, during Fiscal 2021, we were able to commence limited in-person demonstrations and training to supplement our webinar capabilities.

We incurred product promotional costs of $924 thousand for Fiscal 2021, related primarily to the cost of demonstration and training products and accessories delivered to law enforcement agencies that were expensed as marketing costs, as compared to $747 thousand for Fiscal 2020.

We are responding to increased demand for training as a result of expanded product and brand awareness and increased successful field use by agencies.

We had $265 thousand of deferred revenue at December 31, 2021, of which $172 thousand related to virtual reality training and $67 thousand related to extended warranties.

At December 31, 2021, we had backlog of $268 thousand expected to be delivered in the next twelve months.

Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instance’s cancellation in the normal course of business.

The impact of the COVID-19 pandemic and geopolitical conflicts, including the recent war in Ukraine, has created much uncertainty in the global marketplace, with the COVID-19 pandemic continuing to restrict our ability to travel internationally and, to a more limited extent, domestically.

These conditions are expected to continue at least through the first quarter of 2022. 

We are therefore unable to predict at this time whether our sales will continue to increase during fiscal year ending December 31, 2022 at the same rate as the fiscal year ended December 31, 2021 due to these uncertainties.

Although no assurances can be given, we do believe, however, that the challenges to substantially increasing sales caused by COVID-19 will abate as the pandemic wanes, especially given the number of BolaWrap trials currently ongoing and the current environment where non-lethal options are being widely considered by law enforcement domestically and internationally. 

As a result, we believe that revenue during the fiscal year 2022 will increase compared to the revenue recorded during 2021, and this anticipated increase is likely to be material, although no assurances can be given.

We have experienced recent changes in management.

Changes in management and other key personnel have the potential to disrupt our business, and any such disruption could adversely affect our revenue growth in future periods, especially in the near term as we execute our Management Transition plan.

Our cost of revenue for Fiscal 2021 was $5.7 million and included $747 thousand of restructuring inventory charge.

Excluding this non-cash charge, the gross margin for Fiscal 2021 was 36%.

Our cost of revenue for Fiscal 2020 was $2.6 million resulting in a gross margin of 34%.

During the third quarter ended September 30, 2021, we began production of our new generation BolaWrap 150 product with different material inputs and manufacturing processes such that historical margins may not be indicative of future margins.

We have limited warranty cost experience and estimated future warranty costs can impact our gross margins.

Selling, General and Administrative Expense

general and administrative expense increased by $ 4,977,179 during Fiscal 2020, when compared

to Fiscal 2019.

We incurred a $ 546,723 increase in non-cash stock-based

compensation expense allocated to selling, general and

administrative expense that totaled $ 1,956,818 in the Fiscal 2020 as compared to

$1,410,095 in the Fiscal 2019.

Other increases included a

$ 2,043,748 increase in cash

compensation and recruiting costs from an increase in headcount

over the prior year and a $ 276,645 increase in public company related

Marketing and promotion costs increased $ 979,833 due primarily to promotional

products and online advertising.

Travel efforts resumed during the

third quarter of the year ended December 31, 2020, however, due to

the COVID-19 pandemic, travel was still limited.

Our travel costs

related to sales, demonstrations and training decreased by

$ 107,768 from the prior year

even though the number of sales and training personnel increased

from the prior year.

part to our receipt of $414,362 in PPP Loan proceeds, we maintained

staffing in April 2020, and were able to respond to limited

re-openings commencing late in the second quarter of Fiscal 2020.

We developed and deployed new tools such as webinars to communicate

with prospective and existing customers.

We believe these decisions

positioned us to respond to increased opportunities resulting from

recent highly publicized policing issues and an increased focus on

less lethal engagement.

Company’s PPP Loan in the amount of $414,362 and accrued

interest was forgiven in full in December 2020 by the Small

Business Administration.

