WRAP TECHNOLOGIES, INC. 10-K

ITEM 9A. CONTROLS AND PROCEDURES.   We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.   Evaluation of Disclosure Controls and Procedures   We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in our Exchange Act reports is accumulated and communicated to management, including our interim Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.   Our management, with the participation of our interim Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 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.   Changes in Internal Controls   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.   ITEM 9B. OTHER INFORMATION   None.   -40-   Table of Contents   PART III   Certain information required by this Part III is omitted from this report and is incorporated by reference to our Definitive Proxy Statement to be filed with the SEC in connection with the Annual Meeting of Stockholders to be held in 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.   ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.   The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2022.   ITEM 11. EXECUTIVE COMPENSATION.   The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2022.   ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.   The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before April 30, 2022.   ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.   The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2022.   ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.   The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the SEC on or before April 30, 2022.     -41-   Table of Contents   PART IV   ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES   (a)     List of documents filed as a part of this report:     (1)    Index to Financial Statements     Report of Independent Registered Public Accounting Firm (PCAOB ID: 89 )   F-2 Balance Sheets as of December 31, 2021 and 2020   F-3 Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021 and 2020   F-4 Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020   F-5 Statements of Cash Flows for the Years Ended December 31, 2021 and 2020   F-6 Notes to Financial Statements   F-7       (2)    Financial Statement Schedules     All schedules have been omitted because the information is not applicable, is not material or because the information required is included in the financial statements or the notes thereto. (3)    Index to Exhibits     The exhibits listed on the accompanying index to exhibits immediately following the financial statements are filed as part of, or hereby incorporated by reference into, this Form 10-K.   -42-   Table of Contents   Exhibit Number Description 2.1 Stock Purchase Agreement, dated March 22, 2017, by and between Wrap Technologies, LLC, Petro River Oil Corp., and Megawest Energy Montana Corp. Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-1, filed on April 17, 2017. 2.2 Merger Agreement between Wrap Technologies, LLC and Megawest Energy Montana Corp., dated March 30, 2017. Incorporated by reference to Exhibit 2.2 to the Registration Statement on Form S-1, filed on April 17, 2017. 3.1 Amended and Restated Certificate of Incorporation of the Registrant. Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1, filed on April 17, 2017. 3.2 Bylaws of the Registrant. Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1, filed on April 17, 2017. 4.1 Form of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-1, filed on May 30, 2017. 4.2 Form of Investor Warrant, dated October 30, 2018. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on November 5, 2018. 4.3 Form of Placement Agent Warrant, dated October 30, 2018. Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on November 5, 2018. 4.4 Form of Investor Warrant, dated June 18, 2019. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on June 18, 2019. 4.5 Form of Offering Agent Warrant, dated June 18, 2019. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on June 18, 2019. 4.6 Form of Warrant Agreement. Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on June 2, 2020. 10.1 Amended and Restated Intellectual Property License Agreement, dated September 30, 2016, by and between Wrap Technologies, LLC and Syzygy Licensing LLC. Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1, filed on April 17, 2017. 10.2+ 2017 Equity Compensation Plan. Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1, filed on April 17, 2017. 10.3 Form of Placement Agent Agreement, dated October 30, 2018. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on November 5, 2018. 10.4 Form of Registration Rights Agreement, dated October 30, 2018. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on November 5, 2018. 10.5 Supplemental Engagement Letter by and between Wrap Technologies, Inc. and Katalyst Securities LLC, dated June 7, 2019. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on June 13, 2019. 10.6 Engagement Letter by and between Wrap Technologies, Inc., Dinosaur Financial Group, LLC and Katalyst Securities LLC, dated June 12 , 2019. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on June 18, 2019. 10.7 Amended 2017 Equity Compensation Plan. Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on June 24, 2019. 10.8 Industrial Real Estate Lease, dated May 10, 2019, by and between Wrap Technologies, Inc. and JM Sky Harbor Properties LLC. Incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed on June 6, 2019. 10.9 Promissory Note by and between Wrap Technologies, Inc. and Bank of America, N.A. dated May 1, 2020. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on May 5, 2020. 10.10 Consulting Agreement by and between the Company and V3, effective April 1, 2020. Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on May 29, 2020. 10.11 Amendment No. 2 to the Wrap Technologies, Inc. 2017 Equity Compensation Plan. Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on June 17, 2020. 10.12 Form of Subscription Agreement. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on June 2, 2020. 10.13 Employment Agreement by and between Wrap Technologies, Inc., and Marc T. Thomas, dated July 30, 2020. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on July 31, 2020. 10.14 At-Will Employment, Confidential Information, Non-Compete/Non-Solicitation, Invention Assignment, and Arbitration Agreement, dated September 9, 2020 between the Company and Thomas Smith. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on September 14, 2020. 10.15 Asset Purchase Agreement between NSENA Inc. and Wrap Reality, Inc. dated as of December 14, 2020. In accordance with the instructions to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to the Asset Purchase Agreement are not filed herewith.  The Asset Purchase Agreement identifies such schedules and exhibits, including the general nature of their content.  The Company undertakes to provide such schedules and exhibits to the SEC upon request. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed on September 14, 2020. 10.16 Form of At-Will Employment, Confidential Information, Non-Compete/ Non-Solicitation, Invention Assignment, and Arbitration Agreement between the Key Employees and the Company dated December 14, 2020. Incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K, filed on September 14, 2020. 10.17 Cooperation Agreement by and between the Company and Elwood G. Norris and certain of his affiliates dated March 4, 2021. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on March 9, 2021. 10.18   Amendment No. 3 to the Wrap Technologies, Inc. 2017 Equity Compensation Plan. Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, filed on November 5, 2021. 10.19 Separation Agreement between the Company and Mr. Smith, dated January 24, 2022.  Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on January 26, 2022. 10.20 Consulting Agreement between the Company and LWV Consulting, LLC, dated January 24, 2022.  Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on January 26, 2022. 10.21 Consulting Agreement between the Company and LRHIRSH, LLC, dated January 24, 2022. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, filed on January 26, 2022. 14.1 Code of Ethics of the Registrant Applicable to Directors, Officers and Employees. Incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-K, filed on March 4, 2021. 21.1 Subsidiaries of Wrap Technologies, Inc. Incorporated by reference to Exhibit 21.1 to the Annual Report on Form 10-K, filed on March 4, 2021. 23.1 Consent of Independent Registered Public Accounting Firm - Rosenberg Rich Baker Berman, P.A. * 31.1 Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 * 31.2 Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 * 32.1 Certifications pursuant to 18 U.S.C. Section 1350. This certification is being furnished solely to accompany this Annual Report on Form 10-K and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.*       Extensible Business Reporting Language (XBRL) Exhibits*     101.INS 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 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101)   * Filed concurrently herewith. + Management contract or compensatory plan or arrangement.     -43-   Table of Contents     WRAP TECHNOLOGIES, INC.   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS       Page       Audited Consolidated Financial Statements:           Report of Independent Registered Public Accounting Firm (PCAOB ID: 89 )   F- 2       Consolidated Balance Sheets as of December 31, 2021 and 2020    F- 3       Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021 and 2020    F- 4       Consolidated Statements of Stockholders’ Equity for Years Ended December 31, 2021 and 2020   F- 5       Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020   F- 6       Notes to Consolidated Financial Statements    F- 7     F-1   Table of Contents   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     To the Board of Directors and Stockholders of Wrap Technologies, Inc.   Opinion on the Financial Statements   We have audited the accompanying balance sheets of Wrap Technologies, Inc. (the “Company”) as of December 31, 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). 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   These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.   Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.     /s/ Rosenberg Rich Baker Berman, P.A.     We have served as the Company’s auditor since 2016.     Somerset, New Jersey     March 10, 2022       F-2   Table of Contents     Wrap Technologies, Inc. Consolidated Balance Sheets (in thousands, except par value and share amounts)       December 31,       2021     2020   ASSETS                 Current assets:                 Cash and cash equivalents   $ 4,937     $ 16,647   Short-term investments     29,983       24,994   Accounts receivable, net     3,859       1,871   Inventories, net     1,566       2,655   Prepaid expenses and other current assets     868       760   Total current assets     41,213       46,927   Property and equipment, net     976       357   Operating lease right-of-use asset, net     51       139   Intangible assets, net     1,982       1,397   Other assets     9       13   Total assets   $ 44,231     $ 48,833                     LIABILITIES AND STOCKHOLDERS' EQUITY                 Current liabilities:                 Accounts payable   $ 1,779     $ 1,232   Accrued liabilities     824       721   Customer deposits     43       2   Deferred revenue- short term     155       16   Operating lease liability - short term     56       94   Business acquisition liability - short term     -       275   Total current liabilities     2,857       2,340                     Long-term liabilities:                 Deferred revenue- long term     110       -   Operating lease liability - long term     -       56   Business acquisition liability - long term     -       23   Total long-term liabilities     110       79   Total liabilities     2,967       2,419                     Commitments and contingencies (Note 13)                                       Stockholders' equity:                 Preferred stock - 5,000,000 authorized; par value $ 0.0001 per share; none issued and outstanding     -       -   Common stock - 150,000,000 authorized; par value $ 0.0001 per share; 40,851,945 and 37,554,162 shares issued and outstanding each period, respectively     4       4   Additional paid-in capital     91,025       71,705   Accumulated deficit     ( 49,759 )     ( 25,310 ) Accumulated other comprehensive income (loss)     ( 6 )     15   Total stockholders' equity     41,264       46,414   Total liabilities and stockholders' equity   $ 44,231     $ 48,833     See accompanying notes to consolidated financial statements.   