What changed in this filing

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Item 1. Financial Statements

2022-05-03 compared with 2021-10-28 · 246 added, 418 removed, 370 unchanged (64% of the section changed)

Financial Statements                                                                                  

Wrap Technologies, Inc.

1 unchanged sentence

(in thousands, except par value and share amounts)

September 30,

Current assets:

25 unchanged sentences

Operating lease liability - short term

Business acquisition liability - short term

Total current liabilities

2 unchanged sentences

Operating lease liability - long term

Business acquisition liability - long term

Total long-term liabilities

14 unchanged sentences

Accumulated other comprehensive income

( 29 )  

Total stockholders' equity

8 unchanged sentences

(in thousands, except share and per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Product sales

$ 1,719  

$ 4,997  

$ 2,486  

Other revenue

1 unchanged sentence

Cost of revenues

Products and services

Product line exit expense

Total cost of revenues

Operating expenses:

Selling, general and administrative

16,210  

Research and development

Total operating expenses

20,513  

Loss from operations

( 6,019 )  

( 3,863 )  

( 19,256 )  

Other income (expense):

Investment income

$ ( 5,991 )  

$ ( 3,862 )  

$ ( 19,220 )  

Interest income

Net loss per basic and diluted common share

$ ( 0.15 )  

$ ( 0.11 )  

$ ( 0.50 )  

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

40,413,332  

36,419,771  

38,767,009  

32,653,408  

Comprehensive loss:

$ ( 5,991 )  

$ ( 3,862 )  

$ ( 19,220 )  

Net unrealized gain (loss) on short-term investments

Comprehensive loss

$ ( 5,993 )  

$ ( 3,855 )  

$ ( 19,224 )  

See accompanying notes to condensed consolidated interim financial statements.

Wrap Technologies, Inc.

Condensed Consolidated Statements of Stockholders' Equity

Consolidated Statements of Stockholders' Equity

(in thousands, except share amounts)

Three Months Ended September 30, 2021

Comprehensive

Stockholders'

Balance at June 30, 2021

39,911,390  

$ 87,277  

$ ( 38,539 )  

$ 48,755  

Common shares issued upon exercise of stock options

758,338  

Common shares issued upon vesting of restricted stock units

79,133  

Share-based compensation expense

Net unrealized loss on short-term investments

Net loss for the period

( 5,991 )  

Balance at September 30, 2021

40,748,861  

$ 89,979  

$ ( 44,530 )  

$ 45,464  

Nine Months Ended September 30, 2021

Comprehensive

Stockholders'

Balance at January 1, 2022

37,554,162  

$ 71,705  

$ ( 25,310 )  

$ 46,414  

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

1,661,320  

10,799  

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

153,692  

Common shares issued upon exercise of stock options

915,404  

Common shares issued upon vesting of restricted stock units

421,407  

Common shares issued for services

42,876  

Share-based compensation expense

Net unrealized loss on short-term investments

Net loss for the period

( 19,220 )  

Balance at September 30, 2021

40,748,861  

$ 89,979  

$ ( 44,530 )  

$ 45,464  

Three Months Ended September 30, 2020

Comprehensive

Stockholders'

Balance at June 30, 2020

34,361,591  

$ 54,973  

$ ( 17,892 )  

$ 37,084  

Common shares issued upon exercise of warrants at $ 3.00 per share, net of issuance costs

102,621  

Common shares issued upon exercise of warrants at $ 5.00 per share, net of issuance costs

1,742,870  

Common shares issued upon exercise of warrants at $ 6.00 per share, net of issuance costs

675,000  

Common shares issued upon exercise of warrants at $ 6.50 per share, net of issuance costs

177,986  

Common shares issued upon exercise of stock options

34,250  

Common shares issued upon vesting of restricted stock units

14,999  

Share-based compensation expense

Net unrealized gain on short-term investments

Net loss for the period

( 3,862 )  

Balance at September 30, 2020

37,109,317  

$ 69,181  

$ ( 21,754 )  

$ 47,437  

Nine Months Ended September 30, 2020

Comprehensive

Stockholders'

