WRAP TECHNOLOGIES, INC. 10-Q

Item 1. Financial Statements Wrap Technologies, Inc. Condensed Consolidated Balance Sheets (in thousands, except par value and share amounts) June 30, 2021 December 31, (Unaudited) 2020 ASSETS Current assets: Cash and cash equivalents $ 13,050 $ 16,647 Short-term investments 30,002 24,994 Accounts receivable, net 2,623 1,871 Inventories, net 2,837 2,655 Prepaid expenses and other current assets 824 760 Total current assets 49,336 46,927 Property and equipment, net 508 357 Operating lease right-of-use asset, net 93 139 Intangible assets, net 1,395 1,397 Other assets 9 13 Total assets $ 51,341 $ 48,833 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,280 $ 1,232 Accrued liabilities 910 721 Customer deposits 10 2 Deferred revenue 186 16 Operating lease liability - short term 94 94 Business acquisition liability - short term 97 275 Total current liabilities 2,577 2,340 Long-term liabilities: Operating Lease Liability - long term 8 56 Business acquisition liability - long term - 23 Total long-term liabilities 8 79 Total liabilities 2,585 2,419 Commitments and contingencies (Note 12) Stockholders' equity: Preferred stock - 5,000,000 authorized; par value $ 0.0001 per share; none issued and outstanding - - Common stock - 150,000,000 authorized; par value $ 0.0001 per share; 39,911,390 and 37,554,162 shares issued and outstanding each period, respectively 4 4 Additional paid-in capital 87,277 71,705 Accumulated deficit ( 38,538 ) ( 25,310 ) Accumulated other comprehensive income 13 15 Total stockholders' equity 48,756 46,414 Total liabilities and stockholders' equity $ 51,341 $ 48,833 See accompanying notes to condensed consolidated interim financial statements. 3 Table of Contents Wrap Technologies, Inc. Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except share and per share amounts) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenues: Product sales $ 1,852 $ 823 $ 3,278 $ 1,498 Other revenue 82 10 198 24 Total revenues 1,934 833 3,476 1,522 Cost of revenues: Products and services 1,247 565 2,184 971 Product line exit expense 747 - 747 - Total cost of revenues 1,994 565 2,931 971 Gross profit (loss) ( 60 ) 268 545 551 Operating expenses: Selling, general and administrative 6,579 2,538 11,557 4,678 Research and development 1,162 577 2,227 1,111 Total operating expenses 7,741 3,115 13,784 5,789 Loss from operations ( 7,801 ) ( 2,847 ) ( 13,239 ) ( 5,238 ) Other income (expense): Investment income 8 31 10 76 Other ( 6 ) - 1 - 2 31 11 76 Net loss $ ( 7,799 ) $ ( 2,816 ) $ ( 13,228 ) $ ( 5,162 ) Net loss per basic and diluted common share $ ( 0.20 ) $ ( 0.09 ) $ ( 0.35 ) $ ( 0.17 ) Weighted average common shares used to compute net loss per basic and diluted common share 38,162,526 31,241,470 37,938,873 30,749,532 Comprehensive loss: Net loss $ ( 7,799 ) $ ( 2,816 ) $ ( 13,228 ) $ ( 5,162 ) Net unrealized loss on short-term investments ( 4 ) - ( 2 ) - Comprehensive loss $ ( 7,803 ) $ ( 2,816 ) $ ( 13,230 ) $ ( 5,162 ) See accompanying notes to condensed consolidated interim financial statements. 4 Table of Contents Wrap Technologies, Inc. Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) (Unaudited) Three Months Ended June 30, 2021 Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income Equity Balance at March 31, 2021 37,711,698 $ 4 $ 72,777 $ ( 30,739 ) $ 17 $ 42,059 Common shares issued upon exercise of warrants at $6.50 per share 1,661,320 - 10,799 - - 10,799 Common shares issued upon exercise of warrants at $8.125 per share 153,692 - 1,249 - - 1,249 Common shares issued upon exercise of stock options 82,066 - 165 - - 165 Common shares issued upon vesting of restricted stock units 277,614 - - - - - Common shares issued for services 25,000 - 139 - - 139 Share-based compensation expense - - 2,148 - - 2,148 Net unrealized loss on short-term investments - - - - ( 4 ) ( 4 ) Net loss for the period - - - ( 7,799 ) - ( 7,799 ) Balance at June 30, 2021 39,911,390 $ 4 $ 87,277 $ ( 38,538 ) $ 13 $ 48,756 Six Months Ended June 30, 2021 Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income Equity Balance at December 31, 2020 37,554,162 $ 4 $ 71,705 $ ( 25,310 ) $ 15 $ 46,414 Common shares issued upon exercise of warrants at $6.50 per share 1,661,320 - 10,799 - - 10,799 Common shares issued upon exercise of warrants at $8.125 per share 153,692 - 1,249 - - 1,249 Common shares issued upon exercise of stock options 157,066 - 278 - - 278 Common shares issued upon vesting of restricted stock units 342,274 - - - - - Common shares issued for services 42,876 - 239 - - 239 Share-based compensation expense - - 3,007 - - 3,007 Net unrealized loss on short-term investments - - - - ( 2 ) ( 2 ) Net loss for the period - - - ( 13,228 ) - ( 13,228 ) Balance at June 30, 2021 39,911,390 $ 4 $ 87,277 $ ( 38,538 ) $ 13 $ 48,756 Three Months Ended June 30, 2020 Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income Equity Balance at March 31, 2020 30,073,724 $ 3 $ 33,191 $ ( 15,076 ) $ - $ 18,118 Sale of common