F-3   Table of Contents     Wrap Technologies, Inc. Consolidated Statements of Operations and Comprehensive Loss (in thousands, except share and per share amounts)       Year Ended December 31,       2021     2020   Revenues:                 Product sales   $ 7,381     $ 3,868   Other revenue     348       76   Total revenues     7,729       3,944   Cost of revenues                 Products and services     4,987       2,601   Product line exit expense     747       -   Total cost of revenues     5,734       2,601   Gross profit     1,995       1,343                     Operating expenses:                 Selling, general and administrative     20,276       11,631   Research and development     6,214       2,789   Total operating expenses     26,490       14,420   Loss from operations     ( 24,495 )     ( 13,077 )                   Other income (expense):                 Investment income     31       83   Debt forgiveness income     -       417   Other     15       ( 3 )       46       497   Net loss   $ ( 24,449 )   $ ( 12,580 )                   Net loss per basic and diluted common share   $ ( 0.62 )   $ ( 0.37 ) Weighted average common shares used to compute net loss per basic and diluted common share     39,281,620       33,846,338                     Comprehensive loss:                 Net loss   $ ( 24,449 )   $ ( 12,580 ) Net unrealized gain (loss) on short-term investments     ( 21 )     15   Comprehensive loss   $ ( 24,470 )   $ ( 12,565 )   See accompanying notes to consolidated financial statements.     F-4   Table of Contents     Wrap Technologies, Inc. Consolidated Statements of Stockholders' Equity (in thousands, except share and per share amounts)                                       Accumulated                               Additional             Other     Total       Common Stock             Paid-In     Accumulated     Comprehensive     Stockholders'       Shares     Amount     Capital     Deficit     Income (Loss)     Equity   Balance at January 1, 2020     29,829,916     $ 3     $ 31,923     $ ( 12,730 )   $ -     $ 19,196   Sale of Common Stock and warrants at $ 6.00 per share in public offering, net of issuance costs     2,066,667       -       11,667       -       -       11,667   Common shares issued upon exercise of warrants at $ 3.00 per share, net of issuance costs     328,458       -       961       -       -       961   Common shares issued upon exercise of warrants at $ 5.00 per share, net of issuance costs     3,890,839       1       18,718       -       -       18,719   Common shares issued upon exercise of warrants at $ 6.00 per share, net of issuance costs     675,000       -       3,848       -       -       3,848   Common shares issued upon exercise of warrants at $ 6.50 per share, net of issuance costs     261,679       -       1,646       -       -       1,646   Common shares issued upon exercise of stock options     371,000       -       705       -       -       705   Common shares issued upon vesting of restricted stock units     130,603       -       -       -       -       -   Share-based compensation expense     -       -       2,237       -       -       2,237   Net unrealized gain on short-term investments     -       -       -       -       15       15   Net loss for the period     -       -       -       ( 12,580 )     -       ( 12,580 ) Balance at December 31, 2020     37,554,162     $ 4     $ 71,705     $ ( 25,310 )   $ 15     $ 46,414   Common shares issued upon exercise of warrants at $ 6.50 per share     1,661,320       -       10,798       -       -       10,798   Common shares issued upon exercise of warrants at $ 8.125 per share     153,692       -       1,249       -       -       1,249   Common shares issued upon exercise of stock options     915,404       -       1,678       -       -       1,678   Common shares issued upon vesting of restricted stock units     524,491       -       -       -       -       -   Common shares issued for services     42,876       -       239       -       -       239   Share-based compensation expense     -       -       5,356       -       -       5,356   Net unrealized loss on short-term investments     -       -       -       -       ( 21 )     ( 21 ) Net loss for the period     -       -       -       ( 24,449 )     -       ( 24,449 ) Balance at December 31, 2021     40,851,945     $ 4     $ 91,025     $ ( 49,759 )   $ ( 6 )   $ 41,264     See accompanying notes to consolidated financial statements.   F-5   Table of Contents     Wrap Technologies, Inc. Consolidated Statements of Cash Flows (in thousands)       Year Ended December 31,       2021     2020   Cash Flows From Operating Activities:                 Net loss   $ ( 24,449 )   $ ( 12,580 ) Adjustments to reconcile net loss to net cash used in operating activities:                 Depreciation and amortization     478       163   Share-based compensation     5,356       2,237   Common shares issued for services     239       -   Product line exit expense     747       -   Debt forgiveness income     -       ( 417 ) Gain on sale of assets     ( 27 )     -   Warranty provision     10       30   Inventory write-offs     -       ( 68 ) Software impairment charge     170       -   Change in contingent liability     ( 23 )     -   Non-cash lease expense     88       122   Non-cash interest expense     -       2   Provision for doubtful accounts     123       10   Changes in assets and liabilities:                 Accounts receivable     ( 2,111 )     ( 1,686 ) Inventories     559       ( 343 ) Prepaid expenses and other current assets     ( 109 )     ( 508 ) Accounts payable     546       825   Operating lease liability     ( 94 )     ( 128 ) Customer deposits     41       ( 342 ) Accrued liabilities and other     ( 54 )     493   Warranty settlement     38       4   Deferred revenue     249       ( 1 ) Net cash used in operating activities     ( 18,223 )     ( 12,187 )                   Cash Flows From Investing Activities:                 Purchase of short-term investments     ( 55,014 )     ( 34,980 ) Proceeds from maturities of short-term investments     50,005       10,000   Capital expenditures for property and equipment     ( 995 )     ( 249 ) Investment in patents and trademarks     ( 187 )     ( 129 ) Purchase of intangible assets     ( 750 )     ( 543 ) Business acquisition     -       ( 210 ) Proceeds from long-term deposits     4       -   Net cash used in investing activities     ( 6,937 )     ( 26,111 )                   Cash Flows From Financing Activities:                 Sale of common stock and warrants     -       12,400   Offering costs paid on sale of common stock and warrants     -       ( 733 ) Proceeds from exercise of warrants     12,047       26,191   Offering costs paid on exercise of warrants     -       ( 1,016 ) Proceeds from exercise of stock options     1,678       705   Proceeds from bank note     -       414   Repayment of debt     ( 275 )     -   Net cash provided by financing activities     13,450       37,961                     Net decrease in cash and cash equivalents     ( 11,710 )     ( 337 ) Cash and cash equivalents, beginning of period     16,647       16,984   Cash and cash equivalents, end of period   $ 4,937     $ 16,647                     Supplemental Disclosure of Non-Cash Investing                 and Financing Activities:                 Business acquisition liability   $ -     $ 298   Business acquisition cost in deferred revenue   $ -     $ 15   Change in unrealized gain on short-term investments   $ ( 21 )   $ 15       See accompanying notes to consolidated financial statements.     F-6 Table of Contents Wrap Technologies, Inc. Notes to Consolidated Financial Statements (in thousands, except per share and share amounts)     1.       ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Organization and Business Description Wrap Technologies, Inc., a Delaware corporation (the “ Company ”, “ we ”, “ us ”, and “ our ”), is a publicly traded company with our Common Stock, par value $ 0.0001 per share (“ Common Stock ”), listed on the Nasdaq Capital Market (“ Nasdaq ”) under the trading symbol “WRAP”. The Company is a developer and supplier of public safety products and training services for law enforcement and security personnel. The Company’s primary product is the BolaWrap® remote restraint device. The principal markets for the Company’s proprietary products and services are in North and South America, Europe, Middle East and Asia.   Principles of Consolidation The Company has one wholly-owned subsidiary, Wrap Reality, Inc. formed in December 2020 ( see Note 3 ) that sells a virtual reality training system primarily targeting law enforcement agencies. The consolidated financial statements include the accounts of this subsidiary after elimination of intercompany transactions and accounts.   Basis of Presentation and Use of Estimates The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“ U.S. 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 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 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 – 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 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.     F- 7 Table of Contents 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 (“ U.S. ”) Treasury bills and are stated at fair value.   Short-Term Investments The Company’s short-term investments consist of U.S. Treasury bills with original maturities beyond three months at the date of purchase and one year or less from the balance sheet date. 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’ equity.   We adopted Accounting Standards Codification (“ ASC ”) Topic 326 issued by the Financial Accounting Standards Board (“ FASB ”) effective January 1, 2020, and applied the credit loss guidance related to short-term investments prospectively as we had no historical short-term investments. Because we do not have any history of losses for our short-term investments, our expected loss allowance methodology is developed using published or estimated credit default rates for similar investments and current and future economic and market conditions. Any unrealized losses related to credit loss factors are recorded through an allowance for credit losses in other (expense) income, in our consolidated statements of operations, rather than as a reduction to the amortized cost basis in other comprehensive (loss) income, when a decline in fair value has resulted from a credit loss. We determine realized gains or losses on the sale of investments on a specific identification method, and record such gains or losses as other (expense) income, in our consolidated statements of operations. We did not record a credit loss reserve for short-term investments during the years ended December 31, 2021 and 2020.   Share-Based Compensation 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 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 ASU No. 2016 - 13,   Financial Instruments - Credit Losses (Topic 326 ) requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The expected credit losses are developed using an estimated loss rate method that considers historical collection experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The estimated loss rates are applied to accounts receivables with similar risk characteristics such as the length of time the balance has been outstanding and the location of the customer. In certain instances, the Company 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.     F- 8 Table of Contents Wrap Technologies, Inc. Notes to Consolidated Financial Statements (in thousands, except per share and share amounts)   Inventories Inventories are valued at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the FIFO cost method. Inventory is comprised of raw materials, assemblies and finished products intended for sale to customers . The Company evaluates the need for reserves for excess and obsolete inventories determined primarily based upon estimates of future demand for the Company’s products.   