What changed in this filing

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Item 9A. Controls and Procedures

2022-03-10 compared with 2021-03-04 · 901 added, 1828 removed, 330 unchanged (89% of the section changed)

CONTROLS AND PROCEDURES.

We are required to maintain disclosure controls and procedures

designed to ensure that material information related to us, is

recorded, processed, summarized and reported within the time

periods specified in the SEC rules and forms.

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

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules

13a-15(e) and 15d-15(e) under the Exchange Act) that are designed

to ensure that information required to be disclosed in our Exchange

Act reports is recorded, processed, summarized and reported within

the time periods specified in the SEC’s rules and forms.

disclosure controls and procedures are also designed to ensure that

information required to be disclosed in our Exchange Act reports is

accumulated and communicated to management, including our interim

Chief Executive Officer and Chief Financial Officer, to allow

timely decisions regarding required disclosures.

In designing and

evaluating the disclosure controls and procedures, management

recognizes that any controls and procedures, no matter how well

designed and operated, can provide only reasonable assurance of

achieving the desired control objectives, and management is

required to apply its judgment in evaluating the cost-benefit

relationship of possible controls and procedures.

Our management, with the participation of our interim Chief

Executive Officer and Chief Financial Officer, evaluated the

effectiveness of our disclosure controls and procedures as of

December 31, 2020 and, based on this evaluation, our interim Chief

Executive Officer and Chief Financial Officer concluded that, as of

the end of the period covered by this report, our disclosure

controls and procedures were

effective at the reasonable assurance level.

Management’s Report on Internal Control Over Financial

This Annual Report does not include a report of management's

assessment regarding internal control over financial reporting or

an attestation report of the Company’s registered public

accounting firm because the Company is an “emerging growth

company”

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in our Exchange Act reports is accumulated and communicated to management, including our interim Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our interim Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021 and, based on this evaluation, our interim Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

Management ’

s Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of GAAP.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. 

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

With our participation, an evaluation of the effectiveness of our internal control over financial reporting was conducted as of December 31, 2021, based on the framework and criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this evaluation, our interim Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 2021

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.

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.

Changes in Internal Controls

have been no changes in our internal control over financial

reporting during the fiscal quarter ended December 31, 2020, that

have materially affected, or are reasonably likely to materially

affect, our internal control over financial reporting.

for evaluating controls and procedures is continuous and

encompasses constant improvement of the design and effectiveness of

established controls and procedures and the remediation of any

deficiencies, which may be identified during this

There have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.

OTHER INFORMATION

information required by this Part III is omitted from this report

and is incorporated by reference to our Definitive Proxy Statement

to be filed with the SEC in connection with the Annual Meeting of

Stockholders to be held in 2021 (the “

Proxy Statement ”), which must be

filed no later than 120 days after the

close of the fiscal year ended December 31, 2020, pursuant to

Regulation 14A .

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE

The information required by this item will be incorporated by

reference from the Company’s definitive proxy statement, to

be filed with the SEC on or before April 30, 2021.

Certain information required by this Part III is omitted from this report and is incorporated by reference to our Definitive Proxy Statement to be filed with the SEC in connection with the Annual Meeting of Stockholders to be held in 2021 (the “

Proxy Statement ”), which must be filed no later than 120 days after the close of the fiscal year ended December 31, 2021, pursuant to Regulation 14A.

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.

EXECUTIVE COMPENSATION.

The information required by this item will be incorporated by

reference from the Company’s definitive proxy statement, to

be filed with the SEC on or before April 30, 2021.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this item will be incorporated by

reference from the Company’s definitive proxy statement, to

be filed with the Securities and Exchange Commission on or before

April 30, 2021.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND

DIRECTOR INDEPENDENCE.

The information required by this item will be incorporated by

reference from the Company’s definitive proxy statement, to

be filed with the SEC on or before April 30, 2021.

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.

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.

PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required by this item will be incorporated by

reference from the Company’s definitive proxy statement, to

be filed with the SEC on or before April 30, 2021.

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.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)    

List of documents filed as a part of this

(1)   

Financial Statements

of Independent Registered Public Accounting Firm

Sheets as of December 31, 2020 and 2019

of Operations for the Years Ended December 31, 2020 and

of Stockholders’

Equity for the Years Ended December 31, 2020

of Cash Flows for the Years Ended December 31, 2020 and

to Financial Statements

(2)   

Statement Schedules

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

(3)   

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.

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

(1)    Index to Financial Statements

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Balance Sheets as of December 31, 2021 and 2020

Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021 and 2020

Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020

Statements of Cash Flows for the Years Ended December 31, 2021 and 2020

Notes to Financial Statements

(2)    Financial Statement Schedules

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

(3)    Index to Exhibits

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

Exhibit Number

Purchase Agreement, dated March 22, 2017, by and between Wrap

Technologies, LLC, Petro River Oil Corp., and Megawest Energy

Montana Corp.

Incorporated by reference to Exhibit 2.1 to the

Registration Statement on Form S-1, filed on April 17,

Agreement between Wrap Technologies, LLC and Megawest Energy

Montana Corp., dated March 30, 2017.

Incorporated by reference to

Exhibit 2.2 to the Registration Statement on Form S-1, filed on

April 17, 2017.

and Restated Certificate of Incorporation of the Registrant.

Incorporated by reference to Exhibit 3.1 to the Registration

Statement on Form S-1, filed on April 17, 2017.

of the Registrant.

Incorporated by reference to Exhibit 3.2 to the

Registration Statement on Form S-1, filed on April 17,

Common Stock Certificate.

Incorporated by reference to Exhibit 4.1

to Amendment No.

1 to the Registration Statement on Form S-1, filed

on May 30, 2017.

Investor Warrant, dated October 30, 2018.

Incorporated by reference

to Exhibit 4.1 to the Current Report on Form 8-K, filed on November

Placement Agent Warrant, dated October 30, 2018.

Incorporated by

reference to Exhibit 4.2 to the Current Report on Form 8-K, filed

on November 5, 2018.

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

Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-1, filed on April 17, 2017.

Merger Agreement between Wrap Technologies, LLC and Megawest Energy Montana Corp., dated March 30, 2017.

Incorporated by reference to Exhibit 2.2 to the Registration Statement on Form S-1, filed on April 17, 2017.

Amended and Restated Certificate of Incorporation of the Registrant.

Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1, filed on April 17, 2017.

Bylaws of the Registrant.

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

Form of Common Stock Certificate.

Incorporated by reference to Exhibit 4.1 to Amendment No.

1 to the Registration Statement on Form S-1, filed on May 30, 2017.

Form of Investor Warrant, dated October 30, 2018.

Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on November 5, 2018.

Form of Placement Agent Warrant, dated October 30, 2018.

Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on November 5, 2018.

Form of Investor Warrant, dated June 18, 2019.

Incorporated by reference to Exhibit 4.1 to the

Current Report on Form 8-K, filed on June 18,

Offering Agent Warrant, dated June 18, 2019.

Incorporated by reference to Exhibit 4.1 to the

Current Report on Form 8-K, filed on June 18,

Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on June 18, 2019.

Form of Offering Agent Warrant, dated June 18, 2019.

Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on June 18, 2019.

Form of Warrant Agreement.

Incorporated by reference to Exhibit 4.2

to the Current Report on Form 8-K, filed on June 2,

and Restated Intellectual Property License Agreement, dated

September 30, 2016, by and between Wrap Technologies, LLC and

Syzygy Licensing LLC.

Incorporated by reference to Exhibit 10.1 to

the Registration Statement on Form S-1, filed on April 17,

Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on June 2, 2020.

Amended and Restated Intellectual Property License Agreement, dated September 30, 2016, by and between Wrap Technologies, LLC and Syzygy Licensing LLC.

Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1, filed on April 17, 2017.

2017 Equity Compensation Plan.

Incorporated by reference to Exhibit 10.2

to the Registration Statement on Form S-1, filed on April 17,

Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1, filed on April 17, 2017.

Form of Placement Agent Agreement, dated October 30, 2018.

Incorporated by reference to Exhibit 10.1 to the Current Report on

Form 8-K, filed on November 5, 2018.

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on November 5, 2018.

Form of Registration Rights Agreement, dated October 30, 2018.

Incorporated by reference to Exhibit 10.2 to the Current Report on

Form 8-K, filed on November 5, 2018.

Engagement Letter by and between Wrap Technologies, Inc.

Katalyst Securities LLC, dated June 7, 2019.

Incorporated by reference to Exhibit 10.1 to the

Current Report on Form 8-K, filed on June 13,

Engagement Letter by and between Wrap Technologies, Inc., Dinosaur

Financial Group, LLC and Katalyst Securities LLC, dated June 12 ,

Incorporated by reference

to Exhibit 10.2 to the Current Report on Form 8-K, filed on June

Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on November 5, 2018.

Supplemental Engagement Letter by and between Wrap Technologies, Inc.

and Katalyst Securities LLC, dated June 7, 2019.

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on June 13, 2019.

Engagement Letter by and between Wrap Technologies, Inc., Dinosaur Financial Group, LLC and Katalyst Securities LLC, dated June 12 , 2019.

Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on June 18, 2019.

Amended 2017 Equity Compensation Plan.

Incorporated by

reference to Exhibit 10.1 to the Registration Statement on Form

S-8, filed on June 24, 2019.

Industrial Real Estate Lease, dated May 10, 2019, by and between

Wrap Technologies, Inc.

Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on June 24, 2019.

Industrial Real Estate Lease, dated May 10, 2019, by and between Wrap Technologies, Inc.

and JM Sky Harbor Properties LLC.

Incorporated by reference from Exhibit 10.1 to the Current Report

on Form 8-K, filed on June 6, 201 9.

Note by and between Wrap Technologies, Inc.

and Bank of America,

Incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed on June 6, 2019.

Promissory Note by and between Wrap Technologies, Inc.

and Bank of America, N.A.

dated May 1, 2020.

Incorporated by reference to Exhibit 10.1

to the Current Report on Form 8-K, filed on May 5,

Agreement by and between the Company and V3, effective April 1,

Incorporated by reference to Exhibit 10.1 to the Registration

Statement on Form S-8, filed on May 29, 2020.

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on May 5, 2020.

Consulting Agreement by and between the Company and V3, effective April 1, 2020.

Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on May 29, 2020.

Amendment No.

2 to the Wrap Technologies, Inc.

