PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated interim financial statements and management's discussion and analysis of financial condition [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated interim financial statements for Wrap Technologies, Inc., including the balance sheets, statements of operations and comprehensive loss, statements of stockholders' equity, and statements of cash flows, along with accompanying notes. These statements provide a snapshot of the company's financial position, performance, and cash movements for the periods ended June 30, 2023, and December 31, 2022 [Condensed Consolidated Balance Sheets](index=3&type=page&id=Condensed%20Consolidated%20Balance%20Sheets) This table provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific dates Condensed Consolidated Balance Sheets (in thousands) | ASSETS (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------- | :------------ | :---------------- | | Cash and cash equivalents | $11,688 | $5,330 | | Short-term investments | $6,500 | $13,949 | | Total current assets | $27,379 | $26,859 | | Total assets | $30,856 | $30,571 | | LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands) | | | | Accounts payable | $1,928 | $1,419 | | Accrued liabilities | $8,562 | $1,463 | | Total current liabilities | $10,817 | $3,156 | | Total liabilities | $11,081 | $3,516 | | Total stockholders' equity | $19,775 | $27,055 | | Total liabilities and stockholders' equity | $30,856 | $30,571 | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=4&type=page&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) The company's financial performance is detailed, showing revenue, gross profit, operating expenses, and net loss for the reported periods Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands) | (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $1,202 | $1,165 | $1,913 | $2,764 | | Gross profit | $668 | $457 | $1,020 | $1,124 | | Total operating expense | $5,747 | $5,240 | $10,359 | $11,341 | | Loss from operations | $(5,079) | $(4,783) | $(9,339) | $(10,217) | | Net loss | $(5,007) | $(4,785) | $(9,035) | $(10,217) | | Net loss per basic and diluted common share | $(0.12) | $(0.12) | $(0.22) | $(0.25) | - Total revenue for the three months ended **June 30, 2023**, increased by **3%** to **$1.202 million** compared to **$1.165 million** in the prior year period. However, for the six months ended **June 30, 2023**, total revenue decreased by **31%** to **$1.913 million** from **$2.764 million** in the prior year period[11](index=11&type=chunk) - Gross profit for the three months ended **June 30, 2023**, increased by **46%** to **$668 thousand**, with gross margin improving to **56%** from **39%** in the prior year. For the six months ended **June 30, 2023**, gross profit decreased by **9%** to **$1.020 million**, but gross margin improved to **53%** from **41%** in the prior year[11](index=11&type=chunk) - Net loss for the three months ended **June 30, 2023**, was **$(5.007) million**, a slight increase from **$(4.785) million** in the prior year. For the six months ended **June 30, 2023**, net loss was **$(9.035) million**, an improvement from **$(10.217) million** in the prior year[11](index=11&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=5&type=page&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This table details changes in stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit over the period Condensed Consolidated Statements of Stockholders' Equity (in thousands) | (in thousands) | Balance at January 1, 2023 | Share-based compensation expense | Net loss for the period | Balance at June 30, 2023 | | :--------------- | :------------------------- | :------------------------------- | :---------------------- | :----------------------- | | Common Stock Shares | 41,175,993 | - | - | 41,910,687 | | Common Stock Amount | $4 | - | - | $4 | | Additional Paid-In Capital | $94,333 | $1,849 | - | $96,182 | | Accumulated Deficit | $(67,376) | - | $(9,035) | $(76,411) | | Total Stockholders' Equity | $27,055 | $1,849 | $(9,035) | $19,775 | - Total stockholders' equity decreased from **$27.055 million** at **January 1, 2023**, to **$19.775 million** at **June 30, 2023**, primarily due to a net loss of **$9.035 million**, partially offset by **$1.849 million** in share-based compensation expense[15](index=15&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=page&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This table summarizes the cash inflows and outflows from operating, investing, and financing activities for the reported periods Condensed Consolidated Statements of Cash Flows (in thousands) | (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(776) | $(6,207) | | Net cash provided by investing activities | $7,134 | $4,838 | | Net cash provided by financing activities | $0 | $75 | | Net decrease in cash and cash equivalents | $6,358 | $(1,294) | | Cash and cash equivalents, end of period | $11,688 | $3,643 | - Net cash used in operating activities significantly improved, decreasing from **$(6.207) million** in **H1 2022** to **$(776) thousand** in **H1 2023**[20](index=20&type=chunk) - Net cash provided by investing activities increased to **$7.134 million** in **H1 2023** from **$4.838 million** in **H1 2022**, driven by proceeds from maturities of short-term investments[20](index=20&type=chunk) - Cash and cash equivalents at the end of the period increased substantially to **$11.688 million** in **H1 2023** from **$3.643 million** in **H1 2022**, largely due to the **$7.4 million** pre-funding from the Series A Convertible Preferred Stock and Warrants offering[20](index=20&type=chunk)[104](index=104&type=chunk) [Notes to Unaudited Condensed Consolidated Interim Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Interim%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated interim financial statements [1. Organization and Summary of Significant Accounting Policies](index=8&type=page&id=1.%20Organization%20and%20Summary%20of%20Significant%20Accounting%20Policies) This note describes the company's business, its consolidation principles, and key accounting policies applied in preparing the financial statements - Wrap Technologies, Inc. develops and supplies public safety products and training services, primarily the BolaWrap® remote restraint device and Wrap Reality VR training system, for law enforcement and security personnel globally[22](index=22&type=chunk)[25](index=25&type=chunk) - The company's financial statements are prepared in accordance with U.S. GAAP and SEC regulations, with certain information condensed or omitted for interim reporting[23](index=23&type=chunk) - The consolidated financial statements include the wholly-owned subsidiary Wrap Reality, Inc., which sells a virtual reality training system[25](index=25&type=chunk) [2. Revenue and Product Costs](index=9&type=page&id=2.%20Revenue%20and%20Product%20Costs) This note details the components of revenue, including product sales and other services, and outlines contract liabilities - Revenue comprises product sales (BolaWrap products and accessories) and other revenue (VR, service, training, shipping)[29](index=29&type=chunk) - Deferred revenue at **June 30, 2023**, totaled **$340 thousand**, consisting of **$217 thousand** related to VR, **$17 thousand** to training, and **$106 thousand** to BolaWrap extended warranties and services[32](index=32&type=chunk) Contract Liabilities (in thousands) | Contract Liabilities (in thousands) | Customer Deposits | Deferred Revenue | | :---------------------------------- | :---------------- | :--------------- | | Balance at January 1, 2023 | $ - | $333 | | Additions, net | $3 | $124 | | Transfer to revenue | $ - | $(117) | | Balance at June 30, 2023 | $3 | $340 | | Current portion | $3 | $211 | | Long-term portion | $ - | $129 | [3. Financial Instruments](index=9&type=page&id=3.%20Financial%20Instruments) This note describes the company's financial assets, their fair value classification, and market valuation methods - The company classifies its cash equivalent Money Market Funds and short-term investments (U.S. Treasury bills, Certificate of Deposits) as Level 1 fair value assets, valued using quoted market prices[37](index=37&type=chunk) Financial Assets (in thousands) | Financial Assets (in thousands) | As of June 30, 2023 Market Value | As of December 31, 2022 Market Value | | :------------------------------ | :------------------------------- | :--------------------------------- | | Money Market Funds | $2,774 | $3,004 | | U.S. Treasury securities | $ - | $9,949 | | Certificate of Deposits | $6,500 | $4,000 | | Total Financial Assets | $9,274 | $16,953 | [4. Inventories](index=11&type=page&id=4.%20Inventories) This note provides a breakdown of the company's inventory, including finished goods and raw materials, and changes over time Inventories (in thousands) | Inventories (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------- | :------------ | :---------------- | | Finished goods | $3,793 | $2,293 | | Raw materials | $2,727 | $1,682 | | Inventories - net | $6,520 | $3,975 | - Net inventories increased to **$6.520 million** at **June 30, 2023**, from **$3.975 million** at **December 31, 2022**, driven by increases in both finished goods and raw materials[40](index=40&type=chunk) [5. Property and Equipment, Net](index=12&type=page&id=5.%20PROPERTY%20AND%20EQUIPMENT,%20NET) This note details the company's property and equipment, including production assets, and accumulated depreciation Property and Equipment (in thousands) | Property and Equipment (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------------ | :------------ | :---------------- | | Production and lab equipment | $506 | $513 | | Tooling | $490 | $448 | | Computer equipment | $561 | $531 | | Furniture, fixtures and improvements | $181 | $181 | | Total | $1,738 | $1,673 | | Accumulated depreciation | $(1,150) | $(915) | | Property and equipment, net | $588 | $758 | - Net property and equipment decreased to **$588 thousand** at **June 30, 2023**, from **$758 thousand** at **December 31, 2022**, primarily due to accumulated depreciation[41](index=41&type=chunk) [6. Intangible Assets, Net](index=12&type=page&id=6.%20INTANGIBLE%20ASSETS,%20NET) This note outlines the company's intangible assets, such as patents and trademarks, and their estimated future amortization expense Intangible Assets (in thousands) | Intangible Assets (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------- | :------------ | :---------------- | | Patents | $744 | $575 | | Trademarks | $157 | $150 | | Purchased software | $1,962 | $1,962 | | Total amortizable | $2,234 | $2,225 | | Indefinite life assets | $354 | $344 | | Total intangible assets, net | $2,588 | $2,569 | - Net intangible assets slightly increased to **$2.588 million** at **June 30, 2023**, from **$2.569 million** at **December 31, 2022**, with patents showing a notable increase[42](index=42&type=chunk) Future Amortization Expense (in thousands) | Future Amortization Expense (in thousands) | | :--------------------------------------- | | 2023 (9 months) | $259 | | 2024 | $518 | | 2025 | $513 | | 2026 | $290 | | 2027 | $42 | | Thereafter | $612 | | Total estimated amortization expense | $2,234 | [7. Accounts Payable and Accrued Liabilities](index=12&type=page&id=7.