The Company recognized $416,683 in debt

forgiveness income as a result of the

2021, we expect to spend increased resources on the marketing and

selling of our products, training distributors and customers and

administratively supporting our operations to respond to increased

opportunities, but amounts could vary depending on sales levels,

the impact of the COVID-19 pandemic and other factors outside of our

Selling, general and administrative (“

SG&A ”) expense increased by $8.6 million during Fiscal 2021, when compared to Fiscal 2020.

The largest driver of this increase was related to an increase of $2.6 million in share-based compensation, of which $1.5 million was for director compensation, and the remaining $1.1 million was related to incentive for management and employees.

We continue to invest in our marketing and promotion, which augments the media attention we receive from external sources, such as news broadcasts.

During Fiscal 2021, we incurred increases of $325 thousand related to public relations initiatives and $111 thousand related to digital marketing campaigns.

Costs related to advertising and promotional products remained flat from Fiscal 2020.

For Fiscal 2021, our public reporting expense increased by $1.56 million.

This includes $818 thousand in connection with actions by a former executive officer/shareholder seeking changes in the composition of our Board of Directors and candidates to stand for election at the 2021 Annual Shareholders’

Meeting, changes to the Executive Chairman position, and related matters.

There were no comparable costs in 2020.

This matter was settled in March 2021, and we do not expect additional costs.

Other SG&A expense increases included a $2.8 million increase in cash compensation, recruiting and consultancy costs resulting from our growth in personnel over the prior year.

In addition, our travel expense related to sales, demonstrations and training increased by $523 thousand as a result of resumption of travel by sales and training personnel.

In the second and third quarters of 2020, we had virtually no travel due to the COVID-19 pandemic and the various travel restrictions that were in place.

Despite the growth in 2021, we are still well below historical norms for our travel expense but expect travel expense to increase as international travel restrictions ease.

In 2022, we expect to monitor and control the amount of resources we expend on the marketing and selling of our products, training distributors and customers and administratively supporting our operations to respond to increased opportunities, but amounts could vary depending on sales levels, the impact of the COVID-19 pandemic and other factors outside of our control.

We expect increased administrative costs due to costs associated with the Management Transition but cannot estimate such costs at this time.

Research and Development Expense

and development expense increased by $ 551,902 for Fiscal 2020, when compared to

We incurred a $ 153,925 period over period increase in

non-cash share-based compensation expense allocated to research and

development expense as a result of new award grants and vesting

The increase in costs during Fiscal 2020 when compared to

the prior year included a $ 485,910 increase in cash compensation costs

resulting from an increase in headcount primarily associated with

product development.

Prototype related costs increased by

$ 18,984 for Fiscal 2020, which

increase was primarily related to

development efforts to improve our BolaWrap 100 product and develop

new products.

Outside consulting costs decreased by

$ 48,766 for Fiscal 2020,

primarily due to the addition of permanent staff.

related to research and development decreased $ 100,822 for Fiscal 2020 when compared to

Fiscal 2019 primarily due to COVID-19 restrictions and completion

of the Arizona facility setup.

We expect our research and

development costs to increase in the future as we add staff and

expand our research initiatives in response to market

opportunities. 

from operations during Fiscal 2020 increased by $ 4,463,121 when compared to Fiscal 2019,

resulting primarily from increased operating costs due to increased

personnel, marketing and selling and supporting

Research and development expense increased by $3.4 million for Fiscal 2021, when compared to Fiscal 2020.

We incurred a $518 thousand period over period increase in non-cash share-based compensation expense allocated to research and development expense as a result of new award grants and vesting timing.

The increase in costs during the Fiscal 2021 compared to the prior year included a $758 thousand increase in cash compensation costs resulting from an increase in headcount primarily associated with product development.

Outside consulting costs increased by $1.2 million and prototype related costs increased by $570 thousand for Fiscal 2021, primarily due to costs related to the new generation BolaWrap 150 product, initiatives to develop new products, and increased development of virtual reality scenarios.