Balance at March 31, 2022

Balance at January 1, 2021

29,829,916  

$ 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  

Common shares issued upon exercise of warrants at $ 3.00 per share, net of issuance costs

253,125  

Common shares issued upon exercise of warrants at $ 5.00 per share, net of issuance costs

3,593,873  

17,234  

Common shares issued upon exercise of warrants at $ 6.00 per share, net of issuance costs

675,000  

Common shares issued upon exercise of warrants at $ 6.50 per share, net of issuance costs

261,679  

Common shares issued upon exercise of stock options

327,500  

Common shares issued upon vesting of restricted stock units

101,557  

Share-based compensation expense

Common shares issued upon vesting of restricted stock units

Net unrealized gain on short-term investments

Common shares issued for services

Net loss for the period

( 9,024 )  

Balance at September 30, 2020

37,109,317  

$ 69,181  

$ ( 21,754 )  

$ 47,437  

Balance at March 31, 2021

See accompanying notes to condensed consolidated interim financial statements.

Wrap Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

Consolidated Statements of Cash Flows

(in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash Flows From Operating Activities:

2 unchanged sentences

Depreciation and amortization

Product line exit expense

Gain on sale of assets

( 17 )  

Warranty provision

Software impairment charge

Change in contingent liability

( 23 )  

Non-cash lease expense

8 unchanged sentences

Accounts payable

( 51 )  

Operating lease liability

1 unchanged sentence

Customer deposits

( 43 )  

Accrued liabilities and other

Warranty settlement

( 54 )  

Deferred revenue

6 unchanged sentences

10,000  

15,000  

Capital expenditures for property and equipment

2 unchanged sentences

( 69 )  

Purchase of intangible assets

( 561 )  

Investment in long-term deposits

Proceeds from long-term deposits

Net cash used in investing activities

( 6,511 )  

Cash Flows From Financing Activities:

Sale of common stock and warrants

12,400  

Offering costs paid on sale of common stock and warrants

Proceeds from exercise of warrants

12,048  

24,480  

Offering costs paid on exercise of warrants

Proceeds from exercise of stock options

Proceeds from bank note

Repayment of debt

( 275 )  

Net cash provided by financing activities

13,451  

36,110  

Net (decrease) increase in cash and cash equivalents

( 6,789 )  

Net decrease in cash and cash equivalents

Cash and cash equivalents, beginning of period

16,647  

16,984  

Cash and cash equivalents, end of period

1 unchanged sentence

$ 2,000  

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

Supplemental Disclosure of Non-Cash Investing

and Financing Activities:

Change in unrealized gain on short-term investments

$ ( 23 )  

Right-of-use asset and liability recorded during period

See accompanying notes to condensed consolidated interim financial statements.

29 unchanged sentences

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.

The Company has 

one  wholly-owned subsidiary, Wrap Reality, Inc.

formed in 

December 2020 that sells a virtual reality training system primarily targeting law enforcement agencies.

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

Use of Estimates

6 unchanged sentences

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

Stock options, restricted stock units and warrants exercisable or issuable for a total of 5,397,165 shares of Common Stock were outstanding at September 30, 2021.

Stock options, restricted stock units and warrants exercisable or issuable for a total of 5,350,111 shares of Common Stock were outstanding at March 31, 2022.

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.

2 unchanged sentences

(in thousands, except per share and share amounts)

Exit Activity Expense

During the second quarter ended June 30, 2021 the Company recorded $ 747 of product line exit costs related to the wind down and closure of the BolaWrap 100 product line related to a shift in production efforts to a new BolaWrap 150 generation product requiring new tooling, new production equipment and processes and additional licensing.

These non-cash inventory costs included end of life raw material write offs of $ 531 and tooling retirement costs of $ 106 .

An additional $ 110 was recorded in accrued liabilities as a reserve for estimated non-cancelable raw material purchase commitments.

This reserve was applied against raw material purchases and as a $ 56 obsolescence allowance during the three months ended September 30, 2021.

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

There was no such expense recorded during the prior year.