%20ACCOUNTS%20PAYABLE%20AND%20ACCRUED%20LIABILITIES) This note details the company's accounts payable and accrued liabilities, including significant pre-funding for equity offerings - Accounts payable includes amounts due to related party Syzygy Licensing, LLC: **$40 thousand** at **June 30, 2023**, and **$127 thousand** at **December 31, 2022**[44](index=44&type=chunk) - Accrued liabilities significantly increased to **$8.562 million** at **June 30, 2023**, from **$1.463 million** at **December 31, 2022**, primarily due to **$7.350 million** from the pre-funding of a Series A Convertible Preferred Stock and Warrants offering[45](index=45&type=chunk)[47](index=47&type=chunk) Accrued Liabilities (in thousands) | Accrued Liabilities (in thousands) | June 30, 2023 | December 31, 2022 | | :--------------------------------- | :------------ | :---------------- | | Patent and legal costs | $103 | $135 | | Accrued compensation | $777 | $1,100 | | Warranty costs | $75 | $125 | | Pre-funding of shares, preferred stock and warrants | $7,350 | $ - | | Taxes and other | $257 | $103 | | Total | $8,562 | $1,463 | [8. Stockholders' Equity](index=14&type=page&id=8.%20STOCKHOLDERS'%20EQUITY) This note describes the company's authorized capital structure, including common and preferred stock - The Company's authorized capital consists of **150,000,000 shares** of Common Stock and **5,000,000 shares** of Preferred Stock, both with a par value of **$0.0001** per share[49](index=49&type=chunk) [9. Share-Based Compensation](index=14&type=page&id=9.%20SHARE-BASED%20COMPENSATION) This note details the company's share-based compensation plans, expense recognition, and outstanding awards - The **2017** Stock Incentive Plan authorizes **9,000,000 shares** of Common Stock for awards, with **2,848,936 shares** remaining available for grant at **June 30, 2023**[50](index=50&type=chunk) - Share-based compensation expense for the three months ended **June 30, 2023**, was **$1.221 million**, up from **$727 thousand** in the prior year, and for the six months ended **June 30, 2023**, was **$1.849 million**, up from **$1.756 million** in the prior year[60](index=60&type=chunk) Share-Based Compensation Expense (in thousands) | Share-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Selling, general and administrative | $990 | $591 | $1,552 | $1,485 | | Research and development | $231 | $136 | $297 | $271 | | Total share-based expense | $1,221 | $727 | $1,849 | $1,756 | - Total estimated compensation cost for unvested stock options and RSUs at **June 30, 2023**, was **$2.609 million** (over **3.12 years**) and **$1.115 million** (over **1.82 years**), respectively[61](index=61&type=chunk) [10. Defined Contribution Plan](index=16&type=page&id=10.%20DEFINED%20CONTRIBUTION%20PLAN) This note describes the company's 401(k) plan and contributions made during the reporting periods - The Company has a **401(k)** defined contribution savings plan for eligible U.S. employees, established **January 1, 2022**, but made no contributions for the three and six months ended **June 30, 2023** and year ended **December 31, 2022**[62](index=62&type=chunk) [11. Commitments and Contingencies](index=16&type=page&id=11.%20COMMITMENTS%20AND%20CONTINGENCIES) This note outlines the company's contractual obligations, royalty agreements, purchase commitments, and legal contingencies - The Company is obligated to pay **4% royalties** on products using licensed ensnarement device technology to Syzygy Licensing, LLC, up to **$1.0 million** or until **September 30, 2026**, with **$217 thousand** remaining as of **June 30, 2023**[63](index=63&type=chunk) - A Professional Services and Technology Acquisition Agreement with Lumeto, Inc. and Spatial Industries Group, Inc. requires a **$700 thousand** cash payment for technology, services, and perpetual licenses for the Wrap Reality platform[64](index=64&type=chunk) - As of **June 30, 2023**, the Company had purchase commitments of approximately **$3.878 million** for future component deliveries[65](index=65&type=chunk) - A shareholder derivative action filed in **November 2020** was dismissed with prejudice by stipulation of the parties on **May 3, 2022**[68](index=68&type=chunk) [12. Related Party Transactions](index=17&type=page&id=12.%20RELATED%20PARTY%20TRANSACTIONS) This note discloses transactions and arrangements with related parties, including payments for consulting services - The Company reimbursed Mr. Elwood Norris, a former officer and current consultant/stockholder, **$4.5 thousand** for laboratory facility expense and paid **$22.5 thousand** for consulting services during the three months ended **June 30, 2023**[69](index=69&type=chunk) [13. Major Customers and Related Information](index=17&type=page&id=13.%20MAJOR%20CUSTOMERS%20AND%20RELATED%20INFORMATION) This note provides information on significant customer concentrations and revenue distribution by geographic region - For the three months ended **June 30, 2023**, two distributors each accounted for approximately **21% of total revenue**[71](index=71&type=chunk) - For the six months ended **June 30, 2023**, three distributors accounted for approximately **15%**, **14%**, and **13% of total revenue**, respectively[72](index=72&type=chunk) - At **June 30, 2023**, accounts receivable from three distributors accounted for **22%**, **13%**, and **13% of net accounts receivable**[73](index=73&type=chunk) Revenue by Geographic Region (in thousands) | Revenue by Geographic Region (in thousands) | For the Three Months Ended June 30, 2023 | For the Three Months Ended June 30, 2022 | For the Six Months Ended June 30, 2023 | For the Six Months Ended June 30, 2022 | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :------------------------------------- | :------------------------------------- | | Americas | $1,168 | $1,090 | $1,878 | $2,285 | | Europe, Middle East and Africa | $35 | $73 | $36 | $247 | | Asia Pacific | $(1) | $2 | $(1) | $232 | | Total | $1,202 | $1,165 | $1,913 | $2,764 | [14. Subsequent Events](index=19&type=page&id=14.%20SUBSEQUENT%20EVENTS) This note discloses significant events occurring after the balance sheet date, including equity offerings and acquisitions - On **July 5, 2023**, the Company closed a registered direct offering, raising approximately **$10 million** in gross proceeds from the sale of Series A Convertible Preferred Stock and Warrants. Approximately **$7.35 million** was received by **June 30, 2023**[76](index=76&type=chunk)[77](index=77&type=chunk) - The proceeds from the offering are intended to scale the sales team, support marketing, and fuel product evolution and diversification[77](index=77&type=chunk) - On **August 9, 2023**, the Company entered into an agreement to acquire **100%** of Intrensic, LLC for **$553,588** in cash and **1,250,000 shares** of Common Stock. Kevin Mullins, the CEO, has a financial interest in this acquisition[79](index=79&type=chunk)[81](index=81&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition for the periods presented, highlighting key operational results, strategic initiatives, and future outlook. It covers revenue trends, cost management, liquidity, and significant events impacting the business [Overview](index=20&type=page&id=Overview) This section provides a high-level description of the company's business, products, target markets, and global reach - Wrap Technologies is a global public safety technology company providing non-pain compliance tools and immersive training, including the BolaWrap® remote restraint device and the Wrap Reality VR training platform[84](index=84&type=chunk)[86](index=86&type=chunk)[87](index=87&type=chunk) - The target market includes over **900,000 law enforcement officers** in the U.S. and over **12 million globally**, with exploration into military and private security sectors. The non-lethal products market is projected to grow to **$16.1 billion** by **2027**[85](index=85&type=chunk) - The company has established a distribution network across **50 U.S. states** and **49 international distributors** covering **54 countries**[88](index=88&type=chunk) [Management Changes](index=21&type=page&id=Management%20Changes) This section details recent changes in the company's executive leadership team - Kevin Mullins was appointed Chief Executive Officer on **April 17, 2023**, succeeding TJ Kennedy, who stepped down. Glenn Hickman also stepped down as Chief Operating Officer as part of a reduction in force[90](index=90&type=chunk) [Business Outlook and Challenges](index=21&type=page&id=Business%20Outlook%20and%20Challenges) This section discusses the company's strategic direction, market penetration, operational performance, and future financial expectations - The company's products are gaining global recognition, with BolaWrap in use by almost **1,000 US law enforcement agencies** and in **62 countries**, reporting an **83% success rate** in de-escalation[93](index=93&type=chunk)[94](index=94&type=chunk) - Management anticipates substantial sales growth and a path towards sustainable profitability through strategic changes, aggressive marketing, and cost control measures[99](index=99&type=chunk)[100](index=100&type=chunk) - As of **June 30, 2023**, over **1,450 agencies** have received BolaWrap training, with over **4,827 certified instructors**, representing an **18% increase** in agencies and a **16% increase** in trained officers year-over-year[97](index=97&type=chunk) - Operating expense for **Q2 2023** increased by **$0.51 million** (**10%**) to **$5.75 million**, but excluding **$1.4 million** in one-time organizational change costs (severance, legal fees), it would have decreased by **17%**[98](index=98&type=chunk) - The company believes it has adequate financial resources for the next year, with **$18.2 million** in cash and short-term investments as of **June 30, 2023**, following a **$10 million** offering[104](index=104&type=chunk) [Critical Accounting Policies and Estimates](index=23&type=page&id=Critical%20Accounting%20Policies%20and%20Estimates) This section highlights accounting policies requiring significant management judgment and estimation, impacting financial reporting - Key accounting policies requiring significant judgment include revenue recognition, share-based compensation, allowance for doubtful accounts, valuation of inventory and intangible assets, and accrued expenses (e.g., warranty liabilities, bonuses)[110](index=110&type=chunk) - Revenue from product sales is recognized when products are shipped or received, and performance obligations are satisfied. Share-based compensation is valued using the Black-Scholes model for options and market price for RSUs[111](index=111&type=chunk)[113](index=113&type=chunk) [Recent Accounting Pronouncements](index=25&type=page&id=Recent%20Accounting%20Pronouncements) This section addresses the impact of newly issued accounting standards on the company's financial statements - The Company has reviewed recently issued accounting pronouncements and does not anticipate any material impact on its financial condition or results of operations from their future adoption[28](index=28&type=chunk)[121](index=121&type=chunk) [Segment