Compensation Plan.

Incorporated by reference to Exhibit 10.1

to the Registration Statement on Form S-8, filed on June 17,

2017 Equity Compensation Plan.

Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on June 17, 2020.

Form of Subscription Agreement.

Incorporated by reference to

Exhibit 10.1 to the Current Report on Form 8-K, filed on June 2,

Agreement by and between Wrap Technologies, Inc., and Marc T.

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on June 2, 2020.

Employment Agreement by and between Wrap Technologies, Inc., and Marc T.

Thomas, dated July 30, 2020.

Incorporated by reference to Exhibit 10.1 to the

Current Report on Form 8-K, filed on July 31,

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

Invention Assignment, and Arbitration Agreement, dated September 9,

2020 between the Company and Thomas Smith.

Incorporated by reference to Exhibit 10.1 to the

Current Report on Form 8-K, filed on September 14,

Purchase Agreement between NSENA Inc.

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on July 31, 2020.

At-Will Employment, Confidential Information, Non-Compete/Non-Solicitation, Invention Assignment, and Arbitration Agreement, dated September 9, 2020 between the Company and Thomas Smith.

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on September 14, 2020.

Asset Purchase Agreement between NSENA Inc.

and Wrap Reality, Inc.

as of December 14, 2020.

In accordance with the instructions to

Item 601(b)(2) of Regulation S-K, the schedules and exhibits to

the Asset Purchase Agreement are not filed

herewith.  The Asset Purchase Agreement identifies

such schedules and exhibits, including the general nature of their

content.  The Company undertakes to provide such

schedules and exhibits to the SEC upon request.

Incorporated by reference to Exhibit 2.1 to the

Current Report on Form 8-K, filed on September 14,

At-Will Employment, Confidential Information, Non-Compete/

Non-Solicitation, Invention Assignment, and Arbitration Agreement

between the Key Employees and the Company dated December 14, 2020.

Incorporated by reference to Exhibit

2.2 to the Current Report on Form 8-K, filed on September 14,

Code of Ethics of

the Registrant Applicable to Directors, Officers and

Subsidiaries of Wrap

Technologies, Inc.*

Independent Registered Public Accounting Firm - Rosenberg Rich Baker Berman, P.A.

Certification

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

Certification

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

Certifications

pursuant to 18 U.S.C.

dated as of December 14, 2020.

In accordance with the instructions to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to the Asset Purchase Agreement are not filed herewith.  The Asset Purchase Agreement identifies such schedules and exhibits, including the general nature of their content.  The Company undertakes to provide such schedules and exhibits to the SEC upon request.

Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed on September 14, 2020.

Form of At-Will Employment, Confidential Information, Non-Compete/ Non-Solicitation, Invention Assignment, and Arbitration Agreement between the Key Employees and the Company dated December 14, 2020.

Incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K, filed on September 14, 2020.

Cooperation Agreement by and between the Company and Elwood G.

Norris and certain of his affiliates dated March 4, 2021.

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on March 9, 2021.

Amendment No.

3 to the Wrap Technologies, Inc.

2017 Equity Compensation Plan.

Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on November 5, 2021.

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.

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.

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

Incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-K, filed on March 4, 2021.

Subsidiaries of Wrap Technologies, Inc.

Incorporated by reference to Exhibit 21.1 to the Annual Report on Form 10-K, filed on March 4, 2021.

Consent of Independent Registered Public Accounting Firm - Rosenberg Rich Baker Berman, P.A.

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

Certifications pursuant to 18 U.S.C.

Section 1350.

This certification is being

furnished solely to accompany this Annual Report on Form 10-K and

is not being filed for purposes of Section 18 of the Securities

Exchange Act of 1934, as amended, and is not to be incorporated by

reference into any filing of the Company.*

Extensible Business Reporting Language (XBRL)

XBRL Instance Document.

XBRL Taxonomy Extension Schema.

XBRL Taxonomy Extension Calculation Linkbase.

XBRL Taxonomy Extension Definition Linkbase.

XBRL Taxonomy Extension Labels Linkbase.

XBRL Taxonomy Extension Presentation Linkbase.

Filed herewith.

Management contract or compensatory plan or

This certification is being furnished solely to accompany this Annual Report on Form 10-K and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.*

Extensible Business Reporting Language (XBRL) Exhibits*

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

Inline XBRL Taxonomy Extension Schema Document

Inline XBRL Taxonomy Extension Calculation Linkbase Document

Inline XBRL Taxonomy Extension Definition Linkbase Document

Inline XBRL Taxonomy Extension Label Linkbase Document

Inline XBRL Taxonomy Extension Presentation Linkbase Document

Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101)

* Filed concurrently herewith.

+ Management contract or compensatory plan or arrangement.

WRAP TECHNOLOGIES, INC.

1 unchanged sentence

Audited Consolidated Financial Statements:

Report of Independent Registered Public Accounting

Consolidated Balance Sheets as of December 31, 2020 and

Consolidated Statements of Operations for the Years Ended December

31, 2020 and 2019

Consolidated Statements of Stockholders’

Equity for Years

Ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows for the Years Ended December

31, 2020 and 2019

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

Board of Directors and

of Wrap Technologies, Inc.

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets as of December 31, 2021 and 2020 

Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021 and 2020 

Consolidated Statements of Stockholders’ Equity for Years Ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020

Notes to Consolidated Financial Statements 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Wrap Technologies, Inc.

Opinion on the Financial Statements

audited the accompanying balance sheets of Wrap Technologies, Inc.

(the Company) as of December 31, 2020 and 2019, 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, 2020, and the related notes

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).

opinion, the financial statements present fairly, in all material

respects, the financial position of the Company as of December 31,

2020 and 2019, and the results of its operations and its cash flows

for each of the years in the two year period ended December 31,

2020, in conformity with accounting principles generally accepted

in the United States of America.

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

financial statements are the responsibility of the Company’s

Our responsibility is to express an opinion on the

Company’s financial statements based on our audits.

public accounting firm registered with the Public Company

Accounting Oversight Board (United States) (PCAOB) and are required

to be independent with respect to the Company in accordance with

federal securities laws and the applicable rules and

regulations of the Securities and Exchange Commission and the

conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to

obtain reasonable assurance about whether the financial statements

are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to

perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding

of internal control over financial reporting, but not for the

purpose of expressing an opinion on the effectiveness of the

Company’s internal control over financial reporting.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

audits included performing procedures to assess the risks of

material misstatement of the financial statements, whether due to

error or fraud, and performing procedures that respond to those

Such procedures included examining, on a test basis,

evidence regarding the amounts and disclosures in the financial

Our audits also included evaluating the accounting

principles used and significant estimates made by management, as

well as evaluating the overall presentation of the financial

We believe that our audits provide a reasonable basis

for our opinion.

Rosenberg Rich Baker Berman P.A.

served as the Company’s auditor since 2016.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

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

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

We have served as the Company’s auditor since 2016.

Somerset, New Jersey

March 10, 2022

Wrap Technologies, Inc.

Consolidated Balance Sheets

Cash and cash

$ 16,646,811  

$ 16,983,864  

24,994,360  

receivable, net

1,870,934  

195,347  

2,655,390  

2,244,541  

Prepaid expenses

and other current assets

759,445  

250,947  

(in thousands, except par value and share amounts)

Current assets:

46,926,940  

19,674,699  

and equipment, net

357,287  

242,876  

lease right-of-use asset, net

139,088  

260,931  

1,396,484  

230,283  

12,681  

$ 48,832,480  

$ 20,421,470  

AND STOCKHOLDERS' EQUITY

$ 1,232,349  

Cash and cash equivalents

$ 4,937  

$ 16,647  

Short-term investments

29,983  

24,994  

Accounts receivable, net

Inventories, net

Prepaid expenses and other current assets

Total current assets

41,213  

Operating lease

liability - short term

46,927  

Property and equipment, net

Operating lease right-of-use asset, net

Intangible assets, net

$ 44,231  

acquisition liability - short term

$ 48,833  

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

2,340,545  

1,075,800  

Operating Lease

Liability - long term

56,006  

Accounts payable

$ 1,779  

acquisition liability - long term

$ 1,232  

Accrued liabilities

Customer deposits

Deferred revenue- short term

Operating lease liability - short term

Business acquisition liability - short term

Total current liabilities

Long-term liabilities:

78,506  

150,018  

2,419,051  

1,225,818  

and contingencies (Note 13)

Stockholders'

stock - 5,000,000 authorized;

Deferred revenue- long term

Operating lease liability - long term

Business acquisition liability - long term

Total long-term liabilities

Total liabilities

Commitments and contingencies (Note 13)

Stockholders' equity:

Preferred stock - 5,000,000 authorized;

par value $ 0.0001 per share;

issued and outstanding

Common stock -

150,000,000 authorized;

none issued and outstanding

Common stock - 150,000,000 authorized;

par value $ 0.0001 per share;

37,554,162 and

29,829,916 shares issued and outstanding each period,

paid-in capital

40,851,945 and 37,554,162 shares issued and outstanding each period, respectively

Additional paid-in capital

91,025  

71,705  

(25,310,033 )

(12,729,824 )

other comprehensive income

Accumulated deficit

( 49,759 )  

stockholders' equity

Accumulated other comprehensive income (loss)

Total stockholders' equity

41,264  

46,414  

liabilities and stockholders' equity

Total liabilities and stockholders' equity

$ 44,231  

$ 48,833  

accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements.

Wrap Technologies, Inc.

Consolidated Statements of Operations and Comprehensive

  Product

$ 3,868,384  

$ 656,071  

  Other

75,673  

40,719  

3,944,057  

696,790  

2,601,323  

420,016  

1,342,734  

276,774  

  Selling,

general and administrative

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

Year Ended December 31,

Product sales

$ 7,381  

$ 3,868  

  Research

and development

Other revenue

Total revenues

Cost of revenues

Products and services

Product line exit expense

Total cost of revenues

Operating expenses:

Selling, general and administrative

20,276  

11,631  

Total operating

Research and development

Total operating expenses

26,490  

14,420  

(13,076,797 )

income (expense):

  Interest

Loss from operations

( 24,495 )  

Other income (expense):

Investment income

Debt forgiveness income

$ ( 24,449 )  

  Debt

forgiveness income

Net loss per basic and diluted common share

$ ( 0.62 )  

  Other

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

39,281,620  

33,846,338  

$ (12,580,209 )

$ (8,325,488 )

Net loss per basic

and diluted common share

Weighted average

common shares used to compute net loss per basic and diluted common

Comprehensive loss:

$ ( 24,449 )  

Net unrealized gain (loss) on short-term investments

( 21 )  

Comprehensive

$ (12,580,209 )

$ (8,325,488 )

  Net

unrealized gain on short-term investments

Comprehensive loss

$ ( 24,470 )  

Comprehensive

$ (12,565,360 )

$ (8,325,488 )

accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements.