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

Recent Issued Accounting Guidance

Adopted the First Quarter of 2021:

December 2019, 

the FASB issued Accounting Standards Update 

2019 - 12,  

Income Taxes (Topic  

Simplifying the Accounting for Income Taxes  (“

2019 - 12 ”), which is intended to simplify various aspects related to accounting for income taxes.

2019 - 12  removes certain exceptions to the general principles in Topic 

740 and also clarifies and amends existing guidance to improve consistent application.

We adopted ASU 

2019 - 12  in the first quarter ended March 31, 2021 and it did not have a significant impact on our financial statements.

Other Pronouncements:

In August 2020, the FASB issued 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.

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.

October 2021 ,  the FASB issued ASU 

2021 - 08  (“ASU 

2021 - 08 ”), Business Combinations (Topic 

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to require that an acquirer recognize, and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 

606,  Revenue from Contracts with Customers.

At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 

606  as if it had originated the contracts.

The amendments in this update should be applied prospectively and are effective for fiscal years beginning after 

December 15, 2022 ,  including interim periods within those fiscal years.

not  expect the adoption of this standard to have a material impact on our consolidated financial statements and related disclosures.

The Company has reviewed other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoptions of any such pronouncements will be expected to cause a material impact on its financial condition or the results of operations.

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.

REVENUE AND PRODUCT COSTS

January 1, 2018, 

the Company adopted FASB ASC Topic 

606,  Revenue from contracts with customers 

)  and, as it had 

no  prior revenue or contracts with customers, there was 

no  transition required nor any impact on prior results.

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.

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  

 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 (“

1 unchanged sentence

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.

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

If the SSP is 

not  observable through past transactions, the Company estimates the SSP considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

Most of the Company’s products and accessories are sold through domestic and international distributors.

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

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

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.

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.

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

The timing of revenue recognition 

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 September 30, 2021 the Company’s deferred revenue totaled $ 240 , of which $ 152 related to virtual reality training and $ 88 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 

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.

Additionally, the Company may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed.

In such instances, a deferred revenue liability is recorded.

The Company recognizes these contract liabilities as revenue after all revenue recognition criteria are met.

The table below details the activity in our contract liabilities during the three months ended March 31, 2022.

Balance at January 1, 2022

Additions, net

Transfer to revenue

( 43 )  

Balance at March 31, 2022

Current portion

Long-term portion

March 31, 2022, 

the Company’s deferred revenue of $ 282  consisted of $ 170  related to virtual reality training and $ 112  related to BolaWrap extended warranties and services.

December 31, 2021, 

the Company’s deferred revenue of $ 265 consisted of $ 172  related to virtual reality training and $ 67  related to extended warranties. 

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 September 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.

The Company had 

no  such assets at 

March 31, 2022, 

December 31, 2021 .

 The Company will apply the practical expedient to expense any sales commissions related to performance obligations with an amortization of 

one  year or less when incurred within selling, general and administrative expense.

Estimated costs for the Company’s standard warranty, generally one -year, are charged to cost of products sold when revenue is recorded for the related product.

Royalties are also charged to cost of products sold.

9 unchanged sentences

Level 3 —Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The Company’s cash equivalent Money Market Funds and short-term investments consisting of U.S.

Treasury bill securities are classified as Level I because they are valued using quoted market prices.

Wrap Technologies, Inc.

1 unchanged sentence

(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 

September 30, 2021 and December 31, 2020.

As of September 30, 2021

March 31, 2022, and December 31, 2021.

As of March 31, 2022

Money Market Funds

1 unchanged sentence

$ 3,277  

Treasury securities considered cash equivalents

Treasury securities in short-term investments

1 unchanged sentence

( 29 )  

24,956  

Total Financial Assets

1 unchanged sentence

$ ( 29 )  

$ 28,233  

As of December 31, 2021

2 unchanged sentences

$ 1,670  

Treasury securities considered cash equivalents

Treasury securities in short-term investments

4 unchanged sentences

$ ( 6 )  

$ 31,653  

Unrealized gains or losses resulting from our short-term investments are recorded in accumulated other comprehensive gain or loss.