stock and warrants at $6.00 per share in public offering, net of issuance costs 2,066,667 - 11,667 - - 11,667 Common shares issued upon exercise of warrants at $3.00 per share, net of issuance costs 138,721 - 405 - - 405 Common shares issued upon exercise of warrants at $5.00 per share, net of issuance costs 1,731,603 - 8,271 - - 8,271 Common shares issued upon exercise of warrants at $6.50 per share 83,693 - 544 - - 544 Common shares issued upon exercise of stock options 180,625 - 346 - - 346 Common shares issued upon vesting of restricted stock units 86,558 - - - - - Share-based compensation expense - - 549 - - 549 Net unrealized gain on short-term investments - - - - - - Net loss for the period - - - ( 2,816 ) - ( 2,816 ) Balance at June 30, 2020 34,361,591 $ 3 $ 54,973 $ ( 17,892 ) $ - $ 37,084 Six Months Ended June 30, 2020 Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income Equity Balance at December 31, 2019 29,829,916 $ 3 $ 31,923 $ ( 12,730 ) $ - $ 19,196 Sale of common stock and warrants at $6.00 per share in public offering, net of issuance costs 2,066,667 - 11,667 - - 11,667 Common shares issued upon exercise of warrants at $3.00 per share, net of issuance costs 150,504 - 440 - - 440 Common shares issued upon exercise of warrants at $5.00 per share, net of issuance costs 1,851,003 - 8,868 - - 8,868 Common shares issued upon exercise of warrants at $6.50 per share 83,693 - 544 - - 544 Common shares issued upon exercise of stock options 293,250 - 515 - - 515 Common shares issued upon vesting of restricted stock units 86,558 - - - - - Share-based compensation expense - - 1,016 - - 1,016 Net unrealized gain on short-term investments - - - - - - Net loss for the period - - - ( 5,162 ) - ( 5,162 ) Balance at June 30, 2020 34,361,591 $ 3 $ 54,973 $ ( 17,892 ) $ 0 $ 37,084 See accompanying notes to condensed consolidated interim financial statements. 5 Table of Contents Wrap Technologies, Inc. Consolidated Statements of Cash Flows (in thousands) (unaudited) Six Months Ended June 30, 2021 2020 Cash Flows From Operating Activities: Net loss $ ( 13,228 ) $ ( 5,162 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 219 52 Product line exit expense 747 - Gain on sale of assets ( 11 ) - Warranty provision 10 19 Inventory obsolescence - ( 48 ) Non-cash lease expense 46 60 Share-based compensation 3,007 1,016 Common shares issued for services 239 - Provision for doubtful accounts 46 10 Changes in assets and liabilities: Accounts receivable ( 798 ) ( 307 ) Inventories ( 713 ) 206 Prepaid expenses and other current assets ( 65 ) ( 29 ) Accounts payable 48 376 Operating lease liability ( 48 ) ( 62 ) Customer deposits 8 ( 193 ) Accrued liabilities and other 53 165 Warranty settlement 16 - Deferred revenue 170 - Net cash used in operating activities ( 10,254 ) ( 3,897 ) Cash Flows From Investing Activities: Purchase of short-term investments ( 25,009 ) - Proceeds from maturities of short-term investments 20,000 - Capital expenditures for property and equipment ( 367 ) ( 69 ) Investment in patents and trademarks ( 96 ) ( 82 ) Proceeds from long-term deposits 3 - Net cash used in investing activities ( 5,469 ) ( 151 ) Cash Flows From Financing Activities: Sale of common stock and warrants - 12,400 Offering costs paid on sale of common stock and warrants - ( 733 ) Proceeds from exercise of warrants 12,048 10,251 Offering costs paid on exercise of warrants - ( 398 ) Proceeds from exercise of stock options 278 515 Proceeds from bank note - 414 Repayment of debt ( 200 ) - Net cash provided by financing activities 12,126 22,449 Net increase (decrease) in cash and cash equivalents ( 3,597 ) 18,401 Cash and cash equivalents, beginning of period 16,647 16,984 Cash and cash equivalents, end of period $ 13,050 $ 35,385 Supplemental Disclosure of Non-Cash Investing and Financing Activities: Change in unrealized gain on short-term investments $ ( 2 ) $ - See accompanying notes to condensed consolidated interim financial statements. 6 Table of Contents Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Description Wrap Technologies, Inc., a Delaware corporation (the “ Company ”, “ we ”, “ us ”, and “ our ”), is a publicly traded company with our Common Stock, par value $0.0001 per share (“ Common Stock ”), listed on the Nasdaq Capital Market (“ Nasdaq ”) under the trading symbol “WRAP”. The Company is a developer and supplier of public safety products and training services for law enforcement and security personnel. The Company’s primary product is the BolaWrap® remote restraint device. The principal markets for the Company’s proprietary products and services are in North and South America, Europe, Middle East and Asia. Basis of Presentation The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and the rules and regulations of the Securities and Exchange Commission (“ SEC ”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP” ) have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying financial statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 4, 2021. The accompanying condensed consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated balance sheet at December 31, 2020 contained in the above referenced Form 10-K. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year. Where necessary, the prior year’s information has been reclassified to conform to the current year presentation. Principles of Consolidation The Company has one wholly-owned subsidiary, Wrap Reality, Inc., formed in December 2020, and has commenced selling its virtual reality training system primarily targeting law enforcement and security agencies. The condensed consolidated financial statements include the accounts of this subsidiary after elimination of intercompany transactions and accounts. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions (e.g., stock-based compensation valuation, allowance for doubtful accounts, valuation of inventory and intangible assets, warranty reserve, accrued expense and recognition and measurement of contingencies) that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Loss per Share Basic loss per common share is computed by dividing net loss for the period by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss per Common Share reflects the potential dilution of securities that could share in the earnings of an entity. The Company’s losses for the periods presented cause the inclusion of potential Common Stock instruments outstanding to be antidilutive. Stock options, restricted stock units and warrants exercisable or issuable for a total of 6,146,636 shares of Common Stock were outstanding at June 30, 2021. These securities are not included in the computation of diluted net loss per common share for the periods presented as their inclusion would be antidilutive due to losses incurred by the Company. 7 Table of Contents Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts) Exit Activity Expenses During the second quarter ended June 30, 2021 the Company recorded $ 747 of product line exit costs related to the planned wind down and closure of the BolaWrap 100 product line related to a shift in production efforts to a new generation product requiring continued development, new tooling, new production equipment and processes and additional licensing. These non-cash inventory costs included end of life raw material write offs of $ 531 and tooling retirement costs of $ 106 . An additional $ 110 has been recorded in accrued liabilities as a reserve for estimated non-cancelable raw material purchase commitments. These cost were recorded as a component of cost of revenues. There was no such expense recorded during the three and six months ended June 30, 2020. Development and start-up expense of new products are expensed as incurred except for capitalized equipment and tooling. Recent Issued Accounting Guidance Adopted the First Quarter of 2021: In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740 ): Simplifying the Accounting for Income Taxes (“ ASU 2019-12 ”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. We adopted ASU 2019-12 in the first quarter ended March 31, 2021 and it did not have a significant impact on our financial statements. Other Pronouncements: In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (“Subtopic 470-20”) and Derivatives and Hedging—Contracts in Entity’s Own Equity “(Subtopic 815-40”): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact of this standard on its financial statements and related disclosures. The Company has reviewed other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoptions of any such pronouncements will be expected to cause a material impact on its financial condition or the results of operations. 2. REVENUE AND PRODUCT EXPENSE On January 1, 2018, the Company adopted FASB ASC Topic 606, Revenue from contracts with customers (“Topic 606”) and, as it had no prior revenue or contracts with customers, there was no transition required nor any impact on prior results. Topic 606 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations. The Company enters into contracts that include various combinations of products, accessories, software and services, each of which are generally distinct and are accounted for as separate performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account in Topic 606. For contracts with a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts with multiple performance obligations, the Company allocates the contract transaction price to each performance obligation using the Company’s estimate of the standalone selling price (“ SSP ” or “SSPs” ) of each distinct good or service in a contract. The Company determines SSPs based on the relative SSP. If the SSP is not observable through past transactions, the Company estimates the SSP considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations. 