Wrap Technologies, Inc.

Consolidated Statements of Stockholders' Equity

(in thousands, except share and per share amounts)

Comprehensive

Stockholders'

  Balance

at December 31, 2018

27,364,607  

$ 2,736  

$ 16,791,254  

$ (4,404,336 )

$ 12,389,654  

 Sale of

Common Stock and warrants at $6.50 per share and placement agent

warrants in public offering, net of issuance costs

1,923,076  

11,351,022  

11,351,214  

 Common shares

issued upon exercise of warrants at $3.00 per share

127,649  

382,934  

382,947  

 Common shares

issued upon exercise of warrants at $5.00 per share

345,834  

1,700,469  

1,700,504  

 Common shares

issued upon exercise of stock options

38,750  

58,121  

58,125  

 Share-based

compensation expense

1,536,096  

 Common shares

issued for services

30,000  

Income (Loss)

Balance at January 1, 2020

29,829,916  

$ 31,923  

 Net loss for

  Balance

at December 31, 2019

$ ( 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  

$ (12,729,824 )

11,667  

 Sale of

Common Stock and warrants at $6.00 per share in public offering,

net of issuance costs

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  

 Common shares

issued upon exercise of warrants at $3.00 per share, net of

issuance costs

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 $5.00 per share, net of

issuance costs

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  

 Common shares

issued upon exercise of warrants at $6.00 per share, net of

issuance costs

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  

 Common shares

issued upon exercise of warrants at $6.50 per share, net of

issuance costs

$ ( 25,310 )  

$ 46,414  

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

1,661,320  

 Common shares

issued upon exercise of stock options

10,798  

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

153,692  

 Common shares

issued upon vesting of restricted stock units

Common shares issued upon exercise of stock options

915,404  

 Share-based

compensation expense

Common shares issued upon vesting of restricted stock units

524,491  

Common shares issued for services

42,876  

unrealized gain on short-term investments

Share-based compensation expense

Net unrealized loss on short-term investments

( 21 )  

Net loss for the period

( 24,449 )  

 Net loss for

(12,580,209 )

  Balance

at December 31, 2020

Balance at December 31, 2021

40,851,945  

1 unchanged sentence

$ ( 49,759 )  

$ (25,310,033 )

$ ( 6 )  

$ 41,264  

accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements.

Wrap Technologies, Inc.

Consolidated Statements of Cash Flows

Flows From Operating Activities:

$ (12,580,209 )

$ (8,325,488 )

Adjustments to

reconcile net loss to net cash

   used

in operating activities:

   Depreciation

and amortization

163,262  

46,945  

   Warranty

30,364  

13,495  

   Inventory

   Non-cash

lease expense

121,843  

80,069  

   Share-based

2,236,743  

1,536,096  

   Debt

forgiveness income

   Non-cash

interest expense

   Common

shares issued for services

(in thousands)

Year Ended December 31,

Cash Flows From Operating Activities:

$ ( 24,449 )  

   Provision

for doubtful accounts

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

Depreciation and amortization

Share-based compensation

Common shares issued for services

Product line exit expense

Debt forgiveness income

Gain on sale of assets

( 27 )  

   Changes

in assets and liabilities:

     Accounts

     Inventories

     Prepaid

expenses and other current assets

     Accounts

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

Changes in assets and liabilities:

Accounts receivable

( 2,111 )  

     Operating

lease liability

     Customer

Prepaid expenses and other current assets

( 109 )  

     Accrued

liabilities and other

Accounts payable

Operating lease liability

( 94 )  

Customer deposits

Accrued liabilities and other

( 54 )  

     Deferred

     Warranty

     Deferred

Net cash used in

operating activities

(12,186,924 )

Flows From Investing Activities:

short-term investments

(34,979,511 )

Proceeds from

maturities of short-term investments

Warranty settlement

Deferred revenue

Net cash used in operating activities

( 18,223 )  

expenditures for property and equipment

Investment in

patents and trademarks

intangible assets

Net cash used in

investing activities

(26,110,885 )

Flows From Financing Activities:

Sale of common

stock and warrants

Cash Flows From Investing Activities:

Purchase of short-term investments

( 55,014 )  

Proceeds from maturities of short-term investments

50,005  

Offering costs paid

on sale of common stock and warrants

Proceeds from

exercise of warrants

10,000  

Capital expenditures for property and equipment

( 995 )  

Offering costs paid

on exercise of warrants

Proceeds from

exercise of stock options

Investment in patents and trademarks

( 187 )  

Purchase of intangible assets

( 750 )  

Proceeds from bank

Business acquisition

Proceeds from long-term deposits

Net cash used in investing activities

( 6,937 )  

Net cash provided

by financing 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  

increase (decrease) in cash and cash equivalents

26,191  

and cash equivalents, beginning of period

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  

and cash equivalents, end of period

37,961  

Net decrease in cash and cash equivalents

( 11,710 )  

Disclosure of Non-Cash Investing

Financing Activities:

acquisition liability

Cash and cash equivalents, beginning of period

16,647  

acquisition cost in deferred revenue

16,984  

unrealized gain on short-term investments

Cash and cash equivalents, end of period

$ 4,937  

Right-of-use assets

and liabilities recorded during period

$ 16,647  

Issuance costs

relating to warrants issued to public offering selling

Supplemental Disclosure of Non-Cash Investing

and Financing Activities:

Business acquisition liability

Business acquisition cost in deferred revenue

Change in unrealized gain on short-term investments

$ ( 21 )  

accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business Description

Technologies, Inc., a Delaware corporation (the “

Wrap Technologies, Inc., a Delaware corporation (the “

Company ”, “

1 unchanged sentence

us ”, and “

our ”) , is a publicly traded company

with our Common Stock, par value

$0.0001 per share (“

Stock ”), listed on

the Nasdaq Capital Market (“

Nasdaq ”) under the trading symbol

“WRAP”.

The Company is a developer and supplier of

public safety products and training services for law enforcement

and security personnel.

The Company’s primary product is the

BolaWrap®

our ”), is a publicly traded company with our Common Stock, par value $ 0.0001 per share (“

Common Stock ”), listed on the Nasdaq Capital Market (“

Nasdaq ”) under the trading symbol “WRAP”.

The Company is a developer and supplier of public safety products and training services for law enforcement and security personnel.

The Company’s primary product is the BolaWrap®

remote restraint device.

The principal markets for

the Company’s proprietary products and services are in North

and South America, Europe, Middle East and Asia.

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

Principles of Consolidation

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

in December 2020 (see Note 3) and has commenced selling its virtual

reality training system primarily targeting law enforcement

The consolidated financial statements include the

accounts of this subsidiary after elimination of intercompany

transactions and accounts.

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.

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

Basis of Presentation and Use of Estimates

accompanying financial statements have been prepared in conformity

with accounting principles generally accepted in the United States

of America (“

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.

Actual results could materially differ from those

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.

Actual results could materially differ from those estimates

Concentrations of Risk

Credit Risk –

Financial instruments that potentially

subject the Company to concentration of credit risk consisted

primarily of cash, cash equivalents, U.S.

treasury bills and accounts receivable

from customers.

The Company maintains its cash and cash equivalent

deposits at two domestic financial institutions.

The Company is

exposed to credit risk in the event of default by a financial

institution to the extent that cash and cash equivalents are in

excess of the amount insured by the Federal Deposit Insurance

The Company places its cash and cash equivalents with

high-credit quality financial institutions and are managed within

established guidelines to mitigate risks.

To date, the Company has

not experienced any losses on its cash and cash

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.

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

The Company is exposed to credit risk in the event of default by a financial institution to the extent that cash and cash equivalents are in excess of the amount insured by the Federal Deposit Insurance Corporation.

The Company places its cash and cash equivalents with high-credit quality financial institutions and are managed within established guidelines to mitigate risks.

To date, the Company has not experienced any losses on its cash and cash equivalents.

Concentrations of Accounts Receivable and Revenue –

T he Company has a limited number of

domestic and international customers .

The Company may

experience concentrations in both accounts receivable and revenue

due to the timing of sales and collections of related payments (see

The Company has a limited number of domestic and international customers.

The Company may experience concentrations in both accounts receivable and revenue due to the timing of sales and collections of related payments (see Note 16 ).

Concentration of Suppliers –

The Company relies on a

limited number of component suppliers and contract suppliers.

particular, a single supplier is currently the sole manufacturer of

the Company’s laser assembly with some parts sole sourced

from other suppliers.

If supplier shortages occur, or quality

problems arise, production schedules could be significantly delayed

or costs significantly increased, which could in turn have a

material adverse effect on the Company’s financial condition,

results of operation and cash flows.

Impact of COVID-19  

In December 2019,

a novel strain of coronavirus (“COVID-19 ”)

emerged in China.

2020, the World Health Organization declared the outbreak of a

novel coronavirus (“

COVID-19 ”) as a pandemic.

While initially the

outbreak was largely concentrated in China and caused significant

disruptions to its economy, it spread to other countries and

infections have been reported globally.

The extent to which the

coronavirus impacts our operations will continue to depend on

future developments, which are highly uncertain and cannot be

predicted with confidence, including the duration of the outbreak,

new information which may emerge concerning the severity of the

coronavirus and the actions to contain the coronavirus or treat its

impact, among others.

In particular, the continued spread of the

coronavirus globally or emergence of new strains could adversely

impact our operations, including our manufacturing and supply

Our operations could be negatively affected if employees are

quarantined as the result of exposure to a contagious illness.

Similarly, travel restrictions resulting from the rapid spread of

contagious illnesses may have a material adverse effect on our

business and results of operations.

The Company assembles its BolaWrap products in-house using components and subassemblies from a limited number of suppliers and contract suppliers.

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.