As of September 30, 2021, $ 11 was recorded to accumulated other comprehensive gain.

During the three months ended March 31, 2022, $ 23 was recorded to accumulated other comprehensive loss.

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.

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

INVENTORIES, NET

2 unchanged sentences

Inventories consisted of the following:

September 30,

Finished goods

$ 1,796  

$ 1,249  

Work in process

1 unchanged sentence

Inventories, net

Less allowance for obsolescence

( 56 )  

Inventories - net

$ 2,284  

$ 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 and an additional $ 54 was written off during the quarter ended September 30, 2021.

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following:

September 30,

Production and lab equipment

2 unchanged sentences

Accumulated depreciation

( 335 )  

Property and equipment, net

Depreciation expense was $ 69 and $ 191  for the three and nine months ended September 30, 2021 and was $ 35 and $ 82  for the three and nine months ended September 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.

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

Depreciation expense was $ 113 and $ 56  for the three months ended March 31, 2022, and 2021, respectively.

INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

September 30,

Amortizable intangible assets:

Purchased software

Accumulated amortization

( 138 )  

Total amortizable

1 unchanged sentence

Total intangible assets, net

$ 1,772  

$ 1,397  

Amortization expense was $ 48 and $ 145  for the three and nine months ended September 30, 2021 and was $ 3 and $ 9  for the three and nine months ended September 30, 2020, respectively.

An impairment charge of $ 170 for purchased software was recorded in the quarter ended September 30, 2021.

At September 30, 2021, future amortization expense is as follows:

Amortization expense was $ 70 and $ 48  for the three months ended March 31, 2022, and 2021, respectively.

At March 31, 2022, future amortization expense is as follows:

2022 (9 months)

Total estimated amortization expense

$ 1,428  

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable includes $ 208 and $ 228 due to related party Syzygy Licensing, LLC (“

Syzygy ”) as of September 30, 2021 and December 31, 2020, respectively.

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

Syzygy ”) as of March 31, 2022, and December 31, 2021, respectively.

See Notes 10, 11, 12 and 14 for additional related party information.

Accrued liabilities consist of the following:

September 30,

Patent and legal costs

3 unchanged sentences

Taxes and other

Accrued liabilities

Accrued compensation includes $ 317 of future severance payments including a balance of $ 278 for the Company’s former CEO payable through October 2022.

Changes in our estimated product warranty costs were as follows:

Three Months Ended March 31,

Balance, beginning of period

Warranty settlements

( 54 )  

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.

Warranty provision

Balance, end of period

The Company determines if an arrangement is a lease at inception.

The guidance in Topic 

842  defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.

Operating lease right of use ( “

ROU ”) assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date.

The Company’s leases do 

not  provide an implicit rate.

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

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

For leases beginning on or after 

January 1, 2019 ,  lease components are accounted for separately from non-lease components for all asset classes.

On January 21, 2022, the Company’s lease was amended to extend the expiration date to July 31, 2025.

Upon execution of the amendment, which was deemed a lease modification, the Company reassessed the lease liability using the discount rate determined at the modification date and recorded an additional ROU asset for the same amount.

The Company’s lease contains renewal provisions and escalating rental clauses and generally require the Company to pay utilities, insurance, taxes and other operating expenses.

The renewal provisions of the existing lease agreement was 

not  included in the determination of the operating lease liabilities and the ROU assets.

The Company also reassessed the lease classification and concluded that the lease continues to be an operating lease.

Amortization of ROU operating lease assets was $ 24 and $ 25  for the three months ended March 31, 2022, and 2021, respectively.

Wrap Technologies, Inc.

1 unchanged sentence

(in thousands, except per share and share amounts)

Amortization of Right of Use operating lease assets was $ 21 and $ 67  for the three and nine months ended September 30, 2021 and was $ 31 and $ 91  for the three and nine months ended September 30, 2020, respectively.

Operating lease expense for capitalized operating leases included in operating activities was $ 23 and $ 73  for the three and nine months ended September 30, 2021 and was $ 34 and $ 103  for the three and nine months ended September 30, 2020, respectively. 