We expect our research and development costs to remain at current levels despite our plans to increase personnel, as the increase in personnel costs is expected to be offset by lower costs for outside resources due to the substantial completion of BolaWrap 150 and a focus on controlling spending on new research initiatives. 

Loss from operations during Fiscal 2021 increased by $11.4 million when compared to Fiscal 2020, resulting primarily from increased share-based compensation and increased operating costs due to increased personnel, marketing and selling, public company costs, and supporting activities.

We also incurred a one-time non-cash product line exit expense of $747 thousand during the period that we do not expect to recur. 

Liquidity and Capital Resources

We have experienced net losses and negative cash flows from

operations since our inception.

As of December 31, 2020, we had

cash and cash equivalents of $16,646,811, short-term investments of

$24,994,360, positive working capital of $44,586,395 and had

sustained cumulative losses attributable to stockholders of

We believe that our cash on hand and short-term

investments will sustain our operations for at least the next

twelve months from the date of this Report.

During Fiscal 2020 we received $11,667,206 of net proceeds

resulting from the consummation of a registered offering of our

Common Stock in June 2020, $25,879,188 of net proceeds from the

exercise of previously issued warrants and stock options and

obtained $414,362 in proceeds from the PPP Loan.

Our primary source of liquidity to date has been funding from our

stockholders from the sale of equity securities and the exercise of

derivative securities, consisting of options and warrants.

expect our primary source of future liquidity will be from the sale

of products, exercise of stock options and warrants and if required

from future equity or debt financings.

We have experienced net losses and negative cash flows from operations since our inception.

As of December 31, 2021, we had cash and cash equivalents of $4.9 million, short-term investments of $30 million, positive working capital of $38 million and had sustained cumulative losses attributable to stockholders of $49.8 million.

We believe that our cash on hand and short-term investments will sustain our operations for at least the next twelve months from the date of this Report.

During Fiscal 2021, we received $13.7 million of proceeds from the exercise of previously issued stock purchase warrants and from the exercise of stock options.

During Fiscal 2020, we received $11.7 million of net proceeds resulting from the consummation of a registered offering of our Common Stock in June 2020, $25.9 million of net proceeds from the exercise of previously issued warrants and stock options and obtained $414 thousand in proceeds from a loan issued under the Paycheck Protection Act (the " PPP Loan ") (See Note 10 to the Consolidated Financial Statements of this Report).

Our primary source of liquidity to date has been funding from our stockholders from the sale of equity securities and the exercise of derivative securities, consisting of options and warrants.

We expect our primary source of future liquidity will be from the sale of products, exercise of stock options and warrants and if required from future equity or debt financings.

Capital Requirements

Due in part to the volatility caused by COVID-19, we do not have a

high degree of confidence in our estimates for our future liquidity

requirements or future capital needs, which will depend on, among

other things, capital required to introduce our products and the

staffing and support requirements, as well as the timing and amount

of future revenue and product costs.

We anticipate that demands for

operating and working capital may grow depending on decisions on

staffing, development, production, marketing, training and other

functions and based on other factors outside of our control.

believe we have sufficient capital to sustain our operations for

the next twelve months.

Our future capital requirements, cash flows and results of

operations could be affected by, and will depend on, many factors,

some of which are currently unknown to us, including, among other

impact and effects of the global outbreak of the COVID-19 pandemic,

and other potential pandemics or contagious diseases or fear of

such outbreaks;

regarding staffing, development, production, marketing and other

The timing and

extent of market acceptance of our products;

Costs, timing and

outcome of planned production and required customer and regulatory

compliance of our products;

Costs of preparing,

filing and prosecuting our patent applications and defending any

future intellectual property-related claims;

Costs and timing of

additional product development;

Costs, timing and

outcome of any future warranty claims or litigation against us

associated with any of our products;

Ability to collect

accounts receivable;

Timing and costs

associated with any new financing.

factors that could affect our ability to obtain cash from external

sources including from exercise of outstanding warrants and options

Volatility in the

capital markets;

Market price and

trading volume of our common stock.