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

Impact of COVID- 19  – In December 

2019, a novel strain of coronavirus ( “

COVID- 19 ”) emerged in China.

In March 2020, the World Health Organization declared the outbreak as a pandemic.

The extent to which the coronavirus impacts our operations will continue to depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

In particular, the continued spread of the coronavirus globally and emergence of new strains could adversely impact our operations, including our manufacturing, logistics and supply chain.

Our operations could be negatively affected if employees are quarantined as the result of exposure to a contagious illness.

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

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

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.

Short-Term Investments

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

bills with original maturities beyond three months at the date of

purchase and one year or less from the balance sheet date.

December 31, 2020, 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,

expected loss allowance methodology is developed using published or

estimated credit default rates for similar investments and current

and future economic and market conditions.

 Any unrealized losses related to credit loss

factors are recorded through an allowance for credit losses in

other (expense) income, in our consolidated statements of

operations, rather than as a reduction to the amortized cost basis

in other comprehensive (loss) income, when a decline in fair value

has resulted from a credit loss.

We determine realized gains or

losses on the sale of investments on a specific identification

method, and record such gains or losses as other (expense) income,

in our consolidated statements of

operations. 

We did not record a

credit loss reserve for short-term investments during the year

ended December 31, 2020.

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

Company follows the fair value recognition provisions issued by the

Financial Accounting Standards Board (“

FASB ”) in Accounting Standards

Codification (“

ASC ”) Topic 718, Stock

Compensation (“

718 ”) and has 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.

The Company follows the fair value recognition provisions issued by the FASB in ASC Topic 718, Stock Compensation (“

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

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

Share-based compensation expense recognized during 2021 and 2020 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.

Loss per Share

Basic loss per common share is computed by dividing net loss for

the period by the weighted-average number of shares of Common Stock

outstanding during the period.

Diluted net loss per common share

reflects the potential dilution of securities that could share in

the earnings of an entity.

The Company’s losses for the

periods presented cause the inclusion of potential Common Stock

instruments outstanding to be antidilutive.

Stock options,

restricted stock units and warrants exercisable or issuable for a

total of 7,566,502 and 9,857,457 shares of Common Stock were

outstanding at December 31, 2020 and 2019, respectively.

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

Accounts Receivable and Allowance for Doubtful

Company carries accounts receivable at historical cost, less an

allowance for doubtful accounts.

On a periodic basis, the Company

evaluates accounts receivable and establishes an allowance for

doubtful accounts for estimated losses.

The Company’s expected loss allowance

methodology for accounts receivable is developed using historical

collection experience, when available any published or estimated

credit default rates for entities that represent our customer base,

current and future economic and market conditions and a review of

the current status of customers' trade accounts receivables.

Additionally, specific allowance amounts are established to record

the appropriate provision for customers that have a higher

probability of default.

Our monitoring activities include account

reconciliation, dispute resolution, payment confirmation,

consideration of customers' financial condition and macroeconomic

Balances are written off when determined to be

uncollectible.

At December 31, 2020 the Company had an allowance of $10,140

resulting in part from global uncertainty resulting from the

COVID-19 virus .

There was no allowance for doubtful accounts

recorded at December 31, 2019 .

If a major customer’s

creditworthiness deteriorates, or actual defaults exceed our

historical experience, such estimates could change and impact our

future reported financial results.

Inventories are valued at the lower of cost or net realizable

The cost of substantially all the Company’s inventory

is determined by the FIFO cost method.

Inventory is comprised of

raw materials, assemblies and finished products intended for sale

to customers .

The Company evaluates

the need for reserves for excess and obsolete inventories

determined primarily based upon estimates of future demand for the

Company’s products.

At December 31, 2020 and 2019 the Company had no reserve for

obsolescence.

Contract Manufacturers

Company employs contract manufacturers for production of certain

components and sub-assemblies.

The Company may provide parts and

components to such parties from time to time, but recognizes no

revenue or markup on such transactions.

During 2020 and 2019, the

Company performed assembly of products in-house using components

and sub-assemblies from a variety of contract manufacturers and

Basic loss per common share is computed by dividing net loss for the period by the weighted-average number of shares of Common Stock outstanding during the period.

Diluted net loss per common share reflects the potential dilution of securities that could share in the earnings of an entity.

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

Stock options, 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.

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,  

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

The expected credit losses are developed using an estimated loss rate method that considers historical collection experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

The estimated loss rates are applied to accounts receivables with similar risk characteristics such as the length of time the balance has been outstanding and the location of the customer.

In certain instances, the Company may identify individual accounts receivable assets that do not share risk characteristics with other accounts receivables, in which case the Company records its expected credit losses on an individual asset basis.

If an accounts receivable asset is evaluated on an individual basis, the Company excludes those assets from the portfolios of accounts receivables evaluated on a collective basis.

At December 31, 2021 and 2020, the Company had an allowance for credit losses related to accounts receivable of $ 134 and $ 10 , respectively.

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

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.

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

Inventory is comprised of raw materials, assemblies and finished products intended for sale to customers .

The Company evaluates the need for reserves for excess and obsolete inventories determined primarily based upon estimates of future demand for the Company’s products.

At December 31, 2021 and 2020 the Company had no reserve for obsolescence.

Property, Equipment and Depreciation

Property and equipment is stated at cost.

Depreciation on property

and equipment is computed over the estimated useful lives of three

years using the straight-line method.

The Company intends, on any

retirement or disposition of property and equipment, that the

related cost and accumulated depreciation or amortization will be

removed and a gain or loss recorded.

Depreciation on property and equipment is computed over the estimated useful lives of three years using the straight-line method.

On any retirement or disposition of property and equipment, the related cost and accumulated depreciation or amortization is removed and a gain or loss recorded.

Business Combinations

Transactions in which the Company obtains control of a business are

accounted for according to the acquisition method as described in

ASC 805, Business Combinations.

The assets acquired and

liabilities assumed are recognized and measured at their fair

values as of the date control is obtained.

measures goodwill as the excess of consideration transferred, which

the Company also measures at fair value, over the net of the

acquisition date amounts of the identifiable assets acquired and

liabilities assumed.

related costs in connection with a business combination are

expensed as incurred.

Contingent consideration is recognized and

measured at fair value at the acquisition date and until paid is

re-measured on a recurring basis and classified as a

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

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

The Company measures goodwill as the excess of consideration transferred, which the Company also measures at fair value, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed.

Acquisition related costs in connection with a business combination are expensed as incurred.

Contingent consideration is recognized and measured at fair value at the acquisition date and until paid is re-measured on a recurring basis and classified as a liability.

Intangible Assets

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 domains.

The estimated useful lives of

identifiable intangible assets with definite useful lives have been

estimated to be between one and twenty years.

Purchased website

domain costs with an indefinite useful life are not subject to

amortization, but are subject to an annual impairment test, by

comparing their carrying amount with their corresponding fair

For any given intangible asset with an indefinite useful

life, if its fair value exceeds its carrying amount no impairment

loss shall be recognized.

carrying value of intangibles is periodically reviewed and

impairments, if any, are recognized when the future undiscounted

cash flows realized from the assets is less than its carrying

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.

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

Purchased website domain costs with an indefinite useful life are not subject to amortization, but are subject to an annual impairment test, by comparing their carrying amount with their corresponding fair value.

For any given intangible asset with an indefinite useful life, if its fair value exceeds its carrying amount no impairment loss shall be recognized.

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

Impairment of Long-Lived Assets

Long-lived assets and identifiable intangibles held for use are

reviewed for impairment whenever events or changes in circumstances

indicate that the carrying amount may not be recoverable.

sum of undiscounted expected future cash flows is less than the

carrying amount of the asset or if changes in facts and

circumstances indicate, an impairment loss is recognized and

measured using the asset’s fair value.

The Company did not

recognize any impairment loss during the years ended December 31,

2020 and 2019.

Long-lived assets and identifiable intangibles held for use are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

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

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, 2021 and 2020.

Classification and Valuation of Warrants

The Company accounts for warrants as either equity or liabilities

based upon the characteristics and provisions of each particular

Warrants valued and classified as equity are recorded

as additional paid-in capital based on the issue date fair value

and no further adjustment to valuation is made.

As of December 31,

2020, the Company has no warrants or other derivative financial

instruments that require separate accounting as liabilities and

periodic revaluation.

The Company accounts for warrants as either equity or liabilities based upon the characteristics and provisions of each particular instrument.

Warrants valued and classified as equity are recorded as additional paid-in capital based on the issue date fair value and no further adjustment to valuation is made.

As of December 31, 2021, the Company has no warrants or other derivative financial instruments that require separate accounting as liabilities and periodic revaluation.

Advertising and Promotion Costs

costs are charged to expense as incurred and were $287,266 and

$165,119 for the years ended December 31, 2020 and 2019,

respectively.

The Company also incurred product promotion costs for

demonstration products delivered to prospective customers of

$747,443 and $433,172 for the years ended December 31, 2020 and

2019, respectively.

Advertising and promotion costs are included in

selling, general and administrative expenses in the accompanying

statements of operations.

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

31, 2021 and 2020, respectively.

The Company also incurred product promotion costs for demonstration products delivered to prospective customers of $ 924 and $ 747 for the years ended December 31, 2021 and 2020, 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

The Company maintains a demonstration and training department as a

part of its sales and marketing activities and does not charge for

product demonstrations or training.

Training is not a condition or

requirement of sale as most sales are made through distributors to

their end customers.

The Company conducts local and regional

in-person, webinar and on-line demonstrations and use of force and

escalation training to support law enforcement agencies with no

purchase requirement.

Such training, when provided, may occur

before or after initial or subsequent purchase or field deployment

of the Company’s products.

The Company believes that law

enforcement trainers and officers that have seen demonstrations or

have been trained about its products are more supportive of their

departments purchase and deployment of product.

The Company maintains a demonstration and training department as a part of its sales and marketing activities and does not charge for product demonstrations or training.

Training is not a condition or requirement of sale as most sales are made through distributors to their end customers.

The Company conducts local and regional in-person, webinar and on-line demonstrations and use of force and escalation training to support law enforcement agencies with no purchase requirement.

Such training, when provided, may occur before or after initial or subsequent purchase or field deployment of the Company’s products.

The Company believes that law enforcement trainers and officers that have seen demonstrations or have been trained about its products are more supportive of their departments purchase and deployment of product.