Operating lease obligations recorded on the balance sheet at September 30, 2021 are:

Operating lease expense for capitalized operating leases included in operating activities was $ 28 and $ 28  for the three months ended March 31, 2022, and 2021, respectively. 

Operating lease obligations recorded on the balance sheet at March 31, 2022, are:

Operating lease liability- short term

1 unchanged sentence

Total Operating Lease Liability

Future lease payments included in the measurement of lease liabilities on the balance sheet at September 30, 2021 for future periods are as follows:

Future lease payments included in the measurement of lease liabilities on the balance sheet at March 31, 2022, for future periods are as follows:

2022 (9 months)

2 unchanged sentences

The weighted average remaining lease term is 3.3 years, and the weighted average discount rate is 5.0 %.

The Company did 

not  have any short-term lease expense during the three months ended March 31, 2022, or 2021 .

The Company does not have any finance leases.

OTHER LIABILITIES

The Company’s other liabilities at September 30, 2021 consisted of operating lease liabilities (see Note 8 ).

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.

During the quarter ended September 30, 2021 the Company eliminated the contingent consideration, a recurring Level 3 measurement, and recorded a $ 23 gain in other income.

STOCKHOLDERS ’

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 (“

1 unchanged sentence

Summary of Stock Purchase Warrants

The following table summarizes warrant activity during the nine months ended September 30, 2021:

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 September 30, 2021

1,391,667  

$ 6.00  

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

The Company has outstanding Common Stock purchase warrants as of September 30, 2021 as follows:

The Company has outstanding Common Stock purchase warrants as of March 31, 2022, as follows:

Exercise Price

4 unchanged sentences

$ 6.00  

There was no warrant activity during the three months ended March 31, 2022.

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 September 30, 2021 there were 1,667,338 shares of Common Stock available for grant under the Plan.

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.

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.

June 2021 ,  the stockholders ratified an increase in the Plan authorizing an additional 

1,500,000  shares of Common Stock to a total of 

7,500,000  shares.

March 31, 2022, 

there were 

1,528,306  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.

In January 2022 the Company recognized severance acceleration of $ 242 of share-based compensation expense resulting from the resignation of the Company’s CEO as part of a management transition plan.

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 nine months ended September 30, 2021:

The following table summarizes stock option activity for the three months ended March 31, 2022:

Weighted Average

Outstanding December 31, 2020  

Outstanding January 1, 2022

3,935,883  

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$ 5.01  

Outstanding September 30, 2021  

3,678,883  

$ 5.30  

Outstanding March 31, 2022

3,600,971  

Exercisable September 30, 2021  

$ 5.27  

Exercisable March 31, 2022

2,549,388  

$ 2.86  

Options outstanding at December 31, 2020 included 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.

These options were forfeited on September 30, 2021 and no share-based compensation expense was recorded related to these options during the period outstanding.

All other options are service-based.

The Company recorded $ 836  and $ 2,065  of stock option compensation expense for employees, directors and consultants for the 

three and nine months ended 

September 30, 2021, 

respectively.

The Company recorded $ 319  and $ 599  of stock option compensation expense for employees, directors and consultants for the 

three and nine  months ended 

September 30, 

2020,  respectively.

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

All outstanding options at March 31, 2022, are service-based options.

The Company uses the Black-Scholes option pricing model to determine the fair value of the options granted.

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

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

Expected stock price volatility

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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.

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.

The dividend yield of 

zero  is based on the fact that the Company has never paid cash dividends and has 

no  present intention to pay cash dividends.

The Company calculates the expected life of the options using the Simplified Method for the employee stock options as the Company does 

not  have sufficient historical data.

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

Restricted Stock Units

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RSUs ”).

The following table summarizes RSU activity under the Plan for the nine months ended September 30, 2021:

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

The following table summarizes RSU activity under the Plan for the three months ended March 31, 2022:

Weighted Average

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Service-Based

Period (in Years)

Unvested at December 31, 2020

Period (Years)

Unvested at January 1, 2022

269,303  

8 unchanged sentences

$ 4.19  

Unvested at September 30, 2021

Unvested at March 31, 2022

357,473  

$ 5.03  

Compensation expense for RSUs was $ 467 and $ 2,245 for the three and nine months ended September 30, 2021, respectively.