Due in part to the volatility caused by COVID-19, we do not have a high degree of confidence in our estimates for our future liquidity requirements or future capital needs, which will depend on, among other things, capital required to grow product revenues and the staffing and support requirements, as well as the timing and amount of future revenue and product costs.

We anticipate that demands for operating and working capital may grow depending on decisions on staffing, development, production, marketing, training and other functions and based on other factors outside of our control.

We believe we have sufficient capital to sustain our operations for the next twelve months.

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

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

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

The timing and extent of market acceptance of our products;

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

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

Costs and timing of additional product development;

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

Ability to collect accounts receivable;

Timing and costs associated with any new financing.

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

Volatility in the capital markets;

Market price and trading volume of our common stock.

Off-Balance Sheet Arrangements

1 unchanged sentence

Operating Activities

During Fiscal 2020, net cash used in operating activities was

The net loss of $12,580,209 was decreased

by non-cash expense of $ 2,079,882 consisting primarily of

share-based compensation expense of $ 2,236,743 less debt forgiveness income of $416,683

related to the PPP loan .

Other major component changes using

operating cash included an increase of $ 1,685,727 in accounts receivable, an

increase in inventories of $342,741, a $ 341,629 decrease in customer deposits and a

$ 508,498 increase in prepaid

expenses and other current assets.

An increase of $ 825,382 in accounts payable and an increase

of $ 492,564 in accrued

liabilities reduced the cash used in operating

During Fiscal 2019, net cash used in operating activities was

The net loss of $8,325,488 was decreased by

non-cash expense of $1,585,699 consisting primarily of share-based

compensation expense of $1,536,096.

Other major component changes

using operating cash included a $1,892,768 increase in inventories,

an increase of $190,951 in accounts receivable, a $136,084 increase

in prepaid expenses and other current assets and a $96,000

reduction in deferred compensation.

An increase of $286,398 in

accounts payable and accrued liabilities and new customer deposits

of $343,724 reduced the cash used in operating

During Fiscal 2021, net cash used in operating activities was $18.2 million. The net loss of $24.4 million was decreased by non-cash expense of $7.2 million, consisting primarily of share-based compensation expense of $5.4 million, restructuring inventory charges of $747 thousand, depreciation and amortization expense of $478 thousand, and shares issued for services of $239 thousand.

Other major component changes using operating cash included an increase of $2.1 million in accounts receivable, and an increase in prepaid expense of $109 thousand.

A decrease in inventories of $559 thousand, an increase in accounts payable and accrued expense of $492 thousand, and an increase of $249 thousand in deferred revenue reduced the cash used in operating activities.

During Fiscal 2020, net cash used in operating activities was $12.2 million. The net loss of $12.6 million was decreased by non-cash expense of $2.1 million consisting primarily of share-based compensation expense of $2.2 million less debt forgiveness income of $417 thousand related to the PPP loan.

Other major component changes using operating cash included an increase of $1.7 million in accounts receivable, an increase in inventories of $343 thousand, a $342 thousand decrease in customer deposits and a $508 thousand increase in prepaid expense and other current assets.

An increase of $825 thousand in accounts payable and an increase of $493 thousand in accrued liabilities reduced the cash used in operating activities.

Investing Activities

During Fiscal 2020, we used $34,979,511 of cash to purchase

short-term investments and we had proceeds from maturities of

short-term investments of $10,000,000.

We had no short-term

investment activity in 2019.

We used $248,897 and $256,742 of cash for the purchase of property

and equipment during Fiscal 2020 and 2019, respectively.

invested $128,914 and $114,274 in patents during the Fiscal 2020

and 2019, respectively.

During Fiscal 2020, we purchased $543,563

of indefinite life intangible assets and software and paid $210,000

for the first installment of the NSENA acquisition.

During Fiscal 2021, we used $55 million of cash to purchase short-term investments and had proceeds from maturities of short-term investments of $50 million.

During Fiscal 2020, we used $35 million of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $10 million.