8 Table of Contents Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts) Most of the Company’s products and accessories are sold through domestic and international distributors. Performance obligations to deliver products and accessories are generally satisfied at the point in time the Company ships the product, as this is when the customer obtains control of the asset under our standard terms and conditions. Periodically, certain customers request bill and hold transactions for future delivery as scheduled and designated by them. In such cases, revenue is not recognized until after control, title and risk of ownership has transferred which is generally when the customer has requested such transaction under normal billing and payment terms and has been notified that the product (i) has been completed according to customer specifications, (ii) has passed quality control inspections, and (iii) has been tagged and packed for shipment, separated from other inventory and ready for physical transfer to the customer. The value associated with custodial storage services is deemed immaterial in the context of such contracts and in total, and accordingly, none of the transaction price is allocated to such service. The Company has elected to recognize shipping costs as an expense in cost of revenue when control has transferred to the customer. Time-based virtual reality system contracts generally include setup, training and the use of software and hardware for a fixed term, generally one to five years and support and upgrade services during the same period. The Company does not sell time-based arrangements without setup, training and support services and therefore revenues for the entire arrangement are recognized on a straight-line basis over the term. When hardware is bundled and not sold separately the Company allocates the contract transaction price to each performance obligation using the SSP of each distinct good and service in the contract. The timing of revenue recognition may differ from the timing of invoicing to customers. The Company generally has an unconditional right to consideration when customers are invoiced and a receivable is recorded. A contract asset is recognized when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing. At June 30, 2021 the Company’s deferred revenue totaled $ 186 , of which $ 105 related to virtual reality training and $ 81 related to BolaWrap extended product warranties and training services. At December 31, 2020 the Company’s deferred revenue totaled $ 16 , of which $ 14 related to virtual reality training and $ 2 related to extended product warranties. The Company may also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. The Company records customer deposits as a contract liability. The Company recognizes an asset if there are incremental costs of obtaining a contract with a customer such as commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for any such underlying performance obligations. The Company had no such assets at June 30, 2021 and December 31, 2020. The Company applies the practical expedient to expense any sales commissions related to performance obligations with an amortization of one year or less when incurred within selling, general and administrative expense. Estimated expense for the Company’s standard one-year warranty are charged to cost of products sold when revenue is recorded for the related product. Royalties are also charged to cost of products sold. 3. FAIR VALUE MEASUREMENTS Assets and liabilities recorded at fair value on a recurring basis in the Condensed Consolidated Balance Sheets and assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance also establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows: Level 1 —Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2— Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3— Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. 9 Table of Contents Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts) Instruments Measured at Fair Value on a Recurring Basis The Company’s cash equivalent Money Market Funds and short-term investments consisting of U.S. Treasury bill securities are classified as Level 1 because they are valued using quoted market prices. The following table shows the Company’s cash and cash equivalents, Money Market Funds and short-term investments by significant investment category as of June 30, 2021 and December 31, 2020. As of June 30, 2021 Adjusted Unrealized Unrealized Market Cost Gains Losses Value Level 1: Money Market Funds $ 35 $ - $ - $ 35 U.S. Treasury securities considered cash equivalents - - - - U.S. Treasury securities in short-term investments 29,989 13 - 30,002 Total Financial Assets $ 30,024 $ 13 $ - $ 30,037 As of December 31, 2020 Adjusted Unrealized Unrealized Market Cost Gains Losses Value Level 1: Money Market Funds $ 6,035 $ - $ - $ 6,035 U.S. Treasury securities considered cash equivalents 9,998 - - 9,998 U.S. Treasury securities in short-term investments 24,979 15 - 24,994 Total Financial Assets $ 41,012 $ 15 $ - $ 41,027 Unrealized gains or losses resulting from our short-term investments are recorded in accumulated other comprehensive