Compensation expense for RSUs was $ 227  and $ 963  for the 

three  and 

nine  months ended 

September 30, 2020, 

respectively.

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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Selling, general and administrative

$ 1,093  

$ 3,722  

$ 1,393  

Research and development

1 unchanged sentence

$ 1,029  

$ 4,310  

$ 1,562  

As of September 30, 2021, total estimated compensation expense of stock options granted and outstanding but not yet vested was $ 4,300 which is expected to be recognized over the weighted average period of 2.3 years.

As of September 30, 2021, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 1,718 which is expected to be recognized over the weighted average period of 2.1 years.

As of March 31, 2022, total estimated compensation expense of stock options granted and outstanding but not yet vested was $ 1,826 which is expected to be recognized over the weighted average period of 2.2 years.

As of March 31, 2022, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 1,422 which is expected to be recognized over the weighted average period of 2.05 years.

Subsequent Equity Awards

On April 19, 2022, the Company granted the following equity awards to the Company’s newly appointed CEO under the Plan, subject to the terms of the Plan and a related employment agreement:

An RSU award on 17,301 shares of Common Stock vesting in one year.

An RSU award on 233,564 shares of Common Stock vesting in annual installments over three years.

A non-qualified stock option with a ten -year term on 475,662 shares of Common Stock at an exercise price of $ 2.89 per share vesting in annual installments over three years.

A non-qualified performance-based stock option with a ten -year term on 921,832 shares of Common Stock at an exercise price of $ 2.89 per share vesting on achievement of market capitalization targets.

On April 19, 2022, the Company also granted the following equity awards to the Company’s newly appointed President as inducement grants outside the Plan and subject to the terms of a related employment agreement:

An RSU award on 175,173 shares of Common Stock vesting in annual installments over three years.

A non-qualified stock option with a ten -year term on 356,747 shares of Common Stock at an exercise price of $ 2.89 per share vesting in annual installments over three years.

A non-qualified performance-based stock option with a ten -year term on 692,398 shares of Common Stock at an exercise price of $ 2.89 per share vesting on achievement of market capitalization targets.

Wrap Technologies, Inc.

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COMMITMENTS AND CONTINGENCIES

Facility Leases

Facility Lease

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 in royalties or until September 30, 2026, whichever occurs earlier.

The Company recorded $ 65 and $ 185 for royalties incurred under the Syzygy Agreement during the three and nine months ended September 30, 2021 and $ 37 and $ 90  incurred for the three and nine months ended September 30, 2020, respectively.

The Company is obligated to pay royalties and development and patent costs pursuant to an exclusive Amended and Restated Intellectual Property License Agreement dated as of 

September 30, 2016, 

with Syzygy, a company owned and controlled by stockholder/consultant Mr.

Elwood Norris and stockholder/officer Mr.

James Barnes.

The agreement provides for royalty payments of 

4 % of revenue from products employing the licensed ensnarement device technology up to an aggregate of $ 1,000,000  in royalties or until 

September 30, 2026 ,  whichever occurs earlier.

The Company recorded $ 49  and $ 51  for royalties incurred during the three months ended 

March 31, 2022, 

2021 ,  respectively.

Purchase Commitments

At September 30, 2021 the Company was committed for approximately $ 713 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. 

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.

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.

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

At March 31, 2022, the Company was committed for approximately $ 2.3 million for future component deliveries that are generally subject to modification or rescheduling in the normal course of business.

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 

November 13, 2020 ,  Naresh Rammohan filed a shareholder derivative action in the United States District Court for the Central District of California against current and former Company officers Tom Smith, James Barnes, Mike Rothans, Marc Thomas, and David Norris, as well as current and former Company directors Messrs.

1934 ,  docketed as Case 

2:20 -cv- 10444 -DMG-PVCx. On 

January 20, 2021 ,  Ray Westerman filed a 

second  derivative action 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 

2:21 -cv- 00550 -DMG-PVCx.