We used $995 thousand and $249 thousand of cash for the purchase of property and equipment during Fiscal 2021 and Fiscal 2020, respectively.

We invested $187 thousand and $129 thousand in patents during Fiscal 2021 and Fiscal 2020, respectively.

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

Financing Activities

During the year ended December 31, 2020, we received $11,667,206 of

net proceeds resulting from a registered offering of our Common

Stock in June 2020, $25,879,188 of net proceeds from the exercise

of previously issued warrants and stock options and $414,362 in

proceeds from a PPP Loan.

During the year ended December 31, 2019, w e received

$11,351,214 of net proceeds from the June 2019 Follow-On Offering

and obtained $2,141,576 of net proceeds from the exercise of

previously issued warrants and stock options .

During Fiscal 2021, we received $12 million from previously issued stock purchase warrants, $1.7 million in proceeds from the exercise of previously issued stock options and paid $275 thousand in debt relating to the December 2020 acquisition of NSENA.

During Fiscal 2020, we received $11.7 million of net proceeds resulting from a registered offering of our Common Stock in June 2020, $25.9 million of net proceeds from the exercise of previously issued warrants and stock options and $414 thousand in proceeds from a PPP Loan.

Contractual Obligations and Commitments

Pursuant to that certain exclusive Amended and Restated

Intellectual Property License Agreement dated September 30, 2016,

by and between the Company and Syzygy Licensing, LLC

Syzygy ”), we are obligated to pay to Syzygy a 4%

royalty fee on future product sales up to an aggregate amount of

$1.0 million in royalty payments or until September 30,

2026, whichever occurs earlier .

We are committed to aggregate lease payments on facility leases of

$94,011 in 2021 and $56,006 in 2022.

December 31, 2020 the Company was committed for approximately $2.2

million for future component deliveries and contract services that

are generally subject to modification or rescheduling in the normal

course of business.

to the NSENA Asset Purchase Agreement dated December 14, 2020

we are obligated to pay to NSENA cash

consideration of $100,000 on March 15, 2021, $100,000 on June 15,

2021 and $75,000 on September 15, 2021.

In addition, Wrap Reality

assumed $15,000 of liabilities related to funds received by NSENA

but unearned on existing revenue related contract arrangements.

additional earn-out consideration Wrap Reality has agreed to pay

NSENA 10% of net revenues (or a lesser amount equal to 50% of

direct profit) from specific identified prospects that become

revenue customers before September 30, 2021 but only on amounts

collected between Closing and June 30, 2022.

Pursuant to that certain exclusive Amended and Restated Intellectual Property License Agreement dated September 30, 2016, by and between the Company and Syzygy Licensing, LLC (“

Syzygy ”), we are obligated to pay to Syzygy a 4% royalty fee on future product sales up to an aggregate amount of $1.0 million in royalty payments or until September 30, 2026, whichever occurs earlier.

In January 2022 we extended our facility lease for three years through July 2025 and we are committed to aggregate lease payments on the lease of $107 thousand in 2022, $121 thousand in 2023, $126 thousand in 2024 and $75 thousand in 2025.

At December 31, 2021 we were committed for approximately $1.5 million for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

On January 24, 2022, we announced a Management Transition plan and entered into consulting agreements with LW Varner as our interim CEO, and Lawrence Hirsch as our interim financial consultant.

Pursuant to the consulting agreements, unless earlier terminated, we are obligated for aggregate consulting payments of $225 thousand through April 17, 2022 and up to $75 thousand of share-based compensation plus travel costs and expenses.

Effects of Inflation

not believe that inflation has had a material impact on our

business, revenue or operating results during the periods

We do not believe that inflation has had a material impact on our business, revenue or operating results during the periods presented.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in

accounting pronouncements during the year ended December 31, 2020,

or subsequently thereto, that we believe are of potential

significance to our financial statements.

Q UANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT

There have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2021, or subsequently thereto, that we believe are of potential significance to our financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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 7. Management’s Discussion and Analysis