gain or loss. As of June 30, 2021, $ 13 was recorded to accumulated other comprehensive gain. Our financial instruments also include accounts receivable, accounts payable, accrued liabilities and business acquisition liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet. 10 Table of Contents Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts) 4. INVENTORIES, NET Inventory is recorded at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the FIFO cost method. Inventories consisted of the following: June 30, December 31, 2021 2020 Finished goods $ 2,190 $ 1,249 Work in process 152 64 Raw materials 495 1,342 Inventories, net $ 2,837 $ 2,655 As part of product line exit costs (see Note 1) end of life raw material costs aggregating $ 531 were written off during the quarter ended June 30, 2021. 5. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: June 30, December 31, 2021 2020 Production and lab equipment $ 313 $ 148 Tooling - 81 Computer equipment 284 180 Furniture, fixtures and improvements 177 165 774 574 Accumulated depreciation ( 266 ) ( 217 ) Property and equipment, net $ 508 $ 357 Depreciation expense was $ 66 and $ 122 for the three and six months ended June 30, 2021 and was $ 25 and $ 47 for the three and six months ended June 30, 2020, respectively. As part of product line exit costs (see Note 1) unamortized production tooling costs of $ 106 were recorded during the quarter ended June 30, 2021. 11 Table of Contents Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts) 6. INTANGIBLE ASSETS, NET Intangible assets consisted of the following: June 30, December 31, 2021 2020 Amortizable intangible assets: Patents $ 336 $ 280 Trademarks 122 84 Purchased software 662 662 Other 50 50 1,170 1,076 Accumulated amortization ( 119 ) ( 23 ) Total amortizable 1,051 1,053 Indefinite life assets (non-amortizable) 344 344 Total intangible assets, net $ 1,395 $ 1,397 Amortization expense was $ 49 and $ 97 for the three and six months ended June 30, 2021 and was $ 3 and $ 5 for the three and six months ended June 30, 2020, respectively. At June 30, 2021, future amortization expense is as follows: 2021 (6 months) $ 90 2022 151 2023 146 2024 146 2025 146 Thereafter 372 Total estimated amortization expense $ 1,051 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable includes $ 119 and $ 53 due to related party Syzygy Licensing, LLC (“ Syzygy ”) as of June 30, 2021 and December 31, 2020, respectively. Accounts payable at December 31, 2020 also included $ 10 due to related party V3 Capital Partners, LLC. See Notes 12 and 13 for additional related party information. Accrued liabilities consist of the following: June 30, December 31, 2021 2020 Patent and legal costs $ 89 $ 65 Accrued compensation 615 563 Raw material purchase reserve 110 - Warranty costs 74 48 Consulting costs - 2 Taxes and other 22 43 Accrued liabilities $ 910 $ 721 Product line exit expense (see Note 1) includes a reserve of $ 110 for non-cancelable raw material purchase commitments. 8. LEASES The Company adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019 using the modified retrospective approach. The Company has elected not to apply ASC Topic 842 to arrangements with lease terms of 12 months or less. Amortization of Right of Use operating lease assets was $ 20 and $ 46 for the three and six months ended June 30, 2020 and was $ 30 and $ 60 for the three and six months ended June 30, 2020, respectively. Operating lease expense for capitalized operating leases included in operating activities was $ 23 and $ 50 for the three and six months ended June 30, 2021 and was $ 34 and $ 69 for the three and six months ended June 30, 2020, respectively. Operating lease obligations recorded on the balance sheet at June 30, 2021 are: Operating lease liability- short term $ 94 Operating lease liability - long term 8 Total Operating Lease Liability $ 102 Future lease payments included in the measurement of lease liabilities on the balance sheet at June 30, 2021 for future periods are as follows: 2021 (6 months) $ 48 2022 58 Total future minimum lease payments 106 Less imputed interest ( 4 ) Total $ 102 The weighted average remaining lease term is 1.08 years and the weighted average discount rate is 7.0 %. The Company does not have any finance leases. 12 Table of Contents Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts) 9. OTHER LIABILITIES The Company’s other liabilities at June 30, 2021 included operating lease liabilities (see Note 8) and short-term business acquisition liabilities totaling $ 97 including $ 23 related to contingent consideration. Other liabilities at December 31, 2020 included operating lease liabilities (see Note 8) and business acquisition liabilities totaling $ 298 of which $ 275 related to short term business liabilities and $ 23 related to contingent consideration recorded as a long-term business acquisition liability on our balance sheet. 10. STOCKHOLDERS’ EQUITY The Company’s authorized capital consists of 150,000,000 shares of Common Stock, par value $ 0.0001 per share, and 5,000,000 shares of preferred stock, par value $ 0.0001 per share (“ Preferred Stock ”). Summary of Stock Purchase Warrants The following table summarizes warrant activity during the six months ended June 30, 2021: Number Average Price Per Share Shares purchasable under outstanding warrants at December 31, 2020 3,206,910 $ 6.36 Stock purchase warrants issued - - Stock purchase warrants exercised ( 1,815,012 ) $ 6.64 Stock purchase warrants expired ( 231 ) $ 7.58 Shares purchasable under outstanding warrants at June 30, 2021 1,391,667 $ 6.00 The Company has outstanding Common Stock purchase warrants as of June 30, 2021 as follows: Number of Exercise Price Description Common Shares Per Share Expiration Date Purchase Warrants 1,391,667 $ 6.00 June 1, 2022 11. SHARE-BASED COMPENSATION On March 31, 2017, the Company adopted, and the stockholders approved, the 2017 Stock Incentive Plan (the “ Plan ”) authorizing 2,000,000 shares of Company Common Stock for issuance as stock options and restricted stock units to employees, directors or consultants. In May 2019, the stockholders ratified an increase in the Plan authorizing an additional 2,100,000 shares of Common Stock and in June 2020 ratified a further authorization of 1,900,000 shares of Common Stock for a total of 6,000,000 shares subject to the Plan. In June 2021, the stockholders ratified an increase in the 2017 Stock Incentive Plan authorizing an additional 1,500,000 shares of Common Stock to a total of 7,500,000 shares . At June 30, 2021 there were 1,755,338 shares of Common Stock available for grant under the Plan. The Company generally recognizes share-based compensation expense on the grant date and over the period of vesting or period that services will be provided. 13 Table of Contents Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts) Stock Options The following table summarizes stock option activity for the six months ended June 30, 2021: Weighted Average Options on Remaining Aggregate Common Exercise Contractual Intrinsic Shares Price Term Value Outstanding December 31, 2020 3,931,586 $ 4.41 4.80 Granted 847,500 $ 5.34 Exercised ( 157,066 ) $ 1.77 Forfeited, cancelled, expired ( 209,799 ) $ 4.95 Outstanding June 30, 2021 4,412,221 $ 4.66 5.08 $ 16,765 Exercisable June 30, 2021 2,316,429 $ 3.13 2.27 $ 11,780 Options outstanding at December 31, 2020 and June 30, 2021 include 100,000 of performance-based options exercisable at $5.46 per share with vesting based on achieving certain virtual reality revenue targets by December 1, 2024 . The Company has not recorded share-based compensation expense related to these options. All other options are service-based. The Company uses the Black-Scholes option pricing model to determine the fair value of the options granted. The following table summarizes the assumptions used to compute the fair value of options granted to employees and non-employees: For the Six Months Ended June 30, 2021 2020 Expected stock price volatility 50 % 45 % Risk-free interest rate 0.92 % 0.42 % Forfeiture rate 0 % 0 % Expected dividend yield 0 % 0 % Expected life of options - years 5.70 6.03 Weighted-average fair value of options granted $ 2.46 $ 1.86 Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of awards. The Company’s estimated volatility was based on an average of the historical volatility of peer entities whose stock prices were publicly available. The Company’s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price. The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options. The Company accounts for actual forfeitures as they occur. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. The Company calculates the expected life of the options using the Simplified Method for the employee stock options as the Company does not have sufficient historical data. 14 Table of Contents Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts) Restricted Stock Units The Plan provides for the grant of restricted stock units (“ RSUs” ). The following table summarizes RSU activity under the Plan for the six months ended June 30, 2021: Weighted Average Weighted Average Service-Based Grant Date Vesting RSU's Fair Value Period Unvested at December 31, 2020 428,006 $ 6.13 Granted - service based 289,890 $ 5.49 Vested ( 342,274 ) $ 5.42 Forfeited and cancelled (32,874 ) $ 6.10 Unvested at June 30, 2021 342,748 $ 6.30 1.9 Years Subsequent Stock Exercises During July 2021 through the date of this report a total of 526,303 outstanding stock options were exercised for cash proceeds of $ 908 . Share-Based Compensation Expense The Company recorded share-based compensation for options and RSUs in its statements of operations for the relevant periods as follows: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Selling, general and administrative $ 2,027 $ 496 $ 2,629 $ 925 Research and development 121 53 378 91 Total share-based expense $ 2,148 $ 549 $ 3,007 $ 1,016 As of June 30, 2021, total estimated compensation expense of stock options granted and outstanding but not yet vested was $ 4,983 which is expected to be recognized over the weighted average period of 2.4 years. As of June 30, 2021, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 1,759 which is expected to be recognized over the weighted average period of 1.9 years. 