and Related Information](index=25&type=page&id=Segment%20and%20Related%20Information) This section clarifies the company's operating structure as a single segment for management and resource allocation purposes - The Company operates as a single segment, with its Chief Executive Officer managing operations for resource allocation[122](index=122&type=chunk) [Operating Expense](index=25&type=page&id=Operating%20Expense) This section discusses the components of operating expenses and management's expectations for future cost trends - Operating expenses include selling, general and administrative (SG&A) and research and development (R&D) costs. The company expects operating costs to reduce in the second half of **2023** due to changes implemented in **April 2023** and ongoing cost containment efforts[123](index=123&type=chunk)[124](index=124&type=chunk) [Results of Operations](index=25&type=section&id=Results%20of%20Operations) This section provides a comparative analysis of the company's financial performance over different reporting periods [Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022](index=25&type=page&id=Three%20Months%20Ended%20June%2030,%202023%20Compared%20to%20Three%20Months%20Ended%20June%2030,%202022) This section analyzes the company's financial results for the three-month period, highlighting revenue, gross profit, and expense changes Three Months Ended June 30, 2023 Compared to June 30, 2022 (in thousands) | (in thousands) | June 30, 2023 | June 30, 2022 | Change ($) | Change (%) | | :--------------- | :------------ | :------------ | :--------- | :--------- | | Total revenue | $1,202 | $1,165 | $37 | 3% | | Gross profit | $668 | $457 | $211 | 46% | | Selling, general and administrative | $4,745 | $3,764 | $981 | 26% | | Research and development | $1,002 | $1,476 | $(474) | (32)% | | Loss from operations | $(5,079) | $(4,783) | $(296) | 6% | - Total revenue increased by **3%** to **$1.2 million**, but international revenue decreased from **$75 thousand** to **$31 thousand**, impacted by timing of orders and promotional discounts for BolaWrap **150** upgrades[127](index=127&type=chunk) - Gross profit increased by **46%** to **$668 thousand**, with gross margin improving to **56%** from **39%**, driven by BolaWrap **150** rollout, pricing adjustments, and reduced promotional pricing[132](index=132&type=chunk) - SG&A expense increased by **$1.0 million** (**26%**) to **$4.8 million**, primarily due to **$1.4 million** in one-time organizational change costs (severance, legal fees). Excluding these, SG&A would have decreased by **11%**[137](index=137&type=chunk) - R&D expense decreased by **$474 thousand** (**32%**), mainly due to reduced outside consulting and prototype costs after finalizing the BolaWrap **150**[141](index=141&type=chunk) [Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022](index=28&type=page&id=Six%20Months%20Ended%20June%2030,%202023%20Compared%20to%20Six%20Months%20Ended%20June%2030,%202022) This section analyzes the company's financial results for the six-month period, detailing revenue, gross profit, and expense trends Six Months Ended June 30, 2023 Compared to June 30, 2022 (in thousands) | (in thousands) | June 30, 2023 | June 30, 2022 | Change ($) | Change (%) | | :--------------- | :------------ | :------------ | :--------- | :--------- | | Total revenue | $1,913 | $2,764 | $(851) | (31)% | | Gross profit | $1,020 | $1,124 | $(104) | (9)% | | Selling, general and administrative | $8,286 | $8,370 | $(84) | (1)% | | Research and development | $2,073 | $2,971 | $(898) | (30)% | | Loss from operations | $(9,339) | $(10,217) | $878 | (9)% | - Total revenue decreased by **31%** to **$1.9 million**, with international revenue significantly dropping from **$479 thousand** to **$35 thousand**, due to delayed orders and promotional discounts[145](index=145&type=chunk) - Gross profit decreased by **9%** to **$1.02 million** due to decreased sales, but gross margin improved to **53%** from **41%**. Cassettes accounted for **18% of overall revenue** and are expected to grow as a recurring revenue base[150](index=150&type=chunk)[151](index=151&type=chunk) - SG&A expense slightly decreased by **$0.1 million** (**1%**) to **$8.3 million** due to cost containment efforts, despite a **$0.1 million** increase in share-based compensation[155](index=155&type=chunk)[156](index=156&type=chunk) - R&D expense decreased by **$898 thousand** (**30%**), primarily from reduced outside consulting and prototype costs related to finalizing the BolaWrap **150**[159](index=159&type=chunk) [Liquidity and Capital Resources](index=31&type=page&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet its short-term and long-term financial obligations, including cash position and funding sources - The Company's primary liquidity sources have been equity sales and derivative exercises. Future liquidity is expected from product sales, stock option/warrant exercises, and future equity/debt financings[161](index=161&type=chunk) - As of **June 30, 2023**, the Company had **$11.7 million** in cash and cash equivalents, **$6.5 million** in short-term investments, and positive working capital of **$16.6 million**. Cumulative losses attributable to stockholders were **$76.4 million**[162](index=162&type=chunk) - The recent **$10 million** Series A Convertible Preferred Stock and Warrants offering, with **$7.4 million** received by **June 30, 2023**, is expected to provide sufficient capital for the next twelve months[162](index=162&type=chunk) - Net cash used in operating activities significantly improved to **$776 thousand** for the six months ended **June 30, 2023**, compared to **$6.2 million** in the prior year period[166](index=166&type=chunk)[167](index=167&type=chunk) - The Company has contractual obligations including a **4% royalty fee** to Syzygy Licensing, LLC (up to **$1.0 million** or **September 2026**), a **$700 thousand** payment for Wrap Reality technology, facility lease payments (**$61 thousand** in **H2 2023**, **$126 thousand** in **2024**, **$75 thousand** in **2025**), and **$3.9 million** in purchase commitments[172](index=172&type=chunk)[173](index=173&type=chunk)[174](index=174&type=chunk) - The acquisition of Intrensic, LLC for **$553,588** cash and **1,250,000 shares** of Common Stock, entered into on **August 9, 2023**, represents a significant future commitment[175](index=175&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=35&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that there are no material quantitative or qualitative disclosures about market risk applicable to the company for the reporting period - The company has no material quantitative or qualitative disclosures about market risk[179](index=179&type=chunk) [Item 4. Controls and Procedures](index=35&type=section&id=Item%204.%20Controls%20and%20Procedures) This section addresses the effectiveness of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting - As of **June 30, 2023**, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[181](index=181&type=chunk) - There have been no material changes in internal control over financial reporting during the **fiscal quarter ended June 30, 2023**[182](index=182&type=chunk) PART II. OTHER INFORMATION This section provides additional disclosures on legal proceedings, risk factors, equity sales, defaults, and other relevant information [Item 1. Legal Proceedings](index=35&type=section&id=Item%201.%20Legal%20Proceedings) This section outlines potential and ongoing legal matters, including general business claims and intellectual property disputes, and confirms the absence of a provision for liability under existing litigation as of the reporting date - The company may be subject to various legal proceedings in the normal course of business, including claims of intellectual property infringement, breach of contract, and employment law violations[184](index=184&type=chunk) - As of **June 30, 2023**, the company had no provision for liability under existing litigation[184](index=184&type=chunk) [Item 1A. Risk Factors](index=36&type=page&id=Item%201A.%20Risk%20Factors) This section refers to the risk factors previously discussed in the Annual Report on Form 10-K, indicating no material changes for the current reporting period - Management is not aware of any material changes to the risk factors discussed in Part **1**, Item **1A**, of the Annual Report on Form **10-K** for the year ended **December 31, 2022**[186](index=186&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=36&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section confirms that no unregistered equity securities were issued during the three months ended June 30, 2023, that had not been previously reported - No unregistered securities were issued during the three months ended **June 30, 2023**, that were not previously reported[187](index=187&type=chunk) [Item 3. Defaults Upon Senior Securities](index=36&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[188](index=188&type=chunk) [Item 4. Mine Safety Disclosures](index=36&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[189](index=189&type=chunk) [Item 5. Other Information](index=36&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to report for the period - There is no other information to report[190](index=190&type=chunk) [Item 6. Exhibits](index=36&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including agreements, certifications, and XBRL documents - Exhibits include the Separation Agreement for Mr. Kennedy, certifications from the Principal Executive Officer and Principal Accounting Officer, and various XBRL documents[191](index=191&type=chunk) SIGNATURES This section confirms the official signing and submission of the report by the company's authorized financial officer - The report was duly signed on behalf of Wrap Technologies, Inc. by Chris DeAlmeida, Chief Financial Officer and Treasurer (Principal Accounting Officer), on **August 9, 2023**[193](index=193&type=chunk)[194](index=194&type=chunk)

Wrap Technologies, Inc. (NASDAQ:WRAP) Q2 2023 Earnings Conference Call August 10, 2023 5:00 PM ET Company Participants Kevin Mullins - Chief Executive Officer Chris DeAlmeida - Chief Financial Officer Nima Parikh - Chief Marketing Officer Conference Call Participants Operator Good afternoon and welcome to Wrap Technologies Second Quarter 2023 Earnings Conference Call. My name is Nima Parikh and I’m the Chief Marketing Officer at Wrap. Joining me today is our Wrap Technologies, Chief Executive Officer, Kevin ...

Wrap Technologies, Inc. (NASDAQ:WRAP) Q1 2023 Earnings Conference Call May 10, 2023 5:00 PM ET Company Participants Kevin Mullins - Chief Executive Officer Chris DeAlmeida - Chief Financial Officer Conference Call Participants Operator Good afternoon and welcome to Wrap Technologies First Quarter 2023 Earnings Conference Call. Joining me today is our Chief Executive Officer, Kevin Mullins; and our Chief Financial Officer, Chris DeAlmeida. Following their prepared remarks, we will have a few questions submit ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File Number: 000-55838 Wrap Technologies, Inc. (Exact name of registrant as specified in its charter) Delaware 98-055194 ...

