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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