12. COMMITMENTS AND CONTINGENCIES Facility Leases See Note 8. Related Party Technology License Agreement The Company is obligated to pay royalties and pay development and patent costs pursuant to that certain exclusive Amended and Restated Intellectual Property License Agreement dated as of September 30, 2016, by and between the Company and Syzygy (the “ Syzygy Agreement ”), a company owned and controlled by stockholders/officers Messrs. Elwood Norris and James Barnes, both of whom are stockholders and officers of the Company. The Syzygy Agreement provides for royalty payments of 4% of revenue from products employing the licensed ensnarement device technology up to an aggregate of $1,000,000 in royalties or until September 30, 2026 , whichever occurs earlier. The Company recorded $ 68 and $ 119 for royalties incurred under the Syzygy Agreement during the three and six months ended June 30, 2021 and $ 28 and $ 53 incurred for the three and six months ended June 30, 2020, respectively. Purchase Commitments At June 30, 2021 the Company was committed for approximately $ 1,005 for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business. Securities Litigation On September 23, 2020, Carone Cobden filed a putative class action complaint against the Company, former Chief Executive Officer David Norris (“ Norris ”), Chief Financial Officer, James A. Barnes (“ Barnes ”), and President, Thomas Smith (“ Smith ”) in the United States District Court for the Central District of California, docketed as Case No. 2-20-cv-08760-DMG-PVCx (the “ Cobden Complaint ”). The Cobden Complaint alleges that the named defendants, in their capacities as officers of the Company, knowingly made false or misleading statements or omissions regarding trials of the Company’s BolaWrap product conducted by the Los Angeles Police Department (the “ BolaWrap Pilot Program ”). The Cobden Complaint also alleges that the conduct of the named defendants artificially inflated the price of the Company’s traded securities, and that the disclosure of certain adverse information to the public led to a decline in the market value of the Company’s securities. The Cobden Complaint further alleges violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and defines the class period as July 31, 2020 through September 23, 2020. 15 Table of Contents Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts) On October 1, 2020, Joseph Mercurio filed a second putative class action complaint against the Company, Norris, Smith, and Barnes in the same court, which contains substantially the same factual allegations and legal claims as set forth in the Cobden Complaint, and is docketed as Case No. 2-20-cv-09030-DMG-PVCx (the “ Mercurio Complaint ”). On October 15, 2020, Paula Earley filed a third putative class action complaint against the Company, Smith, Norris, Barnes, Chief Strategy Officer Mike Rothans (“Rothans”), and former Chief Executive Officer, Marc Thomas (“ Thomas ”) in the same court, which contains many of the same factual allegations and legal claims as set forth in the Cobden and Mercurio Complaints, but defines the class period as April 29, 2020 through September 23, 2020, and alleges additional false or misleading statements in connection with BolaWrap and the BolaWrap Pilot Program (the “ Earley Complaint ”). The Earley Complaint is docketed as Case No. 2-20-cv-09444-DMG-PVCx. On November 3, 2020, the Hon. Dolly M. Gee consolidated the three above-mentioned cases under the caption In re Wrap Technologies, Inc. Securities Exchange Act Litigation , Case No. 20-8760-DMG (PVCx) (the “ Securities Action ”). On January 7, 2021, the Court appointed a lead plaintiff in the Securities Action, who designated its attorneys as lead counsel. On January 21, 2021, Judge Gee ordered that a consolidated amended complaint be filed in the Securities Action on or before March 12, 2021, with defendants’ motion to dismiss to be filed on or before April 26, 2021, and a hearing on the motion to dismiss to be held on July 23, 2021. On March 12, 2021, lead plaintiff filed an amended complaint, naming the Company, Norris, Thomas, Smith, and Barnes as defendants. Those defendants jointly filed a motion to dismiss on April 26, 2021. Briefing on the motion to dismiss is now complete, and the motion is currently under submission before Judge Gee. The Company believes that the Securities Action is without merit and will continue to vigorously defend against the claims raised therein. Shareholder Derivative Litigation On November 13, 2020, Naresh Rammohan filed a shareholder derivative action in the United States District Court for the Central District of California against Smith, Barnes, Rothans, Thomas, Norris, and Messrs. Scot