Research and Development Costs

Research and development costs consist primarily of contract

development costs and experimental work materials and certain

startup costs.

Research and development costs with no alternative

use are expensed as incurred.

At the commencement date of a lease,

the Company recognizes a liability to make lease payments and an

asset representing the right to use the underlying asset during the

The lease liability is measured at the present value of

lease payments over the lease term.

As its leases typically do not

provide an implicit rate and due to lack of borrowing history or

ability, the Company uses as its incremental borrowing rate a

low-grade debt rate published by the Federal Reserve Bank.

right-of-use (“

ROU ”) asset is measured at cost, which includes

the initial measurement of the lease liability and initial direct

costs incurred by the Company and excludes lease incentives.

Lease liabilities are recorded as a current liability for

the portion due within one year with the balance as a long-term

liability. ROU assets are recorded as operating lease

right-of-use asset, net.

Research and development costs are expensed as incurred.

Contract Manufacturers

The Company employs contract manufacturers for production of certain components and sub-assemblies.

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

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.

Leases with a term of 12 months or less will be accounted for in a manner similar to the guidance for operating leases prior to the adoption of Topic 842.

Refer to Note 9, Leases for more information.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts

with Customers (“

2014-09 ”) and ASC Subtopic 340-40, Other Assets and

Deferred Costs - Contracts with Customers (“

ASC 340-40 ”), (collectively,

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

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.

Shipping and Handling Costs

Shipping and handling costs are included in cost of revenues.

Shipping and handling costs invoiced to customers are included in

Actual shipping and handling costs were $75,106 and

$22,177 for the years ended December 31, 2020 and 2019,

respectively.

Actual revenues from shipping and handling were

$62,679 and $21,414 for the years ended December 31, 2020 and 2019,

respectively .

Shipping and handling costs invoiced to customers are included in revenue.

Actual shipping and handling costs were $ 167 and $ 75 for the years ended December 31, 2021 and 2020, respectively.

Actual revenues from shipping and handling were $ 88 and $ 63 for the years ended December 31, 2021 and 2020, respectively.

Exit Activity Expense

During 2021 the Company recorded $ 747 of product line exit costs related to the wind down and closure of the BolaWrap 100 product line related to a shift in production efforts to a new BolaWrap 150 generation product requiring new tooling, new production equipment and processes and additional licensing.

These non-cash inventory costs included end of life raw material write offs of $ 641 and tooling retirement costs of $ 106 .

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

There was no such expense recorded during the prior year.

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

Warranty Reserves

Company warrants its products and accessories to be free from

defects in materials and workmanship for a period of one year from

the date of purchase.

The Company warrants its products and accessories to be free from defects in materials and workmanship for a period of one year from the date of purchase.

The warranty is generally limited.

Company currently provides direct warranty service.

International

market warranties are generally similar to the U.S.

Company establishes a warranty reserve based on anticipated

warranty claims at the time product revenues are recognized.

Factors affecting warranty reserve levels include the number of

units sold, anticipated cost of warranty repairs and anticipated

rates of warranty claims.

The Company evaluates the adequacy of the

provision for warranty costs each reporting period.

reserve was $48,140 and $13,923 at December 31, 2020 and 2019.

The Company currently provides direct warranty service.

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

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

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

The Company evaluates the adequacy of the provision for warranty costs each reporting period.

The warranty reserve was $ 96 and $ 48 at December 31, 2021 and 2020.

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

ASC Topic 280, “Segment Reporting,”

requires use of the

“management approach”

requires use of the “management approach”

model for segment reporting.

management approach model is based on the way a company’s

management organizes segments within the company for making

operating decisions and assessing performance.

The Company operates

as a single segment and will evaluate additional segment disclosure

requirements as it expands its operations.

income tax expense was recorded for the periods ended December 31,

2020 and 2019 due to losses incurred.

Deferred tax assets and

liabilities are determined based on temporary differences between

the bases of certain assets and liabilities for income tax and

financial reporting purposes.

Company maintains a valuation allowance with respect to deferred

The Company establishes a valuation allowance based

upon the potential likelihood of realizing the deferred tax asset

and taking into consideration the Company’s financial

position and results of operations for the current period.

realization of the deferred tax benefit depends on the existence of

sufficient taxable income within the carry-forward period under the

Federal tax laws.

Changes in circumstances, such as the Company

generating taxable income, could cause a change in judgment about

the realizability of the related deferred tax asset.

Any change in

the valuation allowance will be included in income in the year of

the change in estimates.

Subsequent Events

has evaluated events subsequent to December 31, 2020 through the

date the accompanying financial statements were filed with the

Securities and Exchange Commission and noted that there have been

no events or transactions which would affect the Company’s

financial statements for the year ended December 31,

The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance.

The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

No income tax expense was recorded for the periods ended December 31, 2021 and 2020 due to losses incurred.

Deferred tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes.

The Company maintains a valuation allowance with respect to deferred tax assets.

The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period.

Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the Federal tax laws.

Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset.

Any change in the valuation allowance will be included in income in the year of the change in estimates.

Recently Issued Accounting Guidance

Adopted First Quarter of 2021:

In August 2018, the FASB issued ASU No.

2018-13, Fair Value

Measurement (“

Topic 820 ”):

Disclosure Framework Changes to the

Disclosure Requirements for Fair Value Measurement.

modifies the disclosure requirements in Topic 820, Fair Value

Measurement, to improve the effectiveness of fair value measurement

disclosures by removing or modifying certain disclosure

requirements and adding other requirements.

This ASU is effective

for public companies for annual reporting periods and interim

periods within those annual periods beginning after December 15,

The adoption of this standard in the first quarter ended

March 31, 2020 had no impact on the Company’s financial

statements or disclosures.

In June 2016, the FASB issued ASU No.

2016-13, Financial

Instruments - Credit Losses 

(“Topic

326”):

 Measurement

of Credit Losses on Financial Instruments which was further updated

and clarified by the FASB through issuance of additional related

 Under ASU 2016-13, existing guidance on

reporting credit losses for trade and other receivables and

available for sale debt securities have been replaced with a new

forward-looking “expected loss”

model that has resulted

in the earlier recognition of allowances for losses.

of these standards in the first quarter ended March 31, 2020 had no

impact on the Company’s financial statements or disclosures.

As part of our assessment of the adequacy of our allowances for

credit losses, we consider a number of factors including, but not

limited to, customer credit ratings, bankruptcy filings, published

or estimated credit default rates, age of receivables, expected

loss rates and collateral exposures.

Other Guidance:

In December 2019, the FASB

issued Accounting Standards Update 2019-12, Income Taxes

Topic 740 ”):

Simplifying the Accounting for Income

Taxes (“

ASU 2019-12 ”),

which is intended to simplify various aspects related to accounting

for income taxes.

ASU 2019-12 removes certain exceptions

to the general principles in Topic 740 and also clarifies and

amends existing guidance to improve consistent application.

ASU 2019-12 is effective for fiscal years beginning

after December 15, 2020, with early adoption permitted.

We do not expect that the adoption of this ASU will have a

significant impact on our financial

In August 2020, the FASB issued ASU No.

2020-06, 

Debt—Debt with

Conversion and Other Options (“Subtopic 470-20”) and

Derivatives and Hedging—Contracts in Entity’s Own

Equity “(Subtopic 815-40”):

Accounting for Convertible

Instruments and Contracts in an Entity’s Own

Equity , which simplifies

accounting for convertible instruments by removing major separation

models required under current U.S.

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.

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

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

AND PRODUCT COSTS

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

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.

contracts with multiple performance obligations, the Company

allocates the contract transaction price to each performance

obligation using the Company’s estimate of the standalone

selling price (“

SSP ”) of each distinct good or

service in a contract.

determines standalone selling prices based on the price at which

the performance obligation is sold separately.

If the standalone

selling price is not observable through past transactions, the

Company estimates the standalone selling price considering

available information such as market conditions and internally

approved pricing guidelines related to the performance

Most of the Company’s products and accessories are sold

through domestic and international distributors.

obligations to deliver products and accessories are generally

satisfied at the point in time the Company ships the product, as

this is when the customer obtains control of the asset under our

standard terms and conditions. Periodically, certain customers

request bill and hold transactions for future delivery as scheduled

and designated by them.

In such cases, revenue is not recognized

until after control, title and risk of ownership has transferred

which is generally when the customer has requested such transaction

under normal billing and payment terms and has been notified that

the product (i) has been completed according to customer

specifications, (ii) has passed quality control inspections, and

(iii) has been tagged and packed for shipment, separated from other

inventory and ready for physical transfer to the customer. The

value associated with custodial storage services is deemed

immaterial in the context of such contracts and in total, and

accordingly, none of the transaction price is allocated to such

The Company has elected to recognize shipping costs as an expense

in cost of revenue when control has transferred to the

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.

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

A contract asset is recognized when revenue is

recognized prior to invoicing, or a contract liability (deferred

revenue) when revenue will be recognized subsequent to invoicing.

At December 31, 2020 the Company’s deferred revenue totaled

$16,015, of which $14,125 related to virtual reality training and

$1,890 related to extended warranties.

At December 31, 2019 the

Company had deferred revenue of $2,684 related to future training

contracted as part of a sale.

The Company may also receive consideration, per terms of a

contract, from customers prior to transferring goods to the

The Company records customer deposits as a contract

Company recognizes an asset if there are incremental costs of

obtaining a contract with a customer such as commissions.

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, 2020 and December 31, 2019.

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

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

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 $210,000 and

recorded a short-term business acquisition liability of $275,000.

The liability is payable $100,000 on March 15, 2021, $100,000 on

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

In addition, the

Company assumed a $15,000 liability for unearned revenues.

additional earn-out consideration, the Company agreed to pay NSENA

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

profit) from specific identified prospects that become revenue

customers before September 30, 2021 but only on amounts collected

between Closing and June 30, 2022.

The fair value of contingent consideration

determined as $22,500 is included as a long-term business

acquisition liability on our consolidated balance

The acquisition was accounted for under the acquisition method of

Under acquisition accounting, the acquired tangible and

intangible assets and liabilities of NSENA have been 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:

$ 10,250  

460,250  

40,000  

10,000  

  Total

consideration

December 2019, 

the FASB issued ASU 

2019 - 12,  

portion of the fair value of the consideration transferred has been

assigned to identifiable intangible assets as follows:

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.

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 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.

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.

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.

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

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

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

Time-based 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.

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 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

$ 460,250  

40,000  

10,000  

acquired intangible assets

$ 512,250  

assets acquired were determined to be finite-lived intangible

assets and are being amortized on a straight-line basis over its

estimated useful life with no residual value.

Assets and liabilities recorded at fair value on a recurring basis

in the Consolidated Balance Sheets and assets and liabilities

measured at fair value on a non-recurring basis or disclosed at

fair value, are categorized based upon the level of judgment

associated with inputs used to measure their fair values.

accounting guidance for fair value provides a framework for

measuring fair value and requires certain disclosures about how

fair value is determined.

Fair value is defined as the price that

would be received upon the sale of an asset or paid to transfer a

liability (an exit price) in an orderly transaction between market

participants at the measurement date.

The accounting guidance also

establishes a three-level valuation hierarchy that prioritizes the

inputs to valuation techniques used to measure fair value based

upon whether such inputs are observable or unobservable.

inputs reflect market data obtained from independent sources, while

unobservable inputs reflect market assumptions made by the

reporting entity.

The three-level hierarchy for the inputs to

valuation techniques is briefly summarized as

follows: 

Level 1 —Inputs are

unadjusted, quoted prices in active markets for identical assets or

liabilities at the measurement date;

Level 2—

observable, unadjusted quoted prices in active markets for similar

assets or liabilities, unadjusted quoted prices for identical or

similar assets or liabilities in markets that are not active, or

other inputs that are observable or can be corroborated by

observable market data for substantially the full term of the

related assets or liabilities;

Level 3—

inputs that are significant to the measurement of the fair value of

the assets or liabilities that are supported by little or no market

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.

The following table shows the Company’s cash and cash

equivalents, Money Market Funds and short-term investments by

significant investment category as of December 31, 2020.

Company only had cash and cash equivalents, including Money Market

Funds of $16,618,498 at December 31, 2019 all which were considered

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.

FINANCIAL INSTRUMENTS

Assets and liabilities recorded at fair value on a recurring basis in the Consolidated Balance Sheets and assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values.

The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined.

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

The accounting guidance also establishes a three -level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable.

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

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

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

Level 2 —Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities;

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.

As of December 31, 2021

$ 6,034,757  

securities considered cash equivalents

9,997,812  

Money Market Funds

$ 1,670  

securities in short-term investments

$ 1,670  

Treasury securities considered cash equivalents

Treasury securities in short-term investments

29,989  

29,983  

Total Financial

Total Financial Assets

$ 31,659  

1 unchanged sentence

$ 31,653  

Unrealized gains or losses resulting from our short-term

investments are recorded in accumulated other comprehensive gain or

As of December 31, 2020

was recorded to accumulated other comprehensive

financial instruments also include accounts receivable, accounts

payable, accrued liabilities and business acquisition liabilities.

Due to the short-term nature of these instruments, their fair

values approximate their carrying values on the balance

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

of substantially all the Company’s inventory is determined by

the FIFO cost method.

Inventories consisted of the

$ 1,248,893  

$ 653,323  

64,451  

1,342,046  

1,590,805  

$ 2,655,390  

$ 2,244,541  

the years ended December 31, 2020 and 2019 the Company wrote off

$68,108 and $193,506, respectively, of raw material and scrap parts

primarily due to startup production, model changes and

improvements.

AND EQUIPMENT, NET

and equipment consisted of the following:

Production and lab

$ 147,781  

$ 44,454  

80,936  

59,004  

180,573  

83,368  

Furniture, fixtures

and improvements

165,465  

128,782  

574,755  

315,608  

equipment, net

$ 357,287  

$ 242,876  

expense was $144,736 and $44,239 for the years ended December 31,

2020 and 2019, respectively.

assets consisted of the following:

intangible assets:

$ 279,294  

$ 176,425  

83,964  

57,919  

662,250  

50,000  

1,075,508  

234,344  

1,052,921  

230,283  

Indefinite life

assets (non-amortizable)

343,563  

Total intangible

$ 1,396,484  

$ 230,283  

Amortization expense was $18,526 and $2,706 for the years ended

December 31, 2020 and 2019, respectively.

December 31, 2020, annual amortization of intangible assets, based

upon the Company’s existing intangible assets and current

useful lives, is estimated to be the following:

$ 186,266  

150,766  

145,766  

278,591  

Total estimated

amortization expense

$ 1,052,921  

PAYABLE AND ACCRUED LIABILITIES

payable includes $52,950 due to related party Syzygy Licensing, LLC

Syzygy ”) as

of December 31, 2020.

Accounts payable

at December 31, 2020 also included $10,000 due to related party V3

Capital Partners, LLC (see Note 14).

liabilities consist of the following:

Patent and legal

$ 64,800  

$ 9,851  

Money Market Funds

$ 6,035  

Treasury securities considered cash equivalents

Treasury securities in short-term investments

24,979  

24,994  

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.

During the year ended December 31, 2021 and 2020, $( 21 ) and $ 15 was recorded to accumulated other comprehensive loss and gain, respectively.

Our financial instruments also include accounts receivable, accounts payable, accrued liabilities and business acquisition liabilities.

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

Inventories consisted of the following:

December 31,  

Finished goods

$ 1,027  

$ 1,249  

compensation includes $555,000 in bonuses and $7,792 in commissions

payable at December 31, 2020.

Company adopted ASU 2016-02, Leases (“

Topic 842 ”) on January 1, 2019

using the modified retrospective approach.

The Company has elected

not to apply ASC Topic 842 to arrangements with lease terms of 12

months or less.

The adoption of the standard resulted in the

recognition of a ROU asset and lease liability of $12,900 for one

operating lease as of January 1, 2019, with no impact to retained

Prior year amounts have not been restated.

That lease is

for 1,890 square feet of improved office and warehouse space in Las

Vegas, Nevada.

In January 2019, the Company recorded an additional

$17,101 ROU remeasurement asset and liability from an extension of

the facility lease to December 31, 2020.

In March 2019, the Company

recorded a $57,587 ROU asset and liability for a two-year facility

operating lease for 1,906 square feet of improved office and

warehouse space in Lake Forest, California expiring in February

In June 2019, the Company recorded a $253,412 ROU asset and

liability for a 38-month facility operating lease for 11,256 square

feet of improved office, assembly, training and warehouse space in

Tempe, Arizona expiring in July 2022.

of ROU operating lease assets was $121,844 and $80,069 for the

years ended December 31, 2020 and 2019, respectively.

lease expense for capitalized operating leases included in

operating activities was $137,228 and $94,599 for the years ended

December 31, 2020 and 2019, respectively.

Operating lease

obligations recorded on the balance sheet at December 31, 2020

Operating lease

liability- short term

Work in process

Raw materials

Inventories - net

$ 1,566  

Operating lease

liability - long term

$ 2,655  

Total Operating

Lease Liability

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)

PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following:

December 31,  

Production and lab equipment

Computer equipment

Furniture, fixtures and improvements

Accumulated depreciation

( 440 )  

lease payments included in the measurement of lease liabilities on

the balance sheet at December 31, 2020 for future periods are as

Property and equipment, net

Depreciation expense was $ 297 and $ 144 for the years ended December 31, 2021 and 2020, 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.

INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

December 31,  

Amortizable intangible assets:

Accumulated amortization

( 174 )  

Total amortizable

Indefinite life assets (non-amortizable)

Total intangible assets, net

$ 1,982  

minimum lease payments

$ 1,397  

Amortization expense was $ 182 and $ 18 for the years ended December 31, 2021 and 2020, respectively.

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

At December 31, 2021, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:

Total estimated amortization expense

$ 1,638  

weighted average remaining lease term is 1.54 years and the

weighted average discount rate is 7.0%.

Company did not have any short-term lease expense during the years

ended December 31, 2020 and December 31, 2019.

The Company does not

have any finance leases.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable includes $ 228 and $ 53 due to related party Syzygy Licensing, LLC (“

Syzygy ”) as of December 31, 2021 and 2020, respectively.

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

Accrued liabilities consist of the following:

Patent and legal costs

Accrued compensation

Warranty costs

Taxes and other

Accrued compensation includes $ 305 and $ 563 in employee bonuses and commissions payable at December 31, 2021 and 2020, respectively.

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 Company’s leases do not provide an implicit rate.

Due to a lack of financing history or ability, the Company uses an estimate of low-grade debt rate published by the Federal Reserve Bank as its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments.

The ROU asset includes any lease payments made and excludes lease incentives and initial direct costs incurred.

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

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.

Amortization of ROU operating lease assets was $ 88 and $ 122 for the years ended December 31, 2021 and 2020, respectively.

Operating lease expense for capitalized operating leases included in operating activities was $ 95 and $ 137 for the years ended December 31, 2021 and 2020, respectively.

Operating lease obligations recorded on the balance sheet at December 31, 2021 are:

Operating lease liability- short term

Operating lease liability - long term

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, 2021 for future periods are as follows:

Total future minimum lease payments

Less imputed interest

The weighted average remaining lease term is 0.6 years and the weighted average discount rate is 7 %.

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.

The Company does not have any finance leases.

The Company’s debt at December 31, 2020 included operating

lease liabilities (see Note 9) and business acquisition liabilities

(see Note 3).

Debt at December 31, 2019 consisted of operating

lease liabilities.

On May 1, 2020, the Company received loan proceeds of $414,362 from

Bank of America, N.A.

The Company’s debt at December 31, 2021 and 2020 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

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

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.

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

Under the terms of the CARES Act, the Company subsequently applied

for and in December 2020 was granted forgiveness for the PPP Loan

plus interest.

The Company’s PPP Loan in the amount of

$414,362 and accrued interest was forgiven in full by the Small

Business Administration.

The Company recognized $416,683 in debt

forgiveness income as a result of the forgiveness.

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.

STOCKHOLDERS ’

Company’s authorized capital consists of 150,000,000 shares

of Common Stock, par value $0.0001 per share, and 5,000,000 shares

of preferred stock, par value $0.0001 per share

Stock ”).

2019 Follow-On Public Offering

On June 18, 2019, the Company

consummated the June 2019 Follow-On Offering, pursuant to which a

total of 1,923,076 Units were offered and sold at the public

offering price of $6.50 per Unit.

Each Unit sold consisted of

one share of Common Stock and

one detachable two-year warrant to purchase one share of Common

Stock at an exercise price of $6.50 per share.

resulted in the Company’s receipt of gross cash proceeds of

$12.5 million, or net cash proceeds of $11.35 million after

deduction of commissions and offering

connection with the June 2019 Follow-On Offering, the Company also

issued placement agent warrants exercisable for 153,846 shares of

Common Stock for two years at an exercise price of $8.125 per

The estimated fair value of these warrants was $205,894, as

determined using the Black-Scholes methodology (assuming estimated

volatility of 49%, risk-free interest rate of 1.86%, and expected

dividend yield of 0.0%).

This amount was recorded as both an

increase to additional paid in capital and as a non-cash issuance

cost of the offering.

The Company’s authorized capital consists of 150,000,000 shares of Common Stock, par value $ 0.0001 per share, and 5,000,000 shares of preferred stock, par value $ 0.0001 per share (“

Preferred Stock ”).

2020 Follow-On Public Offering

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

offering (the “

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.

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

following table summarizes warrant activity during the years ended

December 31, 2020 and 2019:

Shares purchasable

under outstanding warrants at December 31, 2018

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

Stock purchase warrants issued

2,066,667  

$ 6.00  

Stock purchase

warrants exercised

Stock purchase warrants exercised

( 5,155,976 )  

Shares purchasable

under outstanding warrants at December 31, 2019

$ 5.08  

Stock purchase warrants expired

( 324,401 )  

Stock purchase

warrants issued

$ 5.00  

Shares purchasable under outstanding warrants at December 31, 2020

3,206,910  

Stock purchase

warrants exercised

$ 6.36  

Stock purchase

warrants cancelled

Stock purchase warrants issued

Stock purchase warrants exercised

( 1,815,012 )  

Shares purchasable

under outstanding warrants at December 31, 2020

$ 6.64  

Stock purchase warrants expired

( 231 )  

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.

Company officer

Elwood Norris exercised 333,334 of these warrants at $5.00 per

share for cash of $1,666,670.

the year ended December 31, 2019 the Company received gross

proceeds of $2,112,117 from the exercise of 2,076,922 warrants and

paid an agent fee of $28,666 for net proceeds of

Company has outstanding Common Stock purchase warrants as of

December 31, 2020 as follows:

$ 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

1 unchanged sentence

Expiration Date

Purchase Warrants

1,391,667  

$ 6.00  

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.

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:

Weighted Average

Outstanding January 1, 2020

2,928,750  

3 unchanged sentences

( 371,000 )  

March 31, 2017, the Company adopted and the stockholders approved

the 2017 Stock Incentive Plan (the “

Plan ”) authorizing 2,000,000

shares of Company Common Stock for issuance as stock options and

restricted stock units (“

RSUs ”) to employees, directors or

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

Company generally recognizes share-based compensation expense on

the grant date and over the period of vesting or period that

services will be provided.

Stock Options

following table summarizes stock option activity for the years

ended December 31, 2019 and 2020:

December 31, 2018

$ 1.90  

Forfeited, cancelled, expired

( 50,000 )  

$ 3.00  

Outstanding December 31, 2020

3,931,586  

$ 4.41  

cancelled, expired

1,254,500  

December 31, 2019

$ 5.33  

1 unchanged sentence

$ 1.83  

Forfeited, cancelled, expired

( 334,799 )  

$ 5.14  

cancelled, expired

Outstanding December 31, 2021

3,935,883  

December 31, 2020

$ 5.24  

$ 1,608  

Exercisable December 31, 2021

2,415,063  

exercisable at December 31, 2020

$ 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.

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

For the Year Ended

Expected stock price volatility

Risk-free interest rate

0.90 %  

In connection with the NSENA acquisition in December 2020 the

Company granted 190,000 service-based options and 100,000

performance-based options for future services as employees and

consultants at an exercise price of $5.46 per share.

Other than the

100,000 performance-based options, all outstanding options at

December 31, 2020 are service-based options.

to December 31, 2020 a total of 58,500 options were exercised for

cash proceeds of $87,750.

Company uses the Black-Scholes option pricing model to determine

the fair value of the options granted.

The following table

summarizes the assumptions used to compute the fair value of

options granted to employees and non-employees:

Expected stock

price volatility

Risk-free interest

Expected dividend

Expected life of

options - years

Weighted-average

fair value of options granted

Expected dividend yield

Expected life of options - years

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.

The Company’s estimated

volatility was based on an average of the historical volatility of

peer entities whose stock prices were publicly available.

Company’s calculation of estimated volatility is based on

historical stock prices of these peer entities over a period equal

to the expected life of the awards.

The Company uses the historical

volatility of peer entities due to the lack of sufficient

historical data of its stock price.

The 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.

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.

following table summarizes information about stock options

outstanding at December 31, 2020:

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

The Company’s estimated volatility was based on an average of the historical volatility of peer entities whose stock prices were publicly available.

The Company’s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards.

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

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

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

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

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

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

The following table summarizes information about stock options outstanding at December 31, 2021:

Exercise Prices

$ 1.50 - 3.61  

16 unchanged sentences

$ 11.22  

350,000  

$ 11.22  

Restricted Stock Units

The Plan provides for the grant of restricted stock units

RSUs are settled in shares of the

Company’s Common Stock as the RSUs become vested.

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

The following table summarizes RSU activity under the Plan for the

years ended December 31, 2019 and 2020:

Service-Based

December 31, 2018

  Granted

The Plan provides for the grant of restricted stock units (“

RSUs ”).

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

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:

Weighted Average

Service-Based

Period (Years)

Unvested at January 1, 2020

308,087  

$ 6.77  

December 31, 2019

Granted - service based

310,874  

$ 6.02  

  Granted

- service based

Granted - performance based

35,211  

$ 4.26  

  Granted

- performance based

( 144,687 )  

$ 5.17  

  Vested

Forfeited and cancelled

( 81,479 )  

  Forfeited

and cancelled

$ 6.47  

December 31, 2020

Unvested at December 31, 2020

428,006  

$ 6.13  

Share-Based Compensation Expense

The Company recorded share-based compensation in its statements of

operations for the relevant periods for options and RSUs as

Selling, general

and administrative

Granted - service based

398,662  

2 unchanged sentences

$ 5.55  

Total share-based

Forfeited and cancelled

( 32,874 )  

$ 6.10  

December 31, 2020, total estimated compensation cost of stock

options granted and outstanding but not yet vested was $4.6 million

which is expected to be recognized over the weighted average period

of 2.8 years.

As of December 31, 2020, total estimated compensation

cost of RSUs granted and outstanding but not yet vested was $2.2

million which is expected to be recognized over the weighted

average period of 2.3 years.

Unvested at December 31, 2021

269,303  

$ 6.47  

Share-Based Compensation Expense

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

For the Year Ended

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)

COMMITMENTS AND CONTINGENCIES

1 unchanged sentence

Related Party Technology License Agreement

Company is obligated to pay royalties and development and patent

costs pursuant to an exclusive Amended and Restated Intellectual

Property License Agreement dated as of September 30, 2016 with

Syzygy, a company owned and controlled by stockholders/officers Mr.

Elwood Norris and Mr.

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.

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 $143,390 and $23,297 for

royalties incurred during the years ended December 31, 2020 and

2019, respectively.

The agreement provides for royalty payments of 4 % of revenue from products employing the licensed ensnarement device technology up to an aggregate of $ 1,000,000 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.

Purchase Commitments

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.

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.

Indemnifications and Guarantees

officers and directors are indemnified as to personal liability as

provided by the Delaware law and the Company’s articles and

The Company may also undertake indemnification obligations

in the ordinary course of business related to its operations.

Company is unable to estimate with any reasonable accuracy the

liability that may be incurred pursuant to any such indemnification

obligations now or in the future.

Because of the uncertainty

surrounding these circumstances, the Company’s current or

future indemnification obligations could range from immaterial to

having a material adverse impact on its financial position and its

ability to continue in the ordinary course of business.

has no liabilities recorded for such indemnities.

Our officers and directors are indemnified as to personal liability as provided by the Delaware law and the Company’s articles and bylaws.

The Company may also undertake indemnification obligations in the ordinary course of business related to its operations.

The Company is unable to estimate with any reasonable accuracy the liability that may be incurred pursuant to any such indemnification obligations now or in the future.

Because of the uncertainty surrounding these circumstances, the Company’s current or future indemnification obligations could range from immaterial to having a material adverse impact on its financial position and its ability to continue in the ordinary course of business.

The Company has no liabilities recorded for such indemnities.

Regulatory Agencies

Company may be subject to oversight from regulatory agencies

regarding firearms that arise in the ordinary course of its

The Company is subject to oversight from regulatory agencies regarding firearms that arises in the ordinary course of its business.

Securities Litigation

On September 23, 2020, Carone Cobden filed a putative class action

complaint against the Company, former Chief Executive Officer David

Norris (“

Norris ”), Chief Financial Officer, James A.

Barnes ”), and President, Thomas Smith

Smith ”) in the United States District Court for

the Central District of California, docketed as Case No.

2-20-cv-08760-DMG-PVCx (the “

Complaint ”). The

Cobden Complaint alleges that the named defendants, in their

capacities as officers of the Company, knowingly made false or

misleading statements or omissions regarding trials of the

Company’s BolaWrap product conducted by the Los Angeles

Police Department (the “

BolaWrap Pilot

Program ”). 

Cobden Complaint also alleges that the conduct of the named

defendants artificially inflated the price of the Company’s

traded securities, and that the disclosure of certain adverse

information to the public led to a decline in the market value of

the Company’s securities.  The Cobden Complaint

further alleges violations of Sections 10(b) and 20(a) of the

Exchange Act, and Rule 10b-5 promulgated thereunder, and defines

the class period as July 31, 2020 through September 23,

On October 1, 2020, Joseph Mercurio filed a second putative class

action complaint against the Company, Norris, Smith, and Barnes in

the same court, which contains substantially the same factual

allegations and legal claims as set forth in the Cobden Complaint,

and is docketed as Case No.

2-20-cv-09030-DMG-PVCx (the

Complaint ”).  On October 15, 2020, Paula

Earley filed a third putative class action complaint against the

Company, Smith, Norris, Barnes, Chief Strategy Officer Mike Rothans

(“Rothans”), and former Chief Executive Officer, Marc

Thomas (“

Thomas ”) in the same court, which contains many of

the same factual allegations and legal claims as set forth in the

Cobden and Mercurio Complaints, but defines the class period as

April 29, 2020 through September 23, 2020, and alleges additional

false or misleading statements in connection with BolaWrap and the

BolaWrap Pilot Program (the “

Complaint ”). 

Earley Complaint is docketed as Case No.

2-20-cv-09444-DMG-PVCx. 

On November 3, 2020, the Hon.

Gee consolidated

the three above-mentioned cases under the

caption 

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 , Case No.

20-8760-DMG (“

PVCx ”) (the “

Action ”). 

January 7, 2021, the Court appointed a lead plaintiff in the

Securities Action, who designated its attorneys as lead

counsel. 

On January 21, 2021, Judge Gee ordered that a

consolidated amended complaint be filed in the Securities Action on

or before March 12, 2021, with defendants’

motion to dismiss

to be filed on or before April 26, 2021, and a hearing on the

motion to dismiss to be held on July 23, 2021. 

believes that the complaints underlying the Securities Action are

without merit and intends to vigorously defend against the claims

raised therein.

Securities Exchange Act Litigation  (the “Securities Action”).

 The Court granted Defendants’

motion on the grounds that the complaint failed to identify any statement by Defendants that was either false or made with scienter.

Concurrently, the Court granted Plaintiff leave to file a second amended complaint on or before December 6, 2021, noting that a failure to file a second amended complaint by that date would result in dismissal of the Securities Action with prejudice. On December 20, 2021, following Plaintiff’s failure to file a second amended complaint, the Court dismissed the Securities Action with prejudice. 

Shareholder Derivative Litigation

On November 13, 2020, Naresh Rammohan filed a shareholder

derivative action in the United States District Court for the

Central District of California against Smith, Barnes, Rothans,

Thomas, Norris, and 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.

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 “

Complaint ”). 

Rammohan Complaint names the Company as a nominal defendant and

recites many of the allegations set forth in the Securities Action

relating to the BolaWrap Pilot Program. 

On January 20, 2021,

Ray Westerman filed a second derivative complaint in the same court

against the same parties, alleging breach of fiduciary duty and

contribution claims under the Securities Exchange Act of 1934,

docketed as Case No.

2:21-cv-00550-DMG-PVCx (the

Complaint ”). 

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 “

Complaint ”). 

The above-mentioned derivative cases (collectively, the

Actions ”) each been have

been transferred to Judge Gee as cases related to the Securities

Action. 

On January 27, 2021, the Judge Gee issued an order to

show cause why the Derivative Actions should not be consolidated

under the caption 

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 and stayed pending

the resolution of the anticipated motion to dismiss in the

Securities Action. 

On February 5, 2021, the parties in the

Derivative Actions responded jointly to the order to show cause,

stipulating that the case should be consolidated and stayed as

suggested by the Court.

 We believe that the Derivative

Actions will be consolidated and stayed by the Court. 

the Securities Action, the Company believes that the Derivative

Actions are without merit and intends to vigorously defend against

the claims raised therein.

PARTY TRANSACTIONS

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)

RELATED PARTY TRANSACTIONS

Commencing in October 2017 the Company began reimbursing Mr.

Norris, an officer and stockholder of the Company, $1,500 per month

on a month-to-month basis for laboratory facility costs, for an

aggregate of $18,000 during the year ended December 31, 2020 and

2019, respectively.

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 $10,000 per month on a month-to-month basis

for an aggregate of $90,000 during the year ended December 31,

In addition, the Company paid V3 a bonus of $175,000 for

assistance in a financing that was consummated in July

See Notes 8, 11 and 13 for additional information on related party

transactions and obligations.

its reverse recapitalization on March 31, 2017, the Company was

treated as a partnership for federal and state income tax purposes

and did not incur income taxes.

The Company accounts for income

taxes under ASC 740.

Deferred income tax assets and liabilities are

determined based upon differences between the financial reporting

and tax bases of assets and liabilities and are measured using the

enacted tax rates and laws that will be in effect when the

differences are expected to reverse.

Accounting standards require

the consideration of a valuation allowance for deferred tax assets

if it is "more likely than not" that some component or all of the

benefits of deferred tax assets will not be realized.

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.

As of December 31, 2020, the

Company has federal net operating loss carryforwards of

approximately $24,449,000 to reduce future taxable income that will

expire beginning in 2038.

Certain changes in stock ownership can

result in a limitation on the amount of net operating loss and tax

credit carryovers that can be utilized each year.

As of December

31, 2020, management has not determined the extent of any such

limitations, if any.

Company provided a full valuation allowance on the net deferred tax

asset, consisting primarily of net operating loss carry forwards,

because management has determined that it is more likely than not

that the Company will not earn income sufficient to realize the

deferred tax assets during the carry forward period.

As a result of

the change in future Federal statutory tax rates due to the passing

of the Tax Cuts and Jobs Act of 2017, management determined that

the deferred tax assets and liabilities should be valued at a

federal statutory rate of 21%.

Company has not taken a tax position that, if challenged, would

have a material effect on the financial statements for the periods

ended December 31, 2020 and 2019 applicable under FASB ASC 740.

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

All tax returns for the Company remain open.

provision for (benefit from) income taxes consist of the

3,158,000  

1,800,000  

in valuation allowance

Income tax benefit

reconciliation of the provision for income taxes at the federal

statutory rate of 21% to the Company’s provision for income

tax is as follows:

taxes benefit computed at federal statutory rate

$ 2,642,000  

$ 1,748,000  

income taxes, net of federal effect

216,000  

114,000  

differences and other

300,000  

in valuation allowance

Income tax benefit

income taxes reflect the net tax effects of temporary differences

between the carrying amounts of assets and liabilities for

financial reporting purposes and the amounts used for income tax

The following table presents the significant components

of the Company’s deferred tax assets and liabilities for the

periods presented:

Net operating

$ 5,444,000  

$ 2,430,000  

45,000  

26,000  

542,000  

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.

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.

See Notes 8, 11 and 13 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.

The Company accounts for income taxes under ASC 740.

Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

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

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

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

As of December 31, 2021, the Company has federal net operating loss carryforwards of approximately $ 52,004 to reduce future taxable income.

Approximately $ 703 will expire in 2037 with the balance having an indefinite carryforward period.

Certain changes in stock ownership can result in a limitation on the amount of net operating loss and tax credit carryovers that can be utilized each year.

As of December 31, 2021, 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 provided a full valuation allowance on the net deferred tax asset, consisting primarily of net operating loss carry forwards, because management has determined that it is more likely than not that the Company will not earn income sufficient to realize the deferred tax assets during the carry forward period.

As a result of the change in future Federal statutory tax rates due to the passing of the Tax Cuts and Jobs Act of 2017, management determined that the deferred tax assets and liabilities should be valued at a federal statutory rate of 21%.

The Company has not taken a tax position that, if challenged, would have a material effect on the financial statements for the periods ended December 31, 2021 and 2020 applicable under FASB ASC 740.

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

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:

Year Ended December 31,

Current tax benefit

Deferred tax benefit

Change in valuation allowance

( 6,409 )  

Income tax benefit (provision)

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

Year Ended December 31,

Income taxes benefit computed at federal statutory rate

$ 5,139  

$ 2,642  

State income taxes, net of federal effect

Permanent differences and other

Change in valuation allowance

( 6,409 )  

Depreciation and

Income tax benefit (provision)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The following table presents the significant components of the Company’s deferred tax assets and liabilities for the periods presented:

Deferred tax assets:

Net operating losses

$ 11,773  

$ 5,444  

Research tax credits

Stock compensation

Accruals and other

12,891  

Deferred tax liabilities:

Depreciation and other

Net deferred tax assets

12,213  

Net deferred tax

Less valuation allowance

( 12,213 )  

Net deferred taxes after valuation allowance

In accordance with ASU 

2016 - 09,  

Less valuation

Net deferred taxes

after valuation allowance

In accordance with ASU 2016-09, 

Compensation-Stock

Compensation (Topic 718) Improvements to Employee Share-Based

Payment Accounting , the Company recognizes windfall tax

benefits associated with the exercise of stock options as a

component of tax expense (rather than equity).

Accordingly, our federal and state operating loss

carryforwards include net windfall tax deductions from stock option

exercises and RSU vesting of approximately $720,000 and $144,000

during the years ended December 31, 2020 and 2019,

respectively.

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 $ 3,168 and $ 720 during the years ended December 31, 2021 and 2020, respectively.

Wrap Technologies, Inc.

Notes to Consolidated Financial Statements

(in thousands, except per share and share amounts)

MAJOR CUSTOMERS AND RELATED INFORMATION

Major Customers

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 accounts receivable

at December 31, 2020.

ended December 31, 2019, revenues from one distributor accounted

for 22% revenues with no other single customer accounting for more

than 10% of total revenues.

This customer accounted for 54% of

accounts receivable at December 31, 2019.

following table summarizes revenues by geographic region.

are attributed to countries based on customer’s delivery

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.

Revenues are attributed to countries based on customer’s delivery location.

Ended December 31,

1 unchanged sentence

$ 1,443  

Europe, Middle East

1,046,499  

116,547  

1,454,736  

98,621  

Europe, Middle East and Africa

$ 7,729  

$ 3,944  

Note 1 –

Concentrations of

Risks for information on reliance on suppliers.

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 4th day

of March 2021.

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, 2021 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, 2021.

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

March 10, 2022

By:  

Interim Chief

Executive Officer

I n 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.

Chief Executive Officer

/s/ LW Varner, Jr

LW Varner, Jr

(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

March 10, 2022

Executive Officer)

Financial Officer, Secretary and Treasurer

LW Varner, Jr

(Principal Executive Officer)

Chief Financial Officer, Secretary and Treasurer

March 10, 2022

Accounting Officer)  

Chair of Board

(Principal Accounting Officer)  

Chairman of the Board

March 10, 2022

/s/ Scot Cohen

March 10, 2022

/s/ TJ Kennedy

March 10, 2022

/s/ Michael Parris

March 10, 2022

Michael Parris

/s/ Kevin Sherman 

March 10, 2022

Kevin Sherman 

/s/Kimberly Sentovich  

March 10, 2022

Kimberly Sentovich  

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