At December 31, 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. 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. The Company measures goodwill as the excess of consideration transferred, which the Company also measures at fair value, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. Acquisition related costs in connection with a business combination are expensed as incurred. Contingent consideration is recognized and measured at fair value at the acquisition date and until paid is re-measured on a recurring basis and classified as a liability.   Intangible Assets Intangible assets 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. 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 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 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.     F- 9 Table of Contents 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.   Research and Development Costs 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.   Leases 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 (“ ASU 2014 - 09 ”) and ASC Subtopic 340 - 40, Other Assets and Deferred Costs - Contracts with Customers (“ ASC 340 - 40 ”), (collectively, “ Topic 606 ”). On January 1, 2018, the Company adopted Topic 606 and, as it had no prior revenue or contracts with customers, there was no transition required nor any impact on prior results. ASU 2014 - 09 requires entities to recognize revenue through the application of a five -step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations. See Note 2 for additional information.   Shipping and Handling Costs Shipping and handling costs are included in cost of revenues. Shipping and handling costs invoiced to customers are included in revenue. Actual shipping and handling costs were $ 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 The Company warrants its products and accessories to be free from defects in materials and workmanship for a period of one year from the date of purchase. The warranty is generally limited. The Company currently provides direct warranty service. International market warranties are generally similar to the U.S. market.   The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenues are recognized. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs and anticipated rates of warranty claims. The Company evaluates the adequacy of the provision for warranty costs each reporting period. The warranty reserve was $ 96 and $ 48 at December 31, 2021 and 2020. Actual warranty costs could differ from estimates.     F- 10 Table of Contents 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” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.   Income Taxes No income tax expense was recorded for the periods ended December 31, 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  December 2019,  the FASB issued ASU  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. 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. GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact of this standard on its financial statements and related disclosures.   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.     F- 11   Wrap Technologies, Inc. Notes to Consolidated Financial Statements (in thousands, except per share and share amounts)     2. 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 (“ SSP ” or “ 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.     F- 12   Wrap Technologies, Inc. Notes to Consolidated Financial Statements (in thousands, except per share and share amounts)     3.   ACQUISITION   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:   Equipment   $ 10   Software     460   Customer contracts     40   Tradenames     2   Noncompete agreements     10   Deferred revenue     ( 15 ) Total consideration   $ 507     A portion of the fair value of the consideration transferred was assigned to identifiable intangible assets as follows:   Description   Useful life in years     Fair Value   Software     5     $ 460   Customer contracts     1       40   Tradenames     1       2   Noncompete agreements     2       10   Total acquired intangible assets           $ 512         F- 13 Table of Contents 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.     4.   FINANCIAL INSTRUMENTS   Assets and liabilities recorded at fair value on a recurring basis in the Consolidated Balance Sheets and assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance also establishes a three -level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three -level hierarchy for the inputs to valuation techniques is briefly summarized as follows:    Level 1 —Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;   Level 2 —Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and    Level 3 —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.     F- 14 Table of Contents 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       Adjusted     Unrealized     Unrealized     Market       Cost     Gains     Losses     Value   Level 1:                                 Money Market Funds   $ 1,670     $ -     $ -     $ 1,670   U.S. Treasury securities considered cash equivalents     -       -       -       -   U.S. Treasury securities in short-term investments     29,989       -       ( 6 )     29,983   Total Financial Assets   $ 31,659     $ -     $ ( 6 )   $ 31,653         As of December 31, 2020       Adjusted     Unrealized     Unrealized     Market       Cost     Gains     Losses     Value   Level 1:                                 Money Market Funds   $ 6,035     $ -     $ -     $ 6,035   U.S. Treasury securities considered cash equivalents     9,998       -       -       9,998   U.S. Treasury securities in short-term investments     24,979       15       -       24,994   Total Financial Assets   $ 41,012     $ 15     $ -     $ 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.     5.   INVENTORIES, NET   Inventory is recorded at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the FIFO cost method. Inventories consisted of the following:         December 31,       2021     2020   Finished goods   $ 1,027     $ 1,249   Work in process     2       64   Raw materials     537       1,342   Inventories - net   $ 1,566     $ 2,655     As part of product line exit costs (see Note 1 ) end of life raw material costs aggregating $ 621 were written off during the year ended December 31, 2021. During the year ended December 31, 2020 the Company wrote off $68 of raw material and scrap parts primarily due to startup production, model changes and improvements.       F- 15   Wrap Technologies, Inc. Notes to Consolidated Financial Statements (in thousands, except per share and share amounts)     6.   PROPERTY AND EQUIPMENT, NET   Property and equipment consisted of the following:       December 31,       2021     2020   Production and lab equipment   $ 500     $ 148   Tooling     273       81   Computer equipment     467       180   Furniture, fixtures and improvements     176       165         1,416       574   Accumulated depreciation     ( 440 )     ( 217 ) Property and equipment, net   $ 976     $ 357     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.     7. INTANGIBLE ASSETS, NET   Intangible assets consisted of the following:       December 31,       2021     2020   Amortizable intangible assets:                 Patents   $ 416     $ 280   Trademarks     134       84   Software     1,212       662   Other     50       50         1,812       1,076   Accumulated amortization     ( 174 )     ( 23 ) Total amortizable     1,638       1,053   Indefinite life assets (non-amortizable)     344       344   Total intangible assets, net   $ 1,982     $ 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:   2022   $ 261   2023     256   2024     256   2025     251   2026     164   Thereafter     450   Total estimated amortization expense   $ 1,638         F- 16   Wrap Technologies, Inc. Notes to Consolidated Financial Statements (in thousands, except per share and share amounts)     8. 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:       December 31,       2021     2020   Patent and legal costs   $ 28     $ 65   Accrued compensation     628       563   Warranty costs     96       48   Taxes and other     72       45       $ 824     $ 721     Accrued compensation includes $ 305 and $ 563 in employee bonuses and commissions payable at December 31, 2021 and 2020, respectively.     9. LEASES   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   $ 56   Operating lease liability - long term     -   Total Operating Lease Liability   $ 56         F- 17 Table of Contents 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:   2022   $ 57   Total future minimum lease payments     57   Less imputed interest     ( 1 ) Total   $ 56     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.     10.              DEBT   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 “ PPP Loan ”) from the U.S. Small Business Administration pursuant to the Paycheck Protection Program (the “ PPP ”) enacted by Congress under Division A, Title 1 of the Coronavirus Aid, Relief, and Economic Security Act ( 15 U.S.C. 636 (a)( 36 )) (the “ CARES Act ”), which was enacted March 27, 2020. The PPP Loan was in the form of a two -year Promissory Note dated May 1, 2020 payable to the Lender (the “ PPP Note ”), bearing interest at a rate of 1 % per annum.   Under the terms of the CARES Act, the Company subsequently applied for and in December 2020 was granted forgiveness for the PPP Loan plus interest. The Company’s PPP Loan in the amount of $ 414 and accrued interest was forgiven in full by the Small Business Administration. The Company recognized $ 417 in debt forgiveness income as a result of the forgiveness.     11.              STOCKHOLDERS ’  EQUITY   The Company’s authorized capital consists of 150,000,000 shares of Common Stock, par value $ 0.0001 per share, and 5,000,000 shares of preferred stock, par value $ 0.0001 per share (“ Preferred Stock ”).   2020 Follow-On Public Offering On June 2, 2020, the Company consummated a follow-on public offering (the “ Unit Offering ”) whereby the Company offered and sold certain securities consisting of one share of Common Stock and one detachable two -year warrant to purchase one share of Common Stock at an exercise price of $ 6.00 per share (a “Unit”) at the public offering price of $ 6.00 per Unit. Pursuant to the Unit Offering, the Company sold 2,066,667 Units, resulting in the Company’s receipt of gross cash proceeds of $ 12.4 million and net cash proceeds of $ 11.67 million after deduction of commissions and offering costs.     F- 18 Table of Contents Wrap Technologies, Inc. Notes to Consolidated Financial Statements (in thousands, except per share and share amounts)   Summary of Stock Purchase Warrants The following table summarizes warrant activity during the years ended December 31, 2020 and 2021:         Number     Average Price Per Share   Shares purchasable under outstanding warrants at January 1, 2020     6,620,620     $ 5.41   Stock purchase warrants issued     2,066,667     $ 6.00   Stock purchase warrants exercised     ( 5,155,976 )   $ 5.08   Stock purchase warrants expired     ( 324,401 )   $ 5.00   Shares purchasable under outstanding warrants at December 31, 2020     3,206,910     $ 6.36   Stock purchase warrants issued     -       -   Stock purchase warrants exercised     ( 1,815,012 )   $ 6.64   Stock purchase warrants expired     ( 231 )   $ 7.58   Shares purchasable under outstanding warrants at December 31, 2021     1,391,667     $ 6.00     During the year ended December 31, 2020 the Company received gross proceeds of $ 26,190 from the exercise of 5,155,976 warrants and paid $ 1,017 as an agent fee to facilitate exercise of certain warrants resulting in net proceeds of $ 25,174 . Elwood Norris was a Company officer at the time he exercised 333,334 of these warrants at $ 5.00 per share for cash of $ 1,667 .   During the year ended December 31, 2021 the Company received proceeds of $ 12,047 from the exercise of 1,815,012 warrants.   The Company has outstanding Common Stock purchase warrants as of December 31, 2021 as follows:       Number of     Exercise Price     Description   Common Shares     Per Share   Expiration Date Purchase Warrants     1,391,667     $ 6.00   June 1, 2022     12.   SHARE-BASED COMPENSATION   On March 31, 2017, the Company adopted, and the stockholders approved, the 2017 Stock Incentive Plan (the “ Plan ”) authorizing 2,000,000 shares of Company Common Stock for issuance as stock options and restricted stock units 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.     F- 19 Table of Contents 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               Options on             Remaining     Aggregate       Common     Exercise     Contractual     Intrinsic       Shares     Price     Term     Value   Outstanding January 1, 2020     2,928,750     $ 2.96       3.71           Granted     1,423,836     $ 6.66       -           Exercised     ( 371,000 )   $ 1.90       -           Forfeited, cancelled, expired     ( 50,000 )   $ 3.00       -           Outstanding December 31, 2020     3,931,586     $ 4.41       4.80           Granted     1,254,500     $ 5.33                   Exercised     ( 915,404 )   $ 1.83                   Forfeited, cancelled, expired     ( 334,799 )   $ 5.14                   Outstanding December 31, 2021     3,935,883     $ 5.24       4.79     $ 1,608   Exercisable December 31, 2021     2,415,063     $ 5.19       2.44     $ 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       December 31,       2021     2020   Expected stock price volatility     50 %     47 % Risk-free interest rate     0.90 %     0.38 % Expected dividend yield     0 %     0 % Expected life of options - years     5.74       5.64   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. 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.     F- 20 Table of Contents 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:                   Weighted                                           Average     Weighted             Weighted                   Remaining     Average             Average   Range of     Number     Contractual     Exercise     Number     Exercise   Exercise Prices     Outstanding     Life (Years)     Price     Exercisable     Price   $ 1.50 - 3.61       652,750       1.32     $ 1.61       652,750     $ 1.61   $ 3.85 - 5.775       2,638,133       5.83     $ 5.20       1,373,564     $ 5.33   $ 5.88 - 8.82       295,000       8.45     $ 6.58       38,749     $ 6.34   $ 11.22       350,000       0.33     $ 11.22       350,000     $ 11.22     Restricted Stock Units 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   Weighted Average     Service-Based     Grant Date   Vesting     RSU's     Fair Value   Period (Years) Unvested at January 1, 2020     308,087     $ 6.77   3.0 Granted - service based     310,874     $ 6.02     Granted - performance based     35,211     $ 4.26     Vested     ( 144,687 )   $ 5.17     Forfeited and cancelled     ( 81,479 )   $ 6.47     Unvested at December 31, 2020     428,006     $ 6.13   2.3 Granted - service based     398,662     $ 5.59     Vested     ( 524,491 )   $ 5.55     Forfeited and cancelled     ( 32,874 )   $ 6.10     Unvested at December 31, 2021     269,303     $ 6.47   2.0   Share-Based Compensation Expense The Company recorded share-based compensation in its statements of operations for the relevant periods for options and RSUs as follows:       For the Year Ended       December 31,       2021     2020   Selling, general and administrative   $ 4,558     $ 1,957   Research and development     798       280   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.       F- 21   Wrap Technologies, Inc. Notes to Consolidated Financial Statements (in thousands, except per share and share amounts)     13. COMMITMENTS AND CONTINGENCIES   Facility Leases See Note 9.   Related Party Technology License Agreement The Company is obligated to pay royalties and development and patent costs pursuant to an exclusive Amended and Restated Intellectual Property License Agreement dated as of September 30, 2016 with Syzygy, a company owned and controlled by 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 $ 278 and $ 143 for royalties incurred during the years ended December 31, 2021 and 2020, respectively.   Purchase Commitments At December 31, 2021 the Company was committed for approximately $ 1,466 for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.   Indemnifications and Guarantees Our officers and directors are indemnified as to personal liability as provided by the Delaware law and the Company’s articles and bylaws. The Company may also undertake indemnification obligations in the ordinary course of business related to its operations. The Company is unable to estimate with any reasonable accuracy the liability that may be incurred pursuant to any such indemnification obligations now or in the future. Because of the uncertainty surrounding these circumstances, the Company’s current or future indemnification obligations could range from immaterial to having a material adverse impact on its financial position and its ability to continue in the ordinary course of business. The Company has no liabilities recorded for such indemnities.   Regulatory Agencies The Company is subject to oversight from regulatory agencies regarding firearms that arises in the ordinary course of its business.   Litigation   Securities Litigation On November 15, 2021, the Hon. Dolly M. Gee of the United States District Court for the Central District of California (the “Court”) granted the motion to dismiss filed by the Company, David Norris (“Norris”), James A. Barnes (“Barnes”), Thomas Smith (“Smith”), Mike Rothans (“Rothans”) and Marc Thomas (“Thomas”) (collectively, “Defendants”) in the action captioned  In re Wrap Technologies, Inc. Securities Exchange Act Litigation  (the “Securities Action”).  The Court granted Defendants’ motion on the grounds that the complaint failed to identify any statement by Defendants that was either false or made with scienter. Concurrently, the Court granted Plaintiff leave to file a second amended complaint on or before December 6, 2021, noting that a failure to file a second amended complaint by that date would result in dismissal of the Securities Action with prejudice. On December 20, 2021, following Plaintiff’s failure to file a second amended complaint, the Court dismissed the Securities Action with prejudice.    Shareholder Derivative Litigation On November 13, 2020, Naresh Rammohan filed a shareholder derivative action in the United States District Court for the Central District of California against Smith, Barnes, Rothans, Thomas, and Norris, as well as directors Messrs. Scot Cohen, Patrick Kinsella, Michael Parris, and Wayne Walker, alleging unjust enrichment, breach of fiduciary duty, waste of corporate assets, and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:20 -cv- 10444 -DMG-PVCx (the “ Rammohan Complaint ”). The Company is named as a nominal defendant. On January 20, 2021, Ray Westerman filed a second derivative complaint in the same court against the same parties, alleging breach of fiduciary duty and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21 -cv- 00550 -DMG-PVCx (the “ Westerman Complaint ”). On January 22, 2021, Jesse Lowe filed a third derivative complaint in the same court against the same parties, alleging breach of fiduciary duty and asserting various claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21 -cv- 00597 -DMG-PVCx (the “ Lowe Complaint ”).    On January 27, 2021, Judge Gee entered an order to show cause why the derivative actions should not be consolidated and stayed pending the resolution of the Securities Action, given the “apparent substantial overlap” between the cases. On February 16, 2021, Judge Gee issued an order consolidating the derivative actions under the caption  In re Wrap Technologies, Inc. Shareholder Derivative Litigation , Case No. 2:20 - 10444 -DMG-PVCx, (the “ Derivative Action ”), and stayed the Derivative Action at least until the resolution of the Securities Action, which has been dismissed with prejudice. The Company believes that the Derivative Action is without merit and will vigorously defend against the claims raised therein.       F- 22   Wrap Technologies, Inc. Notes to Consolidated Financial Statements (in thousands, except per share and share amounts)     14. RELATED PARTY TRANSACTIONS   Commencing in October 2017 the Company began reimbursing Mr. Elwood Norris, a consultant and stockholder of the Company, $ 1.5 per month on a month-to-month basis for laboratory facility costs, for an aggregate of $ 18 during each year ended December 31, 2021 and 2020, respectively. Mr. 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.     15. INCOME TAXES   Until its reverse recapitalization on March 31, 2017, the Company was treated as a partnership for federal and state income tax purposes and did not incur income taxes. The Company accounts for income taxes under ASC 740. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is "more likely than not" that some component or all of the benefits of deferred tax assets will not be realized.   The Company did not provide any current or deferred U.S. 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.     F- 23 Table of Contents 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,       2021     2020   Current tax benefit   $ -     $ -   Deferred tax benefit     6,409       3,158   Change in valuation allowance     ( 6,409 )     ( 3,158 ) 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,       2021     2020   Income taxes benefit computed at federal statutory rate   $ 5,139     $ 2,642   State income taxes, net of federal effect     480       216   Permanent differences and other     790       300   Change in valuation allowance     ( 6,409 )     ( 3,158 ) Income tax benefit (provision)   $ -     $ -     Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities for the periods presented:       December 31,       2021     2020   Deferred tax assets:                 Net operating losses   $ 11,773     $ 5,444   Research tax credits     60       45   Stock compensation     847       542   Accruals and other     211       169         12,891       6,200   Deferred tax liabilities:                 Depreciation and other     678       396         678       396   Net deferred tax assets     12,213       5,804   Less valuation allowance     ( 12,213 )     ( 5,804 ) 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 $ 3,168 and $ 720 during the years ended December 31, 2021 and 2020, respectively.     F- 24   Wrap Technologies, Inc. Notes to Consolidated Financial Statements (in thousands, except per share and share amounts)     16. MAJOR CUSTOMERS AND RELATED INFORMATION   Major Customers 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.       For the Year       Ended December 31,       2021     2020   Americas   $ 3,357     $ 1,443   Europe, Middle East and Africa     2,385       1,046   Asia Pacific     1,987       1,455       $ 7,729     $ 3,944     See Note 1 – Concentrations of Risks for information on reliance on suppliers.     17. 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.     F- 25   Table of Contents     SIGNATURES   Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tempe, State of Arizona, on the 10th day of March 2022.     WRAP TECHNOLOGIES, INC           Date: March 10, 2022 By:   /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.   Name   Position   Date           /s/ LW Varner, Jr   Interim Chief Executive Officer   March 10, 2022 LW Varner, Jr   (Principal Executive Officer)               /s/ James A. Barnes   Chief Financial Officer, Secretary and Treasurer   March 10, 2022 James A. Barnes   (Principal Accounting Officer)                 /s/ Wayne R. Walker   Chairman of the Board   March 10, 2022 Wayne R. Walker                   /s/ Scot Cohen   Director   March 10, 2022 Scot Cohen                   /s/ TJ Kennedy   Director   March 10, 2022 TJ Kennedy                   /s/ Michael Parris   Director   March 10, 2022 Michael Parris                   /s/ Kevin Sherman    Director   March 10, 2022 Kevin Sherman                    /s/Kimberly Sentovich     Director   March 10, 2022 Kimberly Sentovich               -44-