Cohen, Patrick Kinsella, Michael Parris, and Wayne Walker, alleging unjust enrichment, breach of fiduciary duty, waste of corporate assets, and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:20-cv-10444-DMG-PVCx (the “ Rammohan Complaint ”). The Rammohan Complaint names the Company as a nominal defendant and recites many of the allegations set forth in the Securities Action relating to the BolaWrap Pilot Program. On January 20, 2021, Ray Westerman filed a second derivative complaint in the same court against the same parties, alleging breach of fiduciary duty and contribution claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21-cv-00550-DMG-PVCx (the “ Westerman Complaint ”). On January 22, 2021, Jesse Lowe filed a third derivative complaint in the same court against the same parties, alleging breach of fiduciary duty and asserting various claims under the Securities Exchange Act of 1934, docketed as Case No. 2:21-cv-00597-DMG-PVCx (the “ Lowe Complaint ”). The above-mentioned derivative cases were each been transferred to Judge Gee as cases related to the Securities Action. On February 16, 2021, Judge Gee issued an order consolidating these cases under the caption In re Wrap Technologies, Inc. Shareholder Derivative Litigation , Case No. 2:20-10444-DMG-PVCx, (the “ Derivative Action ”), and stayed the Derivative Action pending the resolution of the motion to dismiss in the Securities Action. On March 9, 2021, the Lowe Complaint was designated as the operative complaint in the Derivative Action. As with the Securities Action, the Company believes that the Derivative Action is without merit and will vigorously defend against the claims raised therein. Other Legal Information The Company may at times be involved in other litigation in the ordinary course of business. The Company will, from time to time, when appropriate in management’s estimation, record adequate reserves in the Company’s consolidated financial statements for pending litigation. Currently, other than described above there are no other pending material legal proceedings to which the Company is a party or to which any of its property is subject. At June 30, 2021 the Company had no provision for liability under existing litigation. 16 Table of Contents Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts) 13. RELATED PARTY TRANSACTIONS Commencing in October 2017 the Company began reimbursing Mr. Elwood Norris, a former officer and current stockholder of the Company, $1.5 per month on a month-to-month basis for laboratory facility expense , for an aggregate of $ 9 during the six months ended June 30, 2021 and 2020, respectively. Effective July 1, 2021 Mr. Norris commenced serving as a consultant to the Company and the facility rent costs are expected to continue during such consultancy. See Notes 7, 11 and 12 for additional information on related party transactions and obligations. 14. MAJOR CUSTOMERS AND RELATED INFORMATION For the three months ended June 30, 2021, revenues from two distributors accounted for approximately 37 % and 22 % of revenues with no other single customer accounting for more than 10% of total revenues. For the three months ended June 30, 2020, revenues from two distributors and one agency accounted for approximately 32 %, 19 % and 11 % of revenues with no other single customer accounting for more than 10% of total revenues. For the six months ended June 30, 2021, revenues from four distributors accounted for approximately 20 %, 17 %, 13 % and 12 % of revenues with no other single customer accounting for more than 10% of total revenues. For the six months ended June 30, 2020, revenues from four distributors accounted for approximately 22 %, 19 %, 18 % and 10 % of revenues with no other single customer accounting for more than 10% of total revenues. At June 30, 2021, accounts receivable from three distributors accounted for 30 %, 28 % and 14 % of accounts receivable with no other single customer accounting for more than 10 % of the accounts receivable balance. Two distributors accounted for 28 % and 26 % of accounts receivable at December 31, 2020 with no other single customer accounting for more than 10 % of the accounts receivable balance. The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’s delivery location. For the Three Months For the Six Months Ended June 30, Ended June 30, 2021 2020 2021 2020 Americas $ 1,123 $ 295 $ 1,750 $ 404 Europe, Middle East and Africa 803 293 1,679 602 Asia Pacific 8 245 47 516 $ 1,934 $ 833 $ 3,476 $ 1,522 15. SUBSEQUENT EVENTS See Note 11 regarding stock options exercised between July 1, 2021 to the date of the filing of this Report. The Company evaluated other subsequent events for their potential impact on the financial statements and disclosures through the date the financial statements were available to be issued, and determined that, except as disclosed herein, no subsequent events occurred that were reasonably expected to impact the financial statements presented herein. 17 Table of Contents