PART I [ITEM 1. Business](index=5&type=section&id=ITEM%201.%20Business) Wrap Technologies provides modern policing solutions, including BolaWrap remote restraint and Wrap Reality VR training, for global public safety [Overview](index=5&type=section&id=Overview) Wrap Technologies, Inc. is a global public safety technology and services company, founded in March 2016, delivering modern policing solutions to law enforcement and security personnel - Wrap Technologies' primary products are the **BolaWrap 150** remote restraint device (launched early 2022) and the **Wrap Reality** virtual reality training platform (introduced 2020)[19](index=19&type=chunk) - In November 2022, the company partnered with Lumeto, Inc. and Spatial Industries Group, Inc. to upgrade its Wrap Reality virtual simulation training platform to a cloud-based system[25](index=25&type=chunk) [Industry Background](index=6&type=section&id=Industry%20Background) The non-lethal and less-lethal product market, driven by police reform and de-escalation trends, offers solutions like BolaWrap to reduce use-of-force incidents and improve community relations - The market for non-lethal and less-lethal products serves law enforcement, correctional facilities, military, and private security, with Wrap Technologies focusing on law enforcement[27](index=27&type=chunk) - Demand for non-lethal restraining solutions like BolaWrap is increasing due to trends in mental health cases, police reform, and de-escalation movements, offering an alternative to pain-inducing compliance tools[27](index=27&type=chunk)[28](index=28&type=chunk) - Nonlethal solutions like BolaWrap can reduce use-of-force incidents, decrease litigation, settlements, and insurance costs, and improve community relations with public safety agencies[28](index=28&type=chunk)[29](index=29&type=chunk) [Markets](index=6&type=section&id=Markets) The global non-lethal market is projected to grow to $16.1 billion by 2027 - The global non-lethal market is projected to grow to **$16.1 billion by 2027**[30](index=30&type=chunk) - Target markets include domestic law enforcement (over **900,000 officers** in federal, state, local agencies) and international law enforcement (over **12.1 million police officers** in 100 largest forces outside the US)[30](index=30&type=chunk)[31](index=31&type=chunk) - Additional target markets include correctional facilities (**240,000 officers** in over 1,000 facilities) and private security firms (**1.1 million guards** in the US), though ATF classifications currently restrict sales to non-government security firms[32](index=32&type=chunk)[34](index=34&type=chunk)[35](index=35&type=chunk) - The virtual training and simulation market is projected to reach **$602 billion by 2027**, with law enforcement and military sectors being important growth segments[36](index=36&type=chunk) [Wrap Products and Services](index=7&type=section&id=Wrap%20Products%20and%20Services) Wrap Technologies offers the BolaWrap 150 remote restraint device for non-pain compliance and the Wrap Reality virtual reality training platform with immersive scenarios for law enforcement - The BolaWrap product line includes the BolaWrap 100 and the improved **BolaWrap 150** (delivered Q1 2022), which is electronically deployed, more robust, smaller, lighter, and simpler to use[37](index=37&type=chunk)[48](index=48&type=chunk) - BolaWrap discharges a **7.5-foot Kevlar tether** to entangle individuals from **10-25 feet**, providing a non-pain compliance tool to impede movement and prevent harm, especially in behavioral health crises or with non-compliant individuals[37](index=37&type=chunk)[39](index=39&type=chunk)[43](index=43&type=chunk) - Wrap Reality is a virtual reality training system with immersive computer graphics and proprietary software, offering **38 law enforcement scenarios** and allowing up to two participants to train simultaneously, enhanced via an agreement with Lumeto and Spatial in November 2022[52](index=52&type=chunk)[53](index=53&type=chunk)[55](index=55&type=chunk) [Selling, Marketing and Training](index=11&type=section&id=Selling%2C%20Marketing%20and%20Training) The company uses product demonstrations as a primary sales tool, followed by sales activities, and provides fee-based training services to agencies, believing knowledgeable instructors increase product purchases - The company uses product demonstrations as a primary sales tool, followed by sales activities, and provides fee-based training services to agencies, believing knowledgeable instructors increase product purchases[61](index=61&type=chunk) - Wrap Technologies utilizes a channel distribution approach with independent regional police equipment distributors in **50 states and Puerto Rico**, and **49 international distributors** covering **54 countries**[62](index=62&type=chunk)[63](index=63&type=chunk)[64](index=64&type=chunk) - Marketing efforts include social media, paid advertising, media coverage, press releases, web searches, and distributing body/dash camera videos of successful BolaWrap use[66](index=66&type=chunk) - The 'Train the Trainer' program, initiated in October 2018, certifies BolaWrap Instructors at local agencies to train front-line officers, with certification valid for two years[71](index=71&type=chunk)[72](index=72&type=chunk) [Our Strategy](index=12&type=section&id=Our%20Strategy) The company's commercialization strategy targets over 18,000 federal, state, and local law enforcement agencies with approximately 900,000 officers in the US, and the 100 largest police forces internationally with over 12 million officers - The company's commercialization strategy targets over **18,000 federal, state, and local law enforcement agencies** with approximately **900,000 officers** in the US, and the **100 largest police forces internationally** with over **12 million officers**[77](index=77&type=chunk) - For 2023, the strategy includes expanding revenues domestically and internationally, enhancing the current product portfolio, developing new products for security personnel, and pursuing strategic business initiatives and collaborations, including potential acquisitions[78](index=78&type=chunk) [Manufacturing and Suppliers](index=13&type=section&id=Manufacturing%20and%20Suppliers) Manufacturing, final assembly, testing, and shipping of products are performed at the company's Arizona facility, with parts, components, and subassemblies produced by third-party suppliers - Manufacturing, final assembly, testing, and shipping of products are performed at the company's Arizona facility, with parts, components, and subassemblies produced by third-party suppliers[79](index=79&type=chunk) - The company faces global supply chain challenges, including component shortages, increased lead times, and cost fluctuations, but began increasing final product inventory in late 2022 to meet demand[80](index=80&type=chunk) Backlog at December 31, 2022 | Item | Amount (in thousands) | | :--- | :--- | | Backlog | $257 | - Products come with a one-year warranty, with options for customers to purchase additional one-year increments[82](index=82&type=chunk) [Competition](index=14&type=section&id=Competition) BolaWrap is positioned as a new non-invasive remote restraint solution, distinct from pain-compliance less-lethal devices like tasers, pepper spray, and batons, aiming to be carried alongside handcuffs - BolaWrap is positioned as a new non-invasive remote restraint solution, distinct from pain-compliance less-lethal devices like tasers, pepper spray, and batons, aiming to be carried alongside handcuffs[84](index=84&type=chunk)[86](index=86&type=chunk) - In virtual reality training, the company competes with numerous providers offering simulators, including established video-based 2D systems, but believes its 3D VR Wrap Reality with **38 law enforcement and 25 corrections/societal reentry scenarios** offers a competitive advantage[87](index=87&type=chunk)[89](index=89&type=chunk) [Government Regulation](index=14&type=section&id=Government%20Regulation) The company is subject to domestic and international laws, including ATF classifications for BolaWrap products as firearms and 'Any other Weapons (AOWs)', requiring specific licenses for manufacturing and dealing - The company is subject to domestic and international laws, including ATF classifications for BolaWrap products as firearms and 'Any other Weapons (AOWs)', requiring specific licenses for manufacturing and dealing[90](index=90&type=chunk)[91](index=91&type=chunk) - Export of products from the US requires licenses from the US Department of Commerce, and compliance with shipping regulations for 'dangerous goods' is necessary[92](index=92&type=chunk)[93](index=93&type=chunk) [Intellectual Property Rights and Proprietary Information](index=15&type=section&id=Intellectual%20Property%20Rights%20and%20Proprietary%20Information) The company protects its intellectual property through issued domestic and international patents, pending patents, trademarks, copyrights, trade secrets, and confidentiality agreements - The company protects its intellectual property through issued domestic and international patents, pending patents, trademarks, copyrights, trade secrets, and confidentiality agreements[94](index=94&type=chunk) - As of December 31, 2022, the company holds **19 issued US patents** and **34 issued foreign patents** related to BolaWrap technology, with **8 additional US patents pending**[96](index=96&type=chunk) [Research and Development](index=15&type=section&id=Research%20and%20Development) Research and development initiatives focus on new versions of BolaWrap technology, virtual reality, and new public safety technologies that avoid pain compliance - Research and development initiatives focus on new versions of BolaWrap technology, virtual reality, and new public safety technologies that avoid pain compliance[99](index=99&type=chunk) Research and Development Expenditures | Fiscal Year Ended December 31, | Amount (in millions) | % of Revenue | | :----------------------------- | :------------------- | :----------- | | 2022 | $5.1 | 63% | | 2021 | $6.2 | 80% | [Related Party License and Royalties](index=16&type=section&id=Related%20Party%20License%20and%20Royalties) The company is obligated to pay 4% royalties on revenue from licensed device technology to Syzygy Licensing, LLC (owned by founders) up to an aggregate of $1.0 million or until September 30, 2026 - The company is obligated to pay **4% royalties** on revenue from licensed device technology to Syzygy Licensing, LLC (owned by founders) up to an aggregate of **$1.0 million** or until September 30, 2026[102](index=102&type=chunk)[103](index=103&type=chunk) - As of December 31, 2022, **$720 thousand** in royalties have been paid, leaving a maximum of **$280 thousand** to be paid[103](index=103&type=chunk) [Seasonality](index=16&type=section&id=Seasonality) Local and international law enforcement purchasing exhibits seasonality, with increased spending in Q3 and Q4 for US local agencies (July 1-June 30 fiscal year), Q3 for US federal government (October 1-September 30 budget year), and Q4 for calendar fiscal year budgets - Local and international law enforcement purchasing exhibits seasonality, with increased spending in Q3 and Q4 for US local agencies (July 1-June 30 fiscal year), Q3 for US federal government (October 1-September 30 budget year), and Q4 for calendar fiscal year budgets[104](index=104&type=chunk) [Financial Information about Customer Concentration and Geographic Areas](index=16&type=section&id=Financial%20Information%20about%20Customer%20Concentration%20and%20Geographic%20Areas) Financial information regarding customer concentration and geographic areas is detailed in Note 17 to the consolidated financial statements - Financial information regarding customer concentration and geographic areas is detailed in Note 17 to the consolidated financial statements[105](index=105&type=chunk) [Human Capital](index=16&type=section&id=Human%20Capital) TJ Kennedy was appointed CEO in April 2022, Kevin Mullins as President in April 2022, and Chris DeAlmeida as CFO in July 2022, bringing significant public safety technology and financial management experience - **TJ Kennedy** was appointed CEO in April 2022, **Kevin Mullins** as President in April 2022, and **Chris DeAlmeida** as CFO in July 2022, bringing significant public safety technology and financial management experience[107](index=107&type=chunk)[109](index=109&type=chunk)[110](index=110&type=chunk) - As of December 31, 2022, the company employs **69 full-time employees** (66 in US, 2 in UK, 1 in Australia), with staff allocated to sales/marketing/training (16), production (28), R&D (13), and administration (8)[112](index=112&type=chunk) [Available Information](index=17&type=section&id=Available%20Information) The company files annual, quarterly, and current reports with the SEC, available on www.sec.gov and its website www.wrap.com - The company files annual, quarterly, and current reports with the SEC, available on www.sec.gov and its website www.wrap.com[114](index=114&type=chunk)[115](index=115&type=chunk) [ITEM 1A. Risk Factors](index=18&type=section&id=ITEM%201A.%20Risk%20Factors) Wrap Technologies faces risks from operating losses, product market acceptance, liability, supply chain, regulations, and stock volatility - The company has a history of operating losses, with net losses of **$17.6 million in 2022** and **$24.4 million in 2021**, and expects to incur additional losses until sufficient revenue and margins are achieved[118](index=118&type=chunk) - Future profitability is dependent on the widespread acceptance of the BolaWrap product line and the successful commercialization and revenue growth of the Wrap Reality virtual reality training platform[123](index=123&type=chunk)[124](index=124&type=chunk) - Significant risks include potential personal injury and liability claims from product use, negative publicity, dependence on third-party suppliers, challenges in integrating acquisitions, and government regulations classifying BolaWrap as a firearm/AOW[141](index=141&type=chunk)[142](index=142&type=chunk)[148](index=148&type=chunk)[151](index=151&type=chunk)[154](index=154&type=chunk) [Risk Factors Relating to Our Business and Industry](index=18&type=section&id=Risk%20Factors%20Relating%20to%20Our%20Business%20and%20Industry) The company has a history of operating losses and expects to incur additional losses, with net losses of $17.6 million in 2022 and $24.4 million in 2021 - The company has a history of operating losses and expects to incur additional losses, with net losses of **$17.6 million in 2022** and **$24.4 million in 2021**[118](index=118&type=chunk) - Future growth is highly dependent on the widespread acceptance and sales of the BolaWrap product line and the successful commercialization of the Wrap Reality virtual reality training platform, which faces competition from legacy 2D systems[123](index=123&type=chunk)[124](index=124&type=chunk) - Risks include potential personal injury and liability claims from product use, negative publicity, significant and unpredictable warranty costs, and challenges in managing inventory due to rapidly changing technology[126](index=126&type=chunk)[129](index=129&type=chunk)[141](index=141&type=chunk)[142](index=142&type=chunk) - International operations are subject to risks such as currency fluctuations, changes in regulations, geopolitical conflicts, and difficulties in collecting accounts receivable, with international sales representing **34% of revenue in 2022**[131](index=131&type=chunk)[133](index=133&type=chunk)[138](index=138&type=chunk) - Dependence on third-party suppliers for key components creates vulnerability to price increases, inflation, and supply shortages, which could delay shipments and reduce sales or margins[148](index=148&type=chunk)[149](index=149&type=chunk) - Government regulation, particularly the ATF classification of BolaWrap as a firearm and 'Any other Weapon (AOW)', imposes strict controls on possession and transfers, potentially delaying or preventing sales[154](index=154&type=chunk)[155](index=155&type=chunk) - Competition in the law enforcement market is intense, with larger, better-capitalized companies, and the company's ability to protect its intellectual property (**19 US patents, 34 foreign patents, 8 US pending**) is crucial for competitive advantage[161](index=161&type=chunk)[164](index=164&type=chunk) [Risk Factors Relating to Our Financial Statements and Operating Results](index=26&type=section&id=Risk%20Factors%20Relating%20to%20Our%20Financial%20Statements%20and%20Operating%20Results) Future operating results are unpredictable and subject to fluctuations due to factors like product sales, government spending, supply chain issues, and market acceptance, making period-to-period comparisons unreliable - Future operating results are unpredictable and subject to fluctuations due to factors like product sales, government spending, supply chain issues, and market acceptance, making period-to-period comparisons unreliable[169](index=169&type=chunk)[170](index=170&type=chunk) - Expenses may vary significantly due to R&D efforts, intellectual property costs, marketing, personnel hiring, and supply chain variations, potentially leading to larger losses if sales fall short[172](index=172&type=chunk) - Disclosure controls and internal controls over financial reporting, while deemed effective as of December 31, 2022, may not prevent or detect all fraud or misstatements due to inherent limitations[173](index=173&type=chunk)[174](index=174&type=chunk) [Risk Factors Relating to Our Common Stock](index=28&type=section&id=Risk%20Factors%20Relating%20to%20Our%20Common%20Stock) The market price of the company's Common Stock is volatile and may fluctuate significantly due to operating results, analyst coverage, market trends, and other factors, potentially leading to substantial losses for investors - The market price of the company's Common Stock is volatile and may fluctuate significantly due to operating results, analyst coverage, market trends, and other factors, potentially leading to substantial losses for investors[176](index=176&type=chunk)[177](index=177&type=chunk) - The company may be subject to securities litigation, which can be expensive, divert management attention, and result in substantial costs or negative publicity[178](index=178&type=chunk)[179](index=179&type=chunk)[180](index=180&type=chunk) - Sales of a substantial number of shares by existing stockholders, or the issuance of additional common or preferred stock, could adversely affect the market price and dilute the value of existing shares[182](index=182&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk)[186](index=186&type=chunk) - Failure to meet Nasdaq's continued listing standards could result in delisting, leading to reduced liquidity, loss of investor confidence, and difficulties in obtaining financing[183](index=183&type=chunk) [ITEM 1B. Unresolved Staff Comments](index=30&type=section&id=ITEM%201B.%20Unresolved%20Staff%20Comments) The company has no unresolved staff comments from the SEC - There are no unresolved staff comments[192](index=192&type=chunk) [ITEM 2. Properties](index=30&type=section&id=ITEM%202.%20Properties) Wrap Technologies' executive offices, sales, training, assembly, and warehouse facilities are located in Tempe, Arizona, under a lease renewed in January 2022 through July 2025. The company also rents a 4,000 square foot space in Buffalo, New York, for three Wrap Reality employees on a month-to-month basis - The company's main facilities (executive offices, sales, training, assembly, warehouse) are located at 1817 West 4th Street, Tempe, Arizona[193](index=193&type=chunk) - The lease for the Tempe facility was renewed in January 2022 for three years, with aggregate monthly payments starting at **$9,905** in August 2022 and increasing **4% annually** until July 31, 2025[193](index=193&type=chunk) - Three Wrap Reality employees are located in a **4,000 square foot space** in Buffalo, New York, under a month-to-month rental agreement at **$2,750 per month**[195](index=195&type=chunk) [ITEM 3. Legal Proceedings](index=31&type=section&id=ITEM%203.%20Legal%20Proceedings) A shareholder derivative action filed in November 2020 against current and former officers and directors, alleging unjust enrichment and breach of fiduciary duty, was dismissed with prejudice in May 2022. The company may face other legal proceedings in the normal course of business, for which it makes provisions when a liability is probable and estimable - A shareholder derivative action filed on November 13, 2020, alleging unjust enrichment and breach of fiduciary duty against current and former officers and directors, was dismissed with prejudice on May 3, 2022[196](index=196&type=chunk)[449](index=449&type=chunk) - The company may become subject to other legal proceedings, including claims of intellectual property infringement, breach of contract, and employment law violations[197](index=197&type=chunk) - As of December 31, 2022, the company had no provision for liability under existing litigation[197](index=197&type=chunk) [ITEM 4. Mine Safety Disclosures](index=31&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Wrap Technologies, Inc - This item is not applicable[199](index=199&type=chunk) PART II [ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=32&type=section&id=ITEM%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Wrap Technologies' Common Stock is listed on the Nasdaq Capital Market under the symbol 'WRAP'. As of December 31, 2022, there were approximately 19 stockholders of record and 41,175,993 shares of Common Stock outstanding. The company's 2017 Stock Incentive Plan, which has been amended multiple times, authorized a total of 9,000,000 shares for equity incentive awards, with 1,556,291 shares remaining available for grant at year-end 2022 - The company's Common Stock is listed on the Nasdaq Capital Market under the symbol **'WRAP'**[202](index=202&type=chunk) - As of December 31, 2022, there were **41,175,993 shares of Common Stock outstanding** and approximately **19 stockholders of record**[203](index=203&type=chunk)[340](index=340&type=chunk) - The 2017 Stock Incentive Plan, approved by stockholders, authorized a total of **9 million shares** for equity incentive awards, with **1.56 million shares** available for future issuance as of December 31, 2022[204](index=204&type=chunk)[205](index=205&type=chunk)[206](index=206&type=chunk) - No unregistered securities were issued during the fiscal year that were not previously reported[207](index=207&type=chunk) [ITEM 6. Selected Financial Data](index=33&type=section&id=ITEM%206.%20Selected%20Financial%20Data) Wrap Technologies, Inc. is electing to take advantage of scaled disclosure requirements available to Smaller Reporting Companies, and therefore, information requested by this Item is not included - Information requested by this Item is not included, as the company is electing to take advantage of scaled disclosure requirements available to Smaller Reporting Companies[211](index=211&type=chunk) [ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=ITEM%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Wrap Technologies reduced 2022 operating expenses by 19% and improved gross profit by 87%, aiming for adjusted EBITDA break-even by late 2023 and profitability by late 2024 - Wrap Technologies is a global public safety technology and services company delivering safe and effective policing solutions, with primary products being the BolaWrap remote restraint device and the Wrap Reality VR training platform[213](index=213&type=chunk)[215](index=215&type=chunk)[216](index=216&type=chunk) - In 2022, the company reduced full-year operating expenses by **$5.0 million (19% YoY)** and increased gross profit by **87%** due to the BolaWrap 150 rollout, pricing adjustments, and reduced promotional pricing[222](index=222&type=chunk)[229](index=229&type=chunk)[271](index=271&type=chunk) - The strategic roadmap focuses on repeatable domestic BolaWrap sales, ramping international sales of BolaWrap 150, expanding agency-wide deployment via a customer success function, and transitioning Wrap Reality to a Software as a Service (SaaS) model[222](index=222&type=chunk)[229](index=229&type=chunk)[231](index=231&type=chunk) - The company anticipates reaching an adjusted EBITDA break-even point by the conclusion of fiscal 2023 and potentially achieving profitability by the end of 2024, supported by **$19.3 million** in cash and short-term investments as of December 31, 2022[233](index=233&type=chunk)[240](index=240&type=chunk) [Overview](index=33&type=section&id=Overview) Wrap Technologies is a global public safety technology and services company, providing safe and effective policing solutions, including the BolaWrap remote restraint device and the Wrap Reality virtual reality training platform - Wrap Technologies is a global public safety technology and services company, providing safe and effective policing solutions, including the BolaWrap remote restraint device and the Wrap Reality virtual reality training platform[213](index=213&type=chunk)[215](index=215&type=chunk)[216](index=216&type=chunk) - The target market includes approximately **900,000 US law enforcement officers** and over **12 million international police officers**, with the non-lethal products market projected to reach **$16.1 billion by 2027**[214](index=214&type=chunk) - The company has shipped products to **59 countries** and has distribution agreements with **49 international distributors** covering **54 countries**, in addition to a US network across 50 states and Puerto Rico[217](index=217&type=chunk) [Recent Developments](index=34&type=section&id=Recent%20Developments) In 2022, the company underwent a leadership transition, appointing TJ Kennedy as CEO and Kevin Mullins as President in April, and Chris DeAlmeida as CFO in July - In 2022, the company underwent a leadership transition, appointing **TJ Kennedy** as CEO and **Kevin Mullins** as President in April, and **Chris DeAlmeida** as CFO in July[220](index=220&type=chunk) - Key accomplishments in 2022 included defining market fit, implementing a strategic roadmap for growth, reducing operating expenses by **19%**, expanding distributor relationships, improving BolaWrap 150 pricing, and transitioning Wrap Reality to a SaaS model[222](index=222&type=chunk) - The company also entered an agreement with Lumeto and Spatial to acquire technology and services for an upgraded cloud virtual reality platform for Wrap Reality[222](index=222&type=chunk) [Business Outlook and Challenges](index=34&type=section&id=Business%20Outlook%20and%20Challenges) BolaWrap is now used by over 900 US law enforcement agencies and in 59 countries, with officers reporting successful outcomes in 82% of use cases, primarily for individuals with behavioral health issues and domestic violence calls - BolaWrap is now used by over **900 US law enforcement agencies** and in **59 countries**, with officers reporting successful outcomes in **82% of use cases**, primarily for individuals with behavioral health issues and domestic violence calls[224](index=224&type=chunk)[225](index=225&type=chunk) - As of December 31, 2022, over **1,360 agencies** have received BolaWrap training, with over **4,580 certified instructors**, representing a **32% increase in agencies** and a **30% increase in trained officers** year-over-year[228](index=228&type=chunk) - The company launched a 'Use of Force Reduction Guarantee' in January 2023, offering to buy back devices if agencies deploying BolaWrap patrol-wide do not see a **10% reduction** in reportable use-of-force[232](index=232&type=chunk) - The company anticipates reaching an adjusted EBITDA break-even point by the conclusion of fiscal 2023 and potentially achieving profitability by the end of 2024, driven by sales growth and cost control[233](index=233&type=chunk) - The transition from BolaWrap 100 to BolaWrap 150 in 2022, coupled with COVID-19 related demonstration limitations in 2021, adversely affected sales, but a rebound was seen in H2 2022 with improved BolaWrap 150 production and demonstrations[238](index=238&type=chunk)[239](index=239&type=chunk) - As of December 31, 2022, the company had **$19.3 million** in cash and cash equivalents and short-term investments, providing sufficient capital for operations for the next twelve months[240](index=240&type=chunk) [Critical Accounting Policies and Estimates](index=38&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Key accounting policies requiring significant judgment include revenue recognition, share-based compensation, allowance for doubtful accounts, valuation of inventory and intangible assets, and accrued expenses (e.g., warranty liabilities) - Key accounting policies requiring significant judgment include revenue recognition, share-based compensation, allowance for doubtful accounts, valuation of inventory and intangible assets, and accrued expenses (e.g., warranty liabilities)[247](index=247&type=chunk) - Revenue from product sales is recognized when products are shipped or received, or for bill-and-hold transactions, when control, title, and risk of ownership transfer[248](index=248&type=chunk)[249](index=249&type=chunk) - Share-based compensation expense is determined using the Black-Scholes option-pricing model for stock options and market price for restricted stock units, amortized over the vesting term[250](index=250&type=chunk) - Inventory is valued at the lower of cost or net realizable value, with periodic reviews for impairment; no reserve for obsolescence was recorded at December 31, 2022[253](index=253&type=chunk)[368](index=368&type=chunk) [Recent Accounting Pronouncements](index=39&type=section&id=Recent%20Accounting%20Pronouncements) New pronouncements issued for future implementation are discussed in Note 1 to the financial statements - New pronouncements issued for future implementation are discussed in Note 1 to the financial statements[258](index=258&type=chunk) [Segment and Related Information](index=39&type=section&id=Segment%20and%20Related%20Information) The company operates as a single segment, with the CEO managing operations for resource allocation - The company operates as a single segment, with the CEO managing operations for resource allocation[259](index=259&type=chunk) [Operating Expense](index=39&type=section&id=Operating%20Expense) Operating expenses include selling, general and administrative (SG&A) and research and development (R&D) expenses - Operating expenses include selling, general and administrative (SG&A) and research and development (R&D) expenses[260](index=260&type=chunk) - The scope and magnitude of future R&D and SG&A expenses are difficult to predict and depend on staffing, project elections, marketing efforts, and regulatory costs[260](index=260&type=chunk) [Results of Operations](index=40&type=section&id=Results%20of%20Operations) Total revenues increased by 4% to $8.0 million in Fiscal 2022 from $7.7 million in Fiscal 2021. International revenues decreased from $4.4 million in 2021 to $2.7 million in 2022 Consolidated Statements of Operations (in thousands) | (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :--------------- | :--- | :--- | :--------- | :--------- | | **Revenues:** | | | | | | Product sales | $7,481 | $7,381 | $100 | 1% | | Other revenue | $568 | $348 | $220 | 63% | | **Total revenues** | **$8,049** | **$7,729** | **$320** | **4%** | | **Cost of revenues:** | | | | | | Products and services | $4,315 | $4,987 | $(672) | (13%) | | Product line exit expense | $- | $747 | $(747) | (100%) | | **Total cost of revenues** | **$4,315** | **$5,734** | **$(1,419)** | **(25%)** | | **Gross profit** | **$3,734** | **$1,995** | **$1,739** | **87%** | | **Operating expenses:** | | | | | | Selling, general and administrative | $16,386 | $20,276 | $(3,890) | (19%) | | Research and development | $5,078 | $6,214 | $(1,136) | (18%) | | **Total operating expenses** | **$21,464** | **$26,490** | **$(5,026)** | **(19%)** | | **Loss from operations** | **$(17,730)** | **$(24,495)** | **$6,765** | **28%** | - Total revenues increased by **4% to $8.0 million** in Fiscal 2022 from **$7.7 million** in Fiscal 2021. International revenues decreased from **$4.4 million in 2021 to $2.7 million in 2022**[265](index=265&type=chunk) - Gross profit increased by **87% to $3.7 million (46% gross margin)** in Fiscal 2022, up from **$2.0 million (35% gross margin**, excluding restructuring charge) in Fiscal 2021, driven by BolaWrap 150 rollout, pricing adjustments, and reduced promotional pricing[271](index=271&type=chunk) - Selling, General and Administrative (SG&A) expense decreased by **$3.9 million (19%)** in Fiscal 2022 due to cost containment efforts, including a **$1.9 million decrease** in share-based compensation[275](index=275&type=chunk) - Research and Development (R&D) expense decreased by **$1.1 million (18%)** in Fiscal 2022, primarily due to reduced share-based compensation and consulting costs related to finalizing the BolaWrap 150[279](index=279&type=chunk) - Loss from operations decreased by **$6.8 million (28%) to $17.6 million** in Fiscal 2022, reflecting increased margin and reduced operating costs[280](index=280&type=chunk) [Liquidity and Capital Resources](index=42&type=section&id=Liquidity%20and%20Capital%20Resources) As of December 31, 2022, the company had cash and cash equivalents of $5.3 million, short-term investments of $13.9 million, and positive working capital of $23.7 million - As of December 31, 2022, the company had cash and cash equivalents of **$5.3 million**, short-term investments of **$13.9 million**, and positive working capital of **$23.7 million**[281](index=281&type=chunk) - The company has sustained cumulative losses of **$67.4 million** since inception but believes current financial resources are adequate for the next twelve months[281](index=281&type=chunk)[283](index=283&type=chunk) - Net cash used in operating activities was **$14.6 million** in Fiscal 2022, an improvement of **$3.6 million** compared to **$18.2 million** in Fiscal 2021, primarily due to reduced net loss and non-cash expenses[236](index=236&type=chunk)[286](index=286&type=chunk)[287](index=287&type=chunk) - Investing activities in Fiscal 2022 included **$30.5 million** in short-term investment purchases and **$46.6 million** from maturities, resulting in net cash provided of **$14.9 million**[288](index=288&type=chunk) - Financing activities in Fiscal 2022 generated **$83 thousand** from stock option exercises, significantly less than **$13.5 million** in Fiscal 2021 which included **$12 million** from warrant exercises[290](index=290&type=chunk) [Contractual Obligations and Commitments](index=44&type=section&id=Contractual%20Obligations%20and%20Commitments) The company is obligated to pay a 4% royalty fee on future product sales to Syzygy Licensing, LLC, up to an aggregate of $1.0 million or until September 30, 2026 - The company is obligated to pay a **4% royalty fee** on future product sales to Syzygy Licensing, LLC, up to an aggregate of **$1.0 million** or until September 30, 2026[292](index=292&type=chunk) - Under an agreement with Lumeto, Inc. and Spatial Industries Group, Inc., the company is obligated to pay **$700 thousand** upon execution, and two additional **$125 thousand** payments upon completion of project delivery milestones for VR technology and licenses[293](index=293&type=chunk) Future Lease Payments (in thousands) | Year | Amount | | :--- | :----- | | 2023 | $121 | | 2024 | $126 | | 2025 | $75 | - As of December 31, 2022, the company was committed for approximately **$3.6 million** for future component deliveries and contract services[294](index=294&type=chunk) [Effects of Inflation](index=44&type=section&id=Effects%20of%20Inflation) In 2022, the company experienced increased labor and material costs due to inflation, and anticipates higher payroll costs and operating expenses in 2023 due to low unemployment and rising salaries - In 2022, the company experienced increased labor and material costs due to inflation, and anticipates higher payroll costs and operating expenses in 2023 due to low unemployment and rising salaries[295](index=295&type=chunk) [Recent Accounting Pronouncements](index=44&type=section&id=Recent%20Accounting%20Pronouncements) There have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2022, or subsequently, that are believed to be of potential significance to the financial statements - There have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2022, or subsequently, that are believed to be of potential significance to the financial statements[296](index=296&type=chunk) [ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk](index=44&type=section&id=ITEM%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This item is not applicable to Wrap Technologies, Inc - This item is not applicable[297](index=297&type=chunk) [ITEM 8. Financial Statements and Supplementary Data](index=44&type=section&id=ITEM%208.%20Financial%20Statements%20and%20Supplementary%20Data) The financial statements and supplementary data required for this item are presented in a separate section of the report, commencing on page F-1 - The Financial Statements of the Company required to be included in this Item 8 are set forth in a separate section of this report following Item 15 commencing on Page F-1[298](index=298&type=chunk) [ITEM 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure](index=44&type=section&id=ITEM%209.%20Changes%20in%20and%20Disagreement%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There have been no disagreements or reportable events requiring disclosure under Item 304(b) of Regulation S-K regarding changes in or disagreements with accountants on accounting and financial disclosure - There have been no disagreements or any reportable events requiring disclosure under Item 304(b) of Regulation S-K[299](index=299&type=chunk) [ITEM 9A. Controls and Procedures](index=45&type=section&id=ITEM%209A.%20Controls%20and%20Procedures) Wrap Technologies maintains disclosure controls and procedures designed to ensure timely and accurate reporting of material information. As of December 31, 2022, management, with the participation of the interim CEO and CFO, concluded that these controls and the internal control over financial reporting were effective at a reasonable assurance level. No material changes in internal control over financial reporting occurred during the fiscal quarter ended December 31, 2022 - The company maintains disclosure controls and procedures designed to ensure material information is recorded, processed, summarized, and reported within SEC specified time periods[301](index=301&type=chunk)[302](index=302&type=chunk) - As of December 31, 2022, management, including the interim CEO and CFO, concluded that the disclosure controls and procedures and internal control over financial reporting were effective at the reasonable assurance level[303](index=303&type=chunk)[306](index=306&type=chunk) - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the fiscal quarter ended December 31, 2022[308](index=308&type=chunk) [ITEM 9B. Other Information](index=45&type=section&id=ITEM%209B.%20Other%20Information) There is no other information required to be disclosed in this item - None[309](index=309&type=chunk) PART III [ITEM 10. Directors, Executive Officers and Corporate Governance](index=46&type=section&id=ITEM%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The information required for this item will be incorporated by reference from the company's definitive proxy statement, to be filed with the SEC on or before May 1, 2023 - Information required by this item will be incorporated by reference from the Company's definitive proxy statement, to be filed with the SEC on or before May 1, 2023[312](index=312&type=chunk) [ITEM 11. Executive Compensation](index=46&type=section&id=ITEM%2011.%20Executive%20Compensation) The information required for this item will be incorporated by reference from the company's definitive proxy statement, to be filed with the SEC on or before May 1, 2023 - Information required by this item will be incorporated by reference from the Company's definitive proxy statement, to be filed with the SEC on or before May 1, 2023[313](index=313&type=chunk) [ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=46&type=section&id=ITEM%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) The information required for this item will be incorporated by reference from the company's definitive proxy statement, to be filed with the SEC on or before May 1, 2023 - 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 May 1, 2023[314](index=314&type=chunk) [ITEM 13. Certain Relationships and Related Transactions and Director Independence](index=46&type=section&id=ITEM%2013.%20Certain%20Relationships%20and%20Related%20Transactions%20and%20Director%20Independence) The information required for this item will be incorporated by reference from the company's definitive proxy statement, to be filed with the SEC on or before May 1, 2023 - Information required by this item will be incorporated by reference from the Company's definitive proxy statement, to be filed with the SEC on or before May 1, 2023[315](index=315&type=chunk) [ITEM 14. Principal Accounting Fees and Services](index=46&type=section&id=ITEM%2014.%20Principal%20Accounting%20Fees%20and%20Services) The information required for this item will be incorporated by reference from the company's definitive proxy statement, to be filed with the SEC on or before May 1, 2023 - Information required by this item will be incorporated by reference from the Company's definitive proxy statement, to be filed with the SEC on or before May 1, 2023[316](index=316&type=chunk) PART IV [ITEM 15. Exhibits, Financial Statement Schedules](index=47&type=section&id=ITEM%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the documents filed as part of the report, including an index to financial statements and an index to exhibits. All financial statement schedules have been omitted as the information is either not applicable, not material, or included within the financial statements or their notes - This section provides a list of documents filed as part of the report, including an index to financial statements and an index to exhibits[319](index=319&type=chunk)[320](index=320&type=chunk) - All financial statement schedules have been omitted because the information is not applicable, not material, or included in the financial statements or notes[319](index=319&type=chunk) Financial Statements [Report of Independent Registered Public Accounting Firm](index=50&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Rosenberg Rich Baker Berman, P.A. issued an unqualified opinion on Wrap Technologies' 2022 and 2021 financial statements, confirming fair presentation under US GAAP - Rosenberg Rich Baker Berman, P.A. audited the financial statements of Wrap Technologies, Inc. for the years ended December 31, 2022 and 2021[331](index=331&type=chunk) - The firm expressed an unqualified opinion, stating that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with US GAAP[331](index=331&type=chunk) - The audit did not include an opinion on the effectiveness of internal control over financial reporting, and no critical audit matters were identified[333](index=333&type=chunk)[335](index=335&type=chunk) [Consolidated Balance Sheets](index=51&type=section&id=Consolidated%20Balance%20Sheets) As of December 31, 2022, Wrap Technologies reported total assets of $30.6 million, a decrease from $44.2 million in 2021. This change was primarily driven by a reduction in short-term investments from $29.9 million to $13.9 million. Total liabilities increased slightly to $3.5 million from $3.0 million, while total stockholders' equity decreased to $27.1 million from $41.3 million, reflecting the net loss incurred during the year Consolidated Balance Sheet Highlights (in thousands) | Item | December 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------------ | :------------------ | | **ASSETS** | | | | Cash and cash equivalents | $5,330 | $4,937 | | Short-term investments | $13,949 | $29,983 | | Accounts receivable and contract assets, net | $2,830 | $3,859 | | Inventories, net | $3,975 | $1,566 | | Total current assets | $26,859 | $41,213 | | Property and equipment, net | $758 | $976 | | Intangible assets, net | $2,569 | $1,982 | | **Total assets** | **$30,571** | **$44,231** | | **LIABILITIES AND STOCKHOLDERS' EQUITY** | | | | Total current liabilities | $3,156 | $2,857 | | Total long-term liabilities | $360 | $110 | | **Total liabilities** | **$3,516** | **$2,967** | | Additional paid-in capital | $94,333 | $91,025 | | Accumulated deficit | $(67,376) | $(49,759) | | **Total stockholders' equity** | **$27,055** | **$41,264** | - Total assets decreased by **$13.66 million** from **$44.23 million in 2021 to $30.57 million in 2022**, primarily due to a reduction in short-term investments[340](index=340&type=chunk) - Accumulated deficit increased from **$(49.76) million in 2021 to $(67.38) million in 2022**, reflecting the net loss for the period[340](index=340&type=chunk) [Consolidated Statements of Operations and Comprehensive Loss](index=52&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) Wrap Technologies reported a net loss of $17.6 million in 2022, an improvement from a $24.4 million net loss in 2021. Total revenues increased by 4% to $8.0 million, driven by a 1% increase in product sales and a 63% increase in other revenue. Gross profit significantly improved by 87% to $3.7 million, while total operating expenses decreased by 19% to $21.5 million, reflecting cost containment efforts Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Item | Year Ended December 31, 2022 | Year Ended December 31, 2021 | | :------------------------------------ | :--------------------------- | :--------------------------- | | Total revenues | $8,049 | $7,729 | | Total cost of revenues | $4,315 | $5,734 | | Gross profit | $3,734 | $1,995 | | Total operating expenses | $21,464 | $26,490 | | Loss from operations | $(17,730) | $(24,495) | | Net loss | $(17,617) | $(24,449) | | Net loss per basic and diluted common share | $(0.43) | $(0.62) | | Comprehensive loss | $(17,517) | $(24,470) | - Net loss decreased by **$6.83 million**, from **$(24.45) million in 2021 to $(17.62) million in 2022**[343](index=343&type=chunk) - Total revenues increased by **4%** year-over-year, from **$7.73 million in 2021 to $8.05 million in 2022**[343](index=343&type=chunk) - Gross profit increased by **87%** year-over-year, from **$1.99 million in 2021 to $3.73 million in 2022**[343](index=343&type=chunk) - Total operating expenses decreased by **19%** year-over-year, from **$26.49 million in 2021 to $21.46 million in 2022**[343](index=343&type=chunk) [Consolidated Statements of Stockholders' Equity](index=53&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) Wrap Technologies' total stockholders' equity decreased from $41.26 million at December 31, 2021, to $27.06 million at December 31, 2022. This decline primarily reflects the net loss of $17.62 million for 2022, partially offset by $3.23 million in share-based compensation expense and a $0.10 million net unrealized gain on short-term investments. The number of common shares outstanding increased to 41,175,993 Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Item | December 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------------ | :------------------ | | Common Stock (shares) | 41,175,993 | 40,851,945 | | Common Stock (amount) | $4 | $4 | | Additional Paid-In Capital | $94,333 | $91,025 | | Accumulated Deficit | $(67,376) | $(49,759) | | Accumulated Other Comprehensive Income (Loss) | $94 | $(6) | | Total Stockholders' Equity | $27,055 | $41,264 | - Total stockholders' equity decreased by **$14.21 million**, from **$41.26 million in 2021 to $27.06 million in 2022**[346](index=346&type=chunk) - The accumulated deficit increased by **$17.62 million**, from **$(49.76) million in 2021 to $(67.38) million in 2022**, primarily due to the net loss[346](index=346&type=chunk) - Share-based compensation expense contributed **$3.23 million** to additional paid-in capital in 2022, compared to **$5.36 million** in 2021[346](index=346&type=chunk) [Consolidated Statements of Cash Flows](index=54&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) In 2022, Wrap Technologies' net cash used in operating activities decreased to $14.6 million from $18.2 million in 2021, primarily due to a reduced net loss and changes in working capital. Investing activities provided $14.9 million in cash, a significant shift from using $6.9 million in 2021, driven by net proceeds from short-term investments. Financing activities generated $83 thousand in 2022, a substantial decrease from $13.45 million in 2021, which included proceeds from warrant exercises Consolidated Statements of Cash Flows (in thousands) | Item | Year Ended December 31, 2022 | Year Ended December 31, 2021 | | :------------------------------------ | :--------------------------- | :--------------------------- | | Net cash used in operating activities | $(14,603) | $(18,223) | | Net cash provided by (used in) investing activities | $14,913 | $(6,937) | | Net cash provided by financing activities | $83 | $13,450 | | Net (decrease) increase in cash and cash equivalents | $393 | $(11,710) | | Cash and cash equivalents, end of period | $5,330 | $4,937 | - Net cash used in operating activities decreased by **$3.62 million**, from **$(18.22) million in 2021 to $(14.60) million in 2022**[349](index=349&type=chunk) - Investing activities shifted from using **$6.94 million in 2021 to providing $14.91 million in 2022**, largely due to changes in short-term investment maturities and purchases[349](index=349&type=chunk) - Financing activities provided **$83 thousand** in 2022, a significant decrease from **$13.45 million in 2021**, which included **$12.05 million** from warrant exercises[349](index=349&type=chunk) [Notes to Consolidated Financial Statements](index=55&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The Notes detail Wrap Technologies' accounting policies, financial instruments, risk concentrations, asset valuations, share-based compensation, leases, and related party transactions [1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=55&type=section&id=1.%20ORGANIZATION%20AND%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) Wrap Technologies, Inc. is a publicly traded Delaware corporation (NASDAQ: WRAP) that develops and supplies public safety products and training services, primarily the BolaWrap remote restraint device, for law enforcement and security personnel globally - Wrap Technologies, Inc. is a publicly traded Delaware corporation (NASDAQ: WRAP) that develops and supplies public safety products and training services, primarily the BolaWrap remote restraint device, for law enforcement and security personnel globally[352](index=352&type=chunk) - The company operates as a single segment and consolidates its wholly-owned subsidiary, Wrap Reality, Inc., which sells a virtual reality training system[353](index=353&type=chunk)[394](index=394&type=chunk) - Significant concentrations of risk include credit risk (cash and equivalents at two domestic institutions), customer concentration (limited domestic and international customers), and supplier concentration (sole manufacturers for BolaWrap battery assembly and propulsion components)[355](index=355&type=chunk)[356](index=356&type=chunk)[357](index=357&type=chunk) - The company follows US GAAP, using estimates for share-based compensation, doubtful accounts, inventory and intangible asset valuation, warranty reserves, and tax contingencies[354](index=354&type=chunk) - Revenue from product sales is recognized when products are shipped or received, or for bill-and-hold transactions, when control, title, and risk of ownership transfer. Other revenue includes VR, service, training, and shipping[381](index=381&type=chunk)[383](index=383&type=chunk) - Share-based compensation expense is recognized based on the fair value of stock options (Black-Scholes model) and restricted stock units (market price) over their vesting terms[362](index=362&type=chunk) - Inventories are valued at the lower of cost (FIFO method) or net realizable value, with no reserve for obsolescence at December 31, 2022[367](index=367&type=chunk)[368](index=368&type=chunk) - Intangible assets include capitalized legal fees for patents/trademarks, purchased software, and indefinite-lived website domains, amortized over 1-20 years, with annual impairment tests for indefinite-lived assets[371](index=371&type=chunk) - The company adopted ASC Topic 842, Leases, recognizing right-of-use assets and lease liabilities for leases over 12 months, and recorded **$747 thousand** in product line exit costs in 2021 related to the BolaWrap 100 wind-down[380](index=380&type=chunk)[390](index=390&type=chunk) [2. REVENUE AND PRODUCT COSTS](index=61&type=section&id=2.%20REVENUE%20AND%20PRODUCT%20COSTS) Revenues consist of product sales (BolaWrap products and accessories) and other revenue (VR, service, training, and shipping) - Revenues consist of product sales (BolaWrap products and accessories) and other revenue (VR, service, training, and shipping)[400](index=400&type=chunk) Contract Liabilities Activity (in thousands) | Item | Customer Deposits | Deferred Revenue | | :-------------------- | :---------------- | :--------------- | | Balance at January 1, 2022 | $43 | $265 | | Additions, net | $- | $301 | | Transfer to revenue | $(43) | $(233) | | Balance at December 31, 2022 | $- | $333 | | Current portion | $- | $166 | | Long-term portion | $- | $167 | - At December 31, 2022, deferred revenue of **$333 thousand** included **$198 thousand** related to VR, **$11 thousand** to training, and **$124 thousand** to BolaWrap extended warranties and services[402](index=402&type=chunk) [3. ASSET ACQUISITION](index=62&type=section&id=3.%20ASSET%20ACQUISITION) On November 22, 2022, Wrap Technologies entered an agreement with Lumeto, Inc. and Spatial Industries Group, Inc. to acquire technology, services, and perpetual licenses for its Wrap Reality virtual simulation training platform - On November 22, 2022, Wrap Technologies entered an agreement with Lumeto, Inc. and Spatial Industries Group, Inc. to acquire technology, services, and perpetual licenses for its Wrap Reality virtual simulation training platform[405](index=405&type=chunk) - The acquisition involved a cash payment of **$700 thousand** upon execution, with additional payments of **$125 thousand** upon completion of project delivery milestones (Q1 2023) and **$125 thousand** upon final delivery (Q2 2023)[405](index=405&type=chunk) - Identified intangible assets from this acquisition included **$700 thousand** in software with a useful life of 3 years[405](index=405&type=chunk) [4. FINANCIAL INSTRUMENTS](index=62&type=section&id=4.%20FINANCIAL%20INSTRUMENTS) The company's cash equivalent Money Market Funds and short-term investments (US Treasury bills) are classified as Level 1 financial instruments, valued using quoted market prices - The company's cash equivalent Money Market Funds and short-term investments (US Treasury bills) are classified as Level 1 financial instruments, valued using quoted market prices[408](index=408&type=chunk) Financial Assets at Fair Value (in thousands) | Item | December 31, 2022 Market Value | December 31, 2021 Market Value | | :-------------------------------- | :----------------------------- | :----------------------------- | | Money Market Funds | $3,004 | $1,670 | | US Treasury securities in short-term investments | $9,949 | $29,983 | | Certificate of Deposits | $4,000 | $- | | **Total Financial Assets** | **$16,953** | **$31,653** | - Unrealized gains or losses from short-term investments are recorded in accumulated other comprehensive gain or loss, with a **$100 thousand gain in 2022** and a **$(21) thousand loss in 2021**[409](index=409&type=chunk) [5. INVENTORIES, NET](index=63&type=section&id=5.%20INVENTORIES%2C%20NET) Inventories are valued at the lower of cost (FIFO method) or net realizable value, comprising raw materials, assemblies, and finished products - Inventories are valued at the lower of cost (FIFO method) or net realizable value, comprising raw materials, assemblies, and finished products[411](index=411&type=chunk) Inventories, Net (in thousands) | Item | December 31, 2022 | December 31, 2021 | | :---------------- | :------------------ | :------------------ | | Finished goods | $2,293 | $1,027 | | Work in process | $- | $2 | | Raw materials | $1,682 | $537 | | **Inventories - net** | **$3,975** | **$1,566** | - No reserve for obsolescence was recorded at December 31, 2022, but **$621 thousand** in end-of-life raw material costs were written off in 2021 as part of product line exit costs[368](index=368&type=chunk)[411](index=411&type=chunk) [6. PROPERTY AND EQUIPMENT, NET](index=64&type=section&id=6.%20PROPERTY%20AND%20EQUIPMENT%2C%20NET) Property and equipment are stated at cost and depreciated over three years using the straight-line method - Property and equipment are stated at cost and depreciated over three years using the straight-line method[369](index=369&type=chunk) Property and Equipment, Net (in thousands) | Item | December 31, 2022 | December 31, 2021 | | :-------------------------- | :------------------ | :------------------ | | Production and lab equipment | $513 | $500 | | Tooling | $448 | $273 | | Computer equipment | $531 | $467 | | Furniture, fixtures and improvements | $181 | $176 | | Total | $1,673 | $1,416 | | Accumulated depreciation | $(915) | $(440) | | **Property and equipment, net** | **$758** | **$976** | - Depreciation expense was **$475 thousand in 2022**, compared to **$297 thousand in 2021**. Unamortized production tooling costs of **$106 thousand** were written off in 2021 as part of product line exit costs[413](index=413&type=chunk) [7. INTANGIBLE ASSETS, NET](index=64&type=section&id=7.%20INTANGIBLE%20ASSETS%2C%20NET) Intangible assets include patents, trademarks, purchased software, and indefinite-lived website domains, with estimated useful lives of 1 to 20 years for amortizable assets - Intangible assets include patents, trademarks, purchased software, and indefinite-lived website domains, with estimated useful lives of **1 to 20 years** for amortizable assets[371](index=371&type=chunk)[414](index=414&type=chunk) Intangible Assets, Net (in thousands) | Item | December 31, 2022 | December 31, 2021 | | :-------------------------- | :------------------ | :------------------ | | Patents | $575 | $416 | | Trademarks | $150 | $134 | | Purchased software | $1,962 | $1,212 | | Other | $- | $50 | | Total amortizable | $2,687 | $1,812 | | Accumulated amortization | $(462) | $(174) | | Total amortizable, net | $2,225 | $1,638 | | Indefinite life assets | $344 | $344 | | **Total intangible assets, net** | **$2,569** | **$1,982** | - Amortization expense was **$287 thousand in 2022**, compared to **$182 thousand in 2021**. An additional impairment charge of **$170 thousand** for purchased software was recorded in 2021[414](index=414&type=chunk) Estimated Annual Amortization Expense (in thousands) | Year | Amount | | :--- | :----- | | 2023 | $498 | | 2024 | $518 | | 2025 | $513 | | 2026 | $212 | | 2027 | $42 | | Thereafter | $442 | | **Total** | **$2,225** | [8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES](index=65&type=section&id=8.%20ACCOUNTS%20PAYABLE%20AND%20ACCRUED%20LIABILITIES) Accounts payable included $127 thousand due to related party Syzygy Licensing, LLC as of December 31, 2022, down from $228 thousand in 2021 - Accounts payable included **$127 thousand** due to related party Syzygy Licensing, LLC as of December 31, 2022, down from **$228 thousand in 2021**[416](index=416&type=chunk) Accrued Liabilities (in thousands) | Item | December 31, 2022 | December 31, 2021 | | :---------------- | :------------------ | :------------------ | | Patent and legal costs | $135 | $28 | | Accrued compensation | $1,100 | $628 | | Warranty costs | $125 | $96 | | Taxes and other | $103 | $72 | | **Total** | **$1,463** | **$824** | - Accrued compensation included **$1.02 million** in employee bonuses and commissions payable at December 31, 2022, a significant increase from **$305 thousand in 2021**[417](index=417&type=chunk) Warranty Costs Activity (in thousands) | Item | Year Ended December 31, 2022 | Year Ended December 31, 2021 | | :-------------------- | :--------------------------- | :--------------------------- | | Balance, beginning of period | $96 | $48 | | Warranty settlements | $(181) | $(62) | | Warranty provision | $210 | $110 | | **Balance, end of period** | **$125** | **$96** | [9. LEASES](index=65&type=section&id=9.%20LEASES) The company adopted ASC Topic 842, Leases, on January 1, 2019, recognizing ROU assets and lease liabilities for leases over 12 months - The company adopted ASC Topic 842, Leases, on January 1, 2019, recognizing ROU assets and lease liabilities for leases over 12 months[419](index=419&type=chunk) - The facility lease was amended on January 21, 2022, extending the expiration date to July 31, 2025, and resulting in a reassessment of the lease liability and recording of an additional ROU asset[420](index=420&type=chunk) Operating Lease Obligations (in thousands) | Item | December 31, 2022 | | :-------------------------- | :------------------ | | Operating lease liability- short term | $108 | | Operating lease liability - long term | $193 | | **Total Operating Lease Liability** | **$301** | Future Minimum Lease Payments (in thousands) | Year | Amount | | :--- | :----- | | 2023 | $121 | | 2024 | $126 | | 2025 | $75 | | **Total** | **$322** | - The weighted average remaining lease term is **2.58 years**, and the weighted average discount rate is **5.0%**[422](index=422&type=chunk) [10. DEBT](index=66&type=section&id=10.%20DEBT) The company's debt at December 31, 2022, included operating lease liabilities. At December 31, 2021, it also included business acquisition liabilities - The company's debt at December 31, 2022, included operating lease liabilities. At December 31, 2021, it also included business acquisition liabilities[424](index=424&type=chunk) [11. STOCKHOLDERS' EQUITY](index=66&type=section&id=11.%20STOCKHOLDERS'%20EQUITY) The company's authorized capital consists of 150,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, both with a par value of $0.0001 per share - The company's authorized capital consists of **150 million shares of Common Stock** and **5 million shares of Preferred Stock**, both with a par value of **$0.0001 per share**[425](index=425&type=chunk) - During 2021, the company received **$12.05 million** from the exercise of **1.82 million warrants**. No purchase warrants were outstanding at Decem

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