January 22, 2021 ,  Jesse Lowe filed a 

third  derivative action 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 

2:21 -cv- 00597 -DMG-PVCx.  The Company is named as a nominal defendant in each of these actions.

February 16, 2021 ,  the Honorable Dolly M.

Gee issued an order consolidating the three derivative actions under the caption 

In re Wrap Technologies, Inc.

Shareholder Derivative Litigation , Case No.

Shareholder Derivative Litigation , Case 

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 September 30, 2021 the Company had no provision for liability under existing litigation.

Derivative Action ”) and stayed the Derivative Action at least until the resolution of the action captioned 

In re Wrap Technologies, Inc.

Securities Exchange Act Litigation , Case No.

2:20 -cv- 08760 -DMG (the “

Securities Action ”). 

On December 20, 2021, Judge Gee dismissed the Securities Action with prejudice. 

On April 29, 2022 the above-mentioned parties jointly filed a stipulation of voluntary dismissal in order to dismiss the Derivative Action without prejudice to the plaintiffs, the Company, or Wrap shareholders (“

the Stipulation ”).

The Stipulation is currently pending before Judge Gee. 

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 $ 13 during the nine months ended September 30, 2021 and 2020, respectively.

Effective July 1, 2021 Mr.

Norris commenced serving as a consultant to the Company and the facility rent costs continue during such consultancy.

Elwood Norris, a former officer and current stockholder and consultant of the Company, $ 1.5 per month on a month-to-month basis for laboratory facility expense, for an aggregate of $ 4.5 during the three months ended March 31, 2022, and 2021, respectively.

See Notes 7, 10, 11 and 14 for additional information on related party transactions and obligations.

MAJOR CUSTOMERS AND RELATED INFORMATION

For the three months ended September 30, 2021, revenues from two distributors accounted for approximately 41 % and 29 % of revenues with no other single customer accounting for more than 10% of total revenues.

For the three months ended September 30, 2020, revenues from one distributor accounted for approximately 49 % of revenues with no other single customer accounting for more than 10% of total revenues.

For the nine months ended September 30, 2021, revenues from two distributors accounted for approximately 27 % and 21 % of revenues with no other single customer accounting for more than 10% of total revenues.

For the nine months ended September 30, 2020, revenues from three distributors accounted for approximately 39 %, 12 % and 11 % of revenues with no other single customer accounting for more than 10% of total revenues.

At September 30, 2021, accounts receivable from two distributors accounted for 45 % and 22 % 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.

For the three months ended March 31, 2022, revenues from two distributors accounted for approximately 25 % and 14 % of revenues with no other single customer accounting for more than 10% of total revenues.

For the three months ended March 31, 2021, revenues from three distributors accounted for approximately 28 %, 22 % and 10 % of revenues with no other single customer accounting for more than 10% of total revenues.

Wrap Technologies, Inc.

1 unchanged sentence

(in thousands, except per share and share amounts)

At March 31, 2022, accounts receivable from two distributors accounted for 50 % and 13 % of accounts receivable with no other single customer accounting for more than 10% of the accounts receivable balance.

Accounts receivable from 

three  distributors accounted for 

16 % and 

15 % of net accounts receivable at 

December 31, 2021 .

The following table summarizes revenues by geographic region.

1 unchanged sentence

For the Three Months

For the Nine Months

Ended September 30,

$ 1,088  

Ended March 31,

$ 1,194  

2 unchanged sentences

$ 1,542  

$ 1,007  

$ 5,280  

$ 2,529  

SUBSEQUENT EVENTS

In October 2021 we released a new generation product, the BolaWrap 150.

The BolaWrap 150 is electronically deployed and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100 that is being phased out.

In connection with the Company’s management transition plan announced in January 2022, the Company effective on April 18, 2022, appointed a new CEO and a new President.

See Note 10 for subsequent equity awards.

In April 2022, the Board of the Company approved, subject to stockholder ratification, an increase in the 2017  Stock Incentive Plan authorizing an additional 1,500,000 shares of Common Stock to a total of 9,000,000 shares.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements